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The nature of these operations and the method of processing applications for Federal charter as compared with processing applications for insurance indicates that the FSLIC gives first consideration to the application of the State-chartered association for insurance, whereasthe Division of Savings and Loan Operations gives first consideration to applications for Federal charter. In each instance, however, all applications which result in the granting of insurance must be processed through the Federal Savings and Loan Insurance Corporation.

Although the FSLIC has the responsibility of processing an application for insurance and recommending appropriate action, the Board, under the present procedures, has the final responsibility for chartering as well as the granting of insurance. The placement of total responsibility for chartering and for insurance losses which may be incurred as a result of chartering a Federal association (FHLBB-FSLIC system) would seem to encourage even more conservatism and prudence than an operation which permits one agency to charter and requires another agency to bear insurance losses (Treasury-Federal Reserve-FDIC system).

The FSLIC is under the jurisdiction of and responsible to the FHLBB. The Corporation makes recommendations in regard to granting of insurance which recommendations are accepted or rejected as the case may be by the Board. While it is therefore technically possible for the Board to impose its will over the contrary objections of the Corporation, such an action is not only infrequent but is in keeping with the action of all other Government and private agencies in which top management occasionally overrides the recommendations of its subordinate departments.

Some testimony in hearings on Reorganization Plan No. 2 of 1956 tended to create the impression that there exists today some type of separation of responsibility between the FHLBB and the FSLIC. This impression is fostered by the feeling expressed in some quarters that the FSLIC alone bears responsibility for insurance losses incurred, and that the FHLBB which grants charters is not concerned with such losses. While this would be true if separation were an accomplished fact, it is not true today. The Board is keenly aware that as top management it must bear the final responsibility for insurance losses incurred as a result of its actions, whether they be in the field of chartering or insuring. Thus the final authority to act, along with the undivided responsibility for those actions, is reposed in one body, the FHLBB.

There is no evidence to show that the Board has arbitrarily forced the Corporation to assume risks which it would not normally assume. Neither can it be stated that the Corporation has had no opportunity to "pass upon" the risks it has assumed.

Effect of "separationinsofar as the "conflict of interestissue is concerned.—If the FHLBB and the FSLIC were separated so as to eliminate the possibility of conflict of interest, presumably the FSLIC would be granted authority and responsibility for approving or disapproving applications for insurance received from applicants for a Federal charter as well as applications for insurance from State chartered institutions. With respect to applications for federally chartered associations, the law now requires that they shall be insured. Thus an applicant for Federal charter must meet two tests, the test applicable to the granting of a charter and the test applicable to the granting of insurance.

If these tests, as recommended by Reorganization Plan No. 2 of 1956, are applied by two separate and independent groups, disagreement over the qualifications of applicant groups is inevitable. Disagreement between two separate and independent groups, both of which must agree prior to approval of an application, will result in conflict, confusion, and delay. If two agencies of equal authority come into conflict over a specific point, the conflict may never be resolved.

To establish the FSLIC as a separate and independent body with complete authority to approve or disapprove applications for insurance is equivalent to granting the FSLIC a veto power over the actions of the FHLBB. It would reverse the present chain of command and in effect make the Board dependent upon the actions of the Corporation at least insofar as approval of applications for Federal charters are concerned.

Independence of the FSLIC will not be justified unless it advances and protects the interests of the public, the Federal Government, and the HLB system. If the FSLIČ were made an independent agency with full authority to disapprove applications for insurance, it could as stated above negate the actions of the FHLBB. If the FSLIC were made independent with only limited or nominal authority to pass upon applications for insurance, it could conceivably have less control over the risks it assumes than it has under present procedures.

A case in point is the operation of the FDIC. The FDIC is authorized under the law to insure the deposits of national banks, State banks admitted to membership in the Federal Reserve System, and State banks which are not members of the Federal Reserve System. In practice, however, the FDIC has full authority to approve or disapprove only the applications of the latter group. Applications for national bank charters and applications for membership in the Federal Reserve System, both carrying with them “automatic” insurance of accounts, are the respective responsibilities of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System. As the following testimony? by the FDIC indicates, the role of the FDIC in approving applications for insurance from such applicants is perfunctory:

Senator SPARKMAN. It has always been a little puzzling to me, your responsibility for insuring. As I understand, there are three classes of banks that you may insure. One is a national bank, a State bank that is a member, and a State bank that is a nonmember of the Federal Reserve.

Mr. COBURN. Yes, sir.

Senator SPARKMAN. As I understand it, the only one in which you have any discretion whatsoever as to whether or not you will insure is the nonmember State bank.

Mr. COBURN. Yes, sir.

Senator SPARKMAN. In other words, you have nothing to say about chartering a national bank or a State member bank. But the instant they are chartered, they are automatically insured; is that correct?

Mr. COBURN. That is correct.

2 Source: Hearings before the Senate Banking and Currency Committee on the Illinois Banking Situation, September 21 and 25, 1956, p. 33 of pt. I.

Senator SPARKMAN. You are required to carry the insurance risk, but you have no responsibility in designating or choosing the risk.

Mr. Coburn. That is correct, sir. I may say in each instance the Comptroller, on the one hand, in reference to the national bank, and the Federal Reserve in reference to a member State bank, certifies to the Corporation, gives it. a certification that it has considered the six factors that are enumerated in our act for qualifications.

Senator SPARKMAN. But it is their judgment and not yours.

Mr. COBURN. Yes, sir; that is correct. FSLIC participation in processing applications for insurance now requires a recommendation based upon the best judgment of the Manager of the Corporation. Apparently such exercise of judgment is not present in the commercial banking system despite the independence of the FDIC. The question of "conflict of interest” might more properly be raised with respect to the FSLIC if it were required to rubber stamp the judgment decisions of the Board without making independent judgments beforehand.

"Promotional activity by the FHLBB.The Federal Home Loan Bank Board was authorized to promote" the organization of savings and loan associations by the Home Owners' Loan Act of 1933 and funds were appropriated for that purpose. However, by early 1938 the Board discontinued promotional activities, assigning such duties as were to be continued to the regional banks. By that time practically all the funds available for promotional activities had been expended and the need as originally seen had been met.

The following paragraphs describe the promotional activities of the Federal Home Loan Bank Board : 3

The Home Owners' Loan Act of 1933 authorized the Board “to encourage local thrift and local home financing, and to promote, organize, and develop the associations herein provided for or similar associations organized under local laws. *

* * The sums appropriated and made available
pursuant to this section shall be used impartially in the pro-
motion and development of local thrift and home-financing
institutions, whether State or federally chartered."

There were two types of expenditures authorized by
Congress for the development of savings and loan associations:

1. Money provided by Congress for strictly promotional
purposes.

2. Money provided by Congress for investment in shares of Federal savings and loan associations and State-chartered insured associations.

Under the terms of the act, Congress appropriated $150,000 "to enable the Board to encourage local thrift and local home financing and to promote, organize, and develop the associations herein provided for or similar associations organized under local laws *

An additional $700,000 was later authorized—$500,000 in April 1934 and $200,000 in May

1935—for this purpose. 3 Source: Letter from FHLBB, September 14, 1956.

* *

All expenditures from this total of $850,000 were authorized to be taken directly out of the Federal Treasury and the Secretary of the Treasury was directed to allocate and make the funds available to the Board subject to its call. Under the language of the authorizations, the funds were to "remain available until expended.” The Board's calls from these funds totaled $815,943.91, so that there remained, when the accounts was closed, an unexpended balance of $34,056.09 which was finally transferred to the surplus fund of the Treasury.

The act also authorized $100 million for investment by the Treasury to be used in the purchase of shares of Federal savings and loan associations. Of this amount, the Treasury actually invested $49,300,000. On May 28, 1935, Congress authorized the Home Owners' Loan Corporation to invest $300 million in obligations of the Federal home loan banks and shares of Federal savings and loan associations and State-chartered insured associations. Of this HOLC money, a total of $223,856,710 was invested.

The Federal Home Loan Bank Board, by resolution of November 8, 1935, directed its Savings and Loan Division to perform extensive fieldwork in connection with:

1. The admission of applicant institutions to membership in the Federal Home Loan Bank System.

2. The organization of new Federal savings and loan associations; and cooperation in their development during the early period of their existence.

3. The conversion of existing thrift associations to Federal charter and assistance therewith.

4. The insurance of accounts by the Federal Savings and Loan Insurance Corporation and necessary related services.

5. Assistance to the Federal home loan banks and associations in supervisory matters.

These activities were carried on by presenting to the officers and directors of thrift and home financing institutions the various facilities offered by the Federal Home Loan Bank Board to promote the welfare of the associations and to enhance the services they render to their respective communities. These personal contacts were made primarily by the field representatives of the Division, but in many instances locally organized groups of thrift institutions invited representatives from the Washington staff to describe the services to them.

Field representatives of the Division contacted approximately 572 institutions each month, resulting in an average coverage of 348 cities and towns monthly. Each visit was primarily to explain the advantages of membership in the bank system and how it is obtained, or the benefits of insurance of accounts and the standards of eligibility, or the procedure of converting a State institution to a Federal charter, or how, through capital investments by the Home Owners' Loan Corporation in the institution to supplement the local savings, the home financing needs of the particular

community might be cared for sooner. The field representa-
tives also investigated applications to organize new Federal
savings and loan associations in communities not adequately
served by thrift and home financing institutions. In all of
this work, the responsibility of the Division and its activé
assistance continued until an association had completed its
proposed program and was functioning in a normal manner.

In addition, the Division took an active part in rehabilita-
tion programs for those local thrift and home-financing insti-
tutions which were unable to qualify under the Board's
standards of eligibility for insurance or conversion. These
programs included financial and corporate reorganizations.

On January 11, 1938, the Savings and Loan Division of the Federal Home Loan Board was discontinued and the field services were taken over by the officers of the regional Federal home-loan banks. Promotional activities on the scale previously carried on by the Savings and Loan Division were discontinued as practically all of the funds appropriated by Congress for that purpose had been expended and the fact that the original need for which this activity was started had been fulfilled.

The Board has no future plans for promotional activities. As has been stated elsewhere in this report, there are relatively few communities that are of sufficient size to successfully support a savings and loan association that do not already have such facilities available. According to our records, the inability of worthy applicants to raise the required amount of capital is rarely the reason for a charter not being granted.

OTHER ISSUES INVOLVED IN SEPARATION

In addition to eliminating the alleged "inherent conflict of interest, it has been argued that the proposed separation and independence of the FSLIC would create other advantages. The major advantages claimed for Reorganization Plan No. 2 and for any separation of the FHLBB and the FSLIC accomplished by legislative enactment are discussed in the following paragraphs.

Protection of the interests of the Corporation and the Treasury.—The interest of the FSLIC as referred to by advocates of separation may be defined as the contingent liability incurred as a result of insuring the savings accounts deposited in insured savings and loan associations. This contingent liability stood at $32,127 million on June 30, 1956. The interest of the Treasury, as referred to by the Bureau of the Budget, is the statutory authority which permits the Corporation to borrow from the Treasury up to $750 million. The Bureau of the Budget feels that this borrowing authority would undoubtedly be increased should the need arise.

The suggestion that separation would protect the interests of the Corporation and the Treasury implies that the Board is not concerned with protecting these interests or at least is not so concerned as the Corporation would be if it were separate and independent. In actual practice the FSLIC has initial authority to recommend approval or disapproval of insurance and in so doing must bear initial responsi

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