economical home financing or with the purposes of this title. In view of the above language, it would appear to be at least theoretically possible for the FHLBB to charter a new Federal savings and loan association which did not meet the standards of the FSLIC for admission to insurance. Nevertheless, it might be considered the "duty" of the Corporation to insure the accounts of such an association. We believe that it would be sound policy and consistent with the probable intent of the Congress to amend the existing provisions to remove this ambiguity and to make the issuance of a new Federal charter clearly conditional upon a determination by the Corporation that the association is acceptable for insurance. The FSLIČ should have the final right to pass upon the risks which it assumes. 5 (b). State any recommendations you may have with reference to establishment of branch offices We have no recommendation on this subject at the present time. 5 (c). State any recommendations you may have with reference to the formulation and promulgation of regulations, legal opinions, and Board decisions We have no recommendations to make in this area other than those set forth under Reorganization Plan No. 2 of 1956. Under this plan the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation would have separate managements, and each agency's board would be authorized to formulate and promulgate decisions and regulations required to carry out its particular functions 5 (d). State any recommendations you may have with reference to processing applications for insurance In view of the fact that the FSLIC bears the risk of loss, we believe that full responsibility for final decision on all applications for insurance should be vested in a separate board of trustees independent of the Federal Home Loan Bank Board. 5 (e). State any recommendations you may have with reference to— (1) Liaison between the Board and the regional banks. (2) Liaison between regional banks and member institutions. We have no recommendations to make in this area. 5 (f). State any recommendations you may have with reference to present supervisory procedures both with respect to FHLBB and regional banks We recommend a careful review of the use of the officers of the Federal home-loan banks in the dual capacity of supervisory agents for FHLBB and FSLIC. Although the FHLBB technically designates the officers who are to serve as its supervisory agents, the officers are generally selected by the directors of the Federal home-loan banks, the majority of whom are in turn elected by the members of the banks, i. e., the associations which are to be supervised. A conflict of interest is possible under such circumstances as bank officials, anxious on the one hand to maintain satisfactory relations with their clients, are also placed in the position of policing the operations of the same clients. While the question is not covered by the language of Reorganization Plan No. 2 of 1956, as indicated under item 4 above, it was con templated that changes would be made in the current supervisory procedure under the reorganization plan. Under the plan, the FSLIČ would have dealt with insured associations through appropriate supervisory authorities or, if such authority did not exist, it would have dealt directly with the association. In the case of insured, State-chartered associations, the current process would have been simplified in that the Corporation would have been able to communicate directly with State authorities instead of first going through the supervisory agents of the FHLBB. 5 (g). State any recommendations you may have with reference to coordination of policies by the FHLBB_with_other_governmental agencies, including the Treasury and the Federal Reserve Board We have no specific recommendations on this subject. Such coordination, in our opinion, should continue to be handled by flexible informal arrangements, rather than by specifically prescribed statutory requirements. QUESTIONS RELATING SPECIFICALLY TO THE DESIRABILITY FOR SepARATE MANAGEMENT OF THE FEDERAL HOME LOAN BANK BOARD AND THE FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION 1. What are the advantages and disadvantages of creating separate management for the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation? The advantages of creating a separate management for the Federal Savings and Loan Insurance Corporation are set forth in the President's message transmitting Reorganization Plan No. 2 of 1956 to the Congress, the testimony of Budget Director Percival F. Brundage before the Senate and House Committees on Government Operations on Reorganization Plan No. 2, and reports of audits by the General Accounting Office of the Federal Savings and Loan Insurance Corporation and the Home Loan Bank Board for the fiscal years 1945-46, 1947, 1948, and 1949. These advantages may be summarized as follows: 1. The creation of a separate board of trustees for the Federal Savings and Loan Insurance Corporation would provide fulltime management which is essential both for the most effective performance of the important responsibilities vested in the Corporation and for the protection of the Federal Government's vast and rapidly increasing financial stake in the insurance program. 2. Responsibility for the inherently conflicting functions of insurance underwriting and the chartering and promotion of Federal savings and loan associations would no longer be vested in a single agency. 3. The Federal Home Loan Bank Board would be relieved of responsibility for the insurance program and, therefore, would be better able to concentrate its attention on its original and primary purposes-the maintenance of an adequate and stable flow of funds for home financing, and the promotion, chartering, and regulation of Federal savings and loan associations. The principal disadvantage of separation would be an increase in the administrative and operating expenses of the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corpora tion. It is strongly believed, however, that this increase in costs would be more than offset by the savings which would be obtained through the more effective protection of the Government's and the industry's very large financial stake in the insurance program. Separation would also result in the establishment of another independent agency reporting directly to the President. It is generally recognized that it is essential to the sound management of the executive branch to group together related and mutually compatible Government programs in a minimum number of executive agencies under officials who are directly responsible and accountable to the President. Such arrangements make it possible for the President to rely, in the first instance, on his department and agency heads for the coordination of Government activities within broad program areas. For that reason the President, in signing the Housing Amendments of 1955 which made the Federal Home Loan Bank Board (including the Federal Savings and Loan Insurance Corporation) independent of the Housing and Home Finance Agency, indicated that it would have been preferable to keep both the Board and the Corporation under the overall coordinating authority of the Housing and Home Finance Administrator. The above principle of organization is based on the premise that overall coordinating authority will be vested in the head of an executive department or an operating agency such as the Housing and Home Finance Agency. It is not consistent with this principle for a commission, such as the Federal Home Loan Bank Board, to be responsible for the coordination of executive programs. The relationship of the Federal Home Loan Bank Board to the President is not the same as that of the head of an executive department or an operating agency. In addition, assignment of extraneous functions to a commission such as the Federal Home Loan Bank Board, particularly those which may conflict with its basic responsibilities, should be avoided. Under the circumstances, it is preferable to establish the Federal Savings and Loan Insurance Corporation as an independent agency reporting directly to the President and subject to his immediate supervision than to continue present arrangements. 2. Does the existing identity of management contribute to or detract from the purpose of protecting deposits? The existing identity of management does detract from the purpose of protecting deposits. The financial interests of depositors are safeguarded by Government insurance. But the financial interests of the United States Government and the United States taxpayer, who must ultimately bear the cost of any losses which cannot be met out of the reserves of the Federal Savings and Loan Insurance Corporation, will be better protected if the Insurance Corporation is under separate management, which has no other responsibility than the protection of those deposits. 3. In what ways would separate management of the Board and the Corporation promote public confidence in the savings and loan insurance program, or safeguard the interests of the Corporation and the Treasury? The Federal Savings and Loan Insurance Corporation is today a body corporate without a head. In no other case is management and direction of a United States Government Corporation vested by law in a Commission with major duties and responsibilities largely distinct from the affairs of the Corporation. Such an arrangement would not be permissible in a private corporation and is contrary to accepted governmental practice. The absence of a separate management, together with the procedures and administrative arrangements established by the Federal Home Loan Bank Board, have tended to reduce the prestige and effectiveness of the Federal Savings and Loan Insurance Corporation, have blurred the distinction between the Board's dual responsibilities as supervisor of the Home Loan Bank System and as de facto trustee of the Corporation, and generally have limited the Corporation's ability to deal promptly and effectively with situations threatening the insurance fund. Some of the problems growing out of existing arrangements are well illustrated by facts brought out in the testimony of Mr. Walter McAllister, former Chairman of the Federal Home Bank Board, before the House Committee on Government Operations on House Resolution 541, to disapprove Reorganization Plan No. 2 of 1956. These facts are summarized below. The page references in the printed House hearings are indicated after each point. 1. The Federal Home Loan Bank Board does not maintain separate minutes for the Federal Savings and Loan Insurance. Corporation and does not clearly distinguish between actions taken under its own authority and actions taken on behalf of the Corporation (pp. 50–52). 2. The Board discontinued regular examinations of all applicants for insurance in 1950 and did not reinstitute such examinations until 1956 (p. 52). 3. The Board would overrule a recommendation of the Insurance Corporation against the issuance of insurance if it thought it was the right thing to do (p. 53). 4. Supervisory authority over insured institutions is exercised by the Board's Division of Supervision and the supervisory agents in the 11 home loan banks. The Insurance Corporation is generally brought into the picture when, in the opinion of the Division of Supervision, there are questions with regard to the solvency of the insured institution (pp. 54-55). 5. The Board, acting on behalf of the Insurance Corporation, entered into agreements with certain State supervisory authorities which limited the number of Federal examiners who could be used to examine insured State-chartered institutions in those States. As a result, the Board was unable to make "real" examinations which would disclose defalcations and unsafe and unsound practices. This was done despite the fact that under the law the Insurance Corporation has unrestricted authority to examine insured State-chartered institutions (pp. 55-57). 6. The Board has delegated supervisory authority over insured institutions to the presidents of the regional home loan banks. The home loan banks extend credit to insured associations and, as a practical matter, these loans are insured by the Federal Savings and Loan Insurance Corporation. A possibility of conflict of interest arises from the fact that the bank presidents supervise on behalf of the Board and the Corporation the same institutions to whom they lend money. Furthermore, bank presidents are also subject to other pressures, since a majority of the directors of the regional banks, who control the appointment and fix the compensation of the bank presidents, are elected by the supervised institutions. Officials of supervised institutions are often elected as bank directors (pp. 57-58). Separate management would promote public confidence in the savings and loan insurance program by removing the potential conflicts of interest and diffusion of responsibility inherent in the present organization. A separate board of trustees concerned solely with the interests of the insurance program would be able to make full use of the Corporation's present statutory authority to examine and supervise insured institutions and to take any actions necessary to protect the insurance fund, and thus would best safeguard the interests of the Corporation and the Treasury. 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? The question apparently assumes that present organizational arrangements have existed unchanged since the creation of the Corporation. This is not the case. From its establishment in 1934 to 1942, the Corporation operated under a separate statutory board of trustees composed of the five members of the Federal Home Loan Bank Board.. In 1942, the functions of the trustees were transferred to a Federal Home Loan Bank Commissioner and this arrangement continued until 1947. It was not until 1947 that the board of trustees was abolished by law and its functions vested directly in the Home Loan Bank Board, and its successor agency. The problems arising from identity of management are not new. The General Accounting Office called attention to these problems as early as 1948 and recommended that management of the Insurance Corporation be separated from the Home Loan Bank Board. The urgent need for taking action at this time grows out of the tremendous increase in the number of insured associations and the present and rapidly expanding magnitude of the commitments undertaken by the Corporation. Over a thousand savings and loan associations, whose accounts had not been previously insured, have applied for and obtained insurance since 1945. During the same period the potential liability assumed by the Federal Government has increased from approximately $5 billion to over $30 billion. It may be noted that the surplus and reserves of the Corporation have decreased since 1945 from 1.2 percent to 0.6 percent of the insured liability. The present size and importance of the insurance program emphasize the desirability of establishing a full-time board of trustees separate from the Federal Home Loan Bank Board. 5. In considering the relationship between the Board and the Corporation, of what significance is the $750 million borrowing authority of the Corporation? The $750 million borrowing authority of the Corporation is not in itself a significant factor in appraising the relationships between the Board and the Corporation. The borrowing authority merely emphasizes that the Federal Government stands behind the insurance program. The amount of the borrowing authority is not, however, a full measure of the Federal Government's potential liability since, |