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A p r il 20, 19$3


deposit Insurance


W A S H IN G T O N 2 5

APRIL 20, 1953


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.


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
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 ~


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” *


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
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
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 ;

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;

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

inaugurated both by the banks and by the supervisory agencies;

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

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

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 .


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*

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*


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?”


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.


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.


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

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


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.


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


Improved in tern al controls*

o f bank audits, and 3«


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.