no approval by the FSLIC is required other than that of the FHLBB in its role as manager of the FSLIC. 4. Give any recommendations you may have for changing the functions or relationships of the Federal Home Loan Bank Board and Federal Savings and Loan Insurance Corporation We believe that there is a need for changing the practice of designating officers of the Federal home-loan banks to act as supervisory agents for the FHLBB. This supervisory function consists of reviewing reports of supervising examinations and audits made by FHLBB of Federal savings and loan associations and other insured institutions, taking supervisory action deemed necessary, and reporting the action taken to the FHLBB. These supervisory activities with respect to insured institutions are the responsibility of personnel conducting normal banking lending activities with the same institutions. As explained in our audit reports to the Congress, this change is desirable because the supervised institutions elect the majority of directors of a Federal home-loan bank who, in turn, appoint the supervisory agent. 5. Other recommendations We have no recommendations in regard to (a) chartering new Federal associations, (b) establishing branch offices, (c) formulation and promulgation of regulations, legal opinions, and board decisions, (d) processing applications for insurance, (e) liaison between the FHLBB and the regional banks and between the regional banks and their member institutions, and (g) coordination of policies with other governmental agencies. With respect to item (f) we believe, as indicated in 4 above, that the responsibility for supervisory activities should be separated from the responsibilities for normal banking operations. COMMENTS ON QUESTIONS RELATING SPECIFICALLY TO THE DESIRABILITY FOR SEPARATE MANAGEMENT OF THE FEDERAL HOME LOAN BANK BOARD AND OF 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 principal advantages that would result from a separation of management of the FHLBB and FSLIC and the creation of an entirely separate board of trustees to direct and manage the corporation would be (a) the board of trustees would be able to give full attention to the operations of the corporation; and (b) the board of trustees could establish policies and make decisions relating to the eligibility of existing State-chartered savings and loan associations for insurance and to the financial soundness of insured institutions and their right to continued insurance free from any considerations pertaining solely to their growth and the providing of additional funds for home financing. The principal disadvantages that would result from separate management of the FHLBB and the FSLIC are (a) the possibility of differing policies of the FHLBB and of the FSLIC as they relate to the insured Federal savings and loan associations that would be subject to regulation by the two agencies; and (b) a duplication of supervisory, examination, and administrative functions with increased administrative expenses. In case the management of the FSLIC were to be vested in a separate board of trustees, the duplication of functions could be kept to a minimum by vesting authority in the FHLBB to examine and supervise all insured associations subject to the FSLIC's review and approval of the adequacy of all examination and audit programs, and vesting authority in the FSLIC to review examination and audit reports and corrective actions taken and to make such additional examinations or to take such further supervisory action as it may deem necessary. 2. Does the existing identity of management contribute to or detract from the purpose of protecting deposits? We have no information on which to base a categorical answer to this question. We have observed, however, certain minor weaknesses in the examination, supervisory, and regulatory functions which may or may not have existed if the two agencies had been separately managed. For instance, the recent defalcation in the Commonwealth Building and Loan Association, Inc., Norfolk, Va., and the original insuring of weak institutions (see p. 16 of our audit report for fiscal years 1945 and 1946, H. Doc. No. 660, 80th Cong., 2d sess.) might have occurred even if the Congress had provided separate boards of directors for the two agencies. 3. In what ways would separate management of the Federal Home Loan Bank Board and Federal Savings and Loan Insurance Corporation promote public confidence in the savings and loan insurance program, or safeguard the interests of the Corporation and of the Treasury? We do not believe that as a practical matter public confidence in the savings and loan insurance program would be materially affected by a change in the existing management of the two agencies, because the public at large seems to be content with the knowledge that the Government fosters the insurance program. With respect to safeguarding the interests of the FSLIC and of the Treasury we believe that additional protection would result from the management of the Corporation by a separate board of trustees composed of members well qualified by experience. Such a board would be able to devote their full time to directing the Corporation's operations and evaluating the financial soundness of the insured institutions and their eligibility to continued insurance. In the case of the Federal savings and loan associations, the Board's evaluations would act as a check on those made by the FHLBB in the performance of their regulatory and supervisory functions. 4. What evidence can be cited to illustrate the contention that the existing identity of management is less desirable at the present time that it has been since the creation of the Federal Savings and Loan Insurance Corporation? In our audit reports we have indicated our belief that the separation of the identity of management of the FHLBB and the FSLIC would be desirable because the promotion of Federal savings and loan associations appeared to be inherently conflicting with the functions 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. 84258-56-5 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. FEDERAL HOME LOAN BANK OF CINCINNATI, Re Relationships between the Federal Home Loan Bank Board and Hon. JOHN SPARKMAN, United States Senate, Washington, D. C. DEAR SENATOR: Reply to your letter of August 14 on the subject. was deferred until the 11 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, WALTER D. SHULTZ, Chairman, Conference of Federal Home Loan Bank Presidents. QUESTIONS RELATING TO THE FEDERAL HOME LOAN BANK SYSTEM IN GENERAL 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 Corporation; 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 |