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Director, Federal Deposit Insurance Corporation

Presented at the
Central States School of Banking
University of Wisconsin
Madison, Wisconsin

August 28, 1950


You are, I am sure, fully aware of my topic, But for emphasis
I shall repeat it:

"Banking and Bank Supervision.*'

Not, "Banking

versus Bank Supervision," or vice versa, which is apparently too generally
the concept of not only bankers but of the public.
Our form of bank examination and bank supervision is peculiar
to this country.

This is quite natural, since it has grown out of our

unique system of banking.

"Whether you prefer to call it tho dual banking

system or the free -enterpr ise -banking-sys tern is not important.

We like

to think of it as both.
Only in recent years have other countries shown an interest in
our bank examining processes * You might be interested to Know that about
four years ago an official of The Reserve Bank of India visited the
United States to study the practices and procedures of our bank supervisory

We were somewhat amazed to learn that there were more than

lhOO Independent banking units in India.

This gentleman visited all of

the Federal banking agencies as well as some of the State banking
departments and took back to India with him many original ideas tnat he
discovered here.
About two years ago Japan took steps to set up a system of bank
examination and supervision and copied our pattern.

The chief examiner

of the Inspection Division, Ministry of Finance of Japan spent two months



in the United States this year studying the operation of our hank examining

This gentleman made extensive visits to the Division of

Examination of each of the three Federal hanking agencies.
I mention this only for the purpose of emphasizing the fact
that we were the first to recognize the wisdom and necessity for a system
of hank examination and supervision to aid and promote our system of
In the early days of our Republic each hank was chartered hy
special legislative enactment.

Late in

1781 the Continental Congress

of the 13 original States chartered the Bank of North America the main
purpose of which was to furnish fiscal assistance for the conduct of the
Revolutionary War.

Subsequent to the adoption of the Constitution the

Federal government - in 1791 - hy a special act of Congress, granted its
first hank charter to The First Bank of the United States. The life of
the Charter was 20 years. In 1816 the Congress granted a 20-year charter
to the Second Bank of the United States.
During this same period, of course, the several states were
granting charters for the operation of hanks. Each charter required a
special act of the legislature.

The advantage of a hank charter, naturally

was the limited financial responsibility imposed upon each of the
individual stockholders as compared to the unlimited liability involved in
the operation of a private hanking firm.
All of these early charters carried some provision for supervisory
control hy the chartering authority.

The actual exercise of supervision,

however, was for the most part non-existent or very loose.

At the same

time, the idea always prevailed that the chartering authority should have

-3the right to exercise certain controls.
Finally, in

1837, the State of Michigan set the pattern for our

present day chartering practices for hanks.

A general hank chartering

statute was enacted whereby a group of individuals desiring to establish
a hank could do so by complying with the statutory requirements and
receiving administrative approval.

In other words, it was no longer

necessary to lobby a bill through the legislature in order to secure the
privilege of operating a chartered bank.

The following year New York

passed a similar law and other states followed in rapid succession.


of these laws provided for some form of supervisory control.
Following President Jackson’s successful campaign to prevent
the extension of the charter of The Second Bank of the United States, the
Federal government remained out of the picture in bank chartering until

1863 when the National Bank Act became law.
and improved in

This Act, which was amended

1865, provided for the "free” chartering of banks by the

Federal government and a definite program of supervision, including
periodic examinations of National banks. This was the real beginning of
bank examination and supervision as we know it today.
This brief review is intended to emphasize the fact that some
form of supervision by the bank chartering authorities has been an integral
part of our bank chartering system from its very beginnings. While the
idea has persisted throughout the years, the concepts of supervision have
undergone a gradual change from the original idea of a strictly policing
Job to the generally accepted concept of bank supervisors today that their
most effective contribution to banking lies in the field of counsel and

For several decades, however, the purposes of hank examination
were regarded as being fully served by having an examiner visit each bank
and determine from an inspection of the records that the bank was operating
within the limitations imposed by law.

In most instances, little or no

attempt was made to appraise the quality of individual assets. In other
words, if a loan came within the legal limits it was usually not questioned
unless it was delinquent, perhaps to the extent of being subject to a
classification as a statutory bad debt.

There was very little coordination

between the work of the individual examiners, and little or no follow up
by the department head between examinations.
The original concept of bank supervision, therefore, was that an
individual examiner should visit an individual bank for the purpose of
policing it for violations of law - and little else.
It is interesting to observe the several steps in the evolution
from that very primitive concept of bank supervision to the broader,
more complicated, but undoubtedly more constructive concept that exists

Generally speaking, some broadening - or tightening up, if you

prefer to call it that - of the application of supervisory controls followed
each major financial or general economic crisis. The most notable
legislative example of this, since the enactment of the National Banking
Act, are the Federal Reserve Act of 1913 and the Banking Act of 1933 as
amended by the Act of 1935«
The last mentioned legislation has, of course, had the most
profound effect on the present day thinking of bank supervisors as to
their duties and responsibilities, the sphere within which each
supervisory agency must operate, and the limitations imposed thereby.

The hanking difficulties of the 1920’s which culminated in the
debacle of

1929 to ’33 presented a challenge to hankers and hank

supervisors alike.

They had to prove to the public that our own unique

independent, dual hanking system could and should survive.

State and

nationally chartered hanks realized that they perforce must dwell together
in amity.

Likewise, the various state and federal supervisory authorities

recognized that without in any way surrendering their independent
prerogatives, they must work closely together, if they were to make any
constructive contribution to the future soundness of our hanking system.
So out of all of this has come what I believe to he the consensus
today of hank supervisors as to their duties and responsibilities both to
the public and to the hankers. Perhaps I can summarize this in a few
punch paragraphs, as follows:
(1 )

While it is universally recognized hy the statutes, both

state and federal, that the supervisor’s primary responsibility is the
protection of the interests of the depositors, he must necessarily be
interested in the welfare of the hank and in its entirety because of


The economic disruption to the community as the
result of a bank failure;


The loss to minority stockholders who have no real
voice in the management and therefore are the innocent
victims of misfeasance or malfeasance on the part of
active management;


The reflection on the banking system as a whole and
resulting loss of public confidence which is the
aftermath of any bank failure.





Bank supervision fall3 short of the mark when it limits

its activities to the periodic examination of hanks with no interim
follow-up to obtain corrections of recognized unsatisfactory situations.
(3 )

Bank supervision oversteps its authority as well as the

hounds of propriety when it attempts to usurp normal managerial functions.

In seeking to obtain necessary or desirable corrections

the supervisor should employ the techniques of reason and salesmanship
and avoid wherever possible the exercise of police powers.

The supervisor should strive to the utmost to discharge

the responsibilities of his office in a fair and impartial manner,
never lacking in courage to maintain the integrity of his office while
at the same time studiously avoiding tie imposition of arbitrary
requirements not contemplated by law.
I believe this summarizes fairly the accepted concept of present
day supervision.

Being mere humans, and therefore subject to all of the

accompanying frailties, we may frequently fall short of the ideals to
which we subscribe, but I can assure you that all of the supervisors who
come within my purview are genuinely trying to abide by these principles.
The second phase of my subject, namely, practical application
of these supervisory concepts, very readily divides itself into two
parts (1)

The development of uniform examination procedures and

supervisory policies since

1933; and

The present day application of those procedures and


In discussing present day standards of bank supervision, I


1933 as the "beginning point because prior to that date there was

very little coordination in supervisory practices as between the various
supervisory authorities.

As a matter of fact, we could very well take

1935 as the beginning date because no real progress was made until
after the enactment of the legislation popularly referred to as the
Banking Act of 1935# which became effective on August 16 of that year.
It is true that in 193U the Secretary of the Treasury attempted
to get the three Federal banking agencies together in their thinking
on the appraisal of bank assets but very little immediate progress was
made in the direction of uniformity.

The Banking Act of 1935 > therefore,

was the actual jump-off point from which we have progressed to our present
state of cooperation and high degree of uniformity in the field of
bank supervision.
The Banking Act of 1935 prescribed the first statutory
conditions to be met by banks desiring to participate in any Federal
banking program - other than capital requirements based upon population
as prescribed by the National Bank Act.

The Federal Beserve Act of 1913

imposed on State banks desiring to join the Federal Beserve System
capital requirements similar to "those of the National. Bank Act.
Notwithstanding the lack of specific statutory authority
on any factor except capital* the Comptroller of the Currency had for
a good many years exercised his general discretionary authority to
grant or refuse a National bank charter by requiring a proper showing
as to (l) the needs of the community for the banking facilities being
sought, (2) the acceptable character of the people who were promoting
the organization and (3 ) the adequacy of the proposed capital in



relation to the expected volume of business - the latter without regard
to the basic population requirements.

Many of the states had similar

requirements written into their banking statutes prior to 1935*
The Congress, in recognition of the evils that had beset the
banking system as the result of the free competitive chartering of
banks as between the several states and the National bank department,
followed the lead of the Comptroller of the Currency and laid down
certain specific requirements which must be considered by the FDIC
in admitting a State nonmember to the benefits of deposit insurance.
It required both the Comptroller of the Currency and the Federal Reserve
System to observe the same requirements in granting a charter to a
proposed new national bank, or in admitting a State bank into member­
ship in the System.
Another provision of the Banking Act of 1935 °f equal or perhaps
greater importance than the admission standards, is tnat which gives
the FDIC the right to cite any insured bank, State or National, for
continued unsafe or unsound practices or continued violations of law
and to require their correction within 120 days. If the bank fails to
make the required corrections within the specified period, further
action may be taken by the Corporation leading to the termination of
the bank’s insured status.

As I said before, this action may be taken

against any insured bank, whether it be a National, State Federal Reserve
member, or non-member insured bank.
The primary purpose of this provision of the. law, is to bring
about the correction of unsafe or unsound practices and/or violations
of law end thereby restore the bank to a normal state of healthy


In only a few of the most stubborn and recalcitrant cases

has it been found necessary to carry the termination proceedings through
to a conclusion.

Furthermore, the FDIC and the appropriate State or

Federal supervisory authority, through their ,3oint efforts will have
exhausted all corrective alternatives before recourse to this action.
This is as it should be, because the very essence of the Federal Deposit
Insurance Law is to keep banks open and the banking system healthy.
While there are several other provisions of the Banking
Act of 1935 that are calculated to bring about higher supervisory
standards and a higher degree of uniformity in the application of those
standards, the three provisions I have just described
the most important.

are, in my opinion,

This Act is my second Bible, and the more I read

and study it, the more aware I am that, in its enactment, the Congress
intended that bankers and bank supervisors should work together to
prevent a recurrence of the dismal history of bank failures prior to the
Banking Holiday of 1933*
The law, however, can only lay down general standards of

No matter how well conceived a particular piece of legislation

may have been, or how well it may have been drafted, in the final
analysis, its effectiveness is dependent upon the degree of competence
and honesty with which it is administered and the manner in which the
bankers observe its spirit.

So I shall turn now to the administrative

and policy actions which have been taken since 1935 to implement the
The Corporation examines, in collaboration with the State
banking departments,the 6,700 odd insured State banks which are not



members of the Federal Reserve System.

Taking advantage of that

provision of the law which gives the Corporation right of access to the
reports of examinations made by the Federal Reserve and National Bank
examiners, the Corporation has consistently reviewed the condition of
all insured hanks as reflected by their examination reports almost
since the beginning of deposit insurance.

Incidentally, but very

importantly, we have also had the benefit of reviewing the reports of
the State examiners, and in turn, have made copies of our reports
available to the respective State authorities.
There is no point in reviewing an examination report Just to
see how well or how poorly the banker is conducting himself as of any
one given date.

Except in those situations where a single review

discloses the bank to be in serious difficulty, no real value accrues
from such reviews except by comparison with past performance.


bankers have long recognized that fact through the use of your
comparative analysis cards on your principal borrowing clients.


FDIC decided In 193^ that what was good for the banker, could be of
equal or more benefit to the Corporation in keeping up with its insurance
hazard in some 1^,000 banks. Our first comparative analysis card was
hastily conceived and therefore somewhat crude.

By 1937> ve had

developed our present card, Form 96, which has required little change
since then.
In attempting to set up comparative analysis cards in the
early days we encountered considerable difficulty because of the
divergent methods of reporting by the Federal Reserve, National bank,
and our own examiners. The divergence between the several States and

the three Federal agencies was even greater.

In order to correct this

situation, the Corporation, in 193& > undertook a plan to get the three
Federal agencies together on a uniform examination report.

After a

number of conferences covering a period of several weeks the three
Federal agencies agreed on a form of report that was uniform and
mutually acceptable to the three agencies.
The next step was to solicit the cooperation of the State
bank supervisors to adopt examination report forms similar to ours.
We had a very ready response from the Executive Committee of the
National Association of Supervisors of State Banks.

Practically all

of the State supervisors x-ecognized, as we in the Federal banking agencies
had, that there was need for change in the manner of reporting the
findings made in examinations of banks.

They welcomed our suggestions,

and contributed many of their own which have proven to be of value.
As a result, slightly more than half of the states are now using
examination report forms identical in all practical aspects with those
used by the Federal banking agencies.

The report in its present form

has been changed from time to time, but no change has been made without
first consulting and receiving the approval of the State bank
After adopting uniform examination report forme it followed
logically that there should be an agreement on uniform standards for bank
examiners to use in their appraisal of bank assets.

A number of Joint

meetings looking to the attainment of this objective were held by the
bank supervisory agencies during

193? s^d 1938 a^d finally an agreement

was adopted by the Federal agencies and the Executive Committee of the

Nat5.onal Aesooiation of Supervisors of State Banks which came to "be
known as ’’the uniform valuation method of appraisal of assets".


of you who are interested in the details of the agreement will find it
fully set forth in the FDIC Annual Report of 1938

843 well as in the

Federal Reserve Belletin.
This agreement embodied two major changos in the then
existing classification procedures• Both were designed to "bring about
the appraisal of bank assets on "continuing business" value, rather than
on estimated liquidating values as of the date of a given examination.
The economic set-back in 1937 had left many banks with substantial
depreciation in their bond portfolios, both in investment grade and
substandard issues.

It was therefore agreed that investment grade issues

should be appraised at amortized cost or book value, whichever was the
lower and that the current market value yard, stick would not be applied
to such issues.

Substandard bonds (below investment grade and above

defaults) would be appraised at the average monthly market quotations
for the past eighteen months, and one-half of any depreciation on that
basis would be set up as doubtful - or III.

Defaulted securities and

stocks would be appraised at current market and any resulting
depreciation would be treated as loss and charged off.
The second change resulted from a feeling in certain quarters
that bank examiners were inclined to overclassify loans to intrinsically
solvent borrowers when times became a little tough, either locally or
nationally, and thereby accentuate the difficulties of both the bank and
the borrowers.

The old fashioned classifications of slow, doubtful and

loss took it on the chin as being primarily responsible for these alleged

-13aberrations of judgment on the part of the examiners and were therefore
replaced by the Roman numeral captions of II, III and IV, the purpose
being to base the classification more on the intrinsic worth of the asset
than on its liquidity.
There is no doubt that much good came from these discussions
and the adoption of this agreement.

First, it made all of us in the bank

supervisory field coneciou3 of the fact that each of us could not proceed
blithely in his own jolly direction, but that we must pool our thinking
and attempt to chart a common course.

Second, it emphasized in our minds

the fact that we must not necessarily regard the assets of a properly run
bank as doubtful just because they had taken cm a slightly jaundiced
appearance as the result of a more or less temporally economic disturbance.
Many of us in the supervisory field were never enthusiastic
about the Roman numeral captions.

Classification II was particularly

difficult for the banker to understand, but more importantly to us,
definition of the caption was difficult for our examiners to interpret.
Captions III and IV meant Doubtful and Loss, so why not just call names

At the same time there was a reluctance to go back to the

adjective caption of Slow.

After a considerable period of negotiations,

the Roman numeral captions were replaced in 19^9 by the adjective captions Substandard, Doubtful and Loss.
Another recent but minor change in the 1938 uniform agreement
was the discontinuance of the practice of appraising group
on the basis of the 18-months average of market value.

2 securities

Such securities

are now appraised at current market value. There has been no change with
respect to evaluation of U. S . Government and other group I (investment

-Illquality) securities at the lower of book value or amortized cost.
These revisions represent no fundamental change in the procedure
followed since 1938 nor do they signify any intention on the part of the
supervisory authorities to become more or less severe in the classification
of bank assets.

Their purpose is clarification and simplification of

procedure in the interest of more uniform application.

The use of the

18-months average price for group 2 securities is no longer of practical
significance since the banks of the country have only a nominal investment
in such securities. As to classifications I am sure you bankers now have
a much clearer idea of what the examiner is driving at when he talks in
the language of "substandard, doubtful and loss."
The Corporation, like other supervisory agencies, is fully
aware that its examinations are only as informative and effective as its
personnel and is striving constantly to develop its manpower material.
It is conducting a rather comprehensive educational program for examiners
and assistants.

This program, which began in 19^6, is designed to fit

the particular needs of each participant and to supplement the training
he receives on the Job.

Usually the program consists of correspondence

study in courses given by the American Institute of Banking.

In other

cases, examiners or assistants are enrolled in residence courses offered
through a college or university or by a local chapter of the AIB.


the latter group are included enrollees in the Graduate School of Banking
at Kutgers University, and in Central States School of Banking at the
University of Wisconsin.

Approximately 75 percent of the examining staff

were either enrolled in or had comploted courses under the program by
the end. of 19^9«

The entire cost of the program is paid by the Corporation,

-15but all participants take the courses on their own time, frequently
devoting their vacations to weeks of hard work.
In conclusion I am sure you will agree that The Concept end
Standards of Bank Supervision have developed materially since the Banking
Holiday and the Banking Act of 1933 • Bank supervisors have grown greatly
in stature; they have moved definitely away from the old Idea of coercive
police powers. Now it is universally recognized that the superior
supervision is exemplified by the best salesmanship.
Permit me to emphasize that the well-run bank has nothing to
fear from the bank examiner or his superior.

We may have friendly and

open discussions of controversial matters but never acrimonious differences
of opinion.

The banker who is at continual odds with the bank examiner

should have a moving picture made of himself.

Perhaps he will see that

he is the only man in his company who is out of step’