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CURRENT RANKING PROBLEMS

An A ddress D elivered By

Hon. LEO T. CROWLEY
C hairm an, Federal D eposit Insurance Corporation




Before the

NEBRASKA BANKERS ASSOCIATION
LINCQLN, NEBRASKA
NOVEM BER 4, 1937

CURRENT BANKING PROBLEMS
Mr. C h a irm a n , ladies a n d g e n tle m e n :

I was gratified to receive an invitation to meet with you today.
Not only is it a pleasure for me to be in Nebraska and to visit
with you bankers; I appreciate, too, the opportunity to discuss
some of our mutual problems and to bring you up to date on
what the Federal Deposit Insurance Corporation is trying to
accomplish. I have long felt that bank supervisors were far
too secretive about their problems and their policies and that
as a consequence bankers either lost all interest in the aims of
supervision or attached to supervisory moves an air of mystery.
It is my hope, therefore, by a frank presentation and a free dis­
cussion of our problems to remove any cloak of mystery that
still may surround the activities of the Federal Deposit Insurance
Corporation, to give you a clear conception of the problems
which face the Corporation, and to ask your help in the solution
of these problems.
F ederal d e p o s it in su r a n c e c o m p a re d w ith o ld S ta te
g u a r a n ty p la n s

The existence of your Deposit Guarantee Fund in Nebraska
from 1911 to 1930 indicates an early realization in this State that
something had to be done to prevent losses to depositors. It
is true that the Fund was not as successful as had been hoped,
but its creation showed a desire to end the economic waste and
the individual suffering which the loss of depositors' funds had
caused through the years. Further, as was the case with other
Statewide attempts at deposit insurance or guaranty, the ex­
perience with the Nebraska plan served as a guide to framers
of the Federal deposit insurance scheme and enabled them to
avoid many pitfalls which had worked to the detriment of State­
wide plans.
There can be little question but that the localization of risk,
discrimination among classes of banks, insufficient powers of
control over banking practices, the lack of discretion over
bank chartering, inadequate income, and untimely assessments,
were the chief causes for collapse of the State insurance or




one

guaranty systems. An attempt has been made in creating the
Federal Deposit Insurance Corporation to overcome these
fundamental sources of weakness.
The Statewide plans were vulnerable to the effects of such
local catastrophes as drought, flood, and insect plagues. In
every instance the plans were inaugurated in States which had
suffered severely from similar disasters and which, being pre­
dominantly agricultural, were most likely .to suffer again. By
encompassing in its membership banks throughout the entire
nation the Federal Deposit Insurance Corporation is better
protected against the calamitous effects of these local catas­
trophes and of the regional economic recessions which occur
periodically. The Corporation has been and should continue
to be able to meet these occasional emergencies as part of its
routine operations and so to keep the country's banking struc­
ture as a whole constantly healthy and capable of withstanding
adverse movements of the business cycle.
A further source of weakness in the State plans lay in the
inability of national banks to cooperate. As a consequence of
this discrimination, it was not unusual for State banks to par­
ticipate in the benefits of the plans until the going became dif­
ficult and the benefits expensive, when they converted to national
charters and so increased still further the load upon the banks
which had to pay the bill. Federal deposit insurance is pred­
icated upon the participation of all banks all of the time.
Although membership is not required of State banks not members
of the Federal Reserve System, the vast majority of these banks
have joined the Corporation voluntarily. Efforts to avoid
responsibility in times of stress by withdrawing from insurance
will be discouraged by the provision that insurance of deposits
in withdrawing banks shall continue for two years after their
withdrawal and that the banks must continue to pay assessments
during this period.
There can be no insurance on a sound basis without the
power to select the insured risk. In Nebraska, as in most of
the other States which attempted deposit guaranty, the Super­
intendent of Banks had, during most of the life of the plan, no
discretion with respect to the chartering of new State banks.
He was required by law to grant charters to all applicants who
complied with the minimum provisions set up by law. As a
consequence, there occurred between the inception of the plan
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and the agricultural collapse of 1920 and 1921 an unwarranted
and a thoroughly unhealthy expansion in the number of State
banks. While the FDIC has no direct control over the char­
tering of banks, it does have the power to pass upon the admis­
sion of banks to insurance. In effect this power discourages
the organization of institutions which cannot qualify for insur­
ance. This situation has been further improved through the
acquisition by nearly every State banking supervisor of dis­
cretionary authority over the issuance of charters.
The actual corrective powers of bank supervisory officials
have always been somewhat less than is commonly believed.
For the most part, the only statutory weapon granted supervisors
to enforce observance by banks of legal requirements and sound
banking practices has been to place the offending bank in
liquidation. Naturally, authorities have hesitated to apply so
drastic a measure. The obvious results of this lack of corrective
power were the abuses perpetrated by a few unscrupulous
bankers, the accumulation of unsound assets, the payment of
unearned dividends, and similar practices which made so many
of our institutions vulnerable and sent them to the wall when
economic developments took an unfavorable turn. The Federal
Deposit Insurance Corporation does have power to influence
the banking practices of its members through its authority to
terminate insurance for cause. We are exerting that influence
with notably beneficial results.
The arrangements for financing the various State insurance
or guaranty schemes varied widely but were generally inade­
quate and illogical. In cases where a regular income from
assessment upon insured banks was provided, the assessment
bore no relation to previous loss experience or to the ability of
banks to pay. In all of the guaranty States except one the only
means provided for meeting unusual demands upon the funds
was by levying special assessments upon participating banks
to meet losses as they arose. Naturally, the losses were greatest
following catastrophes or periods of declining values when
banks were uniformly hard pressed and therefore least able
to bear an additional drain upon their profits or reserves. It
is quite likely that this method of financing pushed into in­
solvency many banks which otherwise might have been able to
pull through. It is true that the Corporation^ assessment
income is only one-third as great as would have been required




three

to cover losses occurring during the seventy years preceding
its creation. Congress has felt, however, that the improved
condition of the banking structure and higher standards of
bank supervision will compensate for this difference. In case
of necessity arising from an accumulation of deposit insurance
losses the Corporation is empowered to issue its debentures to
a maximum of more than one billion dollars, with a par market
for $500,000,000 of these obligations guaranteed by the Treasury
and the Reconstruction Finance Corporation. Exercise of its
borrowing power, should the need arise, will enable the Cor­
poration to avoid placing a heavier load upon insured banks
during difficult times.
C u rre n t F D IC p a y o ff a n d loan s ta tis tic s

As you all know, the Federal Deposit Insurance Corporation
is charged by popular and Congressional mandate with re­
sponsibility for protecting from loss the funds of depositors in
insured banks. From the beginning of deposit insurance to
October 1, 1937, 151 insolvent insured banks were placed in
receivership or merged with the aid of loans by the Corporation.
The 210,219 depositors in these banks, having total deposits of
$59,237,000, were protected to the extent of $55,786,000, or
more than 90 percent of their claims by insurance, offset,
pledge of security, preferment, or through loans and purchases
of assets by the Corporation. All but 574, or less than onehalf of 1 percent of the depositors in the suspended banks,
were fully protected against loss. Of the 151 banks 108, with
deposits of $31,050,000, were placed in receivership and 43,
with deposits of $28,187,000, were merged with other banks
with the aid of loans and purchases of assets by the Corporation
amounting to $12,709,000.
N eed fo r b u ild in g a n d m a in ta in in g s o u n d b a n k in g
s y s te m

Should the loss record of the last seventy years recur,
however, neither the Corporation nor the banks could bear
the cost that insurance of deposits would involve. The al­
ternative lies in building and maintaining a strong, well man­
aged banking system, capable of withstanding adverse turns of
the business wheel and sound enough to keep losses at an ir­
reducible minimum. It is towards achievement of this alterfour




native that the Corporation is directing its most earnest efforts.
It is only through achievement of this alternative that deposit
insurance can succeed at a reasonable cost to banks. Finally,
since the collapse of deposit insurance would almost certainly
result in drastic revision of our present system of banking, I
do not hesitate to say that it is only through achievement of
this alternative that you bankers can hope to perpetuate the
system of independent unit banking which you profess to hold
so dear.
The channels through which the Corporation is directing its
efforts to build for better banking are shaped by our three
broad supervisory powers, namely: control of the admission of
banks to insurance, control of the activities and practices of
insured institutions, and the power to terminate a bank's in­
sured status for cause.
A d m is s io n o f n e w b a n k s to in su ra n c e

The Directors of the Corporation are determined to approve
for insurance only institutions which can be justified on the
basis of real need, which have reasonable earnings prospects,
which are adequately capitalized for their probable volume of
business, and which are to be managed by men of proven ability.
We are unalterably opposed to the chartering of institutions
which are economically unsound and likely to fail. There
is no doubt that some communities, now bankless, could sup­
port and should have banks. On the other hand, many com­
munities even today have more banks than they can support.
I believe that the issuance of new charters should occupy a
place on the agenda of supervisors quite subordinate to their
efforts to strengthen and make profitable the institutions which
are already in existence.
I am confident you will agree with the desirability of re­
stricting the number of new institutions chartered, and I believe
you will endorse the factors upon which we base our approval
or disapproval of proposed new banks for insurance. It is
essential for the welfare of our banking system that the excesses
of the past be not repeated. Certainly no deserving community
should be deprived of banking facilities, but just as certainly
no new institution should be chartered unless the chances for
successful operation are heavily in its favor.




five

P rovision fo r u n p ro fita b le e x is tin g b a n k s

The Corporation is equally concerned with the problem of
existing institutions which are operating unprofitably and drift­
ing steadily into an unsecure position. In cooperation with the
several State supervisors of banking we are undertaking a
survey of the banking needs and of the banking facilities of
each State. We propose, when this survey is completed, to
use its findings as a basis for recommending consolidation or
relocation of unprofitable banks in an effort to strengthen the
structure within each State and so to serve the best interests of
both depositors and stockholders.
B ra n c h b a n k in g n o answ er

It might be pertinent to state here that I do not believe the
sort of branch banking which is currently so general a topic of
conversation and resolutions represents a solution to the prob­
lem of our bankless and marginal towns. Any town that can
support a full-time branch can support a unit bank. Iowa,
Wisconsin, and several other States have found a partial an­
swer to this problem through the installation of paying and
receiving windows which can be operated at a nominal cost
or part-time banking offices, which serve bankless towns two
or three times a week. Whatever the proper answer may be,
I firmly believe that the extent of branch or bank office banking
is a matter for determination by each State, and that regulations
adopted by a State should govern the status of all banks within
its boundaries.
So much, then, for the Corporation's interest in changes
in the banking structure.
S u p e rvisio n o f in s u r e d in s titu tio n s

Supervision of the operations and practices of its membership
is naturally a vital concern of the Corporation. Bankers would
have little respect for a fire insurance company which did not
periodically check the condition of buildings it insured. It is
just as necessary that the Corporation follow closely the con­
dition and the trends of institutions composing its membership.
Our supervision of insured banks is predicated upon fun­
damental principles which the years have proved sound and
with which bankers can have no quarrel.
six




We contend that losses should be taken as they arise and
that strong capital cushions should be provided to absorb
losses and fluctuations in value which cannot be anticipated.
Look at the thousands of institutions which failed during the
last fifteen years because they refused to follow this fundamenental rule. We assert that there is no justification for banks
distributing as dividends profits they may have made on the sale
of assets at a price greater than cost, and that all such profits
should be set aside as reserves against the time when it may
be necessary to dispose of assets at a price less than cost. Is
there one of you who would countenance a write-up of his
inventory by one of your borrowers? We insist that unsafe
and unsound practices have no place in the business of banking.
Show me a good banker who thinks otherwise.
These are fundamental principles, the very rudiments of
sound banking, and they should form part of the credo of every
banker in this country. The bank that cannot operate prof­
itably by following these rules and by investing only in sound
assets has no place in our banking system. The banker who
speculates with the funds of his depositors and stockholders or
who otherwise abuses his position of trust is directly respon­
sible for the unpleasantly notorious reputation of bankers in
recent years. I say that every such man should be drummed
out of the profession. There is no reason why sound banking
and profitable banking cannot be reconciled. Neither is there
any reason why sound and profitable banking should not
become the rule in this country. The cooperation of you
bankers is indispensable, however, if we are to reach this goal.
An address I delivered recently before the Kentucky
Bankers Association stressed the desirability of keeping the
supervisory structure of laws and regulations governing
bank operations at a minimum. I favor leaving as wide a
field as possible open to the exercise of their judgment and
discretion by bankers. Yet, as I pointed out in Kentucky, the
boundaries of this field are actually determined by the results
of this exercise of initiative by bankers, as reflected in the sound­
ness of their institutions and the safety of their depositors' funds.
More stringent regulation of the banking business has been
brought about principally through misuse of their privileges
by bankers. The course of future regulation will depend
chiefly upon how bankers meet their responsibilities.




seven

T e r m in a tio n o f in s u r e d s ta tu s

It has fortunately been necessary for the Corporation to use
its power to terminate a bank's insurance in only a very limited
number of cases. Most insured banks promptly correct ob­
jectionable practices which are discovered by the Corporation's
examiners. In obdurate cases the intervention of the State
or national supervisory authority has generally sufficed to hasten
corrective action. The power of expulsion enables the Cor­
poration to protect both itself and well managed insured banks
from the losses which follow unrestrained indulgence in unsafe
and unsound practices. This power rounds out the prerogatives
granted the Corporation in order that its insured membership
may constantly be maintained at a quality consistent with the
principles of insurance, and in order that depositors may be
adequately protected against loss at a reasonable cost to in­
sured banks.
S o m e a sp e cts o f b a n k in g s itu a tio n in N ebraska

Turning now to the banking situation in your own State, I
should like to discuss with you a few of the problems which seem
to me most vitally to affect the course of banking improvement
in Nebraska. By way of approach, let me say immediately
that my sympathy with the problems of Nebraska extends
much farther back than my connection with the Federal
Deposit Insurance Corporation. I believe I can understand
the sentiments and the point of view of your Nebraskans. I
grew up in a frontier State, and I appreciate fully the impetus
given to our national economic development by those courageous
pioneers, the country bankers. I believe that the merits of our
dual system of independent unit banking by private enterprise
outweigh its weaknesses, and I shall support that system so
long as it functions with the safety of depositors' funds as the
primary controlling factor.
I should like also to draw your attention to the fact that no other
agency or group of people has so great a financial concern
with the wellbeing of the banking system as has the Federal
Deposit Insurance Corporation. The Corporation's potential
twenty billion dollar liability in insured banks ranks it far ahead
of stockholders and individual depositors as the principal
beneficiary of soundness for this country's banks. Our concern
eight




with the banking problems which still exist in various States is
therefore, easy to understand. It is logical that this concern
should be shared by you bankers who, in the last analysis, pay
the bill when our liabilities become payable as a result of
bank closings.
The Corporation's experience in Nebraska has been
characterized by splendid cooperation on the part of your
Department of Banking. To your Superintendent of Banks,
Mr. Saunders, to his very capable Deputy, Mr. McLain, and
to the other members of the Department's staff I voice our
thanks for their invaluable aid and our hope that this friendly
relation will long continue.
R e c e n t c h a rte rin g h is to r y

The principal problem of banks everywhere is that of prof­
itability. No bank can long survive unless it is a profitable
enterprise. I have stated already our determination that
profits shall be obtained only through sound bank operations
which do not imperil depositors' funds. Speculative ven­
tures cannot be tolerated. Neither can we look with favor
upon the tendency of many banks to capitalize upon their
local monopoly by charging exorbitant rates of interest upon
extensions of credit to their customers.
In order to protect their opportunities for legitimate profit,
Nebraska banks should encourage extreme care in authorizing
additional banks in the State. New banks will generally
aggravate an already thin situation. A total of sixteen new State
charters were granted in Nebraska between January 1, 1934
and October 1, 1937. Three of these institutions have already
ended their brief careers through voluntary liquidation.
Two points seem to me worthy of comment in connection
with recent chartering history in Nebraska. In the first place
seven of the sixteen institutions I mentioned came into being as
noninsured banks. I believe that no bank should be chartered
unless it is admitted to insurance at the time it begins business.
However strong and however lucky the management of an in­
dividual institution may be, it is absolutely unfair to depositors
to accept risks which are beyond the control of the bank manager
concerned. The sins of our neighbors can react potently
upon our own institutions, and it behooves bankers to provide
all available protection for their depositors.




nine

Second, I must express my extreme regret that it was found
expedient in 1934 to lower the minimum capital required for
the establishment of a new bank in Nebraska from $25,000 to
$10,000. I had imagined that the frantic efforts in 1933 to
obtain additional capital and to reorganize, usually at the ex­
pense of depositors, had demonstrated clearly the difficulties
that can be encountered even by banks with large capital ac­
counts. When State banks in Nebraska required $2,000,000
of capital from the RFC, another $500,000 through the sale
of preferred stock to the public, capital contributions, assess­
ments, and deposit waivers aggregating another $6,000,000,
reduction in the beginning capital of new banks seems the
very last course indicated. I hope that an upward revision of
these requirements will be forthcoming at an early date, since
the Federal Deposit Insurance Corporation cannot, in justice
to the sound banks composing its membership, admit to insur­
ance new banks which are inadequately capitalized.
N ebraska b a n k s e n jo y s o u n d a sset p o s itio n

It is pleasant to be able to report that State banks in Nebraska
currently hold an asset position which compares favorably
with the record of any other State in the country. The portion
of total assets of Nebraska State banks classified by our examiners
as loss and doubtful is less than half as great as for the country as
a whole. The capital ratios of these banks likewise compare
favorably with the nation's average, though some banks still
require additional capital if they are to be adequately cushioned
against unfavorable developments.
A t ta i n m e n t c o stly , how ever

Let me urge, however, that you not forget the sacrifices
that were necessary to attain this strong position. I reviewed
previously the capital rehabilitation that Nebraska State banks
underwent to repair their shaky positions after the banking
holiday. National banks in the State sold an additional $6,000,000 of preferred obligations during this period of reconstruc­
tion. During 1934, 1935, and 1936 State Banks in Nebraska
wrote off losses and depreciation totaling more than $5,000,000,
while national banks in the State eliminated assets with a
carrying value of about $15,000,000 during the same period.
This was truly a great price to pay for the privilege of continuten




ing in business. When we add to it the $240,000,000 of
deposits in Nebraska banks which failed between January 1,
1921 and the inception of Federal deposit insurance on January
1, 1934, the figure assumes staggering proportions.
R e p e titio n o f o u tla y can be avoided

I believe that a repetition of this wholesale dissipation of
wealth can be avoided. Certainly it must be avoided if our
present system of banking is to continue. All bank supervision
today is aimed at safeguarding bank depositors from loss. But
the efficacy of supervision is seriously impaired if bankers do
not cooperate whole-heartedly in the attempt to create and to
maintain a sound banking structure. In retrospect, it is pos­
sible to trace the losses I cited above to their sources in the
practices supervision is now trying to combat. Losses were
allowed to accumulate during good times. In hundreds of
cases dividends were paid regularly when the bank's earnings'
record forbade any at all. Individual bank capital accounts
were allowed to shrink or to remain static, so that even nominal
fluctuations in values could result in severe impairment or
even insolvency for these institutions. Finally, and not least
important, the courage and consistency of supervisory policies
in most jurisdictions was not above criticism.
T h ro u g h im p r o v e d su p ervisio n

I believe it is generally agreed that supervision today is more
constructive and more consistent than has ever before been the
case. I can assure you that the FDIC's liability in the nation's
banks makes it incumbent upon that agency to continue its
policy of thorough surveillance of the activities of insured banks,
making no concessions to political or personal expediency, build­
ing constantly for a sounder banking system, and giving to
depositors the protection and sense of security they deserve
but have seldom had.
A n d im p r o v e d s ta n d a r d s o f b a n k m a n a g e m e n t

Good bankers can have no quarrel with our objectives,
since they are identical with the aims of good bankers. The
conscientious banker can analyze his own institution and remedy
defects in its organization or procedure quite as effectively as a




eleven

bank examiner, if he will take the time and retain an open mind.
Curiously enough, the complaints we receive about the severity
of our examiners come almost without exception from banks
which most need severe scrutiny and constructive help. For­
tunately, most bankers are as conservative as our most critical
examiners. I have not yet given up hope that this majority
will someday approach unanimity.
I stated earlier in my remarks that I favored continuation of
our traditional system of independent unit banking. I neglected
then to remind you that the destiny of that system is entirely in
your hands. Deposit insurance will, I believe, help to per­
petuate the system, but even with deposit insurance a keener
awareness of their responsibilities by bankers and a more de­
serving tenure of their stewardship will be required. I hope
we may rely upon each of you to support our efforts to promote
sound banking. If you will abjure guesswork, work as a part
of the system rather than as isolated units, strive constantly
to improve the quality of your assets and the ability of your
managements, I am confident that the system will survive and
that it will prove worthy of the trust of depositors.
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