if the need should ever arise, the Corporation's borrowing authority undoubtedly would be increased. 6. Does the present identity of management contribute or detract from the Board's ability to encourage local thrift associations? Mr. Walter McAllister, former Chairman of the Federal Home Loan Bank Board, testified before the House Committee on Government Operations (hearings on Reorganization Plan No. 2 of 1956, p. 59) that: "Today we are not out promoting the development of the savings and loan business." Representative Holifield commented: "The argument has been made this morning that the Federal Home Loan Bank Board does not promote these charters. I regret to say that is true. It was the intent of Congress, I believe, that they should promote charters and promote the establishment of a great number of these building and loan associations." The Senate Committee on Banking and Currency has also expressed concern (S. Rept. No. 2005, 84th Cong., 2d sess.) that "many communities are not adequately served by institutions which supply longterm capital" and recommended that "the Federal Home Loan Bank Board undertake a study to assess the need of chartering additional numbers of Federal savings and loan associations." In recent years it has not been the policy of the Federal Home Loan Bank Board to promote the establishment of new savings and loan associations. This policy is attributable undoubtedly to many factors other than identity of management with the Federal Savings and Loan Insurance Corporation. If the Board, however, were relieved of its responsibilities for management of the Insurance Corporation, it could devote a greater proportion of its time to matters related to the encouragement of local thrift associations. 7. What are your best estimates of the changes in operating expenses which would result from separate management of the Board and the Corporation both long-range and short-term changes? Under the present organization of the Board and the Corporation, the operating-expense requirements for both agencies estimated for the fiscal year 1957 total $5,431,500. The breakdown between the major units involved is shown in the following table: Estimated operating expenses for fiscal 1957 Federal Home Loan Bank Board: Division of Examinations (gross) Other Subtotal (gross). Federal Savings and Loan Insurance Corporation (gross). Reimbursement to FHLBB by Division of Examinations.. Total (net) - A precise estimate of the changes in operating expenses resulting from separation of management is difficult in the absence of (1) specific identification of the organizational adjustments the new Board of Trustees of the Corporation would find necessary to meet the responsibilities of a truly independent corporation; (2) a similar identification of the changes in the Board's organization necessary to carry on its important continuing functions efficiently and economically; and (3) knowledge of the working relationships established between the two agencies. Separation of the management of the Board and the Corporation would probably have little, if any, effect on the cost of examining savings and loan associations which constitute more than two-thirds of the total expenses, since no duplication of examinations would be involved. Some increase in the operating expenses of the Corporation would undoubtedly arise when the Corporation supplies its own executive direction and takes over supervision of insured associations. This increase could not be offset by an exactly corresponding reduction in the Board's expenses. However, such items represent only a fraction of the total expenses for the two organizations and, therefore, the potential net increase from this source would be relatively small and would not impose any significant burden upon the industry. The expenses of the Corporation would also increase to the extent that the new management decides that more intensive supervision is necessary for effective protection of the Government's large and growing financial interest. In the long-run, however, the reduction in future losses should far exceed the additional short-run expenses. 8. In what ways would separate management tend to reduce expenditures of the Federal Government as a whole in the long run? The major source of potential expense to the Government in connection with the insurance program is the insurance liability which now exceeds $31 billion and is rapidly increasing. A reorganization which improves the management of the Insurance Corporation and enables the Corporation to strengthen its supervision of insured institutions will provide maximum protection to the Corporation and the Federal Government against losses. 9. If it is your conclusion, based upon your answers to the foregoing and any other consideration, that some change should be made in the relationship between the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation, what are your recommendations for change and how may such change be accomplished? The President's recommendations for changes in the relationship between the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation are set forth in Reorganization Plan No. 2 of 1956 transmitted to the Congress on May 17, 1956. These changes can be accomplished either by reorganization plan or by legislation. COMPTROLLER GENERAL OF THE UNITED STATES, Hon. JOHN SPARKMAN, Chairman, Subcommittee on Housing, Committee on Banking and Currency, United States Senate. DEAR MR. CHAIRMAN: Attached is the information which was requested in the list of questions submitted with your letter of August 14, 1956, concerning the functions and operations of the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation. We are gratified that your subcommittee is studying the relationships of the Board and the Corporation in the light of the problems which were raised during the hearings of the Subcommittee on Reorganization of the Senate Committee on Government Operations on Reorganization Plan No. 2 of 1956. If we can be of any assistance to your subcommittee in your important undertaking, please advise. Sincerely yours, JOSEPH CAMPBELL, Comptroller General of the United States. COMMENTS ON QUESTIONS RELATING TO THE FEDERAL HOME LOAN BANK SYSTEM IN GENERAL 1. State your opinion of the primary purposes of the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation under existing law and administration The Federal Home Loan Bank Board is an independent supervisory and regulatory agency. It was created in 1932 pursuant to the Federal Home Loan Bank Act (12 U. S. C. 1421) and was made an independent agency by the Housing Amendments of 1955 (69 Stat. 640). The agency is directed by a three-man board. The 3 members are appointed by the President with the consent of the Senate for a term of 4 years; no more than 2 of its members may be of the same political party. The primary purposes of the FHLBB comprise: 1. Establishing policies, regulating, and supervising the 11 Federal home-loan banks established and chartered under the Federal Home Loan Bank Act for the purpose of making available reserve credit facilities for home financing institutions. 2. Chartering and establishing policies, regulating, and supervising Federal savings and loan associations established under the Home Owners' Loan Act of 1933 (12 U. S. C. 1461) for the purpose of encouraging local thrift and home financing. 3. Directing the operations of the Federal Savings and Loan Insurance Corporation and establishing policies and regulating the insured associations. The Federal Home Loan Bank Board does not receive any appropriations for its activities. All of its expenses are paid from two general sources of income: assessments on the Federal home-loan banks and the Federal Savings and Loan Insurance Corporation and fees for the examination of Federal and insured State-chartered institutions. However, the Congress annually places a dollar limitation on the amounts which may be expended for its expenses. The Federal Savings and Loan Insurance Corporation is a wholly owned Government Corporation created in 1934 by the National Housing Act (12 U. S. C. 1725 (a)). The primary purpose of the Corporation is to insure the safety of share and deposit accounts of all Federal savings and loan associations and qualified State-chartered institutions against loss up to $10,000 for each investor or saver. Insured institutions are required to pay premiums at a rate equal to 2 of 1 percent per annum of the total amount of all accounts of the insured members plus any creditor obligations. The Corporation's net earnings are required to be accumulated in an insurance fund reserve established for the protection of investors in insured institutions until such time as the reserve equals 5 percent of all insured accounts and creditor obligations of all insured institutions. The net earnings comprise the excess of insurance premiums, income on investments, and other revenues over expenses and provision for losses and for the payment, in lieu of dividends on capital stock, of a return on the average amount of its capital stock at a rate to be determined by the Secretary of the Treasury. In 1950 the act was amended to require the Corporation to retire annually at par a portion of its capital stock equal to one-half of its net income for the year. The appropriation acts place a limitation on the amounts which may be expended for administrative expenses other than for supervisory and various administrative services provided by the Federal Home Loan Bank Board. 2. State your opinion of what these primary purposes should be, if in your opinion they should be changed We have no suggestions for changes in the primary purposes of the FHLBB insofar as they relate to the regulation and supervision of the Federal home-loan banks and the chartering, regulation, and supervision of Federal savings and loan associations, or in the primary purpose of the Federal Savings and Loan Insurance Corporation. However, we believe as indicated under item 9 of our comments on the questions relating to the desirability for separate management of the FHLBB and the FSLIC, that consideration should be given to the desirability of vesting the responsibility for management of the FSLIC in a board of trustees composed of members other than those constituting the FHLBB. 3. State your understanding of the present functions and relationships of the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation The activities of the FHLBB in carrying out its primary purposes consist principally of— 1. Chartering Federal savings and loan associations. 2. Establishing policies, issuing regulations, and supervising the operations of the Federal home-loan banks and the Federal savings and loan associations. 3. Directing the operations of the FSLIC including the establishment of policies and the issuance of regulations pertaining to insured associations. These activities include the supervision and examination of savings and loan associations operating in the District of Columbia and the periodic examination of Federal and insured State-chartered associations. These examinations are made for the purpose of ascertaining the financial condition of the institutions and their compliance with prescribed regulations applicable to membership in the Federal Home Loan Banks, to insurance by the FSLIC, to holding Federal charters, and to doing business in the District of Columbia. The activities of the FSLIC in carrying out its primary purpose consist principally of underwriting insurance, billing and collecting premiums, and investing surplus funds. In addition to these activities the act creating the corporation directs that it shall be appointed conservator or receiver of defaulted Federal savings and loan associations and authorizes it to so act for any other defaulted insured savings and loan association when appointed by a public authority having the power of appointment. The act also directs the corporation to prevent the default of an insured institution and to restore an institution in default to normal operation as an insured institution by making a loan to, purchasing the assets of, or making a contribution to such an institution. The power to declare a Federal institution in default is vested in the FHLBB. Functions pertaining to the insuring of Federal and State-chartered savings and loan associations that are performed by the FHLBB in its direction of the operations of the FSLIC include: (a) The establishment of policies and the issuance of regulations pertaining to insurance of savings and loan associations. (b) The supervision and regulation of insured Federal and State-chartered savings and loan association. (c) Notification to an insured institution of violations of its duty as such, violations of law and regulations, and of unsafe or unsound practices. (d) Notifications to State supervisory authorities, if any, of such violations or practices. (e) Taking the necessary action to terminate the insured status of an institution. The regulation and supervision of all Federal savings and loan associations and insured State-chartered institutions is performed largely by the FHLBB's Division of Supervision and designated officers of the 11 Federal home loan banks who act as field supervisory agents of the FHLBB. Compliance with supervisory recommendations is usually achieved by the Division of Supervision or by the supervisory agents, acting directly or through State supervisory authorities without any formal action by the Federal Home Loan Bank Board. The supervision and regulation of insured savings and loan institutions is based largely on supervisory examinations and audits made by the FHLBB's Division of Examinations. The supervisory examinations of insured State-chartered institutions are, in some cases, performed jointly by Federal and State examiners. The audits of insured savings and loan institutions are made either by FHLBB examiners or by independent accountants retained by the insured institutions. The supervisory examination and audit reports are reviewed by field supervisory agents of the FHLBB, that is, designated officers of the Federal home-loan banks, and, on a test basis, by the FHLBB Division of Supervision which also determines that proper supervisory action has been taken by the field supervisory agents. The law contemplates that upon the granting of a charter to a Federal savings and loan association its accounts will be insured; |