Senator DOUGLAS. He knew about the cashing of the fake warrants, and yet he went in as president of the bank? Mr. COBURN. He knew that it happened before he went in. All of these transactions are transactions that occurred before Mr. Ireland assumed his post. But he assumed the post with the knowledge that the transactions had occurred. Senator ROBERTSON. The Chair regrets that we cannot complete the examination of the FDIC witnesses this afternoon. We have reached the period when normally the committee is recessed. If it is agreeable, the Chair suggests that the committee stand in recess until 9:30, and these witnesses will return, and Senator Douglas will have the floor. He can also get the chief counsel for our committee, who participated in the hearings in Chicago, to ask some questions, if he wishes. Senator DOUGLAS. Thank you very much. Senator ROBERTSON. We will stand in recess until 9:30. (Whereupon, at 5:05 p. m. the committee was recessed until 9:30 a. m., Saturday, November 10, 1956.) STUDY OF BANKING LAWS SATURDAY, NOVEMBER 10, 1956 UNITED STATES SENATE, COMMITTEE ON BANKING AND CURRENCY, The committee met, pursuant to recess, in room 318, Senate Office Building, at 9:40 a. m., Senator A. Willis Robertson, acting chairman, presiding. Present: Senators Robertson, Douglas, and Beall. Also present: Donald L. Rogers, counsel; and Robert A. Wallace, staff director, Banking and Currency Committee. Senator ROBERTSON. The committee will please come to order. I anticipate that my colleague from Illinois will be here shortly because he indicated to me when we recessed on yesterday that he had a few more questions to propound. Until he comes the Chair will now recognize Mr. Cravens to inquire. Mr. COBURN. May I interrupt just a minute, Mr. Cravens? STATEMENTS OF H. E. COOK, CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION; ACCOMPANIED BY MAPLE T. HARL, MEMBER; ROYAL L. COBURN, GENERAL COUNSEL; NEIL G. GREENSIDES, ACTING ASSISTANT TO THE CHAIRMAN; AND G. LOEFFLER, CONTROLLER, FEDERAL DEPOSIT INSURANCE CORPORATION-Resumed Mr. COBURN. We have overnight decided we would like to have the privilege of withdrawing our statement in reference to the first recommendation that was submitted as a supplement to those that were published, so that we may provide a more sound and valid reason for the recommendation. We have copies to submit. Senator ROBERTSON. That request will be, of course, granted, but if your original recommendations are the subject of questions we could not take it completely out of the record. You can show you have amended it. Mr. COBURN. The recommendation is still the same. The basis for it is primarily the purpose of the action. (The recommendation referred to follows:) Bxisting law Recommendations POWER TO REQUIRE AUDITS OF INSURED BANKS It is recommended that legislation be enacted to provide authority for the Board to require an audit of an insured bank by a certified public accountant in any case where it determines, in its discretion, that the affairs of the bank are in such state that its books and records may not reveal its true condition and that the costs of the audit and report be added to the assessment otherwise payable by the bank in those instances where the bank refuses to have such an audit, and it is necessary for the Corporation to cause one to be made. Reasons It is the responsibility of bank management to establish and maintain adequate bookkeeping procedures and to provide satisfactory internal controls. However, some banks do not meet this responsibility. Under such circumstances it is exceedingly difficult to conduct a satisfactory examination and arrive at a satisfactory appraisal of a bank's condition. It would be possible for the examining authorities to conduct appropriate audits, but to do so would constitute an assumption of the duties and responsibilities of bank management and ownership. To conduct such audits would impose unreasonable costs upon the Corporation and consequently to the other insured banks. Further, were the examing agencies to assume such responsibilities management and ownership would tend more and more to rely upon the examining authorities for the accuracy of their recordkeeping and the maintenance of their controls with resultant ill effect upon the banking system. The judicious exercise of the authority requested would facilitate the determination of the condition of dilatory banks, would have a salutary effect upon their managements, and, therefore, would be helpful to bank stockholders as well as be beneficial to the Corporation. Mr. CRAVENS. I think the first question might be better directed to the members of the Board. It has been suggested that possibly the Board should be replaced by a single Administrator. How do you feel about that? Mr. Cook. I feel absolutely against it, Mr. Chairman. We feel that the 3-man Board has functioned satisfactorily ever since creation of the Corporation, and we do not subscribe to the idea of the 1-man Board. Mr. CRAVENS. Should the Comptroller be on the Board? We have heard testimony he should not be. Mr. Cook. My experience has been that I have served under two Comptrollers, both Mr. Delano and Mr. Gidney-it has worked out splendidly and there has been no conflict of interest. Mr. CRAVENS. Should it be expanded to include possibly a Federal Reserve representative, or some State supervisors? Mr. Cook. I do not think so. No, sir; I think the Board is functioning satisfactorily. Mr. CRAVENS. The Comptroller of the Currency recommends that the Federal Deposit Insurance Corporation be appointed receiver of any insured national bank in receivership. Do you agree to that particular recommendation No. 32? Mr. Cook. What is that, Mr. Coburn? Mr. COBURN. Yes. Mr. CRAVENS. I also refer you to the Comptroller of the Currency's recommendation 33, providing for the appointment of comservators. It is quite a lengthy recommendation. What is the attitude of the Federal Deposit Insurance Corporation with respect to that? Mr. COBURN. So far as the original recommendation was concerned we were rather violently opposed to it because it would permit the Comptroller to hold a closed bank in status quo so that the insured deposits could not be paid off. Since the original suggestion I have worked with Mr. Jennings on a redraft of it and we have finally, I think, agreed on a redraft. I don't know what Mr. Gidney spoke about when he testified, but if it is in reference to the amended draft we are in accord in our thinking on it. Mr. CRAVENS. Have we seen an amended draft? Mr. ROGERS. It has been suggested. May I ask a question? Mr. ROGERS. Mr. Coburn, do you think it is necessary to have this Bank Conservation Act, in view of the fact that we have the Federal Deposit Insurance Act to handle the same type of problem? Mr. COBURN. It was our feeling, that it was not absolutely neces sary. Mr. Jennings thought it should be sort of a standby authority. As he expressed it, "we probably won't use it more than once in a blue moon, but I would like to have it in the act." We are not proposing it, but just commenting in reference to it. Mr. ROGERS. To your knowledge, has the Bank Conservation Act ever been used? Mr. COBURN. Not recently. I do not think it has been used since the Corporation Mr. ROGERS. It was enacted before the FDIC Act. Mr. COBURN. That is right. Mr. ROGERS. I think that took care of the job really. Mr. COBURN. Yes. Mr. ROGERS. It was an emergency measure in 1932. Mr. COBURN. As I understand it, the sole purpose of the recommendation is that in cases-it would probably happen only in shortage cases—it would give the Comptroller time to get information and enable the bank to reestablish itself, and would not just automatically wipe out the bank. Mr. ROGERS. My only point is, why should we do this with national banks and not all others? Why not have a similar procedure for all others? Mr. COBURN. It would be impossible for us, Mr. Rogers, to provide that for State banks, because they are subject to State law, and in some States they have some similar provisions there. Mr REESE. Could I ask a question? Mr. ROGERS. Yes. Mr. REESE. It is rather confusing. Was it the intention of that to have the bank go along and do a normal business and accept deposits? Mr. COBURN. No. As amended the draft contemplated it, the bank would be closed, in effect; that the payment on insured deposits would go forward just the same as any regular receivership. Mr. REESE. That was not clear in the statement we had. We did not understand whether it was just trying to throw a bank up in the air and hold it in abeyance while you investigated it. Mr. COBURN. The final draft contemplated it would not accept deposits or do any business. Mr. REESE. Then it is purely a technical thing and you would like to have machinery whereby a study could be made and you will have some written understanding. Mr. COBURN. That is right. So in the case a bank finds it necessary to close then Mr. Jennings or the Comptroller wanted authority to try to rehabilitate the bank if it could be done. If a receivership is appointed for liquidation, then it is too late. Mr. REESE. Yes. Mr. CRAVENS. I would like to refer you to the Comptroller's recommendation 37, which provides that the FDIC should pay, I think, up to 50 percent of the examination costs of the Comptroller. What is the position of the Federal Deposit Insurance Corporation with respect to this recommendation? Mr. COBURN. I think the Board members can speak on that. Mr. McCLOY. Is that the right interpretation of that statute? Is it 50 percent of the cost of the Comptroller's examination, or 50 percent of the cost of the examination that he wants to have? Mr. COBURN. As I understand the proposal, it is 50 percent of the amount of money it costs us to make the examination of the State banks. Mr. McCLOY. That is what I understand. Mr. Cook. Personally I would not concur in that suggestion, sir. The State banks under the State laws pay for their examinations. Having been on the national banking side most of my life, I know what it is to pay for national banking examinations. While the Federal Deposit Insurance Corporation makes no charge for its examinations, yet it has to review the reports of examinations of both national banks and State member banks, and for that reason we feel it would not be a fair arrangement for the State banks who contribute to the fund to pay a part of the costs of examination of national banks. I would like to have Director Harl express his views on that. Mr. HARL. I concur in that regard. And furthermore, it is wrongyou know, under the present formula after the deduction of operating costs underlying losses and reserve for losses, 60 percent of the residual goes back to the banks in the form of a dividend. Consequently it would not only materially cut the earnings of the Corporation which flow back to the banks, but likewise it is a discriminatory measure against State-chartered banks who are examined gratuitously, but do pay for the examinations made by the State bank commissioner. Therefore I concur with the Chairman in that regard. Mr. CRAVENS. In the Federal Reserve's recommendation No. 77 they point out the inconsistencies in their interpretation of the law, and yours, with respect to what is considered payment of interest, primarily, I guess, directed to the absorption of exchange. They recommend on one basis or the other it be uniform. What is your opinion on that? Mr. COBURN. Our view in the Corporation is this: It has been a long-time problem which is highly controversial. The Federal Reserve Board is given authority under their act to define interest. The Corporation was never given that authority. At the time of the creation of the Corporation the absorption of interest was not deemed to be the payment of interest. Therefore the Corporation has insisted that it should not be deemed interest. The matter was presented to Congress some 10 years ago and it was our position then that if it was to be deemed to be the payment of interest, that is, the absorption of exchange, Congress should expressly so provide. We feel that Congress should so expressly provide. There |