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Saturday, April 10, I9 6 5
2:00 P. M.





Banking has experienced -- or endured if you will -- a
dramatic year.

Unexpectedly, the hank supervisory agencies have

found themselves in the forefront of the news emanating from Washington.
Banking matters, ordinarily comfortably relegated to the business
pages of your newspapers, emerged on page 1, and are still there.
Terms like ’’CD’s", "bank raiders”, "single bank agency bill",
"disclosure rules" and "bank failures" have entered the common lexicon.
The banking world is becoming increasingly a conscious
part of the average man’s daily life.

In Washington, those taken up

with the business of government -- and almost everyone is -- have
been forced to devote time and energy to some unusual problems —
problems involving banks, their condition, their regulation and
their liquidation.

These areas normally are the concern of the bank

supervisory agencies alone, working quietly in the background —
but this has changed.
In view of this recent development, I thought today it
might be appropriate to discuss one or two of those matters which
currently occupy the Washington scene.

196 b was a year when bank resources, deposits, and earnings
all reached new highs.

It was a year in which banks continued to

expand their services.

But it was a year of problems as well.

The industry was faced with a cost-earnings squeeze.
bank’s raw material —

money —

The cost of a

rose and is still rising, permitted

to some extent by the increase in the interest rate ceiling, which
in turn was attributable to balance-of'-payments considerations.






The deposit mix continued to be reshaped, with greater emphasis on
time and savings funds.
important —

These are the ordinary problems —


but not uncommon.

Several matters arose during the year, however, which
were not ordinary.

During 1964 seven insured banks failed, and

five more have failed so far this year.

With over 14,000 banks in

the nation, this is not cataclysmic, when placed in proper perspective.
Surely the system as a whole is sound, strong, and not in danger.


it might well be said that such failures are the price paid for the
preservation of a diffuse, locally-oriented banking system within
the framework of a free enterprise economy.

We believe management

must be given maximum freedom from regulation.
means freedom to commit errors of Judgment.

This necessarily

Complete insulation of

bank management from Judgment errors would lead to rigidity,
stultification and quite likely to a banking system unresponsive
to the credit needs of the average citizen.

Nevertheless it is

true that neither the supervisory agencies nor the industry as a
whole can view even one failure with complacency.

When a bank

failure is not caused by the economic decline of business in a
community, it lends itself more readily to correction; it is a
special concern to the regulatory authorities and a stimulant to
corrective action.

These were the kind of failures we had in

Failures of this kind need not and should not be tolerated.
In a sense the F.D.I.C. must act as a pathologist; it

must carefully dissect failed banks.
of the failures.

It must identify the causes

Our autopsies have shown one recurring causal


- 3 pattern in nearly all recent bank closings —

change of control, or

in the new banks, acquisition of control, by persons bent upon
sophisticated thievery.
has been the same.

The obligato has varied but the melody

The bank has been force-fed.

Funds have been

secured from outside the normal trade area through brokered
certificates of deposit and used by self-serving management for
their own aggrandizement, generally in high-risk, low quality loans.
Capital deficiencies have soon occurred, in some instances the
deposits have been exposed to potential loss, and the bank has
hecome insolvent.
To cope with this trend the Corporation has taken several

The first, and most publicized, was the filing of a

declaratory judgment action in a Federal District court in Texas,
and later the filing of a similar action in California.

The suits

seek a court determination of the insured status of certain
certificates of deposit, secured through money brokers and on
which interest was paid, directly or indirectly, above the maximum
permitted under the Corporation’s Regulation 329 and the Federal
Reserve Board's Regulation Q.
It is the position of the Corporation that where a
bank receives funds under any arrangement whereby the one placing
money is to be compensated in excess of the maximum interest
permitted on deposits, the funds placed in the bank constitutes
a borrowing by the bank rather than a deposit of the funds in the
usual course of business, and hence are not entitled to deposit


- I* -

In this connection it should be emphasized that certificates
of deposit obtained by a bank in the ordinary course of business have
not been challenged, but rather have been paid promptly up to $10,000.
Also, even those certificates which have been challenged for insurance
purposes continue to be general obligations against the bank’s assets,
and have and will continue to share on a pro rata basis with other
general claimants in the assets of the bank as liquidation dividends
are declared.
The Corporation has announced several times, not only to
banks, but to the general press, that deposits in an insured bank,
made in the usual course of business and for which there is no
arrangement whereby the depositor received compensation in excess of
the rate permitted on deposits under Federal regulations, are, and
continue to be, insured to the statutory maximum.
We hope for an early disposition of our law suits.

We are

confident that we will prevail.

Members of the Congress have voiced

their hope that we will prevail.

But the mere filing of the actions

has had a salutary effect.

We have reason to believe the noxious

practice has been slowed considerably, if not stopped.
A second step undertaken by the Corporation to eliminate
the cause of the failures has been a broad educational program to
acquaint the industry and the public with the facts.

Members of the

Corporation’s Board of Directors, in speeches, interviews, and articles,
have outlined in general terms some of the problems uncovered, and
have urged the industry toward self regulation.
raiders" were financed by other banks.

Some of the "bank

Loans were made -- sometimes

- 5 100

loans —


on collateral comprised solely of the stock being

The danger in such loaning, without thorough credit

investigation and appraisal, should he clear to all of you.


collateral was, after all, worth only what the borrowers made it.
Faced with a significant increase in bank failures, the
Corporation has sought to improve its payout procedures.
time to pay-out for insured deposits has
to five, on the average.


been reduced from ten days

New techniques have been developed to

minimize the hardships caused by a failure.

Two Deposit Insurance

National Banks have been chartered where the Corporation believed
continuation of banking facilities in the community was essential.
These institutions may remain open for up to two years and they can
offer a limited banking service.

It is the Corporation’s hope that

local capital and management can be developed to open new banks and
to absorb the assets of these two limited banking institutions.


two other cases, we used our statutory power to facilitate the
assumption of failing banks by neighboring banks in sound condition.
In two California bank failures, with the help and
cooperation of your fine Banking Commissioner, a new procedure was
worked out whereby the depositors in the closed institutions were
permitted to execute assignments of their insurance claims in favor
of other local banks.

On receipt of those assignments, the other

banks then were able to give depositors

accounts immediately.

Verification with FDIC officials at the closed bank was done by

In effect, the depositors were afforded immediate access

to their funds without even waiting for the FDIC pay-out.




Finally, the Corporation asked the Congress for legislation
which would enable it to keep abreast of changes in control of banks.
The bill passed both House and Senate, and was signed by the
President in about two months time, remarkably fast action for banking
When effective control of an insured bank changes hands,
the bank must report this fact immediately to the appropriate
Federal banking agency.

The Federal Reserve and the Comptroller of

the Currency are further responsible for passing on the reports
they receive to the FDIC.

Additionally, insured banks are required

to report loans they may make which are collateralized by the stock
of another insured bank.

Such reports, however, are not required

if the bank is a newly chartered institution and the loan is being
made to finance initial ownership, if the stock has been owned by
the borrower for a period of more than one year, or if the amount of
stock pledged as security represents less than 10 percent of the
bank's outstanding stock.
It is the view at FDIC that this simple piece of legislation
has helped materially in curtailing the pernicious practice of bank
As you know, the Permanent Subcommittee on Investigations
of the Senate Government Operations Committee is currently holding
hearings inquiring into the failure of certain banks.

It is too

early to predict what might come out of these hearings, but they
should be of interest to every banker.

Turning away from bank failures, another significant

- 7 problem with which the FDIC grappled last year was the passage of the
Securities Acts Amendments of 196U.

Because of the responsibilities

given to the banking agencies by the bill, we were required to issue
regulations implementing the Congressional directive.
Congress considered for many years putting securities
listed in over-the-counter markets under the disclosure rules of the
Securities Exchange Act.

The broad study of the securities markets

in 1961-63 by the SEC gave added impetus to Congressional action.
Despite the traditional depositor orientation of the industry, Congress
nevertheless determined to include banks within the ambit of the new
of the law.—

However, Congress did decide to vest the administration
for banks -- not in the Securities and Exchange

Commission, but in the appropriate Federal banking agencies.
it is estimated that some


banks are affected.


The law puts

corporations, including banks, under the regulations if they have
assets in excess of $1 million and more than 750 shareholders of a
single class of stock.
After the legislation was signed into law, the Comptroller
of the Currency placed into effect skeletal regulations which he had
previously issued for comment.

The FDIC and the Federal Reserve Board

adopted a different approach and issued for comment extensive
regulations largely modelled on SEC rules -- rules which had been
proven by years of use.
The banking industry was asked to comment and did -- at

After full analysis and discussion of this commentary, and

after lengthy staff discussions with and between industry representatives,

the FDIC and Federal Reserve staff members, the Board of Governors
and the FDIC issued final regulations on December 31 of last year,
to be effective the next day.

They were issued, as we said in a

press release at the time, as "living" regulations, subject to change
as experience suggests need for modification.

The banks subject to

the rules will build up a body of experience through use, and from
that experience, hopefully, will be able to assist the Corporation
in further modifying and improving the rules.
At the same time I should like to emphasize that our Board
views these rules not as an onerous burden on banks, but as a tool
for management to use to improve its competitive position.

We believe

that wise use of these regulations will prove advantageous in three

First, they will assist in attracting new capital to those

banks which seek added funds to enable them to meet expanding demands
for service in a growing economy.

Second, they should prove of

great value in attracting added depositor funds from that class of
depositors which seeks the fullest possible information about their
banking connections and its management.

And, third, there will be a

strong benefit from the increased public confidence generated by
full disclosure.

Fuller disclosure, after all, was one of the key

factors in restoring the public confidence in listed corporate
securities following the market disaster of 1 9 2 9 .
Summarized briefly, these new regulations require:

A registration statement is to be filed within 120

days after the ending of the fiscal year by each bank covered, to
include among other things a description of its business, a list of




principal security holders, a list of directors and officers,
remuneration paid to the two principal officers and certain
directors, the interest of management and principal stockholders
in certain transactions with the bank, stock purchase options, and
certain financial data.

Periodic financial reports must be filed by the bank,

including an annual report and brief quarterly reports and current

Rules are to be followed, both by management and others

in soliciting proxies; provision is made for furnishing information
prior to annual meetings even if proxies are not solicitated.
Reports are required on stock transactions by "insiders
The rules require the filing of initial reports of stock ownership
and reports on changes in ownership as they occur.
All in all, it has been a busy year for the Corporation,
as it has been for the industry.

The American banking system is as

strong, and offers as wide a range of service to the public, as
ever before in its history.

But this posture cannot be continued

unless the industry and the supervisory agencies continue to look
for ways to refine and improve techniques, broaden services, and
strengthen the underlying support which a sound banking system gives
to the nation*s economy.

That is the posture the Federal Deposit

Insurance Corporation always has sought to maintain, and I can assure
you that that is the posture which the Corporation will continue to

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