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For Release on Delivery
April 3, 1985
9:30 A.M. (E.D.T.)

Statement by

Karen N. Horn
President, Federal Reserve Bank of Cleveland

before the
Subcommittee on Commerce, Consumer, and Monetary Affairs
of the
Committee on Government Operations
U.S. House of Representatives
April 3, 1985

CAU Copies:

Adams (BS&R) , Adams (Legal) , Coleman, Cost, Davis, Fricek,
Ormiston, Ware, Pianalto, Abrams, Cerino, Swart, Williams
Circulate to other Senior Officers at Main Office
Circulate to Junior Officers at Main Office

I am pleased to appear before


Commerce, Consumer, and Monetary

Affairs Subcommittee to discuss the Federal Reserve's response to the
recent problems experienced by thrifts insured by the Ohio Deposit
Guarantee Fund.

This morning I will be reviewing for you the response of

the Federal Reserve Bank of Cleveland.

Attached to my statement is a

chronology that sets forth the Federal Reserve System's response to
recent events in Ohio.
I would like to begin by stating that the role of the Federal Reserve
Bank of Cleveland throughout this period has been to assist the State of
Ohio and other Federal regulators in fashioning a solution.

Our initial

involvement was tO'insure that we could act quickly to provide liquidity
assistance at the discount window and to make currency shipments -- first
to Home State and subsequently to other institutions insured by the Ohio
Deposit Guarantee Fund (ODGF).

We have acted at the request of the State

of Ohio, and throughout this period the Federal Reserve Bank of Cleveland
and the Federal Home Loan Bank (FHLB) of Cincinnati have shared
information and staff in a cooperative effort to deal with the problems
and to fashion solutions.

I would also like to recognize the substantial

and supportive role of the correspondent banks in Cincinnati.


,,'" ,


I believe

Federa~ · Reserve has been ' he 1pfu~, and we· will conti nueto '·assi stthe

State of Ohio and other Federal regulators until the problem is solved.
The Federal Reserve Bank of Cleveland first became aware of possible
financial difficulties at Home State Savings Bank of Cincinnati, Ohio on

4, 1985, when an official of Home State telephoned the Federal

Reserve Bank of Cleveland to inquire about the procedures Home State

should follow if it needed to borrow at the discount window.


The Federal

Reserve Bank of Cleveland did not have any financial information on Home

"."~".':, +,:

.. :·c","""', .

- 2State.

It is a state-chartered savings and loan association, regulated

and examined by the Ohio Division of Savings and Loan Associations, and
prior to this time it had never borrowed at the discount window.

We did

know that Home State's deposits were insured by the ODGF, but we did not
have access to any financial reports on Home State.

On March 5, the

press reported that Home State might suffer a large loss in connection
with the failure of LS.M. Government Securities, Inc. (LS.M.), a
Florida-based broker-dealer in government securities.

The Federal

Reserve began an effort to gather information on Home State's situation.
Discussions with the FHLB of Cincinnati confirmed that Home State was not
a member of the FHLB and that the FHLB also had little financial
information on Home State.
Reports from Cincinnati on Wednesday, March 6, indicated a large
volume of depositor withdrawals at Home State.

On that same day, Federal

Reserve examiners entered Home State to examine available collateral in
the event that it became necessary for Home State to borrow at the
discount window.

Depositor withdrawals on Wednesday and Thursday were

funded with Home State's own liquidity and lending by the ODGF.
withdrawals on March 6 totaled $55 million.


On March 7, a meeting was
. . .'


' 1 ,", ,_

... -,



held at the Cincinnati Branch of the Federal Reserve Bank of Cleveland
with representatives from the State of Ohio, ODGF, and Home State to
discuss liquidity assistance for Home State from the Federal Reserve Bank
of Cleveland.

Based on collateral judged to be acceptable by the Federal

Reserve Bank, credit was extended on Friday, March 8, and arrangements
were put in place to extend further credit. ' Depositor withdrawals had
continued on March 7 and 8, reaching approximately $100 million for those
two days.

On Saturday, March 9, Home State did not open for business.

- 3 -

Governor Celeste appointed a conservator for Home State and announced on
Sunde.y ni ght, t·larch 10, that Home State woul d nof reopen for busi ness on
Monde,)' .
A though the problems at Home State were triggered by unique events

out of its transactions with E.S.M., the severity of the public

reaction made us concerned about possible deposit withdrawals at other
ODGF i nsured institutions.

As I mentioned earlier, deposits at Home

State were insured by the ODGF, a private fund that also insured 70 other
State-chartered thrift institutions in Ohio.

According to State

offic i als, the insl!rance fund had assets of about $130 million prior to

r~ n

on Home State.



~ ome

Uncertainty regarding other ODGF insured

was increased by reports on the use of ODGF funds to deal

State's heavy deposit withdrawals.

Financial information on

all OJGF insured institutions was made available to the Federal Reserve
Bank of Cleveland late Friday, March 8.

Federal Reserve examiners and

discount window staff reviewed and analyzed this information on Saturday
and Sunday, March 9 and 10, with the assistance of senior examination
personnel from the FHLB of Cincinnati.

i ,-

Growicng concern that other ODGF . i nstituti ons mi ght confront probl ems



~'lo n day

1ed us on Saturday, March 9, to develop a pl an to moni tor and

deal 'Ioiith deposit withdrawals at other ODGF institutions, should they

The plan had several dimensions: 1) having a timely and effective

mecha nism for sensing unusually heavy deposit withdrawals; 2) informing
ODGF i nstitutions of collateral and other requirements for borrowing at
the di scount window; and 3) planning and putting into place the logistics
necessary to deliver currency, evaluate collateral, and obtain documents
for borrowing at the discount window.

The large number of ODGF



- 4 institutions and the need for prompt and effective action, if action were
required, made it imperative that we be prepared jo deal with the problem
by Monday, March 11, when the ODGF institutions opened.

We were

fortunate in being able to draw upon staff from other Federal Reserve
Banks to assist in the contingency planning and logistics. , The weekend
planning effort concluded with meetings at 10:00 p.m. on Sunday,
March 10, in both Cleveland and Cincinnati to brief Federal Reserve
examiners on their role in the contingency plans.

These plans called for

examiners to be strategically placed near ODGF institutions throughout
the State prepared to deliver borrowing documents upon request.
Also, late Sunday evening, March 10, following the Governor's
announcement that Home State would not reopen on Monday, the Cleveland
Federal Reserve Bank publicly restated its discount window policy:
"State-chartered savings and loans and savings banks, like all depository
institutions, are eligible for liquidity assistance through the discount
window ••. under normal terms and conditions. II

Our weekend efforts had

made it possible to implement the policy, to monitor deposit flows, to
lend at the discount window, and to ship cash throughout the weeks that
followed to a large number of institutions, most of which had not dealt
with our discount window and which normally received their currency from
other sources. ,
Public confidence in ODGF institutions continued to decline.


financial institutions opened on Monday, March 11, the evidence of the
loss in depositors' confidence was almost immediate.

At first the loss

of confidence was largely confined to Cincinnati, where Home State is

As the week progressed, the number of ODGF institutions

suffering heavy cash drains increased, and the volume of withdrawals rose

- 5 -


On Thursday, March 14, for example, the seven most affected

institutions ;n the Cincinnati area lost more than $60 miliion in
deposits -- almost triple the amount withdrawn on Wednesday.


institutions had lost one-fifth of their deposits between Monday morning
and Thursday night, and there was clear evidence that the crisis was
spreading to ODGF insured institutions in other cities.
confidence fell, the more serious the problem became.

The more public
Federal Reserve

examiners were sent upon request to many institutions to begin reviewing
collateral as deposit withdrawals and the potential for borrowing at the
discount window increased.

The Federal Reserve and other commercial

banks shipped currency to institutions that were experiencing heavy
withdrawals, but cash alone was not enough to restore confidence; without
confidence even the strongest financial institution can be severely
Our active and visible role was to provide liquidity assistance to
ODGF institutions at the discount window.

In performing this function,

the Federal Reserve Bank of Cleveland has not modified the normal
eligibility requirements for discount window assistance in any way.


MonetarY .Control Act of ]980 mad.e. the discount window of the Federal
Reserve Bank available to any depository institution that holds
transactions accounts or nonpersonal time deposits.

Regulation A of the

Board of Governors, which prescribes standards for the operation of the
discount window, provides for lending to eligible depository institutions
under two basic programs. One is the adjustment credit program; the other
supplies credit for seasonal and other limited purposes for more extended

Adjustment credit is available on a short-term basis to assist

- 6 -

borrowers in meeting temporary requirements for funds while an orderly
adjustment is being made in their assets and deposit liabilities.
All Federal Reserve advances must be secured to the satisfaction of
the Reserve Bank providing the credit.

Satisfactory collateral includes

securities of the U.S. government and of federal agencies,and, if of
acceptable quality, residential mortgage notes and other assets.
Although collateral is generally held in safekeeping at the Federal
Reserve Banks or acceptable third-party custodians, in this instance,
field warehouses were set up in most ODGF institutions where collateral
was - dentified, evaluated, and earmarked for possible use in securing
discount window borrowings.
The Federal Reserve played another very important role during the
ODGF savings and loan problem -- we served as a facilitator.

During the

early morning hours of Friday, March 15, when the full dimensions of the
problem became clear, Governor Celeste decided to close all ODGF member
institutions for a three-day period.

Following that decision, the

Governor requested that the Federal Reserve assist him in calling a
meeting of large Ohio banking and thrift institutions to discuss the
situation with them and propose a solution to the problem.

A meeting

with representatives of thirteen Ohio depository institutions -- banks
and S&Ls -- was convened that morning at the Federal Reserve Bank of

At that meeting Governor Celeste explained his decision to

close the ODGF institutions and discussed a legislative proposal th~t
would require the ODGF institutions to obtain federal insurance before

He also presented a proposal for dealing with the ODGF

institutions that would not qualify for federal insurance.

The State

subsequently decided it would be useful to discuss the situation with

- 7out-of-state banks, and two meetings were held with out-of-state
institutions at the Federal Reserve Bank of Cleveland--one on Saturday,
March 16, at 9:00 p.m. and another on Sunday, March 17, at 11:00 a.m.
In the past two weeks, some elements of a solution have fallen into

Each ODGF institution was examined on a case-by-case basis to

determine its financial condition and the likelihood of Hs qualifying
for federal insurance.

The State Superintendent of Savings and Loan

Associations requested assistance from the Federal Reserve, the Federal
Deposit Insurance Corporation (FDIC), and the Ohio Division of Banks in
conducti ng these exami nati ons. Th is process began on Saturday,



with examiners provided by the Federal Reserve Bank of Cleveland and,
eventually, by every other Federal Reserve Bank.
to each of the ODGF institutions.

Examiners were assigned

Virtually all examinations were

completed on Sunday, March 17, enabling us to conduct a preliminary
reView of the condition of each institution to supplement and update the
information obtained the previous Friday from the State.

The results of

the preliminary examinations made it clear that a large number of these
institutions were well-managed, in sound financial condition, and,
. ""-" ·conS'eqoently·,· viable ' candidates for . federal deposi t insurance. " ·Others·; - -""
for a "variety of reasons, would have ·· difficulty qualifying for federal
deposit insurance.

The FHLB Board agreed to review on an expedited basis

the Federal Savings and Loan Insurance Corporation (FSLIC) insurance
applications of ODGF member institutions.

Under this arrangement, FSLIC

qualification examinations were expedited, using the resources of the
FHLB System and the Federal Reserve.

The Federal Reserve offered its

assistance to help complete the FSLIC examinations as rapidly as

We believed we could facilitate this process because our

- 8 -

examiners were already in place at the ODGF institutions and had gained
familiarity with these institutions through the just completed
examinations conducted on March 16 and 17.
As of Friday, March 29, according to the State of Ohio, 26 of the
former ODGF institutions have been reopened for the full range of banking
functi ons, most with feder-a-l - insurance.
seems to have been fully restored.

Cbnfi dehce- in these i nsti tuti ons

There has been no evidence of unusual

withdrawals or need for assistance through either the credit facilities
of the FHLB of Cincinnati or the Federal Reserve discount winqow.
federal deposit

applications of some ODGF institutions are


still being considered.


Other ODGF institutions have been informed of

the changes and improvements that will be necessary to enable them to
obtain federal insurance.
The State of Ohio is making intense efforts to develop an orderly
plan for those institutions that might not qualify for federal

It is my understanding that a final outline of such a plan is

not yet complete.

A solution may have to involve the sale of some ODGF

institutions to other Ohio financial institutions and, perhaps, also to
-out:"of-stateinsti tuti ons.

'The FederarReser\le 'BanK 'of ' Cleveland has not

participated in the discussions involving plans for any single
institution except those for which Federal Reserve regulatory approval
was required, such as the sale of Metropolitan Savings Bank of Youngstown
to FNB Corporation, a Pennsylvania bank holding company, and the
conversion of Scioto Savings Association into a state-chartered FDIC
insured commercial bank under the continuing ownership of its parent
company, Society Corporation, an Ohio bank holding ccxnpany.

- 9 -

While this process is underway, the State has authorized the ODGF
institutions not yet Qualified to reopen for full business to open for
the limited purposes of giving each depositor access to a maximum of $750
per month and pledging assets to and borrowing from correspondent banks
or the Federal Reserve discount window to fund the limited deposit
. withdr:awal s • . .,Compl ete ..confi dence in the ODGF i nsti tuti ons has not been
restored, but the "atrnosphere 'is much "calmer than it was two weeks ago.


indicates events not part of the Federal Reserve
to that day's chronology.)


but which



Monday, March 4

* A receiver is appointed for ESM at the request of the S.E.C.
The Cleveland Reserve Bank's Loan and Discount Department receives what
appears to be a routine telephone call from Home State inquiring whether its
borrow i ng documents were in order.
Tuesday, March 5
Cleveland Reserve Bank makes initial inquiries about Home State to the Federal
Horne Loan Bank of Cincinnati
("FHLB Cincinnati")
and the Ohio Deposit
Guarantee Fund ("ODGF").
Home State's correspondent bank meets with Cincinnati branch of the Cleveland
Reserve Bank ("Cincinnati branch") to discuss Home State situation.
Home State.









Wednesday, March 6
Cleveland Reserve Bank sends
begin to review collateral.

examination personnel






Home state has estimated deposit outflows of $55 million.
off ices.











Thursday, March 7
Meeting at Cincinnati branch is held with representatives of the State, ODGF,
Home State, and the Cleveland Reserve Bank to discuss possible discount window
loan. Examiners continue reviewing collateral.
Governor Richard Celeste telephones President Karen Horn to discuss Home State
matter and to learn what assistance might be available from Federal Reserve.











Horne State has estimated deposit outflows of $45 million.
Friday, March 8
Home State's liquidity position declines throughout the day.
Re serve Bank monitors the situation with Home State's correspondent bank.
Frequent discussions are held by Federal Reserve officials in Cincinnati,
Cleveland, and Washington regarding liquidity needs of Home State.
A Cleveland Reserve Bank official attends a meeting in Columbus called by the
Superintendent to discuss possible solutions to Home State situation.
- 1 -

Friday, March 8 (Continued)
In late afternoon, Home State directors sign a note to borrow from the
Cleveland Reserve Bank. Collateral is segregated by examiners and shipped to
the Cincinnati branch.
At 4:00 p.m., a discount window loan is made to Home
off ices.











Home State has estimated deposit outflows of $54.2 million.
At the Cleveland Reserve Bank's request, the Superintendent agrees to provide
financial information for all ODGF institutions in antic ipation of borrowing
requests from these institutions.
'w'i; _, In ~ l,a,te , eveni,ng,

Hpme ,,$tate , management announces

that Home State ,will be ...

closed on Saturday.
Saturday, March 9
Concerned about the potential spillover effects of the Home State closing,
Cleveland Reserve Bank officials begin internal logistical planning for
Cleveland Reserve Bank examination personnel begin analyzing the financial
data of all ODGF member institutions for possible borrowings at the discount
window. Three representatives from the FHLB Cincinnati assist in this process.

* A conservator, Ar 10 Smith,
affairs of Home State.

is appointed by Governor Celeste to direct the

The Super intendent convenes a meeting at a Cleveland bank at 6: 00 p. m. with
several large bank holding companies in Ohio to discuss the proposed sale of
Home State.
Representatives from the Federal Reserve are in attendance as
obse rvers.
Sunday, March 10


Governor Celeste announces that Home State will not open on Monday.

Cleveland Reserve , Bank issues a statement , to the press indicating that
state-chartered savings and loans, like all depository institutions, are
eligible for liquidity assistance through the discount window under normal
terms and conditions.
At the Cleveland Reserve Bank, contingency planning continues and officials
from other Reserve Banks arrive to assist.
Monday, March 11
Cleveland Reserve Bank examiners are placed strategically throughout the state
and are prepared to deli ver borrowing documents to any ODGF institution that
requests such information.
Cincinnati Branch officials discuss the Home State situation with local banks.
Estimated net deposit outflows of $6.0 million at ODGF institutions.

- 2 -

Tuesday, March 12
Conservator Smith repays loan from Cleveland Reserve Bank.
Activity at ODGF institutions remains relatively calm.
Estimated net deposit
outflows for the day approximate $13.4 million at ODGF institutions. Borrowing
documents are delivered by Cleveland Reserve Bank examiners upon request.
Wednesday, March 13
Estimated net











Off icials from four ODGF institutions exper iencing heavy deposit withdrawals
go to Washington, D.C., to meet with members of Congress and officials of the
Federal Reserve and the FHLBB.
institutions to discuss borrowing documents.




Thursday, March 14
Major runs occur at six
institutions accelerate.


Estimated net deposit outf lows
approximate $63.9 million.
Sev en special cash shipments
Cleveland Reserve Bank.



















Friday, March 15
At 7:30 a.m. in Cincinnati, Governor Celeste holds a press conference to
declare a t h ree-day holiday for the ODGF institutions.
President Horn
indicates that the Cleveland Reserve Bank stands ready to supply liquidity
through the discount window under normal conditions when the institutions

At 11: 45 a. m., a meeting at the Cleveland Reserve Bank is convened at the
The Governor requests the institutions to JOlon together to .
develop a rescue package for those ODGF institutions that would not qualifyfor f ederal insurance.
Fifteen special cash shipments are made to 12 institutions.
Saturday, March 16
At 9:00 a.m., a second meeting is held at the Cleveland Reserve Bank vith the
Ohio financial institutions.
The State a l so requests Federal Reserve assistance in discussing this
situation with out-of-state financial
Two meetings with
institutions are
scheduled at the Cleveland Reserve
Bank --one on Saturday night at 9:00 p.m. and another for Sunday at 11:00 a.m.
Representatives from the State requested out-of-state banks to consider
acquiring some or all of those ODGF institutions that would not qualify for
federal insurance.

- 3 -

Saturday, March 16 (Continued)
Examiners are present at every OOG? institution to review collateral.
Examiners from other Reserve Banks arrive to assist. . The Superintendent of
Savings and Loan Associations requests the Federal Reser ve, the FDIC, and the
Ohio Division of Banks to assist in learning the current financial condition
of all the ODGF institutions.
Examinations are then commenced for this
Fifteen special cash shipments are made to 11 ODGF institutions.



A meeting is held at 11: 00 a. m. at the Cleveland Reserve Bank with a second
group of eleven ... out-of-state · bank hold i ng companies.
(This meeting is also attended by some representatives from the previous meeting.)
Examinations conducted at the State's request are concluded at virtually all
ODGF institutions by examiners from the Fe5eral Reserve. Summary results from
these examinations are compiled and reviewed.
Monday, Harch 18

* Governor Celeste signs an executive order requiring ODGF institutions to
remain closed for an additional 48 hours.
Examiners insure execution of borrowing
collateral for all ODGF institutions.






An evening meeting is held at the Cleveland Reserve Bank with officials from
the Federal Home Loan Bank System to OlSCUSS possible assistance by the
Federal Reserve with FSLIC qualification insurance examinations for ODGF
Eight special cash shipments are made to 7 institutions.
Tuesday, March 19
A second meeting is held at the Cleveland Reserve Bank with officials from the
Federal Home Loan Bank System.
The Federal Home Loan Bank Board officials
an offer from the Federal Reserve
to assist
in qualification
,_ G_
overnqr . meets sep.arately .in .W ashington, D.C., wi th Chairman Volcker
and Chairman Gray.
Governor Celeste is assured of expedited processing by
FHLBB of FStIC insurance applications.
As provided in the Cleveland Reserve Bank's check collection operating letter,
the Bank sends notice and begins returning checks drawn on the closed ODGF
institutions with the stamp "not presentable at this time.FSLIC qualification examinations
assistance of Federal Reserve examiners already present at these institutions.
Two special cash shipments are made to 2 institutions.
Wednesday, l1arch 20


The State of Ohio legislature approves legislation requiring federal
insurance and permitting partial withdrawals ($750 per depositor each 30 day
period) for ODGF institutions.

- 4 -






Wednesday, March 20 (Continued)
The availability of discount window assistance to
was restated by Chairman Volcker.

reopened ODGF institutions

Two special cash shipments are made to 2 institutions.
Thursday, March 21
The conversion of Scioto Savings Association into a commercial bank is
approved by the State of Ohio, the FDIC, and the Board of Governors of the
Federal Reserve System.
_ Fr iday, March 22
A task force is established in Columbus at the office of the Superintendent of
Savings and Loan Associations to coordinate communications between the
Superintendent, Cleveland Reserve Bank, and the FHLB-Cincinnati.
Metropolitan Savings Bank in Youngstown, Ohio, is processed and approved on an
emergency basis by the Board of Governors of the Federal Reserve System.
Saturday, March 23
As ODGF institutions reopen for limited withdrawal purposes, cash demands are
placed on the Cleveland Federal Reserve Bank.
FSLIC qualification examinations continue.
In addition, Federal Reserve
examiners continue their presence in ODGF institutions to monitor cash
si tuations, and to secure collateral for borrowings where necessary.
remains on duty at the Cleveland Reserve Bank to provide assistance and
discount window borrowings, answering questions regarding check collection and
manage the large numbers of examiners from outside the Fourth Federal Reserve
Distr ict.
Seven . special cash shipments are made to 4 institutions.
Estimated net deposit outflows (aggregate) - $5.4 million.
Sunday, March 24
.FSLIC qualification examinations continue._
Monday, March 25
The Cleveland Reserve Bank issues notice that it is presenting checks to those
institutions that are fully open.
Six special cash shipments are made to 5 institutions.
Estimated net deposit outflows (aggregate) - $7.7 million.
Tuesday, March" 26
Eighteen institutions are now open on a full-service basis.
Liquidity and
cash situations in these institutions continue to be monitored by Federal
Reserve examiners in the field as well as the Cleveland Reserve Bank staff in
Cleveland, Cincinnati, and Collli~bus.

5 -

Tuesday, March 26 (Continued)
Five special cash shipments to 2 institutions.
Estimated net deposit outflows (aggregate) - $3.9 million.
Wednesday, March 27
Six special cash shipments to 4 institutions.
Estimated net deposit outflows (aggregate) - $2.9 million.
Thursday, March 28
One special cash shipment.
Estimated net deposit outflows (aggregate) - $4.4 million.
Friday, March 29
Twenty-six institutions are now open on a full-service basis.
FSLIC qualification examinations continue.
Three special,cash shipments to 3 institutions.
Estimated net deposit outflows (aggregate) - $2.8 million.
Saturday, March 30
Estimated net deposit outflows (aggregate) - $1.3 million.

- 6 -