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Statement on



Irvine H. Sprague, Chairman
Federal Deposit Insurance Corporation


Wednesday, May 21, 1980.
10:00 a .m.

Dirksen Senate Office Building
Room 5302

F E D E R A L D EPO SIT IN SU R A N C E CO R P O R A TIO N , 5 5 0 Seventeenth St. N.W., Washington, D.C. 20429


Mr. Chairman, I am here today to report that our nation' s
banking system is fundamentally sound but that we need to
remain vigilant.

We must improve our capacity to respond to

any eventuality.
In preparing for this hearing, we have provided your staff
with statistical material that I trust has been useful and
responsive to your requests.
The banking system has spent the past year coping with

After a steep climb in interest rates, we have now

come to a period of sharp decline.

The key six—month Treasury

bill rate went down from a record 15.70 percent on March 24 to
8.78 percent on May 12 —
seven weeks.

a drop of 700 basis points in just

The prime rate, which hit a record 20 percent on

April 2, feJ1 to the 16.5-17.5 percent range by May 14.
The economists tell us that the economy is now in a recession.

Ahead I see more change and uncertainty in the banking

Against this background, I want to give you a summary of
our assessment of the condition of the banking system with
particular focus on the nonmember banks we regulate.

I will

have specific comments in such areas as liquidity, asset quality,
capital adequacy and others.

We have provided your staff with a series of tables that
chart statistics of the banking industry.

Separate tables

covering respectively all 14,357 insured commercial banks and

all 325 FDIC-insured mutual savings banks in 1979 give us, for
each sector of the industry, uniform measures of key banking

The tables contain seven measures of bank capital,

five measures of loan activity and loan reserves, two measures
of Federal funds purchases, one special tabulation each on
other real estate activity and standby letters of credit, and
dollar amounts of aggregate net income with two comparative
measures of that figure.
Aggregate net income after taxes and securities transac
tions for commercial banks showed a 19—percent increase in
1979 from 1978, and for mutual savings banks a decrease of
almost 20 percent in the same period.
in previous years, we have broken down our commercial
bank statistics into separate tables for insured State non­
member banks, State member banks and national banks.

This is

the first time in this annual series of hearings that we have
given you separate tables on the mutual savings bank industry.
Another series of tables, which focuses on quality of
assets in insured nonmember banks, shows that the amounts of
classified and special-mention assets —
assets —

declined in 1979 from 1978.

that is, the problem
This means that these

banks in 1979 were holding loan portfolios with a perceptibly
better assurance of repayment than they did in 1978.


decline in classified and special-mention assets was more than
25 percent for mutual savings banks, compared with six percent
for nonmember commercial banks.

The current downturn in the



economy could well mean an increase in the level of problem
assets for the year 1980.
Other tables reviewing certain assets of insured non­
member banks by problem list status show improvement in 1979
from 1978.

The economic downturn is expected to have adverse

effects on the list for 1980.

I will discuss the problem list

for the entire industry later in the statement.
Finally, we have given you the annual updates of two
other historical tables.

One shows that the ratio of the

insurance fund to insured deposits was approximately 1.22 per­
cent under the $40,000 insurance coverage of 1979, up by .06
percentage points from 1978.

With the 8100,000 insurance figure

established this March, the ratio dropped to about 1.11 percent.
The fund now is an adequate $10 billion, and the new assessment
credit rules should gradually build up the fund ratio.

The other

table shows that domestic assets of insured banks rose by $126
billion or 9.9 percent in 1979 and that domestic assets of banks
in bank holding companies went up by $98 billion or 10.8 percent
in 1979.
The remainder of our preliminary submission to your
Committee consists of the following background material:

A description of the categories of problem banks used
by FDIC and the characteristics used in classifying


A collection of FDIC regulations, policy statement's,
and guidelines used in the valuation of "other real
estate owned,



A summary of formal actions taken by the FDIC in 1979
to terminate insurance and to issue cease-and-desist


A list of insured State nonmember banks closed in 1979
and the reasons for the closings,


State nonmember bank mergers in 1979 under Section 18(c)
expedited procedures,


A report based on a semi-annual survey by the
Comptroller of the Currency, the FDIC, and the
Federal Reserve Board covering foreign offices
of 128 U.S. banking organizations with significant
foreign banking operations as of June 30, 1979, and


A report on the number of full and modified exami­
nations conducted from 1975 through 1979.

Commercial banks had a favorable year in 1979.
Banks spent much of 1979 contending with unsettled
economic forces, especially the pause in economic growth during
the second quarter, the escalation in the rate of inflation,
and the rapid rise in interest rates during the fourth quarter.
Banks experienced some difficulties in adjusting to these
changing market conditions because of the existence of usury

regulations on deposit interest rates and earlier

portfolio decisions of some banks.
Total assets for all insured commercial banks grew 12.1
percent; however, total bank deposits grew only 10.4 percent,

-5largely as the result of competition from other kinds of
institutions and financial outlets.

Thus, the banking indus­

try had to depend substantially on nondeposit sources of funds
in 1979.

Net Federal funds purchases increased by almost 20

percent over year-end 1978.

For commercial banks in general,

operating revenue was up but the percentage increase in
interest expense was larger.

Nevertheless, commercial banks

showed a very favorable increase in net earnings, and the bank
ing system as a whole continued the gains of the preceding two
or three years.
The year 1979 was very different for mutual savings banks
Some of these institutions, with their fixed-yield mortgage
portfolios and limited asset and liability powers in some
States, suffered severely from curtailed deposit growth and
increased interest expense.

Aggregate net income of insured

mutual savings banks dropped sharply in 1979.

Many individual

institutions have had a difficult year, and we can expect
further challenges ahead.

Net income of insured commercial banks after taxes but
before security transactions totaled more than $13 billion in
1979, an increase of 20 percent from 1978.

That figure repre­

sented a return on equity capital of 14.3 percent.


banks of all sizes showed substantial increases in earnings
and return on equity capital.



Gross income for commercial banks was up 32 percent in

More than two thirds of gross income came from interest

and fees on loans.
Earnings of mutual savings banks were down to $648
million in 1979, a drop of 19.8 percent from 1978 earnings.
All size categories of mutual savings banks showed an earn­
ings decline.

The ratio of income to the capital


account for mutual savings banks dropped about 2.3 percentage
points to about 6.8 percent with decreases in every bank size
category except the smallest.
Liquidity did not improve in 1979.
liquidity —

One measure of

the ratio of loans to deposits —

reflects a

modest increase in liquidity pressure on banks as a whole.
Smaller commercial banks generally showed less liquidity
pressure under this measure;

larger banks showed more.


mutual savings banks,’the situation was reversed: smaller
savings banks were under significantly more pressure.
Additional liquidity pressure arose because rising
interest rates induced depositors to move their funds into
shorter-term instruments.

At the end of 1979, six-month

money market certificates, passbook accounts and large
certificates of deposit, most of which had maturities of
six months or shorter, constituted 44 percent of all
deposits in commercial banks.

This means that, when demand

deposits are included, more than 80 percent of all bank


deposits might be subject to withdrawal in six months or

This is up five percentage points from the end of


Generally, asset quality improved in 1979.


and special-mention assets declined for nonmember commercial
and mutual savings banks for the second consecutive year.


total of classified assets and special-mention assets as a
percentage of total assets was down to 2.4 percent for non­
member commercial banks in 1979 from 2.5 percent in 1978 and
3.4 percent in 1977.

For mutual savings banks the ratio

declined to 2.7 percent in 1979 from 3.5 percent in 1978 and
3.8 percent in 1977.
Another indication of improved asset quality is that, the
rate of net loan losses as a percent of total loans continued
to edge down both for commercial and mutual savings banks.

Equity and debt capital in all insured commercial banks
rose to $103.3 billion in 1979, an increase of $10.1 billion
from 1973.

All categories of banks showed substantial dollar

gains from 1978.

The ratio of equity capital to total assets

for all banks declined to 5.7 percent, down 0.1 percentage
point from 1978.

Within the average,

the disparity between the

ratios for large and small banks widened during 1979.




For commercial banks in the $0-99 million and $100-499
million deposits categories, the ratios climbed.

For banks

in the $l-billion-to-$4.99 billion category, the ratio
roughly held about steady.

It was for banks in the $500-

million-to-$999 million category and, to a markedly greater
degree, for the very largest banks in the nation —
the $5 billion and over category —
the third straight year.

those in

that the ratios fell for

Each year these ratios get smaller,

especially for the biggest banks.

For 1979 the $5-billion-

and-over ratio was down to 4.0 percent compared with a ratio
more than twice as great for our smallest banks.
What the table says is that any decline in capital ratios
is not widespread;

it is confined to roughly the 300 largest

The regulators are very mindful of this situation and have
assigned a task force of the Federal Financial Institutions
Examination Council to work on recommendations to address the


through our regular examination process,

our reviews of applications for deposit facilities and other
dealings with banks we supervise, we are emphasizing capital
adequacy considerations.
Almost 90 percent of the new 1979 equity capital in com­
mercial banks came from retained earnings.

The market for

bank stocks and subordinated notes and debentures was depressed
in 1979, and the relative amount of these debt instruments


For insured mutual savings banks, the comparable ratio of
capital to total assets was 6.7 percent. Every bank size cate­
gory showed an increased percentage except that for largest
banks which held steady.

This reflected slow deposit growth.

We have all recognized that mutual savings banks have
been especially hard hit by the effects of the economic con­
ditions of recent years.

We at the FDIC have been monitoring

the situation closely and meeting regularly with mutual savings
bankers on these problems.

The new Depository Institutions

Deregulation and Monetary Control Act of 1980 contains a num­
ber of provisions designed to help thrifts hold their own in
the economic environment of the eighties.

These include new

powers, certain usury pre-emptions ar' access to the discount
The law also created a Presidential task force that is
required to report by June 30 on recommendations for the thrift
At the State level, major legislative packages concerning
powers of mutual savings banks are being readied in Pennsylvania
and New York.

Legislation is also pending in Rhode Island and

New Jersey.
Thirteen mutual savings banks were in the red for the year

Thirty-two were in the red in the last half of 1979.

In the first quarter of 1980, savings banks earnings continued
to decline, even though institutions had the benefit of an




abnormal spurt in penalty income —
year before —

ten times the level of a

as savers accepted early withdrawal penalties

to invest in higher yielding instruments.

Were it not for this

extraordinary penalty income, savings banks,

in the aggregate,

would have incurred net operating losses in the first quarter
of 1980.

With penalty income returning to a normal level as

interest rates decline, we expect severe losses for the mutual
savings bank industry in the second quarter that will wipe out
the artificial gains of the first quarter.
However, we hope that over the entire year, the decline in
interest rates will help materially in returning mutual savings
banks to profitability.
It is true that mutual savings banks are using their reserves,
but mutual savings banks are in a cyclical industry, and one basic
purpose of reserves is to provide for losses and swings in interest
rates and other unexpected circumstances.

Overall, we believe the

mutual savings bank industry is basically sound.
The number of banks of all types on our problem list
entered its fourth consecutive year of decline in 1980.

As of

April 30, 265 banks of all types with deposits of $24 billion were
on the list, down from 287 banks with $20 billion in deposits at
the end of 1979 and 342 banks with $64 billion in deposits at
the end of 1978.
These totals included 204 State nonmember banks with deposits
of $14 billion on the list as of April 30, compared with 222 State

nonmefnber banks with $8 billion in deposits at the end of 1979
and 262 such^banks and $10 billion in deposits at the end of
Most of the figures show improvement, but I would include
a cautionary note.

The problem list contains a built-in lag,

since it is usually 18 months or more before poor conditions in
the economy magnify weaknesses that cause banks to go on the
problem list.

Any effects of the unfavorable developments in

the last half of 1979 might not be reflected in the problem
bank list until late 1980 or in 1981.
the end of 1979, four banks of all types —— none exceed­
ing $100 million in deposits —

were in our most severe category

of problem status, that considered likely to require an FDIC
outlay in the immediate future.

This so called "potential payoff"

category had increased to eight banks of all types by the end of
April, 1980.
It is important to point out that the problem bank list
continues to be very fluid and that most banks remain on the
list for a relatively short period.

During 1979, there were

198 banks removed from problem status, while 143 were added.
These figures included 152 nonmember banks coming off the
list during the year and 112 going on.

Of those on the list

at the end of 1979, 55 percent had been there for 18 months
or less, and 77 percent had been on the list for three years
or less.
Implementation of the interagency uniform problem bank
designation system, using a common rating system, is now in





The Uniform Interagency Bank Rating System was

inaugurated by the banking agencies in 1978.

It was expanded

into a common problem definition and its applicability
broadened to include savings and loans and credit unions in

Under the renamed Uniform Financial Institutions Rating

System, 853 State nonmember banks were rated 3, 4 or 5
(categories indicating at least some degree of concern) at the
end of April, 1980; of these, 115 banks were in the more serious
categories 4 and 5.
For year end 1979, the comparable figures were 1,060 State
nonmember banks of all types in categories 3, 4 and 5, with 154
of these in categories 4 and 5.
The FDIC is now sufficiently comfortable with the new
uniform rating system and expects to phase out its old problem
bank list designations within the next several months.


important feature in making the changeover possible is the
expressed willingness of the Office of the Comptroller and
the Federal Reserve to discuss with FDIC any differences on
the proper rating to be assigned to any given bank and a com­
mitment to reach an identical, common rating for the same
institution by each of the evaluating offices.
As I have indicated, the nation's banking system is
fundamentally sound, but we are entering a recession, and we
cannot accurately project its impact on the banking system.

-13It is important to review what happened in the mid-1970's
recession and its impact on the banking system in the sub­
sequent years.

This will help us anticipate and prepare to meet

the needs of the future when the impact of the current economic
downturn will begin to make itself felt in our banking system.
In the early 1970's, a combination of factors triggered
severe inflation and high interest rates coinciding with the
worst recession since the Great Depression.

For the banking

industry, the economic upheaval generated high costs and big
loan losses, particularly on certain real estate investment
trust loans.

It also meant weakened earnings and capital

positions and presented other problems.

At the same time the

market for municipal debt issues was jarred by the Mew York
City financial crisis; housing was in a steep decline and
unemployment was up sharply.

In this period and its aftermath,

we had the four largest bank failures in our history: the ^931million deposit United States National Bank in San Diego in
1973, the $1.4-billion deposit Franklin National Bank in New
York in 1974, the $336-million deposit Hamilton National Bank
of Chattanooga, Tennessee,

in 1976, and the $607-million deposit

Banco Credito y Ahorro Ponceno in Puerto Rico in 1973.
The number of FDIC insured problem banks of all types
climbed steadily from 183 at the end of 1974 to its all-time
high of 385 in November, 1976.
problem list.

Large banks showed up on the

The number of bank failures went from 10 in the

two years 1973-74, to 13 in 1975, and 16 in 1976.

-14To keep matters in perspective, I want to point out that
even during this extraordinary period the number of banks on our
problem list stayed small —
of insured banks.

less than 2.5 percent of the number

Most banks never have been on the list.


the case of failures, thus far the FDIC has been able to use the
powers available to it to make 98 percent of all deposits immedi­
ately available to depositors either through FDIC payment to
insured deposits or successful purchase and assumption transac­
tions; more than 99 percent of insured deposits were available
in all cases within a few days.

Three weeks ago, using existing authority, we were able to
participate with a group of major banks in a joint interim assis­
tance package to ensure the viability of First Pennsylvania Bank.
This is a unique cooperative effort designed to serve the
public interest by enabling the nation's twenty-third largest
bank to maintain its service to the community and to facilitate
the bank's early return to full financial health.

The loans

are designed to give First Pennsylvania Bank the opportunity
to put its house in order, hold the confidence of its deposi­
tors and other clientele and restore itself ultimately to
Although we were able to work this out within the con­
straints of current law, we want to be sure that we can take
care of any eventuality that may arise in the uncertain future.
The number of commercial banks with total assets exceeding

$1.5 billion has increased by almost 70 percent since 1974 —
from 72 banks to 122 at the end of 1979.

The number of mutual

savings banks with assets exceeding $1 billion has increased
by 60 percent in the same period —

from 25 banks to 40.

The enactment of S. 2575, the extraordinary assistance bill
introduced by yourself, Mr. Chairman, and co-sponsored in the
House by Chairman Reuss, Congressmen St Germain, Stanton and
Wylie, would give regulators the flexibility we need.
Currently, the FDIC can provide assistance to a bank only
when it is in danger of failing and its continued operation is
essential to provide adequate banking services in the community.
The bill would expand FDIC powers so it would be able to act
when it finds a bank is in danger of failing, that severe eco­
nomic conditions exist which threaten the stability of insured
banks in a large geographic area and it is probable that
assistance to the failing bank will substantially reduce the
risk or avert a threatened loss to the FDIC.
Another provision of the legislation would broaden the
field of institutions which may purchase the assets and assume
the liabilities of a failed bank.

In addition to FDIC-insured

banks, under the proposal associations or banks insured by the
Federal Savings and Loan Insurance Corporation would become
eligible bidders.
A third provision would create a new option for handling a
mutual savings and loan association or savings bank in receiver­
ship by authorizing the Federal Home Loan Bank Board to approve

-16the conversion, acquisition or merger of such a failed insti­
tution into a federal stock savings and loan association or
savings bank.

Federally chartered stock savings banks, which

would be insured by the FSLIC, could be acquired by either
savings and loan or bank holding companies and would have the
advantage of access to a new source of capital in the form of
stockholder equity.
The legislation also contains extraordinary acquisition
procedures which would apply Only in the event of failure of the
leading banks or thrift institutions in a State and only then
under certain extraordinary procedures.

Specifically, the bill

would permit the Federal Reserve Board to allow an out-of-State
bank holding company to acquire a bank in receivership or its
controlling holding company if the failed bank has total assets
in excess of $1.5 billion or if it is one of the three largest
banks in a State.

Such authority would be available to the

Federal Reserve Board only if the Federal Financial Institu­
tions Examination Council, with at least four members concurring
first notifies the Board that an emergency exists and that an
intra-state purchase is not in the public interest because of
financial or competitive effects or is otherwise not feasible.
The Federal Reserve Board would be given explicit authority to
deny any such transaction on grounds of possible adverse effects
on competition or the concentration of financial resources in
any State, region or the nation.
The same procedure would be available for the interstate
purchase of the successor of a failed insured savings bank if


the failed bank had assets in excess of $1 billion or was one
of the three largest thrift institutions in the State.
The legislation would grant similar authority to the
FHLBB to approve an extraordinary acquisition by a savings
and loan holding company of a failed institution insured by
the FSLIC or to the successor of a failed FDIC-insured sav­
ings bank.

The relief would be available only for a failed

institution with at least $1 billion in assets or which is
among the three largest insured thrift institutions in a

Again, a four-member vote of the Federal Financial

Institutions Examination Council would be a prerequisite.
This is narrowly drawn, very specialized legislation.
It is authority we hope we never have to use, but it is a
necessary contingency.

It provides a safety net, and it will

enable us to make fuller use of the resources of our nation's
financial system.


I am optimistic about the overall condition of

the banking system and its ability to meet the challenges ahead.
I believe that there are specific areas of concern which require
legislative action, as I have outlined.

I expect the current

period of change and transition to continue into the forseeable

Our goal as regulators is to monitor the industry during

a major period of evolution and to continue to work with the
industry toward an improved banking system providing better ser­
vice to the public.






USE, $300


To the Chief Executive Officer
Important Information