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CONTENTS

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Statement of —

Hengren, Raymond E., Assistant Chief, Division of Research and

Statistics, Federal Deposit Insurance Corporation; accompanied by
William D. Allen, Assistant Chief, Division of Examination; Robert
H. Creswell, Chief of the Statistics Section, Division of Research
and Statistics; Leslie H. Fisher, Assistant General Counsel, Legal

Division; and Harold W. Kefauver, fiscal agent-

Robertson, J. L., member, Board of Governors of the Federal Reserve

System; accompanied by David B. Hexler, Assistant General

Counsel; and Gerald M. Conkling, Assistant Director, Division of

Bank Operations. -

Watson, J. T., Deputy Comptroller of the Currency; accompanied

by R. Coleman Egertson, Chief National Bank Examiner; Robert

Bloom, Chief Counsel; and Dr. Sherman Shapiro, Senior Economist.

Letters, statements, etc., submitted for the record by-

Bloom, Robert, Chief Counsel, Office of the Comptroller of the Cur-

rency: Information re call dates..

Hengren, Raymond E., Assistant Chief, Division of Research and

Statistics, Federal Deposit Insurance Corporation:

Excerpt from amendment to the Federal Deposit Insurance Act,

approved July 14, 1960..

Excerpt from section 5211 of the Revised Statutes.

Excerpt from Senate Report No. 1821, June 30, 1960, and House

Report No. 1827, June 14, 1960 (86th Cong.).

Letter from Jesse P. Wolcott, Director, Federal Deposit Insurance

Corporation, to Hon. Dante B. Fascell, October 16, 1963.-

Numbers of examiners employed by the bank supervisory

agencies

Robertson, J. L., member, Board of Governors of the Federal Reserve

System:

Devices employed to "window dress” bank condition statements

called for by supervisory authorities.

Excerpt from “Alice in Wonderland”

Inflation of figures in voluntary published statements by methods

that are not permitted in official condition reports ---

Watson, J. T., Deputy Comptroller of the Currency:

Excerpt from hearings held by a House Banking and Currency

subcommittee, April 5, 1960.--

Excerpt from Senate Report No. 1821, June 30, 1960, and

House Report No. 1827, June 14, 1960 (86th Cong.).

Letter from James J. Saxon, Comptroller of the Currency, to

the presidents of all national banks, July 3, 1963-

19

“WINDOW DRESSING” IN BANK REPORTS

WEDNESDAY, OCTOBER 2, 1963

HOUSE OF REPRESENTATIVES,
LEGAL AND MONETARY AFFAIRS SUBCOMMITTEE
OF THE COMMITTEE ON GOVERNMENT OPERATIONS,

Washington, D.C. The subcommittee met, pursuant to notice, at 9:45 a.m. in room 100-B George Washington Inn, Hon. Dante B. Fascell presiding.

Present: Representatives Dante B. Fascell, Richard E. Lankford, Torbert H. Macdonald, John B. Anderson, and Robert McClory.

Also present : M. Joseph Matan, staff administrator; Charles Rothenberg, counsel; and Millicent Y. Myers, clerk.

Mr. FASCELL. The subcommittee will come to order.

It is the responsibility of the Legal and Monetary Subcommittee of the House Committee on Government Operations to examine and evaluate the efficiency and economy of the operations of certain executive branch departments and agencies, including those of the Federal bank supervisory agencies.

This hearing will examine the particular operations of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation dealing with the setting of call dates for bank reports.

In our inquiry we will look into the bases on which bank call dates are to be selected, and whether the Federal bank supervisory agencies are applying the same standards and criteria to the statutes involved.

We shall also look into the extent to which window dressing is practiced; whether anyone is thereby deceived; whether the practice lessens the validity and usefulness of condition reports as a supervisory tool, and what, if anything, needs to be done to curb the practice.

I am very pleased to have before the committee this morning, Mr. J. L. Robertson, member of the Board of Governors of the Federal Reserve System, accompanied by Mr. David B. Hexter, Assistant General Counsel and Mr. Gerald M. Conkling, Assistant Director, Division of Bank Operations. If the gentlemen who are accompanying you, Governor, will step up to the table, we will be delighted to have them with you.

I understand you have a prepared statement. If you desire, you may proceed with that. If you want to put it in the record at this point, you may summarize orally, if you like--either way.

1

STATEMENT OF J. L. ROBERTSON, MEMBER, BOARD OF GOV.

ERNORS OF THE FEDERAL RESERVE SYSTEM; ACCOMPANIED BY DAVID B. HEXLER, ASSISTANT GENERAL COUNSEL; AND GERALD M. CONKLING, ASSISTANT DIRECTOR, DIVISION OF BANK OPERATIONS

Mr. ROBERTSON. Mr. Chairman, thank you very much.

I think it might be well, since I endeavored to cover the whole subject in this, I think it might be even better if I do it by reading this statement, then answering any questions you might have. I think it would give us a better background for us to work with.

Mr. FASCELL. All right. Go ahead.

Mr. ROBERTSON. “Window dressing” is a convenient and colorful expression and undoubtedly will continue to be used to describe the problem that concerns this committee, but we should be aware that it is a misnomer. A merchant dresses his show window to display attractively the merchandise that is for sale in the store. If the window contains Paris gowns and only inferior copies are for sale inside, in time the merchant would lose the public's confidence and its patronage.

What is called window dressing in the case of banks' reports of their condition is also deceptive, I am afraid. However, it is less easily detected than the merchant's pretense, and some banks seem to be satisfied that the practice will attract more business and that the deception will be noted by only a few. But although its ill effects on banks may be less direct than on merchants, eventually it would cause erosion of the banking community's most valuable asset: public esteem and trust.

Window dressing by banks has two aspects. It involves, first, deceptive transactions that have no genuine business purpose, and second, a deceptive balance sheet resulting from those transactions. The main purpose of window dressing is to display to the public a report of condition—in other words, a balance sheet—that presents the bank more favorably than its normal condition warrants.

For those who are interested in the devices employed in window dressing, there is being submitted, attached to my statement, for inclusion in the hearing record, an outline of procedures that have been used. The actual results, however, can be described very briefly. Occasionally a bank uses window dressing to hide the fact that it is in debt, but usually the bank's purpose is simply to look bigger than it is. By various arrangements, a bank with real deposits of $900 million for example can plausibly inform the world that its deposits are more than a billion dollars, and that consequently it is the largest bank in the city or State. Naturally, this distresses its rival with bona fide deposits of $950 million, so the next time it understandably is tempted to window dress, just to present the true relative picture. This is why window dressing tends to spread; in fact, it is surprising to me how many bankers have earned our praise by refusing to climb on the merry-go-round.

The impression apparently has been created, in some quarters, that window dressing relates only to reports of condition that banks publish pursuant to requirements of law—the so-called call reports. If that were true, the problem of minimizing or eliminating window

dressing would be relatively simple. But the facts are otherwise, and much harm has been done by intimating that bank supervisors could end the practice simply by suitable call report procedures.

This point is crucial, and I want to explain it as clearly as I can. As long as a bank skirts the criminal false-entry laws, it is free to publish a balance sheet-a report of condition-whenever it wishes, as of any date it selects, and in whatever form and size suits its purpose. Most banks are required by law to publish their balance sheets several times a year in a form and as of a date specified by their governmental supervisors. But these required publications may be compressed into a few square inches in an obscure corner of a newspaper of small circulation, while the bank's voluntary advertisements may be, and often are large and striking displays, as of dates selected by the bank itself, published in journals with immense circulation among the class of readers the bank is most anxious to reach. Does this begin to suggest the fallacy of the contention, recently advanced, that the window-dressing problem can be readily solved by issuing all calls on a surprise basis?

Perhaps I should make clear that a "call" is issued by a bank supervisor to all banks under its supervision, for a report as of a prior date. For example, the Comptroller of the Currency may inform every national bank, on March 5, that it must promptly submit to him, and publish in a local newspaper, a report of its conditiona balance sheet in prescribed form, as I said before-as of March 3. That date having already passed, the bank cannot retroactively juggle its accounts or engage in specious transactions to hide any weaknesses in its actual condition. Unless the bank was able to anticipate the date of the call, this produces an accurate report of its normal condition.

Real understanding of the situation requires knowledge of the origin, the history, and the functions of call reports. The practice of requiring banks to submit reports of their condition to governmental supervisors, and to publish such reports for public scrutiny, began over a century ago. It began against a background of so-called “wildcat” banking of a kind that is difficult for us to envision today. Both internal and external controls were scanty; banking standards were high in some areas but extremely low in others. A bank's condition might vary greatly from month to month, and bank insolvencies were frequent as a result of overextensions of credit, other unsound policies, and runs.

In these circumstances, unexpected calls for reports of condition served two principal purposes. The supervisor received information that enabled him to decide whether any dangerous trends were developing; if they were, he might dispatch an examiner to make a special examination of the bank or to discuss the facts of life with its board of directors.

Equally important was the information available to the banking public in the report of condition published in the local newspapers. In this connection, two facts must be remembered. Fifty or a hundred years ago commercial banks' customers were almost exclusively people of substance, to use a phrase of the time. Wage earners and white-collar workers rarely had accounts. Typical customers were manufacturers, well-to-do farmers, and wholesale and retail mer

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