Page images

4. What evidence can be cited to illustrate the contention that the existing identity of management is less desirable at the present time than it has been since the creation of the Insurance Corporation?

5. In considering the relationship between the Board and the Corporation, of what significance is the $750 million borrowing authority of the Corporation?

6. Does the present identity of management contribute to or detract from the Board's ability to encourage local thrift associations?

7. What are your best estimates of changes in operating expenses which would result from separate management of the Board and the Corporation, both long-range and short-term changes?

8. In what ways would separate management tend to reduce expenditures of the Federal Government as a whole in the long run?

9. If it is your conclusion, based upon your answers to the foregoing and any other considerations, that some change should be made in the relationship between the FÉLBB and the FSLIC, what are your recommendations for change and how may such change be accomplished?


Washington, D. C., September 14, 1956. Hon. JOHN R. SPARKMAN,

United States Senate, Washington, D. C. DEAR SENATOR SPARKMAN: In compliance with the request contained in your letter of August 14, 1956, there are submitted herewith the views of this Board with respect to “Questions relating to the Federal Home Loan Bank System in general" and "Questions relating specifically to the desirability for separate management of the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation,” together with "Additional data" which you also requested concerning promotional activities of the Board from its inception to the present time.

There are transmitted herewith functional charts of the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation and financial statements of the Board, the Federal Savings and Loan Insurance Corporation and the regional banks. The statement of the background and history of the Board and the Federal Savings and Loan Insurance Corporation and the operational charts which were also requested are in the process of preparation and are expected to be ready for delivery to Mr. Carter within the next few days.

For purposes of clarity, answers to the various questions appear in same order as the questions were presented in your letter.



1. The primary purposes of the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation may be stated in summary as being to serve the public interest through the encouragement of thrift and homeownership throughout the Nation.

More specifically, the purposes of the Federal Home Loan Bank Board are

(a) To assure the sound conduct and public usefulness of the Federal Home Loan Bank System as a nationwide central reserve credit system for the privately owned thrift and home-financing institutions comprising its membership.

(6) To provide convenient and safe means for people to save their money and to obtain economical home financing through the establishment and sound operation of privately owned and

locally managed Federal savings and loan associations. The purpose of the Federal Savings and Loan Insurance Corporation is

(a) To encourage and safeguard the practice of thrift and to promote home ownership throughout the Nation by insuring the safety of the people's savings in Federal savings and loan associations and in State-chartered savings and loan institutions that

qualify for such insurance. 2. In the opinion of the Board there should be no change in the purposes for which these two organizations were originally established. It is believed that Federal and insured State-chartered associations operating within the framework of these broad principles are capable of performing maximum community services in connection with thrift and economical home financing. This belief is further confirmed by the fact that during the calendar year 1955 approximately 37 percent of home financing was provided by the savings and loan business.

3. All of the operations of the Federal Savings and Loan Insurance Corporation are the responsibility of the Federal Home Loan Bank Board; however, the Board is responsible for many other activities which do not involve the operations of the Federal Savings and Loan Insurance Corporation. With this in mind, the functions of the Board which are of no direct responsibility of the Corporation are: Supervision and examination of the district Federal home-loan banks; issuance of consolidated obligations and approval of the rates and terms of such obligations; to charter, regulate, examine, and supervise Federal savings and loan associations; approval or disapproval of applications for membership in the Federal Home Loan Bank System submitted by any building and loan association, savings and loan association, cooperative bank, homestead association, insurance company, or savings bank; in cooperation with various State supervisory departments, examine and supervise State-chartered associations which are members of the Federal Home Loan Bank System; coordinate credit and financial policies of the Board with other interested departments and agencies of the Government; initiate legislative proposals and suggestions affecting the Federal Home Loan Bank System, Federal savings and loan associations, and the Federal Savings and Loan Insurance Corporation.

Subject to the general executive direction of the Federal Home Loan Bank Board, the Federal Savings and Loan Insurance Corporation is responsible for the performance of certain major functions, which, as previously stated, are likewise responsibilities of the Board. These functions involve: Recommendations to the Board as to whether applicants for Federal charters meet the standards required for the insurance of their accounts; recommendation to the Board of the action it proposes should be taken in connection with applications for insurance of accounts received from State-chartered associations; take necessary action under existing Corporation authority, and at the direction of the Board to prevent default of insured associations and to effect settlement, liquidation, or otherwise take over the affairs of insured institutions if necessary to protect the interests of the shareholders, the public and/or the Corporation.

4. In view of the fact that the functions of the Board and the Corporation are so closely related, and since their objectives are wholly consistent and compatible, it is believed that the close integration of the Insurance Corporation with the Board should be maintained.

5. (a) According to information available, there are relatively few communities capable of successfully supporting savings and loan institutions that do not already have such facilities. This situation, of course, changes as the result of shifts in population, movement of industry, etc.; however, through the Board's district supervisors, encouragement and assistance is provided all worthy groups in such communities in the establishment of local savings and loan facilities. Where applications for charters emanating from these areas are received that meet the standards necessary to qualify for a charter and insurance of accounts, additional facilities are constantly being authorized. No change in the present procedure is deemed necessary.

(6) It is believed that branch offices provide, in many instances, needed services to communities that may not otherwise support an independent institution or, in more heavily populated areas, provide improved services and benefits to a concentration of an existing association's customers in a particular area. The Board favors the establishment of branches under such conditions provided the parent association is well established, the added facility is needed in the community, and its establishment will not cause undue injury to existing local thrift and home-financing institutions operating in the same area.

(c) Decisions by the Board to change or amend existing regulations or institute new regulations are made only after the most careful and comprehensive deliberation. This often involves considerable research as well as discussion with leaders in the savings and loan business to determine the favorable or adverse effect which may result from a contemplated regulation. It is only after all relevant information has been carefully considered does the Board come to its conclusion as to whether or not a proposed regulation shall be issued. Once the decision is made, public notice of the Board's intention is given and all interested parties are afforded an opportunity to express any comments they wish to make in connection therewith before the regulation is finally adopted. In all such cases the Board through its General Counsel is informed of the legal implications involved. This policy and practice has proved to be satisfactory. No change is recommended.

(d) Applications for insurance are filed by the applicant with the district Federal home-loan bank having jurisdiction over the community in which the association is located. These applications are reviewed in the bank for sufficiency of information submitted. After a thorough investigation and analysis of the application has been made, the bank forwards the application together with its recommendation to the Federal Savings and Loan Insurance Corporation for a determination as to whether or not insurance of accounts should

be approved. Based upon this determination, the Insurance Corporation recommends to the Board the action it thinks should be taken upon the application. While the time required for processing these applications may be accelerated, this can be accomplished by administrative action and no legislative action is recommended.

(e) (1) It is difficult to see how liaison between the Board and the regional banks could be improved. The Division of Federal Home Loan Bank Operations is in daily contact with all banks with respect to matters relating strictly to the operations of the bank. With respect to matters dealing with supervision of member institutions or matters involving insurance of accounts, the supervisory agent has ready access to the Division of Supervision, Division of Savings and Loan Operations, and/or the Federal Savings and Loan Insurance Corporation. This condition also applies to all matters which officers of the banks feel they should take up directly with the Board.

(2) While the banks maintain continuous liaison with their members through personal visits of their supervisory agents to their institutions, this is further augmented by group meetings, correspondence, conventions, etc. The officers and directors of all banks are available to any member who wishes to confer concerning the problems of a member institution. Liaison in this respect is considered satisfactory.

(5) Supervisory problems, as a rule, are disclosed through informåtion reported by the examiners. The procedure for handling these matters provides for immediate corrective action to be taken by the supervisory agents, who are officials of the district bank, with the member institution involved with notice by the agent to the director of supervision in Washington of the action being taken. However, if the analysis of the report of examination discloses serious violation of law or regulation or unsafe and unsound management, the agent consults with the Director of the Division of Supervision before taking action. The Director in all such cases is in close contact with the Board, the Insurance Corporation, and the Legal Department. Insofar as procedures are concerned, they are satisfactory and well coordinated.

(g) Close coordination is maintained with the Treasury, Federal Reserve System, Council of Economic Advisers, and all other departments and agencies of the Government concerned with the activities and policies of the Federal Home Loan Bank Board. This is accomplished satisfactorily through personal contact and through the exchange of information and periodic statistical data.



1. The Board is of the opinion that the present organizational structure whereby the management of the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation is the responsibility of one authority has many advantages that would be lost if there should be a separation of such management. Disadvantages, such as possible conflicts in regulations, dual supervisory and examining responsibility, additional personnel resulting in increased cost, delays and added difficulties in providing services to the public would result. The confusion on the part of not only the public but also the member institutions in dealing with 2 rather than 1 regulatory and supervisory authority would substantially hinder and complicate what has heretofore been a sound and efficient operation.

2. The present identity of management in the opinion of this Board contributes substantially to the purpose of protecting deposits. Under the present system, the Board has authority to charter newly organized Federal savings and loan associations. It also is charged with the responsibility for the insurance, up to $10,000 of all savings accounts in such associations as well as the responsibility for approving applications of State-chartered associations for membership and insurance of accounts. It is believed that this responsibility imposes upon the Board an obligation to determine that all standards applicable to a sound insurance risk are met before a charter is issued. In the opinion of this Board, this system is preferable to any arrangement whereby insurance of accounts by the Corporation would be mandatory once a Federal charter is granted by a separate agency having no responsibility for the insurance risk such actions would compel the Corporation to assume.

Periodic examinations by one group of Federal examiners reporting to one supervisory authority assures uniformity of supervision and provides an excellent safeguard against unsafe and unsound practices, thereby minimizing the insurance risk.

3. It would seem that the record growth experienced by savings and loan associations over the past 22 years is a clear demonstration of the public confidence enjoyed by these institutions. Close collaboration when interest and objectives are the same promotes public confidence, whereas, separation would tend to create conflicts and thus weaken public confidence in the overall supervision and guidance of the Nation's insured savings and loan associations.

4. No evidence to the Board's knowledge has been cited to illustrate this contention. Here again, experience has demonstrated that by virtue of supervisory and insurance authority being vested in one Board, difficult solutions in problem cases have been effected to the advantage of the investors and the communities affected without arousing adverse public reaction. It is doubtful if such a record could have been established had there been divided authority over the affairs of the members of the Federal savings and loan system and the Federal Savings and Loan Insurance Corporation.

5. The Board fails to see any real significance, because of the present relationship between the Board and the Corporation, in the $750 million borrowing authority of the Corporation. Even should there be a separation of the Board and the Corporation, the duties and responsibilities of the management of the Corporation would be the same as are presently imposed upon the Federal Home Loan Bank Board.

6. In the Board's opinion, the present identity of management contributes to the encouragement of local thrift associations, for the reason set out in question No. 1.

7. According to our best estimates, the operating expenses of the Corporation, in the event of separation, would increase approximately 37 percent in addition to the intangible expense imposed on the member institutions because of resultant conditions necessarily attendant as set forth in answer to question No. 1 without there being a corresponding decrease in the overall costs of operations of the Board. This is, of course, an important consideration, and in the Board's

« PreviousContinue »