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EESiiRIS OF ME* MORTIMER J • F02, JR,, AT A DIMMER MIMXlfG OF TW& « » YORK CITY BASK AUDITORS AND eOSPTROLLKRS C 0 « n m D M B S f i w t W CLUB, TUESDAY EVENIHG, M O W S » IS, 1936. ’ JACriE!® X Mr* Chairaan, «eatere of the Mew York City Bank Auditors and Comptrollers Conference — I welcome this opportunity to meet with you again and, under normal conditions, I would be sincerely grateful to the Chairnan of your Program Committee for hie Invitation to partake of this very fine dinner with you. However, I believe he had begun to feel that we fa Washington were giving creditable iaperson«tions of Rip Van Winkle, and I don't blame him for wondering audibly what has happened since our meeting down there Just a year ago this ties, when we first started the unification and standardisation moveaent. As a matter of fact, I feel very Bruch on the spot because off the record, ay sympathies are with you men. I am sure that if I were on the receiving end of the deluge of report forms which emanates from Washington, and for which I must frankly admit my share of the guilt, I would make a loud, long, and furious cry of protest. I can imagine the sotto voce profanity that greets each of these interruptions to your routine and I fully appreciate the difficul ties you frequently experience in interpreting the intention of those who drafted the report blank. But I ask that you remember that we request only material which is both important and valuable to those who have to decide questions of policy affecting the country's entire banking structure} ana I am eure that you can - %- visualise the structural problem# which confront us and which some times make* forms almost unintelligible# To get a fora in such shape that it can be used by 14,EDO banks operating under 49 or more differ ent banking codes is no easy assignment, especially when the task is complicated by limitations of time ami by the widely divergent strata of intelligence which we have encountered in our dealings with those who lay claim to the name "banker"# Actually then, ®y sympathy is almost counter-balanced by well-deserved self pity# Seriously speaking, however, Mr* Brandon asked me to say a few words to you about the progress being made toward unification and standardisation of the call report forms. what we have don© since m I want to tell you started this work a year ago, and I also want to take this opportunity of discussing a few of our problems with you* I m, sure that we can profit from an expression of the viewpoint of the members of this organisation# The problem# and « situations that face you every day are as representative as any which might be found among any group of beakers in the United States com prising, a# they do, the problems of both the large institutions which you represent m d the many-sized correspondents which you serve* 1 sincerely hope that you will express yourselves freely, so that I may benefit from your helpful suggestions# Mow, lot me rapidly review the work which has been don© on the call report since I talked with you in April* At that time, you remember, we suggested that a joint meeting be called of the - sjrofMsioaai groupe tatereit e lu the #ubj#el of cali report®, uhieh «ould include representativos of the Üatlooal Aseeelatioa of Bank Auditor» and Coaptrellsrs, the ¿ m m lotti Associatiora, th# ftessnre City Bteers Aesoctatiaa, Sttto Bank Cosed »«toner#, the representa tir®« of t e Capirò lier1» office, thè federal Besorv© Board# Treaeury, RMOftatnaetito finance Corporation, and federai Sepes! t Xnsura&ce Corporation# ïhlg meeting m ® timliy arranged ami w&s held in Washington on IKftj El and il'-* The conférence ne» «oli atteaded and tito representati’ ve® sho saere chose» foy the e&riou# groupe w r s #*eeedlagiy helpfül* la preporr«tien for the conférence, monhers of our staff under* took to get up a rather e^prehe&siee study whlch eoat&ined so analisi» of thè probi» and, particularîy* the « # « i te in nm* types of cali report«? lu addition, our staff, in coopération sith the reprs* of otto* organisations, preparad a cottpreheasive agenda sbich sas umê by tbs neeting and wfcich »©rved io give it fora end direction* After considerable discussion and a complète esplor&tion of mmg of the argument» m û mmy of the factors lavoleed, thè eoa» f«renes «i&fteé certain résolutions* *t the time* T m m résolutions mr® puhlished Thslr tttet m u be fourni in the Juiy ls#ve of *B«itíKlfig** ïb® résolutions sejnred t© erystslllss thè generai feeling of thet meeting and senrsd as a general guide posi for the mrte whieh «as ta b® under* Utkm m thè re suit of ib&fc meeting# As on# of the eonsequences of thai conférons» a Parsaacumt Standing Connûtes sa# organisée for the iHMrpose of doiag the sork roqulr^d in desslopiog thè cali ro./ori, in an effort to get a revised form which would satisfy a ,1 Federal require ments aad at the same time could be adopted by most of the states* la addition to the Fersmneat Standing Committee there was created a sub—-committee to take under its wing the general task of preparing the basic fora* This sub—cornsittee is coaipoaed principally of represen tatives of the various Federal agencies concerned in this task# The conference recommended that there be a division of the problems before us# It likewise recommended that one fora be developed which could be uniformly adopted as the call report form, this report to contain primarily supervisory aspects and, secondly, sos® statistical aspects# Then, in addition, the conference recommended that a second form be developed which should be primarily a statistical for»# Both of these forms were concerned only with condition reports of banks* The third form m s to be the earnings and. dividend^ report form* la have concentrated our efforts on the first of these, since it h m been felt that we had to develop one basic form first and that after that had been done the task of developing the subsequent forme would be somewhat simpler# Then, too, it was felt that the earnings and dividend^ reports as now used by Federal agencies were pretty nearly satisfactory from our viewpoint m d therefor© required but little change# After working on and off as consistently as our other duties would permit, and after holding joint conferences with the other federal agencies, we have tentatively agreed upon a suggested - sfors which is to b© the basis for further discussion and analysis by the Permanent Standing Committee* This form ha.® been gent to the agencies* field organisations for criticism and, directly upon its return to Washington with comments, it will be revised and submitted to the Permanent Standing Committee. The new report form, Ï feel, is an improvement over that which has existed heretofore and is particularly significant la that it represents a step in the direction toward which w© can hope this general subject will proceed* I am sure you will be glad to know that the form does not differ very radically from that which is now in use* Unfortunately X am not in a position to go into much detail concerning the particular features of this for® sine© it has not* yet been submitted to the Permanent Standing Committee* As an indica tion of the type of change that will be made, however, X might cite the following facts! We are attempting to le^elop as real and intel ligible a picture of a b&ak*a condition as is possible with book figures by developing a true balance sheet 'with contingent item# removedj by eliminating valuation reserves, where they exist, to reflect net book condition! by rearranging balance sheet items in a logical sequence comparable to that favored by most banks in their advertising) and by simplifying terminology. W© are removing data whose usefulness is outmoded or which duplicate examination functions, and we have worked constantly toward the goal that what little new data it is found necessary to call for will produce a maximum of in formation with a minimum additional burden upon the banks* - 6 - Upcm adoption of the fora it 1$ our intention to writs, with the help of qualified banker& and seecunt®mts , an exhaustive instruction booklet defining all face and schedule items in detail* It- seems reasonable to ast»® that this nanual, in view of the fact that the approved fora will presuaiibly be used, by nearly every bank in the country, will represent the greatest possible influence towards the adoption of uniform accounting terminology and practices by the country*» banks* Pending approval and adoption of the new fora the Federal Deposit Insurance Corporation has ©ad© a very sincere effort to have the State Commissioners cooperate in activities of standardization and unification# Prior to each of our call® during the past year, we h&ve written to the commissioners to remind them of the general effort th&t is being made along these lines and at the same time to offer to furnish the State Banking Department# with a sufficient supply of blink forme for their use* Our purpose in doing this hat been to get as many at possible of the State departments to use the forms which the Federal agencies are using, in order that duplication may be avoided and in order that State bunks will hot be required to fill out reports of condition on more than one form* This practice has been productive of satisfactory results and w© are happy to report that on the joint call of June 29 of this year 14 states availed themselves of the opportunity of using our forms* We are now pre paring for the call which is to come some time toward the end of the year and we have again written to the commissioners offering to supply - 7 - them with sufficient blanks for their needs* The response again has been exceedingly satisfactory and the a mber of state« which have already indicated their intention of using our forms has increased to 17* this does not tell the whole story, since there are certain other states which, though they use their own report blanks, actually tire completely in line with the Federal forme since their blanks are substantially the «¿use m the Federal forms* Many of the states, in replying to our recent letters on the subject, have indicated that while they are not in position to avail themselves of our offer at this particular time, they are very anxious to adopt the standard form just as soon as it hag h e m developed and approved by the Permanent Standing Committee* In a year*« time, then, we have covered considerable ground* On the whole wo feel that the movement toward report unification and standard!a&tion is making satisfactory progress and that it will gain momentum now that the task Is wall under way* W© are hopeful that the day is not far distant when bank condition state ments will be rendered on a universally standard form* Among other changes which were brought about by the Banking Act of 19S5 was one in connection with the requirement to publish reports of condition* The Federal Deposit Insurance Corpo ration requested Congress to give it the right to require banks to publish reports of condition in & prescribed form* The Federal Reserve Board, on the other hand, followed the national Banking Act in regard to this point and was specifically directed by Congress to - arequire that ail State member ban.se publish their report© of con dition whenever a call is made by the Board.* The Federal Deposit insurance Corporation has taken the position that it will not require State monmember banks to publish condition statements submitted to the Corporation until such time as the standard and unified report has been adopted* It is quite .likely that at that time the Federal Deposit Insurance Corporation will require that non;»ember State banks publish official statements of condition after each Federal call* It will probably require that all statements of condition, when pub lished, be substantially in the form which is adopted* Here again there are evidences of progress being made* If bank® are to publish statements of condition it is essential that such published statements be an accurate representation of their condition and that they be in a fora which clearly gives the information desired and is at the same time intelligible to the depositing public. The inertia which has existed and the disinclina tion of bankers to publish accurate statements of their condition se©:as to me to be shortsighted* The Federal agencies interested, in banks, particularly the offices of the Comptroller of the Currency* Federal Reserve Board, and the FDIC, have made very mincer© efforts to cut down the number of requests which various Federal departments are inclined to make on banks* We have worked, is cooperation with -the Central Statistical Board and have attempted to clear all requests for in formation from banks through that board, and, as a matter of fact, 9 - most of the request® for information from bank® now are submitted to the tnroe bank supervisory agencies before they are sent out* We been fairly successful in Uniting the number of requests and in incorporating them in reports* You will remember that last December the Federal agencies sent out requests for information for the Department of Agriculture sad for the Federal Housing Adminis tration* These supplement® incorporated information which was likewise desired by the Farm Credit Administration* Then, too, the Department of D&bor has been interested in certain information which has been incorporated in the call report. In June the bank supervisory agencies wore successful in reducing to a minimum the Information required by other governmental agencies and only recently we have been asKed to consult in connection with some information which the Census Bureau is desirous of obtaining. Our effort in the last instance was to reduce the information which they would require in view of the fact that much of it wag already available* So you see that the Federal bunk supervisory agencies are on the job and are really making an effort to reduce the amount of unnecessary information and the duplication of information which is requested by other governmental departments* While we are discussing duplication, I suppose I should express regret that it was necessary to complicate the reporting situation by the somewhat involved Certified Statements and support ing schedules which our Corporation inflicted upon you recently end ~ 10 - which you will he obliged to render seai-annually hereafter* I honestly feel, though, that whatever blame attaches to the creation &Tid distribution of this latest masterpiece should be laid, in large part, directly upon the doorsteps of those bankers whose fertile brains conceived the exceptions and ramifications which made it necessary* Much time and effort m s spent In developing that fora, m you know, and I believe that a fairly decent job m s done, all thiags considered* the many hours which you sea kindly gave toward ironing out goats of the problems which were involved in its develop* sent are gratefully appreciated sod I wish to take this opportunity of thanking you in behalf of the Corporation and particularly th@ Accounting and Auditor*s divisions of the Corporation for the assist* anee which you have rendered la handling this rather difficult problem* It is regrettable that the insured banks , particularly members of the Federal Reserve System, are subjected to two types of reports which are fairly similar in purpose* 1 h ve reference to the Certified Statement and its supporting data for assessment purposes, for the Insurance Corporation, and the semi-weekly, weekly, or semi monthly reports to the Federal Reserve Board for the determination, of reserves and reserve requirements* Recently our staff has given some attention to the differences which exist between these two fundamental concepts, in the hope that through analysis of these problems it would be possible to suggest to Congress certain change® in the law which would place the two on a more uniform basis* The problems which are involved here, however, are quit© complex* I do - u - not believe m y action will be taken along these lines unless the bankers can first decide what they went and then undertake & very vigorous plan of education, for souse reason the question of reserves h&B become so sacrosanct that a person is brave indeed who dares to criticise uiQr of its aspects above a whisper* hike a polecat, the question must be cautiously approached for fear of the cloud of odoriferous publicity which comments will elicit and which will forever brand the critic as a braintruster or inflationist, or as an exponent of the school which advocates government control of the central bank* By the gauge of practicability the present assessment base cun fee questioned and a problem exists here upon which I shall b® very anxious to get your reactions. If the FDIC expects to insure deposits it must h&ve adequate revenue at its disposal with which to pay off insurance losses* To be sure, insurance losses will be com paratively low for the next few years, as is customary after a severe depression or bank crisis such as we have just experienced. When we look h-.ek through history we see that the losses to depositor© per am u s in failed bunks are relatively low immediately following periods of business depression* However, it i© during this period of recovery that m insurance corporation of the nature of the FDIC should build up its reserves, so that when suspensions again become numerous and losses large in volume it will have available sufficient reserves with *diich to meet them* 12 - We have estimated what amount of fund® will b€ required should the losses of the future be comparable to those of the p>* As you know, w© have made a thorough analysis of the losses to de positors during the past 70 years. The results of these findings were discouraging in that they showed that the Corporation would have to have a large reserve which, under the present basis, it could raise only through assessment on insured banks* Th© estimated average loss per year for each #100 of deposits in active banks for the 70-year period 1865-1954 amounted to approximately 52#* That figure represents the portion of total deposits which m s lost to depositors* The un secured insurable deposits which were lost to depositors per year for each #100 of deposits .in active banks for the game 70-yoar period amounted to about 24#* In other words, the loss to depositors with balances not in excess of 15,000 including the first #5,000 of larger accounts amounted to approximately 1/4 of \% of the de posits in active commercial banks. future, therefore, were t If the loss experience of th© be anywhere near the lose experience of the past, the Corporation would be obliged to assess banks at the rate of 1/4 of Iji of their total deposits* As you know, the Corpo ration is assessing banks at a rate only l/Z m large &g that which experience indicates Is required, namely 1/12 of 1$ of total deposits* In addition Congress has directed that the Corporation allow th© banks certain deductions so that th© assessments which are being collected from insured banks are considerably less than would be required wef© - 13 - the date when the Corporation started business January 1, 1865 rather than January 1 » 1934« It did not seem practicable to Congress to assess the banks at a rate which would be equal to the amouat of losses to which depositors had been subjected in the past 70 years, because Congress anticipates an improved suspension record under the aegis of the Corporation and because it m ® felt that a higher rate would absorb-- too much of the bank’s earnings* blem with So you see the pro iiich the Corporation i® faced is one of getting enough revenue to build a sufficiently large reserve to fortify itself against insurance losses to which in all probability it will be sub jected in the future* Under no condition was it practicable to attempt t raise sufficient revenue through assessment on the insured portion of deposit© alone since this would work undue hardship on the small hanks which have a greater proportion of their total deposits in sured* The Corporation m s obliged to levy assessments on the basis of the banks’ probable ability to pay and that Is why assessments are based on total deposits* It is seen* however» that with the present assessment rate which mmy of the bankers feel ©till to be excessive» Congress is predicting that the annual rate of loss for the .future will b@ only 1/3 as large as it has been for the past* Such a position is perhaps not too optimistic since, for one thing, the standard of bank supervision ha® been greatly improved* Then, again, standards of bank management are constantly improving and, finally» the Corporation has been given certain power© whereby it nay protect itself and whereby it may serve to minimise insurance - 14 - Maaj people feel that levying assessments on total de posits is inequitable and they are inclined to take the position that banks should pay for insurance according to the benefits which they receive. These people feel that the sole benefit to be derived fro® insurance is the pay-off provision. They overlook the fact that insurance in itself has a very stabilising influence on the entire banking structure. They likewise overlook the fact that a system which breaks doma regularly and which periodically subjects depositors to a complete loss of their funds is fundamentally faulty. These critics seem to believe that a system which permits of such 'tremendous sacrifices, a system? which permits the loss of S billion 400 millions of dollars of depositors* funds in TO years i® a satisfactory banking system, I do not feel that deposit insurance necessarily eliminates all of the evils of our banking system but it does to aom© extent reduce the sacrifices which depositors are obliged to make. At the time that the Corporation wag established, it offered a. practical lean© for restoring the shaken confidence of tfao public in banks, Banking could not have continued without the confidence of depositors, Depositors were panicky because they had already experienced great losses and they believed additional losses faced them, The entire structure had collapsed and it was essential -that confidence bo re stored, The FBIC accomplished this purpose. The banking structure is now being firmly supported by the buttress of deposit insurance hut this support must m t be aliened to lull into * «ease of security those whose duty it is to plan and ultimately to effect the altera tions which will be necessary to jR&k© our system basically sound*