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For release 11:00 a.m.
Central Standard Time
May 16. 1962

Remarks of J. L. Robertson
Member of the Board of Governors
of the
Federal Reserve System
Before the 72nd Annual Convention
of the
Tennessee Bankers Association
Memphis, Tennessee
May 16, 1962

The Reform of Bank Supervision
It is a pleasure to be in Tennessee again - a state
that has had more than its fair share of the national spot­
light in recent months. First, there was the opening of
Tennessee Williams' new hit on Broadway, "The Night of the
Iguana", which met with general critical acclaim. And then
there was the great drama which was recently acted out in
the marble chambers of the Supreme Court in Washington.
Borrowing Tennessee Williams' style and some of his poetic
license, we might title it "The Twilight of the Gerrymander"
It was greeted with a sharper division of opinion on the
part of the reviewers. Six of them thought that Tennessee
ought to revise the script, though they did not say exactly
how the job might be done.
That is often the way with critics. It is always
easier to oppose than to propose. We all know this from
our personal experience. Your wife asks a simple question,
"What would you like for dinner, dear?" Nine times out of
ten you are completely stumped and respond with that very
evasive answer, "Oh, just anything at all. Your meals are
always wonderful!"
Of course, when the dinner is served, you can think
of any number of ways in which it falls short of perfection
but if you value your life you keep these critical observa­
tions to yourself. Uncle Remus fans may recall the lines,
"Tar Baby ain't saying nuthin, en Brer Fox, he lay low."
Sometimes that is a good policy to follow when we feel the
urge to criticize.
Thomas Carlyle seemed to be supporting this approach
to criticism when he wrote, "Silence is as deep as eternity.
Speech is as shallow as time." On the other hand, Carlyle
elsewhere gave this imperious and rather contradictory com­
mand: "Produce! Produce! Were it but the pitifullest in­
finitesimal fraction of a product, produce it...! 'Tis the
utmost thou hast in thee. Out with it then."
Today I am torn between this conflicting advice but I cannot "lay low" and "say nuthin", even if silence is
as deep as eternity. I know we are all friends, but this

is not a Quaker meeting, and I am committed to a speech.
must therefore follow Carlyle's second admonition.


But I have an even better reason for deciding to
speak today. Recently I have become more and more con­
vinced that if our country is to maintain its position of
leadership in the free world, develop an economy that can
provide work opportunities for all who are willing and able
to work, and eliminate our balance of payments problems,
each of us - not just those in a position to cope with ma­
jor issues, but each of us - must make the right decisions
in the role which he plays in our society, be it large or
small. Every aspect of our economic, social, and political
life must be constantly improved. We cannot afford to drift,
in the belief that what we have is good enough. This means,
among other things, that public officials - like me - must
seek to improve government rather than to maintain the status
quo for the sake of whatever power it provides.
As most of you know, I have labored in the field of
bank supervision for nearly thirty years - two decades with
the Office of the Comptroller of the Currency (at times I
was Acting Comptroller, and as such an ex officio Director
of the Federal Deposit Insurance Corporation), and one dec­
ade with the Federal Reserve System. Perhaps my long ex­
perience in the field qualifies me, in some degree, to take
upon myself the critic's mantle, and to make some sugges­
tions designed to improve and strengthen the federal system
of bank supervision. I hope they will constitute something
more than the "pitifullest infinitesimal fraction of a prod­
uct" .
Everyone is aware of the fact that federal bank super­
vision, like the banking system itself, has grown up like
Topsy; that it is divided among several agencies, with re­
sulting overlapping, inefficiencies, inconsistencies, and
conflicting policies. The only reason that the bad aspects
of this sort of hodgepodge arrangement have not been more
noticeable is that over the years federal bank supervision
has been characterized, with rare exceptions, by an under­
standing that the successfu&itoi|i$ration of this intricate

• 'V

6* '

- 3 -

arrangement requires a high degree of comity and coopera­
tion, together with an atmosphere of candor, patience, tol­
erance, and willingness to work harmoniously to solve the
difficult problems that constantly arise. However, the
fact that the system has been made to work as well as it
has does not argue for the proposition that public offi­
cials like myself should not examine the machinery with
the view of devising a better arrangement, one that will
be effective in carrying out the will of Congress, as ex­
pressed in the banking laws, and shaping the banking struc­
ture in a manner best suited to financing a dynamic economy.
Recently I have undertaken this task. And at the
risk of estranging people with whom 1 have long been asso­
ciated in government, as well as many friends in the bank­
ing industry throughout the country, I feel obliged to dis­
close my conclusions, for whatever value they may have.
As 1 see the picture, the time has arrived when we,
as a nation, must determine the kind of a banking system
we want, whether it be a continuance of many independent
units, a rapid development of branch banking, or perhaps
a rapid development of holding company banking. We must
decide whether, in view of the changing size of business
units in this country, we wish to have a few large banks
with many branches (with a relatively few men dominating
the entire banking system and local offices operated by
subordinates), or to continue the existing system of numer­
ous institutions and opportunities for many men to reach
the top and formulate banking policies. We need a super­
visory structure that will make it possible to face these
issues squarely, reach decisions courageously, and imple­
ment them equitably. We must review and analyze those laws
regarding bank supervision which give rise to overlapping
functions, powers, and agencies, to inconsistent decisions,
and to a "race of laxity" which too often reduces super­
visory standards to the "lowest common denominator".
Such an analysis leads me - as it has led others be­
fore me - to a conclusion which for many years I have sought
to avoid, namely, that all federal supervision of commer­
cial banks should be performed by one agency. This is not

- 4 -

a new idea. It has been the subject matter of bills intro­
duced in Congress by Senator Weeks as early as 1919, by Rep­
resentative McFadden in 1920, Senator Smathers in 1938, and
Representative Ditter in 1939. It was the subject of re­
ports by the Brookings Institution (to a Committee of the
Senate headed by Senator Byrd) in 1937, the Hoover Commis­
sion in 1949, and the CED's Commission on Money and Credit
in 1961. And some of you will remember that in 1938 the
crazy-quilt pattern of federal bank supervision was the ma­
jor subject of the Federal Reserve's Annual Report.
Some of the past proposals would have concentrated
bank supervisory powers in the Federal Reserve, some in the
Federal Deposit Insurance Corporation, and still others in
the Comptroller of the Currency. Plausible arguments can
be made for and against each of the proposals. For example,
some feel that the expenses of such a consolidation of func­
tions could most easily be met out of surplus Federal Re­
serve funds which otherwise would be transferred to the
Treasury; others weigh heavily the fact that the Federal
Deposit Insurance Corporation has an insurer's interest in
the soundness of practically all banks; and others stress
the view that it is easier to deal with a single adminis­
trator, like the Comptroller of the Currency, than with a
Board of three or seven men.
On the other hand, (1) in appraising the soundness
of loans or investments, bank examiners should never be
obliged to switch from rose-colored glasses to black ones,
and back and forth again, in an effort to implement the
monetary policy of the moment; (2) it is doubtful that all
banks should be examined by an agency primarily concerned
with its insurance risks and obligations; and (3) it is
questionable that exclusive control over all federal bank
supervisory matters should be vested in one individual.
Unfortunately, efforts designed to bring order out
of the situation by unraveling some of the overlapping cross­
lines of authority have been enshrouded in (and so impeded
by) clouds of emotion, pique, fear of loss of power, and
charges of power-grabbing.

- 5 -

I am quite aware that the proposal I am making now
may stir up these emotions. However, 1 am convinced that
the people of this country will not - and should not - be
satisfied with a system that by its very structure almost
invites pettiness and bickering, in which one group of
banks can be played against another, and where, in the
name of equity and fairness, bank supervisory standards
are increasingly reduced to the level of the lowest or
most lenient.
There is another reason why I think action - either
by the President, under the Reorganization Act, or by the
Congress - is necessary. During the past few years we have
witnessed a wave of mergers, and at the moment a wave of
applications to create new bank holding companies. How
these applications are dealt with may determine the fu­
ture banking structure of the country. We face a cross­
roads decision calling for wisdom and foresight, for equity
and substantial competitive equality.
Today three different federal agencies pass upon ap­
plications for mergers, and notwithstanding the fact that
each of them receives the views of the other two and of the
Department of Justice with respect to the competitive fac­
tors, their decisions do not reflect uniform application
of statutory standards and factors. It is impossible for
anyone, in my judgment, to analyze all of the merger cases
decided by the three agencies in the past year and come
out with an understandable pattern of decision.
One of the reasons for this is that the decisions
are being made by men with different points of view, but
another equally strong reason is that they are being made
by men whose minds are almost fully occupied with other
things of equal or even greater importance.
Take, for example, the Board of Governors of the
Federal Reserve System. All of the members of that Board,
on which I have the honor to serve, have more than a full­
time job just keeping abreast of ever-changing economic
conditions and developments, in this country as well as

- 6 -

abroad, and developing or adjusting economic policies to
fit the changing circumstances and needs. Still they are
required to spend at least as much time analyzing very com­
plicated bank supervisory problems and merger and holding
company applications. In one case alone, which was de­
cided recently, the documents before the Board, including
statistical tables and the record of hearing, piled more
than six inches high. It is not uncommon for a member of
the Board to have to read and analyze hundreds of pages of
material in a single case. Conscientious men can shoulder,
for a while, these different and ever-expanding tasks each of which demands careful, objective, and time-consum­
ing analysis and thought - but we must be concerned lest
their sheer volume serves to diminish the quality of judg­
ments and decisions, the importance of which cannot be
In view of all this, and after painful soul-searching, I have reached the conclusion that there should be es­
tablished a new agency of government - perhaps to be called
the Federal Banking Commission. It would be headed by five
Commissioners, each to be appointed by the President, with
the advice and consent of the Senate, on a staggered-term
basis. To it should be transferred all the bank and bank
holding company supervisory powers presently vested in the
Federal Reserve Board, the Comptroller of the Currency, and
the Federal Deposit Insurance Corporation. The latter two
would be completely absorbed into the new Commission, ex­
cept for the currency functions of the Comptroller's Of­
fice, which should be transferred to the Federal Reserve.
The Commission would have all the jurisdiction now
exercised by the existing agencies over charters, branches,
mergers, holding companies, fiduciary and foreign banking
activities, as well as disciplinary actions such as termi­
nation of "insurance" or "membership", and removal of offi­
cers or directors. It would also promulgate all regula­
tions which are now required or authorized to be issued by
any of the three supervisory agencies, and it would other­
wise administer and interpret the federal banking laws.

- 7 -

A unit of the new Commission, headed by a Director
of Insurance, would handle the deposit insurance and re­
lated functions now performed by the FDIC. The Director
would be a career man appointed by and responsible to the
There also would be a separate unit of the Commis­
sion, headed by a Director of Bank Examinations. He would
be in charge of all examiners, now employed by the Comp­
troller of the Currency, the FDIC, and the Federal Reserve
System. Since the Director of Examinations, like the Di­
rector of Insurance, should be a career man, with an in­
definite term of office, he, too, should be appointed by
and be accountable to the Commission. His job would be to
see that every national bank was effectively examined, that
the laws of the land were obeyed, and that the regulations
of the Commission were complied with. In addition, he
would be authorized and required to examine state member
and nonmember insured banks to the extent deemed necessary
for any reason by the Federal Banking Commission, the Di­
rector of Insurance, or the Federal Reserve Board, and, of
course, all reports of examinations would be made freely
available to all three.
In addition, the Director of Examinations would be
required to submit to the Commission his report and recom­
mendation with respect to every charter, branch, merger,
and holding company application. He would be expected to
act as an advocate of the public interest in connection
with quasi-judicial proceedings of the new agency on such
applications, so that the Commission would have before it
not only the facts and self-serving arguments advanced by
the applicant, but also the more objective arguments of
those representing only the public interest. He would be
expected to report to the Commission any instance in which
an insured bank is engaging in unsound practices or viola­
tions of law that might warrant the institution of disci­
plinary proceedings. He would refer to the Commission for
its determination any questions for interpretation of law
arising in connection with examinations of insured banks.

- 8 -

One of the facets of the problem that has bothered
me for some time is the way in which Congress has provided
for the financial support of bank supervision. At the pres­
ent time the expenses of the Office of the Comptroller of
the Currency are borne by the supervised national banks on
an assessment basis. The expenses of the FDIC are borne
by the funds obtained through assessments against insured
banks, and the costs of Federal Reserve supervision are
paid out of Federal Reserve funds, involving no assess­
ments on the banks examined.
When a supervisory agency is financed by the organi­
zations being supervised, there is always the danger, usu­
ally latent but sometimes emergent, that the agency will
treat as wards the institutions it supervises, or assume
the role of a trade association - a role that is unbecom­
ing a federal agency. Furthermore, I question whether
banks should be burdened with examination costs; the pur­
pose of supervision is to protect the public interest,
rather than the banks or their shareholders. Consequently,
I propose that the Commission and all of its activities,
other than insurance, be supported entirely by appropri­
ated funds (the cost of providing federal deposit insur­
ance would still be covered by assessments on all insured
Of course, one of the questions which always looms
up when a plan such as this is discussed is: What happens
to the dual banking system? My answer is simply that, if
the dual banking system is to be maintained, federal bank
examinations eventually should be confined to national
banks, except to the extent that the Federal Reserve, the
Federal Banking Commission, or its Director of Insurance,
might need to have examinations made of state banks in
order to aid them in the performance of their statutory
At the present time most states do not have super­
visory forces large enough to examine their state-chartered
banks without material assistance from either the Federal
Reserve System or the FDIC. Consequently, the withdrawal

- 9 -

of federal examination in those states would have to be
gradual. I would suggest that a goal of three years be
set within which those states could develop their examin­
ing staffs to the point where they could assume the full
burden of supervising state banks. After that, assuming
the Federal Banking Commission is satisfied with a State
Supervisor's reports of examinations, federal examinations
of banks in that state would not be made - except perhaps
for spot-checking.
This sort of an arrangement would achieve greater
uniformity and effectiveness - as well as reduce the cost of federal bank supervision, eliminate conflicting interpre­
tations of law, and lead to greater consistency in merger
and holding company policies. Since all merger applica­
tions, for example, which are now passed upon by one or
another of the three federal bank supervisory agencies,
would be dealt with, instead, by the new Federal Banking
Commission, it seems likely that the decisions would be more
consistent and would provide better guidance to the banking
industry. Such an arrangement would also serve to eliminate
a substantial part of the temptation for banks to switch from
state to national, member to nonmember, or vice versa, de­
pending upon which group appears to receive the most gener­
ous or lenient treatment from the federal supervisor.
The new Commission would be almost exclusively con­
cerned with quasi-judicial functions calling for a high de­
gree of knowledge of the banking industry, as well as the
ability to analyze both facts and law. Consequently, its
membership should be selected with the same care that is
called for in the selection of judges. Decisions of the
Commission should be final and conclusive, unless found by
a reviewing court to be wholly without evidentiary support
or clearly arbitrary and capricious.
Some may think that it would be better to have a single
administrator of such an agency, for the sake of speed, ef­
ficiency, and uniformity. My own view is that the problems
involved - for example, in a charter, merger, or holding com­
pany application, as well as in the promulgation of regula­
tions - are so important not only to the individuals and

- 10 -

institutions involved but also the public and to the di­
rection of the development of banking in this country,
that they demand the judgment of more than one mind.
Every man is tied to some degree to his special back­
ground and experience, and consequently is not wholly
free from bias and prejudice. Therefore, I believe the
public interest is best served by requiring that the minds
of several men be focused on each problem - even at the
expense of some delay and awkwardness.
Where would this plan leave the Federal Reserve
System? Exactly where it is - as the central bank of this
country - except that its examination and supervisory func­
tions would be transferred to the new Commission. This
would relieve the Federal Reserve System of a great deal
of work, which, while important, is not essentially inter­
related with its primary function of regulating the supply
of money and credit. In my view, there are few functions
in a capitalistic economy more important than this. If,
for any reason, the flow of money and credit is too large
in relation to the volume of goods and services available
for purchase, inflation usually results. Everyone now is
aware of the consequences which flow therefrom - most of
them evil. On the other hand, the failure of money and
credit to keep pace with the growing needs of the economy
can result in the under-utilization of our vast resources,
excessive unemployment, and - in extreme cases - economic
We all know that monetary policy alone cannot sta­
bilize the economy. Equally important are many other fac­
tors, such as fiscal policy, public psychology, the spend­
ing and savings habits of people, and the pressures of
labor and businesses (including agriculture). But I do
believe monetary policy is one of the most potent and is
essential as an equalizer among the others. It is suffi­
ciently important that the Board of Governors of the Fed­
eral Reserve System should be permitted to devote all of
its time and effort to the task, without diverting atten­
tion to bank supervisory matters that demand concentrated
full-time attention by people especially qualified for the

- 11 -

In concluding, let me state clearly that the views
I have expressed are exclusively my own, reached without
consulting either my associates on the Board of Governors
or the officials of any other agency. Having worked closely
with all of them for many years, it is only natural that I
feel great affection for each of the agencies and the people
who run them. However, in formulating these views, I have
been obliged to look to my mind and my conscience, rather
than my heart, and abide by their dictates.
I do not know what will come of this proposal. To
borrow a phrase from Dickens, I hope that "It mayn't be hu­
man gore!" I am sure that everyone will agree that there
is a job to be done. But there are alternative ways of do­
ing it. I can only bring to bear on the problem the les­
sons I have learned from experience, in the years that have
transformed an upstart from Broken Bow, Nebraska, into one
of Washington's elder bureaucrats. Someone else may de­
velop a better solution. But of one thing I am certain, we
will never find the right solution unless we are willing to
put aside rancor, personalities, and politics, as well as
rigid resistance to change, and proceed to debate the issue
with all the open-mindedness of which we are capable.