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FOR RELEASE TO P. M. PAPERS,
MONDAY, MARCH 15, 1965:




EVALUATING TODAY'S BANKING STRUCTURE
An Address by
K. A. RANDALL, DIRECTOR
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D. C.

before .the
INDEPENDENT BANKERS ASSOCIATION OF THE
TWELFTH FEDERAL RESERVE DISTRICT

8th

Annual Policy Seminar

Jack Tar Hotel
San Francisco, California

Monday, March 15, 19^5
11:00 A. M.

EVALUATING TODAY’S BANKING STRUCTURE

Questions are being raised, in part because of the failure of a bank in this
city, which challenge the health of the banking system and the soundness of the
supervisory stucture.

Suggestions and innuendos have been presented to the

public which are unwarranted, unhealthy, and potentially dangerous.

The vital,

and sensitive, confidence the American public has in the banking system —
which is, in my view, fully merited —
and to no good'effect.

' .

and

is being tampered with, for no good reaso'n

So I hope you will permit me to use this program as a

forum for addressing, through you, bank customers all over the nation, that vast
group of American citizens who use the American banking system to an extent
unknown in any other country on earth.
I can think of at least four areas in which unfounded rumors are circulating.
Perhaps today we can examine these, and place recent developments in a more
accurate perspective, as related to the whole banking structure of the nation.
There are suggestions that recent bank failures represent a serious increase
in failures over past periods.
There have been extensive rumors concerning FDIC actions relating to
certificates of deposit.
Concern has been voiced over suggestions that credit standards of the
banking system have slackened.
Finally, there are widespread reports that the Federal banking agencies are
involved in serious differences of opinion and of operational standards.




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I would like today to state, flatly and without qualification, that none of
these are true.
The American hanking system today is probably as healthy, and as prosperous,
and as able to serve the public, as at any time in its past.

Indeed, the banking

industry’s resources are at all time highs and continue to mount.

The banking

industry’s earnings are at records, and, while there is a certain squeeze on
earnings, the banking industry as a whole is meeting this challenge with admirable
skill.

The industry offers more services, better services, to more Americans than

it ever has before, and far more than any other banking industry in any country
ever did for its people.

I think it would be fair to say without qualification

that the only possible setback to the banking industry would come as a result of
a complete general economic setback to the nation as a whole.
thirty years many safeguards

Over the past

-- not the least of which is the depositor protection

afforded by the Federal Deposit Insurance Corporation -- have been built into the
banking structure.
Before we examine in more detail the five areas outlined above, I would like
to make two other points.
In the first place, the banking industry over the past thirty years has
gradually developed strong public confidence which is one of its greatest assets.
further,
Each year of improving banking service develops this confidence/ and it becomes
more and more the base supporting not only the banking system but the whole
American economy.
This confidence is, I am convinced, well merited by the banking system.
At the same time it is a misservice to the nation




to voice inaccuracies •

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about this system.
The second point I would like to make deals with a necessary task of any
competent supervisory agency and its personnel.

Of necessity, supervisors must

be teachers, and of necessity, they must serve as the warning system which keeps
the industry from possible errors.
mistakes, errors, or dishonesty.

The supervisor cannot assure elimination of
But he can point out potential dangers, setting

the industry on guard against them.
Most bankers must, if they are to do their jobs properly, concern themselves
with the day-by-day operations of their banks.

The banker’s overwhelming duty

is to his institution, his community, and his customers.

Few bankers have the

time, or the staff, to keep abreast of all trends within the industry.
The supervisor, on the other hand,
keep abreast of the latest developments
necessary task for the supervisor.

if he is to do his job properly, must
in the field.

It is a proper and

The supervisor who is not able and willing

to talk to bankers about such potential problems as misuse of certificates of
deposit, or a slackening of credit standards, is not fulfilling his duties.
But where the supervisor is properly discharging his duties in sounding such
warnings, he is doing this as a means of preserving a sound banking structure.
His objective is to eliminate fringe happenings before they become dangerous.
His duty is to warn the system as a whole of minor happenings which potentially
could cause harm.

In doing this he is helping the overwhelming majority of good

sound bankers to resist pressures and to continue sound operations.
With these points in mind,
arisen.

we can

If these problems are examined




examine the areas in

which problemshave

in the total context of the banking

system

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today, it will become apparent that they are only fringe problems.

2k

There have been suggestions that the number of bank failures in the past
months is up dangerously from previous experience.

This is not so, and the amount

of losses has been very small, proportionately to the system as a whole.
no one wants even a single loss, with its impact on a community.

Of course,

The supervisory

agencies, and the bankers themselves, would prefer that every bank continue healthy
and prosperous.

But a few failures is the price paid for a free, flexible, vital

system which serves the public, and proof that the system works within a relatively
free enterprise environment.

A system could be constructed without failures, I

am sure, but it would be a system so hamstrung by regulation, so restricted in
its operations, that the public would get only restricted service and the nation's
economy as a whole would suffer thereby.
The figures show just how minimal these failures have been.
months there have been
date.

13

failures -- two in

1963, 7

in

196^,

In the past

2k

and 4 this year to

Compare this figure of 13 with the June 30, 19&J- figure for all insured

banks.

On that date there were 13,728 insured banks in the United States.

The

failures represent nine one-hundredths of one percent. Examining the assets of
the
these failed banks against the assets of/all insured banks system points this up
even more.

As of June 30, I96I+, the insured banks had assets of

The failed banks had assets of some $11*4- million.

$366

billion.

This is approximately three

one-hundredths of one percent.
This figure would have been half that much if the San Francisco bank had
not failed.




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Seven insured banks were lost in 196*4-, the largest number of insured banks
to be lost since 19*4-2.
banks failed each year.

However, in 19*4-3, 19^7 > 19*1-9, 19557 and

1961

five insured

The difference between five and seven is nominal, in the

context of a banking system of some 1*4-,000 banks.
There have been suggestions that some of these closings were unnecessary.
No supervisor closes a bank without a devoted affort first to save it, yet no
supervisor should allow a bank to remain open when its capital has veen wiped out
and its deposit structure is threatened.

Deposits are not capital, and when

deposits are threatened, the supervisor must protect depositors,
FDIC actions concerning certificates of deposit have been distorted, and too
many holders of perfectly good certificates of deposit have been unnecessarily
concerned.
These questions concerning the insured status of certificates of deposit
have been prompted by reports concerning the two banks recently closed in
California and Colorado and the suits in Federal courts in Texas and California
where the Corporation has submitted the question of the insured status

of certain

claims.
It must be borne in mind that the Corporation is in effect a trustee of the
insurance fund which is held for the benefit of the depositors in almost 1*4-,000
insured banks in the United States,

The Corporation is directed by Section 11

(f) of the Federal Deposit Insurance Act "that in any case where the Corporation
is not satisfied as to the validity of a claim for an insured deposit, it may
require the final determination of a
paying such claim."




court of competent jurisdiction before

Therefore, in order to protect the interests of all insured

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depositors, it is the duty of the Corporation to submit facts in a questionable
situation to the court for decision.
The Corporation has repeatedly emphasized, that deposits in an insured bank,
made in the usual course of business and for which there is no arrangement
whereby the depositor receives compensation in excess of the rate permitted on
deposits under Federal regulations, are and have been at all times, and continue
to be, insured to the statutory maximum of $10,000 for each depositor.
On the other hand, for many years before Congress established the Federal
Deposit Insurance Corporation, bank supervisory authorities strongly criticized
any practice which concealed borrowings of a bank by the issuance of certificates
of deposit or other evidence of an alleged deposit.

The Comptroller of the

Currency before the turn of the century pointed out that such a practice
mis-represented the condition of the bank.

At least thirteen of the States enacted

laws prohibiting, and some even making a criminal offense of, the issuance of
certificates of deposit for borrowed money.

Certificates of deposit issued by

State banks under an arrangement whereby the holder was paid compensation in
excess of the maximum rate permitted by State laws were denied recovery from
State guaranty funds which existed long before Congress established the Federal
Deposit Insurance Corporation.
The Corporation itself has repeatedly warned in public statements and press
releases, as well as in its supervision of State non-member banks, that
arrangements for the payment of compensation in excess of maximum rate permitted
on deposits, created a borrowing instead of a deposit, and that such borrowings
were not insured under the provisions of the Federal Deposit Insurance Act.




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It is the position of FDIC that where a hank accepts funds under any
arrangement whereby the one placing money with the bank is to be compensated in
excess of the maximum interest permitted on deposits, the funds placed in the
bank constitute a borrowing of the bank rather than a deposit of funds in the
usual course of business, and hence are not entitled to deposit insurance.
However, reports that holders of these certificates will lose all their funds,
that they will be Mheavy” losers, are exaggerated.

In the instance of the First

National Bank of Marlin, for example, 60 percent of all common claims have already
been paid by dividends.

Further dividends can be expected.

That obviously dees

not suggest in any way that the Corporation is trying to prevent repayment of
these funds.

The only issue is whether or not these few certificates are insured

deposits or general claims against the receivership of the bank.
The total amount of certificates of deposit involved in our suits is under
$25 million.

Yet the total amount of certificates of deposit outstanding today

is approximately $30 billion.

The misuse of certificates of deposit

represents

only a minute portion of this large market.
Speaking of losses, I might add that reports that bank failures represent
heavy losses to depositors are not justified.

In the closing of failed insured

banks since 193^ there were $637 million in deposits.

Yet losses to the depositors

in those cases totalled only $2 .3 million through 1962 (the latest available
figure) less than half a percent of the total deposits involved..
There has been a good deal of concern expressed over deteriorating credit
standards within the banking system.

The Federal agencies have themselves

discussed these possibilities -- acting in their role of cautioning against any




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excesses.
Much of the concern, we feel at FDIC, steins from the publicfs desire for
new types of hanking service, especially in the shape of longer term loans.
Auto loans, for example, are commonly made for
few years ago the

2b month

upon with disfavor.

36

months now, where only a

auto loan was standard, and the 3P month loan looked

Yet the public sought longer terms, and the banking industry

has given them what they sought, supported for the most part by continued
observance of normal credit standards.
This tendency of the American public, to seek a posture of longer credits,
has forced an adjustment in the banking system, which now finds itself in large
part "borrowing short and lending long."

But there is a rather new, and dramatic,

safeguard to this system, little discussed but of at least equal importance.
That is the tendency of more and more of the loans that banks make, even to
businesses, to amortize over the life of the loan.

Put in simple terms, this

means that more and more loans are being written on an installment basis, with
payments starting immediately.

The result is that while many bank loans are

being written for longer periods of time the cash return to the bank actually
is starting sooner and coming back in a more even flow.

This gives the bank a

major protection against possible credit deterioration. This also means that
needed
banks get funds back for /
future loans sooner. This permits the banker to
serve more of the public with the same lendable dollar and provides a smoother
bank operation.
The final item we must examine is the report of serious disputes between
the supervisory agencies.

Of course there are differences of opinion between

the supervisory agencies -- that is, in my view, one of the great strengths of




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the diverse supervisory structure.
come new and fresh thinking.

Out of these divergent opinions will often

These differences are the natural outcome of a

system which is flexible enough to not only work in such an environment but to
develop new tools, new methods, to serve the public.
Out of this ferment between the various agencies have emerged some constructive
new approaches which today are a commonplace in banking life -- and which are of
great benefit to the public.

Today’s difference of opinion may be tomorrow’s new

approach to a better banking system.
There is no "war" between any of the Federal banking agencies.
to the same broad national goals.

All adhere

Those goals are, simply put, the continued

health and continued development of a banking system created to serve the
general public, within the framework of the free enterprise system.

These goals

are to preserve as much as possible of the free right of a bank’s ownership and
management to run its own shop, within rules and regulations designed to protect
the nation's currency mechanism and the depositor whose funds are placed in a
bank in a relationship of trust.
I do not beleive that any Federal agency or Federal administrator, seeks
to depart from these broad goals.

Nor does the Congress.

Such differences

as do exist are in details, in methods for accomplishing objectives which are
our common goals.

And such differences as do exist can be resolved by men

of good will sitting down and hammering out solutions, and by the passage of
time.

Undoubtedly when these current problems are resolved new ones will arise.

I hope so.

That is a clear proof that the banking system is still seeking ways

to grow, to serve the nation better.




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Summarizing this discussion into one broad statement, the American banking
system as a whole is sound, safe, and serving the public admirably.

There are,

of course, problems, but this is the price which must be paid if we are to preserve
our present system, and that is a system which gives the public a quality and
quantity of banking services unavailable to any other nation.

There have been

seme differences of opinion and of detail planning among the supervisory agencies,
but on the whole these agencies pursue the same goals, and in a broad fashion,
operate under similar ground rules.

The net result is that American credit needs

are met, the public has a healthy banking system to serve its needs, and the
agencies continue to do all in their power to maintain this most excellent posture.
To the public, I can only say, your banks are in better shape, and provide
you with better service than at any time since this nation was founded.

And all

efforts of bank supervisors, state and Federal, plus the efforts of the banking
industry and its associations, in the long run are aimed at preserving this
present status and improving upon it.