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OCTOBER 14, 1945



Each of you at some time has had occasion to point out to bank
directors the legal responsibilities which accompany their charter or
license to engage in banking.

In fulfilling this task of bank

supervision you are doing what is required of you by virtue of the
office which you hold.

That office was created by your State

It was created to implement and enforce the laws which

govern banking in

your State.

The definite legal responsibilities

of your office are outlined in those statutes.

Your official actions

are regulated by them and your decisions are made in accordance with
The statutory frame-work within which you operate is not confined
to State departments of banking. Individual directors of all banks have
definite legal responsibilities, just as you have specific responsibilities
for administering the banking laws of your respective States. The Board
of Directors of the Federal Deposit Insurance Corporation has comparable
legal responsibilities delegated to it by the Congress. As defined by
the Congress and, in some instances, delegated by the Board of Directors
to the Supervising Examiners in the different districts, these statutory
responsibilities are definite and explicit. More than that, they
incorporate the results of fruitful experience and considered judgment.

Conditions for Success of Deposit Insurance
When the frame-work of the Federal Deposit Insurance Corporation
was being laid out in 1933 and 1935> its architects were able to draw
upon over a century of experience with previous measures to protect
bank creditors. From both the successes and the failures among these
early guaranty systems came valuable lessons. The basic dilemma which
confronted the architects of this new attempt to protect bank depositors
was clearly stated by Chairman Crowley during the course of hearings on
the revision of the Act in 1935* Replying to a question of Senator Glass,
Mr. Crowley stated:
"Senator, you cannot hope to keep this Corporation solvent
unless you give it either tremendous income, or unless you
give it supervisory powers and the right to correct unsound
practices . . . "
The soundness of this logic cannot be refuted. The losses of the
Corporation can be kept within the limits supportable at a reasonable
cost to the banks only if the Corporation is given specific implements
to minimize its losses. When the Congress formulated the permanent insurance
plan in 1935> it could have provided a larger income, more in keeping with
the actual losses experienced during the preceding decades of banking;
or it could have provided a lower income predicated upon smaller losses
and the means to keep them small. The Congress elected to give the new
Corporation specific powers to supervise its risk. That is the most
significant single characteristic of Federal deposit insurance.
The obverse side of power is responsibility. When the Congress
empowered the Corporation to do certain things to minimize its risk, it
simultaneously imposed upon the Corporation’s Board of Directors a
responsibility to take prescribed legal measures. The different actions
set forth in the statutes vary in importance and in consequence. Yet
irrespective of their significance, they are equal in that all are
mandatory obligations laid upon the Corporation’s Board of Directors.
Insurance of New Banks
One of the most important ways to reduce the insurance risk, and
certainly the first in terms of sequence, is to accept for insurance
only those banks which have a reasonable prospect of success. When
Federal deposit insurance began existing banks were accepted upon a show
of solvency only. But definite and more rigorous standards for admission
to insurance were set in 1935* The Corporation gained greater freedom
and at the same time accepted greater responsibility in admitting new
banks to insurance.
The actions of the Corporation in considering applications for
deposit insurance are carefully governed by statute. Sections b, 5 and
6 of the Federal Deposit Insurance Act prescribe the manner in which a
new bank may qualify for deposit insurance. New national banks are



certified to the Board of Directors of the Corporation by the Comptroller
of the Currency. Newly organized State banks which initially become
members of the Federal Reserve System are certified to the Board of
Directors of the Corporation by the Board of Governors of the Federal
Reserve System. Other State chartered banks, newly organized or operating,
which desire to be insured are admitted upon application to and examination
by the Corporation and approval by the Board of Directors.
The law requires certain factors to be enumerated in the certification
of the Comptroller of the Currency and the Board of Governors of the Federal
Reserve System, and the same factors must be considered by the Board of
Directors of the Corporation. Section 6 of the Federal Deposit Insurance
Act, which enumerates these factors, reads as follows:
"SEC. 6. The factors to be enumerated in the certificate
required under section h and to be considered by the
Board of Directors under section 5 shall be the following:
The financial history and condition of the bank, the
adequacy of its capital structure, its future earnings
prospects, the general character of its management, the
convenience and needs of the community to be served by
the bank, and whether or not its corporate powers are
consistent with the purposes of this Act."
I invite your special attention to the language of Section 6. It
is unequivocal. "The factors . . . to be considered by the Board of
Directors . . . shall be the following: T h e
Act makes clear that
the responsibility of the Board in tliis matter is mandatory and not
We may be sure that this language was deliberate and not accidental.
By defining the responsibility of the Directors of the Corporation in
considering new risks, it sought to bring those risks within reasonable
Termination of Deposit Insurance
The determination to insure only acceptable risks was reflected
also in the specific power and responsibility to terminate the deposit
insurance of any bank found to be operating in an unsafe and unsound
manner. The power to terminate insurance was quickly recognized as a
corollary of the Corporation’s responsibility to have some measure of
control over its risk. 6ome of the preceding State systems of deposit
guaranty failed for lack of authority to expel defiant and unsound
banks, thus giving particular point to the need for authority in this
area. Testifying before the Senate Committee on this matter in 1935#
Mr. Crowley stated, and I quote:
"We also believe that the insurance Corporation should have
the right to terminate the insurance of any bank if, after
a hearing and after notice to depositors, such action is in

the best interest of both depositors and the Corporation.
In establishing deposit insurance, Congress has assumed
not only a definite responsibility to bank depositors,
but also a moral obligation for the sound management of
To carry out this important responsibility the Congress set forth
in Section 8(a) of the Federal Deposit Insurance Act a clear mandate to
the Directors of the Corporation. Here is the language of this Section:
’’Whenever the Board of Directors (of the Corporation)
shall find that an insured bank or its directors or
trustees have continued unsafe or unsound practices
in conducting the business of such bank, or have
knowingly or negligently permitted any of its officers
or agents to violate any provision of any law or
regulation to which the insured bank is subject, the
Board of Directors shall. .
and there the section lists specific courses of action to be taken.
Again you will note that the Act provides no alternative. The
sense of the language is obvious. The words ’’when the Board shall find"
impose upon the Board the duty to be alert to find forbidden practices.
When such findings are made, the Act defines the course of actions which
must follow.
To protect sound insured banks insofar as possible from paying
for the errors of incompetent and self-serving managements is a basic
supervisory responsibility. The authority to terminate the insurance
of the few banks which engage in unsafe and unsound practices and
violations of law permits the Corporation to guard against intolerable
burdens and gross injustice.
Establishment of Branches
Control over the establishment of branches is not of the same
degree of importance as the authority to grant and terminate insurance.
I might even mention that in England banks may establish branches at will
without the prior approval of a supervisory agency. However, we have a
different tradition and a different situation in this nation, for the
number and character of branches vitally affect our banking system.
Section 18(d) of the Federal Deposit Insurance Act requires the
consent of the Corporation to the establishment of branches by State
non-member insured banks. It also requires the consent of the Corporation
to the change of location of such branches or the change of location of
the main office of a State non-member insured bank. Comparable authority
with respect to national banks and State banks members of the Federal
Reserve System vests, respectively, in the Comptroller of the Currency
and in the Board of Governors of the Federal Reserve System. The scope



of authority in regard to the establishment of branches and changes of
location varies considerably among the several States, and the Corporation's
actions in individual cases are, of course, governed by the lavs of the
respective States.
Retirement of Capital
Consent of the Corporation for an insured non-member State bank to
reduce the amount or retire any part of its common or preferred capital
stock is required by Section 18(c). The withdrawal of capital funds in
connection with the consolidation, merger, or conversion of insured banks
is also governed by this subsection. Authority over the withdrawal of
funds in merger cases is vested in the Corporation if the resultant
bank is to be an insured State non-member bank.
Display of Federal Deposit Insurance Signs
The display of information to the effect that the deposits of banks
are insured by the Corporation is governed by Section 18(a). Specifically,
the law provides that the Board of Directors shall prescribe by regulation
the forms of window signs, the manner of display and the substance
manner of use of such statements.
The purpose of this provision was to place the depositing public
on notice as to whether or not an individual bank is insured by the
Corporation. With this knowledge each depositor would be permitted to
exercise his own discretion in choosing between a bank insured by the
Corporation and one not so insured. Unfortunately, this intended
safeguard has not fully served its purpose. There have been several
instances where non-insured banks failed and where the majority of the
depositors did not realize until after their rude awakening that they
were not protected by Federal deposit insurance. Each instance of this
kind impresses upon the Board of Directors of the Federal Deposit Insurance
Corporation its responsibility under the law to enforce its advertising
regulations strictly. It is not immodesty but a deep concern for the
protection of depositors which prompts these regulations.
Approval of Bank Employees Convicted of Dishonesty
Making its first appearance in the 1950 revision of the law,
Section 19 of the Act reads as follows:
"Except with the written consent of the Corporation, no
person shall serve as a director, officer, or employee
of an insured bank who has been convicted, or who is
hereafter convicted, of any criminal offense involving
dishonesty or a breach of trust, for each willful
violation of this prohibition, the bank involved shall
be subject to a penalty of not more than $100 for each
day this prohibition is violated, which the Corporation
may recover for its use."



This provision of the law applies to all insured hanks, whether
State or national.
The background of this particular provision of the law shows how
the hard school of experience has played its role in the evolution of
deposit insurance. In the early days of the Corporation a certain
individual promoted the organization of a bank in one of our States.
Investigation of the proposal disclosed that several years previously
this individual had been convicted of serious irregularities in
connection with his management of a bank in another State, It was
therefore required by the State authority and the Corporation that he
be disassociated from the proposed bank. When this was done the bank
was duly chartered and insured. However, as soon as the bank opened,
this individual re-entered the scene as Executive Officer of the bank.
The State statute did not permit the Commissioner to remove him and the
Corporation could remove him only through threatened termination
proceedings. In less than a year a shortage of several thousand dollars
was discovered in this small new bank, placing it in a very precarious
position. Section 19 of the present Act is designed to prevent the
repetition of such circumstances.
Fidelity Bonds
The architects of Federal deposit insurance visualized the
Corporation primarily as a fortress against honest mistakes of financial
judgment and economic distress, and only secondarily as insurance
against dishonesty. Long before 1933 protection against losses due to
the dishonesty of employees was available at moderate cost. In keeping
with this distinction the Corporation has encouraged the banks themselves
to take out adequate fidelity bonds, keeping in reserve its full authority
to require insured banks to carry such bond.
Section 18(e) of the Act authorizes the Corporation to require any
insured bank to provide protection and indemnity against burglary,
defalcation and other similar insurable losses. Whenever any insured bank
refuses to comply with such requirements the Corporation may contract for
such protection and indemnity and add its cost to the assessment otherwise
payable by the bank. Not yet having had to resort to this extreme
procedure, the Corporation has cooperated actively with other supervisory
authorities in the encouragement of more adequate fidelity and indemnity
coverage by banks. In these efforts it has met with a high degree of success,
the benefits of which have accrued not only to the Corporation but in even
greater measure to the stockholders of banks.
Protection of Depositors
Let us turn now to the chief beneficiary of Federal deposit insurance—
the depositing public. To depositors the Federal Deposit Insurance
Corporation means one thing and one thing only. It is the agency of
Government which was established to maintain the liquidity of their deposit
funds at all times and to make them readily available up to the maximum
insurance limit. The law provides that whenever an insured bank shall



have been closed by action of its Board of Directors or by the appropriate
supervisory authority, payment of the insured deposits in such bank shall
be made by the Corporation as quickly as possible. The alternative
methods of discharging this obligation are specifically set forth in the
The Corporation has made every effort to comply with both the
letter and the spirit of this mandate. In absorption cases made possible
by the financial assistance of the Corporation, there has ordinarily been
no disruption in the depositor's normal business relations with his bank.
In receivership cases depositors ordinarily have been able to claim their
funds within two weeks following the closing of the bank. In the few
instances when the Corporation has not been able to perform with this normal
degree of promptness, the delays have been occasioned by local statutory
technicalities over which the Corporation had no control. Promptness has
been achieved at no sacrifice of substance, as over 99 percent of all
depositors of closed insured banks have been fully protected against loss.
Liquidation of Assets
Federal deposit insurance does more than assure protection for
depositors. It recognizes and respects the interest of debtors when an
insured bank finds itself in difficulty. The Federal Deposit Insurance
Act directs the Corporation "to realize upon the assets of such closed
banks, having due regard to the condition of credit in the locality."
The intent of this provision is obvious. It enables the banks'
debtors to discharge their obligations to the bank in an orderly manner
without being forced to sacrifice asset values on a depressed market.
This disposition has also been advantageous to the Corporation in its
role as creditor. Despite the adverse selection of assets obtained from
closed insured banks the Corporation has so far recovered about nine-tenths
of its total disbursements. These recoveries have been many times greater
than could have been realized from a hasty liquidation program.
Liability of Stockholders and Directors
Questions have sometimes been raised about the propriety, or possible
impropriety, of the Corporation's actions against directors of a closed
bank for damages resulting from these directors' failure to discharge their
statutory responsibilities. The language of the law as it applies to this
situation is unequivocal. The very sentence which directs the Corporation
to realize upon the assets of a closed bank with due regard to the
condition of credit in the bank's locality includes this following clause,
and I quote: "to enforce the individual liabilities of the stockholders
and directors."
This provision of the law was designed to discourage careless and
reckless individuals from imposing unjustified obligations on the insurance
fund at the expense of prudent and conscientious bankers. Apart from its

deterrent aspects, it has also encouraged many stockholders and directors
to take a more active interest in their hanks, and has thus contributed
greatly to the improvement of banking practices.
Criticisms which sometimes follow specific actions of the Corporation
convince me that there exists some confusion of the purposes sought to be
accomplished by deposit insurance• And even more, there seems to be a
lack of understanding of the relation between those purposes and the
instruments which the Congress made available to the Corporation for their
It is, in fact, an understatement to say that Congress made these
tools available; rather, they directed the Corporation to use them. We
have not alone the power but equally the responsibility to withhold
insurance from unworthy banks; to terminate the insurance of banks which
persistently violate sound banking practices; to control the establishment
of branches and the retirement of bank capital; to regulate advertising
of the fact of deposit insurance; to prevent the employment by banks of
persons convicted of dishonesty and breaches of faith; to require banks
to carry adequate fidelity bonds; to protect depositors; to be mindful of
debtors as well as creditors in the liquidation of assets; and to enforce
the liability of bank directors*
In discharging these responsibilities we are Just a group of
ordinary individuals trying to fulfill an assignment. A highly important
task we think it is, too, for upon the conscientious performance of our
mandate from the Congress depends in large part the welfare of our banking

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