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FD 8 NEW S R ELEASE FEDERAL DEPOSIT INSURANCE CORPORATIOF RELEASE UPON DELIVERY PR-19-77 (3 -1 1 -7 7 ) k D Statem ent on C ond ition o f th e Banking System and Report o f th e General A ccounting Office^ /P resen ted to Committee on Banking, Housing and Urban A ffa ir s U nited S ta te s Senate by O Robert E. B a rn ett, Chairman F ed era l D ep osit^ In su ran ce C orporation March 11, 1977 DEPOSIT INSURANCE CORPORATION, 5 5 0 Seventeenth St. N.W., Washington, D.C. 20429 DigitizedFEDERAL for FRASER 202-389-4221 I a m p le a s e d th a t th e C o m m itte e i s h o ld in g th is ty p e of re v ie w of th e c o n d itio n of th e b a n k in g s y s te m , a n d I h o p e th a t th is w ill b e a r e g u l a r p a r t o f th e C o n g r e s s io n a l o v e r s ig h t of th e b a n k in g in d u s tr y an d th e b a n k in g s u p e r v i s o r y a g e n c ie s . R e g u la r ro u tin e d i s c l o s u r e a n d d i s c u s s i o n of i n f o r m a t io n c o n c e r n in g th e b a n k in g i n d u s tr y is in th e p u b lic i n t e r e s t . G e n e r a l h e a lt h of th e b a n k in g in d u s t r y ; s ta n d a r d s a p p r o p r i a t e f o r ju d g in g i t s h e a l t h . L e t m e f i r s t s ta t e m y b e l i e f th a t th e b a n k in g i n d u s tr y i s in r e a s o n a b ly s o u n d c o n d itio n , c e r t a i n l y in m u c h b e t t e r c o n d itio n th a n i t w a s d u r in g th e p a s t yfear o r tw o . The s t a t i s t i c a l t r e n d s in th e i n d u s t r y o v e r th e p a s t y e a r s e e m to r e f l e c t m o v e m e n ts to w a rd s ta b i lity , i n c r e a s e d c a p i t a l r a t i o s , b e t t e r liq u id ity , d e c lin in g lo a n l o s s e s (a lth o u g h th e y r e m a in e d h ig h in 1976) a n d h ig h e r e a r n in g s . N o n s t a t i s t i c a l i t e m s , s u c h a s m a n a g e m e n t e x p e r ie n c e , a ls o h a v e im p r o v e d . T he i n d u s t r y i s in a n a p p r o p r i a t e p o s itio n to r e c o v e r f r o m th e r e m a in in g i l l e f f e c ts of th e p r o b le m s of th e e a r l y 1 9 7 0 s . T h is i s a s ig n if ic a n t a c h ie v e m e n t if th e d e v e lo p m e n ts of th e p a s t n u m b e r of y e a r s a r e l i s t e d : O v e r th e l a s t 15 y e a r s , b a n k s h a v e c h o s e n to o p e r a t e in a r i s k i e r m a n n e r ; A t th e s a m e tim e , th e U. S. a n d w o r ld e c o n o m ie s h a v e b e c o m e r i s k i e r p la c e s in w h ic h to do b u s i n e s s ; O v e r th e l a s t 5 y e a r s o r so , t h e r e h a v e b e e n s o m e v e r y u n f a v o r a b le e c o n o m ic d e v e lo p m e n ts w h ic h h a d s e r io u s e f f e c ts - > 2 «i „ i b e c a u s e o f th e r i s k i e r s t r u c t u r e of th e e c o n o m ic s y s t e m ; A s a r e s u lt o f t h e s e u n fo r tu n a te e v e n t s , th e g r e a t e r r is k in th e e c o n o m ic e n v ir o n m e n t and th e g r e a t e r r is k in h e r e n t in t h e ir ow n f in a n c ia l s t r u c t u r e and o p e r a t io n s , th e b a n k in g s y s t e m u n d e r w e n t a s e v e r e sh o ck ; The b a n k in g s y s t e m w a s h it h a r d b y th e c o n flu e n c e of t h e s e f o r c e s in th e 1 9 7 3 -7 4 p e r io d , and t h is r e s u lt e d in s e v e r e p r o b le m s f o r a n u m b e r o f b a n k s , in c lu d in g s o m e la r g e b a n k s; D e s p it e a ll o f t h is , th e b a n k in g in d u s tr y and th e f in a n c ia l s y s t e m w e r e b a s ic a ll y sou n d and s t a b le , and th is e n a b le d th e in d u s t r y to w e a t h e r th e s t o r m . L e t m e go b a c k and c o n s id e r t h e s e p o in ts in o r d e r . O v e r th e l a s t 1 0 -1 5 y e a r s th e b a n k in g s y s te m h a s b e c o m e a r i s k i e r one a s b a n k s , p a r t i c u l a r l y th e l a r g e r b a n k s , h a v e o p e r a te d in a m o r e a g g r e s s i v e m a n n e r . S in c e th e e a r ly 1 9 6 0 s, m a n y b a n k s , a n d p a r t i c u l a r l y th e l a r g e b a n k s , a b a n d o n e d t h e i r t r a d itio n a l c o n s e r v a t i s m an d b e g a n to s t r i v e f o r m o r e ra p id g ro w th of a s s e t s , d e p o s its an d n e t in c o m e . L a r g e b a n k s b e g a n p r e s s i n g a t th e le g a l b o u n d a r ie s of a llo w a b le a c t i v i t i e s f o r b a n k s . B e g in n in g in th e m id - 1 9 6 0 s , n a tio n a l b a n k s w e r e a llo w e d to e x p a n d t h e i r a c ti v itie s in to f ie ld s w h ic h , to m a n y o b s e r v e r s , in v o lv e d m o r e th a n th e t r a d i tio n a l d e g r e e of r i s k f o r c o m m e r c i a l b a n k s . W h e th e r s u c h a c ti v itie s a r e in h e r e n tly r i s k i e r , o r r i s k i e r o n ly in t h e i r n e w n e s s to b a n k m a n a g e r s is a p r o b le m I m u s t le a v e to o th e r s to r e s o lv e . i t to s a y th a t a t l e a s t in th e s h o r t ru n , th e y a r e r i s k i e r . S u ffic e T h e se in c lu d e d su c h a c t i v i t i e s a s d i r e c t - l e a s e fin a n c in g , u n d e r w r itin g of ( u - 3 • 1* r e v e n u e b o n d s , an d e x p a n d e d f o r e ig n o p e r a tio n s . I am not sug g e s tin g th a t b a n k s sh o u ld n o t b e in th e s e a c t i v i t i e s . O ne c o u ld m a k e th e a r g u m e n t, 1 b e lie v e , th a t s u c h i n c r e a s e d r i s k i n e s s i s h e a lth y , d e s i r a b l e f o r th e n a tio n 's e c o n o m y , an d c o m p e titiv e ly r e s p o n s ib le . N e v e r t h e l e s s , t h e s e a c t i v i t i e s a r e e x a m p le s of th e g e n e r a l tr e n d to w a rd i n c r e a s e d a g g r e s s i v e n e s s a n d i n c r e a s e d w i l l in g n e s s to b e a r r i s k on th e p a r t of th e b a n k in g s y s te m in g e n e r a l, a n d l a r g e b a n k s in p a r t i c u l a r . The b a n k h o ld in g c o m p a n y m o v e m e n t i s a n o th e r s u c h d e v e l o p m e n t. It a llo w e d b a n k s to g e t in to a r e a s s o m e w h a t d if f e r e n t f r o m t h e i r tr a d i t i o n a l a c t i v i t i e s ; a g a in , n o t n e c e s s a r i l y in a p p r o p r i a t e , b u t a c t i v i t i e s a t l e a s t g e n e r a lly p e r c e iv e d to in v o lv e a g r e a t e r d e g r e e of r i s k . B e g in n in g a t a b o u t th e s a m e tim e , l a r g e r b a n k s b e g a n to a d v o c a te a n d p r a c t i c e th e c o n c e p t of li a b i l i t y m a n a g e m e n t. T his in v o lv e d a c h a n g e f r o m th e tr a d i t i o n a l b a la n c e s h e e t r e q u i r e m e n t of a d e q u a te liq u id ity of a s s e t s to a w illin g n e s s to go in to th e m o n e y m a r k e t an d b u y liq u id ity if n e e d e d , r e g a r d l e s s of p r e v a ilin g r a t e s . M o s t of th e tr a d i t i o n a l f in a n c ia l m e a s u r e s of b a n k a g g r e s s iv e n e s s a n d r i s k i n e s s show th e s e t r e n d s . In I9 6 0 , f o r e x a m p le , b a n k s w ith d e p o s its of b e tw e e n $ 5 -1 0 m illio n h a d an a v e r a g e lo a n d e p o s it r a tio of 46 p e r c e n t , w h e r e a s b a n k s w ith d e p o s its o v e r $500 m illi o n h a d a lo a n - d e p o s i t r a tio of 56 p e r c e n t . B o th s iz e c a t e g o r i e s of b a n k s sh o w e d s ig n if ic a n t i n c r e a s e s in th is r a t i o o v e r th e l a s t 15 .-A - * y e a r s , b u t th e i n c r e a s e h a s b e e n m o r e d r a m a t i c f o r th e l a r g e b a n k s . T h e ir lo a n - d e p o s it r a tio a t th e end of 1974 w a s 79 p e r c e n t a s c o m p a r e d w ith 63 p e r c e n t f o r th e s m a l l e r b a n k s . T h is c a m e a b o u t a s a r e s u l t of a v e r y l a r g e i n c r e a s e in th e v o lu m e of b u s in e s s lo a n s (in c lu d in g c o m m e r c i a l r e a l e s t a t e lo a n s ) in th e e a r ly 1 9 7 0 s . In a d d itio n to th e lo a n - d e p o s i t r a t i o , th e c a p i t a l - a s s e t r a tio sh o w ed th e s a m e t r e n d s . The c a p i t a l - t o - a s s e t r a tio of b o th s iz e c a te g o r ie s of b a n k s w a s n e a r ly th e s a m e in 1 9 6 5 , a n d a v e r a g e d f o r a ll b a n k s , ab o u t 8 p e rc e n t. S in c e th a t tim e th e s m a ll b a n k s h a v e m a in ta in e d t h e i r c a p it a l r a tio a t a b o u t 8 1 /2 p e r c e n t , w h ile th e l a r g e b a n k s ’ r a t i o h a s d e c lin e d to u n d e r 7 p e r c e n t , c a u s in g th e a v e r a g e of a ll b a n k s to d ro p to a b o u t 7 p e r c e n t . W h ile o n e c a n a r g u e th e m e r i t s of th e s e o r o th e r r a t i o s a s m e a s u r e s of r i s k , f o r w h a te v e r th e y a r e w o r th , th e y do e x h ib it a c h a n g e in tr a d i t i o n a l r a t i o s of r i s k m e a s u r e m e n t , w ith a m u c h g r e a t e r c h a n g e on th e p a r t of th e l a r g e r b a n k s th a n th e s m a l l e r o n e s . O ne of th e a r e a s in w h ic h l a r g e b a n k s h a v e m o v e d w ith g r e a t v ig o r in r e c e n t y e a r s h a s b e e n th e in te r n a tio n a l a r e a . A p p ro x im a te ly 140 A m e r ic a n b a n k s , o r o n e p e r c e n t b y n u m b e r of A m e r ic a n b a n k s , h a v e f o r e ig n b r a n c h e s , c o m p a r e d w ith o n ly 27 in 1968. T hese b a n k s, w h ile s m a l l in n u m b e r , a c c o u n t f o r n e a r l y h a lf of to ta l U. S. b a n k d e p o s it s , a n d th e a s s e t s of t h e i r f o r e ig n o p e r a tio n s a m o u n t to a b o u t 30 p e r c e n t of t h e i r to ta l a s s e t s . P a r t of th is o p e r a tio n in v o lv e d a m u c h g r e a t e r r o le f o r A m e r ic a n b a n k s in le n d in g to f o r e ig n b u s i n e s s e s i a n d g o v e r n m e n ts . * - 5 1 O p e r a tio n o u ts id e th e c o u n tr y in w h ic h a c o r p o r a tio n i s o r ig i n a lly e s ta b lis h e d i s n o t n e c e s s a r i l y r i s k i e r th a n d o m e s tic o p e r a tio n s . B u t f o r m o s t A m e r ic a n b a n k s e n g a g in g in th is a c tiv ity d u rin g th e 1 9 6 0 s a n d 1 9 7 0 s , i t w a s a t l e a s t a n ew v e n tu r e , an d new v e n tu r e s a r e a lm o s t n e c e s s a r i l y r i s k i e r th a n th o s e in w h ic h o n e h a s b u ilt up a s o lid b a s e of e x p e r ie n c e . N o t s u r p r i s i n g l y , a n u m b e r of A m e r ic a n b a n k s h a v e i n c u r r e d l o s s e s in t h e i r f o r e ig n o p e r a tio n s . A g a in , n o n e of th e s e l o s s e s h a v e b e e n s u f f ic ie n t b y th e m s e lv e s to r e s u l t in a b a n k f a i l u r e , a lth o u g h th e in te r n a tio n a l o p e r a tio n s of F r a n k l i n N a tio n a l B an k g r e a t l y a d d e d to i t s o th e r p r o b le m s . R e la te d to th e m o v e in to n ew ty p e s of a c t i v i t i e s , an d new g e o g r a p h ic a l a r e a s f o r b a n k in g a c tiv ity , h a s b e e n a c h a n g e in o r i e n t a tio n of A m e r ic a n b a n k s . P e r f o r m a n c e b e g a n to b e a m o r e im p o r ta n t c o n s id e r a tio n , a s d id g ro w th . B anks b e c a m e m o re c o n c e rn e d about t h e i r im m e d ia te p r o f it p i c t u r e a n d th e p r i c e of t h e i r s to c k . In s e v e r a l c a s e s , b a n k s to o k on a c t i v i t i e s , lo a n s o r c o m m itm e n ts th a t s e e m e d to h a v e th e p r o m i s e of im m e d ia te p r o f ita b i lity o r f a v o r a b le s to c k m a r k e t r e a c tio n . P a r t of th is w a s a s s o c i a t e d , a t l e a s t in th e U n ite d S ta te s , w ith a new b r e e d of b a n k e r - - y o u n g e r an d m o r e a g g r e s s i v e . N o t o n ly d id y o u th i t s e l f te n d to m a k e f o r m o r e a g g r e s s i v e n e s s , b u t w e b e g a n to s e e r i s i n g to p o s itio n s of r e s p o n s ib il ity b a n k e r s w ho h a d n o t h a d d i r e c t p e r s o n a l b a n k in g e x p e r ie n c e d u rin g th e d e p r e s s i o n of th e 1 9 3 0 s . O ne c a n ta k e th a t a r g u m e n t o n ly so f a r , h o w e v e r, s in c e s o m e of th e - 6 - in d u s tr y l e a d e r s d u rin g th is p e r io d w e r e in d iv id u a ls w ho w e r e p e r s o n a lly f a m i l i a r w ith th e d e p r e s s i o n . It i s g e n e r a lly a c k n o w le d g e d th a t th e s ta te of th e w o rld e c o n o m y h a s b e c o m e r i s k i e r in r e c e n t y e a r s . h e re . T h e re a r e s e v e r a l f o r c e s a t w o rk The lo n g - r u n w o r ld in f l a tio n a r y tr e n d i s o n e a s p e c t of it. A n o th e r i s th e r e p la c e m e n t of th e s y s te m of r e l a t i v e l y fix e d e x c h a n g e r a t e s th a t h a s p r e v a i l e d f o r m o s t of th e p o s t- W o r ld W a r II p e r io d b y a s y s te m of m o r e - o r - l e s s f r e e l y f lu c tu a tin g e x c h a n g e r a t e s . A w o rld of f lu c tu a tin g e x c h a n g e r a t e s i s a r i s k i e r o n e in w h ic h to do b u s i n e s s . In f a c t, th e m e a n s b y w h ic h b u s i n e s s f i r m s h a v e m in im iz e d t h e i r e x c h a n g e r i s k s h a v e b e e n t h e i r u t i l i z a t i o n of b a n k s to ta k e on th e e x c h a n g e r i s k s . On th e d o m e s tic s c e n e , o v e r th e l a s t 20 y e a r s c o r p o r a tio n s h a v e r e s t r u c tu r e d t h e i r b a la n c e s h e e ts on a r a t h e r m a s s i v e s c a le , s u b s titu tin g d e b t f o r e q u ity an d in c r e a s i n g t h e i r l e v e r a g e . N o t o n ly d id th e f in a n c ia l s t r u c t u r e of th e f i r m s th a t b a n k s le n d to b e c o m e r i s k i e r , b u t a t th e s a m e tim e c o r p o r a t e p r o f i t s w e r e w e a k , so th a t th e c o r p o r a tio n s h a v e fo u n d th e m s e lv e s m o r e d e p e n d e n t on e x te r n a l fin a n c in g f o r b o th t h e i r l o n g - t e r m a n d s h o r t - t e r m fin a n c in g n e e d s . O nce b o th th e b a n k in g s y s te m an d th e e c o n o m y a r r i v e d in th is r i s k i e r p o s itio n , th e w o r ld w a s b e s e t by an e x t r a o r d i n a r y c o m b in a tio n of c r i s e s . F i r s t th e w o rld e n e r g y c r i s i s p r e c i p i t a t e d b y th e O P E C C a r t e l - - th e e m b a r g o an d th e h u g e i n c r e a s e in th e p r i c e of o il. T h is p r o d u c e d a m a s s i v e s h ift in th e b a la n c e of p a y m e n ts of th e U. S. a n d o th e r c o u n tr ie s r e q u ir in g th e fin a n c in g of r e s u ltin g d e f ic its an d r e i n v e s tm e n t of th e O P E C s u r p l u s e s . O ne r e s u l t w a s th e s e r io u s t h r e a t to th e s ta t u s of m u l t i - b i l l i o n d o l l a r o il ta n k e r lo a n s . A n o th e r w a s to g e n e r a te q u e s tio n s a b o u t th e e c o n o m ic o u tlo o k of l e s s d e v e lo p e d c o u n tr ie s w ho w e r e , in f a c t, th e h a r d e s t h it b y th e i n c r e a s e in o il p ric e s . T h e se d e v e lo p m e n ts , a lo n g w ith s u c h d e v e lo p m e n ts a s w id e s w in g s in c o m m o d ity p r i c e s , n o t o n ly h e lp e d p r o d u c e in f la tio n a t a r e c o r d r a t e , b u t le d to a r e c e s s i o n d e e p e r th a n a n y d o w n tu rn s in c e th e 1 9 3 0 s . The in f la tio n a n d r e c e s s i o n c o m b in e d w ith w h a t a p p e a r s to b e a p e a k in g of a n o th e r of th e p e r io d ic c y c le s of r e a l e s t a t e s p e c u la tio n in th e U. S. to p r o d u c e m a s s i v e d e t e r i o r a t i o n of th e r e a l e s ta te m a r k e t , g e n e r a tin g h u g e lo a n l o s s e s . A s e p a r a t e c r i s i s in m u n ic ip a l c r e d i t w a s t r i g g e r e d b y N ew Y o rk C ity 's n e a r d e fa u lt. In th e m i d s t of a l l t h i s , w e h a d th e f a i l u r e of w h a t h a d b e e n th e tw e n tie th l a r g e s t b a n k in th e U n ite d S ta te s an d m a n y n e w s s t o r i e s a b o u t th e r e g u la to r y a g e n c ie s ' l i s t of p r o b le m b a n k s . O ne o b s e r v e r of th e b a n k in g s c e n e p u t i t th is w a y : " s o m e tim e a f t e r 1965, th e h a lc y o n a g e a p p a r e n tly e n d e d . R is in g in f la tio n w a s th e h a r b i n g e r , b u t c e r t a i n l y n o t th e s o le c a u s e o r s y m p to m , of h e ig h te n e d e c o n o m ic in s ta b ility . T his w a s a p e r io d of c o lla p s e of th e B re tto n -W o o d s A g r e e m e n t an d d is a p p e a r in g a n c h o v ie s , of s o c ia l u n r e s t in A m e r ic a an d w id e s p r e a d d ro u g h t a b r o a d . A n A m e r ic a n p r e s i d e n t w a s s h a m e d in to r e s ig n a ti o n an d tr a d i t i o n a l a l l i e s g re w r e s t i v e a s f o r m e r a d v e r s a r i e s w e r e e m b r a c e d u n d e r th e g u is e of d e te n te . In a d d itio n , p e tr o le u m p r o d u c e r s e s ta b lis h e d a p o te n tia lly d i s a s t r o u s p r e c e d e n t f o r o th e r p r i m a r y m a t e r i a l s p r o d u c e r s in e f f e c tiv e ly c a r t e l i z i n g th e - 8 - i n d u s tr y . In s h o r t , th e p e r io d a f t e r 1965, a n d p a r t i c u l a r l y a f t e r 19 7 0 , w a s o n e in w h ic h n u m e r o u s s e e m in g ly u n r e la te d s h o c k s b u ff e te d th e e c o n o m ic s y s te m . Q u ite e x p e c te d ly , th e s y s te m l u r c h e d to a n d f r o , w h ile s ta b i liz a tio n p o lic y m a k e r s s o u g h t to a d m i n i s t e r o ff s e ttin g s h o c k s . A s a r e s u l t of a ll of th i s , w e saw 16 b a n k f a i l u r e s in 1976, th e l a r g e s t n u m b e r in n e a r l y 25 y e a r s , fo llo w in g c lo s e ly th e 13 th e p r e v io u s y e a r . 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 , w h ic h in c lu d e s n a tio n a l b a n k s a n d s t a t e m e m b e r b a n k s , a s w e ll a s n o n m e m b e r b a n k s , i n c r e a s e d f r o m 156 on J a n u a r y 1, 1 9 7 4 , to 349 on J a n u a r y 1, 19 7 6 . We u s u a lly e x p e c t th e n u m b e r of o u r p r o b le m b a n k s to le v e l off a n d d e c lin e a f t e r s o m e tim e la g d u rin g th e r e c o v e r y p e r io d f o r th e e c o n o m y . The tim e la g w a s m u c h g r e a t e r in th e c a s e of th e 1 9 7 3 -7 4 r e c e s s i o n , a n d d u rin g 1 9 7 6 , th e n u m b e r of b a n k s on th e p r o b le m l i s t a c tu a lly i n c r e a s e d , r i s i n g to 373 b y e a r l y s u m m e r of 1976 an d flu c tu a tin g a ro u n d th a t n u m b e r s in c e th a t tim e . A s of J a n u a r y 1, 1 9 7 7 , w e h a d 379 b a n k s on th e p r o b le m l i s t , an d a s of M a r c h 8, 1 9 7 7 , w e h a d 384. It i s s ig n if ic a n t, h o w e v e r , th a t th e n u m b e r of b a n k s in o u r s e r io u s p r o b le m c a t e g o r i e s h a s d e c lin e d s u b s ta n tia lly f r o m a h ig h of 128 in th e s p r in g of 1976 to 11 5 a t th e p r e s e n t tim e , an d t h a t th e n u m b e r of b a n k s th a t w e r e n o t on o u r p r o b le m l i s t w a s a lw a y s a b o u t 14, 500 th ro u g h o u t th is p e r io d . S i m ila r ly , a lth o u g h 16 i n s u r e d b a n k s f a ile d , n e a r l y 98 p e r c e n t * S tu a r t G r e e n b a u m , P r o f e s s o r of F in a n c e , N o r th w e s t e r n U n iv e r s ity , " E c o n o m ic I n s ta b ility an d C o m m e r c ia l B a n k in g . " C o m p e n d iu m of M a jo r I s s u e s in B a n k R e g u la tio n , S e n a te B a n k in g C o m m itte e , M ay 1975. - 9 of a l l d e p o s its w e r e im m e d ia te ly a v a ila b le b e c a u s e of s u c c e s s f u l p u r c h a s e a n d a s s u m p tio n t r a n s a c t i o n s , a n d o v e r 98 p e r c e n t w e r e a v a ila b le in a ll c a s e s w ith in t h r e e d a y s . A s h a s b e e n p o in te d o u t f r e q u e n tly in th e p a s t y e a r , b e c a u s e of th e s e s u c c e s s f u l p u r c h a s e an d a s s u m p tio n t r a n s a c t i o n s , b a n k f a i l u r e s g e n e r a lly a r e no lo n g e r th e d i s a s t r o u s e v e n ts in a c o m m u n ity th a t th e y o n c e w e r e . (S ee th e F D IC 1976 A n n u al R e p o r t, a c o p y of w h ic h i s a tta c h e d h e r e t o . ) W ith a ll th a t b a d n e w s a s b a c k g r o u n d , w e c a n lo o k a t m o r e r e c e n t d e v e lo p m e n ts w ith s o m e o p tim is m . N in e te e n s e v e n ty - s ix w a s a g o o d y e a r f o r th e b a n k in g s y s te m in t e r m s of e a r n in g s an d im p r o v e m e n t in f in a n c ia l c o n d itio n s . B an k liq u id ity p o s itio n s im p r o v e d d r a m a t i c a l l y w ith s u b s ta n tia l i n c r e a s e s in h o ld in g s of g o v e r n m e n t s e c u r i t i e s (h o ld in g s w e r e up $17 b illio n , fo llo w in g a $30 b illio n i n c r e a s e in 1 9 7 5 ). W h ile b a n k s m ig h t h a v e p r e f e r r e d t h a t lo a n d e m a n d w e r e s t r o n g e r , w e m u s t r e c o g n iz e th a t la c k of d e m a n d h a s le d to a n im p r o v e m e n t of th e liq u id ity p o s itio n of th e b a n k in g s y s te m . T he liq u id ity p o s itio n w a s a ls o im p r o v e d b y th e c o n tin u e d d is p la c e m e n t of v o la tile m o n e y m a r k e t s o u r c e s of fu n d s w ith s ta b le s a v in g s ty p e d e p o s it s . ( L a r g e C D s d ro p p e d by $19 b illio n a n d c o n s u m e r s a v in g s - ty p e d e p o s its i n c r e a s e d $58 b illio n . ) The r e d u c tio n in i n t e r e s t c o s ts a llo w e d a n i n c r e a s e in e a r n in g s d e s p ite th e r e l a t i v e l y s la c k lo a n d e m a n d . The c a p it a l p o s itio n of th e b a n k in g i n d u s tr y a ls o im p r o v e d d u r in g 1 9 7 6 , a s th e g ro w th r a t e of c a p it a l, th ro u g h r e te n tio n of e a r n in g s , w a s h ig h e r th a n th e m o d e s t g ro w th - 10 r a t e of lo a n s . (T o ta l c a p it a l a c c o u n ts w e r e up 8 . 5 p e r c e n t an d lo a n s w e r e up 5 p e r c e n t . ) B a n k e r s n e c e s s a r i l y h a v e l e a r n e d s o m e th in g f r o m t h e i r e x p e r i e n c e s of th e l a s t fe w y e a r s . A c tiv itie s th a t w e r e n ew to m a n y of th e m in th e 1 9 6 0 s a r e m o r e f a m i l i a r now th a t th e y h a v e liv e d w ith th e m th r o u g h b a d t i m e s a s w e ll a s g o o d . B a n k e r s ' a ttitu d e s to w a rd r i s k a n d a p p r o p r i a t e lo a n p o lic y h a v e b e n e f itte d f r o m th is e x p e r ie n c e . T he r e a l e s t a t e d e v e lo p e r w ith a g r e a t id e a w ill s i t dow n w ith a lo a n o f f i c e r m o r e e x p e r ie n c e d a n d m o r e s k e p tic a l th a n a fe w y e a r s a g o . B an k lo a n p r o b le m s s t i l l e x is t . S in c e a m a j o r e le m e n t of p r o b le m lo a n s f o r b a n k s o v e r th e l a s t fe w y e a r s h a s b e e n r e a l e s t a t e lo a n s , lo a n s th a t ta k e a lo n g tim e to w o rk o u t, th e v o lu m e of u n d e r p e r f o r m i n g lo a n s a n d c l a s s i f i e d lo a n s i s s t i l l h ig h . (C o m p le te f i g u r e s a r e n o t a v a ila b le , b u t th e r a t i o of c l a s s i f i e d lo a n s to c a p it a l a p p e a r s to b e up s lig h tly in 1 9 7 6 . ) B u t n e t lo a n l o s s e s in 1 9 7 6 , w h ile h ig h , w e r e l e s s th a n th e r e c o r d le v e l s o f 1975. (C o m p le te f i g u r e s a r e n o t y e t a v a il a b le , b u t th e tr e n d c l e a r l y i s dow n. ) A ll in a l l , i t d o e s s e e m f a i r to s a y th a t th e b a n k in g s y s te m h a s tu r n e d th e c o r n e r a n d i t s c o n d itio n i s im p r o v in g . A k e y f a c t o r in i t s c o n tin u in g r e c o v e r y w ill b e th e c o s t of c a r r y i n g p r o b le m a s s e t s u n til t h e i r d is p o s it io n an d w h e th e r th e o p p o rtu n ity c o s t of m i s s e d in v e s t m e n ts w ill e x c e e d o r f a l l s h o r t of u ltim a te r e c o v e r y v a lu e s . T h u s, a lth o u g h s o m e b a n k s a r e n o t y e t c l e a r of th e s e r io u s f in a n c ia l 0 ' p r o b le m s th a t s u r f a c e d d u r in g th e 1 9 7 3 -7 4 r e c e s s i o n , th e in d u s tr y a s - 11 a w h o le c o n tin u e s to e x p e r ie n c e s te a d y im p r o v e m e n t in b o th b a la n c e s h e e t liq u id ity a n d c a p it a l s tr e n g th in e a r l y 1977. W e m ig h t n o te th a t no b a n k h a s c lo s e d b e c a u s e of f in a n c ia l d if f ic u ltie s so f a r in 1977. B y th is d a te l a s t y e a r , w e h a d s e e n f o u r b a n k f a i l u r e s . It i s p e r h a p s u n f o r tu n a te th a t th e i n i t i a l d i s c l o s u r e of th e n u m b e r s o f b a n k s on o u r p r o b le m l i s t c a m e a t a tim e When th e n u m b e r s w e r e l a r g e r th a n th e y h a d b e e n p r e v io u s ly . N e v e r t h e le s s , th e p e r io d ic d is s e m i n a t i o n of s u c h in f o r m a tio n i s u s e f u l an d a p p r o p r i a t e p u b lic in f o r m a tio n . C o n fid e n tia l in f o r m a tio n c o n c e rn in g th e c o n d itio n of a n in d iv id u a l b a n k th a t a r i s e s f r o m th e e x a m in a tio n p r o c e s s s h o u ld r e m a i n c o n f id e n tia l. B u t a g g r e g a te in f o r m a tio n th a t r e l a t e s to th e h e a lt h of th e b a n k in g s y s t e m a s a w h o le i s a p p r o p r ia te ly a p a r t of th e p u b lic r e c o r d . I t r e m a in s o u r in te n tio n to m a k e s u c h p e r io d ic d i s c l o s u r e of a g g r e g a te in f o r m a t io n f r o m o u r p r o b le m l i s t in r e g u l a r f o r u m s s u c h a s p e r io d ic C o n g r e s s io n a l h e a r i n g s on th e c o n d itio n of th e b a n k in g in d u s tr y . I m p l ic it in w h a t I h a v e s a id up to th is p o in t i s th a t th e C o r p o r a tio n b e lie v e s th a t a p p r o p r i a t e s ta n d a r d s f o r ju d g in g th e h e a lth of th e b a n k in g in d u s t r y in c lu d e th e fo llo w in g : --------- e a r n in g s c a p ita l lo a n l o s s e s liq u id ity m anagem ent n u m b e r an d s iz e 'of b a n k s o n th e p r o b le m l i s t c la s s ifie d a s s e ts f a ile d b a n k s - 12 - In a d d itio n , th e C o r p o r a tio n r e f e r s to o th e r s ta n d a r d s th a t a r e m o r e d if f ic u lt to a p p ly . F o r e x a m p le , w ith o u t q u e s tio n 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 i m p o r ta n t to th e h e a lth of th e b a n k in g in d u s tr y . To m e a s u r e c o n fid e n c e i s s o m e w h a t d if f ic u lt, b u t w e do s e e s ig n s th a t p u b lic c o n fid e n c e in th e s y s te m i s p r e s e n t . T h e re i s no e v id e n c e th a t m o n e y i s b y p a s s in g th e b a n k in g s y s te m ; d e p o s its a r e g ro w in g r a p id ly . T h e re w e r e no m a j o r r u n s on b a n k s d u rin g th e p a s t y e a r e v e n th o u g h t h e r e w e r e a l a r g e n u m b e r of b a n k f a i l u r e s , c o n s id e r a b le p u b lic ity a b o u t b a n k s in t r o u b l e , a n d in te n s iv e s c r u tin y by C o n g r e s s an d s ta t e l e g i s l a t o r s of b a n k in g s t r u c t u r e , p o w e r s , an d f u n c tio n s . A ll of th is s u g g e s ts th a t p u b lic c o n fid e n c e i s h ig h . In a d d itio n , w e b e lie v e th a t r e l a t i v e l y f r e e e n tr y an d i n t r a i n d u s t r y c o m p e titio n a r e a p p r o p r i a t e s ta n d a r d s f o r m e a s u r in g th e h e a lt h of th e b a n k in g in d u s tr y . A g a in , th is i s d if f ic u lt to m e a s u r e s t a t i s t i c a l l y , b u t w e do h a v e s o m e n u m b e r s th a t s u g g e s t th a t d e s i r a b l e m a r k e t s a r e s u b je c t to c o m p e titio n f r o m d if f e r e n t in s ti t u t i o n s . For e x a m p le , th e C o r p o r a tio n a p p ro v e d 116 a p p lic a tio n s f o r F e d e r a l d e p o s it i n s u r a n c e in 1976 f o r s t a t e - c h a r t e r e d n o n m e m b e r b a n k s . L ik e w is e , 609 a p p lic a tio n s f o r new b r a n c h e s an d 254 a p p lic a tio n s f o r l im it e d b r a n c h f a c i l i t i e s w e r e a p p ro v e d , a n d 116 n o tif ic a tio n s of u n m a n n e d r e m o te s e r v i c e f a c i l i t i e s . F in a lly , i t i s im p o r ta n t to th e h e a lth of th e b a n k in g in d u s tr y th a t a v ia b le d u a l b a n k in g s y s te m o p e r a te . We th in k 1976 saw th e c o n tin u e d a g g r e s s i v e p a r t i c i p a t i o n in th e b a n k in g in d u s tr y by s ta te - 13 - l e g i s l a t o r s an d s u p e r v i s o r s , a s w e ll a s C o n g r e s s an d th e F e d e r a l s u p e rv is o rs . The d u a l b a n k in g s y s te m s e e m s to h a v e b e e n v ia b le d u rin g 1976, an d th a t sh o u ld c o n tr ib u te to th e h e a lth of th e in d u s tr y . T h e re m a y b e o t h e r s ta n d a r d s w h ic h th e C o r p o r a tio n a p p lie s w h ic h w o u ld b e a p p r o p r i a t e , b u t th e s e s e e m to b e th e o n e s th a t a r e th e m o s t o b v io u s . T he FD1C m o n ito r in g s y s t e m s . In m y e a r l i e r s ta t e m e n ts on th e im p r o v e d c o n d itio n of th e b a n k in g i n d u s t r y , I m e n tio n e d th e e v id e n c e of im p r o v e m e n t in r a t i o s of c a p ita l to a s s e t s f o r c o m m e r c i a l an d m u tu a l s a v in g s b a n k s , l a r g e r r a t i o s of U. S. G o v e rn m e n t s e c u r i t i e s to to ta l a s s e t s , i n c r e a s e d e a r n in g s b e tw e e n 1975 a n d 1976, e tc . S uch m e a s u r e s w e r e m e n tio n e d to h ig h lig h t th e r e c o v e r y of b a n k s g e n e r a lly f r o m th e p r e s s u r e s of th e 1 9 7 3 -7 5 r e c e s s i o n . I t i s im p o r t a n t to n o te th a t th e FD IC h a s b e g u n to u s e s i m i l a r m e a s u r e s to d e te r m in e th e c o n d itio n of th e in d iv id u a l b a n k s w e s u p e r v is e . In th e d e v e lo p m e n t of o u r m o n ito r in g s y s te m s o v e r th e p a s t fe w y e a r s , w e h a v e o b s e r v e d th a t in m a n y i n s t a n c e s , d e v e lo p in g p r o b le m s in i n d i v id u a l b a n k s w e r e f o r e s h a d o w e d by a d e m o n s t r a t io n of a la c k of a b ility on t h e i r p a r t to k e e p up w ith t h e i r p e e r s . In c o m p a r in g b a n k s w ith k n o w n s e r i o u s p r o b le m s w ith b a n k s w h ic h w e f e l t w e r e in so u n d c o n d itio n , o u r r e s e a r c h e r s n o te d th a t s o m e tim e s t h e r e w e r e d i s tin c t d if f e r e n c e s in th e s iz e of c e r t a i n r a t i o s d e r iv e d f r o m th e b a la n c e s h e e t an d in c o m e s t a t e m e n t. D if f e r e n c e s , m o r e o v e r , d id n o t a lw a y s d e v e lo p o v e r n ig h t b u t - 14 - s o m e tim e s o v e r a p e r io d of y e a r s . Now th is i s n o t a r e v o lu tio n a r y c o n c e p t; o u r s u p e r v i s o r y f o r c e h a s b e e n u tiliz in g b a la n c e s h e e t and in c o m e d a ta f o r y e a r s to a s s i s t in th e e v a lu a tio n of b a n k s . W hat is n ew i s th a t, w ith th e h e lp of th e c o m p u te r , th e C o r p o r a tio n h a s p u t th e " e a r ly w a r n in g " a n a ly s is on a m o r e f o r m a l b a s i s . T ake f o r e x a m p le , th e v a r io u s r a t i o s of c a p ita l to a s s e t s w e s u p p lie d th e C o m m itte e . T h e se a r e a v e r a g e r a t i o s f o r in s u r e d n o n m e m b e r c o m m e rc ia l b a n k s. O ne s e r i e s c o n s i s t s of a v e r a g e r a tio s f o r a l l s u c h b a n k s , a n o th e r c o n s i s t s o f a v e r a g e r a t i o s f o r th o s e p a r t i c u l a r b a n k s w h ic h F D IC th in k s w a r r a n t th e d e s ig n a tio n " p r o b le m b an k s. " A ll J u n e 1976 P r o b le m E q u ity c a p it a l to to ta l d e p o s its 8 .7 6. 3 E q u ity c a p it a l to to ta l a s s e t s 7 .8 5 .7 T o tal c a p it a l to to ta l a s s e t s 8 .2 6 .7 T o tal c a p ita l to r i s k a s s e t s 1 1 .1 8 .2 T o ta l c a p it a l to to ta l l i a b i l i t i e s 8 .9 7 .2 D e b t c a p ita l to to ta l c a p ita l 5 .2 14. 2 F o r J u n e 1976, e v e r y s in g le a v e r a g e r a tio of e q u ity a n d to ta l c a p it a l in p r o b le m b a n k s i s lo w e r th a n th e a v e r a g e f o r a ll i n s u r e d c o m m e rc ia l b a n k s. T he r a tio of d e b t c a p ita l to to ta l c a p ita l i s s ig n if ic a n tly l a r g e r f o r p r o b le m b a n k s th a n th a t f o r a ll b a n k s . - 15 - T h e s e r a t i o s th e n b e c o m e p a r t of th e c r i t e r i a th e F D IC u s e s in i t s m o n ito r in g s y s te m . We now fla g f o r f u r t h e r a n a ly s is an y b a n k th a t h a s a m u c h lo w e r c a p it a l r a tio th a n th a t of o th e r b a n k s . S im ila r r e s e a r c h h a s b e e n d o n e o n o th e r r a t i o s a n d , a s a r e s u l t , w e fla g an y b a n k w ith a m u c h h ig h e r r a tio of lo a n s to d e p o s its th a n th a t of m o s t o th e r b a n k s , a m u c h h ig h e r r a tio of o p e r a tin g e x p e n s e s to o p e r a tin g e a r n in g s , a n u n u s u a lly l a r g e i n c r e a s e in a m o u n t of tim e d e p o s it s , e tc . O n c e th e o u t l i e r s o r m a v e r i c k s h a v e b e e n fla g g e d , th e d e v ia n t r a t i o s a r e r e v ie w e d o v e r th e p a s t t h r e e y e a r s to s e e if a c o n d itio n in s o m e p a r t i c u l a r p a r t of t h e i r o p e r a tio n h a s b e e n d e v e lo p in g . If t h e r e i s a c o n d itio n th a t o u r e x a m i n e r f o r c e d o e s n o t a lr e a d y k n o w a b o u t, a n e x a m in a tio n i s q u ic k ly s c h e d u le d . We h a v e fo u n d no s u b s t i tu te f o r a n o n - s i t e e x a m in a tio n to d e te r m in e th e a c tu a l c o n d itio n of th e b a n k . I t h a s n o t b e e n e a s y to g a in th e a c c e p ta n c e of th e s e e a r ly w a rn in g s y s te m s b y th e e x a m in a tio n f o r c e . The s y s te m i t s e l f h a s b e e n g e n e r a lly u s a b le f o r th e p a s t tw o o r t h r e e y e a r s , b u t i t i s on ly d u rin g 1976 th a t a g e n e r a l a c c e p ta n c e of i t h a s b e e n a c h ie v e d in th e C o r p o r a tio n . S p e c ific s ta n d a r d s a b o u t w h ic h c o m m e n t h a s b e e n r e q u e s t e d . The C o m m itte e h a s s p e c if ic a lly r e q u e s te d c o m m e n t a b o u t th e C o r p o r a t i o n 's s ta n d a r d s f o r d e te r m in in g c a p ita l a d e q u a c y , liq u id ity r e q u i r e m e n t s , an d m a n a g e m e n t c o m p e te n c e . A tta c h e d f o r r e f e r e n c e - 16 - a r e a p p r o p r i a t e C o r p o r a tio n b u lle tin s o r m e m o r a n d a w h ic h a r t i c u l a t e o u r s ta n d a r d s f o r th o s e t h r e e a r e a s . W h ile i t i s d if f ic u lt to s u m m a r iz e th e s e s t a t e m e n t s , l e t m e m a k e a b r i e f c o m m e n t on e a c h : C a p ita l A d e q u a c y - - A tta c h e d a r e th e s e c tio n s f r o m th e M a n u a l of E x a m in a tio n P o l i c i e s d e a lin g w ith c a p it a l an d a p p lic a tio n s f o r d e p o s it i n s u r a n c e , an d a c o p y of a 1 1 -6 - 7 3 s p e e c h by f o r m e r C h a ir m a n F r a n k W ille on " C a p ita l A d e q u a c y " , a s p e e c h w h ic h h a s r e c e iv e d w id e d i s t r i b u tio n a n d c o n tin u e s to b e an im p o r ta n t d o c u m e n t on th e s u b je c t. It r e m a in s th e p o s itio n of th e F D IC th a t c a p it a l a d e q u a c y m u s t b e m e a s u r e d f o r e a c h b a n k in d iv id u a lly s in c e b a n k s a r e s u f f ic ie n tly d i s s i m i l a r a s to th e q u a lity a n d n a tu r e of t h e i r a s s e t s , th e r e la tiv e c o m p e te n c y of t h e i r m a n a g e m e n ts , a n d th e r e l a t i v e s ta b i lity of th e e c o n o m ic e n v ir o n m e n t in w h ic h th e y o p e r a t e . The o n ly p r a c t i c a b l e g e n e r a liz a tio n i s th a t th e c a p it a l of an y g iv e n b a n k sh o u ld b e s u ffic ie n t to s u p p o r t th e v o lu m e , ty p e , a n d n a tu r e of th e b u s in e s s p r e s e n t l y c o n d u c te d , p r o v id e f o r th e p o s s i b i l i t i e s of l o s s in h e r e n t t h e r e in , an d p e r m i t th e b a n k to c o n tin u e to m e e t th e r e a s o n a b le c r e d i t r e q u ir e m e n ts of th e a r e a s e r v e d . The m o n ito r in g s y s te m I h a v e r e f e r r e d to a b o v e p la c e s c a p it a l in a f r a m e w o r k w ith o th e r m e a s u r e s an d p e r m i t s a m o r e o b je c tiv e e v a lu a tio n th a n h a s b e e n p o s s ib le b e f o r e . S p e c ific n u m e r ic a l s ta n d a r d s f o r a c a p it a l r a tio a r e a v o id e d b e c a u s e , w h ile th e y a r e a b e n c h m a r k of i n d u s tr y p r a c t i c e a n d c u s to m , th e y a r e a m e r e s ta r tin g p o in t in d e te r m in in g w h e th e r o r n o t a d e q u a te c a p ita l p r o te c tio n i s p re s e n t. The c o m p o n e n ts of th e c a p it a l a c c o u n ts a r e a n o th e r f a c t o r - 17 - to b e c o n s id e r e d . In th e c a s e of a n ew b a n k a p p ly in g f o r d e p o s it i n s u r a n c e , th e F D IC h a s a d o p te d a g u id e lin e w h ic h c a l l s f o r th a t i n i t i a l a m o u n t of c a p it a l w h ic h i s e s ti m a te d w ill b e n e c e s s a y to r e s u l t in a t l e a s t a 10 p e r c e n t r a tio of c a p ita l to a s s e t s t h r e e y e a r s a f t e r o r g a n iz a tio n . L iq u id ity - - A tta c h e d i s a c o p y of a 7 -2 2 - 7 6 m e m o r a n d u m to a ll r e g io n a l d i r e c t o r s (c o p ie s w e r e f u r n is h e d to e x a m i n e r s ) w h ic h d e a ls w ith new e x a m in a tio n r e p o r t p a g e s on liq u id ity a n a l y s i s . A ls o a tta c h e d i s a c o p y of th e s e c tio n f r o m th e M a n u a l of E x a m in a tio n P o li c ie s d e a lin g w ith l i a b i l i t i e s a n d th e d r a f t of a p r o p o s e d s e c tio n on liq u id ity w h ic h i s u n d e r s ta f f c o n s id e r a tio n . The liq u id ity n e e d s of a b a n k a r e a r e s u l t of th a t in d iv id u a l b a n k 's m ix of a s s e t s a n d l i a b i l i t i e s a n d t h e r e f o r e r e q u i r e s a n a n a ly s is of a s s e t q u a lity a n d s t r u c t u r e , tr e n d an d d i s tr ib u tio n of l i a b i l i t i e s , e a r n in g s t r e n d an d c a p it a l a d e q u a c y . c o n d itio n s a ls o h a v e a n im p a c t. L o c a l an d n a tio n a l e c o n o m ic M a n a g e m e n t's a b ility to m a k e a s s e t s e le c tio n s c o n s i s t e n t w ith a n tic ip a te d a n d p o te n tia l liq u id ity d e m a n d s , w h ile a t th e s a m e tim e c o n d u c tin g a f f a i r s in a so u n d , p r o f ita b l e m a n n e r , i s a m a j o r c o n s id e r a tio n in th e e v a lu a tio n of a b a n k 's f u tu r e p r o s p e c t s . U n til r e c e n tly th e C o r p o r a t i o n 's e x a m i n e r s h a d e v a lu a te d th e a d e q u a c y of a b a n k 's liq u id ity p r o v is io n s in a r a t h e r s u b je c tiv e m a n n e r , b u t in m i d - 1976 a q u a n tita tiv e a n a ly s is b e c a m e a p a r t of e a c h e x a m in a tio n an d i t i s b e lie v e d th a t b e n c h m a r k r a t i o s w h ic h c a n s ig n a l th e n e e d f o r f u r t h e r in v e s tig a tio n w ill so o n b e d e te r m in e d . H o w e v e r, w e b e lie v e th a t no o n e - 18 - r a t i o c a n e v e r b e c o n s id e r e d a n o r m f o r a ll b a n k s . The i n c r e a s e d u s e of l i a b i l i t y m a n a g e m e n t c o n c e p ts h a s le d to a c l o s e r lo o k a t th e c r e d i t s id e of th e b a la n c e s h e e t, w h ile a t th e s a m e tim e n o t lo s in g s ig h t of th e a s s e t s id e . A ny a n a ly s is of liq u id ity m u s t n e c e s s a r i l y b e c o n c e r n e d w ith th e s t r u c t u r e , c h a r a c t e r a n d tr e n d of d e p o s it s , s e a s o n a l f lu c tu a tio n s in d e p o s its a n d lo a n s ; a m o u n t of p r i m a r y an d ste c o n d a ry r e s e r v e s ; q u a lity an d m a t u r i t y of th e lo a n p o r tf o lio ; q u a lity an d m a t u r i t y s p a c in g of th e s e c u r i t i e s p o r tf o lio ; a n d th e v o lu m e of s e c u r e d l i a b i l i t i e s . C o n s id e r a tio n m u s t b e g iv e n th e b a n k ’s b o rr o w in g r e c o r d a n d i t s a b ility to b o r r o w a d d itio n a l s u m s , to th e a d e q u a c y of i t s c a p ita l, a n d to i t s e a r n in g s r e c o r d , w h ic h im p a c ts s ig n if ic a n tly on i t s a b ility to m a r k e t a d d itio n a l c a p it a l. E a c h of th e s e a r e a s i s n o r m a lly r e v ie w e d d u r in g a n e x a m in a tio n a n d , c o m b in e d , th e^r r e f l e c t a b a n k 's liq u id ity p o s itio n a n d p r o v id e s u b je c tiv e e v id e n c e of b a n k m a n a g e m e n t s a ttitu d e , p r a c t i c e s , a n d p o lic ie s f o r liq u id ity m a n a g e m e n t. M a n a g e m e n t C o m p e te n c e - - A tta c h e d a r e s e c tio n s f r o m th e M a n u a l of E x a m in a tio n P o l i c i e s d e a lin g w ith m a n a g e m e n t an d th a t p a r t of th e s u p e r v i s o r y s e c tio n w h e r e m a n a g e m e n t i s r a te d . The q u a lity of m a n a g e m e n t i s p e r h a p s th e s in g le m o s t im p o r ta n t e le m e n t in th e s u c c e s s f u l o p e r a tio n of a b a n k . The b o a r d of d i r e c t o r s i s th e s o u r c e of a ll a u th o r ity a n d r e s p o n s ib il ity an d t h e r e f o r e a s ig n if i c a n t d e g r e e of o u r a tte n tio n i s fo c u s e d on th e a b ility a n d p a r tic ip a tio n of th e d i r e c t o r s . T he f o r m u la tio n of p o lic ie s an d p r o c e d u r e s to a s s u r e a d h e r e n c e to s u c h p o lic ie s i s a p a r a m o u n t fu n c tio n o f th e d i r e c t o r s . - 19 - T h e ir c h a r a c t e r i s t i c s sh o u ld in c lu d e k n o w le d g e of th e d u tie s an d r e s p o n s i b i l i t i e s of t h e i r o ff ic e , a g e n u in e i n t e r e s t in p e r f o r m in g th o s e d u tie s a n d r e s p o n s i b i l i t i e s to th e b e s t of t h e i r a b ility , th e c a p a b ility of re c o g n iz in g a n d a v o id in g p o te n tia l c o n f lic ts of i n t e r e s t , so u n d b u s in e s s ju d g m e n t a n d e x p e r ie n c e , f a m i l i a r i t y w ith th e c o m m u n ity th e b a n k s e r v e s an d e c o n o m ic c o n d itio n s g e n e r a lly , a n d a n in d e p e n d e n c e in a p p r o a c h to p r o b le m s o lv in g a n d d e c is io n m a k in g . i s f u n d a m e n ta l. P e rs o n a l in te g rity M any of th e d u tie s a n d r e s t r i c t i o n s on a b a n k d i r e c t o r a r e s p e c if ic a lly s e t b y la w . It m a k e s s e n s e to r e p e a t a t th is p o in t th e c lic h e th a t d i r e c t o r s d i r e c t an d m a n a g e r s m a n a g e . To h a v e a v ia b le , p r o d u c tiv e b a n k th a t s e r v e s th e c o m m u n ity w e ll th e b o a r d of d i r e c t o r s m u s t e m p lo y an d r e t a i n a c ti v e , d a y - to - d a y o f f ic e r s of c o m p e te n c e an d in t e g r i t y . The c o m p e te n c e of e x e c u tiv e m a n a g e m e n t i s r e f l e c t e d in i t s g e n e r a l an d te c h n i c a l a b ility , i t s e x p e r ie n c e a n d c a p a c ity a n d g e n e r a l a ttitu d e an d c h a r a c t e r ; b y th e g e n e r a l c o n d itio n a n d p e r f o r m a n c e of th e b a n k ; b y th e b a n k 's a tte n d a n c e to th e r e a s o n a b le a n d le g itim a te c r e d i t n e e d s of th e c o m m u n ity ; a n d b y i t s a b ility to m e e t r e a s o n a b le c o m p e titio n . C h a n g e s in e x a m in a tio n , s u p e r v is io n an d r e g u la tio n d u rin g th e y e a r ; c o m p a r is o n w ith old s t a n d a r d s . T h e re h a v e b e e n m a n y c h a n g e s in e x a m in a tio n , s u p e r v is io n a n d r e g u la tio n d u rin g 1 9 7 6 . P e r m i t m e to l i m i t th is s e c tio n to a - ,20 - d is c u s s i o n of th o s e w h ic h s e e m to b e th e m o s t s ig n if ic a n t f o r p u r p o s e s of e x a m in a tio n a n d s u p e r v is io n : lc E x a m in a tio n p r i o r i t i e s , f r e q u e n c y , a n d s c o p e . 2. L iq u id ity a n a l y s i s . 3. R e la tio n s h ip w ith b a n k B o a r d s of D i r e c t o r s . 4. E n f o r c e m e n t a c tio n s . F o r c o n tin u ity , p le a s e r e f e r to th e p r e v io u s s e c tio n r e la tin g to C o r p o r a tio n d e f in itio n s of s ta n d a r d s r e la tin g to c a p it a l a d e q u a c y an d liq u id ity . E x a m in a tio n p r i o r i t i e s , fr e q u e n c y an d s c o p e - - W ith r e s p e c t to i t e m 1, w e h a v e p u t in to e f f e c t a p o lic y d e lin e a te d in G e n e r a l M e m o ra n d u m # 1, in w h ic h to p p r i o r i t y i s a c c o r d e d th e e x a m in a tio n of b a n k s w ith kn o w n s u p e r v i s o r y o r f in a n c ia l p r o b le m s . th a t M e m o ra n d u m . A tta c h e d i s a c o p y of T h e s e b a n k s w ill r e c e iv e a f u l l - s c a l e e x a m in a tio n a t l e a s t o n c e e v e r y 12 m o n th s . F o r b a n k s w ith no kn o w n s u p e r v is o r y o r f in a n c ia l p r o b le m s an d w h ic h h a v e a s s e t s of l e s s th a n $100 m illio n , m o d if ie d e x a m in a tio n is p e r m i t t e d f o r a l t e r n a t e e x a m in a tio n s p ro v id e d th e b a n k s m e e t c r i t e r i a in d ic a tin g s a t i s f a c t o r y m a n a g e m e n t, a d e q u a te c a p ita l, a c c e p ta b le f id e lity c o v e r a g e , s u ita b le e a r n in g s , a n d a d e q u a te i n t e r n a l r o u tin e an d c o n t r o l s . B a n k s w h ic h a p p e a r a s e x c e p tio n s on th e F D I C 's m o n ito r in g p r o g r a m an d w h ic h a r e n o t a l r e a d y know n to h a v e s u p e r v is o r y o r f in a n c ia l p r o b le m s w o u ld , of c o u r s e , n o t b e c a n d id a te s f o r a m o d if ie d e x a m in a tio n . The m o d if ie d e x a m in a tio n e m p h a s iz e s m a n a g e m e n t p o lic y an d p e r f o r m a n c e ; n th e e v a lu a tio n of a s s e t q u a lity , d is t r i b u t i o n an d liq u id ity ; c a p ita l a d e q u a c y ; an d c o m p lia n c e w ith la w s an d r e g u la tio n s . B a n k s w ith a s s e t s of $100 m illi o n o r m o r e th a t do n o t p r e s e n t s u p e r v i s o r y o r f in a n c ia l p r o b le m s w ill c o n tin u e to r e c e iv e a f u l l - s c a l e e x a m in a tio n d u rin g e a c h 1 8 -m o n th p e r io d . B u t th e e x a m in a tio n is d e s ig n e d to m a k e f u ll u s e of th e b a n k ’ s ow n r e p o r tin g c a p a b iliti e s an d g e n e r a lly i s t a i l o r e d now to th e s iz e a n d th e c o m p le x ity of th e b a n k m o r e th a n w a s th e c a s e b e f o r e . F o c u s in g th e e x a m i n e r ’s a tte n tio n on p a r t i c u l a r b a n k s an d m o d ify in g th e s c o p e a n d te c h n iq u e s a r e th e c u lm in a tio n of a g r a d u a l c h a n g e f r o m f o r m e r s ta n d a r d s g e a r e d to w a r d e x a m in in g a ll b a n k s a t s i m i l a r i n t e r v a l s a n d in a s i m i l a r m a n n e r . I e a r l i e r m e n tio n e d o u r i n c r e a s e d u s e of m o n ito r in g o r " e a r ly w a r n in g " s y s t e m s . To e m p h a s iz e o u r c o m m itm e n t to th is a p p r o a c h , w e a d d e d to o u r r e g io n a l o ff ic e s in 1976 th e m a n p o w e r w h ic h p e r m i t s o u r r e g io n a l d i r e c t o r s to a s s i g n s p e c if ic p e r s o n n e l to m o n ito r th e o u t p u t of th a t s y s te m . L iq u id ity a n a ly s is - - I n th e p a s t, w h ile e x a m in e r s w e r e c h a r g e d w ith c o m p a r is o n s of th e m a t u r i t i e s an d i n t e r e s t r a t e s of v a r io u s a s s e t an d l i a b i l i t y c a t e g o r i e s , th e F D IC h a d no f i r m l y e s ta b lis h e d p r o c e d u r e s o r c r i t e r i a f o r th e m e a s u r e m e n t of liq u id ity , H o w e v e r, th e liq u id ity p r o b le m s of 1 9 7 3 -1 9 7 5 p r o m p te d d e v e lo p m e n t an d im p le m e n ta tio n in J u ly 197 6 of a 3 - p a r t p r o c e d u r e w h ic h w e b e lie v e w ill b e of s ig n if ic a n t -22 - v a lu e in th e a d v a n c e d e te c tio n of liq u id ity p r o b le m s an d th e m a r s h a ll in g of c o r r e c t i v e e f f o r t s . The f i r s t s c h e d u le of th e liq u id ity a n a ly s is i s e s s e n t i a l l y a r a tio of n e t liq u id a s s e t s to n e t c u r r e n t l i a b i l i t i e s an d i s c o m p u te d a t e a c h r e g u l a r e x a m in a tio n . A s a g u id e to e x a m in e r s an d p e n d in g f u r t h e r e x p e r ie n c e , a 20 p e r c e n t " b e n c h m a r k '' r a tio w a s e s ta b lis h e d . W hen th e r a t i o f a l l s b e lo w th e b e n c h m a r k , f u r t h e r a n a ly s is u s in g a c a s h flo w p r o je c tio n s c h e d u le i s r e q u i r e d . W hen a n e g a tiv e c a s h flo w i s p r o je c te d u s in g th is s e c o n d s c h e d u le , o r if th e e x a m in e r c o n s id e r s th e to t a l a v a ila b le fu n d s to b e in s u f f ic ie n t, f u r t h e r e v a lu a tio n an d r e v ie w w ith b a n k m a n a g e m e n t i s n e c e s s a r y , a n d a s e r i e s of q u e s tio n s i s p r o v id e d in th e c o r r e c t i v e m e a s u r e s (th ird ) s c h e d u le a s a g u id e f o r th e e x a m i n e r in s e e k in g c o r r e c t i v e a c tio n s by b a n k m a n a g e m e n t f o r in d ic a te d liq u id ity p r o b le m s . A lth o u g h F D IC d o e s n o t p r e s c r i b e a n y n u m b e r o r r a t i o a s a s ta n d a r d , th e n ew p r o c e d u r e s f o r liq u id ity a n a ly s is a r e m o r e f o r m a l . C o p ie s of a l l s c h e d u le s a r e a tta c h e d . R e la tio n s h ip w ith b a n k b o a r d s of d i r e c t o r s - - The FD IC i s s te p p in g up th e f r e q u e n c y of m e e tin g s of e x a m in e r s w ith b o a r d s of d i r e c t o r s , a n d i s p u r s u in g o t h e r c o u r s e s a im e d a t m a k in g d i r e c t o r s m o r e a w a r e of t h e i r r e s p o n s i b i l i t i e s w ith r e s p e c t to th e o p e r a tio n s of th e b a n k . F o r e x a m p le , th e F D IC h a s a d o p te d a r e g u la tio n u n d e r w h ic h th e b o a r d of d i r e c t o r s of e a c h b a n k i s r e q u i r e d to r e v ie w an d v o te on e v e r y 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 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 if ie d a m o u n t, th a t a m o u n t v a r y in g w ith th e s iz e - 23 - of th e b a n k . A lth o u g h e x a m i n e r s h a v e c o n tin u a lly d e v o te d a tte n tio n to i n s i d e r t r a n s a c t i o n s , th is n ew r e g u la tio n te n d s to s ta n d a r d iz e th e p r o c e d u r e s to b e fo llo w e d . F o r m a l e n f o r c e m e n t a c tio n s - - O v e r th e l a s t fe w y e a r s , th e C o r p o r a tio n h a s m o v e d to m o r e f r e q u e n t i n itia tio n of f o r m a l a c tio n s , g e n e r a lly c e a s e - a n d - d e s i s t o r d e r s i s s u e d p u r s u a n t to S e c tio n 8(b) of th e F D I A c t. T h e re w e r e 41 c e a s e - a n d - d e s i s t p r o c e e d in g s in itia te d in 1976, c o m p a r e d w ith 8 in 1975 a n d o n ly 7 a s r e c e n tly a s 1971. T h is c h a n g e of p o lic y r e f l e c t s a s h if t f r o m r e l i a n c e on p e r s u a s i o n to r e l i a n c e b o th on p e r s u a s i o n an d on f o r m a li z e d e f f o r ts to w a r d c o r r e c tio n w h e r e n e c e s s a r y . C o m m e n ts on th e GAO r e p o r t . A tta c h e d f o r th e C o m m itte e ’s a n a ly s is i s a d e ta ile d c r itiq u e p r e p a r e d b y th e F D IC s ta f f in r e s p o n s e to s p e c if ic i t e m s c o v e r e d b y th e GAO r e p o r t . M y c o m m e n ts w ill b e m o r e g e n e r a l th a n th a t c ritiq u e . To b e g in w ith , I w o u ld lik e to p o in t o u t th a t in c o m p a r in g th e s u p e r v i s o r y p r o c e d u r e s of th e t h r e e F e d e r a l b a n k r e g u la to r y a g e n c ie s , i t m u s t b e b o r n e in m in d th a t th e d a y - to - d a y r e la tio n s h ip w h ic h th e F D IC h a s w ith s ta t e b a n k in g s u p e r v i s o r s i s e x tr e m e ly im p o r ta n t in o u r s u p e r v i s o r y e f f o r t. U n lik e th e C o m p tr o lle r of th e C u r r e n c y , b u t lik e th e F e d e r a l R e s e r v e B o a r d , w e s u p e r v is e b a n k s w ho a r e o p e r a tin g u n d e r 54 s ta t e a n d t e r r i t o r y la w s , a s w e ll a s th e F e d e r a l - 24 - D e p o s it i n s u r a n c e A c t. T h o se b a n k s a r e c h a r t e r e d b y 54 d if f e r e n t s ta t e a n d t e r r i t o r i a l s u p e r v i s o r y a u t h o r i t i e s a n d th e m a n n e r of s u p e r v is in g th o s e b a n k s a t th e F e d e r a l le v e l d if f e r s a s a r e s u l t f r o m s ta te to s t a t e . I t i s a ls o i m p o r t a n t to r e a l i z e th a t th e F D IC i s th e s o le F e d e r a l r e g u l a t o r f o r th e e n t i r e m u tu a l s a v in g s b a n k in d u s tr y , a $100 b illio n i n d u s t r y . W hile w e a p p r e c i a t e th a t th e GAO r e p o r t is d i r e c t e d o n ly to c o m m e r c i a l b a n k s , i t i s e s s e n t i a l to ta k e in to a c c o u n t th e F D I C s a c t i v i t i e s w ith r e s p e c t to th e m u tu a l s a v in g s b a n k in d u stry in o r d e r to u n d e r s ta n d i t s s u p e r v is o r y e f f o r t. A s to f le x ib ili ty in e x a m in a tio n te c h n iq u e s , w e w h o le h e a r te d ly c o n c u r w ith th e GAO in th e n e e d f o r s u c h f le x ib ility . A s a r e s u l t of a c o n tin u in g s tu d y g o in g b a c k a n u m b e r of y e a r s , w e a m e n d e d in e a r l y N o v e m b e r of 1976 th e b a s ic m e m o r a n d u m w h ic h g o v e r n s o u r e x a m in a tio n p o lic y . T h is a m e n d e d G e n e r a l M e m o ra n d u m N o. 1» w h ic h I m e n tio n e d e a r l i e r in th is te s tim o n y , i s q u ite c o n s is te n t w ith th e t h r u s t of th e GAO r e p o r t a n d w e b e lie v e th a t a f u ll d is c u s s io n of i t s h o u ld h a v e b e e n in c lu d e d in th a t r e p o r t . We lik e to th in k th a t th e p h ilo s o p h y o u tlin e d in th is m e m o r a n d u m , w h ic h w e h a v e t e s t e d d u rin g th e p a s t fe w y e a r s b y e x p e r im e n tin g in d if f e r e n t F D IC r e g io n s , i s th e b e s t p h ilo s o p h y f o r th e F D IC to p u r s u e in th e e x a m in a tio n of n onm em ber ban k s. S in c e i t i s so c e n t r a l to o u r o p e r a tio n s , an d s in c e i t i s a r e l a t i v e l y n ew s ta t e m e n t of a f le x ib le e x a m in a tio n p o lic y , w e w o u ld h a v e lik e d to h a v e h a d th e b e n e f it of th e G A O 's in - d e p th c o m m e n ts a b o u t it. - 25 - W e a ls o a g r e e , a s th e r e p o r t r e c o m m e n d s , th a t m o r e a d m i n i s t r a t i v e e n f o r c e m e n t p r o c e e d in g s s h o u ld b e u n d e r ta k e n in th e s u p e r v is o r y p r o c e s s b y th e F e d e r a l r e g u l a t o r s . We h a v e a tte m p te d to p u r s u e th a t p o lic y , p a r t i c u l a r l y s in c e l a t e s p r in g a n d e a r l y s u m m e r o f 1976, an d h a v e r e q u e s te d f r o m th e C o n g r e s s a d d itio n a l s u p e r v is o r y p o w e r s . In th i s c o n n e c tio n , th e GAO r e p o r t n o te s th e l a i g e n u m b e r of v io la tio n s of la w fo u n d d u rin g a ty p ic a l e x a m in a tio n . We w e r e p le a s e d , h o w e v e r, to n o te th a t th e GAO p o in te d o u t th a t s o m e of th e la w s and r e g u la tio n s a r e c o m p le x a n d th a t s o m e of th e v io la tio n s w e r e of a t e c h n ic a l n a t u r e th a t w o u ld in no w a y a f f e c t th e s o u n d n e s s of a b a n k . It is th e e x p e r ie n c e of o u r D iv is io n of B an k S u p e r v is io n th a t th e m a j o r p o r tio n of v io la tio n s of la w s s e t f o r t h in r e p o r t s o f e x a m in a tio n d o e s n o t a f f e c t th e s o u n d n e s s a n d s a f e ty of a b a n k . A ll v io la tio n s of la w s o r r e g u la tio n s a r e a m a t t e r of c o n c e r n , of c o u r s e , b u t i t i s th e p a r t i c u l a r r e s p o n s i b i l i t y of th e b a n k r e g u l a t o r to c o n s id e r e a c h v io la tio n in t e r m s of w h e th e r i t w a s in te n tio n a l o r w illf u l, th e c o n s e q u e n c e s flo w in g f r o m i t , th e lik e lih o o d of c o n tin u e d v io la tio n , a n d o th e r s i m i l a r m a t t e r s , a n d th e n to ta k e th e a p p r o p r i a t e c o r r e c t i v e a c tio n . The r e p o r t i m p lic itl y s u g g e s ts th a t F D IC e x a m i n e r s sh o u ld b e c r i t i c i z i n g lo a n p o lic ie s b e f o r e b a d lo a n s a r e m a d e . We c e r t a i n l y a g r e e th a t a c l o s e r r e v ie w of lo a n p o lic ie s i s im p o r ta n t, a n d c r i t i c i s m of s u c h p o lic ie s in a d v a n c e of t h e i r im p le m e n ta tio n sh o u ld b e m a d e w h e r e th e w r i t t e n p o lic ie s w ill o b v io u s ly le a d to a n u n s a f e o r u n s o u n d c o n d itio n f o r th e b a n k o r to v io la tio n s of la w . M o st w r i t t e n lo a n - 26 - p o lic ie s w ill b e w r i t t e n in s u c h a w a y , h o w e v e r , th a t a r e a s o n a b le e x a m i n e r w ill fin d i t d if f ic u lt to fin d s o m e th in g s ig n if ic a n t in th e m to c r i t i c i z e . We b e lie v e th a t th e w r i t t e n p o lic ie s th e m s e lv e s a r e n o t th e p r o b le m - - i t i s r a t h e r th e im p le m e n ta tio n of th e s e p o lic ie s . The GAO a ls o r e c o m m e n d s th a t th e F e d e r a l b a n k r e g u la to r y a g e n c ie s d e v e lo p g r e a t e r u n if o r m ity a n d c o o p e r a tio n w ith r e s p e c t to : a. S ta n d a r d s of e x a m in a tio n p r o c e d u r e s , b. U n ifo rm c l a s s i f i c a t i o n of s h a r e d N a tio n a l c r e d i t s . c. U n ifo r m ity in a p p r o a c h to m o n ito r in g a n d e x a m in in g f o r c o m p lia n c e w ith c o n s u m e r c r e d i t la w s , d. U n ifo rm c r i t e r i a f o r id e n tify in g p r o b le m be-hks, e. U n ifo r m e x a m i n e r tr a i n i n g . In s o m e of t h e s e a r e a s w e h a v e a l r e a d y a c h ie v e d u n if o r m ity w ith th e o t h e r F e d e r a l a g e n c ie s o r a r e in th e p r o c e s s of w o rk in g o u t d e t a i l s w ith a g o a l of a c h ie v in g u n if o r m ity . We a r e now p a r tic ip a tin g in th e p r o g r a m i n i tia te d b y th e O ffice of th e C o m p tr o lle r of th e C u r r e n c y f o r th e re v ie w of s h a r e d n a tio n a l c re d its . A lth o u g h th e n u m b e r of s u c h c r e d i t s fo u n d in b a n k s w h ic h w e s u p e r v is e i s r e l a t i v e l y s m a ll, w e h a v e d i r e c t e d o u r e x a m in e r s to a p p ly th e c l a s s i f i c a t i o n s a r r i v e d a t by th e in te r a g e n c y e x a m in in g te a m f o r a l l b a n k s w e e x a m in e w h ic h s h a r e s u c h c r e d i t s . T his c o n s t i t u t e s a s ig n if ic a n t s te p in in te r a g e n c y c o o p e r a tio n in th e e x a m in a tio n p r o c e s s , We a r e d e v e lo p in g p la n s to e n la r g e on th is c o n c e p t - 27 , by p r o v id in g f o r jo in t i n te r a g e n c y r e v ie w of s h a r e d n a tio n a l c r e d i t s in w h ic h a s t a t e n o n m e m b e r b a n k i s th e le a d b a n k . W ith r e s p e c t to e x a m i n e r t r a i n i n g , w e h a v e r e a c h e d te n ta tiv e a g r e e m e n t w ith b o th th e C o m p t r o l l e r ’s O ffic e an d th e F e d e r a l R e s e r v e to e x p lo r e th e f e a s i b l i t y of a jo in t tr a in in g c e n t e r f o r e x a m i n e r s . The F D IC h a s o u tg ro w n i t s tr a in in g c e n t e r b e c a u s e o f an i n c r e a s e in th e n u m b e r of e x a m i n e r s a n d a n i n c r e a s e in th e c u r r i c u l u m r e q u i r e d f o r each e x a m in e r. I t s e e m s a p r o p itio u s tim e to d i s c u s s a jo in t f a c ility , an d to th a t en d I s e n t l e t t e r s to b o th C h a ir m a n B u m s a n d C o m p tr o lle r B lo o m in v itin g th e m to jo in u s in th e d e v e lo p m e n t of a j o in t f a c ility . B o th r e s p o n d e d f a v o r a b ly to th e id e a a n d o u r s ta f f s a r e now a t w o rk on th e id e a . In a m o r e a d v a n c e d s ta g e a r e p la n s f o r a n in te r a g e n c y c o n s o lid a tio n of c o n s u m e r p r o te c tio n s c h o o ls . A lth o u g h n o t f in a lly a p p ro v e d , p la n s a r e b e in g f o r m u la t e d to h o ld th e f i r s t s e s s i o n th is J u n e a t th e p r e s e n t F D IC T ra in in g C e n t e r in R o s s ly n , V ir g in ia . E x a m in e r s a n d o th e r p e r s o n n e l in v o lv e d in b a n k s u p e r v is io n f r o m th e F D IC , th e O ffic e of th e C o m p tr o lle r of th e C u r r e n c y , an d th e F e d e r a l R e s e r v e S y s te m w o u ld p a r t i c i p a t e an d i n s t r u c t o r s w o u ld lik e w is e b e d r a w n f r o m th e t h r e e p a r tic ip a tin g a g e n c ie s . In c lu d e d in th e c u r r i c u l u m w o u ld b e T ru th in L e n d in g , a n t i - d i s c r i m i n a t i o n la w s a n d th e R e a l E s t a t e S e ttle m e n t P r o c e d u r e s A c t. In a d d itio n , tr a in in g w ill b e p r o v id e d in th e a r e a s of c o n s u m e r c o m p la in t p r o c e d u r e s a n d c o n s u m e r e d u c a tio n . T h is e f f o r t, a lth o u g h n o t 28 - » r e p r e s e n tin g a c o m p le te c o n s o lid a tio n of e x is tin g c o n s u m e r r e g u la tio n tr a in in g , i s a n e x p e r im e n t a l s te p w h ic h m a y le a d to e v e n tu a l c o n s o li d a tio n . In o r d e r to p r o m o te c o o r d in a tio n a n d to p ro v id e a v e h ic le f o r th e in te r c h a n g e of i d e a s a n d p o lic ie s , th e I n te r a g e n c y C o o rd in a tin g C o m m itte e h a s e s ta b lis h e d a to p le v e l s ta f f s u b c o m m itte e m a d e up of th e s e n io r e x a m in a tio n s ta f f o f f ic ia ls of th e F D IC , th e C o m p t r o l l e r 's O ffic e , th e F e d e r a l R e s e r v e , a n d th e F e d e r a l H o m e L o a n B an k B o a r d to c o o r d in a te m a t t e r s r e la tin g to b a n k e x a m in a tio n a n d s u p e r v is io n . The fu n c tio n of th is C o m m itte e , w h ic h w ill m e e t on a c o n tin u in g , p e r io d ic b a s i s , i s to p r o v id e a c le a r in g h o u s e f o r i d e a s , p o lic ie s a n d p r o c e d u r e s i n th e a r e a of e x a m in a tio n a n d s u p e r v is io n . U n ifo r m ity m a y n o t a lw a y s b e p r a c t i c a l , o r s e r v e th e b e s t i n t e r e s t s of th e p u b lic . S o m e d iv e r g e n c e a m o n g th e a g e n c ie s in t h e i r a p p r o a c h e s to p r o b le m s m a y r e s u l t in in n o v a tio n s w h ic h m a y l a t e r b e a d o p te d b y th e o th e r a g e n c ie s . I h i s i s e s p e c ia ll y t r u e in n e w ly e m e r g in g a r e a s of r e g u l a t o r y c o n c e r n s u c h a s c o n s u m e r l e g is la ti o n , E F T S a n d b a n k s e c u r i t i e s r e g u la tio n . T h is d iv e r g e n c e i s b e n e f ic ia l an d i s a s s i s t e d b y a c o m m itm e n t f r o m a ll th e a g e n c ie s to r e v ie w t h e i r ow n p r o c e d u r e s a n d to a d o p t a l t e r n a t i v e a p p r o a c h e s w h ic h o th e r a g e n c ie s h a v e fo u n d to b e s u c c e s s f u l in so lv in g p r o b le m s e f f e c tiv e ly a n d e f f ic ie n tly . The I n te r a g e n c y C o o rd in a tin g S u b c o m m i t t e e , r e f e r r e d to p r e v io u s ly , e v id e n c e s o u r c o m m itm e n t to th is p r in c ip le . - 29* -i H ie n e e d to d e v e lo p c o m m o n c r i t e r i a f o r d e te r m in in g p r o b le m b a n k s , f o r e x a m p le , i s n o t o b v io u s a n d m a y n o t b e a p p r o p r i a t e . O ur e x p e r ie n c e i s th a t th e a c c u r a t e d e s ig n a tio n of a p r o b le m b a n k d o e s n o t le n d i t s e l f to th e a p p lic a tio n of s im p le m e c h a n ic a l f o r m u la s th a t c a n b e u n i v e r s a l l y a p p lie d . W hile w e do a p p ly c e r t a i n s c r e e n in g d e v ic e s a s i n i t i a l t e s t s , w e b e lie v e th e a c tu a l d e s ig n a tio n of a b a n k a s a p r o b le m s h o u ld o n ly b e im p o s e d on a c a s e - b y - c a s e b a s i s a f t e r a c o m p r e h e n s iv e , in - d e p th a n a ly s is of th e e n t i r e b a n k . We a ls o b e lie v e i t i s a p p r o p r i a t e f o r th e F D IC , a s i n s u r e r , to v ie w w h a t c o n s ti tu te s a p r o b le m s itu a tio n f r o m a s o m e w h a t d if f e r e n t p e r s p e c tiv e th a n th e o t h e r tw o F e d e r a l r e g u la to r y a g e n c ie s , n a m e ly f r o m th e s ta n d p o in t of u n d u e r i s k to th e i n s u r a n c e fu n d . The d if f e r e n c e s in p e r s p e c t i v e a n d r e s p o n s i b i l i t y m a k e u n if o r m c r i t e r i a f o r d e s ig n a tio n of p r o b le m s ta t u s i m p r a c t i c a l ; th e d iv is io n of s u p e r v i s o r y a u th o r ity o v e r v a r io u s c l a s s e s of b a n k s m a k e s u n if o r m c rite ria u n n e c e ssa ry . The f a c t th a t th e C o r p o r a tio n p la c e s a n a tio n a l o r s ta t e m e m b e r b a n k on i t s p r o b le m l i s t g e n e r a lly r e s u l t s in no d if f e r e n t s u p e r v i s o r y a tte n tio n a c c o r d e d th a t b a n k by i t s r e s p e c tiv e s u p e r v i s o r - - in a lm o s t a l l c a s e s th a t b a n k i s a lr e a d y a m a t t e r of s u p e r v i s o r y c o n c e r n to th e a p p r o p r i a t e a g e n c y . I t d o e s n o t, e x c e p t in th e m o s t u n u s u a l a n d s e v e r e c a s e s , r e s u l t in F D IC e x a m in e r s e x a m in in g th e b a n k o r im p o s in g an y c o n flic tin g s u p e r v is o r y d ir e c tio n s on th e b a n k . W hile s o m e h a v e s u g g e s te d th a t th e C o r p o r a tio n sh o u ld u s e i t s s ta t u to r y a u th o r ity to e x a m in e n a tio n a l a n d s ta te m e m b e r b a n k s , 0 - 30 - ■yA . th e l e g i s l a t i v e h i s t o r y of th e F D I A c t m a k e s i t q u ite c l e a r th a t s u c h a u th o r ity w a s g r a n te d th e C o r p o r a tio n o n ly if i t w e r e to b e u s e d e x c e e d in g ly s p a r in g ly . T he f a c t th a t th e F D IC m ig h t h a v e s o m e w h a t d if f e r e n t b a n k s on i t s p r o b le m l i s t th a n th e C o m p tr o lle r o r th e F e d e r a l R e s e r v e d o e s n o t, th e n , c o n fu s e th e b a n k e r s o r th e p u b lic a n d le a d th e m to b e lie v e th a t t h e i r b a n k m a y b e a p r o b le m to o n e F e d e r a l a g e n c y b u t n o t to a n o th e r . U n d o u b te d ly , t h e r e i s m e r i t to th e p r o p o s itio n th a t p r o b le m s c o m m o n to th e t h r e e a g e n c ie s s h o u ld b e r e s o lv e d th ro u g h c l o s e r c o o r d in a tio n a n d c o o p e r a tio n . T h e re i s , a s I h a v e p o in te d o u t, a s u b s ta n tia l flo w of in f o r m a t io n b e tw e e n a n d c o o r d in a tio n a m o n g th e a g e n c ie s a t th e p r e s e n t t im e . If, h o w e v e r, t h e r e i s a n y m e r i t to th e c o n c e p t of s e p a r a t e F e d e r a l s u p e r v i s o r y a g e n c ie s , a n d to a d u a l b a n k in g s y s te m w ith s ta t e a n d F e d e r a l s u p e r v is io n of b a n k s , a m o n g th o s e b e n e f its w o u ld s e e m to b e th e o p p o rtu n ity to t r y d if f e r e n t a p p r o a c h e s an d to h a v e a d i v e r s i t y of e x a m in a tio n a n d s u p e r v i s o r y p r o c e d u r e s , th e r e b y e n h a n c in g th e p o s s i b i l i t y of u s e f u l in n o v a tio n a n d im p r o v e m e n t in b a n k e x a m in a tio n a n d s u p e r v is io n .
@FedFRASER