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Federal deposit Insurance corporation WASHINGTON 25 ADVANCE — FOR RELEASE 10:30 A,M, CPT» FRIDAY, APRIL 30, 19$h «CONFIDENCE«» ADDRESS OF HONORABLE H. EARL COOK, CHAIRMAN FEDERAL DEPOSIT INSURANCE CORPORATION BEFORE THE ANNUAL CONVENTION OF THE INDEPENDENT BANKERS ASSOCIATION DETROIT, MICHIGAN APRIL 30, 19& ADDRESS OF HON. H. EARL COOK, CHAIRMAN FEDERAL DEPOSIT INSURANCE CORPORATION BEFORE TEE ANNUAL CONVENTION, INDEPENDENT BANKERS ASSOCIATION DETROIT, MICHIGAN APRIL 30, 195U FOR RELEASE AFTER 10s30 A.M., CDT, APRIL 30, 19$h »CONFIDENCE« I t is pleasant to meet again with my friends o f the Independent Bankers A ssociation, p a rticu la rly in the great State o f Michigan. The names o f two o f that S ta te 1s most distinguished sons, the la te Senator Vandenberg and Congressman Jesse W olcott, appear often in our h is to r y . For long years a fte r the establishment o f Federal Deposit Insurance Corporation, Senator Vandenberg was our leading advocate and guardian on Capitol H ill. His team-mate on the other side o f the C apitol, our frien d Jesse W olcott, has always been a tower o f strength to the banking system. Michigan can w e ll be proud o f having given to the Nation and to banking these two able le g is la t o r s . My theme today is «Confidence». What I have to say about confidence would be hardly worth listen in g to i f I lacked fa ith in the ultimate good ness of God, and in the fo rce o f human progress. We cannot be confident concerning the outcome o f every-day problems i f we lack fa it h in the d irection and destiny o f mankind him self. Our Nation would not have reached the p o s itio n o f power and responsi b i l i t y which i t occupies today had i t not been founded upon confidence in divine wisdom. From the f i r s t settlement at Jamestown and the Pilgrim s1 landing at Plymouth Rock, America*s promise o f freedom and opportunity has beckoned to oppressed and despondent and enterprising people everywhere. Broad fro n tie rs challenged the s p ir it o f adventure. Individual freedom to dare great things led to great achievements. Along the way we have, true enough, had our set-backs. We have known the waste o f war and depression, and the d istress o f unemployment. We have seen our savings dissipated during in fla tio n , and consumed Confidence — 2 during periods o f enforced idleness# We have resented the heavy hand o f government, and then have welcomed i t s help* This Nation survives because confidence in i t s in stitu tion s and fa ith in it s destiny refuse to bow to temporary changes o f fortune* By now you must be wondering what a l l th is has to do with banking* It is ju st th is : that banking illu s tr a te s within it s own province the cru cial part that confidence has played in bringing us to our present station* Whatever the fea rs and dangers which surround us today, mass bank fa ilu res is not one o f them. Where twenty years ago banking was enveloped in a cloud o f d istru st and doubt, today the horizon i s clear# I t has been said that worry i s the in terest paid on debts never incurred# In the same vein, i t might be said that confidence pays dividends without requiring any investment* Without confidence, our system o f exchange, our very economic system, would collapse# I f a l l cred itors tried at the same time to c o lle c t what was owed to them, our economic system would become hopelessly snarled, our p o lit ic a l in stitu tion s would be under severe pressure, even our way o f livin g would be severely affected* Fortunately, these things are not li k e ly to happen, fo r as a nation and as in dividu a ls, we do have confidence* We show our confidence every time we w rite or accept a check# We show i t when we buy bonds, deposit money in a bank, or take out an insurance policy# Every industry has an important stake in public confidence, but banking leads the l i s t . Banks deal not in goods but in promises, and confidence is the essen tial element in every promise* The confidence with which depositors today regard our banking system is a p rice le s s asset# To maintain confidence in our banking system, we should know the elements which are mainly responsible fo r i t s existence# The generally favorable economic climate o f the past several years i s , o f course, the fundamental source o f today’ s confidence* Within the framework, however, banks themselves have achieved a status which has in s tille d confidence# The sources o f this confidence may be summarized in three sentencess (1) Bank fa ilu re s and depositor losses have been very low during the past twenty years; (2) Banks are today in generally sound condition; and (3) The protection o f depositors by the Federal Deposit Insurance Corporation provides valuable reassurance* Let us explore for the moment the v a lid it y and sig n ifica n ce o f each o f these statements* (1) Since the Federal Deposit Insurance Corporation began operations in 193k» it s assistance has been enlisted in the cases o f 1|22 banks* During Confidence — 3 an equal period before i t s organization over 15*000 banks fa iled * more banks than are now in existence* In 177 cases in which the Corporation has extended i t s fin a n cia l aid a ll depositors have been f u l l y protected* In those cases the Corporation sought to minimize i t s losses by arranging a transfer o f deposit l i a b i l i t i e s to another insured bank* The Corporation has a lso been ca lled upon to protect depositors in 2U5 receivership cases« In a l l of them there was the p o s s ib ility of loss to depositors whose accounts exceeded the basic protection* Yet even in these cases, 99 percent o f a l l depositors and 98 percent o f a l l deposits were fu lly protected* This favorable record o f few bank fa ilu re s and low depositor losses has led bank depositors to have confidence that th e ir deposits are safe* They p r o je c t th is reassuring experience into the future* (2) Just how sound and how worthy of th is confidence are banks today? The s t a b ilit y o f present-day banking is one o f i t s sa lie n t character is tic s * The decline in the number o f bank fa ilu r e s , along with rigorous requirements fo r the chartering o f new banks, has s ta b iliz e d to a great ex tent the number of banking o ffic e s * This situ ation tends to promote e f ficie n c y in the organization and provision o f banking services* Bank assets and bank earnings have reached unprecedented heights* In part th is is the normal resu lt o f a growing economy; but i t i s also evidence that banks are meeting the conpetitive challenge — that they are moving forward in keeping with th e ir stra te g ic r e sp o n s ib ilitie s * As to bank assets today, I want to make i t clear that we have every reason fo r assurance concerning th e ir quality* Our basic secu rity lie s in the fa c t that bank assets represent an investment in our Nation; they are investments in our fa c to r ie s , our homes and our farms. Federal government obligation s account fo r a substantial proportion o f the t o t a l. Beyond these fa c ts there are several safeguards which o ff e r further reassurance. Appraisal methods based on the in tr in s ic value o f a ssets, as today1s methods are* minimize the untoward e ffe c t s o f market flu ctu a tion s. Wholesale liquidations which depress values and spread consternation and fru stra tion are p r a c tic a lly eliminated by today*s appraisal methods* Moreover, resources are re a d ily available to tid e in dividual banks over a c r is is * Apart from th eir obligation s to depositors, banks themselves have sizeable resources. Capital accounts have grown ste a d ily fo r many years; for a time th eir r a tio to t o ta l l i a b i l i t i e s declined, but th is course has been reversed* C apital and surplus accounts o f a l l banks now exceed Confidence — I* $15 b i l l i o n . The p ra ctice o f settin g up reserves fo r losses and o f absorbing losses currently has become in creasin gly widespread, with the resu lt that p o r t fo lio s are r e la tiv e ly clear o f dead wood. Improvements in banking practices and better bank management are o f paramount importance. A ll banking problems come to a focus in manage ment. The q u a lity of management makes or breaks a bank. There is growing recogn ition among bank d irectors that th eirs is a sober re sp o n s ib ility . (3) The third ingredient o f confidence which I mentioned, the Federal Deposit Insurance Corporation, is one in which I am naturally deeply in terested . Yet there is more than bias in my b e lie f that the insurance of bank depositors is one o f the prime sources o f confidence. I t has, I b e lie v e , been the predominant fa c to r in the favorable experience o f the past two decades; and through i t s examining a c t iv it ie s , Federal deposit insurance has contributed fu rther to the soundness o f our banking structure. These are p o sitiv e influences which we should be carefu l to preserve. How th is confidence in the corporation has arisen, and what presently supports i t , are matters o f considerable importance. I should lik e to suggest that confidence comes prim arily from the C orporations record in being able to meet it s statutory r e s p o n s ib ilitie s , and from i t s presumed a b ilit y to meet whatever demands are made upon i t . The contribution of the Federal Deposit Insurance fund to the maintenance o f confidence in our en tire banking system is w e ll worthy of note. What is the essen tia l character o f the fund, what is an appropriate target fo r s iz e , and how fa s t should the fund grow, i i at a ll? These questions have provoked pronounced d ifferen ces o f opinion. From time to time proposals have been made to curb the growth of the deposit insurance fund. There has been some desire to reduce the amount o f assessments paid by insured banks, ^ome presume that the insurance fund is large enough to take care o f a l l foreseeable contin gencies. In considering each such proposal i t s e f f e c t upon depositor confidence is o f primary importance. When Congress amended the Federal deposit insurance law in 1950, i t made provision fo r cred itin g insured banks with 60 percent o f th eir assessment, a fte r making allowance fo r Corporation expenses and losses and adding the remainder t o the insurance fund* Under terms o f th is le g is la tio n , e ffe c t iv e assessments have b een reduced more than h a lf in each year since 1950. Along with this reduction, however, i t should be noted that the Congress recognized two important p rin cip le s • the p rin cip le o f bank Confidence — f> payments fo r deposit insurance p rotection , and the n ecessity fo r growth in the fund* The provision fo r bank assessment payments to the fund re sts upon both need and prin ciple* Growth o f the fund depends m aterially upon fin a n cia l p a rticip a tion by the insured banks. By such p a rticip a tion the banks provide a tangible expression o f th eir fa it h in the system o f deposit insurance. The deposit insurance assessment is a measure o f bankers* confidence; i t i s evidence o f th e ir active support o f the p rin cip le that deposit insurance is a form o f mutual aid and not dependent upon a government subsidy. Should bankers cease to contribute to the growth o f the fund, the question o f subsidy could be raised again* Both the Corporation and the banks have been steadfast in th eir e ffo r ts to eliminate public subsidies from the structure o f deposit insurance. I f the assessments paid by insured bankers were to end, there would be some basis fo r the contention that they had repudiated th eir e ffo r t s to eliminate subsidy* TO be sure, i f the low loss experience o f the past few years continues the deposit insurance fund would continue to grow without bank assessment payments, through the income on it s investments. These, however, are p rin cip a lly in obligation s o f the Federal government. I f the sole support of deposit insurance came in d ir e c tly from the general funds o f the Federal government in the form o f in te re s t on the investment, c r i t ic s could charge that banks had become passive b en eficia ries o f pu blic subsidy. Insured banks would not want to lose the prerogatives and status which derive from their p osition as active participants in the fund. Think o f what i t would mean i f the fund lo s t it s character as the mutual endeavor o f a l l insured banks. What then would be the basis fo r distinguishing the insured from the noninsured bank? Aside from these matters o f p rin cip le , the size o f the deposit in surance fund i s a matter o f more sign ifica n ce than meets the eye* At the end o f 1953 the fund amounted to $1,U50 m illio n . This may seem lik e a large amount; yet r e la t iv e ly to the deposit l i a b i l i t i e s o f insured banks, i t is no larger — in fa c t , i t is smaller — than i t was 20 years ago. I Expansion, not stagnation, i s the outstanding ch a ra cte ristic o f our economy. Depositors look with favor upon the growing deposit insurance fund* So long as i t grows along with the r e s t of the economy, i t stands as an important symbol of strength. l e t i t i s more than a symbol* I t is a resource re a d ily available fo r the p rotection o f insured d ep ositors. So fa r the t o ta l insurance losses incurred by the Corporation have totaled $28 m illio n , a figure Confidence — 6 4 ^ ',‘ sometimes cite d as evidence that the fund is s u ffic ie n t ly large to take care o f a l l conceivable losses« Proud as we are o f th is fin e record, i t should be made clea r that net losses are not an adequate measure o f demands which might be placed upon the fund« The operation o f deposit insurance requires outlays much greater than the ultimate net losses sustained in protecting dep ositors. When an insured bank gets in to d i f f i c u l t y , and the Corporation advances funds to pay o f f d ep ositors, i t acquires assets that may require several years to liquidate« The a b ili t y to manage and to hold these assets u n til liqu idation opportunities a rise accounts in large part for our favorable loss exper ien ce. Up to now Corporation disbursements to p ro te ct depositors have been more than ten times as much as our realized losses« Deposit l i a b i l i t i e s o f insured banks now stand at record to ta ls « Recognizing the p o s s ib ilit y that these banks in the future may require r e la tiv e ly more assistan ce, the fund seems not out o f lin e with p ossib le demands upon i t . I t i s worth noting that there are lit insured banks, each with deposits larger than the Fund« Certainly, we are not looking fo r trouble to origin ate with them; nov would the amount o f working capital which we might be ca lle d upon to provide be more than a fr a c tio n o f th eir t o ta l deposits* However, the situ a tion does not ju s t ify ignoring our contingent li a b i lit y « Sometimes the need fo r a large fund, or indeed the need fo r any fund, is discounted because o f the borrowing authority o f the corp ora tion . We have authority to borrow up to $3 b i lli o n from the U«S« Treasury« However, th is borrowing authority has always been looked upon only as a la st resort« I t must be apparent that at the moment we draw upon th is lin e o f c r e d it, the character o f deposit insurance would change. We would lose that independence which comes from our a b ilit y to operate on our own. Banks would become lia b le to charges o f pu blic subsidy. The act o f borrowing to meet it s obligation s would be regrettable evidence that the Corporation has not rea lized the hopes and intentions o f i t s founders* In the minds o f depositors i t could be construed as a sign o f weakness« The popular confidence which i s the mainstay and support o f our banking system would su ffer an in calcu lable shock« In clo s in g , I should lik e again to r e fe r to Senator Vandenberg, and his appraisal o f the importance o f confidence. I do th is with some hesitancy, although anyone associated with the Federal Deposit Insurance Corporation fe e ls proud o f his comments concerning the Corporation. These are words o f his back in 19h7$ contained in a le t t e r to Senator Bridges t «The FDIC is the most important o f a l l contributors to the psychology o f pu blic confidence in the pu blic and private f i s c a l system o f this country. I t was a banking c r is is Confidence «*— 7 which a ctu a lly precip itated our great depression in the early t h ir t ie s . The f i r s t necessity in meeting that depression was to cure popular d istru st o f our banking system and to create unlimited confidence in i t . This i s p re cis e ly what the FplG did and has continued to do with spectacular success ever s in ce . I t is the most su ccessfu l sin gle instrum entality o f Government created this century. Just why we should s ta rt to tamper with i t s status a t this p a rticu lar moment is beyond my comprehension. Although we are e n tire ly surrounded these days by economic uncertainty and economic anxiety in a l l other d ire ctio n s , there is no worry about our banking system. The answer i s the FDIC. I confess that I am t o t a lly unable to understand why Congress should do anything to upset this p rice le ss psychology.H Let us hope that Senator Vandenberg was rig h t, and that the source of confidence in our banking system w ill continue to be nurtured in keeping with th eir importance*
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