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ADVANCE - - FOR RELEASE 10*30 A*M« EST, MONDAY, APRIL 20, 1933

«BANKERS ARE MEETING THE CHALLENGE»
ADDRESS
DIRECTOR,

OF HONORABLE H. EARL COOK

FEDERAL DEPOSIT INSURANCE CORPORATION
BEFORE THE
EASTERN REGIONAL CONFERENCE

NATIONAL ASSOCIATION OF BANK AUDITORS AND COMPTROLLERS




BALTIMORE, MARYLAND
A p r il 20, 19$3

Federal

deposit Insurance

Corporation

W A S H IN G T O N 2 5

ADDRESS OF HON, H, EARL COOK, DIRECTOR, FEDERAL DEPOSIT INSURANCE CORPORATION,
BEFORE THE EASTERN REGIONAL CONFERENCE, NATIONAL ASSOCIATION OF BANK
AUDITORS AND COMPTROLLERS
APRIL 20, 1953

BALTIMORE, MARYLAND
“ BANKERS ARE MEETING THE CHALIENQE"

Mr, Chairman, Gentlemen o f the A ssociation, and distinguished guests?

I t was my p r iv ile g e some f i v e and a h a lf years ago, in October o f 19i;7,
to address the National convention o f your a ssociation here in Baltimore.

My

in terest in you and in the progressive a c t iv it ie s o f your association has grown
in creasin gly throughout those years.

There is no profession a l group, to my

knowledge, that has contributed more to improved methods o f bank controls and
in tern al audits than NABAC*
Your regio n a l and n ational meetings are workshops in the tru est sense o f
the word.

What s o c ia l a c t iv it ie s there are lend but s lig h t leavening to the

very serious purpose and the very important accomplishments o f your gatherings.
The imposing s h e lf o f te x ts , o f b u lletin s and o f special studies that have
been published under the a ssociation ’ s in p rin t add up to the most comprehensive
encyclopedia that I have seen on an extremely tech n ical phase o f a tech nical
subject.
Then there is the Auditgram.
corrplete without i t .

No month*s reading in our o f f i c e would be

I t s constant balance o f fa c ts , finding??, opinions,

information and persD nalities contributes to i t s reputation as the most readable
of trade pu blication s.
You may have gathered by now that I think you fello w s are doing a p r e tty
good job.

I do.




But, as is always the case with us from Washington, I have a

Cook — NABAC ~

2

few suggestions as to how i t could be improved*
On that October day in 19U7 - - the occasion o f what was p r a c tic a lly my
maiden address as a member o f the board o f d ire c to rs o f Federal Deposit
Insurance Corporation t - I chose as my top ic ”A Challenge fo r the Banks” *

Today,

fiv e and a h a lf years la t e r , X should lik e to discuss steps banks have taken
to meet the challenge*

The ultim ate success o f these steps depends upon the

understanding, the wisdom and the i n i t i a t i v e o f you men as w e ll as upon the
constant v ig ila n c e o f supervisory au th orities and the Federal Deposit Insurance
Corporation.
P rio r to 19U6 d i f f ic u lt i e s in most o f the banks which required aid from
Federal Deposit Insruance Corporation t o protect depositors arose from
progressive and accumulative d e terio ra tio n in assets*

I t took severa l years

a fte r creation o f the Corporation to clean up the debris which went by the
name o f ” as s e ts ” in many insured banks*
This improvement on the balance sheet was acconplished in many and various
ways:
F ir s t :

Insured banks w ith incurable asset problems were put in

receivership or merged w ith sounder banks, with Federal Deposit Insurance
Corporation making up the d iffe re n c e ;
Second:

Examination procedures were improved to prevent any general

d eterioration o f assets o r any sudden s h ift in th e ir valuation;
Third:

An in ten sive program fo r the betterment o f bank management was

inaugurated both by the banks and by the supervisory agencies;
Fourth:

A continuing high le v e l o f production and prices helped to

’’re h a b ilita te ” some assets and held at steady le v e ls those that had been




Cook —* NABAC - - 3

acquired more recen tly*
As a consequence o f these and other in flu en ces, asset problems in
insured banks diminished su bstan tially*

But another l i t t l e ogre reared i t s

ugly head and i t has continued to plague us constantly.

Of the 22 cases in

which the Corporation lias been c a lle d upon f o r fin a n c ia l aid to p rotect insured
depositors since January 1, 19it6,

19 have been the d ir e c t or in d ire c t re s u lt

of defalcation s*
In 19U7 I mentioned th at Vance S a ilo r , Chief o f our D ivision o f
Examination, had w ritten an essay on «Human F r a ilt y ” which, I b e lie v e , was
reprinted in your Auditgram*

A fte r a study o f the cases which have occurred

during the intervening years and a fte r a review o f those which occurred e a r lie r ,
both Vance and I have come to the conclusion that the primary fa u lt l i e s not
with those who do the misfeasance, but rather w ith those who permit i t to happen.
Not that I agree with the judge who re c e n tly s e t fr e e a d efau lter and
excoriated the board o f d irecto rs o f his bank fo r the low sa la ry they paid him,
"To each his h ir e ” has been an admirable admonition from time immemorial and i t
should p r e v a il today.
I t is time, however, fo r those who claim the t i t l e o f bank d ir e c to r to
start d ir e c tin g .

I t is time, as Vance says, fo r them to s ta rt «knowing th e ir

Marys and Joes«.

I t is time fo r them to r e a liz e th at attending a casual meeting

irre g u la rly is not enough to ju s t if y th e ir t i t l e and th a t such in d iffe re n c e may
be enough to jeopardize not only th e ir standing in the community but th e ir
pocketbooks.

Ihose are the two fa cto rs that got them the jobs in the f i r s t

place and they are the two places where i t could hurt most i f they f a i l to
f u l f i l l th e ir r e s p o n s ib ilitie s .




Cook — NABAC — h
D efalcations in banks, ju st as in most other businesses, don*t ju st
happen.

There has to be an underlying cause.

Let me say a t the outset that

the banking p rofession , s t a t i s t ic a l l y , is a profession o f the highest in t e g r it y
in th is resp ect.

Unfortunately, the public expects i t s bankers to be fla w le s s ,

and the news o f a peculation that is discovered in a bank rates banner heads
on page one, w hile i f a t a i l o r runs o f f with a c lo th ie r*s re c e ip ts , th e news
w ill appear in a fo u r-lin e box next to the obituary column.

What is sauce fo r

the t a ilo r is c e r ta in ly not sauce fo r the t e l l e r 1
Vance S a ilo r lik e s to point out freq u en tly that the a c tiv e , operating
personnel in banks is lik e Iv o ry soap and is 99*kh% pure.

The other 0.5>6$,

however, is s u ffic ie n t to g iv e the banking system a black eye.
What can be done about elim inating th is annoying fra c tio n o f one percent?
Well, in the f i r s t pla ce, we in the supervisory and insuring fie ld s have been
introducing new techniques and improving our examining procedures, w ith the
idea o f doing the best possible job on our side.

We have long been aware o f

the hazards that are involved and we are working constantly t o close what gaps
ex ist, w ithin the lim ita tion s o f our functions and our c a p a b ilitie s .
On the other sid e o f the pictu re, the bankers are doing a fin e jo b .

There

has been general acceptance o f our suggestions fo r improved in te rn a l con trols.
Furthermore, our examiners are instru cted to be constantly on the a le r t fo r
techniques which they fin d employed in one insured bank t hat may be b e n e fic ia l
in other in s titu tio n s *
You men gathered here today are thoroughly fa m ilia r w ith the many simple
steps that can be taken to minimize the danger o f d efa lc a tio n s .
presumptuous to preach to you about them.




I t would be

But I s h a ll take the lib e r t y o f

Cook — NABAC —- 5
reviewing a few o f the fundamental s a fe ty factors in the hope that you, who
govern the in te rn a l operations o f la rg er in s titu tio n s and who command such
respect among your smaller correspondents and a ssociates, w i l l spread the
gospel among the sm aller banks which cannot a ffo rd to employ men o f your
training and ta len t*
I t i s s ig n ific a n t that o f the 19 banks requ iring fin a n c ia l aid from
Federal Deposit Insurance Corporation as the re s u lt o f f i d e l i t y losses from
January 1, 19U6 through the end o f 1952, a l l but one held deposits o f less
than $3*5 m illio n *

That is not to say that ir r e g u la r it ie s do not occur in

larger in s titu tio n s , but the banks that were destroyed through breaches o f
trust — those in which f i d e l i t y bonds and c a p ita l accounts could not equal
the depredations o f trusted o ffic e r s and employees — f e l l among the smaller
size groupings*
What we hope, th e refo re , is th at you who have the knowledge, you who
have the p ra c tic e , you who have the w elfa re o f the whole American banking
system so close to your h ea rts, w i l l spread the gospel among the smaller banks o f
your acquaintance.

Not a l l o f the tech n ical aspects o f p rotection against

fraud — ju st the fundamentals,

Don! t prescribe a two-ton v a u lt door in a

$200,000 bank, but at le a s t suggest procedures that can*t be cracked w ith a
skeleton key*
Our purpose in making this request is s e lfis h only to the extent that
we, too, share pride in the record o f in te g r it y o f the American banking system*
Financial losses that the Corporation has been required to assume because o f
in fid e lit y have been r e la t iv e ly small*




Remember that the surety coverage and

Cook — NABAC — 6

the ca p ita l funds a l l must be dissipated before the Corporation is ca lled upon
to put up a s in g le dime*
The two major s e llin g points you should use in your campaign among the
smaller banks would seem to me to be thesei
F irst?

The d irectors and the stockholders should protect themselves

against personal lo ss and disgrace*
Second:

What happens by way o f dishonesty in the sm allest bank

re fle c ts upon the in te g r it y o f the la rg e s t bank and so breeds d istru s t o f
our whole banking structure*
We in Federal Deposit Insurance Corporation are not convinced that there
is an increasing incidence o f d efalcation s*

We b e lie v e that b e tte r in tern a l

controls and improved examination procedures are responsible fo r turning up
many that have been dormant fo r severa l years*

I t is tru e that the number of

cases reported-to the U*S* D is t r ic t attorneys has grown from 270 in 19U6, to
621 in 1952, but the ra te o f increase has been slowing down ra p id ly, and we
hope to see a sharp declin e when the fig u res f o r 1953 are in .

With your help*

we sh a ll have started to descend the ladder*
Now, w ith your permission, I sh a ll mention ju st a few o f the fundamental
safeguards which we hope you w i l l urge upon your frien d s in the smaller banks*
The f i r s t , o f course, is compulsory vacations fo r a l l employees*

In

some o f the shortages mentioned above the offen der had not taken a vacation
fo r years and in many cases he was complimented because o f his devotion to duty*
We had one case w ithin the la s t few years where d irecto rs inaugurated a p o lic y
of compulsory vacations*




One o f the o ffic e r s , who thought his manipulations

Cook — NABAC — 7

were p re tty w e ll covered up decided to take ten days in Canada*

When a

long-absent depositor c a lle d to make a withdrawal and the ledger sheet was
found missing, subsequent study found the vacationer to be short about

$80 , 0 0 0 *
Another safeguard i s ro ta tio n o f employees*

In smaller banks, this

is ra re ly p o ssib le, but you should urge adoption o f the p ra ctice in every case
where i t i s humanly possible*
fixed schedule*

The ro ta tio n , o f course, should not be on any

I t s value lie s in the element o f surprise*

No matter how small the bank, there should be a complete separati on o f
the t e l l e r and bookkeeping fu n ction s*

Even in banks as large as $5 and $6

m illion we have found appalling la x it y in observing th is basic ru le* Allowing
one o ffic e r or employee to perform both functions is lik e sending a rabb it
to the store fo r a head o f lettu ce*

The temptation is just too great and the

opportunities f o r wrong-doing too many*
Every time a d efa lc a tio n is uncovered the hue and cry is heard:
were the examiners w hile th is was going on?”

“Where

Now you know and I know that

bank examinations are not and cannot be audits in the true sense o f the word*
The function o f examiners is to v e r i f y and appraise assets shown on the books o f
the banks, to assay the q u a lity and e ffic ie n c y o f bank management and to make
recommendations f o r improvements where they seem necessary*
The audit function i s d e fin it e ly and e n t ir e ly the r e s p o n s ib ility o f the
board o f d irecto rs in each bank.

In only very ra re instances are the d irecto rs

themselves competent enough as accountants to make by themselves the examinations
and audits required by statute#

For this reason, we urge th at they make

provision eith er through th e ir correspondent banks or through p riv a te c e r t ifie d




Cook — NABAC — 8
public accountants to have adequate audits made.

I f the d irecto rs can be

made to understand th at the step is p rim a rily fo r th e ir own protection , then
they could have no v a lid excuse f o r n eglectin g th e ir r e s p o n s ib ilitie s in this
supremely important phase o f bank operations*

In many cases, sm aller banks

have grouped together on a county-wide basis to employ auditors to inspect a l l
th eir in stitu tio n s p e rio d ic a lly *

This not only has f u l f i l l e d the in ten t o f

the statute, but i t has reduced costs to an absolute minimum fo r p a rtic ip a tin g
in s titu tio n s •
I t i s true that not a l l outside accountants are s k ille d in the
complexities o f bank auditing*
improve that condition*

But s ig n ific a n t progress is being made to

In Iowa, fo r example, the Iowa S tate Bankers Association

and the Iowa S ociety o f C e r tifie d Public Accountants are planning a jo in t
seminar to acquaint CPA! s with the p e c u la ritie s o f bank auditing*

Sim ilar

cooperative discussions are being held in other States*
Let i t be noted, however, that the directors* re s p o n s ib ility does not
end when he has established adequate in te rn a l controls and provided fo r
periodic audits by q u a lifie d accountants*

The human fa c to r must always be

uppermost in th e ir considerations and d elib era tion s*
As a general ru le , the d ire c to rs are considered to have discharged th is
part of th e ir re s p o n s ib ility when they s e le c t s k ille d and competent management
to operate the bank*

Yet they would be wise to review from time to time the

personnel p o lic ie s being follow ed by the o ffic e r s they s e le c t*

B elieve me,

these are ju st as important as the lending p o lic ie s and the new machines, and
the shiny fix tu re s *
I am convinced th at the grea test safeguard against losses is management *s




Cook - - NABAC - - 9
continuing personal in te re s t in employees o f the bank, A bank has no greater
l i a b i l i t y than a discontented o r neglected employee.

I t could have no more

valuable asset than an employee who is given the fe e lin g o f "belonging11 and
the knowledge that he has someone to turn to in time o f trouble or stress#
Tie morale situ ation in a bank should be o f continuing concern to senior
o ffic e r s and to directors#

Here are a few suggestions that have been

demonstrated to be healthy boosters o f morale in many in s titu tio n s :
An im partial promotion program should be adopted in every bank.

An

employee who fe e ls that his chance w i l l come is not l i k e l y to get discouraged,
even i f his sa la ry increases are very slow.

But the fe llo w who fe e ls th at he

is standing s t i l l and w i l l be held down fo re v e r is not only a bad producer but
also a bad risk#

I t o ften becomes necessary in any business to bring in an

outsider with sp ecia lized s k ills to f i l l a v i t a l spot in the organization#
Whenever such action becomes necessary in a bank, management should make the
reasons clea r to any employee who might f e e l that he is being by-passed.

The

mere fa c t th a t the boss is w illin g to confide in him w i l l take most o f the
sting out o f any imagined s lig h t that he may f e e l .
We have found, too, that health insurance#

paid fo r eith er by the bank

or jo in t ly by the bank and the enployee is a grea t morale booster.

If a

t e l l e r ^ w ife has to undergo an operation he is going to see that the h osp ital
and the doctors are paid in some way.
that takes care o f it #

I f there is a health insurance p o lic y ,

Otherwise, he is very l i k e l y to "borrow" a l i t t l e

money from the t i l l and repayment in those cases is extremely rare#
The management o f every bank — and that includes d irecto rs as w e ll as




Cook — NABAC — 10

o ffic e r s — should know more about th e ir employees, what they think and what
they are doing*

They should know how employees spend th e ir time when they

are not in the bank — what t h e ir hobbies and habits are; who th e ir associates
are*

One doesn*t have to be a pry or a spy to fin d out these things*

In

many of our d efa lc a tio n cases the offenders have been notorious fo r spending
a lo t o f time in night clubs, race tracks, or casinos; and everybody in town
seemed to know about i t except the o ffic e r s and d irecto rs o f the bank.

In

one instance, the d irectors had to pay su bstantial amounts a t the time o f
liqu idation f o r fa ilu r e to discharge th e ir duties in this respect*
I t is ess e n tia l th at an employee should have the fe e lin g that i f he has
a problem he can take i t to one o f his superiors, s i t down and ta lk i t over in
a fr ie n d ly way and expect sound advice and help.

I f bank management would take

greater pains to c u ltiv a te that fe e lin g o f secu rity, most o f th e ir employee
problems would be solved»
W ell, I have rambled on qu ite a t length, but I did want to review what
management has done to meet the challenge since I spoke to you in I 9 I47 and I
did want to suggest what more can be done to bring us c lo s e r to our goal*
In b r ie f summary, the gospel which we preach and the gospel which we
hope you as devoted d is c ip le s w i l l spread thoughout the land f a l l s in to three
categoriesj

1,

Improved in tern al controls*

o f bank audits, and 3«

2.

Wider and more e ffe c t iv e use

An awakening to the need fo r improved human re la tio n s

between top management and employees*

Given your support in promoting these

worthy aims, I am sure that when next I report to you I can say a u th o rita tiv e ly
that "Banking Has Met the Challenge".




Thank you.

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