FEDERAL RESERVE SUPERVISORY POWERS

For many years cogent and persuasive arguments have been advanced on both sides of the question of whether the Federal Reserve should exercise bank supervisory functions in addition to its monetary responsibilities.

Without attempting to judge this complex issue, we would at least raise the question as to whether sufficient consideration has been given the fact that supervision exercised by the Federal Reserve banks gives the System direct and intimate contact with the commercial banking system and thereby keeps open important avenues of communication not otherwise available. Monetary policy decisions are of such farreaching importance to the economy that it is essential that their purposes and consequences be thoroughly understood by the commercial

banks.

Further, the close contact which supervision provides with commercial banks also benefits the Federal Reserve by providing specialized information helpful in making monetary policy decisions; and it is doubtful that a simple review of, or access to, examinations conducted by an independent agency can substitute for this kind of relationship.

Notwithstanding our strong objections to H.R. 5874 in its present form, the American Bankers Association is persuaded of the need for some improvement in the Federal supervisory structure. We are convinced that there are workable and acceptable alternatives to the drastic solution posed by this legislation. One such alternative might be to require that officials of the three agencies meet regularly, not less than four times a year, to discuss, and attempt to resolve, such differences as might arise. This and other possible solutions require and deserve continued study. The American Bankers Association is presently engaged in such studies and, if requested, will be glad to assist the committee in whatever fashion may be deemed appropriate. Mr. Chairman, if I may, may I proceed with my comments on H.R. 729 or would you prefer that I stop.

Mr. MULTER. Please finish your statement.

Mr. KELLY. Thank you, sir.

H.R. 729 would establish a Federal Deposit and Savings Insurance Board to manage the Federal Deposit Insurance Corporation and the Federal Savings and Loan Insurance Corporation. While each corporation would retain its identity-and the insurance funds would remain separate-management by a single board effectively consolidates the two agencies.

The American Bankers Association strongly opposes passage of this bill. Our reasons for this position are

(1) It would place under common management insurance systems designed to exercise distinctly different functions;

(2) It will contribute to increased public confusion over the deposit function of banks and the investment function of savings and loan associations;

(3) There is no need for the legislation in terms of removing conflicting or overlapping jurisdiction of the present agencies.

INSURANCE FUNCTION

Federal deposit insurance is designed to immediately restore-up to the insurance limit-deposits destroyed or made unavailable by bank failure. Share insurance is designed to protect investors in savings and loan associations against loss of their investment-up to the insurance limit-due to the failure of associations.

The monetary implications of deposit insurance-stemming from the fact that deposits comprise the bulk of the Nation's circulating medium-were thoroughly debated in the early 1930's, are clearly embodied in the Deposit Insurance Act, and have been recognized since by the FDIC and by independent observers.

Each of the corporations has a distinct job to do, and each has done it well. Nevertheless, these essentially different functions should be recognized.

PUBLIC ATTITUDE

A bank deposit, representing a debt of the bank to the depositor, is significantly different from a savings and loan share, representing an investment in the association. However, the distinction between the two has never been understood by a large part of the public.

Passage of H.R. 729 would almost certainly add to this confusion by merging the function and character of the two insurance systems, so far as public understanding is concerned. However, this will leave unchanged the fact that banks of deposit-because they do hold deposits rather than issue shares-must handle their funds in a far different manner than can special purpose lenders such as savings and loan associations; and are subject to much more stringent statutory and administrative requirements than are applied to associations. It is hardly equitable, or in the public interest, to adopt legislation which, while serving to blur further the distinction between deposits and shares in the public's eyes, would leave unchanged the distinction which the law insists upon drawing between banks of deposit and investment institutions such as savings and loan associations.

NEED FOR LEGISLATION

It seems doubtful that any significant savings can be accomplished by, in effect, merging the two agencies. Not only is there no overlap in function but the record does not suggest that there is any friction between the two agencies, for which common management would be one solution. In large part this reflects the fact that the insurance functions, and the institutions which each corporation supervises, differ so markedly that there is no real reason for difficulties to arise. Thank you, Mr. Chairman.

Mr. MULTER. Thank you very much, Mr. Kelly. I am sure your statement will be very helpful to us.

Without objection, we will make a part of the record at this point the memorandum dated May 10, 1963, entitled "Principal Proposals for the Consolidation of Federal Banking Agencies, 1936-62” which you attach to your statement.

Mr. KELLY. Yes, sir. I would like that to be made a part of the record.

Mr. MULTER. You don't want to read it at this time?

Mr. KELLY. No, sir.

(The memorandum referred to follows:)

MEMORANDUM: PRINCIPAL PROPOSALS FOR THE CONSOLIDATION OF FEDERAL BANKING AGENCIES, 1937-62

The following summary of proposals made over the past quarter century to consolidate the operations of the various Federal banking agencies is intended as background information. No attempt was made to appraise the worth of the various proposals, or the validity of the arguments advanced by the proponents in each case.

SUMMARY OF PRINCIPAL PROPOSALS

In 1937 President Roosevelt recommended to the Congress that each Government corpoartion "should also be placed under a supervisory agency in the appropriate department." This recommendation was part of a general reorganization plan submitted by the President, but was never implemented.

In the same year, 1937, the Brookings Institution made a special study of the executive agencies of the Government at the request of a select committee of the Senate presided over by Senator Byrd. This study concluded that with respect to the banking agencies, the Office of the Comptroller of the Currency should be abolished and the Federal Deposit Insurance Corporation should be authorized to examine all insured banks. The Board of Governors of the Federal Reserve System was to retain the right to make examinations when necessary for special purposes or for admission to the System."

The Brookings report suggested that the major advantages to be gained by such a consolidation would be economy of operation and uniformity of bank examination standards. It selected the Federal Deposit Insurance Corporation as the agency into which the other two should be consolidated for a number of

reasons:

(1) It would be impracticable and inappropriate to place supervision of insured State banks not members of the Federal Reserve System in the hands of either the Board of Governors or the Comptroller's office;

(2) Bank examination is more important to the Federal Deposit Insurance Corporation than to either of the other agencies because of the insurance function of the Corporation;

(3) Since the Federal Reserve would have access to the examination reports of the FDIC, and could make special examinations if necessary, the System would not suffer for lack of information necessary to carry out its monetary function. (4) Existing inequities in examination costs would be eliminated.

In 1938 the Board of Governors of the Federal Reserve System devoted a substantial portion of its annual report to what it saw as conflict and confusion arising out of the division of bank supervisory authority among the three Federal agencies. The tenor of the report is indicated by the following quotation: "The banking picture emerges as a crazy quilt of conflicting powers and jurisdictions, of overlapping authorities and gaps in authority, of restrictions making it difficult for banks to serve their communities and make a living, and of conditions making it next to impossible for public authorities to apply adequate restraints at a time and in conditions when this may be in the public interest."

In 1939 the Attorney General was requested by the President to examine the need for reform of procedures in the area of administrative law. With respect to the Federal bank supervisory agencies, the report of the Attorney General's committee, which drew heavily upon the 1938 Annual Report of the Federal Reserve, concluded: "In view of the inherent difficulties, it is highly probable that the solution lies not in makeshift voluntary cooperation between the various agencies but in the thoroughgoing coordination and the unification of the several banking authorities ***"4

The move to achieve consolidation of the Federal bank supervisory agencies was suspended with the advent of World War II. However, shortly after the

The President's Committee on Administrative Management, "Report With Special Studies," 1937, p. 45. 275th Cong., "Investigation of Executive Agencies of the Government," S. Rept. 1275, 1937. 8 Board of Governors of the Federal Reserve System, "Annual Report," 1938, pp. 2-16. 76th Cong., "Administrative Procedure in Government Agencies," S. Doc. 186, pt. 9, 1940, p. 41.

conclusion of the war proposals were again made to solve the problem of what was thought to be conflicting or overlapping jurisdiction on the part of these agencies.

The principal effort in this field was made by the Hoover Commission, which in 1949 issued several task force reports. In that year the task force report on fiscal, budgeting, and accounting activities suggested that the Comptroller of the Currency "more properly belongs under the Federal Reserve Board than in the Treasury Department.'

The Hoover Commission task force on lending agencies recommended in 1949 that the Federal Deposit Insurance Corporation be transferred to the Federal Reserve System. A major reason for this proposal was the belief that, as an insuror, the Corporation placed too much stress in its examinations on liquidation values rather than viewing banks as operating institutions. The report also noted that transfer of FDIC to Federal Reserve control would eliminate many of the problems arising from the division of authority among the Federal bank supervisory agencies, and concluded by pointing out that if the Office of the Comptroller of the Currency had been included within the task force purview it would have recommended that it too be placed under the Board of Governors of the Federal Reserve System."

A third task force of the Hoover Commission (Regulatory Commissions) also suggested in 1949 that all Federal bank supervisory agencies be combined, preferably in the Federal Reserve System. The report claimed that duplication and overlapping was not a serious problem in normal periods, but foresaw difficulties should an economic crisis develop. The task force indicated that a reasonable case could be made for selecting any of the Federal agencies as the center for consolidation, but preferred the Federal Reserve, primarily because, in the task force's view, the System would avoid examination policies which might intensify inflations or deflations.'

The various task force reports led up to recommendations by the Hoover Commission itself. The Commission took a somewhat different approach than its task forces had recommended, concluding that the Federal Deposit Insurance Corporation should be transferred to the jurisdiction of the Secretary of the Treasury. Since the Comptroller of the Currency was already in the Treasury Department it was believed that this move would provide for increased coordination. Through establishment of a proposed National Monetary and Credit Council, it was hoped that coordination with the Board of Governors of the Federal Reserve, which would retain its supervisory authority, would also be obtained.

This recommendation of the Hoover Commission was not unanimous. Five members of the Commission objected, several citing the importance of supervision to an insuring agency. Also, the dissenting members pointed to the illogic of putting only the FDIC in the Treasury Department but leaving the Board of Governors of the Federal Reserve System, with its examination and supervisory powers untouched, in its independent status."

The first Hoover Commission report was not implemented and the so-called second Hoover Commission, in 1955, did not recommend any change in the Federal bank supervisory structure. There was discussion of the division of Federal bank supervisory authority during the Douglas and Patman investigations in 1949 and 1952, and also during consideration of the ill-fated Financial Institutions Act in 1956-57. However, no major proposals for consolidation were advanced.

The last significant consolidation proposal prior to the proposed creation of a Federal Banking Commission was made by the Commission on Money and Credit in 1961. Its report suggested that the functions of the FDIC and of the Comptroller of the Currency be transferred to the Board of Governors of the Federal Reserve System, in order to achieve "increased coordination of examining and supervisory authorities." 10

5 The Commission on Organization of the Executive Branch of the Government, "Task Force Report on Fiscal, Budgeting, and Accounting Activities," app. F, 1949, pp. 18-19. The Commission on Organization of the Executive Branch of the Government, "Task Force Report on Lending Agencies," app. R, 1949, pp. 52-53, 107-108.

7 The Commission on Organization of the Executive Branch of the Government, "Task Force Report on Regulatory Commissions," app. N. 1949, pp. 115-117.

8 The Commission on Organization of the Executive Branch of the Government, "Treasury Department," 1949, pp. 11-12.

Ibid., pp. 27-28, 31.

10 The Commission on Money and Credit, "Money and Credit," Englewood Cliffs, N.J.: Prentice-Hall, 1961, pp. 174-175.

Creation of a Federal Banking Commission was proposed by Federal Reserve Board Governor J. L. Robertson in a talk before the Tennessee Bankers Association on May 16, 1962. H.R. 5874, introduced by Representative Multer, follows closely the Robertson proposal. It is reported that several differences between the bill and the Governor's proposal were discussed with and have the support of Governor Robertson.

Since the appearance of the Robertson proposal, an advisory committee appointed by the Comptroller of the Currency has recommended that FDIC be transferred to the Treasury Department, while FDIC has countered by suggesting that it take over a portion of the examining functions of the Comptroller of the Currency."

Summarizing, it is clear that consolidation of the Federal banking agencies has been a matter of continued discussion for more than 25 years. Most of the proposals summarized above suggest the Federal Reserve as the locus of the consolidated power. The FDIC has also had its champions in this regard; and although no proposal examined here would have made the Office of the Comptroller of the Currency the central agency, several did suggest that the Treasury Department was the logical spot for a single banking agency.

A basic issue which has divided proponents of the various consolidation plans is the role of bank supervision. On the one hand it is urged that supervision is an important adjunct of monetary policy; on the other hand it is claimed that supervisory power must be separate from the monetary agency, and should concern itself only with bank soundness and safety. It is interesting that the proposal now under consideration leans toward the latter view, though originally advanced by a member of the Board of Governors of the Federal Reserve System.

Mr. MULTER. Should the agency charged with insuring deposits be merged with or a part of the agency charged by Government with supervising the banks, with chartering banks, with granting applications for mergers and branches and the like?

Mr. KELLY. No, sir. I thought in my statement I made the point that the two agencies have somewhat different functions.

Mr. MULTER. And your association is urging that they be independent agencies.

Mr. KELLY. Yes, sir.

Mr. MULTER. Well, now, hasn't that independence been lost in the FDIC by having the Comptroller of the Currency a member of the Board of FDIC?

Does he belong to this Board since he is the chartering authority, and principal national supervising authority of commercial banks? Mr. KELLY. Well, he has been. The previous occupants of the Comptroller's office, as you know, have been members of the Board. The present incumbent may have a different opinion as to the desirability of membership on the FDIC Board. As far as the members of our association are concerned, I think the majority opinion is that it would be desirable.

Mr. MULTER. How can there be any independence if the man who grants the charter to the new national banks by virtue of granting the charter requires that it be insured by FDIC, and then sits as a member of the Board with a vote to determine whether or not a Statechartered new institution should get insurance.

If the same group has come in before him as the Comptroller and been turned down for a national bank charter, and then goes to the State authorities and gets it from the State authorities conditioned, as it usually is today, on getting FDIC insurance, it then must be before

11 Report of the Advisory Committee on Banking to the Comptroller of the Currency, 240 remarks by the Honorable Erle Cocke, Chairman of the Board of the Federal osit Insurance Corporation, annual convention of the National Association of Supervisors State Banks, Sept. 18, 1962.