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22,' 1935:

I consider this opportunity which you have so generously given me*
not only an occasion to discuss with you certain problems of the Federal De­
posit Insurance Corporation, but also an opportunity to hear your views and
to consider your solutions to these problems.

Particularly do I address thes

remarks to the members of the American Institute of Banking,

In the vigor

and enthusiasm of your minds lies my belief that the banking problems of this
country are solvable.
General Outline of Remarks
I wish to discuss with you, and very frankly, the problem of bank
losses -- the losses ?/hich have been incurred by the banking system as a

This problem is the primary interest of the Corporation, and its

significance to the banking fraternity likewise needs no emphasis.

But I

will point out that the problem of bank losses is also one of deep social

Its effects are manifold.
Also in my discussion I wish to speak specifically on the sub­

jects of loan and investment policy, and bank management.

Their relation­

ship to the question of bank losses and to one another is by their very
nature most intimate.




Bank Lo ss es
The passage of the Federal Deposit Insurance Act has necessitated
a complete alteration in the significance of bank losses.
ly, almost purely a matter of local and individual concern.

Losses were former­
The slack was ab­

sorbed in the community by stockholders and depositors who bore separately
and locally the resulting hardships,.and the long and demoralizing periods of

Only insofar as a particular bank failure was a concomitant of

more fundamental weaknesses was it a concern of bankers in general.
fect was decidely indirect.

Bow it is direct.

The ef­

Now, suspensions even in

single instances, when they result in losses to depositors, are losses for the
entire system and are of definite consequence to all of us.
rate of assessment which you must pay.

They affect the

No longer are losses to burden individ­

ual depositors in individual and scattered coimnunities.

To the extent that

this burden has been lifted through the medium of the Federal Deposit Insurance
Corporation it has fallen, upon each contributing insured bank.

The problem

of losses is now a matter of dollars and cents to every banker.
Under these circumstances it would be well to visualize the extent
of these losses in the past, bearing in mind the changed significance of losses
in our banking system.

During the past 70 years total losses incurred by our

commercial banking system have totalled more than $14 ,000 ,000,000 .

Of this

enormous sum, $3,300,000,000 have been lost by depositors in suspended banks,
and $1,700,000,000 by stockholders in suspended banks.

About $8,000,000,000

represent write-offs of depreciated assets in active banks, and the remainder,
more than $1,000,000,000, the amount of loss or depreciation in assets of active
banks that has not yet been written-off.

The estimates of losses in commercial

banks are based upon available data which clearly minimizes the facts.


figures for national banks are .fairly complete and reliable, and are taken
from the reports of the Comptroller of the Currency.

The figures for other

- 3 commercial banks, however, are incomplete, particularly for the period prior
to 1920,

All failures have not been reported.

Bank depositors as well as

stockholders, therefore, have suffered losses which have not been recorded*
Many records of voluntary liquidation by banks ignore the fact that deposit­
ors have not been paid in full.

Then again, bank reorganizations in later

years have been based upon the waiving of depositors’ claims, while in other
cases, depositors have voluntarily reduced their claims or made contribu«*
tions to capital as a means of absorbing losses.
Before passing I would emphasize that of the total losses only
about 25 per cent represents the depositors’ loss, and it is the depositors’
loss in which the Corporation is directly concerned.

Nevertheless, the re­

maining 75 per cent which represents the loss of stockholders has a real
significance to the Corporation,

Huge losses to stockholders, the constant

write-off of depreciated investments, both represent reductions in net in­
vested capital, and to that extent represent a curtailment of the margin
of protection to depositors.

Therefore, losses to the stockholders are also

of great importance to the Corporation,
Further, it is pointed out that should the rate of loss to deposit­
ors and stockholders continue, it would necessitate on the average the ab­
sorption of nearly one-fourth of the total gross earnings of all commercial


This constitutes a charge upon banks and upon the users of bank credit

which cannot be justified.

Either losses in the future must be greatly re­

duced, or changes of a radical nature and a complete reappraisal of our bankm g system will become not only necessary but warranted.

- 4 Losses in Future
Bank losses in the future as in the past will be subject to the
influences of changes in business activity.

However, there are ascertain­

able weaknesses in our banking structure aside from business depressions
which have contributed in large measure to bank failures and losses.
weaknesses are steadily being eliminated.


Likewise the past two years have

witnessed the addition of many elements of strength to our banking system.
I have no doubt that the period ahead will be one of marked improvement.
One of the most insidious sources of weakness has been the overbanked situation.

The past few years have seen a substantial elimination

of this condition.

A drastic reduction of over 14,000 banks has occurred

during the past 14 years,

In Minnesota alone we note that between the years

1921 and 1934 there was a reduction from 1,536 operating banks to 686.
The competitive lowering of banking standards, the competitive
payments of dividends, and the competitive raising of interest rates on de­
posits, all of which are counterparts of an overbanked situation, can no
longer be tolerated.

It is imperative that this condition does not return.

Let us not consider, however, even at this stage,' that our problem has been
fully solved.

A further purging of those parts of our structure whose weak­

ness detracts from the strength of the whole will be necessary.

It will mean

the elimination of those banks whose opportunities for profit do not justi­
fy existence.

Let it be clear, however, that I do not mean by this elimina­

tion, the removal of the very cornerstone of our banking system - the
strong and independent unit bank.

The unit bank has a definite place in

a fully developed banking system and can contribute greatly to its social

Nevertheless, the unit bank must be able to stand upon its

- 5 -

own feet and it must be able to move forward with the times,

I would

point out that the unit banks which now remain have a greater oppor­
tunity to operate on a profitable basis than ever before, to increase
their powers of resistance, and to justify their economic worth.
The recapitalization program of the Reconstruction Finance
Corporation and its strengthening effect is common knowledge.

The April

30th figures reveal that the Reconstruction Finance Corporation is the
owner of over |900,000,000 worth of preferred stock, capital notes and de­

Of this ^500,000,000 slightly less than .fl6,000,000 has been

placed in 224 Minnesota banks,

ihen we add to this tremendous investment

of the R. F. C. the large volume of preferred stock sold to others, new
common issues, capital contributions, and the amounts contributed by de­
positors in waiver plans and otherwise, the magnitude of the capital re­
habilitation in our banking system is realized.

Over two billions of

dollars have been added to the net sound capital of our banking structure*
The higher quality of bank supervision exercised by both State
and Federal agencies during the past three years is not the least of those
factors which augur well for the -future.

Common problems and common

purposes have brought about a friendly cooperation between these agencies
and have added to the effectiveness of their work.

In addition, the giant

strides made in the field of bank management and personnel, and the incroas
ed sense of responsibility on the part of bank directors are of paramount
With these important evidences of strength in our


system the Federal Deposit Insurance Corporation faces the future.

We are

not under the illusion that any deposit insurance agency can withstand
losses comparable with the losses sustained in the past; losses must and
will be less.
The banking problems in this country have often been handled
in a manner not unlike Mark Twain’s comments on the weather,, ”Everybody
talks about it, but no one does anything about it.”

The Corporation’s

liability and responsibility to the banks and to the depositors is real
and definite; it demands that we be realists and that we do something
about it.

And so wo understand our responsibilities to mean not only the

assuming of losses to depositors, but also the combating of future losses
with every energy at our command.
Loan and Investment Policy
I have emphasized the changing significance of bank losses
since the advent of the Corporation.

It seems to me that a significant

change has also taken place in the nature of loan and investment policy —
a change which is not, in my opinion, consciously realized by many bankers,
and a change which must and should be realized if sound credit conditions
are to be maintained and losses curtailed.
The commercial bank has been conceived of as an institution
which lends on a short time basis to individuals and enterprises which are
engaged in the manufacture, production, and marketing of goods and com­
modities. This orthodox definition of bank credit is reflected in the lan­
guage of the Federal Reserve Act which at the present time allows rediscount
privileges upon "notes, drafts, and bills of exchange arising out of actual
commercial transactions, that is, notes, drafts, and bills of exchange
drawn for agricultural, industrial, or commercial purposes," and which have


- 7 -

a "maturity at the time of discount of not more than 90 days."

It is doubtful

whether 20 per cent of the total loans and discounts in the commercial banking
institutions of this country at the present time conform to this theoretical
ideal of short term self-liquidating paper.
The reason for this lack of demand for pure commercial credit
is related to the fact that the business of this nation is, in fact, being
conducted more and more each year by large business units and to the fact
that the financial practices of business have been changing. There has been
an increasing tendency to obtain funds through the issuance of securities
rather than through commercial bank borrowings.

The demand for credit by

small and medium-sized, merchants and industrialists has become correspond­
ingly less.

This demand for credit formerly supplied banks, particularly in

the smaller centers, with an outlet for their funds which was distinctly
commercial in nature.

The important point is that this curtailment in the

demand for commercial loans has forced banks to employ their funds elsewhere.
I do not argue the efficacy of this change.

I merely urge cognizance of its

reality, because it has brought new problems to banking.
This change has been evidenced by the increased importance of
investments in securities as an outlet for bank funds and as a source of

Whereas during the past five years there has been a marked de­

crease in the volume of loans and discounts, there has been an increase in
the security holdings of banks.
From the standpoint of bank losses this increase in the pro­
portion of investment securities to total loans and discounts has brought
with it new problems.

Losses on loans and discounts for national banks



during the past 15 or lo years have been about $1.00 per year for each $100
of loans and discounts.

On tne other hand, losses on bonds and. securities,

exclusive of obligations of the United States Government, have averaged ap­
proximately $2.00 per year ior each. $100 of investments*

Thus we see that

the losses on investment securities have been approximately twice as great
as the losses on loans and discounts.

The proportion of write-offs sub­

sequently recovered seems to be about the same for both classes of investments
There is no reason to believe that the experience of state banks has been
substantially different irom that of national banks.

The obvious deduction

to be made from these figures is that banks on the whole have boon better
able to appraise the credit risk involved in a loan or discount than in an
investment in bonds or securities.
The fact that banks have incurred relatively more losses in
their investment accounts than in loans and discounts is now of increasing
significance to bankers.

The curtailment of losses in this group of assets,

particularly demands the attention of bankers.

The solution will lie largely

with bankers themselves and in the use of men trained and skilled in the
analysis and study of investment portfolios.

I point this out to the members

of the American Institute of Banking as a field of endeavor which holds great

The increased pooling of investment counsel by banks and the

work which is being carried on by the Securities and Exchange Commission in
Washington will undoubtedly become of added assistance and significance in
this field.
Bank Earnings
Banx earnings in the future must be sufficient to charge-off
losses currently or to provide annually reasonable reserves against

- 9 potential losses. ^ Losses should rightfully be met only from earnings.


the past banks have been prone to allow worthless paper and deadwood to
collect in their portfolios without currently meeting this contingency.
The result has been that in times of substantial readjustment, a large
scaling down of capital structure has become inevitable, and not infrequently
suspension with consequent loss to depositors.
charged against depositors.

But losses can no longer be

They are now a charge against the whole system,

and it is absolutely necessary that individual bankers protect themselves
and the Insurance Fund by providing for these losses as they occur.
The period ahead will undoubtedly be one of substantial
improvement and with it will come increased earnings.

It will in all

probability be a period of sustained low interest rates, and it will thei’efore be essential that interest expense on account of savings deposits be
correspondingly curtailed.

There is no reason to believe, however, that it

will be a period which will not allow a substantial and fair return to
stockholders from their investment.

But I emphasize again that this re­

turn will be conditioned to a greater degree than ever before upon the
skill and soundness of the management.
Undoubtedly the tremendous deflation in loans and discounts
which has characterized the recent depression has occasioned both a
reticence on the part of the bankers to lend and a tardiness on the part
of borrowers to return to the banks.

There is already evidence that this

stage is passing and that increased earnings from this source will be
available, but neglect and unwillingness on the part of bankers to meet
legitimate demands may create weaknesses in the banking system.





is as much to be lost by the refusal of loans and the resulting failure to
increase earnings as in the granting of loans and the assumption of a
reasonable risk.
Personnel and Management
Recently while discussing certain banking problems with a
friend in Washington, the remarK was proffered that perhaps there were not
too many banks, but, too few bankers.

And'this brings me to the most im­

portant of all considerations, not only in banking but in every line of
endeavor —— intelligent management and man—power.

For this, there is no

mechanical substitute; it cannot be created by legislation,; it cannot be
created by the most juo.icxous supervision.

It can be created only by

training and education and by an understanding of the social trust which
is an integral part of banking.
The responsibility for the sound management of a banking in­
stitution rests principally with the local board of directors.


must take a more active part in the conduct of their business.

They must


greater lengths to assure themselves that the executives of their

banks are competent and that the business is being soundly managed.


only the directors but also the entire management and each employee must
realize in the future more concretely than in the past, that banking is
more than an individual business, it is a public trust; that it affects
at every contact the public interest, and that it is a public utility in
the highest sense.

Perhaps we in this country have been somewhat lax in

developing and demanding a true sense of responsibility in our bank

There can be no effective substitute for this responsibility.




i*or those of you who are only a .short distance within- the
portals of the banking fraternity, the heritage is many problems.


it be borne in mind that these problems are not constant or static, but
are as dynamic as the natron itself.

Let it also be borne in mind that

banking is not an easy road to riches, it is a method of life, and a pro­

It is for you to add to the sound traditions of that profession,