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PR-8-55 ADVANCE — FOR RELEASE AFTER 10:30 A.M., CST Friday, September 23, 1955 "CORRELATING OUR FUNCTIONS” Address of H. EARL COOK, CHAIRMAN FEDERAL DEPOSIT INSURANCE CORPORATION Before The FOOT-FOURTH ANNUAL MEETING Of The NATIONAL ASSOCIATION OF SUPERVISORS OF STATE BANKS Chicago, Illinois September 23, 1955 ADDRESS OF HONORABLE H. EARL COOK, CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION Betöre The FIFTY-FOURTH ANNUAL MEETING OF THE NATIONAL ASSOCIATION OF SUPERVISORS OF STATE BANKS Chicago, Illinois September 23, 1955 "CORRELATING OUR FUNCTIONS” President Grant; Members of this distinguished Association; Associates from the Federal Agencies having to do with banking ; and other friends; At Raleigh, last year, I spoke about the Corporation's statutory responsibilities. As I said then, our responsibilities begin the minute a bank makes application for insurance. and wants to expand its facilities. They continue as the bank prospers They come to a crux whenever the safety of insured depositors is threatened. Today, I should like to tell you of the methods we have adopted to meet those responsibilities — of the results that have been obtained, and of the few loopholes that still exist which seem to require further correlation of the functions of Federal Deposit Insurance Corporation and the Supervisors of banks in the various States, So much progress has been made through cooperative effort during the past twenty years that mention of what remains to be done may seem gratuitous. What still can be done, however, will enhance the reputation of the banking system and will further safeguard the depositors in our banks* For this reason I should like to review what has been done and suggest further measures that can be taken to correlate our functions -- yours and ours. When Federal deposit insurance came into existence, very few of you who are active members of the National Association of Supervisors of State Banks today were in office. Some of your predecessors viewed certain of our statutory powers with misgivings. There was a feeling that a Federal agency with examination powers over a large number of insured State banks could represent nothing but Federal interference in State banking and a possible threat to the dual banking system. Time and experience have allayed those suspicions. From its inception, the Corporation had no illusions about any exclusive supervisory powers. To know about State banks we had to work with State Bank Supervisors, This we have tried consistently to do in every field of common interest. Correlating — 2 Olir most frequent contact with the State Bank Supervisors is through our Division of Examination* We of the Corporation are convinced that working together throughout these years has brought better supervision and has fostered better banking practices* Certainly it has brought a sense of close understanding among supervisory groups represented here today. Patterns of operation have occupied most of our joint efforts* The first worthy of mention is the actual performance of the examination function. In this segment we jointly have developed three methods, each designed to fit most appropriately the needs of the Corporation and the preferences of the individual State Bank Supervisors. In l6 States and two territories, the Corporation and the Supervisor conduct joint examinations of insured nonmember banks. In these cases, examiners representing the Corporation and those representing the Supervisor join in preparing a report of examination which embodies the joint opinion and the conclusions of each examining authority. In eight States, examiners representing the Corporation, and those representing the State, conduct concurrent examinations of all insured nonmember banks or, at least, the larger ones. In other words, the examination is conducted simultaneously by FDIC examiners and. State examiners, and each submits his own report. Usually such reports are in substantial accord on classification of assets. Each of these methods has the advantage of subjecting the bank to only one examination. In many other States, where two examinations a year are required by State law, the Corporation has worked out a program with the Supervisor to minimize the load. The Supervisor, in these instances, is permitted by statute to accept a report by the Federal Deposit Insurance Corporation examiner in lieu of a second report by his own examiners. Among the three types of examination which I have described, it should be possible for each State Supervisor to choose one which meets his needs and requirements. If you have suggestions for alternative methods of correlation in this field, the Corporation would be glad to consider them thoroughly. Naturally, some of these examinations require follow-up procedures for corrective action. These procedures can be effective only if they are undertaken together by the Corporation and the State Supervisor. We attribute a large portion of the improvement in banking practices to the cooperative approach of our Supervising Examiners and the State Supervisors in their respective districts. Two heads are better than one, as has often been said, and this holds particularly true when your examiners and ours have to deal with obstinate bank management. If corrections are needed in a bank, they come more easily and more rapidly if the examiners who suggest them are in accord. As a consequence, we of Federal Deposit Insurance Corporation enjoy and profit from our close association with you and your men in the examining field. Correlating •- 3 Another busy phase of bank supervision during recent years is the investigation work required by statute in connection with applications for new charters and the establishment of branches where they are permitted* Mergers and absorptions present additional work loads* In most States, joint investigation of the practicability of these projects has been practiced, The results merit wider adoption of this cooperative approach. In the field of report forms required in all our supervisory activities the years have seen great progress as a result of our cooperative efforts* Currently, a uniform Report of Examination is in use by the Corporation and in 26 of the States, T o r many years it has been our practice to supply examination forms in quantity to any State authority who requests them* In the interest of report uniformity and in order to enlarge the scope and improve the accuracy of banking statistics, the Corporation agreed many years ago to print and to furnish without charge to all State banking departments forms for Reports of Condition and Reports of Earnings and Dividends. The Federal bank supervisory agencies are now using forms which are identical in every essential respect* Furthermore, most of the State banking departments, with the endorsement of the Executive Committee of the Rational Association of Supervisors of state Banks, have joined the program. Today, 32 States are being furnished Report of Condition forms by the Corporation and 12 are printing similar forms for their own use* The Report of Earnings and Dividends form is being supplied by the Corporation to 30 States, while 12 are printing similar forms. When our offer was first made, in I93Î-, we supplied only six States with Reports of Condition, and seven States with Reports of Earnings and Dividends forms. Let me emphasize that no major change in these forms is made without prior consultation with the Executive Committee of this Association* We realize that some States have peculiar statutory requirements covering the content of the report forms there in use, but in other jurisdictions our offer still holds. The mutual fields of endeavor I have described thus far are designed to prevent the development within insured banks of conditions which might result in their insolvency* These preventive measures begin with the rigorous statutory requirements and administrative standards which must be satisfied before the Corporation grants insured status to a bank* To maintain this initial health, the Corporation, in cooperation with other supervisory authorities, places great stress and reliance upon competent bank management. Most bank ailments can be traced to incompetent or misguided management; the exceptions are few* Despite the best efforts of diligent supervisors and enlightened management, however, banking trouble occasionally rears its ugly head. That is where we step in. The Corporation has available three general methods of assisting depositors of insured banks which are in financial difficulty* If the bank is placed in receivership, the Corporation pays off insured depositors up to a maximum of $10,000 per depositor* However, if the Corporation Correlating -- k believes that it can thereby reduce its risk or avert a threatened loss, it may make a loan to the failing bank or purchase assets from it to facilitate the assumption of its deposit liabilities by another insured bank. It should be understood that the Corporation is not always free to choose among these alternatives. When an insured bank has been placed in receivership by the appropriate chartering authority, the only course open is to pay the depositors up to the insured maximum in exchange for their claims up to that amount against the appointed receiver. The Corporation is further constrained by the wishes of the banks concerned in providing financial assistance, A distressed insured bank cannot be compelled to borrow from the Corporation or sell assets to it. Neither can any bank be required to take over the liabilities or assets of another bank which is in difficulty. The first and. necessary step in an assumption case is for the distressed bank to make formal application to the Corporation for assistance. An assumption transaction is accomplished only when it has been approved by the appropriate supervisory authorities and agreement has been reached between the Corporation and the banks involved, each having considered its own interest and alternatives. Within these limitations the Board of Directors of the Corporation is required to exercise its discretion as to which method is best in keeping within the letter and spirit of the law. Although dollar-and-cents considerations bulk large in the Corporation^ thinking, it is obliged to consider also the intangible elements in each case. An impression has grown that the assumption method is superior from the standpoint of protecting the community« It does preclude any interruption of banking services and, in accordance with its statutory Justification, provides full protection to all insured depositors, It should be recognized that the receivership method also provides nearly complete protection. When a receivership occurs, there is necessarily a brief interlude in the availability of insured deposits while determination is made of the amount due to each depositor. But such waiting hardly compares with that of pre-insurance days when depositors had to wait for the statutory time provided by various laws governing the payment of dividends. In most receiverships of insured banks, payoff has started within two weeks. Meantime, the knowledge that the Corporation is on the Job encourages an extension of local credit arrangements to meet the emergency. The degree of protection afforded insured depositors in receivership cases is worthy of note. Despite the fact that depositors with accounts in excess of the basic insurance coverage stand to lose in receivership cases, over 99 percent of all depositors, and 98 percent of all deposits in receivership cases have been fully protected. Along with considering methods to protect depositors and their community, the Corporation is required to estimate its own liability under Correlating — 5 the alternative methods available in individual situations. Uncertainty regarding the hank’s condition is one of the major factors influencing the Board's decision. Since time is usually of the essence, and frequently action is required before we have found out all that we should like to know about a given situation, we sometimes make mistakes. In one case, for instance, where the assumption method was adopted, subsequent discovery of shortages increased the Corporation’s liability much beyond its estimate. This and other experiences have taught us to favor a receivership, when the element of uncertainty is large or disproportionate. Uncertainty also enters the picture when the extent of excess deposits and other liabilities is not readily determinable without a detailed and time-consuming analysis. A cursory tabulation of deposit accounts does not always show the amount of excess deposits. Each insured bank which requires financial aid has its own unique distribution of assets. Since factors other than the character of assets determine the method used by the Corporation in extending financial aid to insured depositors, it is obvious that differences in the amounts realized on assets are attributable to the individual asset situations rather than to the procedure adopted. The results obtained in liquidations depend in part upon the economic conditions of the time. Even though the Corporation follows a policy of awaiting favorable opportunities for liquidation, results cannot but reflect variations due more to the economic climate than to the chance that individual cases involve one or another procedure. The Corporation itself is automatically receiver for closed national banks. In State banks this Corporation is expressly authorized to act as receiver or liquidator of insured banks, when so requested by the State authority having supervision of bank liquidations. At the present time the Corporation may, when requested by the State authority, act as receiver or liquidator of closed insured banks in 22 States. In two additional States the appointment of the Corporation as receiver of a closed bank is mandatory. The Corporation is expressly authorized to act as liquidating agent of closed insured banks when requested by the State authority in five States. Authority for the Corporation to be appointed as receiver, liquidator, or liquidating agent may possibly be implied in certain other States. In two States the Corporation has obtained an opinion from the Attorney General that it may be appointed receiver of a closed Insured bank. In three additional States the court is authorized to appoint a receiver, and in six others the State authorities may appoint a liquidating agent. The Corporation believes it is qualified to act in each of these instances, although the authority is somewhat tenuous. Deposit insurance has changed the administration of bank receiverships greatly. Substitution of the Federal Deposit Insurance Corporation as a single claimant for a large number of depositors whose accounts it has paid Correlating — 6 simplifies and expedites procedure# Where the Corporation itself is receiver — as it has been in 8l of the 2k$ receivership cases the responsibility for liquidation is placed upon the largest creditor, whose interest is to obtain the maximum possible recovery consistent with the credit needs of the community# Where another is receiver, the Corporation, as principal creditor, has maintained close contact with the appropriate State supervisory authority and assisted as much as possible in the efficient liquidation of the closed banks. It has also frequently purchased the residual assets of a receiver, in competition with other bidders, in order to facilitate termination of a receivership# In actual practice, only the loan and asset purchase methods have been utilized to any considerable extent. The loan method, supplemented by the outright purchase of assets in cases where loans were impracticable, was the method used until about 19^0. But it has seldom been used since then, having been almost supplanted by a less cumbersome purchase method which has come to be the typical method of handling an assumption case. The asstiming bank, under a purchase agreement, is under no pressure to accept assets which it may not like,,but is instead encouraged to take only cash and funds due from banks. After the Corporation acquires the unacceptable assets and the asstiming bank has had time to examine them or confer with the debtors, the bank is given first opportunity to purchase them. The advent of deposit insurance has materially changed liquidation procedures. The clamor of depositors for a dividend is eliminated as the insured portion of their deposits is paid by the time the liquidation has begun. The pressure on debtors is likewise reduced to the extent that they and the receiver can agree on orderly liquidations and thus minimize the need to sacrifice valuable collateral. The same advantages inhere in loan and asset purchase liquidations. The diversion of these pressures to a Corporation which can and will wait for its money has spelled the difference between chaos and continuity in banking. At the same time the prompt availability of deposits sustains the economic life of the affected community and contributes much to banking stability# The main principle guiding the Corporation in its disposition of assets, as laid down by law, has been an active regard for credit conditions in the community. Different assets have been handled in different ways. These methods have benefited all interested groups# First of all, the community is spared a depression of property values and the Nation a seed of deflation» The Corporation benefits from the maintenance of values as well as from the earnings obtained through continued operations of debtors. These procedures help to keep Corporation losses to a minimum, despite the adverse selection of assets which necessarily accompanies most of its salvage operations. Actual and expected recoveries at the end of 195^ amounted to about $299 million out of potentially recoverable disbursements of $328 million, or over 90 percent. Correlating — 7 No charge is made against liquidations by FDIC for administrative supervision or for expenses considered preliminary to the beginning of the liquidation, such as the preparation of deposit schedules, the application for a loan or purchase, which is the equivalent of an inventory of acceptable assets and assets to be liquidated, and, in receiverships, the inventory. Where the manipulation of accounts has occurred in an effort to cover shortages, an inestimable amount of auditing and research is required, depending upon the extent and method used. Manipulation of deposit accounts creates the problem of determining the exact amount due each depositor. The expense of such auditing is costly, although done by our personnel, who are highly trained technicians with years of experience. The cost of such audits is not charged by us to receiverships where the Corporation is appointed receiver; it is charged to our overhead expense, the same as payoff expenses. Preliminary auditing expenses in loans and purchases is handled in the same manner. The Corporation strongly urges that each of the supervisors in States where the Corporation is not expressly authorized or empowered to act in this capacity, take steps immediately to see that legislation is proposed which will grant the specific authority. In this connection, our Legal Division will be glad to cooperate with the Supervisors in framing the appropriate legislation, and to aid in any way feasible to the end that the program may be uniform throughout the United States. The Corporation is, of course, most gratified over the protection it has been able to afford depositors of the k2S insured banks which it has aided. About 1,to),000 insured depositors have benefited from its intercession in failing banks. This demonstration of purpose and. strength is a tangible testament of the worth of deposit insurance, and accounts for a good measure of the public confidence in the safety of bank deposits. By continuing to promote sound banking and aiding depositors of distressed banks we are determined, with your help, to continue to justify that confidence. In the fields of bank examination, bank liquidation, banking law and research into banking problems, we have made great progress together. Let us continue, in the interest of sound banking and depositor safety, to take those long, firm, forward strides together. X X K -X-X-