View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.


Statement by

Philip E. Coldwell

Member, Board of Governors of the Federal Reserve System

before the

Committee on Banking, Housing and Urban Affairs

United States Senate

July 16, 1975

I am pleased to appear before you today to present the views
of the Board of Governors on the important question of disclosure of
data for investor analysis of banks and bank holding companies.


approach this subject with full appreciation of the need, as ex­
pressed in our securities laws, for providing the investor with suffi­
cient public information to reach informed opinions on the current
and prospective financial conditions of individual institutions.
The Board recognizes the primary role of the SEC in matters
of disclosure for investor purposes.

Since 1964, when the Board was

given responsibility for certain disclosure provisions of the Securities
Exchange Act of 1934 as they apply to State member banks, our require­
ments have followed substantially the counterpart regulations imposed
by the SEC on other corporations.

With respect to other banks, very

similar disclosures have been imposed by the reporting requirements
of the other Federal bank supervisory agencies.

A great many banks

are not subject to the disclosure requirements of the 1934 Act
because they have less than .500 stockholders;

they also are required

by the bank supervisory agencies to file similarly detailed income
and balance sheet data subject to disclosure.
In recent years, the bank supervisory agencies have acted
on several occasions to expand the amount of individual bank financial
data collected and released to the public.

We believe that still

more disclosure is needed at the present time, and our reporting re­
quirements will be revised accordingly.

Banking practices have

undergone rapid modification in recent years as banks have accommodated


to changes in the "state of the art" and to the economic environment,
and further substantial changes are undoubtedly in store over the
years to come.

Accordingly, I can assure you that the question of

disclosure will remain under continuing review by the Federal Reserve
and we stand ready to make further adaptations in reporting as con­
ditions warrant.
While fully recognizing the need for disclosure, we also
have been aware that, as with all worthy objectives of public policy,
provision for meeting the informational needs of the investor involves
certain costs.

In extreme cases, those costs could far outweigh

possible benefits to the investor that the additional information
would provide.

For banks and other depositary institutions with

liabilities withdrawable on demand or on short notice, disclosure
requirements need to guard against triggering unwarranted rumors that
could impel large outflows of funds.

Thus, the Board has approached

the disclosure problem mindful of its statutory responsibilities as a
bank regulator and supervisor to maintain an environment in which the
banking system can adequately serve the public interest.
In providing for investor informational needs, the Board
believes that the public interest will be served most effectively if
essential disclosure is achieved as fullyj-as possible through regular
reporting requirements imposed by Federal bank supervisory agencies and
the SEC.

Only with comprehensive, standardized, periodic reporting


can the necessary time series of financial information be provided
that will enable the investor to discern significant trends in
individual bank performance and make an adequate assessment of
future prospects.

Moreover, with such a f?ctual base, substantial

changes or differences in the performance of individual banks can
be examined in the broad context of contemporary developments at
comparable banks.

More importantly, a requirement of meaningful

regular reporting should help to minimize the need for ad hoc
disclosure r t the time of proposed financings.

Such disclosure

carries a risk that individual banks issuing securities will be
required to release types of information not available for other banks
that might be misleading or misinterpreted by the market.
The Board also believes that the major focus, in constructing
a disclosure framework for banks and bank holding companies, should be
on earnings performance as reflected in the income statement.
Fundamentally, what the investor in any enterprise is purchasing is
management ability and market opportunities.

Over time, these are

effectively reflected, in distilled form, by earnings performance.
In recent years, the undue attention that often has been focused,
by investors as well as management, on size or "footings" rather than
on operating results, sometimes has led to misinterpretation of the
true picture of financial strengths or weaknesses of banks and bank
holding companies.



To effectively serve its informational function, the income
statement should portray not only what the bank or company has done,
but also should reveal enough of the institution's sensitive vital
signs so that the investor can make an informed estimate oi the pros­
pective income flows.

The present income statement required to be

filed by all Federally supervised banks provides extensive detail
directed toward meeting these needs.

Included in such statements

are refined breakdowns of income and expenses, loan loss and recovery
experience, provision of reserves against future losses on loans and
securities, and segregations of income earned in certain specialized
activities such as foreign branch and trading account operations.
But even more income-statement detail now seems desirable
in order to enable the investor to make an adequate assessment of
future earnings possibilities and to forecast an institution's ability
to adjust to the more fluid market environment that has been emerging.
In particular, we are contemplating additional reporting to provide for:


a more comprehensive measure of the cost to

the banks of interest-sensitive funds;

£ breakdown of loan charge-offs and recoveries;


a measure of the effect on bank income of loans


that are past due or have otherwise been subject to re­
duction or deferral of interest or principal because of
problems associated with the borrower.


Detailed information regarding the composition of assets
and liabilities of banks and bank holding companies is also an
important ingredient for adequate investor analysis.

Such data

are needed to aid in the interpretation of the income statement,
to determine trends and current status of the bank's operations,
and to appraise the bank's liquidity, capital adequacy, and general
financial condition.

The present supervisory "Call Report," which

includes over 100 separate asset and liability items, already pro­
vides the bulk of the information needed for these purposes.
Nevertheless, some additional balance sheet reporting may
now be advisable to reflect recent changes in banking activity and
in the environment in which banks operate.

We have been discussing

possible major additions to regular reporting subject to disclosure
by at least the larger banking organizations.


These might include:

a maturity breakdown for major categories of


a classification of loans according to whether

the rate charged is fixed or floating;

a breakdown

of the outstanding amount of time

deposits in denominations of $100,000 or more; and,

information on the amount of outstanding loan

commitments and the amount of outstanding credit under
those commitments.


More frequent reporting of income and balance sheet in­
formation also seems desirable for adequate investment analysis in
a rapidly changing economic environment.

Accordingly, we are con­

sidering a requirement that reporting of income, now required annually,
be set on a quarterly basis for large banks and semi-annually for
smaller banks.

In addition, the spring and fall Call Reports, which

currently are less detailed than those for June 30 and December 31,
may be expanded to include the greater detail.
As the Committee is aware, the bank supervisory agencies,
at the request of the SEC, have been participating in intensive
interagency consultations over the past three months for the purpose
of seeking a common understanding regarding questions of appropriate
financial disclosure for banks and bank holding companies.
the group has made important progress toward that goal.

I think

agreement has been reached regarding the areas in which additional
disclosure is needed and most of the specific types of information
that would best meet investor needs.

All the agencies involved

have shown a keen awareness of the need to obtain increased disclosures
in ways that will minimize the risk of misinterpretation or unjustified
disturbance to confidence.
The interagency coordinating group has been grappling with
highly complex issues, and some further discussions will be necessary.
We are pressing forward as rapidly as possible, and there is every




reason to expect, on the basis of progress to date, that we will soon
be in a position to publish both the new disclosure guidelines and
the revised bank reporting requirements.
Many suggestions for increased bank and bank holding company
disclosures are being offered in the course of these Congressional

I would caution that, in evaluating these suggestions,

it is vital to take into account a variety of considerations that
bear on the extent to which disclosure serves the public interest.
Certainly the investing public must have access to all material in­
formation needed for intelligent investment decision-making.


unreasonable or excessively detailed demands for information or
requirements for disclosure of information that might be misleading,
could be counterproductive.

Such demands could fail to serve the

interests of the investor, who is the intended beneficiary.


importantly, they might injure a bank's depositors and borrowers,
and thus the general welfare of the community that it serves.


they could create an unjustifiable and costly burden on the reporting
It is most important that the type and form of disclosure
imposed on banks be carefully weighed so as to avoid undermining the
willingness of banks to assume risk or eroding the confidence of
depositors--a critical determinant of banks' ability to attract the
funds needed to finance lending activities.

The evaluation and


assumption of risk are basic attributes of commercial banking.


if a bank is willing to assume reasonable risks will it be able to
help its local community to grow and prosper.

This can be done

prudently if the institution maintains adequate diversification, so
that losses are relatively predictable, and if the bank's charges
are commensurate with its costs, including the risk of losses that
may be incurred on its portfolio of loans and investments.
We must keep in mind that some loan losses are to be expected
when a bank is fully serving the needs of its customers.

To over­

emphasize disclosure of such losses could jeopardize the depositor
confidence so necessary to the health and progress of a financial

Release of information that the public has little or

no experience in evaluating may suggest possible trouble at a bank or bank
holding company and thus bring on sizable deposit outflows, especially
of impersonal money market funds.

We, therefore, have had to seek

a fine balance between the attainment of the level of disclosure needed
for intelligent investor decision-making and the avoidance of the
kinds of information that might damage the public interest in maintain­
ing stability and responsiveness in our banking institutions.
Also of major significance, particularly at this juncture,
is the potential impact that ill-conceived disclosure requirements
might have on the willingness and ability of banks to acquire additional
capital through public issuance of securities.

Owing to rapid asset


growth in recont years, capital positions at a number of banks have
approached minimum acceptable levels.

These banks need additional

capital if they are to participate fully in meeting the loan demands
that will be generated by vigorous economic recovery.

But they may

not be willing or able to raise the capital that is required, unless
the channels for long-term market financing are kept free of artificial
In summary, we at the Board are well aware of the need
for full and meaningful disclosure of the information on the affairs
of individual banks required for sophisticated and intelligent in­
vestment analysis.

We intend to call for such disclosures, insofar

as State member banks are concerned, and we are confident that the
other agencies--all of whom have benefitted by the deliberations of
the coordinating group--will do the same.

But we are also most

mindful of the other public policy objectives that must be served.
The continued stability of our financial system, the need to encourage
reasonable risk-taking by our banking community, and the need to raise
the additional capital required to support a vigorous expansion in
bank lending in support of

economic recovery are among the most

important of these other considerations.

mm #