RECOMMENDATIONS OF THE FEDERAL DEPOSIT INSURANCE CORPORATION LETTER OF TRANSMITTAL FEDERAL DEPOSIT INSURANCE CORPORATION, Hon. A. WILLIS ROBERTSON, OFFICE OF THE CHAIRMAN, Committee on Banking and Currency, United States Senate, Washington, D. C. DEAR SENATOR ROBERTSON: In accordance with your request, we are submitting the enclosed recommendations for the amendment of the Federal Deposit Insurance Act, and related laws, in connection with the current study by the Senate Banking and Currency Committee of the Federal laws governing financial institutions and credit. Time has not permitted ascertaining the relation of these proposals to the program of the President. When we have been advised by the Bureau of the Budget of the relation of these recommendations to the program of the President, we will inform your committee. We are studying certain other amendments of the Federal Deposit Insurance Act and will submit our recommendations thereon as soon as possible. With personal regards, I am Existing law H. E. Cook, Chairman. 86. TERM OF OFFICE OF APPOINTIVE DIRECTORS The third sentence of section 2 of the Federal Deposit Insurance Act, as amended (12 U. S. C. 1812): "Each such appointive member shall hold office for a term of six years." Recommendation This sentence should be amended to provide (1) that at the expiration of the present terms of the appointive directors, the President shall fix the term of the successor of one appointive director at 4 years, and (2) that each appointive director shall serve until his successor is appointed and has qualified. Reason The terms of office of the 2 appointive members now on the Board of Directors are for 6 years from September 6, 1951 (97 Congressional Record, p. 13141). The other member of the Board of Directors is the Comptroller of the Currency, who holds his office for a term of 5 years (12 U. S. C. 2). His term of office is not affected by this amendment. This proposed staggering of the terms of office of the appointive members will assure better continuity in the mangement of the Corporation by voiding the simultaneous expiration of the terms of the two experienced appointive members. The amendment providing for the service of the appointive directors until their successors have been appointed and qualified will assure a quorum for action by the Board of Directors until the successor of one of them has been appointed and qualified. Comparable provision for the staggering of terms of office and for continuance in office is provided for the Board of Governors of the Federal Reserve System (12 U. S. C. 242). For several years the Comptroller General, in his audit reports, has recommended legislation providing for the staggering of the terms of the appointive members. 87. COMPTROLLER OF THE CURRENCY AS A MEMBER OF THE BOARD Existing law The fourth, fifth, and last sentence of section 2 of the Federal Deposit Insurance Act, as amended (12 U. S. C. 1812): "In the event of a vacancy in the office of the Comptroller of the Currency, and pending the appointment of his successor, or during the absence of the Comptroller from Washington, the Acting Comptroller of the Currency shall be a member of the Board of Directors in the place and stead of the Comptroller. "In the event of a vacancy in the office of the Chairman of the Board of Directors, and pending the appointment of his successor, the Comptroller of the Currency shall act as Chairman. "No member of the Board of Directors shall be an officer or director of any insured bank or Federal Reserve bank or hold stock in any insured bank; and before entering upon his duties as a member of the Board of Directors he shall certify under oath that he has complied with this requirement and such certification shall be filed with the secretary of the Board of Directors." Recommendation (a) The fourth sentence of section 2 should be amended to authorize the Acting Comptroller to serve as a member of the Board of Directors in the absence of the Comptroller, whether he is in Washington or not. (b) The fifth sentence of section 2 should be amended to permit the Acting Comptroller to act as Chairman when there is a vacancy in that office until the election, rather than the appointment of his successor. (c) The last sentence of section 2 should be amended to provide that each member of the Board of Directors shall certify under oath that he is not an officer or director of any insured bank or Federal Reserve bank and does not hold stock in any insured bank. Reason (a) This amendment would permit the Acting Comptroller of the Currency to serve as a member of the Board of Directors whenever the Comptroller of the Currency is unable to be present at the meeting of the Board of Directors, as when he may be absent on account of illness, whereas under the existing provision the Acting Comptroller may only serve when the Comptroller of the Currency is absent from Washington. Provision is made for the exercise of the powers and duties of the Comptroller of the Currency by his Deputy Comptroller and Assistant Deputy Comptrollers "during a vacancy in the office or during the absence or inability" of the Comptroller or the Deputy Comptroller (12 U. S. C. 4, 5). (b) This amendment would conform this sentence to the other provisions of the same section. The successor to the Chairman of the Board of Directors would be appointed as a Director of the Corporation and would then be elected Chairman by the Board of Directors. There is no provision in the act for appointment of the Chairman of the Board of Directors. Further, we recommend that the Chairman be elected by the Board of Directors rather than appointed by the President, so that the Chairman may be of the same political party as that of the administration. Not more than two members of the Board of Directors may be members of the same political party. The Comptroller of the Currency represents the balance of power and this we deem to be in the interest of good administration. (e) This amendment would provide a more precise statement of the contents of the Director's certificate. Existing law 88. DEFINITIONS Subsections (f) and (g) of section 3 of the Federal Deposit Insurance Act, as amended (12 U. S. C. 1813 (f) and (g)): "(f) The term 'mutual savings bank' means a bank without capital stock transacting a savings bank business, the net earnings of which inure wholly to the benefit of its depositors after payment of obligations for any advances by its organizers. "(g) The term 'savings bank' means a bank (other than a mutual savings bank) which transacts its ordinary banking business strictly as a savings bank under State laws imposing special requirements on such banks governing the manner of investing their funds and of conducting their business: Provided, That the bank maintains, until maturity date or until withdrawn, all deposits made with it (other than funds held by it in a fiduciary capacity) as time savings deposits of the specific term type or of the type where the right is reserved to the bank to require written notice before permitting withdrawal: Provided further, That such bank to be considered a savings bank must elect to become subject to regulations of the Corporation with respect to the redeposit of maturing deposits and prohibiting withdrawal of deposits by checking except in cases where such withdrawal was permitted by law on August 23, 1935, from specifically designated deposit accounts totaling not more than 15 per centum of the bank's total deposits." Recommendation These subsections should be deleted. Reason There is no need or purpose for continuing these provisions. The definition of the term "State bank" in subsection (a) of section 3 includes any savings bank. The definition of mutual savings banks in subsection (f) of section 3 was necessary before the 1950 amendments of the act repealed the provision permitting a separate fund for mutuals for the benefit of mutual savings banks and depositors therein. The requirements in subsection (g) of section 3 as to notice of withdrawal of savings deposits, redeposit of maturing time deposits and withdrawal of savings deposits by checking are provided in regulations of the Corporation relating to the payment of deposits and interest 83668-56-9 thereon (12 C. F. R. pt. 328), which are uniformly applicable to insured State nonmember commercial and savings banks other than mutual savings banks and savings banks in New Hamphire operating substantially as mutual savings banks. The Board of Governor's regulation Q (12 C. F. R. pt. 217) makes similar provision for national and State member banks. Existing law 89. TRUST FUNDS IN A NONINSURED BANK Subsection (1) of section 3 of the Federal Deposit Insurance Act, as amended (12 U. S. C. 1813 (1)): "The term 'deposit' means the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has given or is obligated to give credit to a commercial, checking, savings, time, or thrift account, or which is evidenced by its certificate of deposit, and trust funds held by such bank whether retained or deposited in any department of such bank or deposited in another bank, together with such other obligations of a bank as the Board of Directors shall find and shall prescribe by its regulations to be deposit liabilities by general usage: **** The first sentence of subsection (i) of section 7 of the Federal Deposit Insurance Act, as amended (12 U. S. C. 1817 (i)): "Trust funds held by an insured bank in a fiduciary capacity whether held in its trust or deposited in any other department or in another bank shall be insured in an amount not to exceed $10,000 for each trust estate, and when deposited by the fiduciary bank in another insured bank such trust funds shall be similarly insured to the fiduciary bank according to the trust estates represented." Recommendation The provisions set forth above should be amended to change the words "another bank" to read "another insured bank" in order that trust funds received by an insured bank as fiduciary would not be insured and assessable when deposited by the fiduciary insured bank in a noninsured bank. Reason Trust funds received by an insured bank in a fiduciary capacity and deposited by the fiduciary insured bank in another insured bank or in a noninsured bank are assessable and insured up to $10,000 for each trust estate. However, provision is made in the Federal Deposit Insurance Act for the payment of insured deposits only at the time an insured bank is closed on account of inability to meet the demands of its depositors. If the noninsured bank, in which such trust funds are deposited by an insured bank as fiduciary, closes and pays out only a portion of the deposited trust funds, the insured bank, as fiduciary, may or may not be liable for the loss in the trust funds, depending on whether such a deposit of trust funds in a noninsured bank was proper or legal. In any event, the questions may arise whether the Corporation is liable for insurance on the loss of such trust funds deposited in a noninsured bank which has closed when the insured bank, as fiduciary, is or is not liable for the loss and, if the Corporation is liable, whether the Corporation must pay the amount of such loss at the time of the closing of the noninsured bank or whenever the fiduciary in sured bank is closed on account of inability to meet the demands of its depositors. The ambiguity in the above provisions of the law presents two undesirable alternatives. One is the insurance by the Corporation of funds in a noninsured bank over which the Corporation has no supervision. The other is the indefinite postponement of the payment of insurance on a loss, incurred in a noninsured bank, on a deposit of trust funds by a fiduciary insured bank on which deposit assessments have been paid. The amendments recommended herein would resolve this problem by providing that trust funds received by an insured bank as fiduciary would not be insured and assessable when deposited by the fiduciary insured bank in a noninsured bank. When such trust funds are retained by the fiduciary insured bank or when they are deposited by the fiduciary insured bank in another insured bank, they would be insured and assessable as under present law. 90. EXCLUSION FROM DEPOSIT INSURANCE OF DEPOSITS OF BRANCHES IN ALASKA, HAWAII, OR THE VIRGIN ISLANDS Existing law The second and third provisos of subsection (1) of section 3 of the Federal Deposit Insurance Act, as amended (12 U. S. C. 1813 (1)): "Provided further, That any insured bank having its principal place of business in any of the States of the United States or in the District of Columbia which maintains a branch in any Territory of the United States, or the Virgin Islands may elect to exclude from insurance under this Act its deposit obligations which are payable only at such branch, and upon so electing the insured bank with respect to such branch shall comply with the provisions of this Act applicable to the termination of insurance by nonmember banks: Provided further, That the bank may elect to restore the insurance to such deposits at any time its capital stock is unimpaired." Recommendation These provisos should be repealed to terminate the right of any mainland bank to exclude from deposit insurance the deposit obligations of any of its branches in any Territory of the United States or the Virgin Islands. Reason There are no mainland insured banks operating branches in Alaska, Hawaii, or the Virgin Islands. In 1952 the right of mainland banks to exclude from insurance the deposits of their branches in Puerto Rico was removed from the second proviso of subsection (1) of section 3 (66 Stat. 605). Insured banks should not be permitted to exclude from deposit insurance any deposit obligations in places where the statute provides for the insurance of deposits, which are the States of the United States, the District of Columbia, any Territory of the United States, Puerto Rico, Guam, and the Virgin Islands. Existing law 91. INSURANCE OF INTEREST ON DEPOSITS The first sentence of subsection (m) of section 3 of the Federal Deposit Insurance Act, as amended (12 U. S. C. 1813 (m)): |