View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

A d d re ss By
G e o rg e A* . Lfc e M a is tr e
I'
D ire c to r
F e d e r a l D e p o s it I n s u r a n c e C o r p o r a tio n
B efo re The
A la b a m a S ta te B a r
M o n tg o m e ry , A la b a m a
F e b r u a r y 6 , 1976
D u rin g th e l a s t tw o a n d a h a lf y e a r s , th e b a n k in g s y s t e m h a s u n d e r g o n e s t r e s s e s
u n p a r a lle l le d s in c e th e 1 9 3 0 s . T h e f a i l u r e o f tw o $1 b illio n i n s t i t u t i o n s , s e v e r a l
o th e r r e l a t i v e l y l a r g e b a n k f a i l u r e s , a r a t e o f in f la tio n u n k n o w n in t h i s c e n tu r y ,
a liq u id ity c r u n c h , th e c o lla p s e o f r e a l e s t a t e m a r k e t s , a n d o th e r e f f e c t s o f th e
m o s t s e v e r e e c o n o m ic c o n tr a c ti o n s in c e th e g r e a t D e p r e s s io n , h a v e a l l p la c e d
g r e a t s t r a i n s on o u r b a n k in g s y s t e m . In r e c e n t w e e k s , t h e s e d if f ic u l tie s h a v e
b e e n h ig h lig h te d , a n d p e r h a p s c o m p o u n d e d , b y th e u n a u th o r iz e d a n d s e n s a t i o n a l
p u b lic a tio n o f c e r t a i n p r o b le m b a n k o r " w a tc h " l i s t s a s w e ll a s e x c e r p t s f r o m th e
b a n k e x a m in a tio n r e p o r t s o f c e r t a i n v e r y l a r g e in s titu tio n s p u r p o r t e d l y o n o n e o f
t h o s e l i s t s . W ith o u t a s s e r t i n g to y o u th a t t h e r e a r e no p r o b le m s in th e b a n k in g
s y s t e m o r th a t b a n k s u p e r v i s i o n is p e r f e c t , I s h o u ld lik e to p la c e c u r r e n t c o n c e r n
a b o u t b a n k s in s o m e p e r s p e c t i v e b y r e v ie w in g th e f a c ts a b o u t " p r o b le m " b a n k s
and b a n k f a i l u r e s ; b y p o in tin g o u t s o m e o f th e im p r o v e m e n ts in b a n k s u p e r v i s i o n
w h ic h w ill flo w f r o m th e l e s s o n s o f th e p a s t tw o a n d a h a lf y e a r s ; a n d f in a lly , b y
o u tlin in g th e to o ls th a t w e h a v e a t o u r d i s p o s a l to m in im i z e th e d i s r u p t i v e e f f e c ts
of b a n k f a i l u r e .
L,-

In th e w a k e o f th e r e c e n t p r e s s d i s c l o s u r e s , th e F D IC , in a l e t t e r to S e n a to r
W illia m P r o x m i r e , C h a ir m a n o f th e S e n a te C o m m itte e on B a n k in g , H o u s in g ,
and U rb a n A f f a i r s , in d ic a te d th a t t h e r e w e r e 369 F D I C - i n s u r e d b a n k s o n th e
C o r p o r a tio n 's " p r o b le m l i s t " a s o f J a n u a r y 2 4 , 1976. O f t h e s e , o n ly 29 w e r e
d e s ig n a te d " s e r i o u s p r o b le m - p o te n tia l p a y o f f ," th e c a t e g o r y o f b a n k s w h ic h ,
in th e ju d g m e n t of s u p e r v i s o r y p e r s o n n e l, p r e s e n t a 50 p e r c e n t lik e lih o o d o f
r e q u i r i n g F D IC a s s i s t a n c e in th e n e a r f u tu r e . N in e ty -tw o w e r e d e s ig n a te d " s e r i o u s
p r o b le m . " T h e s e a r e b a n k s w h ic h - th r e a te n u l t i m a t e l y to r e q u i r e a f in a n c ia l o u tla y
f r o m th e F D IC a b s e n t d r a s t i c r e m e d i a l a c tio n . F in a lly , 238 i n s u r e d b a n k s , o r
a b o u t tw o - t h i r d s o f th e t o ta l, w e r e c l a s s i f i e d " o th e r p r o b le m " - - in s titu tio n s
e v id e n c in g s ig n if ic a n t w e a k n e s s b u t a l e s s e r d e g r e e o f v u ln e r a b ility . It is w o r th y
o f n o te th a t o f th e 121 b a n k s in th e tw o " s e r i o u s p r o b le m " c a t e g o r i e s , a n e v e n 100
h a v e l e s s th a n $50 m illi o n in to ta l d e p o s it s . N one o f th e r e m a in in g 21 h a s d e p o s its
e x c e e d in g $1 b illio n an d o n ly tw o h a v e m o r e th a n $ 5 0 0 m illi o n .
It h a s b e e n o u r g e n e r a l e x p e r ie n c e w ith th is s y s te m o f e v a lu a tio n a n d th e r ig o r o u s
s u p e r v is io n th a t " p r o b le m " d e s ig n a tio n t r i g g e r s , th a t a p p r o x im a te ly 75 p e r c e n t
o f th e b a n k s on th e " p r o b le m l i s t " on an y g iv e n d a te w ill b e o p e n a n d no lo n g e r
c o n s id e r e d " p r o b le m " b a n k s tw o y e a r s l a t e r . D u rin g 1975, f o r e x a m p le , 282
□anks w e r e a d d e d to th e l i s t w h ile 106 w e r e r e m o v e d . A m o n g t h e s e , 93 h a d b e e n
r e s t o r e d to h e a lth a n d o n ly 13 h a d f a ile d .

A lth o u g h 13 b a n k f a i l u r e s i s s o m e w h a t m o r e th a n th e y e a r l y a v e r a g e o f fiv e w h ic h
th e s y s te m h a s e x p e r ie n c e d s in c e I9 6 0 , i t is f a r f r o m s t a r t l i n g . In e v a lu a tin g



-

2

-

these f ig u r e s , w e m u s t b e a r in m in d th a t 9 7 - 1 /2 p e r c e n t o f o u r n e a r l y 15, 000
in su red b a n k s a r e n o t c o n s id e r e d " p r o b le m " b a n k s b y th e F D I C - - a t r i b u t e , i t
seem s to m e , to b o th th e v ig o r o u s a c tio n o f b a n k s u p e r v i s o r s a n d th e r e s p o n s i v e - .
ness of b a n k s to th a t s u p e r v is io n w h e n w e r e m e m b e r th a t w e h a v e j u s t c o m e
through th e c o u n t r y ’s m o s t s e v e r e r e c e s s i o n s in c e th e 1 9 3 0 s.
A fu r th e r te s t im o n y to th e b a s i c s t r e n g t h a n d r e s i l i e n c e o f th e b a n k in g s y s t e m is
to be fo und in th e r e a c t i o n o f d e p o s i t o r s - - l a r g e a n d s m a l l - - t o th e h ig h ly p u b lic iz e d
and o fte n e x a g g e r a te d t r o u b l e s o f in d iv id u a l b a n k s a n d th e b a n k in g s y s te m . O n ly in
very r a r e c a s e s h a v e d e p o s it o r w ith d r a w a ls r e s u l t e d in a b a n k ’s c lo s i n g . In s e v e r a l
in sta n c e s, w e a s r e g u l a t o r s h a v e b e e n s u r p r i s e d w h e n d e p o s i t o r s s to o d f i r m in th e
face of d i s c l o s u r e o f s u b s t a n t i a l l y a d v e r s e f in a n c ia l n e w s a n d th e a i r i n g o f d i r t y
m a n ag e m e n t lin e n . T h e s e c a s e s , ta k e n w ith th e p u b lic ’s c a lm r e c e p t i o n o f th e
sen sa tio n a l s t o r i e s o f r e c e n t w e e k s , r e f l e c t th e d e p th o f p u b lic c o n fid e n c e in th e
soundness o f o u r b a n k s a n d th e s y s t e m o f d e p o s it i n s u r a n c e w h ic h s ta n d s b e h in d it.
N e v e rth e le s s , th e t r a u m a t i c p r o b le m s o f th e p a s t tw o y e a r s h a v e ta u g h t u s a n u m b e r
of v a lu a b le l e s s o n s . A s a c o n s e q u e n c e , b a n k s u p e r v i s i o n i s u n d e r g o in g a r e a p p r a i s a l
which c o u ld h a v e m o r e s ig n if ic a n t lo n g - r u n c o n s e q u e n c e s th a n th e r e c e n t r e t r e n c h ­
ment by b a n k e r s . E a c h a g e n c y i s u n d e r ta k in g c a r e f u l a n d , a t t i m e s , p a in fu l s tu d y
and r e v is io n o f r e g u l a t i o n s a im e d a t i n s u r in g s a f e ty a n d s o u n d n e s s , a n d th e a d e q u a c y
of s u p e r v is o r y p r o c e d u r e s , a n d e n f o r c e m e n t p o w e r s .
One e x a m p le is th e r e s p o n s e o f s u p e r v i s o r y a u t h o r i t i e s to o u r n a tio n ’s f i r s t b illio n
dollar b a n k f a i l u r e . T h e d e m is e o f U. S. N a tio n a l B an k in S an D ie g o , w h ic h a w a k e n e d
the c o u n try to th e f a c t t h a t a b illio n d o lla r b a n k c o u ld f a il, s e r v e d to fo c u s th e
attention o f th e p u b lic a n d b a n k r e g u l a t o r s on i n s i d e r a b u s e . U SN B ’s in s o lv e n c y
was c a u s e d b y th e w h o le s a le a n d u n s o u n d e x te n s io n o f c r e d i t to p e r s o n s a n d e n t i t i e s
co n tro lle d b y o r a s s o c i a t e d w ith C. A r n h o lt S m ith , th e c o n tr o llin g s to c k h o ld e r a n d
fo rm er b o a r d c h a ir m a n . In v o lv in g 2 0 0 -3 0 0 c o r p o r a t e e n t i t i e s , th e i n s i d e r r e l a t e d
tra n s a c tio n s a m o u n te d to b e tw e e n $ 400 a n d $450 m illi o n . It w a s , in th e w o r d s o f
C o m p tro lle r o f th e C u r r e n c y J i m S m ith , a " . . . r i o t o f s e l f - d e a l i n g . " In r e s p o n s e
to th is g r a p h ic d e m o n s t r a t io n o f th e h a r m th a t flo w s f r o m a b u s e o f a n i n s i d e r ’s
re la tio n s h ip w ith h is o r h e r b a n k , th e C o m p tr o lle r h a s im p le m e n te d a d i s c l o s u r e
re g u la tio n a im e d a t u n c o v e r in g a b u s iv e s e l f - d e a l i n g .
The n e e d f o r m o r e v ig o r o u s s u p e r v is io n o f i n s i d e r t r a n s a c t i o n s b y b a n k b o a r d s o f
d ire c to rs a n d b a n k s u p e r v i s o r y a g e n c ie s is n o t b a s e d on th e USNB c a s e a lo n e .
A busive s e l f - d e a l i n g h a s b e e n a s ig n if ic a n t c o n tr ib u tin g f a c to r in m o r e th a n h a lf
of a ll b a n k f a i l u r e s s in c e I9 6 0 . L o s s e s to th e d e p o s it in s u r a n c e fu n d a s a r e s u l t
of th e s e f a i l u r e s a r e lik e ly to a m o u n t to a t l e a s t $ 1 7 5 m illi o n . A r e v ie w o f e x is tin g
and p a s t p r o b le m b a n k c a s e s a ls o r e v e a l s a h ig h in c id e n c e o f a b u s iv e s e l f - d e a l i n g
as a s o u r c e o f s e r i o u s d if f ic u lty . E v e n w h e r e th e im m e d ia te r e s u l t is n o t th e b a n k ’ s
failu re o r i ts d e s ig n a tio n a s a b a n k r e q u i r i n g c lo s e s u p e r v i s i o n , a n i n s i d e r t r a n s ­
action th a t is n o t e f f e c te d on an " a r m 's le n g th " b a s i s m ig h t le a d to a d im in u tio n o f
the b a n k ’s e a r n in g s a n d a n e r o s io n o f i t s c a p i t a l - - t h e r e b y i n c r e a s i n g th e r i s k o f
lo s s to d e p o s i t o r s a n d m in o r i t y s h a r e h o l d e r s an d u l tim a te ly to th e d e p o s it in s u r a n c e




- 3 fund. F in a lly , s u c h t r a n s a c t i o n s r e p r e s e n t a d iv e r s io n to i n s i d e r s o f r e s o u r c e s
that p r o p e r ly b e lo n g to a l l s h a r e h o l d e r s on a p r o r a t a b a s i s , a s w e ll a s a
(n is a llo c a tio n o f a c o m m u n ity 's d e p o s ite d fu n d s .
U r th e s e r e a s o n s , th e F D IC p u b lis h e d f o r p u b lic c o m m e n t on S e p te m b e r 3 a p r o p o s e d
re g u la tio n w h ic h ta k e s a n a p p r o a c h s o m e w h a t d i f f e r e n t f r o m t h a t o f th e C o m p tr o lle r ,
k fte r re v ie w in g th e c o m m e n ts , C o r p o r a tio n s t a f f h a s r e c o m m e n d e d a d o p tio n o f th e
re g u la tio n w ith c e r t a i n m o d if ic a tio n s . I e x p e c t t h a t th e B o a r d w ill a c t o n th i s
P ro p o sal b e f o r e th e en d o f th rs m o n th . In e s s e n c e , th e p r o p o s e d r e g u l a t i o n w o u ld
te e k to m in im i z e a b u s iv e s e l f - d e a l i n g th r o u g h th e e s t a b l i s h m e n t o f p r o c e d u r e s
Lhich w ill i n s u r e th a t b a n k b o a r d s o f d i r e c t o r s s u p e r v i s e s u c h t r a n s a c t i o n s e f f e c t iv e ly ,
and w ill b e t t e r e n a b le C o r p o r a tio n e x a m i n e r s to id e n tif y a n d a n a ly z e s u c h t r a n s a c t i o n s ,
th e b o a r d o f d i r e c t o r s o f e a c h i n s u r e d n o n m e m b e r c o m m e r c i a l b a n k w o u ld b e r e q u i r e d
to re v ie w a n d a p p r o v e e a c h i n s i d e r t r a n s a c t i o n in v o lv in g a s s e t s o r s e r v i c e s h a v in g a
fair m a r k e t v a lu e g r e a t e r th a n a s p e c if ie d a m o u n t, w h ic h v a r i e s w ith th e s iz e o f th e
Lank. In a d d itio n , c e r t a i n r e c o r d - k e e p i n g r e q u i r e m e n t s w o u ld b e im p o s e d in o r d e r
f o s te r e f f e c tiv e c o n tr o ls o v e r s u c h t r a n s a c t i o n s b y th e b a n k i t s e l f a n d to f a c i l i t a t e

L

E xam iner r e v ie w .'1'
[Although th e C o r p o r a tio n h a s d e t e r m i n e d th a t i n s i d e r t r a n s a c t i o n s r e q u i r e s p e c i a l
s u p e rv is io n b y b a n k b o a r d s o f d i r e c t o r s an d c lo s e s c r u t i n y b y th e C o r p o r a tio n s
e x a m in e rs , w e h a v e c a r e f u l l y s o u g h t to a v o id u n r e a l i s t i c p r o h ib itio n s o r u n d u ly
¡burdensom e r e p o r t i n g r e q u i r e m e n t s . I n s te a d , th e C o r p o r a tio n h a s a tte m p te d to
develop r e q u i r e m e n t s w h ic h w ill p la c e r e s p o n s i b i l i t y w h e r e i t b e l o n g s - - i n th e h a n d s
of a b a n k ’s b o a r d o f d i r e c t o r s - - a n d to s tr e n g th e n e x is t in g b a n k a n d s u p e r v i s o r y
p ro c e d u r e s . In so d o in g w e h o p e to c o r r e c t a c o n tin u in g s o u r c e o f p o te n tia l a b u s e
[without e x c e s s i v e b a n k o r r e g u l a t o r y c o s t s .
The p r o b le m s o f r e c e n t m o n th s h a v e i n s u r e d th a t o th e r f a c e t s o f b a n k in g , s u c h a s
fo reig n o p e r a tio n s a n d th e o p e r a tio n o f n o n b a n k a f f i l i a t e s o f b a n k h o ld in g c o m p a n ie s ,
[will a ls o r e c e i v e g r e a t e r e m p h a s is in th e e x a m in a tio n a n d s u p e r v is io n p r o c e s s .
¡And, a s a c o n s e q u e n c e o f th e e x c e s s iv e u s e o f c o s tly p u r c h a s e d fu n d s , b a n k e r s
Lvill fin d e x a m i n e r s p ro b in g m o r e d e e p ly a n d c r i t i c a l l y in to th e c o m p o s itio n o f a
bank’s d e p o s it s t r u c t u r e . M o s t im p o r ta n tl y , d e f e r e n c e to s i z e , b o r n o f th e b e l i e f
that la r g e b a n k s c o u ld n o t f a i l , i s a th in g o f th e p a s t . W e h a v e l e a r n e d th a t th e
[adverse e f f e c ts o f l a r g e b a n k f a i l u r e s on th e b a n k in g s y s t e m a n d th e d e p o s it i n s u r a n c e
[fund a r e o f s u f f ic ie n t m a g n itu d e th a t b ig b a n k s s h o u ld b e s u p e r v i s e d m o r e , n o t l e s s ,
s tr ic tly th a n t h e i r s m a l l e r c o m p e t i t o r s .
In a d d itio n to c a r e f u l r e v ie w o f th e a d e q u a c y o f th e e x a m in a tio n p r o c e s s , c o n c e r n
e n g e n d e re d b y l a r g e b a n k f a i l u r e s h a s le d to i n c r e a s e d i n t e r e s t in th e d e v e lo p m e n t
¡of s o - c a lle d " e a r l y w a r n in g s y s t e m s , " w h ic h e m p lo y f in a n c ia l s t a t e m e n t a n a l y s i s
to d is tin g u is h p o te n tia l p r o b le m b a n k s . A t th e F D IC , w e h a v e b e e n a t w o r k in th is
a re a fo r m o r e th a n t h r e e y e a r s , a n d o u r e x p e r ie n c e s u g g e s ts t h a t w h e n fu lly ---------1 p5 T h is r e g u l a t i o n w a s a d o p te d by th e B o a r d o f D i r e c t o r s o f th e F e d e r a l D e p o s it
I n s u r a n c e C o r p o r a tio n on F e b r u a r y 25, 1976.



- 4 O perational, s u c h s y s t e m s w ill b e c o m e an i n t e g r a l p a r t o f th e b a n k s u p e r v i s o r y
Lro c e s s . I s h o u ld h a s t e n to p o in t o u t th a t t h e s e s y s t e m s a r e n o t " b la c k b o x e s "
Lhich w ill m a g ic a lly g r in d o u t a l i s t o f a ll th e p r o b le m in s t i t u t i o n s e x is tin g a t a
p a rtic u la r t i m e , b u t r a t h e r , a r e to o ls o f e x a m in a tio n , e n a b lin g th e a g e n c ie s to
Allocate s c a r c e r e s o u r c e s m o r e e f f ic ie n tly a n d , a t t i m e s , id e n tif y a p o te n tia l
[failure th a t m ig h t o th e r w is e h a v e b e e n o v e r lo o k e d .
th e a g e n c ie s a r e a ls o s e e k in g to im p r o v e s u p e r v i s o r y p r o c e d u r e s f o r r e m e d y in g
[problems w h e n th e y o c c u r a s w e ll a s im p r o v in g te c h n iq u e s f o r id e n tif y in g p r o b le m s ,
th is h a s r e s u l t e d in in te n s if ie d m o n ito r in g a n d i n c r e a s e d s e n io r s t a f f r e v ie w o f
p ro b lem s i t u a t i o n s , a n i n c r e a s e d flo w o f in f o r m a t io n a m o n g th e F e d e r a l a g e n c i e s ,
C o n sid e ra tio n o f th e u s e o f t e a m s s p e c ia liz in g in th e w o r k in g o u t o f p r o b le m s itu a tio n s
and r e - e v a l u a t i o n o f th e le g a l r e m e d i e s a n d s a n c tio n s a v a il a b le to th e a g e n c ie s to
[effect c o r r e c t i v e m e a s u r e s .
In th is l a s t r e g a r d , th e t h r e e F e d e r a l b a n k in g a g e n c ie s h a v e m a d e r e c o m m e n d a tio n s
to the C o n g r e s s w h ic h w o u ld e n h a n c e c o n s id e r a b ly o u r a b ility to d e a l w ith p r a c t i c e s
which h a v e p r o d u c e d b a n k f a i l u r e s a n d p r o b le m i n s t i t u t i o n s . F i r s t o f a l l , w e h a v e
r e c o m m e n d e d l e g i s l a t i o n w h ic h w o u ld a llo w th e s u p e r v i s o r y a g e n c ie s to a g g r e g a te
loans o r o th e r e x te n s io n s o f c r e d i t to i n s i d e r s a n d t h e i r i n t e r e s t s f o r th e p u r p o s e
of ap p ly in g th e s t a t u t o r y le n d in g l i m i t s , th e r e b y c lo s in g s e r i o u s lo o p h o le s in t h e s e
p ro v is io n s . S e c o n d , th e p r o p o s e d le g i s l a t i o n w o u ld g r e a t l y e x p a n d th e p o w e r o f th e
ag en cies to im p o s e f in e s fo r s e r i o u s v io la tio n s . T h ir d , w e h a v e p r o p o s e d th a t th e
existing c e a s e a n d d e s i s t p o w e r s b e a m e n d e d to a p p ly s p e c if ic a lly to o f f i c e r s , d i r e c t o r s ,
e m p lo y e es, a g e n ts o r o th e r p e r s o n s p a r t i c i p a t i n g in th e c o n d u c t o f th e a f f a i r s o f th e
bank. F o u r t h , th e p r o p o s e d l e g i s l a t i o n w o u ld a llo w r e m o v a l o f o f f i c e r s w ho a r e
g ro ssly n e g lig e n t o r d e m o n s t r a t e a w illf u l d i s r e g a r d f o r th e s a f e ty a n d s o u n d n e s s
of a b a n k . A nd f u r t h e r , th e p a c k a g e w o u ld a u th o r iz e th e F e d e r a l R e s e r v e B o a r d
to o r d e r d i v e s t i t u r e o f a b a n k in g h o ld in g c o m p a n y s u b s i d i a r y o r te r m i n a t i o n o f a
nonbanking a c t i v i t y w h e n th e B o a r d h a s c a u s e to b e lie v e th a t th e o w n e r s h ip o r a c ti v ity
c o n stitu te s a t h r e a t to th e h o ld in g c o m p a n y 's s u b s i d i a r y b a n k o r b a n k s . A lth o u g h
the b a n k in g a g e n c ie s do n o t in te n d th a t i n c r e a s e d e n f o r c e m e n t p o w e r s w ill r e p l a c e
tra d itio n a l b a n k s u p e r v i s o r y te c h n i q u e s , i t is o u r th o u g h t th a t t h e s e to o ls w ill i n c r e a s e
s ig n ific a n tly th e p o w e r o f th e a g e n c ie s to d e a l w ith th e m i n o r i t y o f b a n k s a n d b a n k e r s
that a r e r e c a l c i t r a n t o r w o r s e .
F in ally , I s h o u ld lik e to to u c h b r i e f l y on a n o th e r l e s s o n o f th e p a s t tw o a n d a h a lf
y e a r s - - o n e w h ic h m a y b e th e m o s t s ig n if ic a n t o f a ll. A lth o u g h th e p e r io d h a s n o t
been a c o m f o r ta b le o n e , th e r e s p o n s e o f b a n k e r s , b a n k r e g u l a t o r s a n d th e p u b lic
to r e c e n t b a n k f a i l u r e s — e s p e c i a l l y th a t o f F r a n k l i n N a tio n a l B an k in N ew Y o rk
has d e m o n s t r a t e d c o n c lu s iv e ly t h a t w h e n a b a n k d o e s f a il, th e F D IC h a s th e to o ls
to m in im iz e th e d i s r u p t i v e e f f e c t o f th e in s o lv e n c y on i ts c o m m u n ity an d th e e c o n o m y
g e n e ra lly .
F ir s t of a l l , th e F D IC h a s in d ic a te d p u b lic ly t h a t it w ill m a k e e v e r y p o s s ib le e f f o r t
to find a s u ita b le a c q u i r e r f o r a d i s t r e s s e d i n s titu tio n a n d to f a c i l i t a t e s u c h a n
a c q u is itio n . T h e A m e r ic a n C ity B ank a n d T r u s t f a i l u r e in M ilw a u k e e r e c e n t l y is
illu s tr a tiv e . T h e r e th e le a d b a n k in a f o u r - b a n k h o ld in g c o m p a n y s y s t e m w a s in




- 5 serio u s d if f ic u lty a s a r e s u l t o f b a d r e a l e s t a t e lo a n s , b u t th e o th e r t h r e e s m a l l
in stitu tio n s w e r e s o u n d . U sin g its a u th o r ity u n d e r s e c tio n 13(e) o f th e F e d e r a l
[Deposit I n s u r a n c e A c t to a s s i s t a p u r c h a s e a n d a s s u m p tio n t r a n s a c t i o n w h e n , in
the ju d g m e n t o f th e B o a r d o f D i r e c t o r s , s u c h a s s i s t a n c e w ill r e d u c e r i s k o r a v e r t
loss to th e C o r p o r a tio n , th e F D IC a s s i s t e d th e p u r c h a s e a n d a s s u m p tio n o f th e
A m e ric an C ity B an k a n d T r u s t b y th e M a r in e N a tio n a l E x c h a n g e B a n k o f M ilw a u k e e .
The M a r in e B a n k w a s th e w in n e r o f a c o m p e titiv e b id d in g p r o c e d u r e o v e r s e v e n
other b a n k s a n d b a n k h o ld in g c o m p a n ie s w ith a p u r c h a s e p r e m iu m o f $ 6 , 0 2 7 , 0 0 0 .
The t r a n s a c t i o n a v o id e d th e n e c e s s i t y f o r a s t a t u t o r y p a y o ff o f th e a p p r o x im a te ly
35,000 d e p o s i t o r s o f A m e r i c a n C ity B an k a n d p r e v e n te d f in a n c ia l l o s s a n d d e la y
to the h o ld e r s o f a p p r o x im a te ly $ 6 0 m illi o n o f d e p o s it s th a t e x c e e d e d th e s t a t u t o r y
in su ra n c e l i m i t . F u b lic fu n d s d e p o s it s o f o v e r $ 4 0 m illi o n a n d d e p o s it s o f o th e r
banks to ta llin g m o r e th a n $8 m illi o n w e r e in c lu d e d in th e d e p o s it l i a b i l i t i e s a s s u m e d
by M a rin e N a tio n a l E x c h a n g e B ank o f k lilw a u k e e , A ls o , a c q u is itio n b y th e M ^arine
Jiank a v o id e d d i s r u p t i o n o f th e p a n o p ly o f b a n k in g s e r v i c e s p r o v id e d b y A m e r ic a n
City. F in a lly , a n d p e r h a p s m o s t i m p o r ta n tl y , a n y p o te n tia l r i p p l e e f f e c t w a s a v o id e d ,
yith no u n to w a r d e f f e c ts b e in g f e l t b y o th e r W is c o n s in b a n k s - -in c lu d in g th e o th e r
ee ^ ® n n h e rs o f th e h o ld in g c o m p a n y s y s te m . W e a t th e F D IC v ie w t h i s c a s e a s
p a rtic u la rly s ig n if ic a n t in th a t it d e m o n s t r a t e s t h a t th e d if f ic u ltie s o f th e le a d b a n k
oi a m u ltib a n k s y s t e m n e e d n o t c a u s e a l o s s o f c o n fid e n c e in th e o t h e r b a n k m e m b e r s
of the s y s t e m - - o r t h e i r u l t i m a t e f a i l u r e .
This p r o c e d u r e w a s a l s o e m p lo y e d in th e F r a n k li n a n d U . S. N a tio n a l B an k c a s e s
is w ell a s in th e v a s t m a j o r i t y o f th e o t h e r in s o lv e n c ie s w h ic h h a v e o c c u r r e d in
^ecent y e a r s . O f th e 13 b a n k f a i l u r e s in 1 9 7 5 , 11 w e r e r e s o l v e d in th is m a n n e r .
fa a d d itio n to th e p o w e r to p r o v id e a s s i s t a n c e u n d e r s e c tio n 13(e) o f th e F e d e r a l
peposit I n s u r a n c e A c t, th e C o r p o r a tio n m a y d i r e c t l y a s s i s t a d i s t r e s s e d in s titu tio n
mder s e c tio n 13(c) o f th e A c t i f M. . , th e c o n tin u e d o p e r a tio n o f s u c h a b a n k is
essential to p r o v id e a d e q u a te b a n k in g s e r v i c e to th e c o m m u n ity . " R e s o r t to th is
provision w ill e n ta i l th e im p o s itio n o f s ig n if ic a n t r e s t r i c t i o n s on th e o p e r a tio n o f
•he a s s i s t e d in s titu tio n a n d w ill n o t b e e m p lo y e d u n l e s s t h e r e a p p e a r s to b e a
reasonable lik e lih o o d th a t th e in s titu tio n w ill b e c o m e a n in d e p e n d e n t a n d v ia b le
inter p r i s e . It is g e n e r a l l y u s e d o n ly a s a l a s t r e s o r t a n d h a s b e e n e m p lo y e d in
k ly t h r e e c a s e s in th e C o r p o r a t i o n ’s h i s t o r y .
the C o r p o r a tio n m a y a l s o o r g a n iz e a D e p o s it I n s u r a n c e N a tio n a l B an k u n d e r
jection 11 o f th e A c t to p e r f o r m , f o r a m a x im u m o f tw o y e a r s , b a n k in g f u n c tio n s
»pecified b y th e C o m p t r o l l e r o f th e C u r r e n c y u p o n a d e t e r m i n a t i o n th a t ” . . . it
Is a d v is a b le a n d in th e i n t e r e s t o f th e d e p o s i t o r s o f th e c lo s e d b a n k a n d th e p u b lic . ”
is d e v ic e is e m p lo y e d a s an a l t e r n a t i v e to a n im m e d ia te c e s s a t i o n o f b a n k in g
e rv ic es a n d a p a y o ff o f i n s u r e d d e p o s i t o r s w h e n th e F D IC c a n n e ith e r fin d s u ita b le
pdders f o r th e f a ile d b a n k n o r m a k e th e r e q u i s i t e s t a t u t o r y fin d in g u n d e r s e c tio n 1 3 (c ).
though o n ly th e i n s u r e d d e p o s it s a r e fu lly p r o t e c t e d w h e n a D IN B is e s t a b l i s h e d ,
^ have fo u n d th a t th e u s e o f a D IN B m i n i m i z e s th e t r a u m a in v o lv e d w h e n a b a n k
ails an d m a in ta in s a n e n tity in th e c o m m u n ity w h ic h m a y b e r e v i t a l i z e d b y lo c a l
a v e sto rs. T h is p r o c e d u r e w a s e m p lo y e d tw ic e in 1975.



-

6

-

s h o rt, v a r io u s to o ls a r e a v a il a b le to a v o id th e p o te n tia lly d i s r u p tiv e c o n s e q u e n c e s
L f bank f a i l u r e . A s th e e v e n ts o f th e p a s t tw o y e a r s h a v e d e m o n s t r a t e d , t h e s e to o ls
Lre q u ite e f f e c tiv e .
tn c o n c lu s io n , I s h o u ld lik e to r e i t e r a t e w h a t I h a v e a l r e a d y s a id . L a r g e b a n k
failures a n d th e p r o b le m s o f p a r t i c u l a r b a n k s g e n e r a lly h a v e b e e n p a in fu l a n d
d istu rb in g , b u t th e y a r e n o t o v e r w h e lm in g w h e n v ie w e d in th e c o n te x t o f th e b a n k in g
System a s a w h o le . M o r e o v e r , w h ile t h e s e d if f ic u l tie s h a v e h ig h lig h te d c e r t a i n
w eak n esses in th e b a n k r e g u l a t o r y s y s t e m , th e y h a v e , a t th e s a m e t i m e , s p a r k e d
the s o r t o f p o s itiv e r e a p p r a i s a l n e e d e d to r e m e d y th e m a s w e ll a s d e m o n s t r a t e d
hat w e do h a v e th e to o ls to i n s u r e th a t e v e n a v e r y l a r g e b a n k f a i l u r e d o e s n o t
iause s e r i o u s d is r u p tio n . In m y ju d g m e n t, th e b a n k in g s y s t e m w ill e m e r g e f r o m
this p e r io d o f d if f ic u lty s tr e n g th e n e d , n o t w e a k e n e d , i f b a n k e r s , b a n k r e g u l a t o r s ,
and th e C o n g r e s s c o n tin u e to a p p ly th e l e s s o n s o f r e c e n t m o n th s in a d i s c i p lin e d
and d i s p a s s io n a t e m a n n e r a n d a v o id th e te m p ta tio n to o v e r r e a c t to th e s o m e t im e s
se n s a tio n a l d i s c l o s u r e a n d d i s c u s s i o n o f th e p r o b le m s th a t b a n k in g d o e s h a v e .




############