bility for losses which might occur as a result of its recommendations. The Board has final authority for approval of FSLIC recommendations and, as a consequence, final responsibility for losses which might occur as a result of its actions.

Separation would relieve the Board of authority and responsibility and add to the responsibility of the FSLIC. It would add to the dignity of the FSLIC and enhance its prestige. Separation would place the FSLIC on an equal footing with the Board, but it would not, in the opinion of most informed sources, add to the protection now afforded the FSLIC and the Treasury.

Protection of the interests of the Corporation and the Treasury can be achieved not so much by realinement of the responsibilities of the Corporation and the Board as by a retrenchment of the activities of both the Board and the Corporation. In short, the Board by refusing to charter or grant further memberships in the system, and the Corporation by refusing to insure additional accounts could restrict further exposure to risk except through the normal growth of existing insured associations.

It is doubtful that Congress would take the position that the insurance of savings should be restricted to those associations which now enjoy it. It is more likely that the Congress would reaffirm its original intention to insure the accounts of as many individual depositors as possible, consistent with sound insurance principles applied by administrators of proven integrity.

Increasing the efficiency of present operations. The great preponderance of opinion presented in replies to questionnaires is that the efficiency of present operations would be destroyed rather than enhanced by "separation." The creation of a new independent agency, the possibility of overlapping functions, additional regulations, examinations and supervision, as well as additional expense, are all cited as probable results of separation.

With respect to "efficiency of operations" however, there were presented a number of complaints and recommendations designed to improve the internal operations of the FHLBB. These recommendations are discussed in subsequent paragraphs of this report. Although it was not possible to investigate each of these individual recommendations during the time allowed for the present study, it would not be inappropriate for the FHLBB to study the proposed changes and be prepared to comment upon their value at subsequent hearings of the Housing Subcommittee. Most, if not all, of these suggested changes can be accomplished administratively without separation of the FHLBB and the FSLIC.

Reducing operating expenses.-No one contends that the creation of a new independent agency would contribute to a reduction of operating expenses. Estimates are that the potential net increase would be "relatively small" (Bureau of the Budget); "approximately 37 percent" (Federal Home Loan Bank Board); and "50 percent" (United States Savings and Loan League).

Promoting public confidence.-It does not appear that there is any lack of public confidence in a savings industry which attracted over $82 billion in total assets by 1945 and which by the end of 1955 had increased those assets, principally through increased savings, to almost $38 billion.

PART IV. ISSUES NOT PERTINENT TO SEPARATION

Other suggestions have been made which relate to the present operations of the FHLBB, but which have no real connection with the problem of separation. Such recommendations could legitimately have been made even if separation were not an issue.

Federal Home Loan Bank Board responsibility for maintaining sound credit conditions.-Describing what it felt to be the primary purpose of the Federal Home Loan Bank Board, the Bureau of the Budget suggests that the Board's responsibility for maintaining sound credit conditions and for preventing excessive use of credit in inflationary periods should be emphasized and clarified by specific reference, presumably in an appropriate statute. If inflationary forces are present in the economy to an extent that corrective action by the Federal Reserve Board and other credit agencies is necessary, the Home Loan Bank Board should also participate in credit restrictions. When general inflation influences the economy, a united front presented by all credit institutions is needed to prevent a breakthrough in any of the credit areas involved.

While there was no doubt that the Home Loan Bank Board should maintain sound credit conditions and prevent excessive use of credit, judgments may and often do differ as to what is sound and what is excessive. Recent actions by the Federal Reserve Board have reduced the supply of credit available generally and made credit more expensive. These actions taken in an attempt to control inflation generally have had a disproportionately severe effect upon housing credit. Administration actions taken on September 20, 1956, recognized this and attempted to alleviate the effect of general credit restrictions on the home mortgage market.

The Housing Subcommittee, of course, is, and has been in the past, vitally interested in securing an adequate supply of mortgage financing. It has also questioned the wisdom of general credit controls especially when those controls disproportionately affect the flow of funds into the residential construction field. The subcommittee has been anxious to eliminate the boom and bust psychology so prevalent in mortgage financing, and has in fact held hearings on the subject and recommended legislation which was subsequently passed by the Senate.

The present study, however, does not include within its scope the vastly complicated problem of credit controls and the sufficiency of mortgage credit. If the Bureau of the Budget, which made this suggestion, feels that additional statutory language is necessary to clarify the Board's responsibility for maintaining sound credit conditions, it should make some recommendations along these lines during the coming legislative year.

Examination of insured State chartered institutions.-The Division of Examination of the Federal Home Loan Bank Board (under the authority of title IV of the National Housing Act, as amended) and State authorities conduct joint examinations of insured State-chartered

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associations. These examinations are based on general agreements between the Board and State authorities. In general the Board has allowed State authorities to determine when and in what manner examinations of insured State-chartered associations are to be undertaken. State agents are also in charge of the joint examination teams in many cases. In a few States this practice has tended to handicap Federal examiners. Some administrative action or legislative enactment is needed to insure that Federal examiners will not be handicapped in making examinations aimed at protecting Federal interests. This criticism of the Bank Board's examining procedures is illustrated by the Commonwealth Building & Loan Association case of Norfold, Va. With respect to this association, inadequate examination procedures resulted in the embezzlement of $2,887,000 by an employee of the subject association. The Home Loan Bank Board was requested to report on this case and to indicate what action had been taken to correct the weaknesses and defects in policy as revealed by that case. The following letter from the Chairman of the Board describes the corrective action taken:

FEDERAL HOME LOAN BANK BOARD,
Washington, D. C., October 5, 1956.

Mr. JACK CARTER,

Staff Director, Subcommittee on Housing,
Committee on Banking and Currency,

United States Senate, Washington, D. C.

DEAR MR. CARTER: You have requested a statement with respect to the examining policies and procedures in effect at the time of the special examination of the Commonwealth Building & Loan Association of Norfolk, Va., as of December 16, 1955, and have asked for a summary of actions taken since that date to correct weaknesses and defects in policy or procedure as revealed in that case.

After inquiry into this matter I have been informed as follows: State-chartered insured associations are subject to examination and supervision by State authorities who have the responsibility for supervision of the associations' compliance with State laws and regulations. These associations, because of insurance of accounts, are also subject to examination by the Federal Home Loan Bank Board, which exercises supervision to the extent provided by title IV of the National Housing Act and the rules and regulations made thereunder. Most of the Board's examinations of State-chartered insured associations are made jointly with the State authorities.

When the Board adopted the Manual of Examining Procedure, it was intended that this procedure and related instructions should apply to both Federal and State associations. However, beginning in 1943, 4 years prior to the reestablishment of the Board under Reorganization Plan No. 3 in 1947, there was a deemphasis on our examining and supervisory responsibilities in State-chartered insured associations. State authorities at that time were offered the opportunity of having their examinations accepted by the Board without the participation of Federal examiners. Most State departments did not accept the plan, but this expression of Board policy with respect to placing greater reliance on State examination and supervision definitely affected the examining procedure and method of reporting in joint examinations. The examinations of State associations in Virginia, including the Commonwealth Building and Loan Association of Norfolk, generally

were made jointly with the Virginia Bureau of Banking. During the period in question the State of Virginia had either 1 or 2 examiners engaged in savings and loan examinations. There was objection on the part of the Virginia staff to our having a substantially larger number of Federal examiners on joint examinations. As a result of this situation, there was inadequate control of the association's accounts and records not only at the beginning of the examination but throughout the examination. Without proper control, the procedures upon which we rely, particularly with respect to the integrity of accounts, were ineffective. In other words, the procedures which we then considered and still consider sound could not be applied as intended and therefore did not accomplish the purposes for which they were devised. In addition, since a single report was prepared by the two examining groups, the comments reflected only those matters which could be agreed upon by both examiners in charge. This obviously limited the scope and method of reporting. Developments during the course of the special examination of the Commonwealth Building and Loan Association disclosed that the surprise element upon which we rely was not strictly maintained, apparently due to the policy followed by the Virginia department in the scheduling of examinations.

The Board requested its Division of Examinations to make an analysis of the examining policies and procedures to determine weaknesses in the existing program. It was also requested that the joint examination programs in all States be reviewed and that the Board be furnished a report with such recommendations as seemed advisable to correct deficiencies. Such a report was made to the Board on April 16, 1956. After a number of discussions as to the various programs and the proposals for revision of policy and procedure, the Board, on June 6, 1956, approved the following basic requirements with reference to joint examinations:

1. That on all joint examinations there be a sufficient number of examiners to establish and maintain adequate examining controls and that, so far as practicable, there be an approximately equal number of State and Federal examiners on each joint examination;

2. That procedures as recited in the Manual of Examining Procedures be followed either by both State and Federal examiners or that there be no restrictions as to adherence to such procedures by the Federal examiners;

3. That there be no limitation on either the State examiners or the Federal examiners as to the inclusion in the examination report of factual information which they deem important from an examining or supervisory standpoint; and

4. That the element of surprise be maintained in commencing examinations.

Although the study revealed that relations with most of the State departments were entirely satisfactory, there was a limited number of States, including Virginia, where definite changes were necessary. Furthermore, in order to eliminate the possibility of a deterioration of the program in any State, it was agreed that authorities in all States should be advised of the Board policy. Incidentally, the policy of accepting State reports without participation by Federal examiners had been discontinued effective July 1, 1955. The district chief examiners were advised of the Board's requirements as to joint

examinations and were requested to confer with the appropriate authorities in each State in their districts. These instructions were issued to the chief examiners on June 14, 1956, and since that date joint examination programs which were not entirely satisfactory and in accordance with these requirements have been revised or are presently being considered by the Board to effect changes which will bring them into conformity with Board policy. The Board has made it quite clear that if a State refuses to cooperate in meeting the established standards, separate independent examinations will be made by the Board's examiners of insured associations in that State. These corrective actions cover basic policy and procedure with respect to the conduct of joint examinations. However, the question of examining and auditing procedure has not been ignored. Upon completion of the examination of the Commonwealth Building & Loan Association, the examiner-in-charge submitted a report setting forth his conclusions as to the adequacy of prescribed procedures in the light of disclosures in the Commonwealth case. An analysis of the facts and related procedures was made by the Division of Examinations and by the district chief examiners. A committee of chief examiners will meet with the Director of the Division of Examinations during the week of October 29 to discuss recommendations for amendment of the Manual of Examining Procedure and related instructions. It appears, however, at this point that no major revision of procedure is necessary. As previously explained, the fault in the Commonwealth case was not in the detailed examining and auditing procedures but rather in the ineffectiveness of the control and application of such procedures as the result of the joint examination program and policy. Nevertheless, changes, even though minor, will be effected where the procedure can be strengthened. Such procedural changes will be applicable to both Federal and State examinations.

The Board, as explained, has taken action to insure that sound examining and auditing policy and procedure be followed in the examinations of all insured associations, both Federal and State. If there is any further information you need in this matter please do not hesitate to let me know.

Sincerely yours,

ALBERT J. ROBERTSON, Chairman.

Supervision of member associations.-The Federal Home Loan Bank Board's supervisory authority is exercised through a Division of Examinations and a Division of Supervision. The Division of Examinations is by far the largest in number of personnel, having over 400 employees. Most of these employees are located within the 11 bank districts where the examinations of local savings and loan associations are performed. Each district has a chief examiner whose office is in quarters adjacent to the home-loan bank for the district. The Division of Supervision is composed of a supervisory agent in each district, and a small staff in Washington, D. Č., headed by a Director of the Division.

Each of the 11 home-loan banks is headed by a president and a board of directors. In the past, each bank has had 12 directors on its board (recent legislation provides that certain banks may have more than 12). Eight of these directors are elected by local associations, and four are appointed by the Federal Home Loan Bank Board. These directors elect an individual as president and the Board may, and usually does, approve such election. Each home-loan bank president automatically serves as supervisory agent for his district.