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ran M aH M H H H








Friday, August 31, 1956

Address of
Before The
University of Wisconsin

Madison, Wisconsin



31 , 1956


The Federal Deposit Insurance Corporation was created by
the Congress to protect depositors against the unavailability or
loss of their deposits because of bank failures. The performance
of this function encompasses many activities, but neither the
function nor the activities of the Corporation quite describe its
role. As I see it, the role of Federal deposit insurance in our
economic system is to provide and maintain banking stability, thus
contributing significantly to the maintenance of general economic
stability. It is the purpose of today’s discussion to describe how
the Federal Deposit Insurance Corporation, by fulfilling the
function set forth by the Congress, plays its very important role.
Perhaps the best place to start is with a review of the
principal duties of the Federal Deposit Insurance Corporation,
first as they apply to closed insured banks, and second, to
operating insured banks. With respect to the closed category, the
Corporation’s duty is to pay, or make available, to each depositor
the amount of his insured deposit. In those cases in which the
Corporation is charged with liquidation of the assets of the bank,
it is responsible for carrying out that liquidation in a manner
that will secure maximum recovery, without disruption of values in
the community concerned.
With respect to operating insured banks, the Corporation's
principal duty is to examine insured banks not members of the Federal
Reserve System. These, then, are the major duties; let us see how,
together, they constitute one of the significant roles in American
At the time of its establishment in 1933> and for a
number of years thereafter, most activity by the Corporation centered
on closed banks. This is understandable when we recall the events
which led to the formation of the Federal Deposit Insurance Corporation.
As is true of most legislation, deposit insurance was devised
to meet a particular situation. In the 1920’s an average of about
600 banks failed per year, and from 1930 through 1933 bank failures
averaged over 2,200 per year. Indeed, the total number of bank
failures from 1920 to 1933 exceeded the number of banks in existence
today. Losses to depositors during that period reached nearly
$2 billion, and losses to bank stockholders were even greater.
During the 1920's, the large number of bank failures gave
impetus to proposals for banking reform, the most important of which
were those providing for the insurance or guaranty of bank deposits.



These proposals became more urgent with the increasing number and
seriousness of bank failures during the early 1930's. The result
was the establishment of the Federal Deposit Insurance Corporation
in September, 1933»
You will note that, contrary to the impression many people
now have, deposit insurance was not a new idea in 1933« As a matter
of fact, the bill which became law in that year was at least the
150th bill to be introduced in the Congress calling for the guaranty
or insurance of deposits. Such bills had been introduced in every
Congress but three, beginning with the ^9th Congress during the
administration of President Grover Cleveland. I might note that
the very first bill to be introduced, on January
,1886, was by a
Congressman from the State in which we are meeting today.


Not only was deposit insurance an old idea, but it also
had been tried separately in fourteen States prior to 1933* In six
States deposit insurance systems were in operation prior to the
Civil War and most of these were successful in protecting bank
depositors. The deposit insurance . systems adopted by eight other
States, between 190? and 19X7* were generally unsuccessful. This
was due to the fact that most of these were farm States, in which
there developed serious banking difficulties as a consequence of the
agricultural depression of the 1920’s.
During 193^> the first full year of nationwide deposit
insurance, disbursements by the Corporation to protect depositors
were relatively small. The American banking system was given a
breathing spell following the events of the several preceding years
and the banking holiday of 1933* However, beginning in 1935 there
was a marked increase both in the number of bank cases handled by
the Corporation and its total disbursements. Disbursements which
had been less than $1 million for 193^ rose ten-fold in 1935> to
about $9 million. Five years later, in 19^0,disbursements to protect
depositors of banks failing in that year totaled
million and, in
addition, there were substantial liquidation expenses and advances.
Since 19^0 annual disbursements have been considerably
smaller, as the number of insured banks becoming involved in financial
difficulties sufficiently serious to require disbursements to protect
depositors has averaged only four or five per year. This compares with
an average of about 50 banks per year during the first seven years
of Federal deposit insurance.
For the entire period, from 193^ through 1955» the Federal
Deposit Insurance Corporation has disbursed about a third of a billion
dollars to protect depositors in ^29 insured banks. These banks had
approximately l.U million depositors and total deposits of well over
one-half billion dollars.


Now let us inquire a little more closely into what these
disbursements have meant, and what effect they have had upon the
promotion of banking stability* Their immediate effect has been to
restore to each of the communities affected that part of its money
supply which, in the absence of Federal deposit insurance, would have
been entirely lost, or unavailable for a long period of time.
As you all know, deposits in banks constitute by far the
largest portion of our money supply, and contraction due to bank
failure may lead to corresponding contraction, or even complete
paralysis, of business activity. This decline in business may in
turn affect other banks; and the result may be an ever-widening banking
and economic crisis. This has not occurred during the entire time in
which Federal deposit insurance has been in existence.
A second consequence of disbursements to protect depositors
has been the protection given individual depositors, many of whom
might otherwise have lost their life savings. It is important to
observe in this connection that disbursements by the Corporation have
resulted in virtually complete protection for depositors, despite the
fact that there has always been a maximum insurance limit, presently
amounting to $10,000 for each depositor.
The high level of depositor protection has been due to
several factors: First, many of the banks which closed were of small
size, with few accounts containing deposits larger than the insurance
maximum; Second, because of the more orderly liquidation process which
deposit insurance has made possible, those depositors whose accounts
had balances in excess of the insurance maximum have been able to
recover a substantial portion of the excess from the proceeds of
receivership; Finally, in many of the cases of banks in serious
financial difficulties the Corporation has arranged for the distressed
bank to be absorbed by a sound insured bank. This procedure has been
used by the Coiporation in those cases when it would avert a threatened
loss, or would be less costly than a direct payoff of depositors. The
incidental result has been to provide full protection for depositors,
whatever the amount of their deposits.
Not only have losses to depositors of insured banks been
small, but depositors have been paid promptly, averting personal
hardship, and, again, helping to sustain the money supply of the
community. In each of the 2^9 receiverships of insured banks,
representatives of the Corporation moved immediately into the regular
business office of the failed bank* The records of the bank were
quickly verified, depositors were notified to present their claims
and were then either paid in cash or given demand deposit credits in
another insured bank equal to the amount of their insured deposits.
The time lapse between the suspension of a bank and start of payoff
has been two weeks or less in most of the receivership cases in
which the Corporation has been involved.

Payment of insured depositors has “been even more expeditious
in the l80 cases where the deposits of failing insured banks have
been assumed by other insured banks, with the aid of the Corporation.
In only two or three of these cases has there been any interruption
of regular banking services. Where the assumption method is used
depositors of the distressed bank are simply notified that their
bank has been absorbed by another insured institution and that their
deposits are available at the latter bank.
Before concluding this discussion of the Corporation's
activities insofar as they relate to closed or disabled banks, I
might observe that the Corporation itself has suffered little
financial loss. Indeed, it has recovered about nine-tenths of the
disbursements it has made to protect depositors. This favorable
rate of recovery has been due principally to the Corporation's
ability to await favorable opportunities to liquidate assets.
As I noted earlier, the Corporation's activities relating
to closed banks and to banks in serious financial difficulties have
become relatively less important since 19^0. Emphasis has shifted
to those activities which will prevent the development of bank
difficulties, insofar as such prevention is within the Corporation’s
Today, examination of banks comprises the major part of
the Corporation’s work; nearly three-fourths of its employees are
engaged in such activities. The Corporation regularly examines
only insured State banks not members of the Federal Reserve System some 6,700 banks - and reviews from the standpoint of its insurance
risk the examinationsof the
insured banks made by the
Comptroller of the Currency and the 1,800 banks examined by the
Federal Reserve Banks. The Corporation may also make special
examinations of any insured bank, but rarely exercises this authority.


Through its examinations of banks the Corporation has
exerted considerable influence upon the structure and character of
banking. The quality of bank assets is obviously a matter of
importance and receives close attention. Maintenance of adequate
capital and regular provision for losses on assets are among the
banking practices recommended by the Corporation as consistently
as by most bankers themselves. Recognizing the limited scope of
any examination, the Corporation has encouraged banks to maintain
careful internal controls and to carry adequate fidelity bonds.
The need for qualified bank management, the primary asset
of any bank, has been particularly stressed by the Corporation.
Conscientious and far-sighted directors, capable officers and
competent and loyal employees are beyond mechanical prescription,
but success in this area of intangibles is the best assurance of a
healthy, prosperous bank.


In addition to its examination procedures the Corporation
exercises considerable influence upon the character of American
banking through its right to grant or withhold insurance from newly
organized banks not members of the Federal Reserve System. In
acting upon applications for insurance from such banks the Corporation
is required to give consideration to the adequacy of the bank’s
capital, its future earnings prospects, the quality of management,
and its usefulness in serving the convenience and needs of the
community. The effect of considering such factors has been to help
prevent development of the kind of over-banked condition which
plagued the Nation during the 1920’s.
Another activity of importance stems from the Corporation’s
authority to withdraw insurance from banks which engage in unsafe
and unsound banking practices, or violations of law. Of course, in
most instances such practices or violations are corrected after
consultation between bank officials and representatives of the
Corporation, and thus never reach the stage where the Corporation
must initiate proceedings to terminate insurance. Voluntary
correction is the most desirable solution and we have been fortunate
over the years in securing a high degree of cooperation from bankers.
However, in those instances in which banks persist in engaging in
unsafe and unsound banking practices or violations of law the
Corporation’s authority to withdraw insurance has been used.
Let me now summarize this discussion by reviewing the
ways in which the Federal Deposit Insurance Corporation contributes
to the maintenance of bank stability. In the case of failing banks,
prompt action by the Corporation restores circulating medium to the
communities affected, thus preventing economic paralysis. In the
case of operating banks, regular examination by the Corporation
helps to maintain present high banking standards; at the same time,
the exercise of caution in the admission of new banks to insurance
and the Corporation's insistence upon corrections in the relatively
few cases of unsafe and unsound banking provide additional stablizing
It is at this point that we appear to violate one of the
laws of mathematics, for the whole is greater than the sum of its
parts. By that I mean that the stablilizing factors I have Just
described have combined to produce an additional condition for
stability which is probably more important than any other: namely,
a level of public confidence in American banking that is ■unmatched
in our history.
Confidence is an attitude, an appraisal of the future
in the light of the past. Every industry has an important stake in
public confidence, but banking heads the list, for banks deal not
in goods but in promises, and confidence is the essential element of
every promise. The promise which banks make to pay deposits



practically upon demand can be fulfilled only so long as the
preponderant volume of deposits is left with the banks - in short,
so long as confidence is maintained. In the banking field only
confidence lies between order and chaos.
It would be possible to continue this description of the
activities of the Federal Deposit Insurance Corporation, but I think
such a discussion would add little to an understanding of its role
in our economy. It may well be that the future will bring new
activities, or change the relative importance of those to which we
now give our attention. Of one thing we can be certain: a healthy
and dynamic banking system, with stability, Is basic to our free
enterprise economy; to contribute to the maintenance of such a
banking system is the role of deposit insurance.