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of insuring share and deposit accounts in such associations. Even though, as indicated in our comments in 2 above, we have observed no major weaknesses in the direction of the FSLIC by the FHLBB, we believe that the continual increase in the potential liability of the FSLIC for insured share and deposit accounts is an additional factor which makes it even more desirable now than in the past for the separation of management of the two agencies to be given careful consideration by the Congress. 5. In considering the relationship between the Federal Home Loan Bank

Board and the Federal Savings and Loan Insurance Corporation of what significance is the $750 million borrowing authority of the

Corporation? The FSLIC is authorized by law to borrow from the Treasury such funds up to $750 million, as in the judgment of the FHLBB are required to meet the Corporation's insurance purposes, and is specifically precluded from borrowing money from any other source. The borrowing authority has never been used. We are not aware of any special significance the borrowing authority has on the relationship of the two agencies. However, in case of a separation of management of the two agencies, complete authority to determine the need to use this borrowing authority would need to be vested in the FSLIC. 6. Does the present identity of management contribute to or detract from

the FHLBB's ability to encourage local thrift associations? We have no basis on which to offer a positive answer to this question. However, it occurs to us that the identity of management contributes to the FHLBB's ability to encourage local thrift associations because its authority to charter, insure, and regulate Federal savings and loan associations is final and conclusive. 7. What are your best estimates of changes in operating expenses which

would result from separate management of the Federal Savings and Loan Insurance Corporation and the Federal Home Loan Bank

Board-both long-range and short-term changes? A separation of the two agencies probably could be achieved without a large increase in operating expenses, provided, as indicated in 1 above, the agencies were authorized to conduct their supervisory, examination, and regulatory functions in a manner that would result in a minimum of duplication of effort. 8. In what ways would separate management tend to reduce expenditures

of the Federal Government as a whole in the long run? The management of the FSLIC by a well qualified separate board of trustees would tend to minimize the potential liability of the Corporation for insured share and deposit accounts and any obligation of the Government in case the Corporation's reserves prove to be inadequate. This would be so because the board would be able to devote its full time and attention to directing the Corporation's operations free from any obligation to promote either an increase in the number of savings and loan associations or in their growth.

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9. Accomplishment of change in relationship between the Federal Home,

Loan Bank Board and the Federal Savings and Loan Insurance

Corporation The comments on the foregoing questions set forth our views on the. advantages and disadvantages of separating the management of the two agencies and our reasons for believing that a separation of the management responsibilities should be given consideration by the Congress. As indicated in our comments in 1 above, the functions relating to the examination, supervision, and regulation of the insured institutions could be performed in a manner that would minimize any resultant duplication of effort by the agencies and the insured institutions.


Cincinnati 2, Ohio, September 6, 1956. Re Relationships between the Federal Home Loan Bank Board and

Federal Savings and Loan Insurance Corporation.
United States Senate,

Washington, D. C. DEAR SENATOR: Reply to your letter of August 14 on the subject. was deferred until the ii Federal home loan bank presidents--all of whom received similar letters--could meet for a thorough discussion of the questions involved.

Such a meeting was held in Washington on August 27 and 28 and the presidents jointly drafted and unanimously adopted a reply, copies. of which I am enclosing. It was felt that because of the vital'importance of the questions raised, an interchange of ideas by the presidents, based on their years of operating experience, would best serve you in the study which you and the committee are making. We sincerely hope our procedure meets with your approval and what we are sending will be of real value. If you can use additional copies, let us know.

We thank you for having asked for our opinions on this important subject. Very truly yours,



1. State your opinion of the primary purposes of the FHLBB and of the

FSLIC under existing law and administration The purposes of the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation are to encourage home ownership, privately financed, and to encourage savings through a dual system of locally owned and locally managed Federal and Statechartered thrift and home-financing institutions, an insurance corporation to insure the savings of the public in those institutions and 11 Federal home loan banks which constitute a central reserve banking system for them.

The fundamental objectives of both the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation are to make the savings media served by them attractive to the public in order that there can be a sufficient amount of savings accumulations in each community throughout the Nation to provide home financing needs through the local institutions.

Another purpose of the Board and Insurance Corporation is to assure the public of sound and economical home-financing plants. 2. State your opinion of what these primary purposes should be, if in

your opinion they should be changed. We are unanimous in our opinion that locally owned and locally managed thrift and home-financing institutions can best serve the needs of all American communities for savings accumulations and debt-free home ownership, because of their responsibilities to the communities which they serve as well as because of the responsibility of local management to the institutions which they serve as well as to the local owners of such institutions. The present system has demonstrated its continued and increasing strength in accomplishing the objectives set forth in Question 1 above and we believe there is no necessity for changing those purposes.

These primary purposes are as they should be; they perform the needed economic services in connection with the financing of home ownership in a manner which is most responsive to the needs of the citizens of individual communities. This is accomplished through the maintenance of local ownership and local management without making the people of one community dependent upon organizations in distant cities, or upon Government, for these fundamental services. 3. State your understanding of the present functions and relationships

of the FHLBB and the FSLIC In our opinion, the primary functions of the Federal Home Loan Bank Board-not necessarily listed in order of importance-are as follows: To exercise general supervision over the district Federal home loan banks and to establish regulations and overall credit policies of such banks; to issue consolidated obligations of the banks, the proceeds of which furnish the banks with funds which they acquire from the capital markets-also to approve the rates and terms of such obligations; to charter, regulate, and supervise. federally chartered savings and loan associations and to jointly supervise, with various State departments, State-chartered associations, the accounts of which are insured by the Federal Savings and Loan Insurance Corpo, ration; to supervise noninsured member associations in States where there is no State supervisory authority; to initiate, where advisable, legislative proposals affecting the Federal home loan bank system, the Federal savings and loan associations, and the Federal Savings and Loan Insurance Corporation and to exercise executive direction over the operations of the Federal Savings and Loan Insurance Corporation. Among other things, this responsibility includes such supervision over insured associations as is necessary to protect the insured risk of the Corporation, management of Corporation investments, and actions under the Corporation's authority to prevent default of insured associations; to coordinate the financial policies for which the Federal Home Loan Bank Board is responsible with the policies of other Government corporations and departments of the executive branch of the Federal Government which have any bearing upon them.

Under the general executive direction of the Federal Home Loan Bank Board, the primary purpose of the Federal Savings and Loan Insurance Corporation is to insure the individual savings accounts of Federal savings and loan associations, as well as the savings accounts in State-chartered associations which are eligible and can meet qualifying standards.

In carrying out these functions, the work of the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation are both aimed at the objective of making the savings accumulations in these institutions more attractive to the public and savers to assist in building up adequate pools of savings in the communities all over the country to take care of the home financing needs of these communities. 4. Give any recommendations you may have for changing the functions

or relationships of the FHLBB and the FSLIC The_interrelationships and objectives of the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Coproration are identical and the closest integration of the Insurance Corporation with the Board is desirable and necessary. 5. State any recommendations you may have with reference to the following


(a) Chartering of new Federal associations There are relatively few areas in the United States where the services of local thrift and home-financing institutions are not available. However, we recognize the fact that there are some communities where such institutions would be or might be desirable. It is our intention to continue to cooperate fully with local groups desiring to establish associations, either Federal or State-chartered, where needed, and we shall endeavor to encourage healthy competition in those localities which have inadequate facilities. However, we must continue to be cautious and deliberate in applying the criteria of community representation, necessity, and probability of success without an unduly adverse effect on existing institutions, and wit ut creating any unusual or undesirable insurance risk for the Insurance Corporation.

(6) Establishment of branch offices Branch offices of associations generally provide a needed and desirable facility for the public.

We recognize that some areas which need savings and loan facilities cannot support an independent institution. We also recognize the increasing trend toward decentralization of American cities and towns which makes it necessary for businesses of all types to seek, follow, and serve the people.

Therefore, under appropriate conditions, we favor authorizations for branch offices to sound, well-managed associations where there is an established necessity, probability of success, and no evidence of an unduly adverse effect on existing institutions of similar types.

(c) Formulation and promulgation of regulations, legal opinions,

and Board decisions We believe that the Federal Home Loan Bank Board is careful and deliberate in its formulation and promulgation of regulatory changes and amendments. The requirements of the Administrative Procedure Act for notice and public procedure with respect to regulations are followed by the Board. We have no recommendation for any changes with respect to the formulation and promulgation of regulations, legal opinions, and Board decisions relating to the operation of members of the Federal home loan banks and the institutions whose accounts are insured.

(d) Processing applications for insurance The officers and directors of the Federal home-loan banks are in close daily contact with savings and loan operations throughout their districts. Therefore, the methods of processing applications for insurance of accounts, which utilize the services of these individuals and require their recommendations, is not only the most economical procedure but also the most adequate from the standpoint of the Insurance Corporation. It provides equal treatment for all applicants, Federal and State chartered. Every opportunity is afforded the Insurance Corporation to base its recommendations to the Federal Home Loan Bank Board on established facts. There is close cooperation between the banks, the Insurance Corporation, and the Federal Home Loan Bank Board in the processing of applications and definite coordination and correlation of supervision in reaching decisions on insurance applications. In our opinion, the processing of applications for insurance and the determination of risk assumption is surrounded by adequate, satisfactory safeguards. It has proven to be so since the inception of the Insurance Corporation 22 years ago.

We believe that the criteria for insurance of accounts must be maintained at a high level in order to protect the Insurance Corporation from unreasonable risks. Current criteria are, in our opinion, reasonable and proper.

(e) (1) Liaison between the Board and the regional banks We have liaison which includes the Director of Federal home-loan bank operations, the Director of Division of Supervision, the Director of Federal Savings and Loan Operations and the General Manager of the Federal Savings and Loan Insurance Corporation who have almost daily contact with the Federal home-loan bank officers throughout the country. In addition, the bank officers as a group, or individually, have access to the Board members themselves. We have no specific recommendations for improving liaison because it is already good. There is an "open door" policy.

(2) Liaison between regional banks and member institutions The banks have continuous liaison with their member institutions through individual field trips, numerous group meetings and State meetings of their members, correspondence, telephone, bulletins, et cetera. We believe that all member institutions have access to the regional bank staffs as at frequent intervals as they wish. Each bank has a majority of its directors elected directly by its members and the entire board of each bank is available for consultation with

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