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NEWS FIDERAI DEPOSIT INSURANCE CORPORATION PR-5-77 (2-2-77) FOR RELEASE UPON DELIVERY S ta te m e n t on GAO Stud y of F e d e r a l S u p e r v is io n of B a n k s P r e s e n t e d to S u b c o m m itte e on F in a n c ia l I n stitu tio n s S u p e r v is io n , R e g u la tio n an d In s u r a n c e C o m m itte e on B a n k in g , F in a n c e and U rb a n A f f a i r s H o u se o f R e p r e s e n t a t iv e s an d S u b c o m m itte e on C o m m e r c e , C o n su m e r an d M o n e ta ry A f f a i r s C o m m itte e on G o v e rn m e n t O p e r a tio n s H o u se o f R e p r e s e n t a t iv e s by R o b e r t E . B a r n e tt , C h a irm a n F e d e r a l D e p o sit I n s u r a n c e C o r p o r a tio n F e b r u a r y 2, 1977 * 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 T I O N , 550 Seventeenth St. N.W., Washington, D.C. 20429 202-389-' M r . C h a ir m e n , I w e lc o m e th e o p p o rtu n ity to a p p e a r b e f o r e y o u r S u b c o m m itte e s to d a y to p r e s e n t the v ie w s of the F D IC w ith r e s p e c t to the G e n e r a l A cco u n tin g O ffic e ’ s r e c e n t stu d y r e la tin g to the F e d e r a l s u p e r v is io n o f c o m m e r c ia l b a n k s in th is c o u n try . In g e n e r a l, w e b e lie v e th at the GAO h a s don e a c o m m e n d a b le jo b w ith an e x tr e m e ly d iffic u lt t a s k , m a d e m o r e d iffic u lt b y a r e la t iv e ly tig h t tim e f r a m e . We f e e l th at i t s c o m m e n ts a s an i m p a r t i a l p r o f e s s io n a l o b s e r v e r sh o u ld b e stu d ie d c a r e f u lly in an a t m o s p h e r e o f c o o p e r a t iv e n e s s and r e c e p t iv e n e s s . In th at v ein , I w ould lik e to c o m m e n t b r ie f l y on a few p o in ts r e la tin g to the r e p o r t and th en a t t a c h to m y s t a t e m e n t, f o r the r e c o r d , a m o r e d e ta ile d c r it iq u e p r e p a r e d b y F D IC s t a f f in r e s p o n s e to s p e c i f ic it e m s c o v e r e d by th e GAO re p o rt. To b e g in w ith , I w ould lik e to p o in t out th at in c o m p a r in g the s u p e r v is o r y p r o c e d u r e s o f the th r e e F e d e r a l b an k r e g u la t o r y a g e n c ie s , it m u s t b e b o rn e in m in d th a t the d a y - t o - d a y r e la tio n s h ip w hich the F D IC h a s w ith s t a t e b an k in g s u p e r v i s o r s i s e x t r e m e ly im p o r ta n t in o u r s u p e r v is o r y e ffo r t . U n lik e the C o m p t r o lle r o f the C u r r e n c y , bu t lik e the 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 i s e b a n k s who a r e o p e ra tin g u n d e r 50 s t a t e la w s a s w e ll a s 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. T h o se b a n k s a r e c h a r t e r e d b y 50 d iffe r e n t s t a t e s u p e r v is o r y a u t h o r it ie s and the m a n n e r o f s u p e r v is in g th o se b a n k s a t the 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 fr o m s t a t e to s t a t e . It i s a l s o im p o r ta n t to r e a l i z e th a t the F D IC i s th e s o le F e d e r a l r e g u la t o r f o r the e n tire m u tu a l s a v in g s bank - in d u s tr y , a $100 b illio n in d u s t r y . 2 - W hile w e a p p r e c ia t e th at the GAO r e p o r t i s d ir e c t e d on ly to c o m m e r c ia 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 ac c o u n t the F D I C ’ s a c t i v it 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 ban k in d u str y in o r d e r to u n d e r sta n d i t s s u p e r v is o r y e ffo r t. A s to fle x ib ilit y 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 rte d ly c o n c u r w ith th e GAO in th e n ee d f o r su c h f le x ib ilit y . A s a r e su lt of a co n tin u in g stu 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 am e n d e d in e a r ly N o v e m b e r o f 1976 th e b a s i c m e m o ra n d u m w hich 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 am e n d e d G e n e r a l M e m o ra n d u m N o. 1 ( s e e P a g e 7-1 of a tta c h m e n t h e r e to ) i s q u ite c o n s is t e n t w ith the th r u s t of the GAO r e p o r t and w e b e lie v e th at a fu ll d i s c u s s i o n o f it sh o u ld h a v e b e e n in c lu d e d in th at r e p o r t . We lik e to think th a t the p h ilo so p h y o u tlin e d in th is m e m o ra n d u m , w hich w e h a v e t e s t e d d u rin g th e p a s t few y e a r s b y e x p e rim e n tin g in d iffe r e n t F D IC r e g i o n s , i s the b e s t p h ilo so p h y f o r the F D IC to p u r s u e in th e e x a m in a tio n o f n o n m e m b e r b a n k s . S in c e it i s so c e n tr a l to o u r o p e r a t io n s , an d s in c e i t i s a r e la t iv e ly new sta te m e n t o f a f le x ib le e x a m i n atio n p o lic y , w e w ould h a v e lik e d to h a v e h ad the b e n e fit of the G A O 's in -d e p th c o m m e n ts ab o u t i t . We a l s 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 at m o r e a d m i n i s t r a tiv e e n fo rc e m e n t p r o c e e d in g s sh o u ld b e u n d e rta k e n in the 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 av e a tte m p te d to p u r s u e th at p o lic y , p a r t i c u la r ly s in c e la t e s p r in g and e a r ly s u m m e r of 1 976, and h av e r e q u e s t e 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 . - 3 - In th is co n n e c tio n , the GAO r e p o r t n o te s the l a r g e n u m b e r of v io la tio n s o f law found d u rin g a t y 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 ote th a t the GAO p o in te d out th at s o m e o f the la w s and r e g u la t io n s a r e c o m p le x and th a t s o m e o f the v io la tio n s w e r e of a t e c h n ic a l n a tu r e th a t w ould in no w ay a f f e c t the so u n d n e ss o f a b an k . It i s the e x p e r ie n c e o f o u r D iv is io n o f B an k S u p e r v is io n th at the m a jo r p o rtio n of v io la tio n s o f la w s s e t fo r th in r e p o r t s of e x a m in a tio n d o e s not a ffe c t the so u n d n e ss an d s a f e t y of a b a n k . A ll v io la tio n s of la w s o r re g u la tio n s a r e a m a t t e r o f c o n c e r n , o f c o u r s e , b u t it i s the p a r t i c u l a r r e s p o n s ib ilit y of the b an k r e g u la 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 o f w h eth er it w a s in te n tio n a l o r w illfu l, th e c o n s e q u e n c e s flo w in g t h e r e f r o m , the lik e lih o o d o f co n tin u ed v io la tio n , an d o th e r s i m i l a r m a t t e r s , and then to ta k e th e a p p r o p r ia t e c o r r e c t i v e a c tio n . T h e GAO a l s o r e c o m m e n d s th a t the F e d e r a l bank 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 ifo r m ity an d c o o p e r a tio n w ith r e s p e c t to the d e fin itio n o f p r o b le m b a n k s an d im p ro v in g the s u p e r v is o r y p r o c e s s . B o th r e c o m m e n d a tio n s s e e m to h av e a co m m o n th e m e , n a m e ly i n c r e a s e d h o m o g e n e ity am o n g th e a g e n c ie s . U n d ou b ted ly , th e r e i s m e r i t to the 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 the th r e e a g e n c ie s sh 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 and c o o p e r a tio n . T h e r e i s , in f a c t , a t p r e s e n t a s u b s t a n t ia l flow of in fo r m a tio n betw een and c o o r d in a tio n am o n g th e a g e n c ie s . If, h o w e v e r, th e r e i s any m e r it 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 is o r y a g e n c ie s , and to a d u a l b an k in g s y s t e m - 4 - w ith s t a t e and F e d e r a l s u p e r v is io n of b a n k s , am o n g th o se b e n e fits w ould s e e m to b e th e o p p o rtu n ity to t r y d iffe r e n t a p p r o a c h e s and to h a v e a d i v e r s it y o f e x a m in a tio n an d s u p e r v is o r y p r o c e d u r e s , th e re b y en h an cin g the p o s s i b il i t y o f u s e fu l in n o v a tio n an d im p r o v e m e n t in bank e x a m in a tio n and s u p e r v is io n . F u r t h e r m o r e , th e n ee d to d e v e lo p co m m o n c r i t e r i a f o r d e te rm in in g p r o b le m b a n k s i s n ot o b v io u s an d m a y not b e a p p r o p r ia t e . O ur e x p e r ie n c e i s th at th e a c c u r a t e d e s ig n a tio n o f a p r o b le m ban k d o e s not len d i t s e l f to the a p p lic a t io n o f s im p le m e c h a n ic a l fo r m u la e th at c a n b e u n iv e r s a lly 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 in it ia l t e s t s , w e b e lie v e th e a c t u a l d e s ig n a tio n o f a b an k a s a p r o b le m sh o u ld only 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 l y s i s of the e n tir e b a n k . We a l s o b e lie v e i t i s a p p r o p r ia t e f o r the F D IC , a s i n s u r e r , to v iew w hat c o n s t itu t e s a p r o b le m s itu a tio n f r o m a so m e w h a t d iffe r e n t p e r s p e c t iv e th an th e o th e r two F e d e r a l r e g u la t o r y a g e n c ie s , n a m e ly fr o m the sta n d p o in t o f undue r i s k to the in s u r a n c e fund. F in a lly , the r e p o r t im p lic it ly s u g g e s t s th at F D IC e x a m in e r s sh ou ld b e c r i t ic i z i n g lo a n p o lic i e s b e fo r e b a d lo a n s a r e m a d e . We c e r t a in ly a g r e e th at a c l o s e r r e v ie w o f lo a n p o lic ie s i s im p o r ta n t, an d c r i t i c i s m of su ch p o lic ie s in a d v a n c e o f t h e ir im p le m e n ta tio n sh o u ld b e m a d e w h e re the p o lic ie s w ill o b v io u sly le a d to an u n s a f e o r un sound co n d itio n f o r th e ban k o r to v io la tio n s o f la w . M o st w ritte n lo a n p o lic ie s w ill b e w ritte n in su c h a w ay , h o w e v e r, th a t a r e a s o n a b le e x a m in e r w ill find it d iffic u lt to fin d - 5 - so m e th in g s ig n ific a n t in th e m to c r i t i c i z e . We b e lie v e th at the w ritte n p o lic ie s t h e m s e lv e s a r e n ot the p r o b le m - - i t i s r a t h e r the im p le m e n ta tio n o f t h e s e p o lic i e s th a t i s . The F D IC D iv is io n o f B an k S u p e r v is io n h a s p r e p a r e d e x te n siv e d e t a ile d c o m m e n ts c o n c e r n in g re c o m m e n d a tio n s and c o m m e n ts m a d e in the GAO r e p o r t , w hich I h a v e a tta c h e d to m y s ta te m e n t f o r y o u r S u b c o m m i t t e e s ' c o n s id e r a tio n . W hile th ey a r e len gth y an d d e ta ile d , w e b e lie v e th o se c o m m e n ts r e f l e c t the th o u g h tfu ln e ss w ith w hich w e h av e re v ie w e d the GAO r e p o r t .