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Telephone: 393-8400
Br. 221



Address of



Washington, D. C.

at the

School for State Bank Examining Personnel
at the
University of Illinois
Urbana, Illinois

Sunday, July 19, 196^, at 7:00 p. m.


You are here this week to improve your skills as hank examiners.


are participating in a push by state bank commissioners to upgrade their
departments across the board.

In the final analysis, you are playing a key

role in the improvement of the dual banking system, to insure its continued
existence, and its continued service to the public.
As C. V. Pierce, President of NASSB, has said, "The existence of the
dual banking system is to a large degree dependent upon the excellence of
our state bank examination procedures.

Accordingly, the basic purpose of

our school is to develop the role of supervisors and examiners as important
members of our financial community."
While you are here you will attend classes dealing with asset management,
managing for profit, credit analysis, internal controls, automation, managerial
appraisal, trust departments, and report writing.

Additionally, you will

attend evening seminars on human relations, the Uniform Commercial Code, and
monetary and fiscal policy.
During this one week, therefore, you will be looking not at the bare
bones mechanics of examination--you are experienced examiners now--but at
some techniques and areas which govern the operation of a bank.

You will in

large part be covering topics which are equally pertinent to the bank managements
you examine.

In this year's school, and those to come, which hopefully will

be expanded to two-week sessions, state examiners in attendance will have a
golden opportunity to develop something more than a routine approach to
examination of a bank's assets.


As examiners and potential senior supervisory personnel within the
banking field, you have a potential commitment to banking far beyond the routine
check of a bank’s affairs to assure that prudence is being maintained and the
laws of the state and national government obeyed.

It is a dedication to

positive, progressive banking that I want to urge upon you today.
In the fullest sense, the bank examiner is in a unique position to
assist bankers in developing positive and progressive institutions to serve
the public, within the framework of a system hammered out over the years.
is, as you know, a unique system.

No other nation has one like it.



coincidentally--no other nation has had quite the development, quite the
freedoms, quite the standard of living, that this nation has.
It is a unique system in three basic ways.

In the first place, it

embodies dual supervision, blending state and federal controls in a concept
of checks and balances.

This assures flexibility and it eliminates the fear

of a monolithic, dogmatic approach.
In the second place, the keystone of the system is adherence to the
concept of locally owned and managed institutions.
This is a unique posture and from it stems the third basic attribute
of the system— service to the community as a whole; development of small loans,
of small checking and savings accounts, of service literally available to all
Maintenance of this system, with its strengths and freedoms, requires
above all that the individual components, the locally owned and controlled
banks, continue healthy and vigorous.

Dishonesty cannot be tolerated.

can stagnation, if the system is to continue to flourish.


- 3 -

Your assigned tasks, as examiners, are to weed out dishonesty, to stop
illegalities, and to halt unsafe and unsound practices.

But all supervisors,

state and federal, can exercise a higher role as well, in assisting the
banking system to develop as positive

an approach as possible to the concept

of service to the public, to the nation, and to stockholders.
I do not suggest that any of us can or want to exercise the proper
functions of management.

We cannot make the judgements which management must

We cannot assume the responsibilities which are management's.

We do

not have the incentive which spurs on management, and we do not face the
penalty which management faces for failure.
But we can become a constructive force for better management and for a
better banking system.

We can foster better management and can act as a leaven

spreading out throughout the system all that is best in effective positive
We can and should use as our watchword for all bank activities the
word "excellence."

Look for excellence in bank management, encourage and

assist it, and utilize every possible tool to help management reach levels
of excellence.
Put simply, it should be the task of the bank examiner, and the bank
supervisor, to keep abreast of the latest in banking, and to act as a conveyor
belt for every idea, every concept, every service, which helps a bank management
to do an honest, and a positive, job in serving its community.
There are several areas where these basic premises hold true.
be subjects of this week of study you begin tonight.

Some will

Some are not, but in

order to equip yourself for the best possible job of assisting bank managers




in doing their job, you can and should seek constantly to expand your own
In the time remaining tonight, I would like to explore with you some of
these areas, and to consider some of the ways in which supervisory authorities,
including examiners, may possibly be of assistance to the banker in his everyday

Without attempting to usurp the prerogatives, or the necessary

duties, of the bank manager, these all seem to me to be areas in which the
examiner can constructively help the industry and the individual bank.
To begin with, you all have in the past, and I am sure will in the
future, run up against management problems, both in the form of management
which is perhaps not capable of discharging current responsibilities, and in
the form of a failure to provide for competent successor management.
The scope of this problem, especially as it relates to the smaller rural
bank, is outlined in a study by a
particular state.

FDIC examiner of the rural banks in one

The study is several years old now, but the statistics and

conclusions unfortunately still have validity, and I am sure you will recognize
in some of them problems you have confronted in going into some of your own
state's banks.
Surveying 50 smaller rural banks, this study showed that the average
age of the managing officer was 6l, with seven banks headed by men over 70.
Their average income was very meager.

Every one, without exception, supplemented

his bank income from outside sources.

Mostly they sold insurance, or fertilizer,

or farmed, or ran

general merchandising stores.

The average age of the second ranking official in the bank was
of the salaries reported for second officials were shockingly low.

b 2.




- 5 -

second officials did not have access to outside incomes in a great majority
of the cases.
Even more shocking was the fact that in only seven of these hanks did
management report a qualified successor.
capacity under the senior official.

Two hanks had no one in any managerial

In 20 cases, the second official was a

woman, usually of long seniority, who had heen given a title as a reward for
years of service.

In these cases, however, the women held relatively routine

positions and were not qualified to take over management of the hank.
Where there were men in number two positions, only seven were thought
to he qualified to step up to the top slot.
One statistic may serve to show why these conditions continued to exist.
In 26 cases, better than half, ownership and control of the hank was held in
the hands of one person, while in three, one family owned and controlled, and

15 other cases the board of directors controlled.
This is not a universal problem.

But it is a wide-spread problem, and

it is one where the hank examiner can at least help, by attempting to assist bant
managers to build up their banks to the point where qualified help can be hired
and paid, and hopefully trained to exercise future management functions.
At the same time the examiner faced with such a situation can, in
working on an examination, discreetly turn teacher, helping to upgrade management

Here a positive, helpful approach, rather than the desire to

discipline, is the method which over the long run can get better results.


note that human relations will be one of the topics in the evening seminar
program for this school, and I would suggest that that seminar might give you
some tips on how to handle this kind of problem and render some positive




assistance to managers and other officers who need to know how to do their
job and who can use some sympathetic assistance.
The problem inherent in the area of restricted ownership of a bank’s
stock is a delicate one.

Invasion of the constitutional right to own and

dispose freely of legally-held property seems to me improper.

But there are

ways in which the examiner might be able to help, in keeping abreast of
situations in such banks, and perhaps by sounding a cautionary note.
For example:

Several unfortunate situations have received wide-spread

publicity recently, in which control of a bank was sold by an individual to
promoters who then milked the bank in question.
sold because premiums offered were high.

In most cases, control was

The promoters— not bankers, I should

emphasize— did not care how much they paid above book value because they were
buying for the most part with borrowed funds and for the purpose of using the
bank's assets for their own purposes.
But could these situations have been averted if efforts had been made
to dissuade the original owners from selling to such types?

If the original

owners had received some sound advice from the personnel of the state and
federal agencies, and if the gravity of the problem had been brought out to
them, could the bank failure have been averted?
The answer to these questions might be "no"--but any effort would be
worth it, if only one case could have been averted.
In further discussing crimes against banks, the examiner can serve as
a constructive force in helping bankers upgrade the work they do to guard
against external and internal crimes.

Examiners as a matter of course will

check against possible embezzlements, and will spot check precautions against

- 7 -

But there is further action which can be taken, I should think.


would lie in trying, through education and through the examination report, to
help clear up trouble spots before they occur.

In a recent report, a House of

Representatives subcommittee cited the growth in crimes against banks and urged
several methods to combat this growth.
Among those urged was one that examiners "be given such training in the
methods of prevention of external and internal crimes as will enable them to
ascertain and advise on any security deficiencies in the institutions they
One step recently taken by FDIC along these lines was the addition of
a new checksheet contained in the report of examination.

This sheet requires

the examiner to check 21 specific items, embracing security programs, precautions
against holdup and theft

and against burglary.

These are all areas where the

examiner can be an effective informal adviser to the bank.
Another field in which examiners can contribute as a positive force is
in the area of automation.

This is a growing field; there are predictions that

in the relatively near future automation will be the procedure in the industry
as a whole.

Recently David Rockefeller of Chase Manhattan Bank predicted that

by 1975 money as we know it will be well on the way to being extinct, with the
use of automated systems of credit as a replacement.
Whether we will go that far that fast remains to be seen.

But it is a

present fact that automation is growing, and more and more banks are using it.
Here the examiner can help in several ways.

The examiner perhaps will be in the best position to show this to

the management.

Not all banks are ready for

Then, too, when a bank is considering automation, the examiner,




as the representative of his state banking department, can help guide the banker
to guarantee that the various controls and schedules needed by the banking
department are programmed into the machinery.

This is important not only from

an examination point of view, but from the banker’s as well, since the require­
ments of the supervisory authority will pretty well coincide with requirements
which a prudent management should have.
Perhaps the single most important area in which the examiner can function
(always remembering that his job is one of reinforcing management and not of
usurping management’s tasks) lies in assuring that a bank offers a full service
to its community and gives its community a positive banking approach.
Banking has a public trust implicit in its operations.
to create the larger part of the nation’s monetary supply.

It has the power

It operates chiefly

with the deposit funds of the public--which are not investments, but credits in
large part payable on demand. The failure of a bank involves many other
businesses, institutions, and individuals--and the failure of a bank to do an
effective job inevitably inhibits its community as well.
The examiner’s attitude to his job can have a great deal of bearing on
how well banks in his area will do.

Remember that poor management can drag

down even the best potential situation, while good effective management can pull
up poor assets or can go a long way toward correcting a poor competitive

The examiner who knows the difference can help bolster the poor
He can help the good manager who may face difficulties, even though

the problems may be such that the results shown are not as good as desired.
The examiner's understanding, and attitude, can be of great importance in any
such cases.

If I wanted to set forth some guide lines, I would suggest to you that the
hank examiner can serve as a positive force for good, effective banking in three
main ways:
First, he can be a positive force for upgrading management performance.
He can help correct mistakes and procedures.
Second, he can act as a teacher, passing on new methods and new techniques
or assisting the unskilled in learning proven methods.
Finally, he can be a positive force for dynamic commitment to the concept
that banking is a service industry, with a commitment to the public welfare, and
with a commitment to community well-being and community service.
Bank examination can be an exciting, challenging, rewarding career.
hope you all find it so.

And I hope that during this next week you will


for new ways to become experts in the field of banking, teachers of sound banking
repositories of the best and broadest viewpoints within the industry.
We in bank supervision should look at our task as one not only of
correcting the mistakes, and uncovering the irregularities and illegalities of
bankers, but as one of helping management upgrade its abilities and services.
Bankers want, and need, good examiners and good examinations.

They pay for

this ^service, and they hope to get as much out of it as they can.

Where the

examination is thorough, positive in approach, and geared not only to check
safety, but to enhance ability, they, your state banking departments, and the
public will have received the best in all of you.