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When an examiner completes his examination of a local association, he furnishes a written report to the chief examiner for the district. Copies of these examination reports are forwarded to the supervisory agent of the district who is also the home-loan bank president, and to the Division of Examinations in Washington. It is the responsibility of the supervisory agent to review these examinations and to take supervisory action. This action usually consists of recommending corrective action, where necessary, to the local association.

The vast majority of supervisory actions are taken by the supervisory agent who also is the local home-loan bank president, but in difficult or complicated cases, the Director of the Division of Supervision in Washington may counsel with the supervisory agent or intervene and deal directly with the local association.

The Division of Examinations is the factfinding arm of the Federal Home Loan Bank Board. Once the facts with respect to the financial condition, operations, and policies of a local association have been determined and reported, the Division of Examinations' function is completed and the Division of Supervision in the person of the supervisory agent or the Director of the Division of Supervision recommends. and takes corrective action, where necessary.

Two major criticisms are made with respect to the Board's examination and supervisory functions. First, as the Bureau of the Budget and the General Accounting Office point out, the bank presidents who act as supervisory agents are recommended by the board of directors, a majority of whom are elected by the member associations, i. e., the organizations which are to be supervised. It is argued that the selection of supervisors, even indirectly, by the associations to be supervised may create the possibility of a conflict of interest. Both the United States Savings and Loan League and the National Savings and Loan League take the position that the duties of a bank president are sufficiently important to require the full services of any individual so appointed. They raise the question whether an individual can or should perform as a bank president while at the same time acting as a supervisory agent. It is argued that a bank president should be concerned solely with the duty of operating his bank. The interests of a supervisory agent pertain to the proper operation of local associations and may at times conflict with the interests of a bank president.

Secondly, it is noted that while the examining procedures of the national-bank system are similar in certain respects to those of the FHLB System, there are substantial differences. National-bank examiners are located in each of the 12 national-bank districts. These examiners report directly to a chief examiner of each of the 12 districts who, in turn, report to the Chief of national-bank examiners in Washington. Supervisory actions are then initiated as an integral part of the examining process. This is in contrast to the FHLBB system, wherein the examining function and the supervisory function are separate.

Adequacy of reserves of the FSLIC.The ratio or percentage of capital and reserves of the Insurance Corporation to potential liability as of June 30, 1945, was 3.3 percent. The reduction to 0.7 percent as of June 30, 1956, was primarily occasioned by the unusual growth experienced by insured associations as evidenced by the schedule set out below:

All insured associations

June 30, 1945

June 30, 1956

Savings capital
Mortgage loans.
Assets..
General reserves and undivided profits.

$4, 787,000,000 $31, 865, 516, 000 3, 434,000,000 30, 856, 347,000 5,550,000,000 36, 937,053, 000

356, 000, 000 2, 425, 884,000

Other contributing factors to the reduced percentage were (1) the reduction in premium rate from one-eighth of 1 percent to one-twelfth of 1 percent, effective June 27, 1950, and (2) the provisions made for the gradual retirement of the Corporation's capital stock, effective as of the above date, through the application of one-half of our net earnings each year, subject capital stock having been reduced from $100 million to $40,971,000 as of June 30, 1956.

It will be noted that in the 11-year period referred to the insured associations increased dollarwise their general reserves and undivided profits from $356 million to more than $2,400 million, and this of course would constitute the first line of defense in absorbing any losses occasioned by economic difficulties or otherwise. The ratio of reserves and undivided profits as of June 30, 1945, and June 30, 1956, are also set out below:

Ratio of reserves and undivided profits to

June 30, 1945 June 30, 1956

Assets.
Mortgage loans.
Savings capital..

Percent

6. 46 10.37 7. 44

Percent

6. 57 7. 86 7.61

The question of reserves, although of vital interest to the public and to the Congress, has no proper place in a discussion concerned with separation of the FHLBB and the FSLIC. The level of the reserves to be maintained is set by the Congress. If the Bureau of the Budget has determined that FSLIC reserves are not adequate, it has the duty and responsibility to recommend to the Congress on behalf of the administration the legislative changes necessary to correct the situation.

To date no such recommendation has been received. Before the House Committee on Executive and Legislative Reorganization, Mr. Percival Brundage, Director, Bureau of the Budget, testified' that there was no dangerous situation with respect to the reserves of the FSLIC, that he did not know whether reserves were too low or not, and that he did not at that time (June 26, 1956) recommend that reserves be increased.

Additional issues.-Many other suggestions were received from individuals and organizations responding to the questionnaire sent out by the staff. While all these suggestions are concerned with the policies or operations of the Federal Home Loan Bank System, they are generally unrelated to the question of independence of the FŚLIC. For this reason, and because of the limited time available to the staff, this report does not attempt to evaluate these additional suggestions. It is desirable, however, that the suggestions be studied by the FHLBB in preparation for consideration during future hearings of the subcommittee.

PART V. SUMMARY AND CONCLUSIONS This staff report has been prepared pursuant to the direction of the chairman. In its preparation, the staff studied Reorganization Plan No. 2 of 1956, the President's message which accompanied that plan, the hearings of the House Subcommittee on Executive and Legislative Reorganization, House Report No. 2599 issued pursuant to those hearings, hearings of the Senate Subcommittee on Reorganization, and Senate Report No. 2388 issued pursuant to those hearings. In addition, questionnaires have been forwarded to the following:

United States Savings and Loan League
National Savings and Loan League
Bureau of the Budget
Citizens' Committee for the Hoover Report
Federal Home Loan Bank Board
Comptroller General of the United States

Each president of the home loan banks
Answers to each of these questionnaires have been received.
Numerous interviews have been held with officials of the various
Government agencies concerned, including members of the Federal
Home Loan Bank Board, operating personnel of the Board and
FSLIC, the boards of governors of the United States Savings and
Loan League and the National Savings and Loan League.

The following conclusions are based upon this study:

1. The desirability for separating the FSLIC and the FHLBB has not been established and such separation is not warranted.

2. One reason for recommending Reorganization Plan No. 2 appeared to be an underlying uneasiness and concern over the increased size of the savings and loan industry.

The size of insured liabilities is not pertinent to the question of independent status for the FSLIC. Nor can it properly be used as an argument to support curtailment of the savings and loan industry. The basic soundness of the system, the adequacy of reserves, the adequacy of the chartering, insuring, examining, and supervising functions, in accordance with existing law—and not the size of the liability-are the criteria by which the program should be judged.

3. The Bureau of the Budget, which advocated clarification of the Board's responsibility for maintaining sound credit conditions "by specific reference” in the statute, should on behalf of the administration furnish to the Housing Subcommittee at an appropriate time legislative language to accomplish this purpose.

4. The Federal Home Loan Bank Board, by administrative action (or by legislative recommendation, if necessary), should acquire sufficient authority to require that examinations of insured State associations are conducted in a manner similar to the examinations of federally chartered associations so as to assure the Board of the financial soundness of the institutions and prevent losses such as that occurred in Norfolk, Va.

1 See FHLBB letter of Oct. 5, 1956, p. 21.

5. The Home Loan Bank Board should take appropriate steps to provide itself with a staff of competent supervisory agents responsible to the Board and divorced from any connection with the institutions being supervised. It is recognized that an adequate staff of supervisory agents cannot be acquired and trained within a brief period and it is, therefore, recommended that the Board, in consultation with the Congress, establish a reasonable time limit within which this proposal can be accomplished. The possibility of combining the examination function with the supervisory function should also be explored.

6. The Bureau of the Budget, which raised the question of the adequacy of reserves of the FSLÍC, should state formally on behalf of the administration whether in its opinion the present reserves are adequate, and should forward to the Housing Subcommittee at the earliest practicable time recommendations for increasing those reserves if they are considered inadequate.

7. The FHLBB should examine carefully the recommendations for basic policy changes and improvement of internal operations submitted by interested groups and contained in this report, and should be prepared to discuss these recommendations at subsequent hearings.

84258-56---3

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