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PR-50-75 (7-11-75)

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Statement on


Presented to the

Committee on Banking, Housing and Urban Affairs
United States Senate
Frank Wille, Chairman
Federal Deposit Insurance Corporation
July 11, 1975

FEDERAL DEPOSIT INSURANCE CORPORATION, 550 Seventeenth St. N.W., Washington, D. C. 20429


As Chairman of the Federal bank regulatory agency which insures
deposits in virtually all banks and examines and supervises almost 8,800
State-chartered commercial banks and mutual savings banks which do not
belong to the Federal Reserve System, I welcome the opportunity which these
hearings present to testify on the disclosures which banks and bank holding
companies should make when they offer securities to the general public.
At the outset, may I say that the FDIC is not opposed to the disclosure
of material facts which a reasonable investor should have in order to make
an informed decision when contemplating the purchase or sale of a bank security.
I am one bank regulator who believes that greater disclosure of material facts
by individual banks is beneficial in almost all cases not only to investors
but also to depositors and to public officials charged with bank supervision.*
The interests of depositors and bank supervisors are not fundamentally in
conflict with the interests of investors, although I would be the first to
concede that in the case of ’'problem*' banks — a group which seldom numbers
more than two percent of the nation's 14,500 banks — ilL-timed disclosures
of material facts can frustrate supervisory efforts to work out long-term
solutions. The short answer, however, in the context of these hearings, is
that banks which anticipate a significant runoff of deposits or even consider
failure a possibility if they are forced to make full and adequate disclosure
of material facts should not be issuing securities of any kind to an unsuspecting
public. Needed capital in such cases should be raised directly from insiders
or by private placements with institutional lenders based on full disclosure.
There has been a steady and accelerating increase since 1964 in the
volume of information publicly available about bank operations. In that
year, the Federal securities laws were amended to impose reasonably full
requirements for periodic disclosure on publicly held banks with more than
500 shareholders. The three Federal bank agencies were assigned separate
enforcement responsibility as to banks which they regularly examined, and
their requirements for disclosure became increasingly uniform as the years
went by. Last year, further amendments to the Federal securities laws
directed the bank agencies to review such regulations for conformity with
comparable SEC requirements, or explain why such requirements were not
appropriate for banks, and each of the bank agencies recently released for
public comment proposed amendments to their regulations in compliance with the
statutory mandate. Today, approximately 730 banks are subject to such periodic
disclosure requirements, 319 of them falling within FDIC's jurisdiction.
For years the balance sheets submitted by all insured banks to their
Federal supervisory authority as of call report dates have been available to
the public, but it was not until year-end 1972 that the three bank agencies under­
took to release upon request all information received on the two reports regularly
filed by all banks. Since then, in addition to the balance sheets on the front of
each Report of Condition, the detailed schedules regularly reported on the back of


My views on this general subject were expressed in a November 1972 speech
in which I announced the FDIC's decision to make publicly available upon
request all condition reports and reports of income filed by State nonmember
banks with the FDIC. That speech, in its entirety, is attached for entry
into the record of these proceedings.




each Report of Condition
and the full Report of Income received annually from
each bank have been made
available to any person requesting the information —
and we at FDIC have filled thousands of such requests in the intervening
three years. A continuing staff group composed of representatives pf each
of the three bank agencies meets periodically to consider revisions in
these uniform reports, and extensive revisions are currently in process
which will lead to even greater public disclosure in 1976 and thereafter.
So that the extent of the information now reported on these forms and
publicly available for all banks is known to the Committee, I would like
permission to enter into the record the forms we are currently using.
The Comptroller of
the Currency, in addition, requires all national
banks with less than 500
shareholders to send less detailed but nevertheless
similar financial information to shareholders each year, and carefully reviews
the offering circulars of each proposed new national bank. The FDIC has out­
standing a proposed regulation requiring detailed offering circulars of all
existing and proposed nonmember banks which contemplate a public offering of
their securities, regardless of the number of their shareholders. Numerous
publications are prepared each year by the FDIC and the other agencies which
make available to the public bank operating statistics on an aggregated basis.
The growing reach of the Freedom of Information Act is making public on an
individual bank basis a number of special reports regularly filed by both
sample groups and the universe of the nation’s banks. The surge of bank
holding company activity since 1970 has brought more and more of the nation’s
banks under full SEC disclosure requirements on a consolidated basis with
their parent holding companies. While the report of individual bank examinations
regularly prepared by professional examiners in each of the three agencies has
remained confidential, our staff routinely compares such FDIC reports to
offering circulars and proxy statements filed with the Corporation or trans­
mitted to us by the SEC to determine whether material omissions in such
filings are apparent,
If we believe there is such a material omission based
on the report of examination of a nonmember bank, such information is
immediately passed on to the reviewing office.
Additional disclosures may, of course, appear desirable on an
industry-wide basis in the light of experience and changing regulatory
requirements, but it would be totally erroneous to assume that potential
investors and the investment community at large do not have access
at the present time — to significant, material and vital information
about individual banks which seek to market their securities on a
public basis.
Returning to the subject of today's hearing, let me say that
I am sure that all three of the Federal bank agencies subscribe to the
general proposition that material facts should be disclosed whenever a
bank or bank holding company issues securities to the general public.
In the past, however, reasonable men within the various bank agencies
and in the SEC have differed and perhaps will continue to differ, over
what specific information as to a bank's operations
material for an
informed investment decision. Banks are not industrial corporations.


Their raw material is basically ’’other people’s money” and they put it to
work in thousands of daily investment and loan decisions. By the nature
of their business, all banks — and commercial banks in particular —
take risks, and these risks affect a bank’s assets, its liabilities and
its flow of earnings. Good banks know how to manage and balance these
various risks and years of experience have taught the bank regulatory
agencies that diversification of risk or the lack of such diversification
is far more important than the mere fact of risk in evaluating the condition
of a given bank.
Several months ago, when a number of large member banks and bank holding
companies attempted to come to market with public issues of securities,
there was considerable concern among prospective registrants and their
respective bank supervisory agencies that the SEC had a significantly
different view of what was ’’material” for purposes of investor disclosure
than they did, even allowing for differences in view between the registrants and
their Federal bank supervisors and between the three bank regulatory agencies
themselves. The principals of the SEC, the Federal Reserve, the FDIC and
the Comptroller’s Office were prompt to agree that if at all possible the
Government should speak with one voice as to the types of disclosure
that might be desirable and that even if agreement on all points remained
elusive, a better understanding of each other's positions was likely to
result from a thorough exchange of views.
From April 1 of this year to date, eight interagency meetings have
accordingly been held, three exclusively among designated top level staff
members from all four agencies and five others with staff and one or more
principals from each agency.* Significant areas of agreement were identified
early in the discussions and the participants agreed to attempt a draft of
recommendations for more extensive disclosure which might be transmitted to
the SEC for review and eventual release by that agency for public and industry
comment. Since the three bank agencies had been considering a general revision
in the form and frequency of the call report information submitted periodically
by all insured banks, it also appeared desirable to integrate the two efforts
so that disclosures by a bank or bank holding company issuing securities could
be more readily compared with similar information aggregated as of a common
and relatively recent date for a larger number of banks. Throughout, it was
recognized that standards of materiality for bank disclosure could not be
fixed forever as of a given date, but would be subject to modification,
addition and deletion in the light of experience, changing circumstances
and new banking practices. We also recognized that even though we were


The principals involved in each of these five meetings were:
John R. Evans, Commissioner, SEC; George W. Mitchell, Vice Chairman,
Federal Reserve; James E. Smith, Comptroller of the Currency; and
myself for the FDIC. Deputy Secretary of the Treasury Stephen S. Gardner
was also present as an observer at several of these meetings.

striving for a "standardized" disclosure policy, ad hoc disclosures of a
material nature might be required of some banks coming to market that would
not be appropriate for all banks.
With those caveats, I can report substantial progress within the fouragency group in arriving at a common view of what types of financial Informatio
any material for purposes of evaluating the bank or bank holding company which
publicly issues securities. We seem agreed, for example, subject to revision
based on the public comments which may be received, that:*
For All Banks:

The basic categories of loans to be used for disclosure
purposes should conform with Schedule A on the Report of
Condition, Schedule A being expanded to include a separate
itemization under "Real Estate Loans" for "construction
loans" and a separate itemization under "Loans to financial
institutions" for loans to financial institutions "engaged
primarily in real estate financing".


A maturity breakdown for each major category of investments
held by the nation's commercial banks (U. S. Treasury,
Federal agencies and State and political subdivisions),
which was collected on a special basis from all insured
banks as of June 30, 1974 and is again being collected on
a special basis as of June 30, 1975, should be added as a
permanent schedule to the back of the Report of Condition.


A segregation of time deposits held in denominations of
$100,000 or more should be added to each Report of Condition,
and each Report of Income should reflect as a separate item
interest paid on such time deposits, thereby identifying
both the volume and the aggregate interest cost of one of
the most interest-sensitive portions of a bank's total funds.

For Larger Banks:


The effect on income for a given accounting period of
the non-payment of interest on all loans past due
60 days or more with respect to the payment of interest
or principal should be regularly reported to the bank
supervisory agencies and publicly disclosed as a dollar
amount, although banks could supplement this presentation
by reporting, for example, an earnings impact per share.

The information on the next two pages does not purport to be a complete
statement of the items discussed or even the agreements reached by the
four-agency group, whose deliberations will undoubtedly continue in the
months ahead.



Claims on foreigners and liabilities owed to foreigners,
broken down by broad general and geographic categories,
should be regularly reported to the bank supervisory
agencies and publicly disclosed.


Gross loan charge-offs and recoveries should be
regularly reported to the bank supervisory agencies
and publicly disclosed in six major loan categories,
i. e., consumer, home mortgages (1-4 family), other
real estate (including construction loans), commercial
and industrial, foreign, and "all other" for each
accounting period which is the subject of the report.


Unused commitments to extend credit for which a fee
has been paid and outstanding loans made under
commitments for which a fee has been paid should be
reported on a regular basis to the bank supervisory
agencies and publicly disclosed.

We are also in agreement that the Report of Income which is now filed
only once each year by all insured banks should be required semiannually
from all banks and on a quarterly basis, possibly in abbreviated form,
from larger insured banks.
In addition, we are considering, at least for
the larger insured banks, more frequent reporting and disclosure of some of
the schedules now completed only once or twice a year in connection with
Reports of Condition.
These two basic reports, once filed, are now made
available upon request to any member of the public and would, of course,
be available in the future for disclosure purposes on both an individual
bank or aggregated basis.
While many of the items of disclosure raised by Chairman Proxmire’s
letter of June 17 are covered in the partial list of agreements reached by
the four agencies which I have indicated above, I have made no mention of
several other items in the Chairman’s letter and should do so at this juncture.
One of these, i.e. (3), inquires as to the disclosure which should be
required of "the amount of substandard quality, high risk loans, or concentra­
tions of credit which [banks] hold in various sectors of the economy
(e.g., real estate investment trusts, retail companies, airlines, building
developers)." No single disclosure issue has been discussed at greater length
by the four—agency group, and it is the one issue which the bank supervisory
agencies, at least, believe is neither suitable nor feasible in a standardized
disclosure policy. Each of the four sectors of the economy specified in your
Chairman’s letter have both good credit risks and bad credit risks, a situation
which is true of almost any industry category one might select. Moreover, if
one or more Government agencies single out a particular industry for special
disclosure of loan volume, past due loans and management estimates of future
charge-offs and adverse earnings impact, members of the public might well
conclude that the Government considers all firms in that industry to be
unsound or unworthy of investment or credit regardless of individual performance,




the security offered or the rate of return paid. In such an industry a sluggish
earnings performance may change quickly as economic conditions change, yet
special disclosure requirements may inhibit the very recovery which the
Government itself seeks.
Obviously, a large concentration of credit in troubled firms of a
particular industry could indicate a significant problem for an individual bank,
and would constitute a material disclosure for that bank, but it does not follow
that the same disclosures are material for all banks or bank holding companies
coming to market. I share the view of the other bank regulatory agencies
that special disclosures of the status of bank credits to particular
industries should be approached cautiously in all cases and should be
required for individual banks only after a careful and current investigation
indicates that the disclosure is significant in evaluating that bank's
The interagency group ended up by concluding that the issue
seems one best handled by continuing consultation between the SEC and the
three bank agencies.
Another of these, i.e. (4), inquires as to the disclosure which should
be required of "the amount of loans which [banks] hold made to interests
of directors or officers." This subject has not been specifically discussed by
the four-agency group, but I think it would be the unanimous view of all the
participants that any significant concentration of loans in the total loan
portfolio and any material transaction attributable to officers, directors or
their various interests, particularly those that were made on more favorable
terms than comparable loans to outsiders, would constitute material facts
which might be important to an investor's evaluation of the character of the
bank's management. This is the view taken by existing regulations and
interpretations for banks with more than 500 shareholders (See, e.g., FDIC
Regulation Part 335.41, Item 12) and is also the view taken by the FDIC's
proposed regulation on required disclosures for public securities offerings
by other banks (Proposed FDIC Regulation Part 340.41, Item 15). Furthermore,
whenever the SEC staff requests FDIC to review a proposed registration state­
ment, any significant concentration of self-serving loans held by a bank
holding company subsidiary or affiliate which is known to the FDIC through
its examination process at the time of offering is brought promptly to the
SEC's attention.
With respect to a portion of Item (5) in Chairman Proxmire's letter,
i.e. the extent of depreciation in a bank's securities holdings, this figure
is now required in bank holding company filings with the SEC and is
being volunteered with increasing frequency by non-holding company
banks in their certified financial statements, although it is not
presently required in any filings with the bank regulatory agencies.
Historically, the bank agencies have been reluctant to require the
disclosure of this figure for several reasons. The figure can fluctuate
significantly over short periods of time depending on the general movement
of interest rates and on other market developments since the reporting date.
Some issues held by banks, particularly infrequently traded municipals,
are exceedingly difficult to price without being sold. The depreciation


figure, in many cases, could alarm an ill-informed investor who fails to
recognize that most banks seldom have to sell such investment securities
at any significant loss to provide short-term liquidity.
Some investors,
on the other hand, may find the figure helpful in assessing a bank's
ability to reinvest assets in the event of adverse developments in its
liability structure or its earnings performance. The absence of a depreciation
figure is mitigated for such investors by the availability of income figures
by type of security holding and the detailed data which will soon be made
available on a regular basis as to the maturity distribution of such holdings.
Nonetheless, with increasing sophistication among bank shareholders and the
investing public, the time may be at hand for the banking agencies to reexamine
the desirability of requiring a current market figure to supplement the
historical cost of such security holdings now reported in the body of the
balance sheet.
With respect to Item (7), i.e., the disclosures which should be required
of "risks involved in [bank] leasing transactions and standby letter of credit
commitments," these items (which to date affect mostly large banks) are
under continuing review by the bank regulatory agencies. All three bank
regulatory agencies have adopted regulations governing the use of standby
letters of credit, the gist of which is to require the principal amount of
such commitments to be included with outstanding loans in determining whether
the bank has complied with applicable lending limits to a single customer.
These regulations have greatly reduced the risk of excessive concentrations
of credit to a single customer and concomitantly the materiality of such
standby letters of credit to an informed investor. The total volume of
such standby letters of credit, moreover, is now reported as a memorandum
item on the face of the Report of Condition filed four times a year by all
insured banks and is available to any interested person on an individual
bank basis. All three agencies are also monitoring both leasing transactions
and standby letter of credit developments in their examination process and
would, I feel confident, require disclosure of material concentrations
involving unusual risks known to the agencies if the lending bank seeks to
issue securities to the public.
I think this recitation of disclosure developments on the part of the
FDIC, the other bank regulatory agencies and the SEC should reassure the^
Committee that all four agencies take seriously their respective responsibilities
to the investment community where publicly offered securities of banks and bank
holding companies are involved. Access to material information about bank
operations has been significantly expanded over the past ten years, and I have
little doubt that this evolutionary process will continue in the months and
years ahead.