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FEDERAL DEPOSIT INSURANCE CORPORATION

FOR RELEASE UPON DELIVERY

PR-42-77

(5-24-77)

Address by

Robert E. Barnett
Chairman

before the

Pennsylvania Bankers Association Annual Convention
Atlantic City, New Jersey

May 24, 1977
U

Ä

FEDERAL DEPOSIT INSURANCE CORPORATION, 550 Seventeenth St. N.W., Washington, D.C. 20429



•

202-389-4221

in m y ju d g m e n t, th e F D IC h a s d o n e a n e x c e lle n t jo b of m a in ta in in g
c o n fid e n c e in th e A m e r ic a n b a n k in g s y s te m .

T h e b a n k p a n ic s of th e '2 0 s

and '3 0 s a r e m e m o r i e s of th e p a s t, e v e n th o u g h e c o n o m ic c y c le s h a v e
c o n tin u e d in e x o r a b ly s in c e th a t tim e , c o n tr ib u tin g tr o u g h s a s w e ll a s
p e a k s to o u r e c o n o m ic h i s t o r y .
J u s t o n e y e a r a g o , I m a d e m y f i r s t s p e e c h a s C h a ir m a n of th e
F D IC .

T h e s p e e c h w a s a d d r e s s e d to th e c u r r e n t p r o b le m s of th e b a n k in g

in d u s tr y w h ic h h a d b e e n r e c e iv in g a g r e a t d e a l of p u b lic ity .

I w o u ld lik e

you to t r y to r e c a l l th e a tm o s p h e r e of th a t tim e , w h ic h w a s n o t a p le a s a n t
one f o r th e b a n k in g b u s i n e s s .

B ank f a i l u r e s w e r e o c c u r r in g a t a m o r e

ra p id r a t e th a n a t an y o th e r tim e s in c e th e a f t e r m a t h of th e D e p r e s s io n
of th e '3 0 s .

We h a d 5 f a i l u r e s in th e f i r s t fiv e m o n th s of 1976, c o m p a r e d

w ith a n a v e r a g e of 6. 6 f o r e a c h f u ll y e a r f r o m 1965 to 1 9 7 5 .

The n u m b e r

of b a n k s on o u r p r o b le m l i s t h a d c lim b e d a t a n u n p r e c e d e n te d r a t e an d
in c lu d e d , f o r th e f i r s t tim e , a n u m b e r of l a r g e b a n k s .

A t th e end of l a s t

M ay, t h e r e w e r e 373 b a n k s on o u r p r o b le m l i s t , up f r o m 248 a y e a r
e a rlie r.

T h i r te e n of th o s e h a d d e p o s its o f o v e r $300 m illio n , w h ile t h e r e

w e re o n ly 6 of th a t s iz e a y e a r e a r l i e r .
d r a m a tic a lly .

B an k lo a n l o s s e s w e r e up

T h e p o s s ib il ity of f u r t h e r l o s s e s on lo a n s to R E I T 's an d

o il t a n k e r s w a s a m a t t e r of s e r io u s c o n c e r n .
I s e t f o r t h th e s e d a ta in s o m e d e ta i l, a n d h e n c e m y s p e e c h ,
s in c e I w a n te d i t to b e c a n d id , c o u ld n o t b e a to ta lly c h e e r y o n e .

My

e v a lu a tio n of th e p r o b le m a t th a t tim e t r a c e d th e i n c r e a s e in b a n k lo a n




-

2

-

l o s s e s , th e i n c r e a s e in th e n u m b e r of p r o b le m b a n k s , a n d th e n u m b e r of
f a ilu r e s p r i m a r i l y to th e v e r y s e v e r e r e c e s s i o n of 1 9 7 4 -7 5 .

B u t I a ls o

n o ted th e tr e n d to w a r d g r e a t e r r i s k - t a k i n g on th e p a r t of th e b a n k in g s y s te m
th a t h a d ta k e n p la c e d u rin g th e 1 9 6 0 s a n d p o in te d o u t th e p r o b le m s th a t tr e n d
had p ro d u c e d a s w e ll a s a c k n o w le d g in g th a t t h e r e a r e s o m e p u b lic b e n e f its
fro m a m o r e a g g r e s s i v e a p p r o a c h to b a n k in g .

U n fo rtu n a te ly , t h e r e w e r e

so m e u n u s u a l c h a r a c t e r i s t i c s of th e e c o n o m ic an d i n t e r n a tio n a l s itu a tio n
of th e tim e th a t m a g n ifie d th e e f f e c t of th a t g r e a t e r r is k - t a k i n g on th e
b an k in g s y s te m .
I r e p o r t e d on s o m e r e s e a r c h a t th e F D IC th a t fo u n d a c o n s is te n t
p a tte r n of lo a n l o s s i n c r e a s e s d u rin g r e c e s s i o n p e r i o d s , fo llo w e d b y a
d e c lin e in th e f i r s t y e a r of r e c o v e r y fo llo w in g a r e c e s s i o n .

On th e b a s i s

of th a t a n a l y s i s , I f o r e c a s t a d e c lin e in th e lo a n l o s s r a tio f o r 1976.
I a ls o n o te d th a t o u r p r o b le m l i s t s e e m s to f lu c tu a te w ith th e
eco n o m y b u t, a s d i s t i n c t f r o m th e lo a n l o s s e s , w ith a tim e la g of a b o u t
12 m o n th s .

I p o in te d o u t th a t " it i s n o t s u r p r i s i n g th a t now , a b o u t a y e a r

f r o m th e low p o in t in th e r e c e s s i o n , w e a r e a t a h ig h p o in t on o u r p r o b le m
l is t.

If th e c u r r e n t r e la tio n s h ip fo llo w s p r e v io u s e x p e r ie n c e , I w o u ld

e x p e c t th e n u m b e r on o u r p r o b le m l i s t to g e t s m a l l e r l a t e r on th is y e a r . "
Now th e f o r e c a s t s I m a d e in th a t s p e e c h a y e a r ag o tu r n e d o u t to
h av e s o m e s h o r tc o m in g s .
as c o m p a r e d w ith 197 5.

In f a c t, b a n k lo a n los*ses i n c r e a s e d in 1976
T h e n u m b e r of b a n k f a i l u r e s f o r th e f u ll y e a r

of 1976 w a s 16 - - th e h ig h e s t n u m b e r s in c e 1943.




A nd th e n u m b e r of

- 3 -

problem b a n k s , w h ile s e e m in g to h a v e r e a c h e d a p la te a u , h a s n o t
declined s in c e l a s t M ay a n d , in f a c t, a d d itio n a l l a r g e b a n k s h a v e b e e n
added to th e l i s t .
My f o r e c a s t s a y e a r ago w e r e h o n e s t o n e s .
been a b le to f o r e t e l l th e f u tu r e m o r e a c c u r a t e l y .

B ut su p p o se I had
S u p p o se I h a d b e e n a b le

to p r e d ic t th a t lo a n l o s s e s , a t a r e c o r d le v e l in 1975, w o u ld i n c r e a s e s t i l l
fu rth e r in 1 9 7 6 .

T h a t th e n u m b e r of b a n k f a i l u r e s in 1976 w o u ld e x c e e d

the h ig h n u m b e r of 1975.

A nd th a t th e p r o b le m l i s t a lr e a d y a t e x tr e m e ly

high le v e l s , w o u ld f a il to d e c lin e o v e r 1976 an d 1977 a n d w o u ld in c lu d e
more b illio n d o l l a r b a n k s .

In s u c h a s c e n a r i o , m o s t of u s w o u ld h a v e

expected a g r e a t j o l t to p u b lic c o n fid e n c e in th e b a n k in g s y s te m , an d
concern a b o u t th e a b ility of th e b a n k in g s y s te m to w ith s ta n d th e s e e v e n ts
fo re c a s t f o r 1976.

C o n fid e n c e in th e b a n k in g s y s te m w a s m a in ta in e d , an d

even im p r o v e d by an y r e a s o n a b le m e a s u r e .

W h ile m a n y of th e p r o b le m s

of a y e a r ag o a r e s t i l l w ith u s , w e do n o t h a v e g r e a t p u b lic c o n c e r n a b o u t
the s o u n d n e s s o f th e b a n k in g s y s te m o r e v e n a b o u t in d iv id u a l b a n k s w h ic h
have p e r f o r m e d p o o r ly o r r e c e iv e d u n f a v o r a b le p u b lic ity .
W hat a c c o u n ts f o r th e g r e a t c o n fid e n c e w h ic h th e A m e r ic a n p u b lic
seems to h a v e in th e b a n k in g s y s te m in s p ite of v n fa v o ^ a h 1e d e v e lo p m e n ts
and u n fa v o ra b le p u b lic ity ?

It m a y a p p e a r im m o d e s t f o r m e to s a y so , b u t

I think th e a n s w e r i s , in l a r g e p a r t , th e F e d e r a l D e p o s it I n s u r a n c e C o rp o
ration.




- 4 -

T he y e a r s I h a v e b e e n w ith th e F D IC , b o th a s C h a ir m a n a n d a s
Deputy to f o r m e r C h a ir m a n F r a n k W ille , h a v e b e e n th e m o s t tr a u m a t i c
in th e h i s t o r y of A m e r ic a n b a n k in g s in c e th e D e p r e s s io n of th e 1 9 3 0 s.
The FD IC p r a c t i c a l l y h a d to l e a r n f r o m s c r a t c h how to d e a l w ith th e
d ra m a tic e v e n ts o f th e 1 9 7 0 s , w h ic h in c lu d e d th e 10 l a r g e s t b a n k
fa ilu re s in o u r h i s t o r y .

I a m v e r y p ro u d of th e w ay th e F D IC h a s b e e n

able to d e a l w ith th e p r o b le m s a s th e y a r o s e , a n d th e r o le th a t i t p la y s
in m a in ta in in g c o n fid e n c e in th e A m e r ic a n b a n k in g s y s te m .
A t o n e l e v e l , th e c o n fid e n c e of th e p u b lic in th e b a n k in g s y s te m
is a r e f le c tio n of r e l i a n c e o n th e f i s c a l s o lv e n c y of th e F D IC .

The

F e d e ra l d e p o s it in s u r a n c e fu n d h a s g ro w n c o n s id e r a b ly d u rin g th e p e r io d
of the 197 0s d e s p it e o u r l a r g e s t l o s s e s e v e r .

In 1 9 7 3 , b e f o r e th e f a i l u r e

of U nited S ta te s N a tio n a l B an k in S an D ie g o , th e l o s s e s on w h ic h e x c e e d e d
by a l a r g e m a r g i n th e l o s s e s to th e F D IC on a ll th e o th e r b a n k f a i l u r e s in
our h is to r y c o m b in e d , an d b e f o r e th e 35 f a i l u r e s (in c lu d in g F r a n k li n
N ational B ank) th a t h a v e o c c u r r e d s in c e th e n , th e fu n d w a s $5. 6 b illio n .
Now it i s $ 7 .5 b illio n .

I b e lie v e th a t s im p le c o m p a r is o n m a k e s a n e lo q u e n t

sta te m e n t.
E v e n th o u g h th e fu n d i s o n ly a s m a l l f r a c t i o n of i n s u r e d d e p o s its
in o u r b a n k s , a s i t a lw a y s h a s b e e n , th e p u b lic s e e m s to h a v e no d o u b ts
that, if th e n e e d a r i s e s , th e F D IC h a s th e f in a n c ia l a b ility to m a k e good
on its le g a l o b lig a tio n s .

In f a c t, in r e c e n t y e a r s o n th o s e r a r e o c c a s io n s

where w e do h a v e a f a i l u r e r e s u ltin g in a p a y o u t of in s u r e d d e p o s its by




the F D IC , w e h a v e a p r o b le m in g e ttin g p e o p le to ta k e th e tim e to c o m e
in and g e t t h e i r m o n e y .

T h e y g e n e r a lly a r e n o t lin e d up an d in a g r e a t

ru sh to g e t t h e i r m o n e y f r o m u s b e c a u s e th e y a r e s u r e th a t i t w ill b e
th e re w h e n e v e r th e y n e e d i t .
B u t m o r e im p o r t a n t th a n r e l i a n c e on th e s iz e o f th e d e p o s it in s u r a n c e
fund, I th in k , h a s b e e n th e c o n fid e n c e o f b o th l a r g e an d s m a ll d e p o s it o r s
s o p h is tic a te d a n d u n s o p h is tic a te d b a n k c u s t o m e r s , in th e a b ility of th e
FDIC to h a n d le p r o b le m s itu a tio n s a n d to c o n d u c t i t s s u p e r v is o r y an d
in s u ra n c e r e s p o n s i b i l i t i e s in a p r o f e s s i o n a l a n d c a p a b le m a n n e r .

The

FDIC h a s d e v e lo p e d te c h n iq u e s w h ic h m in im iz e th e d is r u p tio n to a c o m ­
m u nity r e s u ltin g f r o m a b a n k f a i l u r e .

It sh o u ld b e n o te d th a t th is g o e s w e ll

beyond w h a t w e g e n e r a lly th in k of a s th e p r i m a r y r e s p o n s ib il ity o f th e
FDIC - - p r o te c tin g s m a l l d e p o s it o r s a g a in s t l o s s in th e c a s e o f b a n k f a i l u r e .
In f a c t, w e h a v e n o t o n ly b e e n a b le to p r o t e c t th e s m a l l d e p o s it o r , b u t th e
la rg e d e p o s it o r a s w e ll.

In m o s t c a s e s , w e h a v e a ls o b e e n a b le to a v o id

any f in a n c ia l d is r u p tio n to th e o n -g o in g b u s i n e s s a c t i v i t i e s of c r e d itw o r th y
bank b o r r o w e r s , a n d w e h a v e th e r e b y m in im iz e d d is r u p tio n to th e e c o n o m y
of th e c o m m u n ity .

We h a v e r e a c h e d th e p o in t w h e r e f a i l u r e s of m o d e r a te

sized b a n k s , th a t i s , b a n k s of up to $100 m illi o n of d e p o s it s , r e c e iv e
v irtu a lly no a tte n tio n o r p u b lic ity o u ts id e t h e i r im m e d ia te a r e a . A nd e v e n
r e la tiv e ly l a r g e b a n k f a i l u r e s h a v e n o t g e n e r a te d m u c h p u b lic a tte n tio n
du ring th e p a s t y e a r .




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6

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L e t m e s a y a fe w w o rd s a b o u t th e s e p r o c e d u r e s an d how th e y h a v e
w orked.

W h e n e v e r a b a n k i s c lo s e to f a ilin g , w e w o rk to g e th e r w ith th e

p rim a ry s u p e r v i s o r (th e C o m p tr o lle r of th e C u r r e n c y in th e c a s e of n a tio n a l
banks, a n d th e S ta te B an k in g D e p a r tm e n t in th e c a s e of S ta te b a n k s ) in a n
attem pt to s o lv e th e p r o b le m .

I m ig h t ad d th a t d e s p ite o c c a s io n a l c o m m e n ts

and d is c u s s io n of la c k of c o o r d in a tio n a m o n g th e b a n k in g s u p e r v i s o r s , and
c rie s f o r c o n s o lid a tio n of th e a g e n c ie s , w e h a v e g e n e r a lly fo u n d th a t in th e s e
situ a tio n s th e c o o p e r a tio n i s e x c e lle n t.

If th e p r o b le m c a n n o t b e s o lv e d ,

and f a ilu r e i s u n a v o id a b le , th e F D IC s e e k s to fin d a so u n d b a n k o r b a n k
holding c o m p a n y th a t is c a p a b le of a s s u m in g th e l i a b i l i t i e s of th e fa ilin g
bank and p ro v id in g b a n k in g s e r v i c e on a n u n i n te r r u p t e d b a s i s .

In th e

in te r e s ts of f a i r n e s s an d of m in im iz in g o u r l o s s e s (an d s to c k h o ld e r l o s s e s )
we g e n e r a lly t r y to s e l e c t a b u y in g b a n k on a c o m p e titiv e b id d in g b a s i s .
We g e n e r a lly fin d a b u y e r w illin g to p a y a p r e m iu m l a r g e en o u g h to m a k e
this a r r a n g e m e n t c h e a p e r to u s th a n c lo s in g th e b a n k an d p a y in g off i n s u r e d
d e p o s ito rs .
It i s n o t a lw a y s p o s s ib le to fin d an e x is tin g b a n k o r q u a lifie d
group of i n v e s t o r s w illin g an d a b le to a b s o r b th e b u s in e s s o f a fa ilin g
bank.

In s o m e c a s e s , th e F D IC h a s u s e d a p r o v is io n of th e F D I A c t to

p ro v id e a s s i s t a n c e d i r e c t l y to th e b a n k to e n a b le i t to s u r v iv e .

T hough

this p r o v is io n h a s b e e n p a r t of o u r A c t s in c e 1950, i t w a s u s e d f o r th e
f ir s t tim e in 1971.

We h a v e b e e n v e r y c a r e f u l in o u r u s e of th is te c h n iq u e

to b a la n c e off o u r d e s i r e to a v o id d is r u p tio n to th e c o m m u n ity w ith o u r
re lu c ta n c e to s e e th e p e o p le r e s p o n s ib le f o r a b a n k 's p r o b le m s b a ile d o u t.




- 7 -

In a ll c a s e s , t h e r e f o r e , w e h a v e i n s i s t e d on a c h a n g e in m a n a g e m e n t an d
the f in a n c ia l t e r m s h a v e b e e n a r r a n g e d so th a t i n v e s t o r s (a s d i s t i n c t f r o m
d e p o s ito rs ) h a v e i n c u r r e d s iz a b le l o s s e s .
W hat I h a v e d e s c r i b e d so f a r I c o n s id e r to b e a v e r y s ig n if ic a n t
a c h ie v e m e n t f o r w h ic h th e F D iC d e s e r v e s a g r e a t d e a l of c r e d i t .

That

a c h ie v e m e n t h a s b e e n g e n e r a lly r e c o g n iz e d , th o u g h I do n o t f e e l th a t th e
FDIC a lw a y s g e ts th e c r e d i t i t d e s e r v e s f o r th e c u r r e n t s ta t e o f c o n fid e n c e
in th e b a n k in g s y s te m .

B u t th e m a in te n a n c e of c o n fid e n c e in th e b a n k in g

s y s te m h a s o t h e r im p lic a tio n s th a t a r e n o t so o b v io u s , a n d I w a n t to sp e n d
a few m in u te s d e s c r ib in g th e m .
O ne s id e e f f e c t of th e g e n e r a l c o n fid e n c e in th e b a n k in g s y s te m
is th a t w e c a n a f f o r d to h a v e f u ll d i s c l o s u r e o f a d v e r s e in f o r m a tio n a b o u t
the b a n k in g s y s te m , and f r a n k p u b lic d is c u s s io n of p r o b le m s th a t w o u ld
not b e p o s s ib le w ith o u t th a t c o n fid e n c e .

B a n k e r s an d b a n k s u p e r v i s o r s h a v e

tr a d itio n a lly s h ie d a w ay f r o m f o r t h r i g h t d i s c l o s u r e a n d d is c u s s io n of a d v e r s
d e v e lo p m e n ts .

A c tio n s of in d iv id u a l b a n k s , th e b a n k in g a g e n c ie s , th e SEC

and o u r n e w s p a p e r s h a v e le d to m u c h g r e a t e r d i s c l o s u r e of f in a n c ia l i n f o r ­
m a tio n c o n c e r n in g b a n k s th a n w a s th e c a s e o n ly a fe w y e a r s a g o .

It h as

long b e e n a n ite m of f a ith e m b o d ie d in o u r s e c u r i t i e s la w th a t, in th e b u s i ­
n e ss s e c t o r , f u ll d i s c l o s u r e i s i m p o r ta n t to i n v e s t o r s a n d to th e fu n c tio n in g
of th e f in a n c ia l m a r k e t s .

We h a v e b e e n r e l u c t a n t to c a r r y th a t a r g u m e n t

o v e r in to b a n k in g b e c a u s e of c o n c e r n th a t a d v e r s e p u b lic ity a b o u t b a n k s
could le a d to r u n s a n d p e r h a p s b a n k f a i l u r e s .




-

8

-

T h e s ta b i lity of th e b a n k in g s y s te m in th e l a s t y e a r o r so in d ic a te s
that w e c a n a ffo rd to h a v e m u c h g r e a t e r d i s c l o s u r e th a n p r e v io u s ly .

The

TDIC h a s m a d e a r e c e n t a n a ly s is of th e im p a c t of d i s c l o s u r e s of b a d n e w s
on th e p r i c e of b a n k s to c k s , p a r t i c u l a r l y s o m e w h ic h h a v e b e e n th e s u b je c t
of u n f a v o r a b le d i s c l o s u r e s .

In g e n e r a l, t h e r e d o e s n o t s e e m to b e an y

s ig n ific a n t a d v e r s e e f f e c t on b a n k s to c k s r e s u ltin g f r o m d i s c l o s u r e o r d i s ­
c u ss io n of p r o b le m s of th e b a n k in g i n d u s tr y .

I a m n o t d e fe n d in g le a k s of

c o n fid e n tia l in f o r m a tio n , b u t th is la c k of h a r m s u g g e s ts th a t w e a r e on th e
rig h t t r a c k in p r o m o tin g w id e r d i s c l o s u r e of f in a n c ia l in f o r m a tio n by b a n k s ,
and in th e F D I C 's d e c is io n to r e l e a s e in f o r m a tio n o n a r o u tin e b a s i s c o n c e r n ­
ing th e s ta t u s of o u r p r o b le m b a n k l i s t .
Soon a f t e r I b e c a m e C h a ir m a n of th e F D IC , I h a d th e F D IC s ta f f
u n d e rta k e a l a r g e - s c a l e stu d y of p o s s ib le c h a n g e s in th e d e p o s it in s u r a n c e
s y ste m .

T h is w a s to b e a re v ie w of th e p r e s e n t s y s te m an d th e d e v e lo p m e n t

of r e c o m m e n d a tio n s f o r c h a n g e s in th e s y s te m .

I w a n te d th is a n a ly s is n o t

b e c a u s e I w a s a w a r e of an y m a j o r p r o b le m a t th e tim e , a lth o u g h t h e r e s e e m e d
to b e s o m e p r o b le m s of f a i r n e s s in th e s y s te m , b u t s im p ly b e c a u s e th e
b asic s t r u c t u r e of d e p o s it i n s u r a n c e in th e U n ite d S ta te s h a d n o t b e e n s i g n i ­
fic a n tly c h a n g e d in 40 y e a r s .
rev iew of th e s y s te m .

I t s e e m e d to m e th a t i t w a s tim e f o r a th o ro u g h

I s p e lle d o u t m y c o n c e r n s , an d th e a r g u m e n ts th a t

m ight b e r a i s e d f o r a n d a g a in s t d if f e r e n t a p p r o a c h e s to d e p o s it i n s u r a n c e
re fo rm , in a s e r i e s of s p e e c h e s l a s t y e a r .

In p a r t i c u l a r , I n o te d th e u s e

of th e p r o c e d u r e s I h a v e j u s t d e s c r ib e d h a v e r e s u l t e d in a lm o s t a d e f a c to
100 p e r c e n t d e p o s it in s u r a n c e s y s te m .




I r a i s e d th e q u e s tio n of w h e th e r

- 9 -

fo rm a l de j u r e 100 p e r c e n t d e p o s it in s u r a n c e m ig h t n o t b e a m e a n s of
e lim in a tin g w h a t l i t t l e u n c e r ta in t y a b o u t th e s a f e ty of d e p o s its th a t now
e x is ts a t v e r y l i t t l e a d d itio n a l c o s t.
O u r s ta f f s tu d y of t h e s e i s s u e s h a s r e c e n tly b e e n c o m p le te d an d w e
hope to p u b lis h s p e c if ic c o n c lu s io n s f r o m th a t s tu d y so o n .

A s o n e w o u ld

e x p ec t a n d d e s i r e in a s ta f f c o n s is tin g of a n u m b e r of ta le n te d an d e x p e r ie n c e d
in d iv id u a ls , w e d id n o t a c h ie v e a u n a n im ity of v ie w s . S o m e of th o s e p a r t i c i ­
pating in th e s tu d y f a v o r e d one c h a n g e , s o m e a n o th e r , an d s o m e no c h a n g e .
I am n o t u n h a p p y w ith th e la c k of u n a n im ity o r w ith th e r e s u l t th a t, a f t e r
th is in te n s iv e s tu d y , o u r s ta f f h a s n o t r e a c h e d a c o n s e n s u s f o r m a j o r c h a n g e
in th e d e p o s it i n s u r a n c e s y s te m .

P e r h a p s , in f a c t, i t w a s to b e e x p e c te d

sin ce s u c h a r e l a t i v e l y s m a l l n u m b e r of p e o p le w e r e i n ju r e d d u rin g th e
la rg e n u m b e r of f a i l u r e s in th e 1 9 7 0 s .
I do n o t e x p e c t o u r s ta f f stu d y to b e th e l a s t w o rd on th is s u b je c t.
Both D r . C a r t e r G o le m b e an d G o v e r n o r W a llic h h a v e r e c e n tly a d d r e s s e d
th e m s e lv e s to th i s s u b je c t an d h a v e c o m e o u t d if f e r e n tly f r o m o u r s ta f f.
T h e ir p o s itio n s , a n d th e p o s itio n s of o th e r s w ho m ig h t a d d r e s s th e s u b je c t,
m u s t an d I ’m s u r e w ill b e c o n s id e r e d .
W ith r e s p e c t to th e i s s u e of 100 p e r c e n t d e p o s it in s u r a n c e , o u r s ta ff
c o n clu d e d th a t w e c o u ld p r o v id e 100 p e r c e n t in s u r a n c e a t l i t t l e a d d itio n a l
c o st o r r i s k .

T h e stu d y f u r t h e r p o in te d o u t th a t 100 p e r c e n t in s u r a n c e w o u ld

e ffe c tiv e ly e lim in a te th e d a n g e r of b a n k r u n s o r r a p id d e p o s it w ith d r a w a ls
and h e n c e w o u ld g iv e u s m o r e tim e to w o rk o u t th e p u r c h a s e an d a s s u m p tio n
tr a n s a c tio n s w e a lw a y s t r y to a r r a n g e .




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10

-

T h e r e a r e tw o n e g a ti e c o n s id e r a tio n s in th e 100 p e r c e n t d e p o s it
in s u r a n c e i s s u e .

F i r s t i s th e f a c t th a t u n d e r o u r p r e s e n t s y s te m , t h e r e a r e

la rg e u n in s u r e d d e p o s it o r s w ho a r e , a t l e a s t to s o m e e x te n t, a t r i s k .

T hey

have a n in c e n tiv e to p o lic e th e b a n k in g s y s te m b y s e le c tin g b a n k s on th e
b a s is of t h e i r s o u n d n e s s , t h e i r c a p it a l, a n d t h e i r c o n s e r v a t i s m .

We w o u ld

be r e lu c ta n t to s e e t h i s m a r k e t f o r c e l o s t b y e lim in a tin g a ll r i s k to d e p o s it o r s
fro m th e s y s te m .
A c tu a lly , o u r s ta f f stu d y in v e s t ig a te d th is i s s u e a n d fo u n d th a t i t i s
not a v e r y s ig n if ic a n t f a c t o r , a t l e a s t in d e p o s it o r c o n s id e r a tio n s r e g a r d in g
d em an d d e p o s it s . A p p a re n tly , w e h a v e b e e n a lm o s t to o s u c c e s s f u l in in s p ir in g
c o n fid e n c e in th e b a n k in g s y s te m in th a t e v e n s o p h is tic a te d l a r g e d e p o s it o r s
do n o t g iv e m u c h th o u g h t to th e p o s s i b i l i t y of l o s s in a b a n k f a i l u r e .
A m o r e s e r i o u s d ra w b a c k to 100 p e r c e n t d e p o s it i n s u r a n c e i s n o t
eco n o m ic b u t p o litic a l.

If th e FD IC i s b e a r in g th e e n t i r e r i s k of b a n k

f a ilu r e , i t w ill a p p e a r lo g ic a l to s o m e th a t th a t b e a c c o m p a n ie d by g r e a t e r
r e g u la tio n of th e b a n k in g s y s te m .
p r e s e n ta tio n on th e s u b je c t.
g e ste d b y D r. G o le m b e .

In f a c t, I m e n tio n e d th a t in m y i n i t i a l

A lo g ic a l e x te n s io n of th a t w a s r e c e n tly s u g ­

H e p o in te d o u t th a t:

"O n ce a ll d e p o s its a r e e x p lic itly i n s u r e d by th e f e d e r a l
g o v e r n m e n t, i t w o u ld b e a s m a l l a n d p o s s ib ly n o t e n tir e ly
ill o g i c a l s te p (a t l e a s t a s v ie w e d b y c e r t a i n C o n g r e s s m e n )
to p u t in to p la c e v a r io u s a s s e t - a l l o c a t i o n p la n s . T h e
i n v e s t m e n t of d e p o s it s , in o th e r w o r d s , c o u ld b e d i r e c t e d
b y la w in to c e r t a i n a lle g e d ly s o c ia lly d e s i r a b l e u s e s ,
r e g a r d l e s s of th e r i s k in v o lv e d . T h e r a tio n a le , o f c o u r s e ,
w o u ld b e th a t s in c e th e g o v e r n m e n t i s a s s u m in g t h e r i s k of
l o s s , i t sh o u ld h a v e a s a y in h o w d e p o s its a r e u s e d . "




-

11

If in s u r a n c e w e r e th e n p r o v id e d to b a n k s to c k h o ld e r s a s w e ll a s
d e p o s ito r s , G o le m b e n o te s :
" . . . n a tio n a liz a tio n of th e b a n k in g s y s te m w o u ld b e b u t a
s te p a w a y . "
F o r m y p a r t th e n , I fin d th e e c o n o m ic a r g u m e n t f o r e x p a n s io n o f
d e p o sit in s u r a n c e c o v e r a g e , p e r h a p s to th e p o in t of 100 p e r c e n t p r o te c tio n
of d e m a n d d e p o s it s , o r s o m e tim e - d e la y e d p r o te c tio n s u c h a s re c o m m e n d e d
by D r. G o le m b e , r a t h e r c o n v in c in g .

I a m v e r y c o n c e r n e d , h o w e v e r, a b o u t

the n o n e c o n o m ic im p lic a tio n s th a t I th in k c o u ld b e d a m a g in g to th e b a n k in g
s y s te m a n d to th e U. S. e c o n o m y , a n d on b a la n c e , w o u ld b e r e l u c t a n t to
change th e p r e s e n t s y s te m .
T he s a m e a n a ly s is h o ld s t r u e f o r a to p ic w h ic h h a s r e c e iv e d c o n ­
s id e r a b le a tte n tio n o v e r th e l a s t few y e a r s - - r e g u la to r y r e f o r m o f b a n k in g
s u p e r v is io n .

A n u m b e r of C o n g r e s s io n a l l e a d e r s w o u ld lik e to s e e s o m e

c o n s o lid a tio n of th e b a n k in g a g e n c ie s .
T h e r e a r e s o m e le g itim a te a r g u m e n ts in f a v o r of c o n s o lid a tio n
of th e b a n k a g e n c ie s , th o u g h I f e e l th a t th e d is a d v a n ta g e s of g r e a t e r c o n ­
so lid a tio n w o u ld o u tw e ig h th o s e a d v a n ta g e s .

A y e a r o r so a g o , h o w e v e r,

the a r g u m e n t w a s b e in g m a d e th a t c o n s o lid a tio n w a s n e c e s s a r y b e c a u s e o u r
p r e s e n t s y s te m of b a n k in g s u p e r v is io n w a s n o t w o rk in g w e ll; th a t th e
p ro b le m s of th e b a n k in g in d u s tr y w e r e d u e to s h o r tc o m in g s of th e b a n k
s u p e r v is o r s ; a n d th a t th e p r e s e n t s t r u c t u r e of b a n k s u p e r v is io n h a d r e s u lte d
in m a s s iv e p u b lic l o s s of c o n fid e n c e in o u r b a n k in g s y s te m .

T h is a r g u m e n t

should h a v e b e e n p u t to r e s t b y th e c o u r s e of e v e n ts of th e p a s t fe w y e a r s .




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12

-

The d is c u s s io n of r e g u la to r y r e f o r m c a n go o n , b u t i t s h o u ld p r o c e e d on th e
m e rits of th e s itu a tio n .

We c a n d i s c u s s w h e th e r th is p la n o r th a t p la n w ill

r e p r e s e n t r e a l im p r o v e m e n t o v e r th e p r e s e n t s y s te m , w ith o u t fe e lin g th a t
some c h a n g e i s n e c e s s a r y b e c a u s e th e p r e s e n t s t r u c t u r e of s u p e r v is io n h a s
failed to m a in ta in th e c o n fid e n c e of th e p u b lic in o u r b a n k in g s y s te m .
W h ile tim e d o e s n o t a llo w a f u ll d is c u s s io n of th e i s s u e of r e g u la to r y
agency s t r u c t u r e , I w o u ld lik e to c o m m e n t b r i e f l y on a fe w p o in ts th a t h a v e
re c e iv e d r e c e n t a tte n tio n in th e p r e s s .

T h is m a y b e a p a r t i c u l a r l y a p p r o ­

p ria te tim e to do so s in c e , in v ie w of m y f o r th c o m in g d e p a r t u r e f r o m th e
FDIC, i t i s c l e a r th a t I h a v e no p e r s o n a l in v o lv e m e n t in th e f u tu r e d i s t r i ­
bution of s u p e r v i s o r y r e s p o n s i b i l i t i e s .
A s I h a v e in d ic a te d b e f o r e , I b e lie v e th a t th e p r e s e n t s y s te m of
c o o rd in a tio n of b a n k in g s u p e r v is io n on th e F e d e r a l le v e l w o rk s r a t h e r
well.

In k e e p in g w ith m y v ie w s a s to th e p r im e im p o r ta n c e of d e p o s it

in s u ra n c e to b a n k in g s u p e r v is io n , I h a v e s u g g e s te d th a t a m e m b e r of
the B o a rd of D i r e c t o r s of th e F D IC s e r v e a s a n o n v o tin g m e m b e r of th e
F e d e ra l R e s e r v e B o a r d .

T h e C o m p t r o l l e r ’s O ffice sh o u ld b e r e o r g a n iz e d

as a t h r e e - m a n b o a r d , a n d a m e m b e r of th e F D IC B o a r d of D i r e c t o r s sh o u ld
serv e on th a t b o a r d a s w e ll.

T h is p r o p o s a l w o u ld im p r o v e c o o r d in a tio n

w ithout e lim in a tin g th e a d v a n ta g e s I s e e in th e d i v e r s i t y an d o p p o rtu n ity
for in n o v a tio n in o u r p r e s e n t t r i p a r t i t e s t r u c t u r e .

F u r th e r , such an

a p p ro a c h w o u ld e lim in a te th e u n d e s e r v e d c r i t i c i s m th a t th e C o m p t r o l l e r 's
Office h a s r e c e iv e d o v e r th e y e a r s a s r e f le c tin g th e a r b i t r a r y w h im s of one
in d iv id u a l.




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W hen a l l i s s a id , h o w e v e r, c o n c e r n in g th e s t r u c t u r e of F e d e r a l
s u p e rv is io n of b a n k in g , I m u s t a g r e e w ith th e r e c e n t c o m m e n ts of G e o rg e
L e M a is tre , m y c o lle a g u e on th e F D IC B o a r d of D i r e c t o r s , w ho h a s p o in te d
out th a t a m u c h m o r e s e r i o u s p r o b le m of o v e r la p an d d u p lic a tio n of s u p e r ­
v iso ry r e s p o n s i b i l i t i e s e x is t s b e tw e e n F e d e r a l an d S ta te b a n k in g s u p e r v is io n ,
I c a m e to th e F D IC a s D e p u ty to F r a n k W ille , w ho h a d a n i m p r e s s i v e
re c o rd a s a S ta te b a n k in g s u p e r v i s o r .
State b a n k in g s u p e r v is io n .

H e h a d a s tr o n g d e s i r e to s tr e n g th e n

O ne of m y m a jo r t a s k s a s h is D e p u ty w a s th e

in itia tio n a n d o r g a n iz a ti o n of o u r e x p e r im e n t in t h r e e s t a t e s in F D IC w ith ­
d raw al f r o m b a n k e x a m in a tio n f o r t h r e e y e a r s .

I lo g g e d th o u s a n d s of a i r

m ile s in a tte m p tin g to s e l e c t s t a t e s th a t w e th o u g h t c a p a b le of a s s u m in g
this r e s p o n s ib il ity on t h e i r ow n.
as C h a irm a n .

I c o n tin u e d m y i n t e r e s t in th is p r o j e c t

E v e n th o u g h I h a v e p a r t i c i p a t e d in S ta te g o v e r n m e n t, an d

p h ilo s o p h ic a lly f a v o r r e l i a n c e on S ta te an d lo c a l i n i tia tiv e r a t h e r th a n
F e d e r a l w h e n e v e r p o s s ib le , I w a s r e lu c ta n t ly f o r c e d to c o n c lu d e th a t th e
d e le g a tio n of e x a m in a tio n r e s p o n s i b i l i t y to th e s t a t e s c o u ld n o t b e e x p a n d e d
to b e c o m e th e b a s i c a p p r o a c h to s u p e r v is io n of S t a t e - c h a r t e r e d b a n k s .
Even a f t e r c a r e f u l l y s e le c tin g th e t h r e e s t a t e s f o r o u r e x p e r im e n t a s th e
s ta te s w h e r e th e e x p e r im e n t h a d th e g r e a t e s t c h a n c e f o r s u c c e s s , th e m o s t
th a t c a n b e s a id i s th a t th e e x p e r im e n t w o rk e d f a i r l y w e ll in tw o of th e
s ta te s .

W hile t h e r e a r e p r o b a b ly a v e r y fe w a d d itio n a l s t a t e s w h ic h a r e

c a p a b le of g r e a t e r r e s p o n s ib il ity f o r e x a m in a tio n , th e a b a n d o n m e n t of o u r
e x a m in a tio n r e s p o n s i b i l i t y to a ll s t a t e s a s a b a s i s f o r d iv is io n of r e s p o n ­
s ib ility in b a n k s u p e r v is io n i s j u s t n o t f e a s ib le .




A s D ire c to r L e M a is tre has

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s u g g e s te d , i t m a y m a k e m o r e s e n s e f o r th e s t a t e s to le a v e th e e x a m in a tio n
fie ld to th e F D IC a n d to c o n c e n tr a te on p r o b le m s itu a tio n s , c o n s u m e r
p r o te c tio n la w s , a n d o th e r a r e a s in w h ic h th e y h a v e d e m o n s t r a t e d t h e i r
s tr e n g th s .
A t th e p r e s e n t tim e , t h e r e a r e d i s c u s s io n s g o in g on in th e b a n k in g
in d u s tr y a n d in th e C o n g r e s s c o n c e r n in g s o m e p o s s ib le m a j o r c h a n g e s in
the s t r u c t u r e of th e f in a n c ia l s y s te m a n d th e r o le a n d f u n c tio n s of v a r io u s
fin a n c ia l in s t i t u t i o n s .

P r o p o s a l s f o r th e p a y m e n t of i n t e r s t on d e m a n d

d e p o s its , o r f o r n a tio n w id e NOW a c c o u n ts p r o m i s e f u n d a m e n ta l c h a n g e s in
the w ay b a n k s do t h e i r b u s i n e s s a n d in th e n a t u r e of b a n k c o m p e titio n w ith
each o th e r a n d w ith t h r i f t i n s t i t u t i o n s .

T h e r e a r e goo d a r g u m e n ts f o r an d

a g a in s t th e s e c h a n g e s , b u t if th e b a n k in g s y s te m w e r e w a v e rin g on th e
b rin k of c o lla p s e , i t w o u ld b e im p o s s i b le to d i s c u s s th e m e r i t s of su c h
fu n d a m e n ta l c h a n g e s a t th is tim e .

I t i s b e c a u s e c o n fid e n c e h a s b e e n m a i n ­

ta in e d in th e s ta b i l i t y of th e b a n k in g s y s te m th a t m a j o r c h a n g e s c a n b e
d is c u s s e d w ith o u t c o n c e r n th a t a d o p tio n of s u c h p r o p o s a ls w o u ld s h a k e th a t
c o n fid e n c e .

T h a t i s , w e c a n d i s c u s s w h e th e r n a tio n w id e NOW a c c o u n ts a r e

d e s ir a b le o r n o t d e s i r a b l e f r o m th e p o in t of v ie w o f th e g e n e r a l p u b lic
i n te r e s t .

We do n o t h a v e to b e c o n c e r n e d th a t im p o s itio n of th is k in d of

shock to th e b a n k in g s y s te m w o u ld d is t u r b b a n k c u s t o m e r c o n fid e n c e in th e
a b ility of th e s y s te m to h a n d le th a t s o r t of sh o c k .
I th in k t h e s e e x a m p le s c o u ld b e m u ltip lie d , b u t th e b a s ic p o in t is
c le a r .

P u b lic c o n fid e n c e in th e b a n k in g s y s te m i s a t a h ig h le v e l, d e s p ite

the u n d e n ia b le p r o b le m s of th e b a n k in g in d u s t r y o v e r th e l a s t few y e a r s .




- 15 -

To a c o n s id e r a b le e x te n t, t h a t c o n fid e n c e i s d u e to p u b lic c o n fid e n c e in
the F e d e r a l d e p o s it in s u r a n c e s y s te m , a n d to th e w ay th e F e d e r a l D e p o s it
I n s u r a n c e C o r p o r a tio n h a s c a r r i e d o u t i t s r e s p o n s i b i l i t i e s .

T h e f a c t th a t

th a t c o n fid e n c e e x is t s a llo w s u s to d e a l w ith a n u m b e r of i s s u e s a ffe c tin g
th e b a n k s y s te m in a r a t i o n a l m a n n e r .

We c a n c o n s i d e r p u b lic b e n e f its

and c o s t s , a n d n o t b e h e ld h o s ta g e to f e a r s o f a d v e r s e p u b lic r e a c tio n .




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