32

tory Institutions Examination Council Act of 1978 (as

redesignated by the amendment made by section 7(b)(1)), except that for purposes of sections 3 and 5 such term also includes the Federal Savings and Loan

Insurance Corporation.

(3) DEPOSITORY INSTITUTION.-The term 'depository institution' has the meaning given to such term by section 19(b)(1)(A) of the Federal Reserve Act. (4) INSTITUTION OF HIGHER EDUCATION.-The term "institution of higher education" has the meaning given to such term by section 1201(a) of the Higher Education Act of 1965.

(5) FEDERAL EXAMINER.-The term "Federal examiner" means any individual employed by a Federal depository institutions regulatory agency or a regional bank, branch, or other office of such agency whose duties involve the examination of depository institutions.

Chairman ST GERMAIN. At this time I recognize Mr. Wylie, the ranking minority Member.

Mr. WYLIE. Thank you, Mr. Chairman.

I want to welcome our panel of distinguished witnesses this morning, and I would like to commend our colleagues on their bill to improve the supervisory process. The bill includes a number of provisions ranging from a confirmation of the independent status of the Federal regulatory agencies to the consolidation of examiners' training programs. There is a lot in this bill. It may not be possible to get through it all this year, but I believe that at a minimum, this subcommittee and the full committee should take action to clarify the Federal bank regulators are not subject to GrammRudman and the Anti-Deficiency Act.

I think we would be remiss if we did not question the wisdom of subjecting the Federal financial regulatory agencies, all of which operate with nontax, nonappropriated funds, to the same kind of deficit reduction as other Government programs which are funded at the direct expense of the taxpayers. I would observe there is no doubt that exceptionally conscientious supervision is required today. Since 1981, the FDIC has handled over 250 bank failures, and there are currently over 1,000 banks on the problem list and over 450 savings and loans that have a negative net worth on a GAAP accounting basis. So I think it is essential we have the proper supervisory action.

Mr. Chairman, I also would like to commend Mr. Lehman, the author of the second bill, the truth in savings bill, which is similar to language I had in a bill introduced earlier last year, H.R. 15.

Again, welcome to our witnesses, and I look forward to hearing their views on these very important bills before us this morning. Thank you.

Chairman ST GERMAIN. At this time, I recognize the cosponsors— principal cosponsors of the legislation, in order of seniority. We will recognize first Governor Lundine.

Mr. LUNDINE. Thank you.

Chairman ST GERMAIN. I am sorry, Congressman Lundine.

Mr. LUNDINE. Thank you, Mr. Chairman. I thank you for your courtesy of asking us to participate today, although we are not on this subcommittee.

I ask unanimous consent that my opening statement be made a part of the record. I will very briefly summarize.

We have felt and worked for some time to develop a legislative framework for improving the quality of supervision. That does not reflect ill on people who have been doing this difficult task up until now. It is simply a recognition that in the future, bound as we are by the stringencies of Federal austerity, we have got a big job to do, and the present framework may not be ideal to do it.

We listen to criticisms, private and public, from various organizations and various perspectives. We reintroduced a bill recently that we think accommodates many or most of those criticisms, and I look forward to a healthy dialog on this subject. Hopefully we can move legislation. I want to publicly acknowledge, although I have been recognized first, in the forefront of this effort has been my friend and colleague, Tom Carper, from Delaware.

[The opening statement of Congressman Lundine can be found in the appendix:]

Chairman ŚT GERMAIN. At this point, the Chair recognizes Mr. Carper of Delaware.

Mr. CARPER. Thank you, Mr. Chairman.

I would like to thank you for scheduling this hearing on this legislation. I thank you for joining us as original cosponsor of the revised version of this bill.

I also thank Mr. Wylie for his participation and cosponsorship and the other 37 Members of this committee who have joined Mr. Lundine and me as original cosponsors in the revised version which I introduced yesterday. I simply want to thank you.

I welcome our witnesses today and would ask unanimous consent that a proposed statement be inserted into the record. I have some very brief comments I would like to offer. There are some in this country who believe that deregulation of financial institutions also means less rigorous supervision of banks and savings institutions. I do not agree with those people on that observation.

Last year, we are well aware, a record number of banks since the Great Depression failed in this country. We have significant numbers of banks and savings and loans that are on so-called trouble lists, and the situation, I think, remains serious and is likely to remain serious for some time. In this environment, America does not need fewer, less well-trained examiners and supervisors of financial institutions. If anything, we need, I think, more. I think we need better trained, better prepared supervisors in order that we can avoid a national crisis of confidence such as ones we had on a local basis in Maryland and Ohio.

We had hearings last year right here in this room to address questions of what do we do about the pressures being brought to bear on the insurance funds, the FSLIC and the FDIČ. A number of recommendations were made by witnesses. Some people said we need risk-based premiums, while others said risk-based capital. Some contended we need to have public disclosure of ratings of public institutions; others suggested we simply require assets to market.

While no one agreed on those particular solutions, almost everyone agreed on one thing: to the extent we can reduce turnover among regulators, ensure better quality training, and hire better people in the first place, we as a nation, in particular in our financial institutions, would be better off.

Again, I thank the chairman, ranking minority Member, and say it has been a pleasure working with my colleague, Mr. Lundine, and the minority staff as well as the majority staff in crafting this legislation and to thank a number of people before us today for their assistance in improving the bill we originally introduced last year. Thank you, Mr. Chairman.

[The opening statement of Congressman Carper can be found in the appendix.]

Chairman ST GERMAIN. We will now put the statements of each and every member of the panel into the record in their entirety, without objection. I will go in the order they are listed here.

Our first witness will be the Honorable Manuel Johnson, Governor of the Federal Reserve Board.

STATEMENT OF HON. MANUEL H. JOHNSON, MEMBER, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Governor JOHNSON. Thank you, Mr. Chairman. I appreciate the opportunity to appear before the subcommittee today on behalf of the Federal Reserve Board to discuss H.R. 3567, the Depository Institutions Examination Improvement Act, and H.R. 2282, the Truth in Savings Act.

Regarding the Examination Improvement Act first, we are in agreement with the basic objectives of the proposed legislation and have taken steps to achieve many of them. We do have reservations concerning the arrangements the bill would establish to accomplish certain of the objectives, however, and I will discuss them as I proceed.

With respect to the major provisions of the bill that would exempt the supervisory agencies from Federal civil service laws and the Federal budgetary process, we would point out that the Federal Reserve is already exempt from these constraints under specific provisions of the Federal Reserve Act. Accordingly, the Board believes that the Federal Reserve should be excluded from this portion of the bill.

At the same time, the Board supports the legislation insofar as it applies to the other supervisory agencies. The legislation will provide them with the flexibility necessary to establish their own employee compensation programs and budgets and thereby enable them to maintain a qualified examination and supervisory staff.

The proposed legislation would also require the Examination Council to conduct regional studies of private sector pay scales and employee benefits for jobs comparable to those of Federal examin

ers.

Under the existing practice, the Federal Reserve banks, which employ substantially all of the System's examiners, set their salary levels commensurate with those being offered by banks and other financial institutions in their local areas. In determining what the local salary levels are, the Federal Reserve banks conduct surveys that are essentially the same as envisioned for the Council. The Federal Reserve would be prepared to share with the Council the information that the Reserve banks gather. Our survey experience, we would point out, is that, while the Federal pay scale is below going compensation levels in certain sections of the country, it is significantly above local levels in other sections.

As important as the issue of examiner compensation is, it cannot be considered without regard for the continuing need to control costs governmentwide and to achieve budgetary savings consistent with the Gramm-Rudman-Hollings legislation. Although the Federal Reserve System is not covered by Gramm-Rudman, Chairman Volcker has stated the Federal Reserve System's intention to comply voluntarily with the spirit of that legislation.

Despite this commitment to budgetary restraint, the Federal Reserve is increasing the number of its onsite examinations and hiring additional examiners to help conduct them. Because of these concerns with supervision,, we support the bill's objective to provide the other supervisory agencies with adequate budgetary flexibility to meet increased requirements for bank supervision.

It is, of course, particularly difficult to strengthen our supervisory function at a time when our overall budget is being reduced. Of necessity, we have expanded the supervisory function by less than we had planned and, to meet the added expenses of the expansion that has been accomplished, have had to make cuts in other areas of our budget. Thus, if the Congress were to provide the other agencies with flexible compensation and budgetary authority, we would take guidance from this action in setting our own salary and budgetary policies.

With respect to consolidating all other examiner training in the Council, we believe that in addition to the present schools the Council conducts for all the agencies, serious consideration should be given to having the Council assume responsibility for conducting certain core courses for examiners. We would stop short, however, of having the Council assume all educational responsibilities for the agencies. Each agency has unique activities and responsibilities that require specialized training for its examiners-for example, in the area of bank holding company inspections and Edge Act corporation examinations, which apply to the Federal Reserve Board specifically. Thus, it is essential that the agencies retain the flexibility to offer their own courses to meet their special training needs.

The proposed legislation would also direct the Council to establish standards for judging the adequacy of State supervisory agencies and to conduct reviews of individual State supervisory departments to determine whether Federal agencies should rely on their examinations. It seems more appropriate to have the Federal supervisory agencies ultimately charged with the responsibility for ensuring the safety and soundness of State institutions assigned the requisite legal authority for certifying the States. Thus, the Board cannot quite support this portion of the proposed legislation because it does not establish the necessary interrelationship of authority and responsibility which we think is necessary.

In summary, we support the main thrust of the bill to provide, where needed, adequate compensation and budgetary flexibilityauthority the Federal Reserve already has-to assure a continued high priority for adequate supervision of the Nation's depository institutions. We also see certain benefits to be gained from further coordinating the examiner training programs of the agencies. We do not, however, believe it is appropriate to vest in the Council responsibility for certifying the acceptability of a State's examination reports for use by the Federal supervisory agencies.

I would now like to direct the balance of my comments to the provisions of H.R. 2282.

H.R. 2282 would address deposit account advertising and disclosure by establishing uniform requirements applicable to all depository institutions. The bill calls for advertisements regarding interest rates to state an annual percentage yield and an annual rate of simple interest, as well as other factors. With respect to disclosures, depository institutions would be required to provide schedules of fees and charges for all existing accounts and prior to any changes in the schedules. Rule writing authority to implement these requirements for all institutions is given to the Board of Governors of the Federal Reserve System.