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Address Of


Former Chairman
Deposit Insurance Corporation
Before The


Hotel Commodore
New York City

September 18, 1957


When I was asked to participate in this program my expected remarks
commanded the respect and the prestige that go with the office of chairman
of the Federal Deposit Insurance Corporation.

Since my acceptance of your

gracious invitation, however, I have regained my old title of "private
citizen", and any authority that my words might have today must rest upon
the prestige of experience rather than that of office.

To hold your

attention in these changed circumstances is a real challenge, and I am
grateful for this opportunity to talk with you once again about hanking ~
a subject of interest to all of us.
In my 50 years in the banking profession -- and I think we are
entitled to call it a profession — I have never known a group more deeply
devoted to the well-being, the progress, and the public responsibility of
banking than your Association. Thirteen years ago I attended my first
conference as Superintendent of Banks in Ohio, and I have been coming ever
since. During the past ten years, while I was on the Board of Directors
of the Federal Deposit Insurance Corporation, you have extended to me
every courtesy and have been an unfailing ally in the promotion of a sound
banking system.
As one comes to make his valedictory talk he feels especially called
upon to address his remarks to important and enduring problems. Every
problem, of course, has its own particular complications and significance,
and I would not belittle the many problems which now confront both the
banking business and the supervisory agencies. There is one problem,
however, which holds a kind of record for persistence and insolubility.
It has been with us from the very beginning and is still today a matter
of vital import. I refer to the question of bank capital.
Something of the timeless character of the bank capital problem
is apparent in the emphasis I placed upon it in my remarks to this
association at our meeting in Washington ten years ago. Then, as now,
there was concern over the adequacy of the bank capital margin. The major
post-war trends were becoming evident; loans and other risk assets were
growing at a rate greatly exceeding the shrinkage in the volume of cash
and Federal obligations. As these trends continued, banks added steadily
to their capital, even managing to improve slightly the relationship
between total capital accounts and total assets, but slipping steadily
behind in the relationship of capital to "risk" assets.



In some quarters there is a disposition to view the present capital
margin as an inevitable and tolerable result of historic trends, and to
accept it as a new norm of adequacy. In that attitude there lies a great
threat to our present banking system, failing as it does to recognize the
vital link between bank capital and the functioning of our economic system.
Banks have a primary responsibility in allocating credit among different
economic demands. They have performed this responsibility in an efficient
way. This is indicated by the development of our economy to its unparalleled
position of strength. The key to their efficiency in doing this rests upon
the decentralization of decision-making, a decentralization that goes hand
in hand with our dual banking system and our thousands of independent banks.
What has the adequacy of bank capital to do with this mechanism?
Simply this: Serious questions are bound to be raised if and when the owners
of a bank permit their equity in the enterprise to shrink so drastically
that they have little at stake in sound banking. They may well be accused
of exercising authority and reaping rewards all out of proportion to the
risk they assume. Our present system of decentralized decisions, with its
inherent wisdom and efficiency, may be threatened. To assure the vitality
of the present system, banks need to maintain a reasonable relationship be­
tween capital and assets, and bankers need to awaken from the complacency
of believing that "whatever is, is right".
Most discussion of capital adequacy is based upon less philosophical
considerations than I have just indicated. Instead, concern is focused more
upon the capital accounts as a margin or reservoir for absorbing losses.
Looked at in this light, how do banks measure up today?
Capital accounts of all banks total almost $20 billion. We should
not be misled or unduly encouraged by that large figure, however, despite
its very considerable size. For one thing, it is only a small fraction of
total bank assets or deposits. For another, it is an aggregate very unevenly
distributed among banks. Furthermore, any substantial inroads upon these
capital funds, even falling far short of exhausting them, would do irrepar­
able harm to our banking system.
Though bank losses have been extremely low for several years, the
present situation is not entirely reassuring. Many latent losses have no
doubt been avoided through the price rises and general prosperity character­
istic of the last few years. Lately, the fluctuating market values for
fixed-income-bearing securities have introduced a new complication. This
latter circumstance is, of course, no cause for concern to bankers whose
asset structure features high quality credits scheduled to mature so as to
avoid any need to sell depreciated securities. But not every bank can be
expected to anticipate its needs accurate3.y, and depreciation in the
securities portfolio can be the source of substantial losses. Sour loans
and sales of depreciated securities can quickly impair capital margins.
What can banks do to improve their capital position? For many years
they have relied principally upon retention of earnings. While this is a


prudent thing to do, it has not resulted in as rapid or substantial growth in
capital as I feel to be necessary, Some of you may be familiar with my
recent talk before the Illinois Bankers Association, where I suggested that
the sale of new bank shares is the only remedy today that measures up to the
urgent need.
Seldom has the situation been as conducive as it is today for the
successful flotation of new bank shares. Banks can improve the attractiveness
of such investments by paying out a larger proportion of their earnings, I
feel that any given increment of earnings paid out to share-holders in the
form of dividends would attract more in new capital than it would itself add
by being retained in capital accounts. By lending their encouragement to
this course, as well as by other effective measures, the bank supervisory
authorities can do much to facilitate the availability of capital to banks.
We must not expect, however, that we have or shall soon find a
permanent solution to the complex problem of bank capital. The problem
itself is eternal; we learn this over and over as our solutions of old
problems become out-moded by new situations. All we can expect is an
intelligent attention to the day's developments, flexibility in our approach
to this vital problem and firmness in our resolve to equate bank capital
with banking integrity,
I trust that you will not take lightly my plea for more adequate bank
capital as merely the swan song of a departing friend. For you may not so
easily get rid of me. It is not easy to push aside the interest of a lifetime
or to break off the friendships that I have found among you. Providence
willing, I hope to attend many more of your meetings, and thus renew at least
once a year the inspiration I have always received from being with you.