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Federal Deposit Insurance Corporation W ASHINGTON FOR RELEASE AFTER 12:00 'UPON, SATURDAY, JUNE 26, 19.37 ADDRESS OF HONORABLE LEO T « CROWLEY CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION BEFORE THE JOINT CONVENTION OF THE VIRGINIA BANKERS ASSOCIATION AND THE WEST VIRGINIA BANKERS ASSOCIATION WHITE SULPHUR SPRINGS, WEST VIRGINIA JUNE 36, 1937 ADDRESS OF HON* LEO T. CROWLEY, CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION, BEFORE THE JOINT CONVENTION OF THE VIRGINIA BANKERS ASSOCIATION AND THE 1-YEST VIRGINIA BANKERS ASSOCIATION WHITE SULPHUR SPRINGS, VŒST VIRGINIA JUNE 26, 1937 ”CURRENT BANKING PROBLEMS” Mr* Chairman, distinguished guests, and members of the Virginia and West Virginia Bankers Associations: I am indeed happy to meet with you today. This is the first opportunity I have had to become acquainted with the bankers of your two States since I became associated with the Federal Deposit Insurance Corporation three and a half years ago. In retrospect I find it hard to realize that so much has happened during those years. considerably. Our thoughts and our ways of life have altered Many of the doubts and fears which harassed us during the early part of 1934 have disappeared, permanently we hope. The energy and effort we then directed toward stopping the depression and stemming the tide of deflation have turned now to applying brakes to a boom and to preventing inflation. Where in 1934 we saw widespread unemployment, we now hear constantly about the serious shortage of skilled and semi-skilled labor* Surpluses of raw materials and commodities which thon filled our warehouses and storage bins have been exhausted and in many cases it is now difficult to moot the demand - for those goods* 2 - Bank deposits have grown from tho low of |41*5 billion in 1933 to an all time high of more than $61 billion as of December 31* 1936* Increased business activity is reflected in available figures of bank debits which indicate that the activity of deposit accounts was 65 percent greater in 1936 than in 1933. Recently released figures indicate that our banks have emorgod, temporarily at least, from the lean years of large deficits* It is good to see those signs* we like to think of as normalcy* They indicate a return to what Tie take personal pride in them because they represent real achievement in overcoming tho tromendous force of an unprecedented depression. Yic look forward to a fuller realization of their promise since they indicate wo may expect soon to regain a fair amount of leisure to devote to outside interests* Yes, it is good to see these things* sonse of relief at their occxirrence. I share your joy and your But at the risk of seeming pedantic and a killjoy, I should like horo to interpolate a word of caution. May we enjoy to the fullest the fruit of those changes, but ;my we escape being lulled into a sense of false security. May wo not fail to recognize that the conditions we like to think of as normal recently proved highly vulnerable and volatile, indicating that our standards ox normalcy need to be raised* May wo romember that inimical economic forces have boon beaten back before only to return again with oven greater destructive forco; and may wo be farseeing enough to rebuild and reinforce our barricades in anticipation of 3 tho next attack* Let some of our new-found leisure be devoted to restful and complacent musing on tho more abstract aspects of our existence* is only right. We are tired. That It has boon too long since we had an opportunity for such relaxation* Let us dovoto the lion’s share of this leisure, however, to clear-hoadod planning and vigorous application of tho plans so that when the businoss cyclo begins its noxt downward glide our banks will bo in shipshape orders sails trimmed, and hatches battened, ready and able to ride out tho storm* Because I am, as is tho Federal Deposit Insurance Corporation, a friend of our traditional banicing system, because I boliove that proper and timely application of the principles underlying Fodoral deposit insurance will assure a prosperous future for that system, and because I believe that each of you is really interested in my subject, I propose to talk to you frankly — to friond* as friend should talk I intend to tell in full detail what wo are doing and what we think should be done in tho interest of sounder banking. In an equally plain-spoken fashion I shall outline what the banker himself must do to make our offorts bear fruit* Certainly tho record of the last decade and a half constitutes a challenge to the bankers of America* There can be no justification for tho shameful fact that during the thirteen-year period from 1921 to 1933, inclusive, 16,800 of this country’s banks ceased operations because of financial difficulties, and that of the more than $9 billion - 4 - of deposits in those banks at tho timo they closed more than $3 billion have never been recovered by depositors. In Virginia during this pofriod 158 banks with deposits in excoss of $>70 million wore suspended, while 169 banks with deposits of more than $115 million were closed in West Virginia. If wo can assume that the loss ratio for the country as a whole applies to the situation in these States, it means that from 1921 through 1933 about $62 million of your depositors’ funds vanished into thin air. No nation, no State, and no community can long withstand such a continuous seepage of its wealth; nor can any people be expected to bear placidly the suffering and bewilderment of having its funds, whether working capital or savings, disappear through tho workings of economic forces which are difficult to comprehend. It requires only ordinary vision to realize what will happen to our banking system in the event this loss record is repeated. Everyone of you hero today is to be commended for his courage, because every person who enters the banicing business today and every person who has managed to remain in that business throughout the recent purge assumes responsibility not only for his own economic survival, but also for tho survival of American banking as it is now and traditionally has been constituted. That, my friends, I consider a real challenge. You and I, as bankers, have assumed a tremendous responsibility. I hope we are capable of carrying the load. As representativo of tho Fodoral Deposit Insurance Corporation I moot with you today more as your partner in the banking business 5 than as a governmental authority. You who pay tho bill, whoso employees wo are, should realize that the Corporation’s largo financial stake makes its interest in tho sound and successful operation of the banicing system and of each of your institutions not only the moral and paternalistic interest of a governmental agency, but also the hard, cold cash interest bf a stake-holder in your business venture. In its capacity as insurer of bank deposits the Federal Deposit Insurance Corporation has potential liabilities in excess of $21 billion. If the loss record I citod above is to recur, the Corpora tion’s ultimate failure is inevitable. The legal provisions for the Corporation’s capital, its revonuo, and its backlog of Omergency borrowing power, all were based on the assumption that the loss record for tho future will be considerably less appalling. I am certain that every banker wants to keep at a minimum the cost to him of deposit insurance. Clearly then, the only way out of our dilemma lies in a mutual effort to strengthen the banking system to a point where it can withstand shocks which previously have cracked its foundations. It is inconceivable that our interest in improving the banicing system should be at all at variance with the interests of each of you in maintaining a strong institution. Deposit insurance was not created for the purpose of collapsing ono day. Neither did any of you ontor tho banicing business with tho idea of failing. Our aims are identical. I fail to see that tho means to 6 your individual ends oan possibly bo different in the long run from the means leading to the success of deposit insurance. The really good banker is eager to raise the standards of his profession — to purge from the business those men who, through indulging in unsafe and unsound practices, have previously brought the profession into disrepute» The really good banker, therefore, has no better friend than the Federal Deposit Insurance Corporation, which is determined to accomplish the same end. Intelligent bankers look at the broad picture and realize that in the long run the fortunes of their individual institutions are determined by the fortunes of the whole banking system. insurance is a cooperative plan. You see, Federal deposit The Corporations success or failure is only incidentally the responsibility of its managers. This responsibility rests primarily upon the bankers themselves. If what the Corporation is trying to accomplish is worthwhile — and I consider the development of sound banking a praiseworthy goal — then we deserve not only the tolerance but the active support of every banker in America. It would probably bo appropriate at this time to report briefly upon our stewardship as managers of the Federal Deposit Insurance Corporation. Tho Corporation recently distributed to insured banks a report of its activities« to Decomber 31, 1936, and of its condition on that date. The surplus of tho Corporation, representing an excess of income over total expenses and losses from the boginning of deposit - 7 - insurance, was more than $54 million on December 31« Our income from assessments and from our investments now amounts to about $45 million a year* So far the income from our investment has more than covered both administrative expenses and deposit insurance losses and expenses. To the general public the principal benefit of deposit insurance is the knowledge that a bank closing in a community no longer brings individual suffering or want or the economic paralysis which formerly was a by-product of the lengthy process of liquidation. To this public I am proud to report that in the seventy-five cases where it was found necessary or desirable to place insured banks in receivership, between January 1, 1934 and December 31, 1936, the claims of each depositor up to a maximum of ¡$5,000 were made almost immediately available. The 88,912 depositors of these banks, with total deposits of about $22 million, woro protected to the extent of $18 million by insurance, off-set, pledge of security, or proformont. All but 446, or one-half of one percent of the depositors, were fully protected against loss. In an additional twonty-eight cases tho Corporation thought it desirable to purchase or loan upon the assets of insured banks in difficulty rather than to let the institutions drift into receiver ship. In these cases the subjoct banks woro merged with other insured institutions or were reorganized as new banks without interruption to the banicing facilities of the towns in which they woro located and without loss to any of tho bonks * depositors. To you and to me, whose primary interest is preserving the soundness and good health or the financial structure the most important of the Corporation's functions is its power to strengthen that structure, to minimize losses from bank failures, and to protect bank stockholders from assigning more than the ordinary risks of an entrepreneur# You or I would be foolish to believe that bank failures could be eradicated completely# There is nothing unique about banking institutions which will exempt them from susceptibility to the economic forces that control the destinies of other commercial enterprises* The banker deals chiefly with funds belonging to others than stockholder however, and for this reason there has come to be accepted as a legitimate function of government close supervision of the banker's exercise of his functions# By undertalcing this supervisory duty the government assumes an obligation which it can not ignore, and X can state positively that it is the intention of the Directors of the Federal Deposit Insurance Corporation to exorcise vigilantly the supervisory duties that have been delegated to the Corporation« I am confident that the intelligent uso of our authority will result not only in increased safety for depositors, but also in a greater degroe of security for the investment of bank stockholders« It is the importance of this supervisory function which leads me to urge careful appraisal of the present state of the banicing system and intelligent planning for the future of that system* I should like now to discuss with you a few of the factors which will dctermino that future. - 9 - It would be quite impossible to cover at one sitting all of the contributory causes underlying the suspension and loss records which I citod. earlior* The Board of Directors of the Federal Deposit Insurance Corporation is convinced, however, that chief among those causes were two against which an unremitting vigilance must bo maintained if a repetition of the recent disastrous period is to be prevented* I refer, of course, to tho indiscriminate granting of bank charters and to insufficiency of bank capital» It is possible that the 30,000 banking institutions which existed in this country in 1920 wore really needed, but tho dis appearance of half that number during tho intervening years makes any such assumption far-fetched. In any event, tho popularization of the automobile, tho extension of paved roads, changes in financing habits, and similar progressive stops in our economic evolution, all have combined to minimize the need for maintaining banking facilities on a next-door basis. To those facts can be attributed the determination of tho Directors of the Corporation to approvo only charters which can be justified on the basis of real need, which have reasonable oarnings prospects, which are adequately capitalized for their probablo volumo of business, and which are to be managed by men of proven ability. We are definitely opposed to tho chartering of institutions which aro economically unsound and likely to fail. Our efforts have received tho hearty cooperation of most supervisory and chartering authorities* It is only reasonable to suppose, howovor, that there will bo an increasing pressure? for the croation of new banks as, with improving conditions, the banicing business becomes more profitable and therefore more attractive for investors* Not only the danger of woalcening the system but also the desiro to protect his own vested interests should lead every thinking banker to support State and Fodoral authorities in their drive to place bonk chartering on a reasonable basis. I boliove furthor that no bank should be chartered unless it is admitted to insurance at tho time it begins business. However strong and however lucky the management of an individual institution may be, it is absolutely unfair to depositors and to stockholders unnecessarily to accept risks which are beyond tho control of tho bank manager concerned* Tho sins of our neighbors can react powerfully upon our own institutions* Of oqual importance with tho regulation of new institutions is the problem of insuring profitable operations for banks alroady in existence. Ho bonk can operate successfully unless it is a profitable enterprise* This fact moans, of course, that every banking institution must have a sufficient volume of business to permit it to realize a fair profit from conservative operations* Otherwise tho profit must bo sought in speculative loans and investments which almost certainly will result in heavy losses* Tho development of an adequate volumo is an acute problem for many banks. I do not moan to infer that wo believe all small banks unsound and without a place in the banking system, or that tho problems 11 - of supervision arc confinod to snail banks. truth. That would bo feu* fron tho Any bank that can afford capable management and can operato profitably without impairing the safety of depositors is a good bank in the oyos of the Federal Doposit Insurance Corporation, no natter ' how large or how snail that bank nay be. many banks to accomplish this end. Natural growth is helping It is to be hoped that this growth will continue and that through it many banks will be able to develop an adequate earnings record. Where the limit of growth has been reachod, where the possible margin of growth is insufficient, or whore adequate management can not be afforded, I can see only one alternative to ultimate failure. That alternative is some form of merger with one or more neighboring institutions, a banker• obscurity. I realize that suggesting a morger is asking a lot of None of us likes to see his own creation pushed into Bank managers, howevor, must subordinate selfish considera tions to the best interests of both depositors and stockholders, and I believe that those interests can best bo served in tho majority of questionable cases by a consolidation or relocation of bank facilities based upon a thorough survey of the banicing needs of each State. My intention in prescribing control of chartering and consolida tion of existing facilities, where necessary, is certainly not to deprivo a deserving community of banking facilities, but rather to insist that proposed banks must prove that tho chancos for successful operation - arc heavily in their favor• 12 « There is no doubt that some communities, now bankless, could support and should have banks. On the other hand, many communities even today are seriously overbankod. There aro still 16,000 banks in the United States and I should prefer to have the necessary recession in this number accomplished in an orderly managed way* Tho mushroom growth of various typos of thrift and crodit institu tions outside tho commercial banicing structure gives me much concern. I do not doubt that cooperative banks, building and loon associations, credit unions, personal finance companies, and many other typos of institution have a legitimate place and servo a useful purposo in many communities. I consider it imperative, however, that tho creation and operations of these institutions be subjoct to as strict regulation as is the case with banks. Our offorts to strengthen banks can bo seriously hindorod or oven defoatod by a lax attitude with respect to the chartoring and tho competitive activities of financial institu tions other than bonks. I suggest, therefore, that it is to the advantage of bankers to campaign for the legal regulation of all typos of thrift and loan organizations. Thoso rogulatory powors must bo delogatod to tho officer or board that supervises banks in order to ensure a unified financial policy within a State. Lot us assumo now that oach bank has built up an adequate volume of business, that it is well managed, and that an over-all picture of the banking system, a snapshot as it woro, takon today or tomorrow, loaves nothing to be desired from a current, or static, point of view. - 13 Shall wo rost then, sigh with satisfaction, and announce that a prosperous future for tho banking system is assured? not. I say emphatically Ours is a dynamic economy and unpredictability is its outstanding characteristic. Our plans for the future must include adequate pro visions for tho contingencies which tho ebb and flow of business will force upon us. Tho best preparation a bank can make for those contin gencies is to maintain constantly an adequato ratio of capital to assets and to take his losses as they dovelop. Wo know from sad and bitter oxporionce how fickle is that illusivo attribute of value by which we measure tho worth of our assots. Wo all hope fervently that values will never again become inflatod to their 1928 and *29 levels and that they will novor become deflated to the extent we experienced in the early 1930’s. Values must fluctuate, though, in a competitive business system and sinco wo all hope Just as fervently for a continuation of that system our best bet, as bankers and bank supervisors, is to attempt to narrow the range of fluctuation and to maintain a capital cushion sufficiently large to absorb unfavorable shifts in values up to a reasonable limit. To my mind tho most disturbing trend in bank balance sheets during tho past sevoral docados has been the stoady decroaso in the ratio of capital funds to either assots or liabilities. The views of the Directors of tho Federal Deposit Insurance Corporation on tho question of an adoquate capital cushion aro, I bolievo, quite generally known. Suffice it hero to say that wo aro now doing and shall continue to do everything in our power to remedy capital 14 deficiencies whore thoy exist and to insist upon tho building up and tho maintenance of tin adequate ratio of not sound capital to not sound assets in ovory bank for whoso well boing wo are responsible. Many banks, upon tho strongth of high liquidity and inprovod earnings, aro now attempting to rotiro thoir outstanding proforrod capital obligations. I should like to make clear tho Corporation's attitude on this issue. In tho first place liquidity is not now, has novor boon, and I hope never will bo a propor measure of tho adequacy of a bank's capital structure I realize as well as you that banks aro of necessity now more liquid than thoy ever, have boon before and that there is loss possibility of loss or depreciation dovoloping in those liquid assets than would bo the case with what we like to look bac^ on as a normal asset distribution. Wo cannot assumo, howovor, that this high liquidity will continue indofinitoly. You bankers will bo tho first to admit that tho present condition has its disadvantages and that tho sensible thing to do, insofar as capital is concornod, is to plan for futuro contingencies. m Wo aro determined to discourage any roduction a bank's existing capital structure until tho monagonont of that bank has demonstrated not only its willingness but its ability to build and to maintain an adequate capitalization without outsido help. How, as to tho quostion of dividends. I roalizo fully that after tho long period of famine just past, bank managers are oagor to reward tho patience of stockholders by resuming tho payment of dividends. Rising operating income, appreciation of asset values, 15 - and profits taken in the investment portfolios look mighty good to you after so long a period of writing with rod ink. I admit readily the right of tho owners to a fair return on their investment, and no one will be more pleased than will I when reasonable dividends are tho order of the day* I do insist, though, that the bank’s condition must at all tines be such as to justify beyond question tho payment of any dividond. Our examinations of hanks have rovealod hundreds of cases whore worthless assets wore allowed to accumulate while dividends were paid during the boom poriod with the rosult that when supervisors finally did force their elimination bonks faced huge capital impairments or insolvency. is this: The prescription I propose, then, take depreciation rogularly and losses as they occur; roscrvo out of profits a sizeable addition to capital account in anticipation of tho next poriod of deflation; then, and thon only, consider the distribution of dividends. Lot no emphasize that charge-offs should be taken or reserves established as soon as possible aftor losses havo boon detormined by examination. If a banker can’t take his losses as thoy occur, how can he hope to remove the accumulated doadwood of years when a crisis finally forces action. I would imagine that tho experience of 1933 had taught us all a lesson in this rcspoct. I do not claim, mind you, that our examiners are infallible, but I do urge that if there is to be any error, lot it bo on tho sido of conservatism. I am old fashionod onough to bolievo that a banker’s first responsibility is to his 16 - Ctopositors and that that responsibility is best served by conservative banking* To tho few bankers who might not agree with tho primacy of the depositors’ interests, who think that it is quite all right to bamboozle tho depositors, and oven tho stockholders, by concoaling tho facts, I say that quite apart from tho othics of tho quostion, it is pretty shortsighted to try to fool yourselves and that is precisely what a refusal to face tho facts amounts to« Tho Corporation views with concern tho incroasing tendency among banks to favor speculative practices in handling their investments« Over tho past two or throe years many banks have been buying securities y/ith a view to obtaining profits from a riso in tho prices of those socuritios rathor than for tho purpose of obtaining reasonable earnings over a period of time* When a bank buys securities, whether high-grade or low-grade, with tho primary intention of soiling thon again at higher pricos, that bank is speculating. Bonks should bo institutions of loan and investment, not bucket shops, and the first concern of bankers should be to obtain a proper distribution of typos and maturities# Only by pursuing a sound, conservative investment policy will it be possiblo to keep a bank’s portfolio turning ovor in such a way as to roduco to a minimum tho possiblo necessity of liquidation at doprossod prices« Tho safe, and tho sound, and tho practical ivay to rebuild bank capital and to pay dividends is out of operating oarnings and not through tho fair-weather profits of speculation« Tho greatest sin ,1c drawback to offoctivo action by a united - 17 - front of bonkers now is tho diversity of controlling legislation among the several States* To my mind tho National Association of Supervisors of State Banks could make no greater contribution to tho well-being of the banking system than tho dovelopnont and enactment of a uniform banking codo for State banks* Such a code in combination with the uniform improvement of banking practices it is possible to accomplish through the Federal Deposit Insurance Corporation, and uniform call and examination reports and procedure, will ensure to State banks the benefits of a unified working basis without endangering tho future of tho dual system* I could go on indefinitely without exhausting all the phases of our mutual problems* I believe, however, that I have covered tho points which aro most fundamental* It is true that these fundamentals are, or should be, familiar to all of you, but I consider them sufficiently important to boar frequent repetition* Adherence to proper basic principles will almost certainly place our banks in a position to cope successfully with unfavorable economic trends* To you bankers, too, wo aro grateful for tho reception you havo given deposit insurance and for the earnest effort I believe you aro putting forth to operate sound banks* I an sure that you aro willing to apply to your own situations the fundamentals with which I have dealt today, and I am confident that you will work fearlessly, both as individuals and through your professional associations, to dovolop in your States banks that will deserve the trust of your people and that will contribute at least their sharo to tho enduring hoalth and soundness of tho nationwide system*