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FEDERAL DEPOSIT INSURANCE CORPORATION PR-15-77 (3 -2 -7 7 ) FOR RELEASE UPON DELIVERY R e m a r k s by- R o b e r t E . B a r n e tt , C h a ir m a n 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 b e f o r e th e T r u s t e e s ' S e m in a r S a v in g s B a n k s A s s o c ia tio n of N ew Y o rk S ta te A r d e n H o u s e , H a r r i m a n , N ew Y o rk M a r c h 2, 1977 FEDERAL DEPO SIT IN SU RAN CE CO RPO RATIO N, 550 Seventeenth St. N.W., Washington, D.C. 20429 202-389-4221 L a s t w e e k , th e s e n io r s ta f f of th e F D IC a n d I m e t in B o s to n w ith th e c h ie f e x e c u tiv e o f f i c e r s of o v e r 125 m u tu a l s a v in g s b a n k s in N ew E n g la n d . In J a n u a r y , w e h a d a s i m i l a r m e e tin g in N ew Y o rk C ity . T h e se m e e tin g s fo llo w e d c lo s e ly th e f o r m a t of m e e tin g s f i r s t o r g a n iz e d b y F r a n k W ille w h e n h e w a s C h a ir m a n of th e F D IC . T he p u r p o s e of th e s e m e e tin g s i s to f a c i l i t a t e c o n ta c t b e tw e e n th e s a v in g s b a n k in d u s tr y a n d th e F D IC . W e w a n t to k n o w th e a ttitu d e of th e s a v in g s b a n k e r s on a n u m b e r of c u r r e n t i s s u e s a n d w e w a n t to l e a r n a b o u t a n y p r o b le m s th a t w e m a y n o t b e a w a re o f. L ik e w is e , w e w a n t th e s a v in g s b a n k e r s to k n o w o u r v ie w s o n th e s e i s s u e s a n d to h a v e a n o p p o r tu n ity f o r d is c u s s io n of d if f e r e n c e s . The i s s u e s d is c u s s e d r a n g e f r o m l e g i s l a t i v e m a t t e r s to m a t t e r s of in d iv id u a l b a n k s u p e r v is io n . The m e e tin g s w e r e f r a n k a n d liv e ly w ith c o n tr a s tin g a n d c o n flic tin g p o in ts of v ie w f r e e l y e x p r e s s e d . T h e r e w a s , h o w e v e r, a m o r e c h e e r f u l to n e to th e m e e tin g th a n o t h e r s w e h a v e h a d in th e p a s t w ith r e p r e s e n t a t i v e s of th e s a v in g s b a n k i n d u s t r y . F o r m o s t s a v in g s b a n k s , i t w a s p o s s ib le to lo o k b a c k on a r e l a t i v e l y s u c c e s s f u l y e a r l a s t y e a r , an d lo o k f o r w a r d w ith o p tim is m to 1977. N in e te e n s e v e n t y - s i x w a s a g o o d y e a r f o r th e m u tu a l s a v in g s b a n k in d u s t r y . D e p o s its r o s e by o v e r $5 b illio n on a n e t b a s i s f o r th e in d u s tr y , a s ig n if ic a n t im p r o v e m e n t o v e r 1975 w h ic h w a s i t s e l f a good y e a r in t e r m s of d e p o s it g ro w th . O p e ra tin g r e s u l t s f o r th e y e a r w e r e a ls o r a t h e r g ood. - 2 - O p e ra tin g in c o m e a s a p e r c e n ta g e of a s s e t s r o s e by 21 b a s i s p o in ts w h ile i n t e r e s t e x p e n s e h a d i t s s m a l l e s t i n c r e a s e in m a n y y e a r s . E v e n th o u g h o p e r a tin g e x p e n s e s c o n tin u e d t h e i r i n c r e a s e in 1976, n e t in c o m e w a s w e ll a b o v e t h a t of th e m o s t r e c e n t y e a r s . N e t in c o m e r e p r e s e n t e d a b o u t 45 c e n ts p e r $100 of a v e r a g e a s s e t s c o m p a r e d w ith 34 c e n ts in 1974 a n d 36 c e n ts in 1 9 7 5 . T h is i s s u b s ta n tia l im p r o v e m e n t e v e n th o u g h i t le a v e s 1976 e a r n in g s w e ll b e h in d th e a v e r a g e 55 c e n ts p e r $100 o f a s s e t s e a r n e d in th e 1 9 7 2 -1 9 7 3 p e r io d . W e lo o k f o r w a r d to c o n tin u e d im p r o v e m e n t in 1 9 7 7 . D e p o s it in flo w s h a v e b e e n v e r y s tr o n g so f a r th is y e a r , an d w e e x p e c t th a t f a v o r a b le d e p o s it t r e n d s w ill p r e v a i l th ro u g h o u t th e y e a r , th o u g h p e r h a p s n o t q u ite a t th e r e c o r d le v e l s of 1976 . W e a r e lo o k in g f o r n e t in c o m e of a b o u t 52 c e n ts p e r $100 o f a v e r a g e a s s e t s in 1 9 7 7 . The o n ly s ig n if ic a n t b la c k lin in g I s e e on th i s s i l v e r c lo u d i s th e f a c t th a t e a r n in g s , d e s p ite t h e i r im p r o v e m e n t in r e c e n t y e a r s , h a v e n o t b e e n s u ffic ie n t to k e e p p a c e w ith th e v e r y r a p id g ro w th of s a v in g s b a n k d e p o s it s . H e n c e , c a p ita l r a tio s h a v e te n d e d to d e c lin e , a l b e i t m o d e s tly , a n d th is w a s a m a t t e r th a t w a r r a n t e d c o n s id e r a b le d is c u s s i o n a t o u r m e e tin g w ith C E O s of m u tu a l s a v in g s b a n k s . I t i s a ls o a m a t t e r o f c o n c e r n to s a v in g s b a n k s t r u s t e e s to w h ic h I w ill r e t u r n s h o r tly . We c a n n o t r e a l l y d is c u s s th e m a t t e r of c a p it a l a d e q u a c y , h o w e v e r , a p a r t f r o m d is c u s s io n o f th e a s s e t q u a lity of th e in d iv id u a l i n s titu tio n s t h a t m a k e up th e in d u s tr y . - 3 - S a v in g s b a n k s a r e im p o r t a n t r e a l e s t a t e le n d in g i n s titu tio n s . The s a v in g s b a n k i n d u s t r y , h o w e v e r , h a s a v o id e d m a n y of th e r e a l e s ta te le n d in g p r o b le m s th a t h a v e p la g u e d o th e r r e a l e s ta te l e n d e r s , s u c h a s th e c o m m e r c i a l b a n k s a n d th e R E I T s . A s c o m p a r e d w ith c o m m e r c i a l b a n k s , y o u r r e a l e s t a t e le n d in g o p e r a tio n s h a v e b e e n e i t h e r lu c k i e r o r s m a rte r. M u tu a l s a v in g s b a n k s lo a n l o s s e s h a v e a v e r a g e d a b o u t .0 3 p e r c e n t of lo a n s f o r th e l a s t fe w y e a r s . 3 c e n ts p e r $ 1 ,0 0 0 of lo a n s . That is , lo s s e s h av e b e en about A s a p e r c e n ta g e of to ta l lo a n s ( r e a l e s ta te I a n d a ll o t h e r s ) , c o m m e r c i a l b a n k l o s s e s h a v e b e e n a b o u t tw e n ty tim e s a s h ig h . P u t a n o th e r w a y , c o m m e r c i a l b a n k lo a n s a r e a b o u t e ig h t tim e s th e v o lu m e of m u tu a l s a v in g s b a n k l q a n s , b u t t h e i r l o s s e s a r e 150 tim e s as g re a t. A g r e a t p a r t of th e s e l o s s e s a r e in r e a l e s t a t e . L oans \ c l a s s i f i e d a d v e r s e ly b y e x a m i n e r s r a n a b o u t 3 .6 p e r c e n t of lo a n s f o r m u tu a l s a v in g s b a n k s in 1976 a s c o m p a r e d w ith 4 . 8 p e r c e n t f o r th e c o m m e rc ia l b a n k s. T h ese' c o m p a r is o n s c a n n o t b e to ta lly r e a s s u r i n g , h o w e v e r, b e c a u s e w ith r e s p e c t to b o th lo a n c l a s s i f i c a t i o n s an d lo a n l o s s e s , th e tr e n d o v e r tim e h a s b e e n u n f a v o r a b le f o r th e s a v in g s b a n k s a s w e ll a s th e c o m m e r c i a l b an k s. In 1970, f o r e x a m p le , m u tu a l s a v in g s b a n k lo a n l o s s e s w e r e a lm o s t n o n e x is te n t, a t a b o u t 3 c e n ts p e r $1 0 , 000 of lo a n s . B e c a u s e of t h e s e t r e n d s , i n c r e a s e d a tte n tio n h a s b e e n g iv e n o v e r th e l a s t y e a r o r so to 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 . T h at i s l a r g e ly , - 4 - b u t n o t to ta lly , a c o m m e r c i a l b a n k p r o b le m . A s of J a n u a r y 31, th e r e w e r e 383 F D IC i n s u r e d b a n k s o n o u r p r o b le m l i s t . a b o u t 2 1 /2 p e r c e n t of a ll i n s u r e d b a n k s . a r e m u tu a l s a v in g s b a n k s . p r o b le m s . T h is n u m b e r is Of th o s e 383 b a n k s , s e v e n Two of th o s e a r e c o n s id e r e d to b e s e r io u s T h e s e n u m b e r s of p r o b le m s a v in g s b a n k s a r e v e r y s m a ll, b u t i t c o n t r a s t s w ith th e s itu a tio n o f a fe w y e a r s ag o w h en w e h a d p r a c t i c a l l y no m u tu a l s a v in g s b a n k s c l a s s i f i e d a s p r o b le m s . The i s s u e h a s b e e n r a i s e d in th is c o n n e c tio n a s to w h e th e r a b e t t e r jo b of b a n k s u p e r v is io n c o u ld h a v e p r e v e n te d th e g ro w th of b a n k p r o b le m s in r e c e n t y e a r s . B u t I th in k th is m i s s e s th e m a in p o in t. T h e r o le o f f in a n c ia l i n s t i tu tio n s in o u r e c o n o m y i s to ta k e r i s k s in le n d in g a c t i v i t i e s . We r e c o g n iz e th a t b a n k in g i s a r i s k - t a k i n g b u s i n e s s a n d w e m u s t r e ly on m a r k e t f o r c e s , on m a n a g e m e n t, on d e p o s i t o r s , a n d p a r t i c u l a r l y on t r u s t e e s in a d d itio n to o u r s u p e r v i s o r y ju d g m e n t to d e t e r m i n e th e a p p r o p r ia te d e g r e e of r i s k f o r in d iv id u a l in s t i t u t i o n s . I do n o t b e lie v e th a t e v e n th e m o s t o u ts p o k e n c r i t i c s of b a n k in g a n d b a n k r e g u l a t o r s w a n t th e r e g u la to r s to ru n th e b a n k s r a t h e r th a n th e b a n k e r s . W e c a n a l l a g r e e th a t th a t i s n o t o u r fu n c tio n . In s o m e c a s e s , G o v e rn m e n t p o lic y , on b o th th e s ta te an d f e d e r a l le v e l, h a s e n c o u r a g e d a s h if t to w a r d a r i s k i e r b a n k in g p o s tu r e . We h a v e i s s u e d r e g u la tio n s o n " le e w a y in v e s t m e n t s " w h ic h h a v e b ro a d e n e d th e ty p e s of in v e s t m e n ts t h a t c a n b e m a d e . By d is a p p r o v a l of re d lin in g an d - 5 - p ro m o tin g th e c o n c e p t of e q u a l c r e d i t o p p o rtu n ity , w e h a v e a c tiv e ly p u s h e d b a n k s in to le n d in g th a t th e y m a y f e e l (th o u g h I do n o t n e c e s s a r i l y a g re e ) is m o re ris k y . The F D IC h a s b e e n in th e v a n g u a r d of th o s e w ho i n s i s t th a t th e B an k M e r g e r A c t b e i n t e r p r e t e d to p e r m i t m o r e c o m p e titio n b e tw e e n b a n k s : th is a p p r o a c h h a s a s i t s c o r o l l a r y an u n w illin g n e s s to p r o t e c t c o m p e t ito r s f r o m th e r e s u l t s of c o m p e titio n - - t h a t i s , o n e w in s , o n e l o s e s . I f e e l th e s a m e w ay a b o u t r e s t r i c t i o n s on th o s e E F T d e v e lo p m e n ts w h ic h a r e d e s ig n e d p r i m a r i l y to p r o t e c t l e s s e f f ic ie n t b a n k s . T h is in no w a y s u g g e s ts th a t th e F D IC i s in d if f e r e n t to , o r i s p le a s e d b y , b a n k f a i l u r e s . F a r fro m it. I t i s o u r d e s i r e to m in im iz e b o th th e n u m b e r of b a n k f a i l u r e s a n d th e r e s u l t s o f s u c h f a i l u r e s . O ur r e v ie w of o u r p r o c e d u r e s a n d p o lic ie s fo llo w in g th e s e v e r a l l a r g e b a n k f a i l u r e s of r e c e n t y e a r s h a s le d to s e v e r a l c h a n g e s . Of m o s t s ig n if ic a n c e to th is g ro u p i s o u r fin d in g th a t m o s t b a n k f a i l u r e s r e s u l t f r o m im p r u d e n t o r s e l f - s e r v i n g a c tio n th a t d i r e c t o r s c o u ld h a v e an d s h o u ld h a v e fo u n d o u t a b o u t, a n d d o n e s o m e th in g a b o u t. In f a c t, in m o s t b a n k f a i l u r e s , w e e n d up w ith a s u it a g a in s t s o m e o r a ll of th e d i r e c t o r s of th e c lo s e d b a n k in w h ic h w e c la i m th a t th e d i r e c t o r s w e r e n e g lig e n t in m e e tin g t h e i r r e s p o n s i b i l i t i e s . S o m e c a s e s of b a n k f a i l u r e s , of c o u r s e , a r e a r e s u l t of e m b e z z le m e n ts th a t c a n n o t b e d e te c te d in t im e , e v e n th o u g h th e d i r e c t o r s a r e g iv in g - 6 d u e d ilig e n c e to t h e i r r e s p o n s i b i l i t i e s . d ire c to rs . - N o rm a lly , w e w o u ld n o t s u e s u c h In o th e r c a s e s , th e d i r e c t o r s a r e d i r e c t l y in v o lv e d in a n d b e n e f ittin g f r o m th e s e l f - s e r v i n g p o lic ie s of th e b a n k th a t r e s u l t in f a i l u r e . O b v io u s ly , w e h o p e to r e c o v e r a ll th a t w e c a n f r o m th o s e g u ilty of s u c h m a lf e a s a n c e . M o re c o m m o n ly , h o w e v e r , w e fin d d i r e c t o r s g u ilty s im p ly of n o n f e a s a n c e , of n o t p a y in g s u f f ic ie n t a tte n tio n to th e c o n d itio n , th e p o lic ie s a n d th e a c tio n s of th e b a n k . W h ile w e m a y f e e l s o m e s y m p a th y f o r th e p lig h t o f th o s e d i r e c t o r s w ho m a y h a v e b e e n s im p ly d u p e d by m a n a g e m e n t o r o th e r d ir e c to r s , n e v e r th e le s s , a s a r e c e iv e r , w e h av e a le g a l o b lig a tio n a s r e p r e s e n t a t i v e of th e c r e d i t o r s of th e b a n k to s e e k r e c o v e r y f o r l o s s e s f r o m d i r e c t o r s w ho d id n o t m e e t t h e i r le g a l r e s p o n s ib ilitie s . A s a s u p e r v i s o r , w e a r e in s i s t i n g th a t d i r e c t o r s p a y m o r e a tte n tio n to t h e i r r e s p o n s i b i l i t i e s . The d e m is e of th e U . S. N a tio n a l B an k in S an D ie g o , w h ic h h e lp e d a w a k e n th e c o u n tr y to th e f a c t th a t a b i l l i o n - d o l l a r b a n k c o u ld f a il, s e r v e d to fo c u s th e a tte n tio n of th e p u b lic an d b a n k r e g u l a t o r s on th e p r o b le m of in s id e r a b u se . A s y o u u n d o u b te d ly k n o w , th e USNB in s o lv e n c y w a s c a u s e d by th e e x te n s io n of b e tw e e n 4 0 0 -4 5 0 m illi o n d o l l a r s in lo a n s to m o r e th a n 200 p e r s o n s a n d e n titie s c o n tr o lle d b y o r a s s o c i a t e d w ith C . A rn h o lt S m ith . P r o m p te d b y th e U. S. N a tio n a l f a i l u r e , th e F D IC b e g a n a re v ie w of th e m a t t e r of i n s i d e r a b u s e a n d F D IC p o lic ie s an d p r a c t i c e s w ith r e s p e c t to i t . U pon r e v ie w , a b u s iv e s e lf - d e a lin g w a s fo u n d to b e a s ig n if ic a n t - 7 - c o n tr ib u tin g f a c t o r in m o r e th a n h a lf of a ll b a n k f a i l u r e s s in c e I9 6 0 . L o s s e s to th e d e p o s it i n s u r a n c e fu n d a s a r e s u l t of th e s e f a i l u r e s a r e lik e ly to e x c e e d $175 m illi o n . M o r e o v e r , a re v ie w of e x is tin g an d p a s t p r o b le m b a n k c a s e s a ls o r e v e a le d a h ig h in c id e n c e of a b u s iv e s e lf - d e a lin g a s a s o u r c e o f s e r i o u s d if f ic u lty . In a d d itio n to t h e s e c l e a r l y q u a n tifia b le e f f e c ts , e v e n w h e n th e im m e d ia te r e s u l t i s n o t a b a n k 's f a i l u r e o r i t s d e s ig n a tio n a s a p r o b le m b a n k , a t r a n s a c t i o n th a t i s n o t e ffe c te d on a n a r m s - l e n g t h b a s i s m a y le a d to a d im u n itio n of th e b a n k 's e a r n in g s and a n e r o s i o n of i t s c a p i t a l . A ls o s u c h t r a n s a c t i o n s r e p r e s e n t a m i s a l l o c a - tio n of th e c o m m u n ity 's d e p o s ite d fu n d s . In s h o r t, th e re v ie w in d ic a te d a n e e d f o r m o r e v ig o r o u s s u p e r v is io n of i n s i d e r t r a n s a c t i o n s b y b o th th e b o a r d s of d i r e c t o r s of b a n k s a n d th e F D IC . B a s e d u p o n th is r e v ie w , th e F D IC a d o p te d a r e g u la tio n g o v e rn in g i n s i d e r t r a n s a c t i o n s of c o m m e r c i a l b a n k s a n d m u tu a l s a v in g s b a n k s e f f e c tiv e M ay 1, 1 9 7 6 . O u r e x p e r ie n c e w ith a b u s e of i n s i d e r d e a lin g s le a d in g to b a n k f a i l u r e h a s c o m e f r o m th e c o m m e r c i a l b a n k s e c t o r , b u t i t s e e m d p r u d e n t to e x te n d c o v e r a g e of th e r e g u la tio n to m u tu a ls a s w e ll. T he r e g u la tio n r e q u i r e s th a t th e b o a r d of t r u s t e e s of e a c h in s u r e d m u tu a l s a v in g s b a n k r e v ie w a n d a p p ro v e e a c h i n s i d e r t r a n s a c t i o n in v o lv in g a s s e t s o r s e r v i c e s h a v in g a f a i r m a r k e t v a lu e g r e a t e r th a n a s p e c ifie d a m o u n t w h ic h v a r i e s w ith th e s iz e of th e b a n k . The p u r p o s e of th is p r o v is io n i s to i n s u r e th a t b o a r d s of t r u s t e e s p o lic e i n s i d e r t r a n s a c t i o n s to i n s u r e I - 8 - th a t th e y a r e b o th so u n d a n d in th e b a n k 's b e s t i n t e r e s t . In a d d itio n to th e re v ie w a n d a p p r o v a l r e q u i r e m e n t s of th e r e g u la tio n , c e r t a i n r e c o r d k e e p in g r e q u i r e m e n t s a r e s p e lle d o u t w h ic h a r e in te n d e d to f o s t e r e f f e c tiv e i n t e r n a l c o n tr o ls o v e r s u c h t r a n s a c t i o n s by th e b a n k i t s e l f an d to f a c i l i t a t e e x a m i n e r re v ie w of s u c h t r a n s a c t i o n s . In a d d itio n to s p e llin g o u t re v ie w a n d a p p r o v a l an d re c o r d k e e p in g r e q u i r e m e n t s , th e r e g u la tio n m a k e s i t c l e a r th a t f o r m a l c o m p lia n c e w ith th e s e r e q u i r e m e n t s n e i t h e r r e l i e v e s th e b a n k of i t s d u ty to c o n d u c t i t s o p e r a tio n s in a s a f e a n d so u n d m a n n e r n o r p r e v e n ts th e C o r p o r a tio n f r o m ta k in g a p p r o p r i a t e s u p e r v i s o r y a c tio n w ith r e s p e c t to an y i n s i d e r t r a n s a c tio n . T he r e g u la tio n m a k e s i t c l e a r th a t s u c h a c tio n , in c lu d in g le g a l a c tio n u n d e r S e c tio n 8 in th e F e d e r a l D e p o s it I n s u r a n c e A c t w ill b e ta k e n w h e r e a n i n s i d e r t r a n s a c t i o n r e p r e s e n t s u n s a f e an d u n s o u n d b a n k in g p ra c tic e s . A lth o u g h th e C o r p o r a tio n h a s d e te r m in e d th a t i n s i d e r tr a n s a c t i o n s r e q u i r e s p e c ia l s u p e r v is io n b y b a n k b o a r d s of t r u s t e e s an d c lo s e s c r u tin y b y th e C o r p o r a t i o n 's e x a m i n e r s in o r d e r to e n s u r e t h e i r f a i r n e s s , w e h a v e c a r e f u l ly s o u g h t to a v o id u n r e a l i s t i c p r o h ib itio n s o r u n d u ly b u r d e n s o m e r e c o r d in g r e q u i r e m e n t s . I n s te a d , th e C o r p o r a tio n h a s a tte m p te d to d e v e lo p r e q u i r e m e n t s w h ic h w ill p la c e r e s p o n s i b i l i t y w h e r e i t b e lo n g s - - i n th e h a n d s of th e b a n k 's b o a r d s - - a n d to s tr e n g th e n e x is tin g b a n k a n d s u p e r v i s o r y p r o c e d u r e s f o r p o lic in g i n s i d e r t r a n s a c t i o n s . In d o in g s o , w e - 9 - h o p e to c o r r e c t a s e r i o u s a n d c o n tin u in g s o u r c e of a b u s e w ith o u t e x c e s s iv e b a n k o r r e g u la to r y c o s t s . In th e s e v e r a l m o n th s s in c e i t s a d o p tio n , w e a t th e C o r p o r a tio n h a v e a tte m p te d to m o n ito r c a r e f u l l y th e o p e r a tio n o f th is r e g u la tio n by s e e k in g f e e d b a c k b o th f r o m o u r ow n e x a m i n e r s an d f r o m b a n k e r s . p le a s a n tly s u r p r i s e d . We h av e b een I t a p p e a r s th a t m o s t b a n k s w h ic h w e r e g u la te h a v e b e e n a b le to i m p le m e n t th e r e q u i r e m e n t s of th is r e g u la tio n w ith o u t u n d u e b u r d e n o r c o s t a n d th a t m a n y in f a c t f e e l th a t i t h a s c e r t a i n s a lu t a r y b e n e f its f r o m t h e i r p o in t of v ie w - - s o m e th in g of a n o v e lty in o u r e x p e r i e n c e w ith th e a d o p tio n of n ew r e g u la tio n s . In s o m e c a s e s , m a n a g e m e n t h a s to ld u s th a t th e r e g u la tio n m a k e s i t e a s i e r to t u r n dow n u n r e a s o n a b le p r o p o s a ls of i n s i d e r s f o r f a v o r a b le t r e a t m e n t . T h is i s n o t to s a y , of c o u r s e , th a t c o m p lia n c e i s p e r f e c t o r th a t th e r e g u la tio n c a n n o t b e im p r o v e d . E x a m in e r s in s o m e r e g io n s r e p o r t a s ig n if ic a n t n u m b e r of v io la tio n s of th e r e v ie w a n d a p p r o v a l a n d r e c o r d k e e p in g r e q u i r e m e n t s of th e r e g u la tio n - - a p h e n o m e n o n e x p e r ie n c e d e a r l y in lif e o f an y n ew r e g u la tio n . A few b a n k e r s h a v e c o m p la in e d a b o u t s o m e a s p e c t s of th e r e g u la tio n - - m o s t p a r t i c u l a r l y a b o u t th e in c lu s io n of l a r g e d e p o s its in th e c o v e r e d t r a n s a c ti o n s . F DIC s ta f f a r e in th e p r o c e s s o f e v a lu a tin g b a n k e r a n d e x a m in e r c r i t i c i s m o f th e v a r io u s f a c e t s of th e r e g u la tio n ; I w o u ld e x p e c t th a t th is e v a lu a tio n w ill n o t r e s u l t in a n y m a j o r m o d if ic a tio n of th e re g u la tio n . W e h o p e th a t th e in tr o d u c tio n an d e n f o r c e m e n t of th is r e g u la tio n h a s r e d u c e d o n e o f th e m o r e d e s t r u c t i v e e le m e n ts of r i s k in b a n k in g . - 10 - W h ile w e r e c o g n iz e t h a t b a n k in g s h o u ld n o t b e a p e r f e c t ly r i s k l e s s b u s i n e s s , w e a r e c o n c e r n e d th a t b a n k s n o t m o v e to o f a r in th e d ir e c tio n of ris k . F in d in g th e a p p r o p r i a t e p o s itio n f o r a b a n k b a s e d on i t s lo c a tio n , r e s o u r c e s an d m a n a g e m e n t c a p a b iliti e s is p r i m a r i l y a r e s p o n s ib ility of th e t r u s t e e . O u r p o lic y w ith r e s p e c t to s u p e r v is io n of c o m m e r c i a l b a n k s i s to r e l y h e a v ily o n a b o a r d of d i r e c t o r s . The r o le of t r u s t e e s ¿n m u tu a l s a v in g s b a n k s i s e v e n m o r e im p o r ta n t. I do n o t w a n t to d i s c u s s th e le g a l fin e p o in ts of d is tin c tio n s b e tw e e n r e s p o n s i b i l i t i e s of c o m m e r c i a l b a n k d i r e c t o r s a n d m u tu a l s a v in g s b a n k t r u s t e e s , b u t t h e r e i s a d if f e r e n c e th a t i s c r u c i a l to u s . C o m m e r c ia l b a n k d i r e c t o r s a r e e le c te d by s to c k h o ld e r s w ho h a v e a f in a n c ia l i n t e r e s t in th e p e r f o r m a n c e of t h e i r b a n k . If th e b a n k ’s p e r f o r m a n c e i s p o o r f r o m th e p o in t of v ie w of th e d iv id e n d s a n d e a r n in g s a c c r u in g to s to c k h o l d e r s , w e c a n e x p e c t p r e s s u r e to re m o v e in e f f e c tiv e d i r e c t o r s . S a v in g s b a n k s do n o t h a v e s to c k h o ld e r s , so to a m u c h g r e a t e r e x te n t th a n in c o m m e r c i a l b a n k s , lo n g e v ity of t r u s t e e s on a b o a r d i s n o t d i r e c t l y r e l a t e d to th e f in a n c ia l p e r f o r m a n c e of th e b a n k . T he t r u s t e e s th u s a r e m u c h m o r e in d e p e n d e n t a s f a r a s t h e i r a b ility to d e te r m in e p o lic y f o r s a v in g s b a n k s th a n a r e d i r e c t o r s of c o m m e r c i a l ban k s. W hen a n e w ly c h a r t e r e d c o m m e r c i a l b a n k s e e k s d e p o s it i n s u r a n c e , w e h a v e s o m e th in g to s a y a b o u t th e s e le c tio n of d i r e c t o r s of th e b a n k . The s a m e w o u ld b e t r u e if a n e w m u tu a l s a v in g s b a n k w e r e e s ta b lis h e d , o r i f a - 11 s a v in g s o r lo a n a s s o c i a t i o n c o n v e r ts to a s a v in g s b a n k . In g e n e r a l, h o w e v e r, w e do n o t h a v e a n y le g a l a u th o r ity to d e te r m in e w ho i s o r i s n o t a m u tu a l s a v in g s b a n k t r u s t e e . W e do n o t e x p e c t o r w a n t a ll t r u s t e e s to b e b a n k e r s b y p r o f e s s i o n , b u t s a v in g s b a n k t r u s t e e s m u s t m a k e s o m e e f f o r t to l e a r n a b o u t b a n k in g a n d to ta k e t h e i r jo b s s e r io u s ly . W e a r e tr o u b le d b y s itu a tio n s w h e r e t r u s t e e s s e r v e s o le ly f o r th e h o n o r o r p r e s t i g e a tta c h e d to b e in g a t r u s t e e , o r b e c a u s e i t i s a f a m ily t r a d i tio n to do s o , a n d w h e r e th e p e r s o n so h o n o r e d d o e s n o t in te n d to b e a n in d e p e n d e n t f o r c e in f o r m in g th e p o lic ie s of th e in s titu tio n . We w ant in f o r m e d a n d i n t e r e s t e d t r u s t e e s . W h ile th e r a n g e of r e s p o n s i b i l i t i e s o f s a v in g s b a n k s t r u s t e e s i s b r o a d , I w o u ld lik e to m a k e a b r i e f c o m m e n t on w h a t I th in k i s th e s in g le m o s t i m p o r ta n t t a s k of a t r u s t e e . e v a lu a tio n of m a n a g e m e n t. T h a t i s th e s e le c tio n a n d c o n tin u o u s I a g r e e w ith th e v ie w th a t t r u s t e e s sh o u ld n o t b e ru n n in g th e b a n k o n a d a y - to - d a y b a s i s , b u t th e b o a r d c a n n o t e s c a p e r e s p o n s i b i l i t y f o r m a n a g e m e n t of th e b a n k . M u ch h a s b e e n w r i t t e n o n th e p r o b le m s of s e le c tin g to p m a n a g e m e n t. I w o u ld p r e f e r to s t r e s s th e n e e d f o r th e b o a r d , a f t e r m a n a g e m e n t h a s b e e n s e le c te d , to d e v e lo p w ith to p m a n a g e m e n t s p e c ific g o a ls an d o b je c tiv e s f o r th e b a n k . W e s e e m a n y p r o b le m b a n k s th a t fin d th e m s e lv e s in t h a t c o n d itio n b e c a u s e of n e b u lo u s g o a ls an d o b je c tiv e s , c o n tr a d ic t o r y g o a ls a n d o b je c t iv e s , a n d a d iv e r g e n c e b e tw e e n th e b o a r d an d th e c h ie f - 12 - e x e c u tiv e o f f ic e r a s to w h a t a r e a p p r o p r ia te g o a ls a n d o b je c tiv e s . Ih is a g a in i s a m o r e s e r io u s p r o b le m f o r m u tu a l s a v in g s b a n k s th a n f o r c o m m e rc ia l b an k s. F o r th e c o m m e r c i a l b a n k , w e k now th a t th e lo n g - r u n o b je c tiv e of th e i n s t itu tio n m u s t b e k e y e d to p r o f its an d p e r h a p s th e m a r k e t 's a s s e s s m e n t of th a t in th e s to c k p r i c e . T h is im p o r ta n t m e a s u r in g ro d i s a b s e n t o r l e s s p r o m in e n t m a m u tu a l s a v in g s b a n k , th u s th e n e e d f o r y o u to b e m o r e e x p lic it c o n c e rn in g y o u r g o a ls an d o b je c tiv e s . O n c e g o a ls a r e e s ta b lis h e d a n d a g r e e d u p o n , to p m a n a g e m e n t sh o u ld b e a s k e d to p r e p a r e p o lic y an d p r o c e d u r a l g u id e lin e s f o r i m p l e m e n tin g t h e s e o b je c t iv e s . T h e s e m u s t b e r e v ie w e d b y th e b o a r d to i n s u r e c o n s is te n c y an d r e a s o n a b l e n e s s , an d c o n tin u o u s c o n tr o l an d m e a s u r e m e n t d e v ic e s m u s t b e b u i l t in to th e s y s te m . It i s h ig h ly im p o r ta n t th a t p r o g r e s s b e m o n ito r e d c o n tin u o u s ly a n d n o t on a o n e s h o t o r o n c e - a - y e a r b u d g e t r e v ie w b a s i s . O ne s p e c if ic a s p e c t of th is r e s p o n s i b i l i t y f o r s e ttin g p o lic ie s a n d p r i o r i t i e s h a s c o m e to th e f o r e th is y e a r an d m u s t b e g iv e n s e r io u s a tte n tio n b y a l l s a v in g s b a n k b o a r d s a n d m a n a g e m e n t. N in e te e n s e v e n ty - s e v e n m a y w e ll b e a y e a r in w h ic h a k e y d e c is io n m u s t b e m a d e b e tw e e n s e e k in g g ro w th o r e a r n i n g s . N in e te e n s e v e n ty - s ix saw a s ig n if ic a n t d ro p in m a r k e t i n t e r e s t r a t e s a c c o m p a n ie d b y a s u b s ta n tia l in flo w of fu n d s to s a v in g s i n s t i t u t i o n s . T h o s e tr e n d s a r e c o n tin u in g , a t l e a s t in th e f i r s t - 13 - p a r t of 1977. A p o te n tia l s q u e e z e on e a r n in g s m a y d e v e lo p f o r s o m e in s titu tio n s w ho fin d t h e i r p o r tf o lio i n t e r e s t in c o m e d e c lin in g w h ile i n t e r e s t c o s t s on d e p o s its a r e r e l a t i v e l y fix e d . M any in s titu tio n s w o u ld lik e to r e d u c e th e i n t e r e s t r a t e th e y a r e p a y in g on d e p o s it s , b u t f e a r th e c o m p e titiv e c o n s e q u e n c e s of s u c h a s te p , th o u g h s o m e n u m b e r of i n s t i t u tio n s , b o th c o m m e r c i a l a n d s a v in g s b a n k s , h a v e m a d e th a t d e c is io n . S e v e r a l in s t i t u t i o n s h a v e u r g e d th e b a n k in g a g e n c ie s to s o lv e th is d ile m m a f o r th e m by r e d u c in g i n t e r e s t r a t e c e il in g s . W hile I c a n n o t p r e d i c t w h a t th e F e d e r a l R e s e r v e , th e H o m e L o a n B an k B o a rd , o r e v e n th e F D IC w ill do in th e m o n th s a h e a d w ith r e s p e c t to a d m in is t r a t i o n of i n t e r e s t r a t e c e i l i n g s , a n d I c e r t a i n l y c a n n o t p r e d i c t w h a t c h a n g e s th e C o n g r e s s w ill m a k e in th e s y s te m , w e m u s t r e c o g n iz e th a t t h e r e a r e s tr o n g p r e s s u r e s o p p o s in g r e d u c tio n of i n t e r e s t r a t e s p a y a b le to c o n s u m e r s b y G o v e rn m e n t a g e n c ie s f i a t . T h u s, w h ile I c a n n o t s a y w h a t th e d e c is io n s o f th e a g e n c ie s w ill b e a s th e y e a r d e v e lo p s , th e w e l l - r u n s a v in g s b a n k w ill n o t b e c o u n tin g on a c tio n by th e G o v e rn m e n t to s o lv e th i s p r o b le m f o r i t , b u t w ill b e m a k in g i t s ow n p la n s a n d d e c is io n s . W e a r e n o t i n d if f e r e n t to th a t d e c is io n . I n o te d e a r l i e r o u r c o n c e r n a b o u t d e c lin in g s u r p lu s r a t i o s in s a v in g s b a n k s . T h is c o n c e r n c o u ld b e c o m e m o r e s e r i o u s if w e sa w in 1977 a s q u e e z in g of th e s u r p lu s r a tio f r o m b o th e n d s , t h a t i s , a r a p id e x p a n s io n in s a v in g s b a n k d e p o s its - 14 - r e s u ltin g f r o m a t t r a c t i v e r a t e s p a id o n s a v in g s b a n k d e p o s its a s c o m p a r e d w ith m a r k e t i n s t r u m e n t s a n d s im u lta n e o u s ly a r e d u c tio n in e a r n in g s r a t e s b e c a u s e of th e d e c lin e in m a r k e t i n t e r e s t r a t e s . L e t m e b e c l e a r th a t I a m n o t u rg in g th e in d u s tr y o r a n y in d iv id u a l b a n k to e i t h e r lo w e r o r n o t lo w e r i t s d e p o s it i n t e r e s t r a t e s . W hat I a m s a y in g i s th a t th is i s a p a r t i c u l a r l y i m p o r ta n t d e c is io n th is y e a r th a t m u s t b e f a c e d up to . D oing n o th in g d o e s n o t a v o id th e p r o b le m . c u r r e n t i n t e r e s t r a t e s i s a d e c is io n . M a in ta in in g T he d e c is io n , w h ic h e v e r i t i s , w ill h a v e an im p a c t o n th e s u r p lu s r a t i o o f th e in s titu tio n . T h is i s n o t a d e c is io n to b e c a s u a lly m a d e b y m a n a g e m e n t, b u t o n e th a t m u s t b e s q u a r e ly p u t to th e b o a r d of t r u s t e e s . T r u s te e s w ill n o t b e a b le to p a r t i c i p a t e a c tiv e ly a n d a p p r o p r ia te ly in th a t d e c is io n o r a n y o t h e r , f o r th a t m a t t e r , u n le s s th e b o a r d i s a n in f o r m e d o n e . I th in k i t i s f a i r to s a y th a t th e p r i m a r y r e s p o n s ib il ity of t r u s t e e s i s s im p ly to kn o w w h a t i s g o in g o n . T hat is e a sy w hen m a n a g e m e n t m a k e s a n e f f o r t to s e e th a t th e b o a r d i s k e p t in f o r m e d . w e r e th e u n i v e r s a l s itu a tio n , b u t, u n f o r tu n a te ly , i t i s n o t. I w is h th a t B u t e v e n w h en m a n a g e m e n t i s n o t d o in g w h a t i t s h o u ld to s e e th a t t r u s t e e s a r e k e p t in f o r m e d , i t i s p o s s i b l e e v e n f o r a n o n b a n k e r t r u s t e e to b e k n o w le d g a b le if h e a s k s th e r ig h t q u e s tio n s a n d k n o w s w h e r e to lo o k f o r in f o r m a tio n . In b a n k in g , to a g r e a t e r e x te n t th a n in o t h e r b u s i n e s s e s , I b e lie v e , th e r e a r e s o u r c e s of in f o r m a t io n th a t e a s e th e jo b of k n o w in g how y o u r b a n k is d o in g a n d w h a t c o n d itio n i t i s in . - 15 - O b v io u s ly , w e r e g a r d th e b a n k e x a m in a tio n p r o c e s s a s p la y in g a k e y r o le in th a t p r o c e s s . T h e b a n k e x a m in a tio n , w h e th e r by th e F D IC o r th e S ta te s u p e r v i s o r y a u th o r ity , p r o v id e s a w e a lth o f in f o r m a tio n a n d a n e x c e lle n t, e v e n if u s u a lly a s o m e w h a t c r i t i c a l , p i c t u r e of th e c o n d itio n a n d f in a n c ia l s itu a tio n of th e b a n k . T h e s e e x a m in a tio n s a r e in te n d e d to b e u s e f u l to th e b a n k s , a n d w e th in k th e y a r e . th e s a m e w a y . M o s t m a n a g e m e n ts f e e l O b v io u s ly th e n , t r u s t e e s sh o u ld re v ie w th e r e p o r t of e x a m in a tio n c a r e f u l l y . O ne w ay to b e s u r e th a t y o u h a v e a m p le tim e an d o p p o rtu n ity to do so i s to i n s i s t u p o n a c o p y of th e e x a m in a tio n r e p o r t f o r y o u r ow n u s e , a n d d o n 't b e c o n te n t w ith j u s t a s u m m a r y . In s o m e c a s e s , th e e x a m i n e r s w ill s e e k a m e e tin g w ith th e b o a r d to r e v ie w th e r e p o r t , th o u g h a g e n c y p o lic ie s o n s u c h m e e tin g s v a r y . F D IC e x a m i n e r s a t th e p r e s e n t tim e do n o t r o u tin e ly m e e t w ith b o a r d s of t r u s t e e s fo llo w in g e v e r y e x a m in a tio n , b u t do a tte m p t to a r r a n g e s u c h m e e tin g s i f th e e x a m i n e r f e e l s t h e r e i s s o m e th in g u n u s u a l to d i s c u s s . I u n d e r s ta n d th a t th e C o m p tr o lle r of th e C u r r e n c y d o e s fo llo w a p o lic y of h a v in g n a tio n a l b a n k e x a m i n e r s m e e t w ith th e b o a r d of d i r e c t o r s of n a tio n a l b a n k s fo llo w in g e a c h e x a m in a tio n . T he F D IC a tte m p te d to i n t r o d u c e th a t r e q u i r e m e n t a n u m b e r of y e a r s ag o a n d d is c o v e r e d th a t in m a n y c a s e s i t w a s u n p r o d u c tiv e . N e v e r t h e l e s s , w e f e e l th a t i t i s a p p r o p r ia te to c o n s i d e r th a t p o lic y o n c e a g a in . In an y c a s e , I b e lie v e th a t i t i s a r e s p o n s ib il ity of th e t r u s t e e to fin d o u t th e s u b s ta n c e of th e e x a m i n e r 's - 16 - c o m m e n ts , a n d n o t s im p ly a s s u m e th a t b e c a u s e n o th in g h a s b e e n b r o u g h t to h is a tte n tio n th a t t h e r e i s no n e e d f o r h im to in v e s t ig a te th e r e p o r t . W hen F D IC o f f ic ia ls s p e a k a b o u t th e r e s p o n s ib il ity of t r u s t e e s , w e u s u a ll y ta lk a b o u t r e s p o n s i b i l i t y f o r th e s a f e ty a n d s o u n d n e s s of th e bank. B u t I w a n t to a d d s o m e th in g a l i t t l e d if f e r e n t to d a y w ith o u t in an y w ay d e tr a c ti n g f r o m s a f e ty a n d s o u n d n e s s . I w a n t to r e m in d y o u of th e r e s p o n s ib il ity to s e e t h a t th e b a n k ’s e a r n in g s a r e s a t i s f a c t o r y . A g o o d d e a l of r e s e a r c h in r e c e n t y e a r s h a s le d to th e c o n c lu s io n th a t so u n d , p r u d e n tly g e n e r a te d b a n k p r o f ita b i lity i s c r u c i a l to th e f u tu r e s o u n d n e s s of th e b a n k . We f e e l th is s tr o n g ly a t th e F D IC . In o u r e c o n o m ic s y s te m , " p r o f it a b ili ty " i s n o t a d i r t y w o rd an d i s , in f a c t , to b e e n c o u r a g e d . We h a v e b e e n d o in g s o m e w o rk on th e d e v e lo p m e n t of s t a t i s t i c a l e a r ly w a rn in g s y s te m s a t th e F D IC (in f a c t, w e h a v e t h r e e d i f f e r e n t o n e s in o p e r a tio n ) an d w e h a v e c o m e to th e c o n c lu s io n - - a c o n c lu s io n th a t h a s b e e n d e fe n d e d by le a d in g b a n k s to c k a n a ly s ts f o r s o m e tim e - - th a t th e m o s t im p o r t a n t k e y to th e f u t u r e o f a b a n k i s to b e fo u n d in i t s in c o m e s ta t e m e n t an d in i t s b o tto m l in e . a re c ru c ia l. S ou n d , p r u d e n tia lly g e n e r a te d p r o f its T h is r e p r e s e n t s a c h a n g e f r o m th e t r a d i t i o n a l v ie w th a t th e b a la n c e s h e e t a n d b a n k c a p i t a l r a t i o s a r e th e s o le r e l i a b l e i n d i c a t o r s of bank so u n d n e ss. T h is i s e v e n m o r e i m p o r t a n t f o r a m u tu a l s a v in g s b a n k , w h e r e e a r n in g s a r e th e o n ly s o u r c e of c a p it a l. N ow th is c r e a t e s s o m e d if f ic u l tie s f o r th e t r u s t e e b e c a u s e , to a c o n s id e r a b le e x te n t, th e e a r n in g s of a b a n k a r e n o t a n a c c u r a t e r e f le c tio n - 17 - of th e s k ill a n d q u a lity of m a n a g e m e n t. To a c o n s i d e r a b l e e x te n t, th e e a r n in g s p e r f o r m a n c e of a b a n k d e p e n d s on e x t e r n a l f a c t o r s , s u c h a s th e g e n e r a l e c o n o m y , th e c o m p e t itiv e n e s s o f th e r e l e v a n t m a r k e t p l a c e , F e d e r a l R e s e r v e m o n e ta r y p o lic y , e tc . A n d , a s I m e n tio n e d , p r o f ita b i lity i s n o t n e c e s s a r i l y th e o v e r r id in g c o n c e r n f o r a m u tu a l i n s titu tio n th a t i t i s f o r a s to c k c o r p o r a t i o n . B u t i t i s p o s s ib le to c o m p a r e th e p e r f o r m a n c e o f y o u r b a n k w ith th a t of o th e r b a n k s s u b je c t to t h e s e s a m e e x t e r n a l f o r c e s . T h e re i s a g r e a t d e a l of in f o r m a t io n m a d e a v a il a b le on a r o u tin e b a s i s b y th e F D IC to f a c i l i t a t e s u c h c o m p a r i s o n s . In f a c t , th e p r o b le m f o r th e t r u s t e e m a y b e th a t t h e r e i s to o m u c h f in a n c ia l d a ta a v a il a b le , to o m a n y r a t i o s . f o r e s t f o r th e t r e e s . I t m a y b e d if f ic u lt to s e e th e W e c a n c o u n t o n m a n a g e m e n t to p o in t o u t th o s e a r e a s in w h ic h th e b a n k ’s p e r f o r m a n c e lo o k s g o o d , b u t th e t r u s t e e m u s t ta k e a b r o a d e r p i c t u r e th a n th a t. T he F D IC , o n a s e m i - a n n u a l b a s i s , s e n d s a good d e a l of c o m p a r a ti v e f in a n c ia l in f o r m a t io n to e a c h in s u r e d b a n k . We h a v e fo u n d th a t m a n y b a n k s u s e th is in f o r m a t io n a s a b a s i s of a b o a r d m e e tin g , a n d w e h a v e r e c e iv e d m a n y c o m p lim e n ta r y l e t t e r s f r o m b a n k e r s , b a n k d i r e c t o r s a n d t r u s t e e s a b o u t th e v a lu e a n d u s e f u ln e s s of th is i n f o r m a tio n . W hen w e lo o k e d in to i t a l i t t l e d e e p e r , h o w e v e r , w e fo u n d th a t th e b a n k s th a t w e r e p le a s e d w ith th is s e r v i c e , an d w e r e p r e s e n tin g th is i n f o r m a tio n to t h e i r b o a r d , w e r e a l l b a n k s w h o s e p e r f o r m a n c e lo o k e d v e r y g o o d in c o m p a r is o n to b a n k s in t h e i r a r e a o r o t h e r b a n k s of t h e i r s i z e . I am - 18 - a f r a id th a t d a ta f o r th e b a n k w h o s e p e r f o r m a n c e lo o k s b a d m a y s im p ly b e th ro w n in th e w a s te b a s k e t, a n d th e b o a r d m a y s e e n o n e of i t . If y o u r b a n k lo o k s p o o r in c o m p a r is o n w ith o t h e r s in th e a r e a , o r w ith th e b a n k s w h ic h y o u p a r t i c u l a r l y th in k a r e c o m p a r a b le to y o u r s , a s k w hy. T h e re m a y b e a r e a s o n a b le a n s w e r . B u t a t l e a s t th e q u e s tio n s h o u ld b e a s k e d a n d m a n a g e m e n t s h o u ld b e r e q u i r e d to g iv e a n e x p la n a tio n . The jo b of s a v in g s b a n k t r u s t e e i s n o t a n e a s y o n e , a n d th e t a s k of s o r tin g o u t e c o n o m ic p r e d i c t i o n s , t h e i r im p a c t on y o u r b a n k , a n d th e a c tu a l c o n d itio n of y o u r b a n k i s n o t a n e a s y o n e . T h e re a r e te c h n iq u e s a n d m a t e r i a l a v a ila b le th a t w ill m a k e th e t a s k p o s s ib le , h o w e v e r , a n d I u r g e e a c h of y o u to m a k e u s e of th e m .
@FedFRASER