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PR-44-79 (4-30-79)

for immediate release


MAY 2 5 1079
c o rpo ra t io n


t **

Address by
Irvine H. Sprague, Chairman
Federal Deposit Insurance Corporation

before the

Conference of State Bank Supervisors,
W The Homestead



Hot Springs, Virginia

April 30, 1979



FED ER AL DEPO SIT IN S U R A N C E CO RP O R A TIO N , 550 Seventeenth St. N.W., Washington, D.C. 20429


The first time I attended your State Supervisors annual
convention was ten years ago.

Today I was looking forward to

renewing acquaintances I made in 1969, but I see only a few
familiar faces.

Only twelve of you were in office when I left
the FDIC in February 1973. Those of you on the Honor Roll whom
I see here today are —
Harry Bloom - Colorado
Jack D. Dunn - Georgia
Tom D. McEldowney - Idaho
Jim E. Faris - Indiana
John B. Olin - Oregon
Bob Stewart - Texas
Dwight D. Bonham - Wyoming
Ten new State Supervisors have been appointed in 1979:
Beverly J. Lambert - Arkansas
Ignacio Borja - Guam
Roy Britton - Kansas
Michael J. Pint - Minnesota
Paul Amen - Nebraska
Ben McEnteer - Pennsylvania
Tany Hong - Hawaii
M. D. Borthick - Utah
Gerald T. Mulligan - Massachusetts
Thomas C. Mottern - Tennessee
While some turnover is unavoidable and perhaps even desirable
to maintain a continual flow of new ideas into bank regulation at
the State level, I am inclined to think that a somewhat greater
degree of continuity at the State supervisory level would be in
the public interest.

However, I fully comprehend the attendant

Other Commissioners with six years or more service who are
not in attendance are:

Dick Francis - Michigan
Jimmy Means - Mississippi
Carl Cleveland - South Carolina
Walt Wintrode - South Dakota
Erich Mildenberg - Wisconsin

problems of reducing turnover at the top levels of bank regulation
because similar difficulties exist at the Federal level.
When I left the FDIC six years ago, I was one of 13
regulators making up the governing bodies of the FDIC, the Office
of the Comptroller of the Currency, the Federal Home Loan Bank
Board and the Federal Reserve System.
thirteen are gone.

Today twelve of those

I am the lone survivor, and I have been away

from the business for six years.
For continuity, we must look to our staffs.

The excellent

staffs with which we are all blessed help to maintain relative
constancy in our regulatory endeavors.

Nevertheless, I believe

we should make every reasonable effort to reduce the continual
flux of our State and Federal supervisors.

I, for one, made a

commitment to the President to serve out my full six-year term as
FDIC Chairman, and I would heartily recommend to those of you
appointed for specific terms that you make similar commitments to
your respective governors.
Another requisite to achieving excellence in the quality of
bank supervision is closer cooperation between State and Federal
regulators of financial institutions.

At times in the past 15

years the banking system has come under great pressure; in the
early 1970s the annual bank failure rate rose to its highest
level since before World War II and at one time almost 400 banks
were on the FDIC's problem list.

To be sure, the number of failures

and problem banks were small by comparison to the number of insured

Nonetheless, bank regulators felt their responsibilities

more keenly than at any time since the Great Depression.
significant culprit was economic conditions:


the longest and

worst peacetime inflation in American history and the most severe
downturn in the post war period.

Another significant contributing

factor was the aggressiveness of bankers in liability management
and in reaching out for exotic credits, failing to remember the
lessons of the past.
The banking system is more sensitive to adversity than it
once was and more resilient.

But we still face problems,

particularly if we have a severe economic downturn.
regulation on its mettle.

That places

If the number of banks requiring close

oversight and surveillance is larger, it means that even closer
cooperation between primary and secondary supervisors is needed for
increased effectiveness.
In that regard, holding company banking represents a particularly
important area for supervisory coordination.

Holding company banks

now hold almost 3/4 of total bank assets in the United States and
many have non-bank subsidiaries which cross product lines and State

The overlapping jurisdiction at the Federal level has been

troublesome and the FDIC has recommended that the supervisor of
the lead bank should supervise the holding company and its non-bank

Two weeks ago, at an organizational meeting of the Federal
Financial Institutions Examination Council, we sorted out priorities.
I can tell you that this matter of bank holding company supervision
is very, very high on the Council's list.
As you know, the Federal Financial Institutions Examination
Council was created by Title X of FIRICA (the Financial Institutions
Regulatory and Interest Rate Control Act of 1978).

It is made up

of the five regulatory bodies, and its purpose is to explore areas
of cooperation and consolidation by the agencies.

In developing our

procedures and establishing our priorities, we created five inter­
agency staff task forces:

A Task Force on Supervision (Paul Homan,

OCC), a Task Force on Consumer Compliance (Harry Blaisdell, NCUA), a
Task Force on Reports (Stan Sigel, FRS), a Task Force on Examiner
Education (Jim Davis, FDIC), and a Task Force on Surveillance
Systems (Bob Eisenbeis, FRS).
The law establishing the Council also gives special impetus
to closer cooperation in Federal-State supervision by creating a
State liaison committee to meet with the Council to encourage the
application of uniform principles and standards.

I have recommended

in congressional testimony that the Council be given the best
possible chance to succeed —
to attain this objective —

and we at the FDIC will do our part

with special emphasis on Federal-State

cooperative efforts.
The first members of the State liaison committee are:
Ms. Muriel Siebert, the Superintendent of Banks of the State of

New York; Mr. John B. Olin, the Superintendent of Banks of the
State of Oregon; Mr. Walter C. Madsen, Superintendent of Banks of
the State of Arizona; Mr. Timothy E. Griffin, the Commissioner of
Savings and Loan Institutions for the State of Illinois; and
Mr. Charles Filson, the Superintendent of the Credit Union Division
for the State of Illinois.

We will have our first session with

your State liaison representatives May 3.

We are unanimous in the

opinion that these five State representatives will have a meaningful
role in our deliberations.
I sense a genuine commitment on the part of all members,
including myself, to make the Examination Council work.

1 know

that our performance is going to be closely monitored by Congress
and others.

If the Council is perceived as ineffectual or as a

dodge for genuine progress in supervisory cooperation, we will be
confronted with a real push for legislation to accomplish some type
of statutory consolidation of financial institution supervision.
If it comes to that, I would take the position that such legislation
should consolidate the regulation and supervision of all State
banks within the FDIC.

This would have the effect of separating

monetary policy from supervision, except, of course, that the
FDIC would continue to make available to the Federal Reserve all
the information it needs for the effective conduct of monetary

Supervision and the conduct of monetary policy are two

very important functions, and each is significant enough in its


own right to merit the full-time attention of the appropriate
government agencies.
Regardless of the legislative situation, we all recognize
that budget pressure is another significant force pushing the
agencies toward cooperation.
Inflation and the opposition of taxpayers to wasteful govern­
ment expenditures have made State and Federal authorities conservativ|
in their expenditure authorizations.

Banking agencies may be

better insulated against austerity than other executive agencies
because most are funded through fees and assessments paid by banks.
But they are not immune.

I understand that my home states of

California, for one, is faced with severe cutbacks.
For my part, I have made it clear since I took office three
months ago that we are going to run an extremely cost-conscious
operation at the FDIC.

I have asked our Controller, Jim Davis,

and our Budget and Management Committee, which is chaired by my
Deputy, Alan Miller, to take a very hard line on requests for

I intend to personally participate in our internal

FDIC budget hearings this summer.

New hiring, in particular,

is going to be tightly controlled.
The dollar squeeze we all face means quite simply that we all
must work together to achieve the greatest efficiency in bank super­
vision at the least cost.

As you know, the FDIC last year commissioned a study on the
problem of overlap and conflict in the regulation of State banks.
The object of the study is to make policy recommendations for making
the State/Federal partnership work better.

The report will be

issued by the end of June and a considerable body of background
research on the operation and structure of the supervisory
system for State banks will also be made available.

In broad

terms, preliminary indications are that the study will show that
the opportunities for constructive cooperation are great.
A good way to make our working partnership even more productive
is for Federal and State supervisors to maximize cooperative
examination arrangements.

The FDIC has always tried to cooperate

with State supervisors to the greatest extent possible in order
eliminate or minimize unneeded overlap.

Depending on State

law, manpower resources, and the preference of the State supervisor,
the FDIC over the years has conducted examinations on a joint,
concurrent, or independent basis and, in recent years, developed
the divided examination program.
By joint examinations, I mean those examinations in which
State and FDIC examiners comprise one examination team, where
the work of the examination is assigned without regard to whether
the examiner is employed by FDIC or_by the State, and where the
bank's management at the conclusion of the examination receives
a single report of examination.

A concurrent examination is


conducted in exactly the same manner as a joint examination, the
only difference being that a separate examination report is pre­
pared by the FDIC examiners and by the State examiners.


independent examination, of course, is self-explanatory.
In 1978, 21 states conducted more than half of their examina­
tions on a joint or concurrent basis and 29 conducted more than
half on an independent basis.

During 1978, 57 percent of FDIC's

commercial bank examinations were done on an independent basis,
29 percent on a joint basis and 14 percent on a concurrent basis.
This indicates that most examinations still are conducted
on an independent basis.

Where independent examinations are

conducted and both the FDIC and the State examine the same bank
separately, you have greater possibilities for substantial
<3ifferences in the criteria used for supervisory evaluations of
a bank's performance trends.

We recognize, of course, that in

many states there are legal impediments to conducting joint or
concurrent examinations.
As some of you may recall, on February 1, 1974, the FDIC in
cooperation with CSBS and the states of Iowa, Washington and
Georgia initiated a 13-month experimental program, subsequently
extended, whereby the Corporation withdrew from examinations in a
certain percentage of State nonmember banks in each of the
three states.

The Corporation agreed to rely heavily upon 1974

and 1975 examinations by the respective State supervisors for
determination of the financial condition of the banks.
In 1976, the FDIC examined more than half of those banks in
the participating states that it had not examined in the previous
two years.

The 1976 FDIC follow-up examinations had the

additional purpose of providing an evaluation of the experiment
as well as an assessment of the current condition of the banks.
The results of this review did not justify an expansion
of the program.

But the experiment provided us with the rationale

for shifting our focus from complete withdrawal to a divided
examination concept whereby examinations of a large portion of
the nonproblem State chartered banks would be conducted by the
State and the FDIC on an alternative year basis.

The divided

examination concept provides for the sharing of examination
responsibilities, thereby reducing overlap and redundancy in
the examination process.
The first formal agreement implementing the concept was
executed early in 1977 with the State of Georgia.


arrangements with New Jersey and Missouri followed in early 1978.
Under a divided examination program, problem banks and other
banks of supervisory concern ("pool") are examined by both
supervisors at least once each year; the remaining banks ("other")
are divided about equally and examinations alternated annually,


although either supervisor may examine a bank for which he is
not primarily responsible that year.

Either supervisor may at

any time add banks to the "pool" group of banks and either can
make progress visitations to "pool" banks after giving the other
supervisor an opportunity to join.

Either supervisor scheduling

a board meeting of a "pool" bank, other than at the conclusion of
an examination, would notify the other supervisor so that it might

Also, either supervisor is free at any time to cancel

unilaterally a divided examination arrangement.

Our experience

at the FDIC is that the divided examination concept can provide
a means, when all the necessary elements are present, of reducing
overlap and redundancy in the bank examination process.


for a variety of reasons, adoption of a divided examination program
may not be advantageous or possible for many states.


divided examination programs are not lightly entered into.


Corporation must be assured through careful evaluation that the
State involved has the resources and capabilities to implement
a divided examination program.

Of course, the Corporation reserves

its right either to continue the program or to expand it with other

While it is too early to fully evaluate the efficacy of

the divided examination program, we stand ready to explore with each
of you any method of examination which will increase efficiency
and reduce costs in the examination of State nonmember banks without
abdicating our statutory duties and responsibilities.


These initiatives in State-Federal cooperation coincided
with FDIC's unilateral undertaking, begun in 1976, to revise
and improve its procedures for examining and supervising banks.
Our revised approach to the examination function is designed to
deploy more effectively the resources needed to meet an increasing
work load, to marshal efforts in the appropriate areas and to
maintain technical competence in the face of increasing
sophistication in operating and management systems of banks.
The essential thrust of these changes is to concentrate the
FDIC's efforts more on those banks in need of closer supervision

while stretching out the frequency and reducing the scope of
examination of those which do not exhibit such a need.


were recently amended to provide even greater flexibility to the
regions in conducting examinations of State nonmember banks and
to encourage wider use of modified examinations where appropriate.
I have been talking about innovation.

But one of the mainstays

of our Federal-State cooperative effort has traditionally been

I assure you that effort will continue.

Last year 190

State examiners took courses at our training facility in Rosslyn,

As I mentioned, the Federal Financial Institutions

Examination Council has established a Task Force on Examiner

Any improvements developed by the Task Force for the

training of Federal examiners also can be shared with our State


Another area where the FDIC has attempted to streamline the
Federal regulatory process and thereby minimize the dual regulatory
burden on State banks is in the implementation of bank branching
approval procedures.

As you are all aware, the FDIC's Board of

Directors has delegated authority to the 14 Regional Directors to
approve applications to establish branches under certain circum­

To insure uniformity throughout the various regions,

certain minimum criteria were prescribed that an applicant would
have to satisfy before the application could be approved by a
Regional Director.

The delegation of authority does not include

the power of denial.

Only the FDIC Board can deny an application

for a branch office.
This delegation of branch approval authority has had its
intended effect.

Processing time for handling applications to

establish a branch has been reduced as an increasing number of
branch applications are processed through delegated authority.
For example, in 1978, out of 892 applications to establish branches
filed with the FDIC, 845 or approximately 95 percent were approved
under delegated authority.
While these figures demonstrate that the vast majority of
branch applications require no Board involvement, there are those
who*argue that the FDIC should accept the decision of the State
authority with respect to branches and forego any independent
review whatsoever.

This argument apparently is premised on the

assumption that the FDIC could legitimately delegate to a State
all decision-making authority regarding the approval or disapproval
of branch applications and perhaps other types of applications as

Our Legal Division reviewed the issues involved in such

assertions and concluded that the statutory mandate of the FDIC,
involving as it does the exercise of judgment and discretion, is
not a function which may properly be delegated to any other
agency or official, Federal or State.

Just last week our Board

denied a State-approved branch application with a finding that
the institution had not yet met its obligations under the
Community Reinvestment Act.
With 50 independent State supervisors, the FDIC's role in
decision making brings to the entire application process a
desirable degree of uniformity and continuity which might not
otherwise exist.
The application process can be expedited when States permit
banks to file applications concurrently with State authorities and
the FDIC.

We still would not act at the Federal level, of course,

until the State authority has given its approval.

But in the

meantime, we would have the opportunity to begin our own processing
so that we could be ready to act as soon as possible after the
State approval.

In controversial cases, a delayed filing with FDIC

may be appropriate.
I believe that such a concurrent procedure would be a
substantial improvement over the present system which prevents


the FDIC from even beginning its own processing until certain
States have approved their banks' applications.
In any event, we want to foster improved cooperation in
this area, and we actively encourage our regional offices to get
involved in the application process with the State supervisor
at the earliest possible time.
We are exploring the use of common application forms in
processing branch and other applications by State nonmember banks.
While recognizing the difficulty in framing common forms that
would be acceptable and would meet the needs and statutory
requirements of all 50 states and the FDIC, it would be worth­
while to reach as much commonality as possible.

If forms can be

agreed upon, the FDIC would be willing to bear the cost of
printing such documents and of supplying them to the various State
supervisors at no cost.

I might add parenthetically that a recent

survey conducted by the FDIC established that eight states use
FDIC application forms to some extent.
In the same vein, most states already use FDIC Call Report
forms, and FDIC and the Comptroller of the Currency have just
entered into an agreement by which FDIC will handle joint processing
and editing of certain banking reports both from our own banks and
from the national banks supervised by the Comptroller.
Another cooperative effort —
information in our FDIC data base —

State access to certain
has just been expanded.

The FDIC Board just last week authorized access for seven
additional states —

Arizona, Michigan, Nebraska, New York,

Ohio, Pennsylvania and Washington.
pilot states —

They will join the three

California, Indiana and Tennessee —

which are

now connected with our computer data base.
At the close of March of this year, the FDIC issued new rules
and regulations dealing with procedures to be followed by State
nonmember insured banks in establishing remote service facilities,
such as automated teller machines, cash dispensing machines,
point-of-sale terminals, and other remote electronic facilities
where deposits are received, checks are paid, or money is lent.
The procedures are designed to be consistent with Federal appellate
court decisions defining remote service facilities as branches,
as well as to lessen administrative burdens for banks and the
FDIC and to provide necessary information regarding remote
service facilities.

To expedite the application process, the

FDIC has again delegated to the Director of the Division of Bank
Supervision and Regional Directors authority to approve, but not
disapprove, remote service facility applications.
The FDIC has traditionally pursued a policy of cooperation
with State supervisors in our areas of mutual interest.

We have

worked together to find means to reduce the time in processing
applications and to minimize overlap and redundancy in the super­
vision of State nonmember banks.

We are always open to new