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S t a t e m e n t on B e k a l f
of ik e
o f G o v e rn o rs of tk e F e d e r a l R e se r v e S y ste m
Q ia ir m a n
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“ T o A m e n d T k e F e d e ra l D e p o sit In su ra n c e A c t ”
JANUARY 1950
ISSUE D » Y THE
BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
W ASH IN G TO N
STATEMENT BY THOMAS B. McCABE, CHAIRMAN
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
ON S. 2822 A BILL
"TO AMEND THE FEDERAL DEPOSIT INSURANCE ACT”
I am happy to have the privilege of submitting
to this Committee the views of the Board of Gov
ernors of the Federal Reserve System on S. 2822.
The Board is in essential agreement with the gen
eral purposes of this proposed legislation and is
gratified that the bill is receiving careful study and
consideration by your Committee.
The insurance of bank deposits is today an in
tegral part of our banking organization and its
efficient functioning is a matter of vital interest to
the Federal Reserve. The System is charged with
primary responsibility for monetary and credit pol
icy in the national interest and this responsibility af
fects the entire banking system as well as the non
banking financial community. Furthermore, the
Federal Reserve has a direct concern for the welfare
of its member banks which hold 85 per cent of the
deposits of the commercial banking system and sup
port to a corresponding degree the deposit insur
ance program.
Responsibility for monetary and credit policy in
our American tradition cannot be discharged ef
fectively without a strong and profitable private
banking system. Deposit insurance contributes to
confidence in our banking mechanism by the assur
ance it gives to small depositors of the availability
of their funds.
We believe that the Federal program of bank
deposit insurance has made a notable contribution
to banking stability. We further feel that the prin
cipal provisions of S. 2822, if enacted, will consti
tute a distinct improvement in the program.
During the past year, your Committee has on
several occasions requested the Board’s views on
bills dealing with the insurance of bank deposits.
In response to a request relating to S. 80, a bill to
increase deposit insurance coverage from $5,000 to
$15,000, the Board in March, 1949, advised your
Chairman that the questions of insurance coverage,
reduction of assessments and revision of the basis
for assessments were interrelated and that a change
in coverage should not be considered without re
gard for the other aspects of the program. The
Board also reported that it had instituted a study
of the insurance program for bank deposits with a
view to placing itself in position to respond to such
further inquiry as the Committee might wish to
make.
During the period in which the Board’s study
was conducted, we received requests for views on
bills S. 2094, S. 2300, and S. 2307. In addition, we
were asked by Senator Douglas, Chairman of the
Subcommittee on Monetary, Credit, and Fiscal Poli
cies of the Joint Committee on the Economic Re
port, for our views on what changes in the bank
deposit insurance program would further the effec
tiveness of general monetary and credit policies.
With respect to such requests, we stated that in
view of the primary responsibility of the Federal
Deposit Insurance Corporation in this field, the
Board of Governors was hesitant about offering
specific suggestions without having the benefit of
the Corporation’s views concerning desirable
changes.
A preliminary draft of the Board’s study was com
pleted by its staff in late August 1949. In early
September, the Board circulated copies of this draft
for review and comment to the Presidents of the
12 Federal Reserve Banks^ the members of the Fed
eral Advisory Council (the membership of which
consists of one active banker from each of the 12
Federal Reserve districts), and the Chairman of the
Federal Deposit Insurance Corporation. Following
this circulation, a number of comments and sug
gestions were received from the Federal Reserve
Hanks and the Federal Advisory Council. A re
vised draft was prepared in the light of these com
ments and suggestions. A copy of this draft was
sent to the President of the American Bankers
Association.
The comments received from the Federal Reserve
Banks and the Federal Advisory Council indicated
some difference in judgment as to the desirability
of increased insurance coverage but a strong con
1
STATEMENT BY THOMAS B. MCCABE ON S. 2 82 2
sensus as to the desirability of reducing the assess
ment burden on banks.
The Board reviewed the revised staff study *
and was in general accord with the suggestions
therein presented with respect to increased insur
ance coverage, reduced assessments, and simplifica
tion of procedure by which individual banks com
pute assessment liabilities. The revised study was
then circulated again to the interested parties men
tioned above for further suggestion or comment.
Replies recently received from the Presidents of the
Federal Reserve Banks indicate general concurrence
with the Board’s position. However, we did not
have the benefit of an expression of the views of
the Federal Deposit Insurance Corporation before
we received a copy of the bill.
At this point, I should like to offer for the record
a copy of the Board’s study. The study is primarily
directed to a review and analysis of the coverage
and assessment aspects of bank deposit insurance.
I hope that it will be useful to your Committee in
its further consideration of S. 2822. You will note
that the conclusions of the study, arrived at independendy, agree in principle and objective with the
proposals set forth in this bill with respect to insur
ance coverage and assessments. In making the
study available, it is not my thought to present an
alternative approach, but merely to give your Com
mittee the benefit of our painstaking examination
of this complex subject.
The bill, S. 2822, would modify the insurance
program in two principal ways by: (1) increasing
deposit insurance coverage from $5,000 to $10,000,
and (2) reducing the net cost of deposit insurance
to insured banks. It would also simplify the
manner in which the assessment liability is com
puted. In the light of the conclusions reached in
the Board’s study, I am pleased to say that the
Board feels that these proposals are a step in the
right direction and urges that they be given prompt
consideration. I have a few comments to make
on the proposals.
Banf{ deposit insurance coverage— S e c . 3(m ).
There are arguments for no increase in insurance
coverage as well as arguments for a much more
substantial increase than is proposed. Those favor
ing an increase in coverage are not in agreement as
* Th is study was presented to the Senate Banking and C ur
rency Com m ittee and is available upon written request to the
Board of G overnors of the Federal Reserve System, W ash
ington 25, D . C.
2
to the desirable amount of the increase. Extending
coverage from $5,000 to $10,000 appears to the
Board to be reasonable and a good compromise of
the conflicting views.
Assessment burden— S e c . 7(e). The Board be
lieves that experience, the size of the deposit insur
ance fund, and the financial condition of the bank
ing system justify a reduction in the burden on
banks of insurance assessments. We would suggest
that consideration be given to determining the divi
dend in a manner which will make it less subject
to fluctuation from year to year.
The use of average loss experience over five or
more years instead of the loss experience of the
preceding year for assessment purposes would mod
erate fluctuations in the dividend rate. This would
keep the net assessment burden on banks more
stable and would avoid the adverse effect of a sharp
increase in the net assessment burden in the event
of widespread banking difficulties concentrated in
a period of economic reaction.
A more stable net assessment rate would also re
duce any tendency, on the part of the speculative
elements of the financial community, to use changes
in the dividend rate as an index of the soundness
of bank stocks as well as the banking system.
Size of fund. We have noted that the bill does
not indicate in any way what a desirable size of
the fund might be. If the size of the fund is not
to be increased indefinitely without regard for
probable adequacy, there should be some provision
designed to retard its further growth after it reaches
a desired magnitude in relation to total deposits or,
even better, in relation to total deposits minus cash
assets and Government securities.
Amount of assessment relief. The Board believes
that relief from the existing assessment burden
should be more liberal than is provided for in this
bill. Investment income should be included in com
puting net income and the dividend rate should be
higher than 60 per cent of the combined net in
come. We have come to this conclusion on the
basis of the present size of the insurance fund, the
availability of other resources to supplment it when
necessary, and the potential losses which may be
realized from bank holdings of risk assets. Re
specting the availability of other resources, it should
be borne in mind that the existing authority of the
Corporation to borrow up to 3 billion dollars from
the Treasury is continued in the bill. Furthermore,
the broad powers of the Federal Reserve Banks to
STATEMENT BY THOM AS B. MCCABE ON S. 2 8 2 2
provide credit to the commercial banking system
will make it easier for banks to meet the demands
of their depositors if a period of strain should arise
in the future.
The suggestion was also made during the hear
ings on the bill that the authority of the Corporation
to set up reserves be more carefully defined, and
the Board is in agreement with that suggestion*
We think that the various changes which have
been outlined above would improve the provisions
of the bill which relate to deposit coverage and
assessment.
There are two other provisions of the bill, how
ever, to which we take particular exception, namely,
section 13(b) relating to loans and section 10(b)
relating to examinations.
FD IC loan and asset purchase powers— S e c .
13(b). The bill proposes to eliminate the require
ment in the present law for a merger or consoli
dation in those cases in which the Corporation be
lieves that a distress situation can best be taken
care of by loans or by purchasing assets. The loan
or asset purchase approach is frequently preferable
to the more involved and at times more costly proc
ess of receivership and liquidation. The restriction
in the present law may at times prevent effective
action in relieving distressed situations without
liquidation. The Corporation should certainly have
adequate powers to deal with distress cases and
the Board favors the removal of this restriction.
The provisions of the bill with respect to the cir
cumstances under which such loans may be made,
however, are not altogether clear, and the language
might at some future time be interpreted to permit
the Corporation to embark upon the general busi
ness of lending to banks. It is understood that
this power is intended to pertain only to distress
cases which could not be handled by normal bank
ing processes. In order to make clear that this is
the case, we recommend that the provisions of sec
tion 13(b) be revised as follows:
Examinations— S e c . 10(b). Section 10(b) would
give the Federal Deposit Insurance Corporation
power to examine, without the consent of the Board
of Governors, the State member banks of the Fed
eral Reserve System. It would, however, continue
the requirement that the Corporation obtain the
written consent of the Comptroller of the Currency
in order to examine any insured national bank.
The Board opposes this change. It is unnecessary
and no sound reason has been advanced to indicate
its need. It would lead to confusion and to in
creased overlapping and duplication in the examina
tion and supervision of banks. It would act as a
deterrent to State bank membership in the Federal
Reserve System. It would be an inappropriate way
of dealing with the realignment of Federal bank
supervisory authority.
L ac\ of necessity. If the Committee were to
study the practices of the Federal bank examination
and supervisory agencies it would find, I am sure,
that the proposed extension of power is not neces
sary to the effective discharge of the insurance
functions of the Federal deposit insurance system.
As indicated in replies to the Douglas question
naires, the Federal bank supervisory agencies now
follow substantially uniform examination practices
and standards and use similar report forms. As a
matter of course, Federal Reserve examination re
ports are made available freely to the Corporation.
On the first work day of each week the Federal
Reserve Board’s Division of Examinations, which
reviews and coordinates the examination work of all
the Federal Reserve Banks, sends to the Examina
tion Division of the Federal Deposit Insurance
Corporation a memorandum giving the names of
State member banks whose examination reports
have been received by the Board during the previ
ous week. The Corporation calls for these reports
as it wants them, extracts from the reports such
information as it wants for its own files, and then
returns the examination reports to us. It is our
understanding that a similar procedure is followed
“ In order to reopen a closed insured bank or, in the case of insured national banks examined by
when the Corporation has determined that an in the Office of the Comptroller of the Currency.
sured bank is in imminent danger of closing, in Thus the Corporation has the most recent informa
order to prevent such closing, the Corporation, tion on every insured bank in detail.
in the discretion of its board of directors, is
Unusual deterioration in asset condition, defalca
authorized to make loans to, or purchase the tions, and like adverse matters developed by our
assets of, such an insured bank upon such terms „ examining representatives are brought by our re
and conditions as the board of directors may pre- 1 view examiners, informally and promptly, to the
attention of the review examiners of the Federal
scribe”
3
STATEMENT BY THOMAS B. MCCABE ON S. 2822
Deposit Insurance Corporation. The review of
such reports is given priority by us so as to make
them available to the Corporation as promptly as
possible. The Corporation furnishes to the Board’s
Division of Examinations periodic lists of State
member banks classed as problem cases by the Cor
poration. Significant information concerning such
banks, received between examinations, is trans
mitted to the Corporation.
The Corporation also furnishes the Board’s Divi
sion of Examinations with copies of memoranda
setting forth the analysis by its review examiners
of the condition of State member banks considered
as problems on the basis of current examinations.
Despite the fact that the reports involved have been
analyzed and reviewed at the Reserve Banks and
by the Board’s Division of Examinations in Wash
ington, photostatic copies of such memoranda re
ceived from the Federal Deposit Insurance Corpo
ration are sent to the vice president in charge of
examinations in the appropriate Reserve Bank with
the request that the Board be advised of further
developments. As previously indicated, when any
such information is received it is relayed to the
Federal Deposit Insurance Corporation either by
telephone or memoranda.
In view of the foregoing, I feel that the Federal
Deposit Insurance Corporation is currently in
formed on the condition of State member banks
and, therefore, that nothing would be accomplished
by any change in the law giving the Corporation
power to examine such institutions without the
consent of the Federal Reserve Board.
Whenever the Corporation has felt that special
circumstances have warranted a separate examina
tion of a State member bank it has requested per
mission of the Board of Governors to make such
an examination. A review of the cases reveals that
the present provision of law has not hampered the
Corporation in the discharge of its insurance re
sponsibilities and that the proposed extension of
power is unnecessary.
A statement was made to your Committee by a
representative of the Federal Deposit Insurance
Corporation that there have been several instances
in which the Corporation has requested consent
of the Board of Governors to make examinations
of State member banks and in which the Board’s
consent has not been forthcoming. We do not
know of any instances of this kind and, accordingly,
on January 25, we requested the Corporation to
4
furnish us with a list of such cases. Up to this
time, however, we have not been furnished with
any such information.
The Board’s records show that 115 requests for
consent to make examinations of State member
banks were received from the Corporation. Of
these not one was refused, 110 were granted, and
in five cases the requests were withdrawn or
dropped.
Increased overlapping and duplication. We have
48 State and 3 Federal bank supervisory agencies.
Among them they supervise about 14,500 banks.
In spite of the existence of so many agencies re
markable success has been achieved in coordinating
and standardizing bank examination procedures
and supervisory policies so as to minimize dupli
cation and reduce the burdens and costs of exami
nation.
In order to minimize duplication, Congress pro
vided for examination by the Federal Deposit In
surance Corporation of only those insured banks
not otherwise subject to Federal examination and
supervision, and for the requirement of written
consent from the appropriate Federal agency be
fore the Corporation could examine independently
any bank otherwise subject to Federal examination.
The bill would eliminate this provision with regard
to the 1,900 State member banks with less than
$40 billion of deposits but not with regard to the
5,000 national banks with nearly $80 billion of
deposits.
Such a change after 16 years of experience with
existing law could be interpreted as Congressional
approval of increased activity in this field. By the
very nature of the bureaucratic process the change
would lead to more Federal examiners, more ex
aminations, more conflicts, more confusion, and
more burdens on State member banks.
While the Federal Reserve has authority with
respect to national banks comparable to that being
requested for the Insurance Corporation with re
spect to State member banks, for years the Federal
Reserve has relied exclusively on the examinations
of the Comptroller of the Currency. We have not
found it necessary to exercise this authority. In
fact, if the purpose of this section of the bill is to
assure parity among Federal supervisory agen
cies, as has been suggested in testimony before the
Committee, this can best be achieved by requiring
the written consent of the Comptroller of the Cur
rency for examination of national banks by the
STATEMENT BY THOM AS B. MCCABE ON S* 282 2
Federal Reserve, instead of by providing for dupli
cate Federal examination of State banks.
Deterrent to State ban\ membership. The pro
posed change would expose State member banks
to examination by two Federal agencies in addition
to examinations by State authorities. The addition
by the Congress of another independent Federal
examining authority would constitute an obstacle
to State bank membership in the Federal Reserve
System and I have been advised by Presidents of
the Federal Reserve Banks would lead to with
drawals from the System. As a result, the effective
ness of Federal credit and monetary policies would
be weakened.
Inappropriate way of realigning Federal super
visory authority. I should like to emphasize the
Board’s opinion that realignment of bank examina
tion and supervisory functions of the three Fed
eral bank supervisory agencies is not a matter
which should be dealt with in a piecemeal fashion
or as an incident to a bill designed primarily for
other ends. The Board feels that, should the Con
gress wish to deal with the problem of organization
and functioning of the Federal bank examination
and supervisory establishment, it should do so only
after a careful study by the Banking and Currency
Committees for the specific purpose of determining
the advisability of legislation in this field.
Concluding comment. In conclusion, I should
like to re-emphasize the Board’s strong sympathy
for the objectives of this proposed bill relating to
the insurance coverage, the payment of dividends,
the assessment base, the simplification of the assess
ment computation, and the liberalization of the
loan and asset purchase powers of the Corporation.
We question whether any of the other provisions
of this bill are essential at this time. There has
been only a very short period within which to
examine all of the provisions in detail. It is quite
possible that, on further study of the detailed pro
visions of the bill, we would have additional sug
gestions to make and, if so, we hope the Commit
tee will permit us to do so.
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@FedFRASER