Full text of "Window Dressing" in Bank Reports : Hearing Before a Subcommittee of the Committee on Government Operations, House of Representatives, Eighty-Eighth Congress, First Session. October 2, 1963

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“WINDOW DRESSING” IN BANK REPORTS

HEARING
BEFORE A

SUBCOMMITTEE OF THE

COMMITTEE ON
GOVERNMENT OPERATIONS
HOUSE OE REPRESENTATIVES
EIGHTY-EIGHTH CONGRESS
FIRST SESSION

OCTOBER 2, 1963

Printed for the use of the
Committee on Government Operations

-4 624




U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1968

COMMITTEE ON GOVERNMENT OPERATIONS
WILLIAM L. DAWSON, Illinois, Chairman
CHET HOLIPIELD, California
JACK BROOKS, Texas
L. H. FOUNTAIN, North Carolina
PORTER HARDY, Jr., Virginia
JOHN A. BLATNIK, Minnesota
ROBERT E. JONES, Alabama
EDWARD A. GARMATZ, Maryland
JOHN E. MOSS, California
DANTE B. FASCELL, Florida
HENRY S. REUSS, Wisconsin
JOHN S. MONAGAN, Connecticut
RICHARD E. LANKFORD, Maryland
TORBERT H. MACDONALD, Massachusetts
J. EDWARD ROUSH, Indiana
WILLIAM S. MOORHEAD, Pennsylvania
CORNELIUS E. GALLAGHER, New Jersey
WILLIAM J. RANDALL, Missouri
BENJAMIN S. ROSENTHAL, New York

R. WALTER RIEHLMAN, New York
GEORGE MEADER, Michigan
CLARENCE J. BROWN, Ohio
FLORENCE P. DWYER, New Jersey
ROBERT P. GRIFFIN, Michigan
GEORGE M. WALLHAUSER, New Jersey
JOHN B. ANDERSON, Illinois
RICHARD S. SCHWEIKER, Pennsylvania
OGDEN R. REID, New York
FRANK J. HORTON, New York
BILL STINSON, Washington
ROBERT McCLORY, Illinois

Christine Ray Davis, Staff Director
James A. Lanigan, General Counsel
Miles Q. Romney, Associate General Counsel
Malcolm K. Edwards, Minority Professional Staff
J. P. Carlson, Minority Counsel

Legal and Monetary Affairs Subcommittee
DANTE B. FASCELL, Florida, Chairman
RICHARD E. LANKFORD, Maryland
JOHN B. ANDERSON, Illinois
TORBERT IL MACDONALD, Massachusetts ROBERT McCLORY, Illinois
CORNELIUS E. GALLAGHER, New Jersey
M. Joseph Matan, Staff Administrator
Charles Rothbnberg, Counsel
Millicent Y. Myers, Clerk
II




CONTENTS
Statement of—
Hengren, Raymond E., Assistant Chief, Division of Research and
Statistics, Federal Deposit Insurance Corporation; accompanied by
William D. Allen, Assistant Chief, Division of Examination; Robert
H. Creswell, Chief of the Statistics Section, Division of Research
and Statistics; Leslie H. Fisher, Assistant General Counsel, Legal
Division; and Harold W. Kefauver, fiscal agent________________
Robertson, J. L., member, Board of Governors of the Federal Reserve
System; accompanied by David B. Hexler, Assistant General
Counsel; and Gerald M. Conkling, Assistant Director, Division of
Bank Operations_________________________________________
Watson, J. T., Deputy Comptroller of the Currency; accompanied
by R. Coleman Egertson, Chief National Bank Examiner; Robert
Bloom, Chief Counsel; and Dr. Sherman Shapiro, Senior Economist,
Letters, statements, etc., submitted for the record by—
Bloom, Robert, Chief Counsel, Office of the Comptroller of the Cur­
rency: Information re call dates____________________________
Hengren, Raymond E., Assistant Chief, Division of Research and
Statistics, Federal Deposit Insurance Corporation:
Excerpt from amendment to the Federal Deposit Insurance Act,
approved July 14, 1960________________________________
Excerpt from section 5211 of the Revised Statutes___________
Excerpt from Senate Report No. 1821, June 30, 1960, and House
Report No. 1827, June 14, 1960 (86th Cong.)______________
Letter from Jesse P. Wolcott, Director, Federal Deposit Insurance
Corporation, to Hon. Dante B. Fascell, October 16, 1963____
Numbers of examiners employed by the bank supervisory
agencies____________________________________________
Robertson, J. L., member, Board of Governors of the Federal Reserve
System:
Devices employed to “window dress” bank condition statements
called for by supervisory authorities_____________________
Excerpt from “Alice in Wonderland”______________________
Inflation of figures in voluntary published statements by methods
that are not permitted in official condition reports--------------Watson, J. T., Deputy Comptroller of the Currency:
Excerpt from hearings held by a House Banking and Currency
subcommittee, April 5, 1960____________________________
Excerpt from Senate Report No. 1821, June 30, 1960, and
House Report No. 1827, June 14, 1960 (86th Cong.)-----------Letter from James J. Saxon, Comptroller of the Currency, to
the presidents of all national banks, July 3, 1963----------------




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“WINDOW DRESSING” IN BANK REPORTS
WEDNESDAY, OCTOBER 2, 1963

Legal

House of Representatives,
and Monetary Affairs Subcommittee
of the Committee on Government Operations,

TVaskvngton, D.C
The subcommittee met, pursuant to notice, at 9:45 a.m. in room
100-B George Washington Inn, Hon. Dante B. Fascell presiding.
Present: Representatives Dante B. Fascell, Richard E. Lankford,
Torbert H. Macdonald, John B. Anderson, and Robert McClory.
Also present: M. Joseph Matan, staff administrator; Charles Rothenberg, counsel; and Millicent Y. Myers, clerk.
Mr. Fascell. The subcommittee will come to order.
It is the responsibility of the Legal and Monetary Subcommittee of
the House Committee on Government Operations to examine and eval­
uate the efficiency and economy of the operations of certain executive
branch departments and agencies, including those of the Federal bank
supervisory agencies.
This hearing will examine the particular operations of the Comp­
troller of the Currency, the Board of Governors of the Federal Re­
serve System, and the Federal Deposit Insurance Corporation dealing
with the setting of call dates for bank reports.
In our inquiry we will look into the bases on which bank call dates
are to be selected, and whether the Federal bank supervisory agencies
are applying the same standards and criteria to the statutes involved.
We shall also look into the extent to which window dressing is prac­
ticed ; whether anyone is thereby deceived; whether the practice lessens
the validity and usefulness of condition reports as a supervisory tool,
and what, if anything, needs to be done to curb the practice.
I am very pleased to have before the committee this morning, Mr.
J. L. Robertson, member of the Board of Governors of the Federal
Reserve System, accompanied by Mr. David B. Hexter, Assistant
General Counsel and Mr. Gerald M. Conkling, Assistant Director,
Division of Bank Operations. If the gentlemen who are accompany­
ing you, Governor, will step up to the table, we will be delighted to
have them with you.
I understand you have a prepared statement. If you desire, you
may proceed with that. If you want to put it in the record at this
point, you may summarize orally, if you like—either way.




l

2

“WINDOW DRESSING” IN BANK REPORTS

STATEMENT OF J. L. ROBERTSON, MEMBER, BOARD, OF GOV­
ERNORS OF THE FEDERAL RESERVE SYSTEM; ACCOMPANIED BY
DAVID B. HEXLER, ASSISTANT GENERAL COUNSEL; AND GERALD
M. CONKLING, ASSISTANT DIRECTOR, DIVISION OF BANK OPERA­
TIONS

Mr. Robertson. Mr. Chairman, thank you very much.
I think it might be well, since I endeavored to cover the whole sub­
ject in this, I think it might be even better if I do it by reading this
statement, then answering any questions you might have. I think it
would give us a better background for us to wmrk with.
Mr. Fascell. All right. Go ahead.
Mr. Robertson. “Window dressing” is a convenient and colorful
expression and undoubtedly will continue to be used to describe the
problem that concerns this committee, but we should be aware that it
is a misnomer. A merchant dresses his show window to display at­
tractively the merchandise that is for sale in the store. If the window
contains Paris gowns and only inferior copies are for sale inside, in
time the merchant would lose the public’s confidence and its patronage.
What is called window dressing in the case of banks’ reports of their
condition is also deceptive, I am afraid. However, it is less easily
detected than the merchant’s pretense, and some banks seem to be
satisfied that the practice will attract more business and that the decep­
tion will be noted by only a few. But although its ill effects on banks
may be less direct than on merchants, eventually it would cause erosion
of the banking community’s most valuable asset: public esteem and
trust.
Window dressing by banks has two aspects. It involves, first, de­
ceptive transactions that have no genuine business purpose, and sec­
ond, a deceptive balance sheet resulting from those transactions. The
main purpose of window dressing is to display to the public a report of
condition—in other words, a balance sheet—that presents the bank
more favorably than its normal condition warrants.
For those who are interested in the devices employed in window
dressing, there is being submitted, attached to my statement, for inclu­
sion in the hearing record, an outline of procedures that have been
used. The actual results, however, can be described very briefly.
Occasionally a bank uses window dressing to hide the fact that it is in
debt, but usually the bank’s purpose is simply to look bigger than it is.
By various aiTangements, a bank with real deposits of $900 million
for example can plausibly inform the world that its deposits are more
than a billion dollars, and that consequently it is the largest bank in
the city or State. Naturally, this distresses its rival with bona fide
deposits of $950 million, so the next time it understandably is tempted
to window dress, just to present the true relative picture. This is
why window dressing tends to spread; in fact, it is surprising to me
how many bankers have earned our praise by refusing to climb on the
merry-go-round.
The impression apparently has been created, in some quarters, that
window dressing relates only to reports of condition that banks pub­
lish pursuant to requirements of law—the so-called call reports. If
that were true, the problem of minimizing or eliminating window




“WINDOW DRESSING” IN BANK REPORTS

3

dressing would be relatively simple. But the facts are otherwise,
and much harm has been done by intimating that bank supervisors
could end the practice simply by suitable call report procedures.
This point is crucial, and I want to explain it as clearly as I can.
As long as a bank skirts the criminal false-entry laws, it is free to
publish a balance sheet—a report of condition—whenever it wishes,
as of any date it selects, and in whatever form and size suits its pur­
pose. Most banks are required by law to publish their balance sheets
several times a year in a form and as of a date specified by their
governmental supervisors. But these required publications may be
compressed into a few square inches in an obscure corner of a news­
paper of small circulation, while the bank’s voluntary advertisements
may be, and often are large and striking displays, as of dates selected
by the bank itself, published in journals with immense circulation
among the class of readers the bank is most anxious to reach. Does
this begin to suggest the fallacy of the contention, recently advanced,
that the window-dressing problem can be readily solved by issuing all
calls on a surprise basis ?
Perhaps I should make clear that a “call” is issued by a bank super­
visor to all banks under its supervision, for a report as of a prior
date. For example, the Comptroller of the Currency may inform
every national bank, on March 5, that it must promptly submit to
him, and publish in a local newspaper, a report of its condition—
a balance sheet in prescribed form, as I said before—as of March 3.
That date having already passed, the bank cannot retroactively juggle
its accounts or engage in specious transactions to hide any weaknesses
in its actual condition. Unless the bank was able to anticipate the
date of the call, this produces an accurate report of its normal
condition.
Real understanding of the situation requires knowledge of the
origin, the history, and the functions of call reports. The practice
of requiring banks to submit reports of their condition to govern­
mental supervisors, and to publish such reports for public scrutiny,
began over a century ago. It began against a background of so-called
“wildcat” banking of a kind that is difficult for us to envision today.
Both internal and external controls were scanty; banking standards
were high in some areas but extremely low in others. A bank’s con­
dition might vary greatly from month to month, and bank insolvencies
were frequent as a result of overextensions of credit, other unsound
policies, and inns.
In these circumstances, unexpected calls for reports of condition
served two principal purposes. The supervisor received information
that enabled him to decide whether any dangerous trends were devel­
oping ; if they were, he might dispatch an examiner to make a special
examination of the bank or to discuss the facts of life with its board
of directors.
Equally important was the information available to the banking
public in the report of condition published in the local newspapers.
In this connection, two facts must be remembered. Fifty or a hun­
dred years ago commercial banks’ customers were almost exclusively
people of substance, to use a phrase of the time. Wage earners and
white-collar workers rarely had accounts. Typical customers were
manufacturers, well-to-do farmers, and wholesale and retail mer­



4

“WINDOW DRESSING” IN BANK REPORTS

chants. This was long before the days when 49 of every 50 bank
depositors were completely covered by deposit insurance. In that era,
the majority of bank customers could, and probably did, read reports
of condition to decide whether the bank looked safe or whether it
might be advisable to shift to a stronger institution. It is important
to bear in mind also that in those days the bank statements so published
in accordance with law were practically the only statements that were
published at all.
In our lifetime the significance of required reports of condition has
changed greatly. Today, I venture to assert, only a tiny fraction of
bank customers pause to read items headed “Report of Condition of
XYZ State Bank * * *” published in accordance with call made by
whomever it would be; instead, they relax calmly in the shelter of
Federal deposit insurance. Those who are interested in the condition
of a bank—such as the treasurers of corporations with millions on
deposit—are seldom misled by window’ dressing. They know it exists
and make necessary allowances, checking against the surprise reports,
and often they can directly ask banks for the information they want.
They are not fooled.
For bank supervisors also, call reports are less important today as
instruments of supervision. With extremely rare exceptions, the gen­
eral condition of a bank does not alter substantially from month to
month. Furthermore, supervisors have developed better alternative
sources of information. Reports of examiners today are much better
than they used to be. During my 30 years of bank supervision, I do
not recall a single instance in which a dangerous trend calling for cor­
rective action first came to our attention through a call report.
But reports of condition today serve one important purpose that
hardly existed in 1900. In economic analysis and planning and par­
ticularly in the formulation of monetary policy, reliable bank statistics
are a principal tool. Reports of condition, I venture to say, are the
No. 1 source of these statistics for the American banking industry.
For statistical information of this kind, standardization of report­
ing dates is of great value. In many bank asset and liability cate­
gories, seasonal, even intraweekly, variations are astonishingly large.
If reports were called for as of December 26 in one year, December 6
in the second, and December 16 in the third, even our owrn skilled stat­
isticians would not be able to measure, with reasonable accuracy,
movements in such basic items as deposits, business loans, and many
others. Moreover, since most nonbank statistics to which banking data
must be related are end-of-month figures, variable bank reporting
dates detract considerably from the suitability of banking data for
analyses of this character. Even the accuracy of the actual data re­
ported would be better under fixed-date reporting than under surprise
calls. Bankers have repeatedly informed us that it is most difficult to
reconstruct an accurate report of condition retroactively for items not
regularly covered in their daily trial balances. Because of these diffi­
culties, manv banks resort to estimating procedures that are often
subiect to a troublesome margin of error. With fixed-date reporting
at the midvear and vearend, banks could arrange in advance for an
accurate tally for each reported item as of the reporting date.
Against this background, I return to the fallacy that might be called
the surprise call panacea. Plainly stated, this is the argument that




“WINDOW DRESSING” IN BANK REPORTS

5

all the benefits of call reports would be retained and perhaps even
enhanced and the evils, particularly window dressing, would disap­
pear, if all calls were made on a surprise basis. What I have already
said suggests some of the weaknesses of that argument. However, to
evaluate it effectively, understanding of the actual call report situa­
tion is essential.
Under section 7 of the Federal Deposit Insurance Act, almost all
banks in the United States are required to make four reports of condi­
tion annually to their Federal supervisors. The date of such balance
sheets is the same for all banks. In actual practice, the regular cus­
tom has been to call for two of these reports, each year, on unexpected
dates, usually in the spring and fall. The remaining two ordinarily
are called for on or about June 30 and December 31 of each year.
The latter are the principal source of the financial statistical series
that I have mentioned. We see, then, that ordinarily there are two
surprise calls every year. To the extent that publication of reports
of condition called for unexpectedly are of benefit to the public, such
benefit is derived from these calls. (However, in the opinion of at
least one Federal supervisor, it appears, publication of those surprise
call reports is of little benefit to the public. The Comptroller of the
Currency has authorized national banks to omit current publication
of those reports, requiring publication only as an adjunct to the re­
ports that are customarily called for as of June 30 and December 31.)
The surprise call fallacy amounts to a contention that all benefits
of call reports would be retained and all detriments eliminated if
June 30 and December 31 were avoided as dates for the remaining
two calls. Actually, however, this is far from the case. As I men­
tioned, a “call” as of December 18 would not prevent banks from
window dressing, if they cared to, in preparation for a widely publi­
cized yearend voluntary statement. In other words, even if the su­
pervisors called for a report as of December 18, and in that report—
because of its unexpected date—there was little or no window dress­
ing, the report that actually comes to the public’s attention, and
which is the basis of the semiofficial size rating of the bank, would be
a voluntary yearend statement, which would contain just as much or
as little window dressing as the bank might wish. From that view­
point, the only result of the December 18 call would be to impose
upon all banks (including the vast majority that do not indulge in
window dressing) the work and expense involved in the preparation
and publication of two yearend statements instead of one.
Occasional issuance of an end-of-year call as of a date other than
the last business day of December has at least one advantage, how­
ever. It helps to reveal to supervisors and other interested persons the
extent of window dressing. This was demonstrated in 1962. Re­
ports of condition were called for as of Friday, December 28, which,
for most banks, was just 1 business day before the end of the year.
It can be assumed that since banks are accustomed to December 31
calls, the December 28 figures were not appreciably inflated by win­
dow dressing. Most banks, particularly large banks, published not
only their call reports as of December 28, 1962, as required by law,
but also voluntary reports as of December 31, and the latter were in
more eye-catching form.
24-624—63-




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6

“WINDOW DRESSING” IN BANK REPORTS

Comparison on the figures of these two statements, just 1 business
day apart, was instructive. The hundred largest banks in the coun­
try, according to a compilation published in the American Banker,
furnish a striking example, although similar conditions exist in
smaller banks as well. Those hundred banks showed total deposits of
$121 billion on December 28, and by the end of December 31, 1 busi­
ness day later, this had increased to almost $129 billion, a difference
of more than 6 percent. Among the hundred, nine banks showed de­
posit increases, in 1 business day, of more than 10 percent. Indi­
vidual figures ranged up to a high of 34 percent expansion. It is ob­
vious that most of these increases were due to window dressing. Not
all of them; some of them. Consequently, last year’s experience pro­
vided a good picture of the magnitude of the problem.
Although window dressing sometimes has been attacked for the
wrong reasons—mainly the loss of benefits to the supervisors—the
undesirability of the practice must not be underestimated. It is not
a negligible problem. The aggregate volume of window dressing, I
suspect, does not vary so greatly, from year to year, as to distort
seriously the bank statistics we need, but I have no doubt that, al­
though allowance may be made for window dressing, the figures on
which we depend would be more realistic and reliable if window dress­
ing could be done away with. In addition, there is inequity in a
system that enables a bank to pretend to the public that it is the largest
in the community or State, when in fact it is not. Personally, I do not
believe banks gain or lose much by this “numbers game,” but some
banks take it very seriously indeed, and that is why window dressing
sometimes threatens to get out of hand as banks try to outmaneuver
each other. One is reminded of what the Red Queen said in “Through
the Looking Glass”:
* * * here, you see, it takes all the running you can do to keep in the same
place. If you want to get somewhere else, you must run at least twice as fast
as that.

Window’ dressing, then, is an undesirable practice—an untruthful,
unfair, wasteful, and misleading device. There is little doubt as to
how a good banker w’ould react to a borrower’s statement that was in­
flated to show a more liquid position or a larger volume of business
than in fact existed. To the degree these efforts succeed, they result
in deceiving the public. And, to the degree they are recognized and
discounted, they result in raising doubts as to the reliability of bank
statements and of bankers’ statements.
I must apologize for quoting from myself here. This is a part of
the statement which I made to the Illinois Bankers Association earlier
this year.
All bank supervisors, and most banks as well, would like to see the
last of window dressing. But the “all surprise call” approach clearly
is not the answer. As I have said, it w’ould impose additional burdens
on banks, would not materially improve public understanding, and
might weaken essential statistics rather than improve them. In fact,
an all-surprise program actually would eliminate the only existing
penalty for window dressing. At present, a bank that window dresses
its yearend report pays a larger deposit insurance premium, and this
deterrent to window dressing, for whatever it is worth, would be lost
if the required reports, on which the insurance assessment is based,
were called for as of December 18, let us say, rather than December 31.



“WINDOW DRESSING” IN BANK REPORTS

7

As the committee may know, a number of efforts actually have been
made to diminish window dressing. Perhaps the most effective has
been moral suasion—efforts to convince bankers that the practice is
morally unworthy, that it could be injurious to the prestige of the
banking industry—that is, to public confidence in the ethics of banks—
and that the game simply is not worth the candle, in the long run.
In my judgment, moral suasion is not only the most promising
avenue toward the elimination of window dressing, but also the
most desirable. Because of the complicating factors I have described,
I am inclined to believe that the problem could not be solved by gov­
ernmental fiat without an excessive degree of regulation and control.
Actual experience indicates that bankers are prepared to stop this
practice “if the other fellow will.” Many are convinced that com­
peting in window dressing is an unprofitable tug of war, but each par­
ticipant hesitates to let go for fear that his opponent will carry off
the prize. I believe that if the bank supervisory authorities, acting
vigorously and simultaneously, would request banks throughout the
country to quit window dressing, the likelihood of success would be
excellent. But I emphasize that such an effort would certainly fail
unless it was based on complete cooperation and coordination, most
careful preparation, and determined face-to-face discussion with the
bankers, State or National, in every city where the practice prevails.
And after intial success, the supervisors would have to remain alert
to chop off any new sproutings of this unhealthy growth.
A supplementary line of approach would be to require call re­
ports to include daily average figures for important items. This
might also be helpful from the statistical viewpoint, although it would
add to the reporting burdens of banks—including the majority which
do not window dress—and it would not, by itself, prevent window
dressing in the yearend balance sheet, and that is where it is principally
used.
I should like to summarize my ideas on this subject. Window dress­
ing is an undesirable practice. Every reasonable effort should be made
to eliminate it. Calling for all reports of condition on surprise dates
is not a satisfactory answer. I believe that bank supervisors are in a
position to develop a program, based on moral suasion, that will enable
American banking to rid itself of this detrimental practice. If that is
the answer, or if some other effective answer is found, it will be trans­
muted from a hope to a reality only through painstaking study of this
complex question, with full and frank interchange of ideas and criti­
cisms leading to cooperative action, among bank supervisory agencies
and the industry itself. I hope that these conditions will prevail, so
that efforts to solve this problem, and the many other problems that
confront bank supervisors, can take place under conditions that offer
the greatest likelihood of success.
(The attachment follows:)
Devices Employed To “Window Dress” Bank Condition Statements Called
for by Supervisory Authorities

1. Roundrobin exchange of interbank deposits among three or more banks
which increases both deposits and cash-equivalent assets to make the bank appear
larger and more liquid than it normally would. At least three banks must
participate, since reciprocal deposits between two banks are required to be
reported “net” in official condition reports.




WINDOW DRESSING” IN BANK REPORTS

8

2. Short-term reductions in borrowings, which member banks may offset by
larger borrowings on other days of the reserve-computation period to main­
tain the required level of average reserves. This does not inflate the report’s
figures, but it does show a debt-free condition in published statements of the
borrowing bank, although the payoff of the borrowing may be in the mail on the
statement date and the loan account of the lending bank may not be reduced.
3. Arrangements with large depositors to increase their deposits temporarily
by drawing drafts against their accounts at other banks. These drafts are
credited to the customer’s account immediately but are in the process of collec­
tion on the statement date and are not charged against the account at the
other bank until after the statement date. This transaction may be reversed
immediately after the statement date, so that there is no change in the allocaion of the depositors’ balances in the long run.
4. Very short-term loans to cooperating customers, the proceeds of which are
credited to the customers’ accounts on the statement date and repaid immediately
afterward. Similar results may be obtained by purchase of bank acceptances
or open-market paper from brokers or nonbank dealers or by shifting of loan
participations among banks. Payment is credited to the seller’s account and
the drafts used in payment are in transit on the statement date so that both
loan and deposit totals are inflated.
5. Delayed processing of items presented for collection, or of interoffice clear­
ings in a branch system. This is a simple and practically undetectable way of
inflating total deposits and liquid assets and can be accomplished by holding
back only a relatively few large checks without disturbing normal processing
arrangements and without resorting to collusion with other banks or with
customers.
Inflation

of

Figures in Voluntary Published Statements by Methods That
Abe Not Permitted in Official Condition Reports

1. Voluntary statements may include reciprocal interbank balances which are
required to be reported “net” in official reports of condition.
2. Voluntary statements may incorporate the assets and liabilities of foreign
branches, which must be excluded from official condition reports.
3. Loan and investment totals and capital accounts may include bad debt
reserves and other valuation reserves. They are required to be excluded from
totals in the official condition reports of most banks.

Now, Mr. Chairman, I would be very glad to try to answer any ques­
tions that you or the members of the committee might have.
I have with me not only my lawyer but my statistician and they can
provide any help.
Mr. Fascell. I am going to nominate you the modern man, Mr. Rob­
ertson, since you are accompanied by the right people.
Mr. Robertson. That always helps.
Mr. Fascell. Thank you, Mr. Robertson. Your statement has been
very candid, and you are certainly clear enough in your position.
I think as far as moral suasion is concerned, it is always nice to
think that everybody is going to police himself, but I am afraid the
facts of life are that that usually does not happen; whether it is in
the banking industry, in Congress, or some place else. So, it seems to
me, although moral suasion is, of course, the primary method, you
may need a little help.
Mr. Robertson. May I give you an example, Mr. Chairman, of
moral suasion that I think has worked in this field ?
Mr. Fascell. Yes, sir; by all means.
Mr. Robertson. I might just say that over the years, and I have
had a lot of experience in this supervisory field, there has never been
a time, when determined interest on the part of the various agencies
of the Federal Government was focussed on the same problem at the
same time. One agency would be interested at one particular period,
and the other one could not be bothered.



“WINDOW DRESSING” IN BANK REPORTS

9

Mr. Fascell. Yes, sir. We have that problem up here all the time.
Mr. Robertson. I am sure you do; but a few years ago, just a very
few, this window-dressing problem was most active in a given section
of the country. The president of the Federal Reserve bank in that
district called in all the big bankers, those that were really engaging
in this problem; laid it out on the table; established to their satisfac­
tion that it was not in their own best interests—it was certainly not in
the public’s interest, it was a futile sort of thing to do—and asked them
to stop it. They stopped.
Now, the difficulty is, you see, that all agencies don’t do this at the
same time and the same place. You must work up a coordinated pro­
gram, where you get all of the agencies pushing in the same direction
at the same time. If we can just do that, we can whip this without
any difficulty.
Mr. Fascell. Well, maybe you are right. I am not sure that this
committee can put all the supervisory agencies in the same hat and
make them do the same thing at the same time. Maybe that is part
of the problem.
Just saying that this is the way to do it, really does not accomplish
anything, because we are right back where we were.
Mr. Robertson. I think that is right.
Mr. Fascell. I am not sure that I can get you to do anything or
the Comptroller or that you can get him to do anything, or that he
can get you to do anything.
Mr. Robertson. This is the answer, though.
Mr. Fascell. If you gentlemen want to get together and solve
this problem, that is fine. We can quit holding hearings and forget
the whole thing.
Mr. Robertson. Oh, I am delighted to have the interest of Congress
in this matter. I think the more we can point up the differences be­
tween agencies, and the need for concentrated, coordinated action, the
better off we are. You only get this brought out----Mr. Fascell. All bankers are intelligent. All they have to do is
quit doing something which they know is not right.
Mr. Robertson. I hope that is right; but you have to focus atten­
tion on the problem. That is what this committee is doing, and I am
grateful.
Mr. Fascell. Fine. Maybe we can take this kind of an approach.
See what you think of it.
Supposing we were to decide that the size of an institution is a
matter for official determination and that an institution could not
itself make that determination. It therefore, could not claim that it
is larger than others. Would that take away the incentive for window
dressing? Is the purpose of window dressing simply to advertise?
Mr. Robertson. My answer is “Yes”; but does one advocate legis­
lation keeping an individual from stating what is a fact ?
Mr. Fascell. Only if it is not a fact, Mr. Robeitson. I mean,
we have all kinds of agencies that deal with that. The Federal
Trade Commission; the Security and Exchange Commission; and
I would hope the supervisory agencies for financial institutions.
Mr. Robertson. You see the difficulty with this is that bankers
would contend that on December 31 they were the biggest one; that
these were deposits in their bank that raised their total, and they



10

“WINDOW DRESSING” IN BANK REPORTS

were; but. you see, the extra deposits were not for a genuine busi­
ness purpose. They were just put there for show, but they can truth­
fully say that, they did have deposits in their bank of $1 billion on
December 31. This is not a false statement. This is a true state­
ment. I don’t see how you can have legislation which tells them they
cannot do it.
Mr. Fascell. I was not thinking about legislation.
Mr. Robertson. Or even a regulation of agencies. I don’t see how
that could be handled, either.
Mr. Fascell. In other words, what you are saying is that you don’t
see any value in a regulation which would say that an institution can­
not advertise its size.
Mr. Robertson. No; I don’t. I would be reluctant to have any
regulation which says an individual institution cannot state a truth to
the public.
Mr. Fascell. Would you have a regulation that would say that thev
could not state an untruth?
Mr. Robertson. I would; but the trouble is, you see, that there is
not an untruth. This is a truth, but it is a deceptive device to make
them look bigger than they are normally.
Mr. Fascell. Well now, let’s use your words, “a deceptive device.”
If it is deceptive, is that wrong?
Mr. Robertson. I think it is wrong. I think it is also not in their
own interest.
Mr. Fascell. Can we regulate the wrong in any way ?
Mr. Robertson. That is what I have been trying to devise a way to
do; and I don’t know a sure way to do it; and I don’t know of anyone
else who has come up with a sure way. If we can find it, that is
wonderful.
Mr. Fascell. I haven’t read all of your list of devices that are used
to window dress, but are the five which you identified unlawful by
regulation ?
Mr. Robertson. No.
Mr. Fascell. Are they unlawful as a result of an examination?
Mr. Robertson. Not at all.
Mr. Fascell. Where an examiner finds any one of these conditions
is present, does he do anything about it ?
Mr. Robertson. No; these are truthful statements which they put
out.
Mr. Fascell. Yes; I know. I understand that they are truthful.
Mr. Robertson. And the particular transactions should be discour­
aged, but you cannot—in my opinion, there is nothing in the regula­
tions or the rules, that can prevent it.
Mr. Fascell. The question is, Should they be outlawed? If you
cannot outlaw the whole thing, can you outlaw the practices, one by
one?
Mr. Robertson. This might be possible to outlaw them one by one,
but new ones would develop all the time—of doing this sort of thing.
Mr. Fascell. That is the reason you have an examiner, though,
isn’t it ?
Mr. Robertson. What is the examiner going to do ?
Mr. Fascell. I don’t know. You tell me. You are the expert.




“WINDOW DRESSING” IN BANK REPORTS

11

Mr. Robertson. I can tell you exactly what they do, but I cannot
tell you just how he would stop this sort of window dressing when the
banker contends that this is a true statement of the conditions of his
bank and the size of his bank on a certain day.
Mr. Fascell. Well of course^ he could say, “We don’t like this par­
ticular practice, and we are going to do something about it.” What
control do you have over an institution now ?
Mr. Robertson. If it is a false entry, we can, of course, do something
about it. If it is a cooperative arrangement, entered into with another
individual or a corporation or several of the banks, which is not by
itself a violation of law, a false entry of any kind, this becomes a very
difficult problem to deal with.
Mr. Fascell. Well now, you are saying that this is a bad thing;
that it is deceptive; it ought to be stopped; we ought to do it by moral
suasion; and that there is no way of identifying it by regulation so
that you can stop it.
Mr. Robertson. Oh, no. I am not saying any such thing, I hope.
Mr. Fascell. Then I misunderstood you. I am sorry.
Mr. Robertson. No. What I am trying to do is to spell out what
the problem is; how it arises—and no one in the banking industry has
any misunderstanding about this—to get cooperation among the super­
visory agencies, applied simultaneously throughout the country; by
calling in all the bankers that are engaging in this practice, and we
know which ones are doing it; convincing them that this is wrong and
not in their best interest, because they are the ones who really suffer
from this, rather than the supervisor or the banking public.
What this does is to cast doubts upon the reliability of bank state­
ments themselves, which in my opinion can in the long run, destroy
public confidence in banks. That is what ought to be stopped; but
you see this is a matter of self-discipline on the part of banks them­
selves. If the agencies would work with them on this, in this respect,
on a coordinated, cooperative basis, it could be done.
Mr. Fascell. Well, in other words, you say that what should be
done is that the supervisory agencies ought to indicate their displeasure
at this point?
Mr. Robertson. Absolutely. Absolutely.
Mr. Fascell. And they are not doing that now.
Mr. Robertson. Not sufficiently, no.
Mr. Fascell. Therefore, if you put enough heat on the bankers, this
would really stop?
Mr. Robertson. The contention has been made that this is not the
fault of the banker, this is the fault of the supervisor; with this, I
quarrel drastically.
Mr. Fascell. It seems then, you don’t have to have a meeting of the
agencies to coordinate anything at all. Each agency just ought to put
the heat on.
Mr. Robertson. That would be true, I would say, but I would think
that would be more effective if all the agencies put the heat on and en­
deavored to stop it simultaneously.
Mr. Fascell. You keep emphasizing “simultaneously.” I don’t
know how we are going to get it—but we will get back to that subject.
Mr. Anderson?




12

“WINDOW DRESSING” IN BANK REPORTS

Mr. Anderson. On that question, Mr. Chairman, that you just
raised, I see that the different agencies do get together do they not,
to decide on the date that is to be the date for this ?
Mr. Robertson. Yes, they do. This is for the past few years, since
the statute was enacted putting the decision in the heads of the three
agencies on a majority basis. They now do, you see, set the date.
Mr. Anderson. So you can cooperate and coordinate your efforts as
far as picking the date. I would think they ought to be able to get to­
gether to coordinate a program.
I have one other question. I understand your objection to window
dressing—that it may distort the bank’s statistics, and so on; but ac­
tually, what are some of the evils that flow out of this practice, other
than it is not nice, of course, to do things that are unfair to your com­
petitors ?
But are there any—can you visualize any situation where any harm
comes to the depositors of an institution ?
Mr. Robertson. No, no. That is what I was trying to point out.
The banking public ordinarily is not injured by this practice.
Mr. Anderson. I remember a while back, one of the airlines was
advertising nationwide ads, that it had the fastest planes, and so forth;
and the other airlines were mad at them because that was not very ac­
curate, I guess, and there was some talk about that. We have a lot
of this puffing that goes on in various industries.
Mr. Robertson. That is right.
Mr. Anderson. I was just wondering what evil consequences flow
from that ?
Mr. Robertson. In my view, the evil consequences are the reaction
with respect to public confidence, as to the whole banking industry
itself. That is really the big issue here. The banking public is not,
fooled. The sophisticated corporate treasurers do not pay any atten­
tion to this. They are not fooled. They get the information. They
know what the status is. The supervisors are not fooled either. We
know. So that you cannot say that anyone is really put in jeopardy
by this at all.
Now, I think the banking industry of America ought to have the
highest degree of integrity. I think it will lose prestige because a
few people engage in this sort, of puffing, simply in order to put them­
selves up higher on the American Bankers’ list of the largest banks
in the country.
Mr. Anderson. Do you think the practice has grown perceptively
in recent years?
Is it getting worse?
Mr. Robertson. Yes, I do.
Mr. Anderson. Is it about the same ?
Mr. Robertson. I do think it is growing.
There was a time maybe 10 years ago, when I think I could count
on the fingers of both hands the banks that were really engaging in
this. This is not so today. Now other banks find, “Well, we are not
going to be put down when we are really bigger than that other bank.
We are not going to be put in second place.” You see, so much em­
phasis has been placed on the size of the institution by virtue of the
publication of the list of the top hundred banks; the second hundred
banks; and the third hundred banks; and everyone wants to climb



WINDOW DRESSING” IN BANK REPORTS

13

up a rung or two on the ladder and they use this as a means of doing
it, but this is not in any sense a practice which jeopardizes the safety
of the depositor of any bank.
Mr. Anderson. That is all I have.
Mr. Fascell. In my judgment, Mr. Robertson—I am really not
quarreling—it seems to me that you are saying that this affects only
the banking industry, but we are really talking about the entire public
of the United States. I cannot think of any greater damage than to
say, “This is bad practice. It is really deceptive. It has a tendency
to destroy the confidence in the banking institution.” What we are
really saying is that we want to recognize this as a practice which we
know is deceptive, which is really immoral. As you yourself pointed
out, if I go into a bank for a loan, and to inflate my financial state­
ment I borrow $50,000 from some friend, which I have to pay back the
next day, that certainly is not moral. Yet a bank can do that, and
inflate its yearly statement. I don’t see anything right about that.
It will take more than moral suasion, in my judgment, to stop the
practice. If it does, I think we ought to examine it very critically.
Mr. Robertson. I could not agree with you more. You are just
carrying it one step beyond my point. I had it related to the banking
industry, but the eventual effect upon the Nation, as a result of a
loss of confidence in the banking industry could be great.
Mr. Fascell. Well more than that: If the bank can do this, why
can’t I? Why should I be subjected to the criticism of a banker,
when I go up with a puffed-up or a wundow-dressed financial state­
ment, but the banker can do it—and advertise it to hundreds of
thousands of people—and nothing happens to him. I don’t see it.
Mr. McClory.
Mr. McClory. Mr. Robertson, some banks publish their—circulate
widely, their statements that are made after the surprise call, don’t
they, without resorting also to voluntary calls? It seems to me I have
seen banking statements which reflect an unusual date and give a great
detail of their particular condition.
Mr. Robertson. They have to publish, the call reports—as a matter
of fact, all banks have to publish such reports. But voluntary re­
ports—on which these alinements are for ranking among top hun­
dreds of banks—are only the end of the year and midyear reports.
Mr. McClory. But there are some banks that only publish the sur­
prise call statements ?
Mr. Robertson. Oh, yes. Yes. Many. Especially the smaller in­
stitutions.
Mr. McClory. Is there any window dressing which banks indulge
in, which you feel you, as a supervisory authority, are unable to detect ?
Mr. Robertson. Well, I don’t think it is possible. I don’t think it
is possible for any bank to window’ dress to any significant extent, in
a way that supervisory authority, through the examination process,
could not detect.
Mr. McClory. How would you regard authority in the Federal Re­
serve Board, or the FDIC, or some other agency, or all of you—
authority to comment with regard to the voluntary statements which
bear window dressing, with a requirement that the comment be included
as a part of any published statement ?
Would that be helpful to resolve the difficulty ?
24-624—63------ 3




14

WINDOW DRESSING” IN BANK REPORTS

Mr. Robertson. At one time we considered requiring a statement
to be inserted in the report to the effect that the figures were free from
window dressing. However, this idea was dropped because it would
apply to all banks rather than the few engaging in the practice and
possibly cast doubt on all bank financial statements. Nevertheless,
this is one way in which you could do it. This is one possible way.
Mr. McClory. Well, the only time for a comment would be a com­
ment where you are aware of a window dressing, and you tell me that
you are able to detect window dressing in every case so there would
not be any doubt in your mind as to the ability to fairly and accurately
comment, would there ?
Mr. Robertson. No, I don’t think there would. I think the matter
of getting the information so quick—you would need it before the
publication date—would present a real problem.
I am not sure about that, but this is something that ought to be
explored.
Mr. McClory. And the presence, or the authority to make this com­
ment, or the threat or recognition that this comment might be in­
cluded, would tend to discourage window dressing; would it not?
Mr. Robertson. Yes, of course. That was the hope of the surprise
calls near the yearend: that that in itself would discourage it, because
it would make it so obvious that they were building it up, but that
did not have that effect.
Mr. McClory. That is all.
Mr. Fascell. Mr. Macdonald?
Mr. Macdonald. I have one short question, sir. If it is so basic,
it is only because I am not a banker; but in answering Mr. McClory,
you said it was impossible, in your judgment, to have any of these
window-dressing-type things go on without your being able to detect
it; and I am referring to your department. I was wondering what
methods you used to make this detection.
Mr. Robertson. Oh, you use—in the first place, you can compare
reports, but that isn’t the primary way. The primary way is that the
examiners go in and check over these items from the bank’s own books,
at the time of the examination. And, therefore, you could determine
what the situation was.
Mr. Macdonald. Which banks are selected ? Is it done at random,
or is it an annual thing ?
Mr. Robertson. Oh, no. It is not an annual thing. My point
was it could be done. You could send examiners in to examine the
books and records of a given institution, to see which of these trans­
actions were not genuine business transactions.
Mr. Macdonald. My question is not what could be done, but what
is being done.
Mr. Robertson. What is being done is nothing. Nothing. You see,
we are not fooled about this. We have the reports of condition; we
know that. We have additional information in the reports of exami­
nation. So that we are not laboring under any misapprehension;
but when you throw all of these things into the computer for example,
in order to get your all-bank statistics, you have to make adjustments,
and allowances, and you do; but since no one has been seriously in­
jured, there has been no all-out effort to try to weed out those that are
puffed.



'WINDOW DRESSING” IN BANK REPORTS

15

Mr. Macdonald. Is it your opinion—I am not trying to put words
in your mouth—is it your opinion that something should be done more
than is currently being done in this area ?
Mr. Robertson. Yes, sir.
Mr. Macdonald. But you have made the suggestion earlier----Mr. Robertson. I would be very glad to tell you what I really
think should be done.
Mr. Macdonald. Right. I would like to hear it.
Mr. Robertson. I think all the Federal bank supervisory agencies,
and the State agencies, ought to make a concentrated effort by calling
in the bankers engaging in this process, showing to them this is not
the thing to do; that it is not worth the candle; that they ought to
stop it; and I think they would stop it. The trouble has been that
we have not been able to get cooperative action along the same lines,
among all the supervisory authorities, and it is going to be difficult
to get this sort of thing until you get a single Federal Banking Com­
mission. for example, as I have recommended.
Mr. Macdonald. That’s right; but don't you have a lot of power
already in this field? Doesn’t the Federal Reserve have power to look
at these things ?
Mr. Robertson. As I pointed out earlier, we have done this in one
area, where this practice really started on a big scale. We called in
all the banks that were engaging in this and they have stopped it.
Mr. Macdonald. Would not just word-of-mouth among—I know
it is a fairly tight fraternity—the banking circles; if you would just
put out the word that you were about to crack down on this, do you
think that would have a salutary effect?
Mr. Robertson. If all the agencies did it: but if we did it for ex­
ample, as far as the State member banks are concerned, and the
Comptroller did not do it in the case of national banks, this would
just give the national banks an advantage over the others, or vice
versa.
Mr. Macdonald. You are pointing out the lack of coordination.
Mr. Robertson. That is exact what I am pointing out.
Mr. Macdonald. Thank you.
Mr. Fascell. Mr. Matan.
Mr. Matan. Are there any other reasons why banks window dress
than just the prestige reason for self-aggrandizement ?
Mr. Robertson. I don’t think so, really.
Mr. Matan. How extensive is window dressing?
Mr. Robertson. Well----Mr. Matan. We don’t have any figures in the record here. ITow
many banks would you say practice it ? Can you give an estimate ?
Mr. Robertson. Can you give that ?
Mr. Conkling. I would say the top 200 probably half of them.
When you get down below the top 200, a much smaller percentage,
except in certain areas. You see it in certain towns, that all the banks
in that town are; but it is a small percentage of the small banks.
Mr. Matan. What areas would they be, sir, where all the banks
engage in the practice?
Mr. Robertson. There is no area at all. That is not what you are
saying. There is no area in which all the banks practice it.
Mr. Conkling. Oh, no. No, no.




16

“WINDOW DRESSING” IN BANK REPORTS

Mr. Robertson. He was thinking in terms of, I am sure, a small
community, say, where there are three banks, and they are all about
the same size but one of them gets the idea it wants to puff itself up,
and appear to become the biggest. Then the other two engage in it.
Mr. Fascell. Mr. Robertson, it is a fact that actually has happened,
is it not ?
Mr. Robertson. That is certainly true.
Mr. Fascell. That is a fact?
Mr. Robertson. That is true.
Mr. Fascell. So then his statement is correct.
Mr. Robertson. I was thinking in terms of areas and he was talking
in terms of communities.
Mr. Fascell. Well----Mr. Robertson. If there is no difference----Mr. Fascell. It is a nice game of semantics.
Mr. Robertson. Not intentionally.
Mr. Fascell. I understand. I think it is clarified for the record.
A community is an area.
Mr. Robertson. Absolutely.
Mr. Matan. Do banks in the large areas, like New York, Los An­
geles, and San Francisco, engage in it more than banks in other areas?
Mr. Robertson. The banks in the larger cities engage in it to a much
greater extent than the banks in smaller communities. Generally, the
banks in smaller communities do not put out a voluntary yearend state­
ment. They just use the regular call report publication; but in the
larger cities, in these larger banks especially, this is much more preva­
lent.
Mr. Matan. Is it extremely prevalent for instance, in the emerging
financial centers like Dallas?
Mr. Robertson. It was in Dallas. It is not today. Dallas is really
where this grew up. It started fast, but it stopped. And this was
by virtue of moral suasion.
Mr. Macdonald. How about Boston ? It always has a big advertising campaign going on as to who is the biggest bank.
Mr. Robertson. I am sorry, I cannot give you the information about
Boston.
Do you know ?
Mr. Conkling. It is not a window-dressing town.
Mr. Macdonald. Happy to hear that.
Mr. Matan. Have any cooperative efforts between the Federal
supervisory agencies ever been attempted in the field of moral suasion ?
Mr. Robertson. Not satisfactorily. There have been times when
both agencies, the Comptroller and the Federal, for example, would
be of one mind. And this is when we started our Dallas operation.
There has never been a time however, when it has been possible in
my judgment to whip up interest on both sides of the fence at the same
time. But I hope this hearing will serve that purpose.
Mr. Matan. One more question, sir. The reports of the Federal
Reserve System indicate that banks make great efforts to pay off their
loans and debts outstanding to the Federal Reserve banks at the yearend, particularly December—the end of December—and then within
a couple of days later, they reborrow.
Is that a factor in window dressing ?
Mr. Robertson. Yes; it is a factor in window dressing.



’

t

WINDOW DRESSING” IN BANK REPORTS

17

This is based upon a longstanding tradition, among banks, that they
prefer not to show indebtedness. Banks are very reluctant to show
borrowings from the Federal Reserve, for example. This attitude, in
my judgment, has no foundation, no meritorious foundation, but it is
true, it is a fact, and so they try to get out of debt as of the time of
the call report, so it is not shown on the call report. Sometimes they
are not successful but sometimes they are.
Mr. Fascell. Mr. Robertson, do you think we ought to do away
with the two surprise calls ?
Mr. Robertson. I think it would do no great harm to do away with
the two surprise calls. We get most of the information we need from
the yearend and the June 30, but there must be supplemental infor­
mation-gathering facilities. We have these, you see, in the Federal
Reserve. We get them, some on a daily, some on a weekly, basis, so
that we have constant information. This we could not dispense with.
Mr. Fascell. I was not talking about reducing the number of calls;
just doing away with the surprise calls.
Mr. Robertson. Oh, no; I would keep the spring and the fall for
whatever purpose they serve on a date that is not a fixed date. I don’t
think it makes too much difference one way or the another.
Mr. Fascell. If it is of no value to the supervisory agencies and it
does not fool anybody and it does not particularly help the public,
what good is it ?
Mr. Robertson. This is just one of those things that stayed in the
statutes over the years.
Mr. Fascell. We have had too much of that in the statutes.
Mr. Robertson. I would not be opposed to dropping those two re­
quirements and giving the supervisory authorities the power to make
special calls.
Mr. Fascell. That is what I was getting at.
In other words, if it is not of value to the public and it is of no
value to the supervisory agencies, why continue an archaic practice?
Mr. Robertson. We use some of these figures on the surprise calls
for comparative purposes, but not sufficient to warrant a retention of
those two calls, if we have the power to make special calls whenever
we thought it was necessary.
Mr. Fascell. One final thing.
We were talking about coordination between supervisory agencies,
and I want to be sure that I understood it correctly. You said that we
would never get the kind of coordination you envision as being neces­
sary unless we adopted the single banking commission which you
advocate.
Is that correct ?
Mr. Robertson. I am sorry to say, in my opinion, this is generally
true.
Mr. Fascell. So in other words, you will never get coordination to
apply moral suasion to do away with window dressing—in your
judgment ?
Mr. Robertson. Not necessarily. I think on this particular phase,
it may be possible, if the agencies can be made aware that there is an
interest in this matter; the matter is brought out to the fore; put into
the public limelight.
This, I think, would serve the purpose.
Mr. Fascell. At least, we ought to try it ?



18

“WINDOW DRESSING” IN BANK REPORTS

Mr. Robertson. That is right.
Mr. Fascell. Thank you very much.
Air. Matan. One more question
There will be testimony, perhaps by the next witness, that the Comp­
troller’s Office will propose to Congress an amendment to the existing
laws, which would provide for calls on the fixed dates of the last busi­
ness days of the months of June and December, and also for dailyaverages-for-a-quarter or random-date reports.
Are you familiar with that bill, sir ?
Air. Robertson. No, I am not.
Air. Matan. Has that ever been discussed with you ?
Mr. Robertson. No. This is not a new proposition. The bill has
not been discussed with me. I never heard of it until this moment,
but the idea is not new at all. It has been considered for a very long
period. As a matter of fact, the averaging process, we tried to get
accepted many, many years ago. We were unsuccessful in getting that
idea accepted.
You see, the members of our staff and the members of the Comp­
troller’s staff and the FDIC do have joint meetings, frequently, with
the idea of trying to perfect the content of the call report. The call
report itself is a result of a compromise, and this is as it should be;
but the averaging process can serve a purpose. It is a helpful sort of
device. It does not prevent window dressing, if the call is on a sur­
prise date near the end of the year.
Mr. Fascell. Thank you, sir. We appreciate very much your very
fine contribution to the study of this committee. Thank you and those
who accompanied you this morning.
Air. Robertson. Thank you very much.
Air. Fascell. Now, we would like to hear from Mr. AVatson, Deputy
Comptroller of the Currency.
Mr. Watson will you come up and bring those accompanying you
to the table.

STATEMENT OP J. T. WATSON, DEPUTY COMPTROLLER OP THE
CURRENCY; ACCOMPANIED BY R. COLEMAN EGERTSON, CHIEF
NATIONAL BANK EXAMINER; ROBERT BLOOM, CHIEF COUNSEL;
AND DR. SHERMAN SHAPIRO, SENIOR ECONOMIST

Air. Watson. Air. Chairman, my name is J. T. Watson. I am a
Deputy Comptroller of the Currency. Accompanying me from this
Office are Robert Bloom, chief counsel, on my right; R. Coleman
Egertson, on my far right, the chief national bank examiner; and
Dr. Sherman Shapiro, on my left, the senior economist for the Comp­
troller.
Mr. Chairman, you have requested elaboration of the Comptroller’s
statement of July 3,1963. This letter noted:
It is the opinion of this Office that the legislative history of the call report laws
clearly indicates a design to employ these reports as a supervisory device and
on a surprise basis. In practice, however, this design has not been followed.
During the past 25 years, calls were made on the last business day of June, 21
times, and on the last business day of December, 24 times. As a consequence, the
supervisory purpose of call reports has fallen into disregard. This default from
sound bank supervision has brought about the widespread practice of window
dressing.




WINDOW DRESSING” IN BANK REPORTS

19

(The complete letter referred to above follows:)
Comptroller of the Currency,
U.S. Treasury,

Washington, D.C., July 3,1963.
To the Presidents of all National Banks:
As shown in the enclosed request, June 29, 1963, was selected by the majority
of the Federal supervisory agencies as the date for the second call report for
1963. This Office would have preferred a date other than June 29.
It is the opinion of this Office that the legislative history of the call report
laws clearly indicates a design to employ these reports as a supervisory device
and on a surprise basis. In practice, however, this design has not been followed.
During the past 25 years, calls were made on the last business day of June, 21
times, and on the last business day of December, 24 times. As a consequence,
the supervisory purpose of call reports has fallen into disregard.
This default from sound bank supervision has brought about the widespread
practice of window dressing. Although the banking industry generally regards
this practice as undesirable, no justifiable criticism can be lodged against the
banks for window dressing in view of the failure of the bank supervisory
agencies to take the steps necessary to prevent this practice.
The practice of end-of-month calls has been defended by some as a means
of providing statistical information on a comparable basis for analytical pur­
poses. We recognize the usefulness of such data for these purposes, but it is
our view that the practice of window dressing has impaired the validity of these
figures. Although surprise calls do not provide strict comparability of data,
this would be less serious from a statistical viewpoint than the consequences
of window dressing. Thus, the procedure of surprise calls would serve our
supervisory responsibilities more effectively without impairing, and perhaps
improving, the statistical worth of the data.
Sincerely,
James J. Saxon,
Comptroller of the Currency.

Going back as far as 1914 there were only six occasions when the
call report was made other than on the last business clay of June and
only two on other than the last business day of December. Because
these dates have become standard, banks can prepare for these calls,
if they are so inclined. Consequently, window dressing has become
widespread. The use of traditional call dates of the bank supervisory

agencies aids and abets this practice and, in our opinion, is not in
harmony with the intent of Congress.
The legislative history of the 1960 amendment to the Federal De­
posit Insurance Act—Public Law 86-671—indicates that it was the
intent of the Congress that requests for call reports be made on a
surprise basis. The Senate Report No. 1821 of June 30,1960, and the
House Report No. 1827 of June 14,1960, stated the following under the
heading “What the Bill Would Do”:
Also, basing deposit liabilities on surprise call dates will eliminate any
tendency which may now exist among banks to resort to window dressing to
create artificial assessment deductions for the assessment dates fixed in the
statute.

It is further noted on page 47 of the hearings conducted by the
House Banking and Currency Committee that Congressman Multer
asked Mr. Loeffler, then Controller of the Federal Deposit Insurance
Corporation, whether reports had been called for at fixed times. Con­
gressman Multer was assured that they would not be at fixed times
but would be surprise calls. I quote Mr. Loeffler:
No, sir; they are not at fixed times. They are surprise calls. The calls are
not announced until after the date as of which they are going to ask for it.




20

“WINDOW DRESSING” IN BANK REPORTS

Window dressing is a practice of inflating deposits and resources.
Some of the more common devices to window dress a call report are:
Example 1. (1) Bank A deposits x dollars with bank B. (2) Bank
B deposits x dollars with bank C. (3) Bank C deposits x dollars with
bank A.
Assuming that $1 million was the amount of the so-called deposit in
each instance, banks A, B, and C will show an inflated deposit struc­
ture in the amount of $1 million.
Example 2. (1) Bank A has a “due to'’balance for the account of
Bank B. (2) Bank B deposits a portion of this balance, say $500,000
with bank C. (3) Bank C then redeposits $500,000 with bank A.
In this instance bank B derives no benefit, but banks A and C re­
ceive a temporary benefit to the extent of $500,000.
Example 3. Bank A draws its own cashier’s checks payable to its
own order or to the order of bank B. The checks are then sent to
bank B for deposit to the credit of bank A. When the cashier’s checks
are returned to bank A for payment, bank A remits by means of a draft
drawn against its account at bank B.
Example 4. A customer is granted a temporary loan with the pro­
ceeds being credited to his account. After the call date the transaction
is reversed through payment of the loan.
The above transactions are not uncommon just prior to or imme­
diately following the traditional call dates. This practice exists be­
cause of the natural desire of bankers to maintain or improve the publ ic
conception of their relative size. The banking industry generally
regards these practices to be undesirable. But, singly, bankers are in
no position to stamp out these practices.
Our first effort to deal with the problem of window dressing was in
December 1962. The Comptroller proposed a call date as of December
28. The Federal Reserve and the Federal Deposit Insurance Cor­
poration agreed to this date.
To give the committee an idea of the extent of window dressing over
the 1962 yearend, I cite the following figures: Total deposits of all
commercial banks which were members of the Federal Reserve System
rose 4.7 percent ($10.3 billion) between December 30,1961, and Decem­
ber 28, 1962, the last call report of each year. Based on reports sub­
mitted to the Board of Governors of the Federal Reserve System in
connection with their compilation of required reserves, total deposits
on December 31, 1962—3 days after the December 1962 call—were
7.6 percent above December 30, 1961. Hence, between December 28,
1962, and December 31, 1962, reported deposits rose by $5.7 billion or
2.6 percent. This increase in deposits in the 3-day period represented
55 percent of the total deposit increase for the year 1962. It thus
appears that a very substantial amount of window dressing took place
over the yearend. The source for this information was the 100th
Annual Report, Comptroller of the Currency, 1962.
In June 1963 the Comptroller in the interest of moving against the
practice of window dressing proposed a call date of June 14, which
would have been a surprise. He was outvoted and the call was made
for June 29, the last business day of the month.
It is understood that the Federal Reserve and the Federal Deposit
Insurance Corporation felt the main purpose of the call is the statis­
tical analysis of banking trends. In their view, the undesirability of




WINDOW DRESSING” IN BANK REPORTS

21

window dressing was overbalanced by the need for statistical banking
information that could be precisely comparable from year to year.
We do not dispute the need for comparable statistical information.
Even with call dates as of the last business day of June and December,
the data are not strictly comparable because of the impossibility of
correcting for window dressing.
The Comptroller will propose to the Congress an amendment to the
existing law which would provide for fixed dates of June 30 and De­
cember 31, or the last business days in these months. The Comptrol­
ler’s authority with respect to special reports as provided in title 12,
United States Code, section 161 will be retained. If the law is amended
to provide for fixed call dates we will take steps to preserve the func­
tion performed by surprise calls. This could be done by requiring na­
tional banks to submit and publish averages of net deposits, loans and
investments, or selected data, at random dates during the interim
period between call reports. The Advisory Committee on Banking
to the Comptroller recommended that an averaging method would
discourage any efforts at window dressing as it would be ineffective in
the average figures.
We strongly believe that it would be in the public interest that
banks be required to publish statements which are reliable. It is the
responsibility of the bank supervisory agencies to employ every means
to see that this is done.
The call report is a useful tool for bank supervision as it provides
the Comptroller’s Office with information necessary to assess the effect
regulatory policies have upon the lending and investing decisions of
national banks. Also, the information contained in these reports is
helpful in charting our policy with respect to merger, charter, and
branch applications, and the proposing of bank legislation designed
to enable the national banking system to respond promptly to the
growing and changing needs of our industry, commerce, and Govern­
ment.
We recently began a series of meetings with representatives of the
Federal Reserve System and the Federal Deposit Insurance Corpora­
tion to discuss revisions in the call report. We are hopeful that by the
June 1964 call a uniform report will be devised which will provide the
necessary banking information and eliminate as much as possible the
practice of window dressing, while at the same time making the report
more informative to the public.
Mr. Fascell. Thank you, Mr. "Watson.
The first thing that strikes me at this point is that I got the impres­
sion from Mr. Robertson that, as far as the Reserve Board is con­
cerned, window dressing is a negligible item no matter how distasteful
it might be. Yet I gather from your analysis of statistics that the
position of the Comptroller is that window dressing is not negligible
and that—as you pointed out in your statement—it represented 55 per­
cent of the total deposit increase for the year 1962.
If that is accurate, based on your reports, I would certainly have
to concur with you that this is not negligible, but substantial.
Mr. Watson. We are not trying to state that this $5.7 billion deposit
increase is all window dressing but wre surmise that a substantial por­
tion of it would be.




22

WINDOW DRESSING” IN BANK REPORTS

Mr. Fascell. Well, if the 3-day increase accounts for 55 percent of
the whole year’s increase----Mr. Watson. It would appear so.
Mr. Fascell. I cannot imagine a lot of people depositing a lot of
money in the 3 days of the holidays. It is possible, but----Mr. Watson. It would appear----Mr. Fascell (continuing). But it would seem reasonable to assume
otherwise.
I notice you say you are hopeful you are going to get a uniform re­
port. Does that raise a presumption that it now is not a uniform
report ?
Mr. Watson. For the third quarter call of this year, we are using
a different report form than the Federal Reserve and the FDIC is
using. One of the reasons that it was necessary for the Comptroller
to amend the call report form was that we issued the Comptroller
manual here a few months ago which contained different interpreta­
tions and, in addition, permitted the banks to expand their powers
particularly in the direct leasing field. As a consequence, we had to
provide for that item on the call report.
In addition, the Comptroller felt that the call report would be more
informative if the banks were required to publish their valuation
reserves.
Mr. Fascell. In other words, the Comptroller is going on the basis
of a different report.
Mr. Watson. For this particular period, out of necessity.
Mr. Fascell. Now, Mr. Watson, I notice that you point out in your
statement the legislative intent of Congress with respect to surprise
calls, and what they hoped it would do. Yet the Comptroller proposes
an amendment to do away with surprise calls but to retain an other­
wise interim authority to get the effect of a surprise call.
Mr. Watson. That is right.
Mr. Fascell. Now, do I understand correctly, that this means that
you agree with Mr. Robertson, or the Comptroller, that really there is
very little reason for the surprise calls that are now provided ?
Mr. Watson. Yes. We don’t feel that there is great reason to con­
tinue the surprise call.
Mr. Fascell. It does not help the public any, and it has no value to
the supervisory agencies ?
Mr. Watson. It is a relative value at most.
Mr. Fascell. Notwithstanding the good intent that Congress had
at the time it passed the amendment, the fact is it doesn’t work that
way and we better do something else ?
Mr. Watson. Yes, sir.
Mr. Fascell. Why can we not in some way provide by regulation or
otherwise that the determination of the size of the financial institu­
tion shall be an official one by the supervisory agency ?
Mr. Watson. Well, then, that would pose the problem each super­
visory agency presumably would have to go in and make a determina­
tion to the extent of the window dressing in each bank and then make
an adjustment.
Is that correct ?
Mr. Fascell. I don’t know. I don’t know whether it would elim­
inate window dressing or not—or whether window dressing is going




WINDOW DRESSING” IN BANK REPORTS

23

to become a daily practice. If the Comptroller of the Currency made
the official determination as to the actual size of the financial institu­
tion, would that not remove a great deal of the incentive that now
exists with respect to what I would call simply puffing practices with
dangerous consequences.
Mr. Watson. Well, that would place a burden upon the Comptroller
to ascertain that there was no window dressing in the statements pre­
sented to him.
Mr. Fascell. It seems to me that the Federal supervisory agencies
have that burden now. All we are trying to do is to give them a tool
which would be effective beyond that which they now have. The
Reserve Board—you heard Mr. Robertson—wants to do it with moral
suasion, by some kind of a coordinated effort—which he admits is
not working—so he is advocating a single banking commission.
Now, the Comptroller wants to amend the law to fix the call dates
but retain his interim rights, and use an averaging system in order to
stop the practice.
Maybe it will; maybe it won’t; but if the incentive for window
dressing is simply to establish size for the purpose of advertising,
then it seems to me that what we ought to do is to remove the incen­
tive. Either that, or make the practice you described here—which is
simply a rotating kiting proposition—illegal. Frankly, I don’t see
any purpose in the practice except to be completely deceptive. Either
we ought to remove the incentive, or by regulation we ought to make
the practice illegal.
Is tliS-t unreasonable ?
Mr. Bloom. My name is Robert Bloom; Chief Counsel to the Comp­
troller of the Currency.
Addressing myself to your first question, Mr. Chairman, on the
possibility of a statute giving the supervisory agencies the task of
assessing the actual size of all of the commercial banks, if I were
assigned the task of drafting such a bill, Mr. Chairman, I envisage
some formidable problems such as, of course----Mr. Fascell. I did not think of drafting a bill, Mr. Bloom. I can­
not see why this would have to be put in a Federal statute.
Mr. Bloom. Then, do I take it, your inquiry is directed to possibly
doing this by regulation ?
Mr. Fascell. Or doing it without regulation. I don’t care how
you do it.
.
Mr. Bloom. Well, with the dual system and the different agencies
involved, the job of ranking the banks which is now done on an in­
formal basis, 1 believe, by one of the banking publications, would be
a formidable thing and of course, I think it would be an injection
into the, well, competitive aspect of the industry and of the advertis­
ing aspect, which would be rather unique.
Mr. Fascell. Well, how about something that said that no financial
institution shall advertise its size in relation to other financial institu­
tions, unless that size determination has been made by the supervisory
agency.
I mean, that is an example. I don’t know that it is good. I have
not examined the law on this. I do not know all the problems of the
industry, but there is a way to get at it. What about the other one now ?
Mr. Bloom. As I recall your other question goes to possibly out


24

WINDOW DRESSING” IN BANK REPORTS

lawing by regulation some of the specific practices which enable the
yearend deposit figure to be inflated.
Mr. Fascell. Like phony deposits and phony loans and phony pay­
backs, because that is what these are in the examples that Mr. Watson
has presented to us as typical cases of window dressing.
I don’t think that is negligible. I don’t think it is the kind of thing
you brush under the rug. It is just as phony as anything can be.
Mr. Bloom. I certainly agree that the practice is highly undesirable.
Now, the distinction-—drawing the distinction between the com­
pletely bad faith situation where there is absolutely no business pur­
pose at all to the deposit—and drawing that distinction, in comparison
with the usual flow of funds between banks, might pose some nice
questions because of the fact that one would presume that these are
banks which do have a continually corresponding relationship—that
are doing this; and there is, of course, a normal flow of funds.
Mr. Fascell. In other words, what you are saying, Mr. Bloom, is
that it may be tough to find; but the fact is that you fellows find it.
Mr. Bloom. Our examining people tell me that they have full com­
mand of the manner in which banks are indulging in this practice, so
they do find it.
Mr. Fascell. Yes. In other words, they won’t indicate that the
motive is fraudulent; but they know it is going on without regard to
what the motive is.
Mr. Bloom. That is exactly correct.
Mr. Fascell. I see. Thank you very much.
Mr. Anderson ?
Mr. Anderson. I have no questions.
Mr. Fascell. Mr. Macdonald ?
Mr. Macdonald. Yes. I am rather confused in your example that
you gave sir, on page 3, the banks A, B, and C. It seems to me a bit
of an old shell game here, but I could see where someone would en­
gage in that sort of a game. But, why, if it is as general as Mr. Bloom
said, a highly competitive business, you see, what is in it for the three
banks to work together in this way and still, if they are doing it in
coordination, who really benefits? Why would they bother going
through this type of operation ?
Mr. Watson. Well, first of all----Mr. Macdonald. If there is true competition.
Mr. Watson. First of all, these banks would probably do it with
out-of-city banks. You see they would not do it with their competitor.
For example, a bank on the east coast might do it with a bank on the
west coast and a bank in the Midwest.
Mr. Macdonald. We had an exchange before about what an area
is and what a community is. I understood that this happens in areas
and in communities as well.
Am I correct ?
Mr. Watson. Yes, but assuming there are two banks in the same
community, bank A will be doing it with a different group of banks
than bank B.
You see, there would be no point in two banks in the same commu­
nity engaging in it because they would both be inflating their resources
by the same account. So more than likely they would take the banks
which are not in, say, their primary service area or trade area.



“WINDOW DRESSING” IN BANK REPORTS

25

Mr. Macdonald. That brings me to the second and last question.
If the auditors and examiners know that this is going on, and we have
just been assured that they do know it is going on, why don’t they
stop it ?
Mr. Watson. Well first of all, it is not considered an illegal practice.
Mr. MacDonald. Well, we all agree, I thought, that was the one
thing everyone in the room agreed to, that it serves no real purpose
in building up a bank, and leads only, in the long run, to misleading
the public. Therefore, if it is not illegal, it gets mighty close to being
illegal.
Mr. Watson. Another thing, too, if an examiner would stop it in
one bank, and there is not a concerted effort for all examiners to
stop it, in effect, the examiner who takes a tough position on this mat­
ter is really penalizing the bank he is examining.
Mr. MacDonald. Isn’t that the whole point of examiners ? That if
they are doing something that is not exactly ethical or legal, that
that is what the examiner is getting paid for—to correct that situation ?
Mr. Watson. Yes.
Mr. MacDonald. Well, I don’t understand why, even if it is hap­
pening in another area, that the examiner is not charged with the
duty of handling it. I still don’t see that relieves him from the duty
of stopping it in the area that he is charged with examining.
Mr. Watson. Well, I think before an examiner would do that he
■would probably want direction from his head office.
Mr. MacDonald. Why doesn’t the head office give it to him ?
Mr. Fascell. Because they are waiting on the other head office.
Mr. Watson. Well, there would be considerable merit, I would
think, if the three agencies would attack it.
Mr. MacDonald. In the meantime why doesn’t the agency—your
agency for a concrete example—who just said they know this is going
on, why don’t they stop it ?
Mr. Watson. We feel if we did it on an individual basis, we would
be penalizing our national banks.
Mr. MacDonald. Why ? For being illegal ? I thought that was the
whole point of examiners.
Actually, you are condoning it, are you not, if you don’t stop it?
I mean, you should not choose up sides because you are examining
the national banks. That does not mean that you are on their side,
I hope, because the whole point of examination is just the opposite.
How friendly can you get ?
Mr. Bloom. Mr. MacDonald, I will address my self at least to
the legal aspect of the question.
Of course, that is the big question—are these practices illegal ?
There is serious question and there always has been, or else I am
sure that action would have been taken long before now to stop
the individual practices which lead to the inflated account.
As to the more general aspect of vour question, why have they not
done something about it, of course, in recent months, it has been the
action of the Comptroller which has brought about, I believe, this
whole interest in the problem, in resuscitating the nature of the call.
Mr. Macdonald. My question is not said in any argumentative way.
I am just curious. I am not casting aspersions on anybody. As an
outsider, 1 just don’t understand it.



26

"WINDOW DRESSING” IN BANK REPORTS

Mr. Bloom. As far as the authority of the examiner, of course, he.
in his duty, I am talking about the actual examiner who goes into the
bank and renders his report as to the condition of the bank; and this
is a problem which would have to be handled on a much larger, much
higher level than the examiner and, of course, the problem there has
been that it is useless to do it on an individual basis unless it is done
across the board. And also, the serious question is just how you would
enforce this thing with the present statutory setup that we have.
Mr. Macdonald. My last question is: Don’t you think that under the
present setup, if you just, tell the bank to stop" putting themselves in a
false position; it is advertising to the general public, which actually
misleads the general public, it perhaps doesn’t do any definitive harm
to the public, unless the bank fails—don’t you have authority to stop
them from doing something that is not a good, ethical banking
practice?
Mr. Bloom. Well, I think the Comptroller has made it very well
known, in no uncertain terms, his views toward this practice; and all
of the banks, I am sure, are aware of it.
Mr. Macdonald. I know I said that would be my last one; this will
be my last one.
Have they done anything about it now that they know he is against
this sin ?
Mr. Bloom. Well, I have not, of course, at this early date, any way
of knowing what the banks’ reaction to the Comptroller’s statement
has been; the real test I suppose, comes in the next year.
Mr. Macdonald. I thought you were going to get away from that.
That you thought the yearend practice served no purpose. I thought
it was a wonderful brief, in which these people, if they know you are
coming in on a certain date, they can always fix it.
Mr. Bloom. Exactly.
Mr. Macdonald. So why wait until the end of the year to find out
if you know they will fix it by the end of the year? Why doesn’t
somebody do it now ?
Mr. Bloom. As I said, we would not know whether our efforts had
been successful until the yearend.
Mr. Macdonald. Thank vou.
Mr. Fascell. Mr.Lankford?
Mr. Lankford. You are talking about the voluntary yearend state­
ments or the call report ?
Mr. Bloom. Well, the comparison of both.
Mr. Fascell. Go ahead.
Mr. Lankford. That is all.
Mr. Fascell. OK. Mr. Matan?
Mr. Matan. Mr. Bloom, going back to your statement that exam­
iners know which banks window dress, I wonder if you could de­
velop that a little more?
How do they know that ?
Mr. Bloom. Well, this gets in on an area----Mr. Watson. May I answer that ?
Well, by examining the books they can see substantial increases in
deposits over the call dates, substantial increases.
Mr. Matan. How can they tell whether those increases are due to
bona fide practices, normally engaged in, by banks?



“WINDOW DRESSING” IN BANK REPORTS

27

Mr. Watson. They would have to make an analysis to determine
that.
Mr. Matan. Do they do that, sir ?
Mr. Watson. Not normally, no.
Mr. Matan. Do they ever do it ?
Mr. Watson. It has been done on occasions, and reported to this
office, but it is not a normal practice for the examiner to review all
the transactions which might take place several days before and after
a call date.
Mr. Matan. Had examiners ever stopped a bank from window
dressing ?
Mr. Watson. I believe there have been occasions when they have
stopped them. It would be only in rare instances, I believe.
Mr. Matan. Has any consideration ever been given to the prosecu­
tion of particularly flagrant cases of window dressing ?
Mr. Watson. To my knowledge, there has not.
Mr. Matan. Mr. Bloom, I think you expressed a statement that it
would be difficult to regulate window dressing in interbank transac­
tions.
Would that hold true too, in your example No. 4 where a customer
is granted a temporary loan, and deposits the proceeds to his account.
As I understand it, in those cases, bank deposits are increased by the
amount of the loan and the loan account is also increased by that
amount. Where those transactions are entered into solely for call
report statements, to be repaid—washed out a day or two later—could
those not be regulated against by regulations?
Mr. Bloom. Insofar as a loan is initiated by the bank, for this pur­
pose, I would think that this is an easier, more vulnerable practice
for our regulation.
Mr. Matan. How were the call dates chosen before the 1960 amend­
ments to the Federal Deposit Insurance Corporation Act?
Mr. Watson. The Comptroller selected his own call dates but I
believe that the other agencies used the same date. I may be wrong
on that.
Mr. Bloom. I am sorry, Mr. Matan, I don’t have that answer with
me but I could get it for you readily enough.
(After the hearing Mr. Bloom added the following:)
Before 1960, the Comptroller set the call date; he would notify the other
agencies beforehand and they would coordinate with the State authorities to
issue their call as of the same date.

Mr. Matan. Your statement shows that, going back as far as 1914,
there were only six occasions when call reports in June were made on
other than the last day, and in December on only two dates other than
the last day. Those report dates would have been selected by the
Comptroller of Currency ?
Mr. Watson. For the case of the national banks, yes.
Mr. Matan. That brings me to asking when it was that the Comp­
troller’s Office first realized something should be done about the win­
dow-dressing problem ?
Mr. Watson. Well, I think in the 1950’s, the Comptroller had meet­
ings with the Federal Reserve people, relative to the situation that
Governor Robertson described.
Mr. Matan. What resulted, if anything, from those meetings ?



28

“WINDOW DRESSING” IN BANK REPORTS

Mr. Watson. I believe Governor Robertson stated the president of
the Federal Reserve in Dallas called in some of the Texas bankers,
to request them to eliminate window dressing.
Mr. Matan. What year was that, sir ?
Mr. Watson. I am not certain. I think it was 1955. Either 1954
or 1955,1 believe.
Mr. Macdonald. It was before Billy Sol Estes, I take it?
Mr. Watson. Yes, sir; a few years before.
Mr. Matan. Is there anything in the call report law particularly
section 7(a)(4) of the Federal Deposit Insurance Corporation Act,
as amended in 1960, which apparently would permit window dressing
in certain interbanking arrangements?
Mr. Watson. I believe you are referring to that section of the law
where the wording says “may”; is that correct?
Mr. Matan. That is right, sir.
Mr. Watson. Well, I think the instructions to national banks cover­
ing the call reports, would more or less supersede that section. In
other words, these particular instructions, in referring to the recipro­
cal bank account arrangement, I believe the instructions say, should
be netted out, rather than may, as it might indicate in the law; if I can
find that.
Mr. Matan. We won’t take up your time with that, Mr. Watson.
We will check it out.
Mr. Watson. All right.
Mr. Matan. Who is it that the Comptroller’s Office believes is
deceived by window dressing?
Mr. Watson. Well, to a large extent, the public. Of course, the
bankers are deceiving each other here.
Mr. Matan. And the supervisory agencies too; are they deceived ?
Mr. Watson. No ; I would not say so, because we rely on our exam­
ination report to determine the soundness of the bank. We seldom
would refer to a call report, as you might say, as a bank supervisory
tool.
Our basic instrument in determining the condition of the bank is
the report of examination.
Mr. Matan. Well, do you use it then chiefly for statistical purposes ?
Mr. Watson. Chiefly, yes.
Mr. Matan. I am thinking for example, of the Comptroller’s state­
ment, in which he said the validity of call reports as supervisory tools
has been rendered of less value.
Mr. Watson. Yes.
Mr. Matan. Of less value.
Mr. Watson. Well, we feel that it is a supervisory tool, in this re­
spect. It provides the Comptroller with information, as I state in
my statement, to assess the effect of regulatory policies; the effect they
have on bank lending and investing activities. We also make reference
to call report statistics in connection with approving of branches and
mergers and charters.
Mr. Fascell. Mr. McClory?
Mr. McClory. Mr. Watson, I just want to ask one question which
I asked Mr. Robertson.
Do you have an opinion as to the efficacy of comment or the require­
ment or authority to make comments on a statement of conditions, in
order to discourage window dressing?



“WINDOW DRESSING” IN BANK REPORTS

29

Mr. Watson. You are speaking now of the certification of the offi­
cers of the bank, that there have been no nonpurpose practices en­
gaged in ?
Mr. McClory. No. No. I am thinking of the authority of the
Comptroller of the Currency, for instance, or other Federal agency
to be authorized----Mr. Watson. To make----Mr. McClory. To make comment with regard to the voluntary or
the special call statement.
Mr. Watson. Well, I believe under the law the Comptroller would
have the power to do that now because he has the power to publish
any report of the examination which he sees fit to do and if the exam­
iner uncovered the transactions in the report of examination the
Comptroller could go ahead and do it.
Mr. McClory. What if the authority was expanded to require that
such comment, if made by the Comptroller of the Currency, should
be included in the published statement of condition?
Mr. Watson. It would be a burdensome task, I would say, for our
examiners to analyze each bank and then make the determination after
much discussion with the officers, as to how much window dressing
there is in each individual bank.
My personal opinion would be it might be more effective if the offi­
cers and directors of the bank signed a certification that there were no
nonpurpose transactions in the call, because I think when you sign the
statement you do some thinking before you would sign a statement
such as that.
Mr. McClory. Do you think that would be an effective alternative
suggestion to discourage it?
Mr. Watson. I think it would be easier to handle than to place the
burden on us to go in to determine what the window dressing is.
Mr. McClory. Thank you.
Mr. Watson. Because we are having a problem meeting our statu­
tory requirements on bank examinations now.
Mr. Fascell. Mr. Watson, Mr. McClory has raised a very good
point and it ought to be examined one step further.
Might it not be a good idea to require the financial institution, once
a determination has been made by the examiner that some window
dressing exists, to publish with its financial report a statement that
“this statement includes window dressing, a practice which has been
determined to be improper and highly undesirable by the financial
supervisory agencies” ?
Mr. Watson. I don’t think a banker would be inclined to want to
put that at the bottom of his statement.
Mr. Fascell. I don’t think he might, either. You know, it might
even stop window dressing.
Mr. Watson. It might.
Mr. Matan. Going back to the statement of the Comptroller, he
refers to the widespread practice of window dressing.
Does your Office have any data on how widespread window dressing
is?
Mr. Watson. We don’t have any specific data but we say it is wide­
spread.




30

“WINDOW DRESSING” IN BANK REPORTS

Mr. Matan. The statement also says that most bankers believe the
practice is not desirable.
On what do you base that statement ?
Mr. Watson. From discussions with bankers. A banker says, “I
would like to cut it out if the banker across the street will do it.” He
is in the swim with him.
Mr. Matan. Well, the word “most” is used, and I was wondering
to what basis you attribute that.
Mr. Watson. Well, mainly from discussions with bankers and from
the suggestions which were received by the Comptroller’s Advisory
Committee.
Mr. Matan. Now, the Comptroller has characterized as the “fail­
ure” of the bank supervisory agencies, to take steps to prevent the
practice. What steps has the Comptroller’s Office taken other than
the recent attempts to get calls on surprise dates, and the Comptroller’s
statement of July 3?
Mr. Watson. Well, the Comptroller in December proposed a date
other than the 31st. That was really the first step taken.
Mr. Matan. I say other than that, and other than the June pro­
posal of a surprise date, and other than his statement of July 3 to
the presidents of all national banks. Has he taken any other steps?
Mr. Watson. No. Of course, the Comptroller has only been in
office----Mr. Matan. I don’t mean the existing Comptroller. I mean the
Office of the Comptroller.
Mr. Watson. The previous Comptrollers? None, to my knowledge.
Mr. Fascell. Any further questions ?
Well, Mr. Watson, I want to inquire about these meetings that you
talked about in your statement.
Mr. Watson. Yes, sir.
Mr. Fascell. Is this some kind of an interdepartmental committee
on this question ?
Mr. Watson. Yes. Dr. Shapiro, Mr. Egertson, and myself have
met with representatives of the Fed, and the FDIC. We just had
one meeting to discuss the yearend call report, and we plan a series
of meetings to discuss proposed revisions in the call report, and, of
course, we will cover this matter of window dressing, to see what
steps can be taken to minimize the practice or eliminate it.
Mr. Fascell. So you have three items under discussion; is that
correct ?
The question of the report itself.
Mr. Watson. Yes.
Mr. Fascell. The date?
Mr. Watson. Well, as far as our meetings are concerned, and the
date, we have to go on the assumption as to what the law provides
now—four call dates a year.
Mr. Fascell. Yes.
Mr. Watson. The actual selection of the date, of course, is arrived
at by discussion between the Comptroller, the Chairman of the Fed,
and the FDIC.
Mr. Fascell. I see. That won’t be a purpose of this committee?
Mr. Watson. No. Our committee does not select the dates.




“WINDOW DRESSING” IN BANK REPORTS

31

Mr. Fascell. Right; and then, you will be discussing the problem
of window dressing?
Mr. Watson. The problem of window dressing, yes.
Mr. Fascell. Well, Mr. Watson, I certainly appreciate your coming
here, with those who have accompanied you. I want to commend and
compliment you and the Comptroller for your current interest and
continuing interest in this problem of window’ dressing.
The thought occurred to me that perhaps the thing to do, from the
standpoint of the Comptroller, is to just keep right on doing what you
think is right. You might stop window dressing, and, all of a sud­
den the burden will descend upon the other Federal agencies. They
wTill have to be called to account to do that which they ought to be
doing, but which they say they are not doing because you are not
doing it.
Maybe that is the best thing to do about this thing, after all.
Maybe Mr. Robertson is right.
Mr. Watson. We plan to proceed as best w’e can to minimize this.
We don’t know whether wTe will accomplish that goal or not.
Mr. Fascell. Thank you very much, gentlemen.
Mr. Fascell. Gentlemen, now we would like to hear from the rep­
resentatives of the Federal Deposit Insurance Corporation: Mr. Ray­
mond E. Hengren, Assistance Chief, Division of Research and Sta­
tistics; who is accompanied by William D. Allen, Assistant Chief,
Division of Examination; Robert H. Cresswyell, Chief of the Statistics
Section, Division of Research and Statistics; Leslie H. Fisher, Assist­
ant General Counsel, Legal Division; and Harold W. Kefauver, Fiscal
Agent.
STATEMENT OF RAYMOND E. HENGREN, ASSISTANT CHIEF, DIVI­
SION OF RESEARCH AND STATISTICS, FEDERAL DEPOSIT INSUR­
ANCE CORPORATION; ACCOMPANIED BY WILLIAM D. ALLEN,
ASSISTANT CHIEF, DIVISION OF EXAMINATION; ROBERT H.
CRESWELL, CHIEF OF THE STATISTICS SECTION, DIVISION OF
RESEARCH AND STATISTICS; LESLIE H. FISHER, ASSISTANT
GENERAL COUNSEL, LEGAL DIVISION; AND HAROLD W.
KEFAUVER, FISCAL AGENT

Mr. Hengren. Thank you, Mr. Chairman.
By way of preface, it should be noted that in accordance with law’,
pending the appointment of a successor to Mr. Erie Cocke, Sr., the
former Chairman, whose term expired August 4, 1963, Mr. James J.
Saxon, the Comptroller of the Currency and a Director of the Federal
Deposit Insurance Corporation, has been Acting Chairman. With
respect to the subject matter of your hearings, the views of Mr. Saxon
are available as Comptroller of the Currency. Owing to these cir­
cumstances, the Corporation does not have an official position to pre­
sent for your consideration. However, this statement has been
reviewed and approved by Director Wolcott as an expression of his
thoughts on the subject.
The chairman of your subcommittee has voiced an interest generally
regarding the operations of the Federal bank supervisory agencies in
respect of call dates for bank reports. In a communication dated




32

“WINDOW DRESSING” IN BANK REPORTS

September 24,1963, and addressed to the Chairman of the Corporation,
your chairman expressed concern “* * * that making calls on the
last business days of June and December is contrary to congressional
intent, disregards the supervisory purpose of call reports and results
in widespread ‘window dressing’.”
Two quotations from the pertinent statutes deserve careful attention
in considering the aspects of call reports within the range of your
present interest. Section 5211 of the Revised Statutes, as amended,
includes language as follows:
Each report, shall exhibit in detail and under appropriate heads the resources
and liabilities of the association at the close of business on any past day specified
by the Comptroller * * * (12 U.S.C. 161).

And in the amendment to the Federal Deposit Insurance Act, ap­
proved July 14, 1960, which provides for the use of call report data in
calculating the assessments for deposit insurance, these words appear:
(3) Each insured State nonmember bank (except a district bank) shall make
to the Corporation, each insured national bank and each insured district bank
shall make to the Comptroller of the Currency, and each insured State member
bank shall make to the Federal Reserve bank of which it is a member, four
reports of condition annually upon dates which shall be selected by the Chair­
man of the Board of Directors, the Comptroller of the Currency, and the Chair­
man of the Board of Governors of the Federal Reserve System, or a majority
thereof. The dates selected shall be the same for all insured banks, except that
when any of said reporting dates is a nonbusiness day for any bank, the preced­
ing business day shall be its reporting date * * * (12 U.S.C. 1817(a) (3)).

The foregoing provision of the statute does not require prior or ad­
vance notice to the banks of the date selected for the call report, nor
does it specifically prevent such prior notice. Nevertheless prior no­
tice of the dates fixed for condition reports has not developed as a
practice over the long history of this reporting system. Accordingly,
it is important to give consideration to the legislative history of the
provision. Both Senate Report No. 1821 of June 30, 1960, and House
Report No. 1827 of June 14,1960, set out the following statement under
the heading “What the Bill Would Do”:
Also, basing deposit liabilities on “surprise call” dates will eliminate any
tendency which may now exist among banks to resort to “window dressing” to
create artificial assessment deductions for the assessment dates fixed in the
statute.

So by enacting the statutory provision quoted from the 1960 amend­
ment to the Federal Deposit Insurance Act, it seems reasonable to con­
clude that the Congress intended reports of condition to be continued
on “surprise call” dates. Prior notice of such dates would surely
facilitate “window dressing.” Furthermore, if the Congress had con­
templated prior notice to the banks of call report dates, it would have
fixed them in the statute.
In recent years, the call dates for reports of condition have in fact
varied considerably. Thus, since 1960, 4 of the 10 call dates have pre­
scribed reporting for the last business day of June or December;
whereas various other dates have been set for the remaining 6 calls.
Moreover, the call for a report is always made on a day subsequent
to the specified report date and it seems reasonable to believe that
every one of these call dates was in the nature of a surprise to re­
spondents. Notwithstanding the variety of report dates, comment in
the financial community has persisted that “window dressing” is prev­
alent. at least in certain geographical areas.



“WINDOW DRESSING” IN BANK REPORTS

33

The Corporation administers reporting in response to calls by up­
ward of 7,300 State banks, not members of the Federal Reserve Sys­
tem, whose assets account for about 25 percent of the total assets held
by approximately 13,000 insured banks. With relatively few excep­
tions, the banks reporting directly to the Corporation are small com­
mercial institutions. For obvious reasons, small commercial banks
are not likely to engage in “window dressing.”
The bank examination process furnishes a means for detecting a re­
port of condition that presents an unrealistic picture of an individual
bank. All federally insured banks are examined by a Federal bank
examining authority—the Comptroller of the Currency examines all
national banks, the respective Federal Reserve banks examine their
State-chartered members of the Federal Reserve System, and the Fed­
eral Deposit Insurance Corporation examines all insured Statechartered banks not members of the Federal Reserve System. Under
standard procedures, bank examiners are required to satisfy themselves
that the data in the accounting records are properly reflected in the re­
port of condition. With respect to call reports, bank examinations
could be expected to reveal any departures from proper accounting or
acceptable banking practices which overstate bank size or conceal ad­
verse features.
The amendments to the Federal Deposit Insurance Act in 1960 would
seem to discourage the “overstatement” of deposit liabilities by insured
banks on their reports of condition. In accordance with the provi­
sions of the statute, the data presented on these reports furnish the
basis for calculating the amount of deposit insurance assessment for
each bank. If the total amount of deposits is increased in some man­
ner unrelated to the ordinary course of business—presumably for com­
petitive reasons—one immediate result will be an increase in the
amount of the assessment.
As matters now stand, Federal agencies charged with the supervi­
sion of banks have wide latitude under existing statutes so that full
advantage may be taken of the surprise element in fixing dates for the
reports of condition. In addition, these agencies have bank examiners
who are trained to discover, among other things, departures from sound
banking practices and accounting procedures. Accordingly, it would
seem that the means are at hand for detecting reports of condition that
do not reflect the true condition of individual banks. To be sure, that
would require close coordination in the processing of condition re­
ports as they are filed and bank examination work in the field. Though
the task may be difficult, the bank examining authorities now have
adequate power to cope with window-dressing situations.
In conclusion, Director Wolcott has expressed the thought that to
obtain the most reliable information, minimize the possibility of dis­
tortions, and at the same time fully comply with the intent of Con­
gress, call dates should be surprise dates. Furthermore, the so-called
conventional dates should be utilized infrequently.
Mr. Fascell. Thank you, sir.
Mr. Macdonald ?
Mr. Macdonald. I just have one question. I don't know if you can
answer it, sir. As you spell out the number of examiners for the vari­
ous agencies, I was wondering if you had any idea how many ex­
aminers there are, examining the various types of banks in the United
States ?



34

“WINDOW DRESSING” IN BANK REPORTS

Mr. Hengren. Well, now, for our own staff, Mr. Allen can give
you an approximate figure.
Mr. Allen. We have approximately 900 men on the examining
staff. A number of them are in a supervisory capacity, but I would
say that there would be approximately 800 of them in the field, regu­
larly examining the banks.
Mr. Macdonald. Roughly, how many banks ?
Mr. Allen. 7,300 approximately.
Mr. Macdonald. 7,300 ?
Mr. Allen. Yes, sir.
Mr. Macdonald. If the chairman would not mind—the gentleman
who testified before—I was wondering how many you have, sir?
Mr. Watson. We have approximately 1,200 fieldmen; that is. per­
sonnel engaged in the actual examination of banks.
Mr. Macdonald. How many banks do you have ?
Mr. Watson. We have about 4,500 banks, sir.
Mr. Macdonald. How about the Federal Reserve. Do you have any
idea of how many they have ?
Mr. Hengren. No; I would not. There would be a staff in each one
of the Federal Reserve banks. Perhaps Mr. Watson would have a
better idea of staff size, or Mr. Allen.
Air. Allen. There are approximately 1,500 banks that they would
be examining.
Mr. Hengren. But the staff?
Mr. Allen. I don’t know about the staff. It would vary.
Mr. Fascell. We will supply that for you, Air. Macdonald.
We will have our staff get it and put it in the record at this point.
Air. Macdonald. Thank you. I think it might have some bearing
on the conclusions which you draw.
(The numbers of examiners employed by the bank supervisory agencies at
present were stated by the agencies to be as follows :)
Agency

Examiners

Comptroller of the Currency (for commercial banks)_____________________ 997
Federal Reserve System______________________________________________ 500
Federal Deposit Insurance Corporation_______________________________ S00
Mr. Fascell. Mr. Anderson?
Mr. Anderson. Is it a fair assessment of your statement that, really,

this problem of window dressing that we have been discussing this
morning is not much of a problem, as far as the banks that report di­
rectly to, are examined or supervised by the FDIC ?
Is this largely a problem of the larger banks that would be under
the examining authority and reporting jurisdiction of either the Comp­
troller of the Currency or the Board of Governors of the Federal
Reserve System?
Is that a fair import of your statement?
Air. Hengren. I think that would be correct.
Aly conversations with Director Wolcott suggest that he feels that
the Congress intended surprise calls and that an effort is being made
to use surprise in making calls and that, furthermore, our examiners
in the field are endeavoring to review each condition report as a regu­
lar part of the examination process and to satisfy themselves that the
individual report fully reflects the condition of the bank. If it did not,
there is machinery for carrying that information back to the cor­
poration.



“WINDOW DRESSING” IN BANK REPORTS

35

That is substantially what we are doing about window dressing.
Director Wolcott feels we are doing something very definite bear­
ing on the subject right now.
Mr. Anderson. But there is a little difference of opinion, as I un­
derstand it, between this witness and the previous witness, on the
general usefulness and applicacy of these surprise call dates.
Do you feel that surprise dates are useful in preventing this
practice ?
Mr. Hengren. From my discussions with Director Wolcott, he feels,
I think it is fair to say, that the intent of Congress was to insure that
the calls would have a surprise element; that surprise is helpful to
some extent, but how much is not too easy to measure.
Mr. Anderson. Just one last question.
How come the Comptroller gets outvoted ? Two out of three seem
to agree on this. I am curious as to why he lost out in that election.
Mr. Hengren. There is a fact that should be mentioned; namely,
that Mr. Wolcott is now the Director and there have been some changes
over the years.
Mr. Anderson. I see. T see.
Mr. Lankford. No questions.
Mr. Fascell. Mr. McClory?
Mr. McClory. The point I have been trying to explore here, is the
validity of comments with regard to the bank statements.
I notice in the reports of CPA’s and audit reports, that if there is
anything which is irregular or does not coincide with recognized
accounting principles, that there is a comment which is made by the
auditor or the CPA, and I am just wondering whether you feel that
there is any validity to the requirement or authority which would
authorize or require such a comment where there is window dressing.
Mr. Hengren. To clarify your question, as I understand it, you
would contemplate something comparable to the auditor’s certificate
which would appear as part of the financial statement.
Mr. McClory. Yes.
Mr. Hengren. This is not a proposal that I have heard Director
Wolcott comment about. I shall be very happy to bring this back to
the Corporation if you so desire.
Perhaps you would like to have a letter returned to the committee,
with his expression of views.
Mr. McClory. I would appreciate that.
Mr. Fascell. All right, Mr. McClory. Mr. Hengren, we would
appreciate very much getting a letter of opinion on the proposal made
by Mr. McClory.
Mr. Hengren. Yes, sir. You shall.
Air. Fascell. And submit it to us at your earliest convenience for
the record.
Air. Hengren. We shall.
(The letter is as follows:)
Federal Deposit Insurance Corporation,

Washington, October 16, 1963.
Hon. Dante B. Fascell,
Chairman, Legal and Monetary Affairs Subcommittee of the House Committee
on Government Operations, House of Representatives, Washington, D.C.
Dear Congressman Fascell : In the course of a hearing with respect to the
setting of call dates for bank reports, conducted by your subcommittee on
Wednesday, October 2, 1963, Mr. Raymond E. Hengren of the Federal Deposit



36

WINDOW DRESSING” IN BANK REPORTS

Insurance Corporation agreed to obtain an expression of my views on a question
posed by Congressman McClory. The question was concerned with the desir­
ability of requiring the publication of a statement as a part of the condition
report that no element of window dressing was reflected in the document. Al­
though the proposal was not spelled out in detail, it would seem that the
suggestion contemplates substantially the equivalent of the auditors’ certificate
normally accompanying financial statements prepared by a certified public
accountant.
Users of financial statements attach great importance to the audit certificate
and study it carefully for guidance in the interpretation of the figures. As in
the case of the conventional audit certificate, however, to have any real signi­
ficance the certificate accompanying the report of condition would need the sig­
nature of some person whose competence was established in the financial com­
munity, who stands in an independent relationship with a reporting bank, and
who has thoroughly examined the reports and the supporting books of account.
In the absence of these safeguards, a certificate actually could do more harm than
good by engendering a false security in the minds of the readers.
Thus, it is apparent that a certificate such as the one proposed for the con­
dition report would require a rather thorough audit of the relevant accounting
information. To be sure, the Federal Deposit Insurance Corporation has always
encouraged the insured banks to follow a sound audit program. Nevertheless,
there has been no attempt to impose auditing by certified public accountants on
all insured banks. Such a program, in my opinion, would be unduly burdensome.
The banks examined regularly by the Corporation are with few exceptions
small institutions, and window dressing is rarely encountered in this size
group. Any evil that results from window dressing as part of competitive
rivalry between two small banks may easily be controlled through the effort
of our examiners, and that is precisely what we are doing now.
Based upon my observations over the years, I am persuaded that the window
dressing problem tends to localize in a few areas where banking rivalry is intense
and among a handful of large banks. The Federal Deposit Insurance Corpora­
tion stands ready to cooperate with the other Federal and State supervisory
authorities in any endeavor to correct window dressing, and, in my opinion,
well-timed cooperative efforts would be effective.
Sincerely yours,
Jesse P. Wolcott, Director.
Mr. Fascell. Mr. Matan ?
Mr. Matan. Do your examiners actually examine the call reports

for window dressing?
Mr. Hengren. The best way to answer the question would be to
ask Mr. Allen, who has been an examiner in the field, and who now
supervises the work of the examiners, to explain just what examiners
do when they are in the bank and what they are expected to do.
Mr. Allen. The examiners review each call report prepared and
made between examination dates. They check them back against
the records of the bank to determine that the reporting is accurate
and agrees with bank records.
Now, in cases where they find that deposits have expanded con­
siderably on the particular call date and prior to that time have been
less than that and have run off rather rapidly afterward, it is their
responsibility to check further into the matter.
Generally speaking, however, it would be an aggravated case of
obvious window dressing before the examiner would make a real issue
of it. He might discuss with the executive officer the possibility that
there was window dressing involved and suggest that such would not
be in the best interest of that bank, because if they were doing it this
time, to try to boost their figures over what last year’s, or the last
call reports were, that condition would continue to haunt them. On
each subsequent call date, they would be faced with it. Usually,
through discussion with them, the banker will be persuaded to recog-




“WINDOW DRESSING” IN BANK REPORTS

37

nize that window dressing is not in the best interests of the bank or
of the public, so that it will be discounted and discontinued.
As Governor Robertson has pointed out, the question of what is
legitimate entry and what is window dressing is difficult at times to
determine. The motive behind it seems to be the important thing.
There will be legitimate reasons why banks make deposits in other
banks, maybe around the call date, but if the deposit is primarily
for the purpose of window dressing it can be recognized. But, at
times, it is a question that the banker will defend.
Mr. Matan. Do you have any idea how often banks have been
criticized by your examiners for window dressing, say, in a particular
examination period ?
Mr. Allen. We have no such statistics. If you will permit me to
give my personal experience there have been very few occasions,
when I examined banks, that I found any evidence of window dressing.
The smaller banks have not as much to gain from being among the
first hundred in the country, and the prestige and the advertising
which they can point to is not as strong.
Now, small banks may want to get ahead of their neighbor across
the street, their competitor in the banking business, and, at times,
they may encourage their depositors to bring in funds at a call period.
It is rather difficult in such cases to determine true window dressing.
Mr. Matan. Is there any instance where a bank examiner attempted
to dissuade a bank from further window dressing and the banker
refused; are there any sanctions or administrative action which your
agency can impose on that bank ?
Mr. Allen. The banks we examine are supervised by the State
authorities. We would endeavor to work through the State authority
to try to get the practice corrected.
Mr. Macdonald. You can lift their policy, can you not ?
Mr. Allen. Their insurance coverage ?
Mr. Macdonald. Yes.
Mr. Allen. The Congress gave that recourse to the Corporation,
to be used rather sparingly, as we understand it.
Mr. Macdonald. But you have it ?
Mr. Allen. We have it.
Mr. Fisher. The question would be whether it reached the point
that that Board felt it constituted an unsafe and an unsound prac­
tice. If they made such a finding, then the bank would normally be
given 120 days in which to correct it. If they did not do so, there
would be a hearing, and they might eventually lose their insured
status.
Mr. Macdonald. I just want to ask one question.
The one light motif that goes through everybody’s testimony is
that everybody knows that everybody is doing this thing. It is a
bad thing, but it is not really a very bad thing.
Mr. Fisher. We do not believe that it is prevalent in the banks
that report directly to us, in any major degree at all.
Mr. Macdonald. The examiner just said an effort, is usually made
in the community to have one of these small banks be larger—the
largest in the community.
Mr. Fisher. I don’t think he meant to say that it was a general
practice.




38

WINDOW DRESSING” IN BANK REPORTS

Mr. Macdonald. After the call period, to bring in funds so that it
will look as if it is the largest bank in the community.
Mr. Allen. On occasion, banks will solicit their customers to get
deposits for a particular period. I would not say that practice is
very prevalent. It is quite isolated.
Mr. Lankford. What this boils down to then is that in your opinion
the window dressing is carried on only by the bigger banks, is that
correct ? The banks of national reputation ?
Mr. Allen. I would say that the advantages of window dressing
rested with the larger banks, and the means by which they could
accomplish it are more readily available.
Mr. Fascell. Any further questions ?
Mr. Matan. Just one.
Has your Corporation ever found unsafe conditions and cracked
down on the banks because of window dressing ?
Mr. Fisher. Well, I am familiar with the last 47 cases where they
have cracked down and I would say that each of them involved a
number of things. I don’t recall this being the real motivation for
a section 8(a) case.
Mr. Fascell. Let me ask you a question.
Supposing a bank in a small community, one of the types of banks
regulated by the FDIC, were to advertise in one way or another
that it was the soundest institution in that particular area of three
or four, when in reality on examination it was not—it was the shakiest.
Would this be considered an unsafe and unsound practice, or would
this be considered a nonacceptable banking practice, or what would it
be considered ?
Mr. Fisher. Would that be illegal ?
Mr. Fascell. Do you mean it is illegal, or it is puffing ?
Mr. Fisher. Well, it would seem to me that would be a little beyond
puffing, to say that it is the soundest, when in fact, we know that it is
the shakiest.
Mr. Fascell. Is there any difference between that and saying that
you are the largest, when you know very well that you are not? If
the idea of size means anything any more to anybody who is going
to deposit money—I don’t know whether it does or not.
Mr. Fisher. In most of our banks, I do not believe the depositors
in the smaller communities pay too much attention to the statements.
I think in the last 30 years, they have come to rely pretty much on
deposit insurance. Most of them have less than $10,000 in the bank.
Mr. Fascell. Then it simply boils down to a question as to whether
or not the managers of a financial institution ought to get away with
it or think they ought to get away with it as an acceptable practice.
Mr. Fisher. I am handicapped somewhat because of our position
here today.
Mr. Fascell. You can make it personal if you like, and the record
will reflect it.
Mr. Fisher. Well----Mr. Macdonald. Mr. Wolcott will read it.
Mr. Fisher. I am sure he will.
I was going to say that what is, and what is not, an unsound practice
under a given set of circumstances is a matter that the Board has never
delegated. The Board makes the determination each time.




“WINDOW DRESSING” IN BANK REPORTS

39

Mr. Fascell. Based on an examination of the examiner’s report?
Mr. Fisher. Based upon the reports of examination, and irregu­
larity reports, if any, and on a memorandum prepared in the Division
of Examination which is passed through the Legal Division for recom­
mendations. The Board goes into all these pretty carefully themselves
because such a proceeding is a very drastic remedy, and once you start
it, the effect may be to put a bank out of business. It is something
that is not delegated to the staff.
Mr. Fascell. Thank you very much, gentlemen.
We appreciate your coming down and appearing before the sub­
committee and giving us the benefit of your views.
The meeting will adjourn.
(Whereupon, at 12:10 p.m., the meeting was adjourned.)




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