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complete and consistent examinations. More importantly, the new approach should result in early detection of situations which could lead to deterioration in some aspect of banking operations. This approach could help avoid bank problems after they have occurred. Thus, the OCC is not attempting to improve bank supervision through arbitrary regulations which might limit bank services to the public. Instead the OCC is attempting to foster procedures in each bank through which that bank can better manage itself. The GAO report, although endorsing the new OCC procedures, implies criticism of the OCC for not developing its new programs in conjunction with the two other agencies. As pointed out in the OCC responses to the GAO recommendations, the OCC has attempted to share its new ideas with the other two agencies. The OCC also endorses the GAO recommendation of more formalized communication among the agencies concerning new examination techniques. The OCC takes issue, however, with the apparent GAO assumption that the best way to generate new ideas is through an interagency committee (or, as some have proposed, through a giant monolith combining the three agencies). A primary virtue of three agencies, each with somewhat differing statutory responsibilities, is the ability of a single agency to experiment with a new idea or procedure. It is doubtful that the new OCC examining techniques endorsed by GAO could have been developed otherwise. A unified approach is important and appropriate after a new idea has been proved successful, not when it is being first developed. In summary, the purpose of the OCC is to operate so that economic progress and change is not inhibited and, at the same time, to prevent unsound banking practices. It is that fine line of promoting innovative response while supervising the banking system that makes bank supervision so difficult. The banking system has just come through its first major economic crisis since the world wide depression of the 1930's. There were some casualties. But, in fact, fact, the threatened financial crisis did not develop and the banking system seems to be stronger today than it was before. New procedures have been developed by the banking system and the continuing dynamic future of American banking is assured. For the first time we are assured that, just as the industry has changed, the tactics and techniques of a major bank supervisor, the Office of the Comptroller of the Currency, have changed in a similar, positive fashion.
banks in all of the 50 states and in Puerto Rico and the Virgin Islands. The widely differing banking environments found in the U.S. make it most impossible to develop definitive criteria which can be universally applied both in states like Arizona, which has six national banks, and in states like Illinois, which has over 400 national banks. The diversity of criteria therefore, is a function primarily of the differing political, social and economic environments in which the OCC must operate. The OCC's chartering criteria, of necessity, must be somewhat flexible. That is only to be expected since the OCC does not charter in one environment. Also, under the terms of the McFadden Act, the OCC's actions are often affected by applicable state law. New corporate guidelines (Annual Report, 1976, pp. 274-282), the development of which began in September 1975, and which became effective on November 1, 1976, answer many of the GAO's criticisms. Written opinions containing reasons are now sent to applicants receiving denials. As examples, we present excerpts from three recent letters denying charter applicants. One letter, in part, states: Based upon the population and the median income per household, it would appear difficult for many individuals in the primary service area to qualify for a loan. Furthermore, income levels are inadequate to provide a sufficient deposit base for the proposed bank to become a viable institution. In another case, we quote in part: In view of the Supreme Court decision in Whitney and the Federal Reserve Board's decision in InterMountain Bank Shares, it would be an exercise in administrative futility for this Office to approve the present charter application. . . . Should West Virginia change its statutes or should the statute be successfully challenged, then this Office could consider a new application in light of these changed circumstances. In still another case, the denial letter to the applicants stated: The new guidelines state that a new banking office will not be approved, if its establishment would threaten the viability of a newly chartered independent bank. Such protection will typically not exceed 1 year. As you are aware, the new bank opened on September 27, 1976. It is the opinion of this Office that this newly chartered independent state bank is entitled to the protection set forth in the Comptroller's policy statement. Every attempt is now made to document thoroughly the decision-making process. Further efforts will be made by our Office to identify each factor as favorable or unfavorable. Our decisions have been subject to judicial review for many years. In the long series of court cases concerning our chartering process, the Comptroller's decision on a charter application has never been finally overturned by a reviewing court. See annotations to 12 USC 21 et seq. Our Department of Research and Economic Analysis has undertaken a market study of 35 national
Responses to Specific Recommendations Recommendation (2-21): Accordingly, we recommend that the Comptroller of the Currency (1) develop more definitive criteria for evaluating charter applications and (2) thoroughly document the decision-making process, including an identification by reviewers of each factor as favorable or unfavorable.
OCC Response: The OCC is the only federal agency with the responsibility for chartering banks. It charters Page 3
on the requirements of these laws and to detect and correct noncompliance. Over the past 3 years we have intensified our activities in this area. As the foremost example, the Comptroller has assigned a specially trained corps of national bank examiners to conduct consumer compliance investigations of every national bank during the coming year. Over 6 percent of our field staff currently is allocated to the consumer area. Support for that staff is provided by Consumer Specialists in each region. We have conducted three 2-week schools which trained over 140 examiners in the new procedures. A second series of three schools is scheduled for March and April, and a third series will take place in the Fall. The schools stress examination techniques and feature heavy reliance on case studies to give experience in examining for compliance. The procedures are tailored to spot problems most likely to result in harm to consumers. We make use of sophisticated financial calculators, specially programmed for consumer transactions, and sampling techniques designed to increase our effectiveness. Particular emphasis is placed on evaluating policies and practices to detect unlawful discrimination. Statistical sampling of a bank's loans is taken as part of a review for conformity with various statutory and regulatory requirements. Bank lending policies are examined as are policies implementing consumer protection laws. Extensive interviews with lending officers are conducted, as well, to assist us in assuring that a bank adheres to its policy standards. Where violations are detected during the examination, we will use the full authority of our Office to see that they are corrected. In most cases, when made aware of unlawful overcharges, banks volunteer to reimburse their customers. For the few recalcitrant institutions, however, we may find it necessary to rely upon our additional cease-and-desist powers under the Financial Institutions Supervisory Act, As of this date, approximately 12 percent of the country's 4,700 national banks have been examined under the new procedures. Preliminary analysis of those examination reports indicates that our expanded efforts in the consumer area are both justified and effective. Significant evidence of noncompliance with the consumer protection laws has been detected. In some areas, that noncompliance has resulted in overcharges to consumers, sums which now will be reimbursed As the new laws take hold and consumer consciousness rises, we find that consumer complaints account for an increasingly large part of the work load of the Consumer Affairs Division. In 1976, the first year for which we kept a tally, the number of complaints handled by all of our offices around the country totaled 6,234. In our Washington Office alone, the volume increased 46 percent over the previous year. Complaints against national banks cover numerous consumer banking activities. Among the complaints received are ones dealing with check cashing privileges, interest charges, deposits not credited, rebates and individual credit decisions. Notably, credit card difficulties account for a substantial part of all com
plaints. Most of those complaints involve allegations of billing errors or denial of applications on the grounds of sex or marital status or failure of the applicant to meet bank credit standards. We have designed a computer program to catalog consumer complaints. When such a complaint is received, a letter of inquiry is sent to the bank against which the complaint was made. If necessary, an examiner visits the bank to complete the investigation. Depending on what we discover, either the bank is asked to correct its error or the complainant is informed that no basis for remedial action has been found. Sometimes facts essential to resolution of a controversy are disputed and may turn on such issues as credibility of witnesses. Those controversies can be resolved, consistent with due process, only in a judicial forum. In those instances we advise the complainant to seek legal counsel. In order to deal more efficiently with the sizable increase in consumer complaints, we are attempting presently to streamline our procedures by requesting a number of national banks throughout the country to designate specific personnel who are available to discuss consumer problems with members of our staff and with the consumers themselves. As a large number of questions posed by complainants involve a misunderstanding of the reason for a bank's actions or lack of action, the problems frequently can be resolved readily by our staff's telephoning bank officials to review the matters and to determine what actions, if any, are necessary. In many instances, bank officials may clear up misunderstandings by communicating directly with the complainants. In addition to our own examination efforts, I would like to outline some of the other activities in the consumer protection area which the Comptroller of the Currency has undertaken in recent months. In March 1976, this Office, together with the Civil Rights Division of the Justice Department, the Department of Housing and Urban Development (HUD), the Federal Reserve Board, the FDIC and the Federal Home Loan Bank Board, created the interagency Task Force on Fair Housing Enforcement. The purpose of the task force is to consider the various aspects of fair housing enforcement and seek solutions to the problems encountered. Discussions so far have centered on the powers of each agency to implement regulations concerning fair housing and the desirability of keeping records on applicants' race, color, sex, etc.; examining procedures, training and techniques; appropriate and permissible corrective mechanisms; and whether consumer examinations should be worked into regular commercial examinations or should be completely separate. The task force has developed a memorandum of understanding by which any agency receiving a fair housing complaint will give notice to other agencies which might be interested in such a complaint. For instance, if HUD receives a complaint of discrimination against a national bank, it will investigate the complaint but, at the same time, will give notice to us and to the Justice Department. Separately, our Office has signed a special memowith the law become involved in litigation for trivial, technical violations resulting in harm to no one. Thus, it has been our experience that those provisions tend to benefit attorneys, printers and defaulting borrowers more than the consumer. Page 4
trusts and estates. In a corporate fund such as this, however, with the announced policy of investing in assets possessing a unique and illiquid character, advance notice of withdrawals is necessary so that the fund administrator can invest the fund assets in an orderly manner, and such waivers have been permitted. In large pension trusts it is usually quite possible to isolate amounts which can safely be placed in long term investments. Accordingly, the exception permitting the advance notice requirement was permitted, (2) A provision that the trustee is not obliged to honor withdrawal requests in excess of the amount of cash reserves and amounts necessary for the acquisition of pending investments. Subsection (b) of Section 18 has required that a fund have such cash and readily marketable investments as shall be deemed necessary to provide adequately for the needs of the participants. As in the case of the previous exception, this could impose a burden on the managers of Ag-Land Fund-I, which would impair the ability to provide for the orderly operation of its investments. The requested exception would prevent a single participant from forcing the sale of a farm to the possible detriment of the other participants, an obviously essential feature in a fund of this type. In cases where a participant wished to withdraw from the fund and insufficient cash exists, the plan calls for the withdrawing participant to become a creditor of the fund, entitled to interest, to be paid when additional cash becomes reasonably available. Protection of the withdrawing participant could be supplied, we believed, by our monitoring of the fund during examinations of the bank and by our insistence that bona fide efforts be made to acquire funds to pay off the withdrawing participant at the earliest opportunity. That consideration, plus the realization that the provision would be understood and assented to by all pension accounts being invested in the fund, enabled us to decide to permit the provision. (3) A number of cash reserves are permitted by Section 6.02 of the plan for this fund. In each case they appear to be prudent provisions for a fund investing in working farms. Regulation 9's provisions providing for only one type of reserve account simply reflect a mode of operation which has become standard for funds invested in securities and mortgages. Thus, the regulation was needlessly specific as to an administra
tive matter in that respect. For that reason the exception was permitted. (4) Real estate brokers' commissions and other sales expenses which might be incurred on future sales are permitted to be considered in determining the value of assets. Regulation 9 requires that assets be valued at market value. In a fund invested in securities, the amount of commissions which may be paid may vary widely depending upon the investment policy of the fund. No one has suggested that valuations should contemplate amounts which might be paid as commissions, and this Office has seen no reason for attempting to permit the practice. On the other hand, the amount to be expended to sell real estate held by the fund is usually predictable and is, typically, quite substantial. It appeared reasonable, therefore, that the value of real estate be adjusted to reflect the fairly certain amount which would have to be paid to realize that value. For that reason the exception was permitted. (5) No new participants are to be admitted to the fund except to the extent that there are withdrawing participants. That requirement would be viewed by this Office as imposing an unnecessary inflexibility on funds investing in securities. However, for reasons touched upon previously, it was deemed necessary that the trustee be able to manage the portfolio of unique illiquid assets in an orderly fashion. Because the requirement would not affect participants in the fund, it was deemed to be acceptable. This exception had the incidental effect of providing more control over the orderly growth of the fund. In summation, it appeared to us that some of the restrictions which have been devised over the year for collective funds in which personal trusts and estates are invested, which in turn are invested in securities or mortgages, are unnecessary for pooled funds for pension trusts and, needlessly, impair the ability of the trustee to manage a portfolio including real estate and other unique and illiquid assets. Because it appeared further that our oversight of the banks through regular examination would enable us to ensure that the interests of the beneficiaries of trusts of this type were being properly administered, we could see no reason to deny the waivers requested.
Statement of Robert Bloom, Acting Comptroller of the Currency, before the Commerce, Consumer and Monetary Affairs Subcommittee of the House Committee on Government Operations, Washington, D.C., March 3, 1977
| appreciate this opportunity to give the views of our Office on H.R. 2176, which would provide for audits by the Government Accounting Office (GAO) of the banking regulatory agencies. We understand the purpose of the legislation is to provide the Congress with periodic data as to the adequacy of the performance of the three banking agencies as well as with audits of their internal finances. We have, as you know, recently undergone a perfor
mance review by the GAO. While this Office has not previously been subject to GAO review, we voluntarily entered into agreement for such a review last April. The review was performed in accordance with a memorandum of agreement setting forth the scope of the review and clarifying issues of accessibility to, and confidentiality of, information derived from our examinations of national banks. Our experience with that GAO review indicated that we could work productively with the GAO under mutually satisfactory guidelines. The final report was an objective description of our Office's duties and recent developments which have occurred in the bank regulatory field, although we do not necessarily agree with all of the conclusions.
In light of that recent experience, we would not object to reasonably spaced periodic reviews by the GAO. It is essential, however, to preserve the environment which permits us to carry out our mandate to examine every aspect of a national bank's activities in depth and on a regular basis. The examination process is only possible where we can protect the confidentiality of information divulged to us by the banks, including detailed information on customers' private affairs. The broad language of H.R. 2176 would seriously interfere with that traditional relationship. We, therefore, urge the Committee to adopt the following important provisions of our April 19, 1976, agreement with the GAO in any bill that might be reported out on this subject. (1) It should be made explicit in any bill that the GAO will not conduct separate examinations of banks in order to evaluate the accuracy of factual findings in examination reports. GAO did not have such access in connection with the review it has just completed, and the quality of the review does not seem to have been impaired. To our knowledge, the GAO team did not discover any evidence that examiners have been negligent in the examination process or have otherwise failed to carry out their duties. Direct examination by the GAO for verification would create an unconscionable duplication of government effort in the banks where there is no demonstrable need to justify it. Commercial banks already are examined in depth on a regular basis and are open to scrutiny to a degree unknown by other types of businesses. We do not think that, in the absence of clear proof of the need for another series of examinations, banks should be subjected to still more governmental
interference. (2) As previously noted, confidentiality is absolutely essential to effective bank examination. Therefore, any bill should include the provision that the GAO will not identify any bank customers or any bank or provide details that can lead to identification of any bank or bank customer. (3) An advance draft of the GAO report should be made available to the agency at least 30 days prior to its release for agency comment. The final report should include any written comments submitted by the agency within that period. Our memorandum of agreement with the GAO provided for inclusion of our views and we are under the impression that that both helped the GAO and provided a more balanced report to the Congress and the public. We understand that current GAO procedures call for a review of reports by the audited agencies within 30 days, and we do not think that time frame would cause any problems. We do, however, think it would be advisable to ensure the opportunity for agency comment by including such a provision in law, rather than depending on organizational procedures which could change without notice. Other protections contained in the memorandum of agreement, such as the provision that GAO workpapers and copies of sensitive agency documents be kept in secure facilities on the premises of the audited agency, contributed materially to our satisfaction with the procedures employed. We suggest that the Committee carefully consider such provisions in its deliberations. Finally, we understand that a revised bill might be introduced on this subject with changes to make the audit more appropriate to the particular and unique circumstances of bank examination. Our staff has worked with the Committee and GAO staff in the past and we stand ready to cooperate in the future in formulating a bill which will permit adequate Congressional oversight while at the same time permitting an effective bank examination and supervisory process.
Statement of Robert Bloom, Acting Comptroller of the Currency, before the Senate Committee on Banking, Housing and Urban Affairs, Washington, D.C., March 11, 1977
I appreciate this opportunity to discuss the condition of the National Banking System and the Government Accounting Office (GAO) report on federal supervision of banks. My testimony will cover four basic areas:
I am attaching to my statement, as an appendix, the detailed statistical data requested in the Chairman's letter of November 15, 1976.
lij The condition of the National Banking System; (2) The status of national banks requiring special supervisory attention; (3) Measuring capital adequacy, liquidity and bank management, and (4) The GAO report recommendations,
The Condition of the National Banking System In his statement before the Committee on February 5, 1976, the previous Comptroller of the Currency stated that, despite the economic problems which the country had recently experienced, "the National Banking System ... is sound and prosperous." The accuracy of that observation has been confirmed in 1976. During 1976, the condition of the National Banking System improved significantly as the economy continbanks, showed some improvement during 1976, but not as much as smaller national banks. Those large banks were hit harder by the 1973-75 recession and, as a consequence, it has taken them longer to work out their problems. More substantial improvements in the condition of the 12 largest national banks are likely in 1977.
Total net income of the 12 largest national banks was $1.5 billion in 1976. Year-end 1976 data show that the rate of return on average assets increased from 0.55 percent in 1975 to 0.56 percent in 1976. Net chargeoff coverage remained at 3.9 times loan losses; however, gross loan chargeoffs as a percent of average loans worsened from 0.69 percent, in 1975, to 0.85 percent, in 1976. A bright spot was the improvement in the ratio of total capital to assets from 4.6 percent, in 1975, to 4.8 percent, in 1976. In addition, an analysis of the 12 largest national banks revealed that:
ued its recovery from the severest recession since the Great Depression of the 1930's. Reflecting the halting pace of the economic recovery, national banks grew slowly during the first half of 1976, but grew much more rapidly in the second half, particularly in the fourth quarter. Comparing adjusted December 31, 1975 data to preliminary and virtually complete December 31, 1976 data, total domestic and foreign assets grew 9.3 percent, net loans grew 8.4 percent, U.S. government investment securities grew 13.2 percent and total capital grew 10.1 percent. As a result, the total capital to assets ratio increased slightly from a December 31, 1975 figure of 6.2 percent, adjusted for reporting changes, to 6.3 percent on December 31, 1976. Earnings and loan losses are two important measures of the health of national banks. Net income as a percent of total assets was 0.65 percent in 1976, virtually the same return on assets as in each of the three preceding years. Loan losses as a percent of total loans improved slightly in 1976, declining to 0.56 percent from 0.58 percent in 1975. Although the loss rate remains high compared to prior years, the continued improvement in the economy and the health of business firms should cause the loss ratio to continue its fall toward more normal levels. Key indicators of the ability of national banks to respond flexibly to changing economic conditions show little change from 1975. The loan to assets ratio, an indicator of the degree to which bank financial resources are committed to lending activity, declined slightly from an adjusted 53.9 to 53.4 percent. That decline was complemented by an increase in holdings of U.S. government investment securities relative to total assets from 9.5 to 9.9 percent. The ratio of cash items plus U.S. government securities to assets, a traditional measure of bank liquidity, remained unchanged at 27.8 percent. Those ratios, by themselves, do not reveal the full extent of the improvements in 1976. Dependence on interest-sensitive funds declined and deposit stability improved as large denomination certificates of deposit decreased and time and savings deposits increased. National banks' access to funds was ample as demonstrated by the availability of Federal funds at low rates. In short, these changes increased the liquidity of national banks and enhanced their flexibility. As an indication of the breadth of the improvement during the first 6 months of 1976, 18 of the 19 national bank peer groups used by our National Bank Surveillance System to monitor the condition of national banks, showed increases in the return on average assets. Gross loan chargeoffs as a percent of loans declined in 17 groups, and end-of-period assets to endof-period capital declined in 18 groups. Coverage of net loan chargeoffs by current earnings before taxes and loan loss provisions, a key indicator of a bank's ability to absorb loan losses, showed great improvement, exceeding ten times losses in 18 of the 19 peer groups. In the remaining peer group, net chargeoff coverage was 3.9 times losses. The 12 largest national banks, which hold over 40 percent of the assets and deposits of all national
• Total assets increased $23.9 billion, or 9.0 per cent, to $289.7 billion; gross loans increased approximately $12.3 billion, or 7.9 percent, to $168.1 billion; and total deposits increased $14.9 billion, or 6.8 percent, to $233.6 billion, • Loan loss reserves increased $55 million, to $1.5 billion, and reserves were 1.36 times net chargeoffs in 1976. • Total capital increased $1.72 billion, or 14.0 percent, to $14.0 billion; $880 million came from the retention of earnings, $190 million from new subordinated note and debenture issues and $650 million from new stock issues and other additions to equity capital. • Total capital to asset ratios increased in 9 of the 12 banks.
As the economic recovery continues into 1977, further improvement in the condition of national banks, especially the largest ones, is likely. Because of the improvement in liquidity, earnings and capital that has occurred over the last 2 years, national banks are in a position to support economic expansion.
Banks Requiring Special Supervisory Attention A history of the methods the Office of the Comptroller of the Currency (OCC) has used to identify banks requiring special supervisory attention has been previously submitted to the Committee. (See Annual Report of the Comptroller of the Currency, 1976, pp. 189-190 and 198-200.) OCC considers its "problem" banks to be those banks that are receiving special supervisory attention and whose continued liquidity and solvency is in question. Our professional staff rates the condition of those banks as either "critical" or "serious." A detailed description of the characteristics which we consider in placing a bank in either of those categories is furnished in the appendix. As of December 31, 1976, there were 23 national banks in the "serious" and "critical" categories combined. Of those, five, with total assets of $1,689 million and deposits of $1,396 million, had a combination of In recent years, we have greatly increased our capacity to assure the best efforts of both the agency and the banks to correct problems, but no competitive system can be completely fail-safe. There must be some room for innovations based on bank management judgments. From time to time, therefore, failures will occur. We believe that some failures are an inevitable and acceptable cost of preserving a healthy, competitive and responsive banking system. workpapers and the conclusion is discussed in the open section of the report of examination presented to the board of directors. The examination, in general, and the adequacy of the bank's capital position, specifically, are thoroughly discussed with both management and the board of directors at a meeting required at the conclusion of each examination.
weaknesses and adverse trends constituting a nearterm threat to liquidity or solvency. At the time of our February 5, 1976 testimony before this Committee, there were seven such banks, with total assets of $1,669 million and deposits of $1,359 million. The remaining 18 "problem" banks, with total assets of $8,635 million and deposits of $6,074 million, exhibited weaknesses which could lead to insolvency if not corrected, but they were in no immediate danger. Twenty-one banks, with total assets of $9,856 million and deposits of $6,242 million, were in that "serious” category at the time of our last testimony on this subject before the Committee. In addition, the OCC reviews, monitors and provides special supervision to a number of other banks that have adverse performance characteristics but whose prospects of failure are remote. Those banks are assigned a "close supervision" designation. As of December 31, 1976 there were 124 banks under "close supervision," compared to 57 banks at year-end 1975 The increase in the number of banks being monitored does not reflect a deterioration in the National Banking System. The increase is, instead, largely the result of a number of OCC procedural, policy and timing changes, as follows:
Capital Adequacy, Liquidity and Bank Management OCC has developed significant new tools to measure and monitor the traditional indices of performance capital, liquidity and management. The National Bank Surveillance System (NBSS) combines computer-based analysis of national bank performance statistics with bank examiner experience. It may be helpful to the Committee to provide a brief comparison of our new procedures with earlier practices. Supervisory rating of a bank's capital adequacy, liquidity and management has always required that the examiner engage in a complex series of subjective judgments based only in part on ratio analysis. Capital and liquidity ratios alone do not necessarily indicate the financial condition of a bank, but they are useful when calculated frequently and observed in relation to other ratios and trends. It is our experience that capital and liquidity ratios are usually lagging indicators of existing problems. To judge properly the health of the National Banking System, this Office now tries to identify leading indicators of potential problems.
(1) The 1976 downgrading of some 39 banks re sulted from adverse 1974-1975 economic conditions captured for the first time in 1976 examination reports. That time lag is inherent in the bank examination process. (2) Some banks, which would ordinarily not be of concern to the OCC based on their individual conditions, were nevertheless added to the "close supervision" category and followed for the first time in 1976 because of their affiliation with parent holding companies which were ex periencing financial difficulties. (3) The Washington unit, whose sole responsibil ity it is to identify such banks, analyze their problems, and insure that corrective measures are taken, did not become fully staffed and operational until early in 1976. That, together with improved procedural and review processes, has led to the identification of more banks for inclusion. (4) The National Bank Surveillance System, since it became operational in the summer of 1976, has enabled the Office to detect adverse trends at an earlier stage and, thereby, to single out banks for review and monitoring which would have escaped such early special attention under preexisting procedures
Capital Adequacy Past Examination Procedures In the past, techniques for measuring the adequacy of capital have varied somewhat from region to region and even from examiner to examiner. Quite properly, an examiner did not base his or her entire analysis of the bank's capital adequacy on ratios alone. He or she was also directed to evaluate, subjectively, such factors as quality of assets, quality of management, liquidity, earnings, ownership, occupancy needs, volatility of deposits, operational procedures and capacity to meet the community's needs. That subjective process was and is as important as the calculation of objective ratios. In making those complex judgments, however, the examiner lacked significant current information on the performance of the bank under examination in relation to other similar banks operating in similar environments. If the examiner felt that the trends in capital adequacy were adverse, he or she commented on the situation in the report of examination's confidential section addressed to the regional administrator. Discussion with bank management was not mandatory. Examiner-mandated board meetings typically were not held until the situation was considered serious.
In addition to pointing out banks that require special supervisory attention, our new monitoring systems are designed to alert us, at the earliest possible stage, to incipient weaknesses in any national bank. A bank experiencing a temporary adverse trend is not automatically considered a "problem" bank. Rather, each bank is analyzed individually to determine the cause of the trend and the appropriate remedial action.
In addition to the review of a bank's capital position during the examination, a trained analyst in the regional office reviews quarterly NBSS data on banks exhibiting the most significant changes or unusual performance. That review includes an analysis of the bank's capital adequacy. Thus, review or tracking of a bank does not wait until the next examination. Each condition of concern indicated by the analysis of capital adequacy is investigated by the regional office and monitored on the Action Control System. That system requires the regional office to report, at least once a month, the bank's progress or lack of progress toward correcting the conditions of concern. A capital problem usually cannot be corrected after a bank is in a serious condition. But, under the procedures required by the Action Control System, a potential capital deficiency, detected in this "early warning system," is more likely to be corrected before a crisis occurs.
needs and options for reducing funding needs or attracting additional liquid funds. As far as quantitative measures are concerned, we continue to use the basic liquidity ratio, but it is complemented by NBSS data which enable the examiner to analyze trends within the bank and significant variations from peer group averages. Since liquidity sources are dependent upon the confidence that others have in the bank, an analysis of the factors affecting that confidence is important. One of the principal trends affecting such confidence is a decline in the bank's earnings. NBSS is designed to monitor earnings and significant changes in asset and liability composition on a quarterly basis. All banks selected for priority review through analysis of the quarterly call reports are reviewed, with subsequent followup of all problem areas. Continued improvements in NBSS will be geared toward improving our methods of quantitatively measuring a bank's liquidity position.
Liquidity Adequate liquidity can be defined as a bank's ability to provide funds to its customers, including borrowers, in response to reasonable demand. A liquidity ratio should measure all liquidity requirements against all sources of liquidity. However, all liquidity demands and sources, by their nature, are not recordable in the traditional financial reports produced by banks. Unrecordable factors include the ability of the bank to secure new liabilities as needed and its ability to liquidate certain assets. Those are qualitative factors which cannot be captured by ratios.
Management Past Examination Procedures Examiners were previously required to state their evaluation of management in the confidential section of the report of examination. Their written comments were usually preceded by a one word caption – "Excellent," "Good," "Fair" or "Poor." The primary officers and directors were listed with a narrative evaluation of each. Examiners were told that those evaluations "should reconcile with the bank's condition." Instructions recommended that, "When an unsafe management is encountered the examiner should take pains to nail down the indictment both in the open and confidential sections of the report." In practice, however, comments pertaining to unsafe management appeared all too frequently only in the confidential section.
Past Examination Procedures In the past, our analysis of a bank's liquidity position was based primarily upon a single traditional ratio. A bank's net liquid assets were generally deemed acceptable by the Office if they exceeded 15 percent of net liabilities. If a bank's liquidity dropped below that point, additional analysis of the bank's recorded assets and liabilities and their contractual maturities was usually performed. That analysis included a somewhat subjective review of the bank's liquidity position as well as the composition of its deposit structure. Procedures for making those subjective judgments were not formalized, thus, there was some.undue dependence on the ratio.
Examiners must not restrict their appraisals to the past and present ... the determination of what the management will do for the bank in the future is most significant. Senior management should be judged by the sufficiency of earnings to date and by its plans for the bank's assets and liability mix to achieve both maximized future earnings and a strong liquid future condition.
Current Examination Procedures – Recognizing the limitations of trying to analyze a bank's liquidity with a single, static ratio, comprehensive analytical procedures encompassing the entire area of funds management are now in effect. Those work programs entail a careful weighing of the bank's historical funding requirements, current liquidity position, earnings, stability of sources and uses of funds, anticipated future
Those views are now presented to the bank's board of directors. The leading indicators and significant ratios tracked by NBSS on a quarterly basis all reflect the actions of bank management. Banks which are designated for quarterly priority review by NBSS are analyzed in detail by regional specialists. Their recommendations for immediate investigation usually require discussion with bank management Adverse evaluations of bank management from reports of examination or from the more frequent NBSS reviews can be placed in the Action Control System. Any condition of concern placed in the Action Control Page 5
System requires review of corrective progress at least once a month. We believe that the regular distribution of NBSS bank performance reports to national banks will make a significant contribution to the improvement of bank management. That distribution will begin shortly.
The GAO Report As I have previously testified, we have little difficulty with many of the recommendations in the GAO report. Many of the recommendations endorsed, in some measure, procedures and approaches which the Comptroller's Office was already taking. Thus, the GAO recommended that the OCC invite the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve System (FRS) to evaluate jointly the OCC's new examination procedures with the goal of incorporating our new concepts, after proper testing, into their approaches. We have provided such orientation. The latest edition of our revised examination procedures handbook is being made available to the other agencies as it comes off the press. Our new “small bank" examination procedures have just been released for field testing and have been forwarded to the FDIC for their review. Perhaps most significant, the Interagency Coordinating Committee has formed a top level staff subcommittee composed of the Director of Banking Supervision and Regulation, FRS; The First Deputy Comptroller of the Currency for Operations, the Director, Division of Bank Supervision, FDIC; and the Director, Office of Examination and Supervision of the Federal Home Loan Bank Board for the purpose of coordinating, on a regular and continuing basis, the examination policies and procedures of the four agencies. One of the first assignments for this new group is to explore approaches to development of uniform criteria for the identification of "problem" banks. The GAO recommended that the Federal Reserve System and the Comptroller's Office develop a single approach to country risk classification. We are continuing to work with the FRS to develop a coordinated program in that area. The GAO made certain recommendations about how the FRS and the OCC might combine their foreign examination efforts to better utilize examiners and facilities. There are some legal obstacles, but we are receptive to the idea. In particular, I have requested that senior examination officials on my staff explore, with their Federal Reserve counterparts, increased coordi
nation in matters of mutual interest such as minimum standards for foreign exchange operation and country risk analysis. I have also asked that, in such exchanges, they specifically review the advantages and disadvantages of joint overseas examinations. With regard to the GAO recommendation that all supervisory agencies establish more aggressive policies for using formal actions, we believe that statistics quoted in the GAO report are adequate testimony to our increasingly aggressive posture. However, formal actions taken under the Financial Institutions Supervisory Act are only part of the story. As I pointed out in my testimony before the joint session of committees of the House, the present formal enforcement powers of the agencies are inadequate in a number of respects. Improvements recommended by the agencies have been contained in a number of bills before committees of the present and past Congresses. However, bank problems arising from managerial incompetence and poor economic conditions cannot always be solved through cease and desist actions. When we conclude that formal action will assist in rehabilitating an institution, we will use it. I suspect that increasing use of the formal enforcement tools will continue and, perhaps accelerate, particularly if legislation granting the agencies additional flexibility in that area is enacted by the Congress. For most institutions, however, we believe that recent improvements in the examination process, including better communication with bank directors and methods for early detection of adverse trends, will achieve an even greater impact. The GAO recommended that, where possible, the bank regulatory agencies coordinate and combine their examiner training efforts. The OCC has contacted the FRS on the development of common courses and has responded positively to the FDIC's proposal for establishment of a joint training facility in Rosslyn, Va. The GAO specifically recommended that all agencies jointly staff a group to analyze shared national credits. That recommendation has met with positive response from all three agencies. Examiners from the three agencies, meeting in joint session, will analyze and classify such credits. The results of those joint meetings will be binding on both national and state member banks. The FDIC shares its responsibility in that area with state agencies, and its inclusion in the process promises to be more complex. Nonetheless, the FDIC will be included. We anticipate that the program will begin in early May.
Appendix to March 11 Statement by Robert Bloom (In the interest of space, this is not a complete reproduction of the information provided. It represents, however, the most significant portions. Complete data are available elsewhere. Item numbers have been altered to be consecu
Explanation of Bank Descriptions Used
Banks so characterized exhibit a combination of weaknesses and adverse financial trends which are pronounced to a point where the ultimate liquidity
and solvency of the institution and its continuance as an independent entity are in question. The probability of failure is high for such banks.
Usually these banks are suffering from a variety of ills which may include combinations of:
bine to virtually preclude outside support from existing or prospective shareholders. Moreover, the traditiona remedy of merger with or sale to a stronger institution is obviated by the same considerations and uncertainties. Such institutions obviously require the most intense supervision and monitoring by the Comptroller's Office.
1. Mismanagement, arising from ineptness or fraudulent and self-serving practices. 2. Inadequate earnings or loss operations emanating from high loan losses; excessive overhead and operating expenses; deficient asset/liability/liquidity management which has failed to properly match interest-sensitive assets and liabilities to provide the bank with a profitable interest spread and a means to meet current demands placed upon it; heavy concentrations in non-accrual loans, renegotiated reduced interest rate loans and non-earning foreclosed real estate; imprudent or speculative dealing and trading in securities; and the like. 3. Inadequate capitalization in terms of the bank's earnings capacity and retention rate, its growth pattern, the quality of its assets, management capacity, the liquidity of assets, the efficiency of operations, liquidity/liability management, and its capacity to meet present and future financial needs of its trade area, considering the competition it faces. 4. Poor quality assets, especially when excessive rigidity is prevalent and concentrations exist in assets of doubtful collectibility. 5. Lack of liquidity emanating from an excessive reliance on interest-sensitive purchased funds which have become confidence-sensitive due to adverse financial trends and which have not been properly matched against interestsensitive assets. Secondary liquidity sources through the sale of loans or securities are generally not available to such banks, except at a substantial discount due to heavy concentrations in low yielding fixed-rate securities and loans, their poor quality, or their lack of marketability 6. Other unsafe and unsound policies and prac tices.
Serious Banks in this category reflect combinations of all or some of the adverse factors noted for critical banks, except that the weaknesses and financial trends are not so severe as to threaten the immediate liquidity and solvency of the institution. The potential for failure is present but not pronounced. In addition to financial and management considerations, banks may also be placed in this category when significant violations of law or regulation are evident, when unsafe and unsound banking practices or policies first become apparent, or when self-dealing practices of officers and directors come to light. This is true even though such violations or practices may not yet be actually threatening the viability of the bank. Such banks also require continuous monitoring, supervision and attention from the OCC.
Close Supervision This category includes banks that may be experiencing a combination of adverse factors noted for banks rated critical and serious to the same or lesser degree than those banks in the serious category. However, they possess certain characteristics more favorable than banks in the problem bank categories. Those favorable characteristics might include all or a combination of the following a strong market position with solid fund sources and a diversified asset structure: a strong ownership affiliation: management quality; earnings capacity and capital protection. These banks are less vulnerable than serious banks and their strength and financial capacity as a whole is such as to make failure a remote possibility. Nevertheless, certain problems remain and require more than ordinary supervisory concern and monitoring. Such banks have typically identified their problems and have implemented remedial action, but because of the nature of some of their problems, such as depressed real estate conditions, a return to a satisfactory condition is primarily dependent upon the rate of economic recovery or other factors beyond the bank's control.
The precarious condition of these banks and the attendant uncertainties as to possible contingent losses arising from threatened or protracted litigation or from the prospects for further financial deterioration, com
Table 1 (Dollars in millions)
Table 3 (Dollars in Millions)
December 31, 1975: 0-$100 million $100 million - 1 billion Over $1 billion
Table 4A Extensions of credit to directors, officers, employees, and their interests, by asset size of bank, for national banks with assets of over $1 billion, during 1976 (Dollar amounts in millions)
Extensions of credit to directors, officers, employees, and their interests, by asset size of bank, for national banks requiring special supervisory attention, during 1976 (Dollar amounts in millions)
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Cease and Desist Order requiring the improvement of inadequate management through the hiring of an operations officer, trust officer and an auditor. Requirements to eliminate violations of 12 USC 24, 12 CFR Part 21, 12 CFR 328.1 and 31 CFR 103.33. Requirements to eliminate collateral exceptions, criticized status of certain loans and establish new internal operations policies. 8. A written formal Agreement to eliminate self serving concentrations of credit to a director. Provisions to improve the bank's liquidity position and to require compliance with 12 USC 60. Requirement to remove loans from criticized status. Requirements to improve the loan portfolio by providing new written loan policies. Restrictions of outof-trade area loans. Provisions requiring confor mity with 12 USC 371C. 9. A written formal Agreement to prohibit payment of self-serving and self-dealing management and consulting fees to the bank's holding company Provisions to require conformity with 12 USC 56, 60 and 84, and the elimination of loans from criticized status. Requirement of new written lending and investment policies. Provisions to improve bank's liquidity position and raise additional capi tal. 10. A written formal Agreement prohibiting self serving and self-dealing practices, prohibitions of financial transactions with certain persons and corporations, elimination of violations of 12 USC 84, 375a and 1829(b), 12 CFR 23, 221, 1134 and 7.2120, and 31 CFR 103.33. Provision requiring the hiring of a new executive officer and loan officer. Provision to improve the condition of the loan portfolio by prohibiting extensions of credit to criti borrowers, reducing concentrations of credit, and adopting a written program improving internal operations and lending policies. Requirement of audit by outside auditing firm. Requirement of additional capital and prohibitions on pay ing dividends. 11. A written formal Agreement eliminating extensions of credit in violation of 12 USC 84. Requirements to improve the bank's liquidity position and improve the capital base. Requirement that the bank improve the status of all criticized loans by correcting collateral imperfections, reducing loan delinquencies and obtaining current and satisfactory credit information. Requirements that the bank develop new written lending and investment policies. Requirement that the bank hire a new execu tive officer. 12. A formal written Agreement to increase the bank's capital to protect the bank from potential loss from concentrations of investments. 13. A letter Agreement eliminating the upstreaming of funds and use of the bank's correspondent accounts for the benefit of the bank's holding com pany 14. A written formal Agreement directed specifically at eliminating violations of consumer laws, in particu
lar violations of the Truth-in-Lending Act (15 USC 1601) and Regulation Z (12 CFR 226). Requirement that the bank obtain current and satisfactory credit information from certain borrowers. 15. A written formal Agreement to limit management fees and extensions of credit to the bank's holding company and to eliminate self-dealing practices reflected in violations of 12 USC 56, 60, 84 and 371c. Requirements that the bank develop written investment and collection policies. Requirement that the bank improve the status of certain loans by obtaining current and satisfactory credit information. Requirement that the bank increase its capital 16. A written formal Agreement eliminating self serving and self-dealing by controlling shareholders and elimination of violations of 12 USC 3710 and 375a. Requirement that the bank eliminate violations of the Truth-in-Lending Act (15 USC 1601) and Regulation Z (12 CFR 226). A restriction of extensions of credit to certain directors, other persons and their increases. A requirement that the bank recoup certain expenses and review officers' salaries and bonuses. Requirements that the bank improve its operations by hiring an independent auditing firm and developing written lend ing policies. 17. A written formal Agreement eliminating self dealing and requiring the hiring of a new management team. Requirement that the bank improve the status of criticized loans by developing new written lending policies, obtaining current and satisfactory credit information, and reducing concentrations of credit. Requirement that violations of 12 USC 84 be eliminated. Requirements that the bank maintain a certain liquidity position, improve its capital base and adjust its loan valuation reserve. Requirement that the bank improve its in ternal controls and audit procedures. 18. A written formal Agreement eliminating violations of 12 USC 84. Requirements that the bank improve the status of criticized loans by hiring a new lending officer, implementing lending and collection policies, obtaining current and satisfactory credit information, and correcting collateral imperfections. Requirements that the bank improve its liquidity and capital base. 19. A written formal Agreement eliminating self dealing as reflected in violations of 12 USC 84 and 375a, and correcting irregularities in the bank's trust department. Requirements that the bank improve the status of criticized loans by obtaining current satisfactory credit information. Requirement that the bank implement an asset and liabil ity management program. 20. A written formal Agreement to eliminate self dealing by majority owners by prohibiting extensions of credit to certain individuals and corpora tions. 21. A Notice of Charges, Permanent Order to Cease and Desist and a Consent Stipulation to the Issuance of a Cease and Desist Order to eliminate self-dealing practices as reflected in violations of 12 USC 84, 371a, 375a and 1829b. A requirement to eliminate large lines and concentrations of Page 7
posit run-off exceeding $35 million, coupled with an inability to raise funds in the money market. Sustained reliance by the bank on the purchase of Federal funds to maintain its liquidity, and a corresponding loss of credibility to sellers of Federal funds, resulting from adverse published reports had, since June 1974, virtually foreclosed the bank from the Federal funds market. During the fall of 1975, bank management engaged in numerous discussions with bank holding companies and individuals to try to effect a take-over by qualified purchasers of the bank and, concomitantly, to inject additional needed capital without FDIC assistance. However, it increasingly became apparent that a solution short of FDIC assistance could not be accomplished because of the massive problems in the bank. The Marine National Exchange Bank of Milwaukee purchased certain assets and assumed certain liabilities of the insolvent institution from the FDIC acting as receiver.
The Hamilton National Bank of Chattanooga, Chattanooga, Tenn. Declared insolvent: Feb. 16, 1976 Total assets on that date: $441,267,000
Total Assets and Deposits for 5 Years Preceding Failure (Dollars in thousands)
gage Corporation, a wholly-owned subsidiary of Hamil ton Bancshares, Inc. Many of those loans represented 100 percent financing of acquisition, development and construction costs for large real estate projects. Most borrowers were highly leveraged and lacked the ability to complete or sell the projects undertaken. The Comptroller of the Currency entered into an agreement with the board of directors of the bank on December 18, 1974, restricting extensions of credit or loan participations between Hamilton National Bank and the holding company and its affiliates and subsidiaries. Successive examinations and visitations revealed further deterioration. The September 29, 1975 examination revealed that assets acquired from Hamilton Mortgage Corporation aggregated 87 percent of total assets whose creditworthiness was questioned and 243 percent of gross capital funds. Non-accrual loans and non-income producing real estate exceeded $77 million. Almost 27 percent of the loan portfolio was past due. Of those delinquent loans, 97 percent rad been acquired from Hamilton Mortgage Corporation. During the first 11 months of 1975, the bank had a net operating loss of $8.2 million, principally as a result of heavy loan losses and non-accrual assets. During the period between January 31, 1975 and January 31, 1976, the bank underwent considerable retrenchment and suffered an absolute deposit decline of $76.9 million as well as a decline in borrowings of $15.7 million. Those reductions, which aggregated $92.6 million, were met primarily through the liquidation of assets, including cash and due from banks, securities and Federal funds. That steady drain on liquid assets of the bank was, in the end, to cause its demise. At the end of 1975, it became apparent that, without a massive capital infusion, Hamilton National Bank would be unable to sustain operations over the time period necessary to work out its real estate and other problems. Without such assistance, the bank and Hamilton Mortgage Corporation could not fund out the real estate projects or otherwise complete them. In view of the extended litigation on many of the properties, their location in economically depressed areas and the inactive and incomplete nature of some of the developments, it was the OCC's opinion that the liquidating value of the bank's portfolio of Hamilton Mortgage Corporation-related loans and foreclosed properties was much less than the value shown on the bank's books and records. In early February 1976, the Comptroller's Office estimated that, on a liquidating basis, the loss inherent in the bank's $73 million of Hamilton Mortgage Corporation-related assets and the securities portfolio would exceed the gross capital funds of approximately $28.5 million shown on the bank's books as of January 31, 1976. The Comptroller decided at that time that, unless the bank or its parent holding company was able to raise the needed capital immediately, the bank could no longer be viewed as a going concern. There were no available sources of capital to rescue the bank as an entity and place it on its feet. Hamilton Bancshares, Inc., was in an extended financial condition at the time
Summary of facts leading to failure: Hamilton National Bank was chartered by the Comptroller's Office in 1905. As of December 31, 1975, Hamilton National Bank ranked as the largest of the seven banks located in Chattanooga, Tenn. In 1969, Hamilton National Bank became a subsidiary of Hamilton Bancshares, Inc., a registered multibank holding company. The bank and the holding company had been closely associated since 1930 because of common ownership. Hamilton National Bank was the largest of the 18 banks operated by the holding company in Tennessee and Georgia. The holding company also had several non-banking subsidiaries which were engaged in real estate, data processing, mortgage banking, loan servicing, life insurance and factoring. Those subsidiaries were formed between 1971 and 1974. The principal non-bank subsidiary, Hamilton Mortgage Corporation, was located in Atlanta, Ga. An examination of Hamilton National Bank begun on September 30, 1974, and continuing into November 1974, revealed substantial asset difficulties. The examiner criticized the creditworthiness of loans and other assets amounting to 154 percent of gross capital funds. The poor condition of Hamilton National Bank was directly attributable to the large number of real estate loans originated or acquired from Hamilton Mort Page 8
publication of the resulting report; (3) periodic performance audits by the Government Accounting Office (GAO) authorized either by agreements such as those recently used or by legislation such as H.R. 4469, which we have recently supported; and (4) regular appearances of agency representatives before House and Senate banking committees. Such approaches as the GAO performance audit, in particular, offer a sound means for Congress to conduct a thorough, objective review of the management decisions of the banking agencies.
other fundamental changes designed to ensure that the quality of our examination keeps pace with the complexity of the institutions we regulate. Those improved procedures, which have received favorable comment from the GAO in its study of our Office, require examiners with highly-developed analytical and communications skills to deal directly with the highest levels of bank management of multibillion dollar banks. The study also concluded that maintaining an examination force with such capabilities can be done effectively only if the Office undertakes recruitment, training and compensation programs equal to the task. Such programs have been designed and approved by the Secretary of the Treasury. The experience of state banking departments operating on appropriated funds or under other fiscal approval of the legislature is not reassuring. A study by the Conference of State Bank Supervisors concluded that 29 of 46 state banking departments which operate on appropriated funds or which must receive fiscal approval from the legislature conclude that their budgets are inadequate to support professional and effective examination programs. We believe that the demonstrated ability of the federal banking agencies to maintain a group of experienced, competent professionals is directly related to present budgetary flexibility. The present system has worked well. It should not be changed
Flexibility of Present Financing The bank regulatory agencies must, on occasion, commit unusually large resources in the contemplation of unforeseen emergency situations most of which can be satisfactorily resolved by discreet and careful handling. Those financing needs are affected by events of the marketplace beyond the agencies' control. We have recently come through the most severe recession since the Depression of the 1930's. Some banks did not survive in that environment. Because of the unique method of financing of the banking agencies, however, extraordinary resources could be devoted, with a short lead time, to intensified supervision and rescue plans for troubled institutions. Corps of examiners and support personnel were transferred from one part of the country to another notwithstanding the impact upon projected budgets. As a result, public confidence in the banking system remains intact. If the agencies had been forced to go to Congress for authority to expend funds in these unforeseen situations, significantly different consequences could have occurred. First, premature disclosure in appropriations hearings of contemplated problems could have led to runs on the banks and the impossibility of salvaging resources. In effect, staff projections by the bank regulatory agencies would become self-fulfilling prophecies. In addition, because of the procedures and delays involved in making supplemental appropriations requests, timely action might not have been possible at all. As it was, long, discreet, sometimes costly efforts by the banking agencies permitted rehabilitations and other orderly solutions. Even the failure of a few large institutions did not result in a dollar of depositor losses. Bank examination is an extraordinarily peopleintensive function. The 2,700 national bank examiners who make up our field forces daily critique the performance of management of the nation's largest and most sophisticated banks. Traditionally, and by any measure, bank examiners have performed that role well. However, the 60's and 70's have seen an enormous growth in the complexity and sophistication of our nation's financial institutions. Examination procedures and skills have not always kept pace. In recognition of the need to eliminate such lags, the Comptroller's Office, in 1974, commissioned the management consulting firm of Haskins & Sells to conduct a thorough review of Office procedures and practices. After a year-long study, the firm recommended revolutionary revisions of our examination procedures and
Safeguarding the Bank Regulatory System from Pressure The federal bank regulatory agencies have functions which are to some extent similar, and to some extent unique. All the agencies have bank examination and enforcement responsibilities. However, the Comptroller is the sole franchiser for federally chartered banking institutions, the FDIC is the insurer on which depositors rely in the event of insolvency, and the Federal Reserve conducts monetary policy, licenses foreign offices and regulates holding companies. That is a delicately balanced structure, the components of which must work together to work at all. Under the present structure, both the agencies and the Congress are well insulated against possibly improper constituent demands. All three agencies share the sensitive bank examination function and, thus, possess unique access to private financial details on millions of Americans that are contained in the loan files of the nation's banks. Likewise, each of the agencies possesses extremely sensitive, and frequently controversial, enforcement responsibilities, including the power to issue and enforce cease and desist orders and to initiate the removal of officers and directors. Almost always, such individuals are among the most important leaders of their communities. Similarly, OCC grants valuable franchises for new national banks and has responsibility for approving or denying applications for new branches, mergers and national bank security y issues. Many, if not most, such matters involve serious financial consequences to the public and interested parties, and they are, therefore, often contested. We are now able to make such decisions on the basis of professional, objective judgment, without consideration of possible future budgetary impact.
It is precisely a concern for maintaining the objectivity of the banking agencies in those matters that has prompted Congress to adopt various measures designed to ensure the independence of the agencies. Senator Burnet R. Maybank, as Chairman of the Senate Banking and Currency Committee, voiced the following concern, in 1950, opposing reorganization proposals which could conceivably have eroded the Comptroller's independence in franchising decisions:
The power of life and death over about 5,000 banks ... would pass into other less independent hands. Likewise would pass the general supervision and examination of the banks with power to control and shape credit policies which could lead to political domination and control of the money and credit of this country.... Political considerations are often demanding and the urge to exercise power hard to resist.
Similar concerns were expressed in 1947 by Senator Vandenberg in the course of a bipartisan effort to prevent requiring the FDIC to submit a budget annually to the Bureau of the Budget. (94 Cong. Record 10121) (1947). In the absence of the clearest evidence that other mechanisms for Congressional oversight of the operations of the banking agencies are insufficient, the objectivity resulting from the banking agencies not being subject to the appropriations process should not be abandoned.
albeit more limited in scope than a trial de novo, in the U.S. Court of Appeals. We believe that this type of administrative assessment procedure would facilitate the use of the civil money penalties remedy and, thereby, make it much more effective than it otherwise would be were the agency required to undertake protracted litigation in the face of any challenge, no matter how frivolous We recommend that the imposition of civil money penalties be made applicable to violations of the National Bank Act in addition to violations of the Federal Reserve Act, the Bank Holding Company Act and the Federal Deposit Insurance Act. The deterrent effect of those penalties should be expanded to include some of the most important statutes which govern national banks, including 12 USC 84 (national bank lending limits) and 12 USC 82 (indebtedness of national banks). We recommend defining "felony" in connection with section 401(f) of the Board's proposed bill which authorizes a federal banking agency to remove or suspend officers, directors or other individuals from participating in the affairs of a bank on the ground, inter alia, of commission of a felony involving dishonesty or breach of trust. As some states consider a number of crimes which would constitute felonies under federal law, only as "high misdemeanors,” we propose defining "felony" as "a crime involving dishonesty or breach of trust and which is punishable by imprisonment for a term exceeding 1 year under state or federal law." We recommend a change in connection with the anomolous situation under present law in which the suspension of an individual is terminated upon any disposal of an indictment, including disposal by conviction. Under current procedures, once a judgment of conviction is rendered, the suspended individual may participate in the affairs of the bank unless or until the appropriate banking agency is notified of the conviction and issues a second order permanently removing the individual. To correct that problem, we suggest an amendment giving the individual the opportunity to appear at a hearing before the appropriate agency on the issue of suspension or removal, while, at the same time, obviating the necessity of issuing a second order permanently removing a suspended individual upon conviction. Finally, we recommend that our Office be permitted to schedule examinations of national banks in the most appropriate intervals, without the rigid requirement of present law that examinations of national banks be conducted twice each calendar year, with the right of the Comptroller to waive one examination every 2 years. That revision is identical to a recommendation (p. 4-9) made in the recent General Accounting Office report on federal supervision of state and national banks, and would give the Comptroller the same discretion now possessed by the Federal Reserve and the FDIC.
Strengthening the Enforcement Powers of the Banking Agencies In the last Congress, this Office, together with the other banking agencies, proposed a strengthening of the agencies' supervisory authority over financial institutions and their affiliates. Those enforcement provisions, which were embodied in S. 2304 (94th Congress), were not enacted. We again support legislation improving our enforcement powers. We particularly endorse Titles II and IV of the expanded substitute bill to S. 71 proposed to the Congress by the Federal Reserve Board, with some perfecting amendments of our own. Those amendments, detailed below, have been drafted after consultation with the staffs of the Federal Reserve Board and the FDIC. We recommend incorporating civil money penalty assessment procedures in the model form recommended by the Administrative Conference of the United States. Unlike the procedure in S. 71 and the original Board proposal, which would allow a bank or person charged with a violation and assessed a penalty by a Federal banking agency to challenge that determination in a trial de novo in a U.S. district court, this proposal would provide for a formal administrative hearing at the request of the bank or person charged The determination of the Administrative Law Judge at the hearing then would be subject to judicial review,
S. 73 – Prohibition of Management Interlocks Turning to S. 73, we believe that the limited prohibition against interlocks among management officials of we do not have any objections. We do, however, urge the Committee to include employees of all federal bank regulatory agencies in section 7 of the bill which would amend 18 USC 1114 to make it a felony to kill or to otherwise harm or intimidate FDIC employees. bill which especially interest the Office of the Comptroller of the Currency
depository institutions in the same Standard Metropolitan Statistical Area (SMSA), or within 50 miles of each other, is appropriate and will help to strengthen public confidence in the nation's financial institutions. The bill, wisely, provides needed flexibility by permitting the Board to exempt interlocks which are in the public interest. A reservation we have about the bill, and one that can be easily remedied by a simple deletion of a subsection, is the removal from the Clayton Act of the enforcement authority of the Federal Reserve Board. We urge that section 8(c), which makes that change, be struck from the bill.
S. 1433 Restrictions on Subsequent Activities of Financial Regulatory Agency Officials Finally, we urge the Committee to consider S. 1433 in the context of the President's "Ethics in Government” program. The President's proposals deal comprehensively, on a government-wide basis, with issues of conflict of interest and in our view deal more thoroughly and equitably with the problem than does S. 1433
S. 895 - FDIC "Housekeeping" Bill In regard to S. 895, the FDIC "housekeeping" bill,
Statement of Thomas W. Taylor, Associate Deputy Comptroller for Consumer Affairs, before the Consumer Affairs Subcommittee of the Senate Committee on Banking, Housing and Urban Affairs, Washington, D.C., July 11, 1977
A review of the litigation spawned by Truth-inLending reveals that comparatively few actions are brought against creditors for substantive violations of the Act. Rather, most involve issues not at all material to the consumer's ability to evaluate and compare credit terms. Creditors who attempt to comply scrupulously, as well as those who do not, must, unfortunately, without distinction be prepared to cope with costly lawsuits. Such a situation is intolerable and calls loudly for revision of the statutory requirements to accomplish a return to the original purposes of the Act.
Thank you for this opportunity to present the views of the Comptroller of the Currency on the legislative proposals which are designed to simplify and clarify the Truth-in-Lending Act. As the agency responsible for enforcing that Act and Federal Reserve Regulation Z as they apply to national banks, our Office recognizes the need for sharpening the focus of the law to improve consumer understanding of basic loan information. We commend the Committee for undertaking the important task of perfecting this consumer legislation. The Comptroller's Office has had considerable experience with administration of the Truth-in-Lending Act since its enactment. The Office has recently assigned a specially trained corps of national bank examiners to conduct consumer law compliance investigations of every national bank. As part of that new program we have committed substantial resources to examining for compliance with the requirements of Truthin-Lending The results so far, in this particular regard, indicate too many instances of noncompliance with key provisions of the law, impairing the ability of consumers in some areas to shop in an informed way for credit. However, clear breaches of legal duty can be corrected as they are discovered through regular enforcement mechanisms. We are concerned today about the technical noncompliance which may not impair the consumers' interest but greatly interferes with enforcement of the Truth-in-Lending laws, efficient bank examination and sound management of the nation's banks. Instances of technical noncompliance have run the gamut from failure to disclose the amount of loan proceeds, in contravention of the statute but in compliance with Federal Reserve Regulation Z, to inadequate disclosure of a security interest taken in automobile insurance premiums which were ruled to be "proceeds of the insurance policy" but not, as stated, "of the automobile."
Simplification of Disclosures It is useful to examine the original intent of the drafters. As stated at the outset, the Truth-in-Lending Act was meant to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available ... and avoid the uninformed use of credit." In practice, however, events have not quite worked out that way. Some of the information currently disclosed under Regulation Z is of dubious value to the consumer. In exchange for marginal utility, those disclosures have been permitted to fuel the bulk of wasteful litigation which adds enormously to the cost of lawful compliance by creditors. Tronically, the additional information actually may serve to distract the consumer's attention from the core of disclosures which are of value in shopping for credit. It is in that light that we endorse the approach of the staff of the Board of Governors of the Federal Reserve System (Board), as outlined in their proposed draft of May 24, 1977, limiting disclosure in closed-end transactions (exclusive of residential mortgages) to the amount financed, the finance charge, the schedule and total of payments, the annual percentage rate, and the deferred payment price in the case of credit sales). However, we would expand the list of items to include late fees, security interests, prepayment penal
ties and rebates, as these items also are important to comparison credit shopping, The argument often is heard that disclosures, no matter how meaningful, are not actually used by consumers in obtaining the most favorable credit arrangements. The Committee may consider appropriate a requirement that each core disclosure be followed by a brief and simple explanation, as recommended by the Board staff in the sample form attached to its proposed draft, e.g., Finance Charge (this is the amount the credit is costing you)
Provisions Ripe for Amendment At this point I would like to comment upon several aspects of the law which should be reviewed as part of any serious inquiry into Truth-in-Lending simplification, In shopping for credit, consumers, out of necessity or convenience, rely heavily on information conveyed through telephone inquiries and printed and broadcast media. Consequently, we find it disturbing that even a cursory review of newspaper advertisements for loans, especially in connection with real estate, reveals widespread promotion of rates other than the annual percentage rate, with the APR disclosed in fine print. Although that practice is prohibited under existing law, it is likely to continue to frustrate the public because no civil remedy is available for violations of the advertising provisions of the Truth-in-Lending Act. Therefore, we suggest that the law be amended to require that the annual percentage rate (APR) be stated more conspicuously than any other rate in all advertising, including responses to oral inquiries by telephone or otherwise. Appropriate penalties for violations should be provided. Currently, a number of charges are excludable from the finance charge if particular conditions are met. One of those charges, for optional insurance, is excludable if certain disclosures are made and the borrower indicates in writing that insurance is desired. Serious questions exist as to whether those charges really are optional, despite the fact that borrowers sign statements to that effect. Other charges involving costs associated with perfecting security interests are excludable from the finance charge as a matter of course. Because they constitute a basic part of the cost of credit, we believe that such charges should be reflected in the finance charge at all times. Moreover, the rules for exclusion are complex and therefore, lead to confusion and increasing litigation. The right of rescission was incorporated into the law to deal with a particular class of creditors involved in indirect sales of goods and services, frequently solicited and consummated at the borrower's residence. While we believe that right to be beneficial in connection with that type of transaction, we question the need for its extension to loan transactions conducted directly between a borrower and a financial institution. Typically, in the latter situation the borrower approaches the lender with the intent of obtaining credit. He or she is not caught unawares or in a weak moment and, therefore, needs no period to "cool off" or reassess the matter. Unless evidence of abuses in di
rect loan transactions can be produced, we would advocate restriction of rescission rights to indirect paper and home solicitation sales only. In a related aspect, we also believe that a considerable amount of paper is wasted in providing a borrower with two copies of the notice of rescission rights when a single copy would serve the same purpose. With respect to the avoidance of civil liability, section 130(b) of the Truth-in-Lending Act allows the creditor to notify the borrower and adjust the account within 15 days of discovering an error. That time period may be unrealistically brief for many large creditors and for problems involving a large class of borrowers. The Board staff has proposed that the law be amended to allow notification of borrowers within 30 days of discovery of an error. We support that proposal. Such a modification would not jeopardize consumer rights but would help to curtail court actions on failure to meet technical deadlines. We also support the Board's proposal to clarify the meanings of "notice" and "discovery" with regard to the civil liability provisions. Those amendments will avoid the present uncertainty concerning application of the statutory language in cases where problems are discovered during the course of examinations conducted by regulatory agencies. Under the current law, tolerances allowed in the quoting of the annual percentage rate are confusing and unfair. Section 107(c) of the Truth-in-Lending Act permits rounding of the disclosed APR to the nearest one-quarter of 1 percent. The Federal Reserve Board has taken the position that creditors either must disclose the precise APR or round to the nearest onequarter of 1 percent. Thus, a creditor who chooses to disclose the exact rate is allowed no tolerance for error. As a simple solution to that problem, we suggest that the law be amended to allow a uniform tolerance of one-eighth of 1 percent, more or less, than the APR which a creditor discloses. As I have mentioned, the Comptroller possesses substantial authority under present statutes for administrative enforcement of Truth-in-Lending requirements. Section 8 of the Federal Deposit Insurance Act permits the federal banking agencies to require banks "to take affirmative action to correct the conditions resulting from any ... violation or practice." We use that authority to take any steps necessary, including the compulsion of reimbursement to customers, to insure full compliance by national banks. Unfortunately, we cannot ignore the prospect that that may embroil the Comptroller in costly and time-consuming litigation against recalcitrant banks. Clarification of the law to reaffirm that authority in express terms would eliminate the problem
Section 2 of S. 1312, exempting agricultural credit, is a sensible amendment. We see no reason to afford greater protection to farmers than to other small businesses. S. 1501 shares that approach. Section 3 of S. 1312, authorizing state authorities to enforce the Truth-in-Lending laws against all creditors, is not as welcome a change. The national banking laws provide for the thorough supervision and regulation of national banks by the Comptroller of the Currency. Crucial to that comprehensive scheme is the bank examination process embodied in 12 USC 481, et seq. Through the grant of exclusive visitorial powers under 12 USC 484, Congress has created a special working relationship between national banks and the Comptroller's Office. Our effectiveness in carrying out broad responsibilities concerning the National Banking System depends on our ability to maintain this high level of confidentiality and supervisory trust. Ever since the creation of the National Banking System in 1863, Congress has always included, as part of the statutory provision for bank examinations, an express statement which limits the exercise of visitorial powers. Only once, when it established the Federal Reserve Board, has Congress elected to expand authority to conduct examinations of national banks, and that expansion was justified on the basis of the close and intimate relationships" that would exist between Federal Reserve Banks and their member banks. Even then, the expressed concern about the potentially burdensome impact of additional examinations on national banks was apparently strong enough to make Federal Reserve examinations discretionary rather than mandatory. We continue to perceive no need to upset the present division of enforcement authority so pivotal to the balance of the dual banking system. With state laws proliferating in the Truth-in-Lending field, it is easy to envision, under proposed section 3 of S. 1312 multiple enforcement efforts on the state and federal level which would cause agencies to work at crosspurposes, unduly encumber the operations of individual banks, and pose a serious threat to the maintenance of a stable and competitive National Banking System In requiring the banking agencies to direct banks to reimburse borrowers for creditor violations, section 4 of S. 1312 appears to fall short of explicitly reaffirming our present enforcement powers under section 8 of the Federal Deposit Insurance Act with respect to Truth-inLending. We also question the desirability of the companion provision requiring an agency to notify customers of the facts in the event a creditor refuses to reimburse. In order to minimize costs to the regulators, we think it would be more efficient to require such creditors to mail a proper notice to all affected accounts, as is now our practice. Section 5 of S. 1312, through what appears to be a technical error, would provide a longer statute of limitations, applicable to actions brought for violation of Truth-in-Lending, only in states exempted from the re
quirements of the federal statute. We would prefer that the new enforcement flexibility afforded by such an extension apply instead to violations uncovered by any of the regulators designated in section 4 of the bill. We have additional difficulty with the blanket limitation section 5 would place on all actions against creditors brought more than 3 years from the date of the transaction. Without that restriction, borrowers who have entered into long-term contracts, such as 30-year mortgages, could bring suit for continuing overcharges for the duration of their loans. We doubt the wisdom of eliminating all limitations on civil actions, however, on the other hand, our experience has demonstrated that a borrower normally is not equipped to discover Truth-in-Lending violations and must rely on expert bank examiners or attorneys. Therefore, in the interest of fairness, we would suggest a 3-year limitation, measured, in the alternative, either from the date of the transaction or from the date of enactment of the amendment, whichever comes later. That approach would permit borrowers who now are repaying loans which were taken more than 3 years ago to sue creditors when notified, by a regulatory agency during the first 3 years the law is in effect, that violations have occurred. Sections 11 and 12 of S. 1312 deal with default charges and security interests, respectively. We are pleased to note the improvements offered by S. 1312 in clarifying default charge disclosure and by the common approach of S. 1312 and S. 1501 in requiring only a simple statement that a security interest is taken. Under S. 1312 all disclosures now required by the Truth-in-Lending Act would remain fundamentally intact. However, section 13 of the bill would attach civil liability only to a failure to disclose certain items. What results is that civil liability is eliminated for failure to disclose deferred payment price, a disclosure peculiar to credit sales. As civil liability is valuable principally as a spur to compliance, credit sale customers dealing with creditors who choose not to comply, in the absence of such a threat, will have difficulty in comparing the cost of a financed purchase with that of a cash transaction. For that reason, we are opposed to any limitation on civil liability which would remove coverage from any of the core items that I have described earlier in my statement. The issues of set-off rights under Truth-in-Lending has been a matter of controversy since enactment of the statute. A number of courts have ruled that creditor violations may only be used offensively by aggrieved borrowers and not as grounds for recoupment or offset. Section 14 of S. 1312 would ratify the more widely held interpretation that set-off is permissible as a defense. As its sole weakness, that provision of the bill leaves open to question the applicability of the Truthin-Lending Act statute of limitations to defensive use of claims for violations. We urge that that point be clarified to suspend operation of the statute in such cases. Dissemination of annual percentage rates, as proposed in section 15 of S. 1312, is a concept which we endorse in principle. We would point out, however, that the concept poses practical problems of implementa Page 9
tion. How should those rates be computed and how often? What categories of loans would be broken out? We also are seriously troubled by the bill's coverage of “all creditors" in the most populous metropolitan areas across the nation. Section 15 would have the Federal Reserve Board undertake a herculean task in gathering and verifying the accuracy of such a vast range of data from unregulated, as well as regulated, businesses. We hope the Committee will devote careful attention to the practical import of that proposal in formulating a requirement which is useful and informative to the public
closed APR of 9 percent cited in the Record can legitimately be disclosed as 9 percent, even if payments are rounded to the nearest penny ($241.39). Here the true APR would be only 9.000148942 percent. In fact, payments of as much as $244.08 per month could be charged without the APR (9.124543188 percent) having to be disclosed at a level higher than 9 percent. Eliminating civil liability for violations not material to the consumer's awareness of the cost of credit is a commendable idea. In practical terms, though, the question to be answered is which disclosures are important enough to trigger liability. Section 12 of S. 1501 would have liability turn on an ex post facto determination of exactly what information was most useful to the individual credit shopper. That provision, however, easily can be made more precise and workable once the core items, as suggested earlier, are settled upon. Thus, we would favor language imposing civil liability only for failure to disclose any terms which the statute expressly deems material to an intelligent comparison of credit offers. The final provision of S. 1501, affecting the relation of the relevant federal statutes to state laws, appears to be a case of unintentional overkill. As it now reads, section 15 would preempt all state laws in the consumer credit area, thereby nullifying retail installment sales acts, small loan acts and all adaptations of the Uniform Consumer Credit Code. The Committee is well aware that those and similar state laws provide important substantive rights not at all duplicated by existing federal law. Therefore, we urge that the effect of section 15 be redesigned to pre-empt only state laws which attempt to deal specifically with matters pertaining to disclosure of credit cost information.
S. 1501 The Truth-in-Lending Simplification Act of 1977 Focusing on S. 1501, we believe this bill offers a constructive approach to Truth-in-Lending simplification. As noted, section 2 pairs with section 2 of S. 1312 in exempting agricultural credit, but the provision in S. 1501 goes farther in its intent to exempt all consumer loans made by farm credit institutions. The language of that exemption, however, raises a question as to the true breadth of its scope when it speaks of "borrowerowned federal instrumentalities which extend credit under the supervision of an agency of the United States." For the sake of clarity, that provision should state specifically who is intended to be exempted from coverage of Truth-in-Lending Section 4 of S. 1501 heads in the wrong direction in its attempt to simplify Truth-in-Lending disclosures by eliminating the requirement under present law to itemize certain charges not included in the finance charge. Rather, we think these charges should be included in the finance charge. Earlier stressed that fees relating to the filing of security interests, or insurance in lieu of such fees, are peculiar to credit sales and are very definitely a part of the cost of credit. If those charges are not included in the calculation of the finance charge, the consumer's ability to compare the cost of a cash purchase with a deferred payment sale will remain seriously impaired. I have already discussed the problems created by the rules now governing disclosure of the annual percentage rate. Section 10(f) of S. 1501 would correct the shortcomings of the existing provisions by allowing disclosure within a tolerance of one-eighth of 1 percent of the actual APR. Ostensibly to avoid forcing creditors to commit hypertechnical violations of the law, subsections (a), (d) and (g) of section 10 provide tolerances for the disclosed number of payments and the finance charge with regard to transactions payable in more than 120 installments. The presence of those provisions, which seem to be unjustified even under existing rounding principles, is apparently attributable to a faulty example incorporated into remarks in the Congressional Record of May 12, 1977. There it was explained that the large, 1 percent tolerance for such calculations is necessary to cope with the effects of rounding payments to the nearest penny. On the contrary, such minor deviations are well within current tolerances. For example, the 30-year, $30,000 loan carrying a dis
Consumer Education In closing, I want to reemphasize the interest of the Comptroller of the Currency in simplification of the Truth-in-Lending statutes and regulations. But we also recognize that no law, no matter how clear and salutory, can fully accomplish its purpose without those whom it is designed to protect having a fundamental awareness of their rights. Without a comprehensive educational program, efforts to simplify and enhance enforcement of Truth-inLending requirements are largely futile gestures. Our experience continues to demonstrate that customers of national banks normally learn of their rights under any of the various consumer protection laws only when they contact us with specific complaints or default on their loans, leaving their attorneys to raise creditor violations as a defense. For that reason, we view education of the public as the most important challenge to the effectiveness of federal statutory protections. As a partial solution we now are preparing a consumer guide to national banks which will explain how consumers can use banking services to their best advantage and what legal rights they may exercise to protect their interests. The ultimate soiution cannot be wholly within the means of a bank regulatory agency. Although consumer education by federal agencies may not have been contemplated at the time of enactment of the Truth-in-Lending Act or any of the other important consumer protection laws, we suggest to the Committee that the Education Division of the Department of Health, Education and Welfare (HEW) already possesses the necessary authority to develop a comprehensive program of this sort. Within its broad mandate, that division is responsible for providing professional and financial assistance to strengthen education in accordance with federal laws and regulations.
Some progress in that direction already has been made. In the latter half of 1976 the Office of Consumer
Affairs in HEW established the Interagency Consumer Education and Information Liaison (CEIL). Representatives from more than 50 government agencies, including our own, convene once a month to develop and disseminate information to our nation's schools and communities. The potential of this panel is apparent, but, whether through CEIL, the Education Division or some other vehicle, our Office is ready to support fully any efforts on behalf of consumer education in the financial area, and we pledge all facilities at our disposal in aid of producing an effective educational program.
Statement of John G. Heimann, Comptroller of the Currency, before the Senate Committee on Banking, Housing and Urban Affairs, Washington, D.C., September 16, 1977
I am very pleased to be here today, Mr. Chairman, to discuss the important issue of the bank regulatory structure, specifically the proposals for change contained in S. 684 and S. 711. Although I have appeared previously before the Senate Banking Committee, this is my first appearance as Comptroller of the Currency My experience as a state bank supervisor and now as the Comptroller gives me a unique opportunity to comment from a first-hand view of both the state and national bank systems. As you know, I testified last year before this Committee on a bill similar to S. 684. I was then the Superintendent of Banks of the State of New York and I viewed the regulatory problems primarily from the vantage point of one who was acquainted with those problems at the state level. It was my opinion then, as state bank superintendent, and it continues to be now, as Comptroller, that the dual banking system is necessary for a competitive and healthy banking structure. Strong state banks and bank regulators are necessary for an effective dual banking system. In my prior appearance, l envisioned a change in the federal regulatory structure that would include a consolidated federal agency to supervise and regulate federally chartered financial institutions, with a strong FDIC taking a special role in helping to strengthen state supervisory efforts. My present opinion on the agency consolidation question continues to be predicated on a strong dual banking system. That system would depend on state regulators who would have as adequate resources and firm commitments to effective regulation as the federal supervisors. A uniformly effective state system would provide the counterbalance to a consolidated agency for federally chartered financial institutions. Unfortunately, a uniformly strong state system does not exist at the present time. Some states have regulatory structures which are comparable to federal agencies, but many do not. A healthy diversity in the financial system now exists because of the divided federal authority, not because of the strength of the state systems. If we are going to move toward an ideal, dual,
state /federal system, we must first improve the state system. Although that development can be advanced through FDIC support, it must also come from the commitment of the states themselves. I believe that a time will come when we can have a Federal Banking Commission regulating federally chartered institutions, but it is not yet here. At this time, I believe the present structure is sufficiently effective to maintain the necessary diversity at the federal level which will preclude a monolithic and stultifying centralization, and will permit freedom of choice. Within the present structure, however, interim solutions include working through the recently established Interagency Supervisory Committee or creation of a new Federal Bank Examination Council to reconcile some of the problems which exist in regulation of financial institutions. In explaining the reasons for my present position, I would like to present an overall view of the total U.S. financial system and its regulatory structure. I am aware that the literature and testimony on the subject is voluminous. I think, however, it would be helpful to present, in one document, a succinct description of the current financial regulatory system and the capital market within which it functions. Then we can evaluate advantages and deficiencies and consider the proposals which have been made to address the problem. Because of time limitations, I would like to submit that material for the record as a supplement to my statement and concentrate my remarks on the major problems which I perceive in the system. The reality of the dual banking system in the United States is that state systems do not yet provide an effective alternative to the federal system. On one hand, the various federal agencies have thousands of examiners similarly trained and similarly paid with access to sophisticated staff support and the latest computer systems. On the other hand, states with wellstructured, well-financed supervisory agencies exist side by side with other state agencies which are not comparably structured and financed The statistics put that inequality into stark relief. The Comptroller's Office has 1,938 commercial bank examiners in the field examining 4,737 banks. On average, a field examiner handles $301 million in domestic bank assets and 2.4 banks. The FDIC has 1,798 field examiners jointly responsible for 9,064 banks; on average, each examiner is responsible for $204 million in domestic assets and 5 banks. The Federal Reserve Banks have 611 examiners jointly responsible for 1,029 banks, or $294 million in domestic assets and 1.7 banks per examiner. Those differing numbers reflect the different types of banks administered by the three agencies. As a basis for comparison, the more simple depository institutions, credit unions, utilize 318 federal examiners who handle an average of 40 federally chartered institutions per examiner but only $77 million of assets per examiner.
According to the Conference of State Bank Supervisors there are 1,918 state bank examiners who handle, jointly with the FDIC and the Federal Reserve Banks, 10.093 commercial banks with $547 billion in domestic assets. Thus, there are 5.3 banks and $285 million of assets per state examiner. But when we look at individual states, we see considerable disparities. For example, in New York, there is less than one commercial bank and an average of $490 million in assets per bank examiner. In Oklahoma there are 11 banks and only $157 million in assets per examiner. In Florida, the dollar value per examiner is identical to Oklahoma, but there are only 5.6 state banks to each examiner. In Ohio, there are 5.9 banks to an examiner, but the examiner is responsible for an average of $490 million in state bank deposits. Perhaps the disparity is due to the differing structures of state banks, but I am not sure that is the case. To view the problem in another light, it is my firm belief that in reality there is one large capital market in the U.S. which is linked in various ways to an even larger international capital market. Commercial banks, regardless of type of charter or structure, compete for the public's savings with various types of other financial intermediaries savings and loan associations, mutual savings banks, credit unions, insurance companies, consumer credit companies, public and private pension funds and the securities markets. Institutional specialization and varied legal environments prevent across-the-board competition. But competition really does exist among institutions. On the liability side, banks and thrift institutions of various types all compete for the public's savings. Banks offer a greater variety of specialized accounts and, as a result, control 65 percent of all monies placed in depository institutions in the United States. That is down 2 percentage points from 1971; $32 billion of potential growth lost to savings and loans or credit unions. Banks get the lion's share of corporate deposits because they offer demand deposits, but that business is the most vulnerable to the fine tuned efforts of modern corporations to hold minimal cash balances. On the asset side, banks compete with all other types of financial institutions for their share of business. Thus, the 14,698 banks compete with the 473
mutual savings banks and 4,858 savings and loans for the public's home mortgages. They compete with credit unions and consumer credit companies for the public's installment paper. And they compete with the commercial paper firms for the short-term debt of major corporations. They must now compete with foreign banks for American business in the increasingly important international money market. There is a single U.S. capital market with 42,637 depository institutions competing for their respective shares. Over $1 trillion is in the U.S. commercial banking system out of a total of $1,612 billion in the domestic depository market. The figures are truly imposing. But, despite the strength of the banking system, savings and loan associations have grown 38 percent faster in the last 5 years than have banks, and credit unions, with their small part of the market, have grown even faster, 63 percent faster, in the same time period. Each of the financial institution regulators is responsible for a segment of that complex market, with the SEC also involved in enforcing disclosure laws for investors. Although a more rational structure of regulation is desirable, what is eventually desirable may not be immediately possible. For example, there is a movement to broaden the powers of thrift institutions. I am in favor of that movement, provided we place all directly competitive institutions on the same basis. But, broadening the powers of thrifts, which possibly may result in a shift of resources to them, may diminish the power of the Federal Reserve Board to regulate the money supply. The financial structure of the United States is a vastly more complicated matter than the federal/state problem. There is a problem of segmented financial markets, each with its own special interests and its own dedicated supervision. As discussed in the portion of the supplement to this statement dealing with various recommendations for regulatory structural change, experts have proposed different solutions to the problem of an imperfect system. Several noted authorities have proposed a centralized Federal Bank Commission, such as provided in S. 684. Some proposals, especially the Hunt Commission recommendations, have been more comprehensive by addressing the roles of the financial institutions, as well as the regulators, in an integrated capital market. Last year, I made a proposal for a strong Federal Bank Commission for federally chartered financial institutions, which would be counterbalanced by a strong FDIC and a vigorous state regulatory structure. Although I continue to work for the ideal, I hope that the art of the possible will permit us to address immediately some of the pressing needs in that area. The Senate has taken a very important step in passing S. 71, and I hope that the House will complete action on a similar measure this year. Another important development has been this Committee's approval of the NOW account bill. Much work is needed to make the state financial systems and regulatory structures uniformly more effective. I do not have any easy answers to give you today. I shall, however, use my position as a director of the FDIC to help in developing new and improved measures to bring about the strengthening of the state system
In addition, I would request Congressional consideration of legislation concerning the present regulatory structure of bank holding companies, which continues to present problems. That system, with divided authority between bank regulators and the Federal Reserve System, has not always worked smoothly. A bank holding company shares common identity and assets with its subsidiaries. However, the Comptroller has no authority to issue cease and desist orders, to approve or disapprove applications or to take other supervisory measures against a holding company, even if the only subsidiary of the holding company is a national bank. Divided responsibility between the supervisor of the bank and the holding company has led to problems. Therefore, I recommend that the federal regulatory agency which is responsible for supervising the bank or banks which hold a majority of assets of a bank holding company also serve as the principal supervisor of that holding company. It is possible for a shifting of charters within a multi-bank holding company to result in undesirably frequent changes in regulators. To address that problem, I suggest that after the initial regulator has been determined by the majority of assets in a holding company, change of regulators would not occur unless two-thirds of the assets changed from one type of charter to another. As I have previously stated, creation of a monolithic regulatory agency at the present time would be unwise. However, closer coordination among the financial regulatory agencies is desirable to resolve any uncertainties that might exist in the regulated industries, to share improvements in financial regulation and to standardize examining techniques One of the means of improved coordination is through the Interagency Supervisory Committee, established in February 1977, a subcommittee of the Interagency Coordinating Committee. Already, substantive progress has been made in the following areas: 1. Uniform bank rating system There has been criticism, notably by the Government Accounting Office (GAO), because the three federal banking agencies utilize different approaches to the classification and monitoring of "problem banks." Progress is being made toward stan dardizing these approaches. 2. Shared national credits In certain situations involving a loan in excess of $20 million, a group of domestic banks may join in making the loan. Not all the members of the lending group may be banks supervised by the same federal banking agency. Under the terms of an agreement which already has been implemented, teams of examiners, representing the various agencies, inspect the lead banks and distribute their classification of the loan among the agencies. As part of a preliminary summary of the program's initial results, one agency has indicated a considerable savings of time on a recent examination of a large bank.
3. Uniform approach to nonaccrual loans – A uniform approach in defining nonaccrual loans and the application of that concept in the supervisory process were agreed upon by the subcommittee 4. Uniform approach to concentrations of credit A concentration of credit involves a group of loans to similarly situated individuals or companies by one bank. An interagency task force proposed a compromise definition of concentrations of credit for supervisory purposes which was adopted by the subcommittee. Implementation will take place via instructions to each agency's examining personnel, 5. Uniform trust department rating system -- An interagency joint training session for senior trust examiners of the three agencies is planned for this year. In addition, an interagency task force will study the trust rating system and report when substantive results are achieved 6. Consumer affairs The subcommittee has agreed to pursue a uniform consumer examination manual, procedures and training. An initial interagency training session has already been held in that area. 7. International banking Agencies have agreed to coordinate examinations of Edge Act corporations, foreign branches and foreign wholly-owned subsidiaries to achieve supervi sory objectives more efficiently and effectively. 8. Restitution The subcommittee has con cluded that a uniform policy with respect to restitution of overcharges is desirable and should be pursued through the agencies' respective offices dealing with consumer matters. If sufficient progress is not forthcoming on those and other matters of financial institution regulation and supervision, creation of a Federal Bank Examination Council would become more feasible. While S. 711 provides the framework for such an agency, the following changes in the bill would, in my opinion, improve its effectiveness. The membership should be expanded to include representatives from other regulators of financial institutions such as the Federal Home Loan Bank Board and the National Credit Union Administration and state bank supervisory agencies. That recommendation was also made by the GAO. The chair of the Council should rotate periodically among the Council members. That is another GAO recommendation. The possibilities for experimentation inherent in the present system should be preserved by making it clear that the recommendations of the Council would not be binding on the agencies. The GAO has presented an alternative which I consider to be satisfactory in the event that one agency does not consider a Council recommendation to be feasible. When a recommendation of the Council is found unacceptable by an agency, the agency must submit to the Council, within a time period specified by the Council, a written statement of the reasons that the recommendation is not acceptable.
Again, I would like to thank you for this opportunity
to present my views. Let me assure you of my desire to work with you and this Committee on all matters concerning the improvement of the financial system and its regulators.
Supplement to September 16 Statement by John G. Heimann
(In the interest of space, this is not a complete reproduction of the information submitted. It represents, however, the most significant portions. Complete data are available elsewhere. Item numbers have been altered to be consecutive.)
General Functions and Responsibilities of Supervisory Agencies
• Approval or denial of applications for mergers and acquisitions by state member banks and bank holding companies.
Office of the Comptroller of the Currency The Office of the Comptroller of the Currency (OCC) was established in 1863 as a bureau of the Treasury Department. It is headed by the Comptroller who is appointed by the President, with the advice and consent of the Senate, for a 5-year term. The OCC regulates national banks by its power to: • Approve or deny applications for new charters, branches, capital, or other changes in corpo rate or banking structure; • Examine the banks; • Take various supervisory actions against banks which do not conform to laws and regulations or which otherwise engage in unsound banking practices, including removal of officers, negotiation of agreements to change existing bank practices, and issuance of cease-and-desist orders; and, • Issue rules and regulations concerning banking practices, and governing bank lending and in vestment practices and corporate structure. The OCC has divided the country into 14 geographical regions, each of which is headed by a regional administrator The Office is funded through assessments on the assets of national banks.
The Board is aided in the formulation of monetary policy by the statutorily mandated Federal Open Market Committee, which consists of all seven Board members and the presidents of five Reserve Banks on a rotating basis. Implementation of policy decisions is carried out by the 12 District Federal Reserve Banks, each of which has operational authority within a specific geographical area. Each District Bank has a president and other officers, is under the general supervision of a nine-member board of directors and is an incorporated institution. The stock of the Banks is held by commercial banks that are members of the Federal Reserve System. All national banks must be members, and state-chartered banks may apply and be accepted for membership The funding for the District Banks is derived primarily from interest payments on federal government debt held by them. The funds for such investments are derived primarily from non-interest earning reserves which member banks are required to hold at the Reserve Banks. The District Banks pay assessments to the Board which are used to meet its expenses, with revenue in excess of expenses and dividends to stockholder-members paid to the U.S. Treasury.
Federal Reserve System The Federal Reserve System (FRS) was established in 1913. It is headed by a seven-member Board of Governors, each of whom is appointed by the President with the advice and consent of the Senate for a 14-year term. The President selects two Board members to serve 4-year terms as Chairman and Vice Chairman The Board establishes policies in the area of:
Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) was created in 1933 as the third federal bank regulatory agency. It is headed by a three-member Board of Directors, no more than two of whom may be of the same political party. Two of the Directors are appointed by the President with the advice and consent of the Senate for 6-year terms, and one of those two is elected by the Board to be Chairman. The Comptroller of the Currency is the third Board member and serves on the Board during his or her tenure as Comptroller. The FDIC was established to provide:
Design and implementation of monetary (and foreign exchange rate) policy; • Provision of a national funds transfer system; Provision of fiscal agent services to the federal government; • Examination, supervision, and regulation of state member banks and bank holding companies; and,
• Deposit insurance for banks, • Ongoing supervision of insured state banks (and mutual savings banks) that are not members of the Federal Reserve System; and, Page 10
Services as receiver of all closed national banks and insured state-chartered banks, if appropriate.
surance companies have applied and been accepted as members of the System. Federal Home Loan Banks provide credit and other services to member institutions. District Banks have three sources of funds: Subscription to their stock by member associa tions; • Sale of consolidated obligations; and, • Deposits by members.
Deposit insurance is provided through the maintenance of a fund which may be used for several purposes. It can cover deposits, up to the insured limit, in banks that have been closed; advance funds to facilitate a merger or absorption of a troubled bank; extend direct assistance to distressed banks through loans, purchases of assets, or deposits of funds; and maintain banking services in communities in which the failure of a bank has left inhabitants without such services, by establishing a "deposit insurance national bank." The bank supervisory functions of the FDIC are shared with state and other federal authorities. All national banks and state banks that are members of the Federal Reserve System must be insured by the FDIC. The FDIC examines and supervises those banks under its purview that are not examined by the other federal regulators, approves or denies their applications for structural or corporate changes and rules on applications for insurance. The FDIC has divided the country into 14 geographical regions, each of which is headed by a Regional Director. The Corporation is funded by assessments on average total deposits of insured banks.
The FSLIC, under supervision of the Board, insures individual accounts. All federally chartered savings and loan associations must be insured, and statechartered institutions may apply and be accepted for insurance. The FHLBB is funded by assessments on District Banks and the FSLIC, and by fees charged to the institutions it examines.
National Credit Union Administration The National Credit Union Administration (NCUA) was created in 1970 to charter, examine, supervise and provide insurance for all federal credit unions and those state-chartered credit unions which apply and are accepted for insurance. The NCUA is headed by a seven-member Board appointed by the President with the advice and consent of the Senate, for 6-year terms. The Board consists of a Chairman, named by the President, and one member from each of the six regions. Major responsibilities of the NCUA are
Federal Home Loan Bank Board The Federal Home Loan Bank Board (FHLBB) was established in 1932. It is headed by a bi-partisan three-member Board. Members of the Board are appointed by the President with the advice and consent of the Senate. Each member is appointed for a 4-year term. The Board is headed by a Chairman who is designated by the President. The Board regulates federally chartered savings and loan associations and supervises the Federal Home Loan Bank System and the Federal Savings and Loan Insurance Corporation (FSLIC). The Federal Home Loan Bank System is composed of 12 geographical districts, each of which has a District Federal Home Loan Bank. As with the Federal Reserve System, the District Banks are owned by their member institutions. In addition to federally chartered savings and loans, mutual savings banks and life in
• Chartering federal credit unions; • Supervising federal credit unions; • Examining federal credit unions; • Providing administrative services for federal credit unions; and, • Administering the National Credit Union Share Insurance Fund (NCUSIF).
The NCUSIF is the insurance fund for federal credit unions and other credit unions that apply and are accepted for insurance, much like the FDIC or the FSLIC programs. The NCUA is financed solely by funds received from federal credit unions for services performed.
Description of the Depository Institutions
Statistical Profile of Depository Institutions, 1971 and 1976 Tables 1 through 4 show the relative size of the significant categories of depository institutions for yearend 1971 and 1976 and present annual rates of growth over that 5-year period. Figures are presented for the number of branches, number of institutions and total assets of commercial banks, mutual savings banks, savings and loan associations and credit unions, according to primary regulator. Also, for each of the year-end tables, the proportion of the total for all
depository institutions, excluding credit unions, is given. Credit unions were excluded from that computation because their very large number but relatively insignificant assets would have made comparison with the larger depository institutions difficult. Commercial banks, holding $1,040 billion of a total of $1,612 billion in domestic assets, remain the most significant category of depository institutions. However, that 66.4 percent share of the assets of all banks and savings and loans is a decrease from the 68.6 percent share they held just 5 years earlier. In addition, FRB member banks have seen their share of the total market decline even more. National banks and state member banks combined held 54.5 percent of the assets of all major depository institutions at the end of 1971, but that share had decreased to 49.6 percent by the end of 1976. That sharp drop was only partially offset by an increase in the share held by state nonmember banks, both FDIC-insured and other, from 14.1 to 16.8 percent.
The decline in the relative importance of commercial banks has been caused primarily by the very rapid growth of savings and loan associations. During the 5-year period, total savings and loan assets grew at an annual rate of 13.73 percent, compared to 9.98 percent for all commercial banks and 8.52 percent for mutual savings banks. That rapid growth in assets was accompanied by an even greater growth in the average size of savings and loans and reflected, in part, the FHLBB's liberal branching policy. Although the actual number of savings and loans declined, the number of branches operated by savings and loans de
clined, the number of branches operated by savings and loans increased at an annual rate of 19 percent, much higher than the corresponding rate of 6.1 percent for commercial banks and 11.7 percent for mutual savings banks. Indeed, federally chartered savings and loans, which are solely under the supervision of the FHLBB, increased their branches at an annual rate of 25.1 percent. As a result, savings and loans increased their total share of assets from 21.9 to 25 percent, and their share of branches from 16.8 to 26.1 percent, at the same time that their share of number of institutions dropped from 27.7 to 24.2 percent. Only credit unions, which have not been included in the aggregate figures, grew at a more rapid rate. Their assets increased at an annual rate of 16.25 percent over the last 5 years, and reached $45 billion at the end of 1976. However, their average size remains small and their number has declined only slightly, to 22,608, which is more than the total number of commercial banks, mutual savings banks and savings and loan associations.
Table 1
Percent of all
Type of institution Commercial Banks: FDIC Insured National State Fed Member State Nonmember. Total FDIC Insured State non-FDIC Insured Total Commercial Banks.
13,322 3.821 6.163 23,306 64 23,370
Note. Includes depository institutions in Puerto Rico and U.S. Trust Territories: foreign assets are excluded.
Note: Includes depository institutions in Puerto Rico and U.S. Trust Territories; foreign assets are excluded.
Growth of Depository Institutions in the United States, 1971 to 1976 (Percent Annual Increase)
Table 4 Commercial Banks, Mutual Savings Banks and Savings and Loan Associations Including Foreign Operations of Commercial Banks, December 31, 1976
Note: Foreign assets of commercial banks include holdings of foreign branches and Edge Act and Agreement Corporations in the U.S.
as fiduciary agents for individuals, corporations and governments to provide investment services, estate management, pension management and all other forms of financial management which require a fiduciary relationship. Because of the increasing importance of the United States as the major power in international commerce and finance, approximately 150 large American banks have expanded overseas.
Commercial Banking Commercial banks constitute the major form of financial intermediary in the United States. The 14,698 commercial banks control approximately twothirds of all depository institution assets. They perform their intermediary function by accepting deposits of households, businesses and governments and lending them back to the same group and to foreigners. The two major liabilities of commercial banks are demand deposits (those subject to checking) and time deposits (those which are deposited at interest and are not withdrawable prior to 30 days or more after deposit). In providing funds for the borrowing public, banks provide a wide list of varied services. They provide short-term credit to both households and businesses, much of which is in the form of installment credit. Further, commercial banks purchase as assets various types of securities, primarily issued by various governmental bodies both federal and state and local governments. Although they provide many long-term loans, commercial banks typically prefer to maintain an average shorter maturity on their assets to coincide with the shorter maturity of their liabilities. Commercial banks provide long-term and mortgage loans to both households, businesses and governments, but that does not represent a major proportion of their assets. In order to expand their services, banks have developed, in recent years, highly specialized forms of lending via equipment lease financing, mortgage backed bonds, credit cards and other specialized forms of credit. In addition to their lending and depository functions, many banks offer trust services. Those banks act
Savings & Loan Associations The next most numerous depository institutions in the United States are the savings and loan associations. There are 4,858 such associations that control approximately 24 percent of all depository assets in the United States. Traditionally, the role of the savings and loan is to provide a safe place for community savings at interest and to use those funds to provide individual home mortgage credit based upon the collateral of family housing. In recent years, savings and loans have increased their functions so that they provide funds for all forms of real estate development, home improvement loans, trailers, education loans, and, in the case of some state associations, general consumer credit. The structure of the savings and loan industry is such that approximately 20 percent of industry assets is controlled by stock companies. The balance is in mutual organizations. In the three great credit crises over the last decade, the savings and loan industry has experienced serious problems of disintermediation — the process of investors removing funds from institutions at legally fixed Page 11
empowered, in most states, to provide many of the same credit services as commercial banks. Mutual savings banks are among the leaders of a program to provide more varied services to the public. They pioneered the introduction of NOW accounts and a more varied approach to lending. In the New England area, many mutual savings banks are the owners of allied commercial banks, often domiciled in the same building
rates of interest to take advantage of money market instruments at free market rates. The general thinking of both the industry and the government has been that the process of disintermediation could only be prevented by allowing the asset structure and the liability structure of the industry to become more varied. Thus, there have been several attempts, legislatively, to give the industry broader lending powers and a greater variety of deposit accounts to offer to their depositors. Savings and loans also are the direct beneficiaries of Federal Reserve Regulation Q which guarantees that they may pay one-quarter percent more on all forms of interest-bearing deposits than commercial banks. Mutual Savings Banks There are 473 mutual savings banks controlling approximately 8.5 percent of all assets in depository institutions. Mutual savings banks are concentrated most heavily in the northeastern part of the United States. These savings institutions pre-date the organization of the savings and loan industry. As savings banks, they were early promoters of small public deposits, not subject to check, on which interest was paid. While mutual savings banks are heavy providers of funds for mortgages, typically their portfolios of assets are much more varied than those of savings and loans. They do provide credit through the purchase of state and local bonds and are
Credit Unions A fourth form of depository institution is the credit union. There are 22,608 credit unions holding $45 billion in assets, approximately 3 percent of total assets in depository institutions. Credit unions are typically organized in a very simple manner. There is, invariably, a common thread between the depositors. Usually they are fellow-employees or union members who organize themselves to provide a common pool of credit. Usually, office space and, often, the clerical help are provided gratis by an employer. Almost all credit unions have, as a common practice, a rule that they lend only to depositors in the association. The majority of their credits are in the form of installment credit which rarely matures in more than 5 years. Recently, credit unions have expanded their activities to provide mortgage credit and to provide, experimentally, share draft accounts to deposit members.
Significant Aspects of the Financial Regulatory System
A review of the significant functions performed by the financial regulatory agencies is helpful in evaluating the present condition of the financial regulatory system and determining its strengths and deficiencies. The present financial system is defined by the vast body of laws, regulations and practices that have developed over the past 100 years. Different types of financial institutions have developed in response to market forces, specialized needs and governmental intervention in the market process designed to accomplish a particular national goal. As a consequence, the institutions developed specialties and the regulators have become as specialized as the institutions they regulate.
Examination by Federal Authorities There are 42,635 depository institutions in the United States which run the gamut from giant New York banks with numerous foreign and domestic branches to municipal employees' credit unions in Kansas. All of those financial intermediaries are conduits for the flow of savings from households, businesses, and government to the users of such funds. The financial history of the United States has revealed the vulnerability of financial institutions. As a result, our law, both state and federal, has mandated that such institutions be subject to examination and oversight by governmental authorities and that they operate in the public interest. The five major federal agencies which examine depository institutions employ approximately 5,600
commissioned and non-commissioned examining personnel. That total does not include headquarters personnel who are commissioned or noncommissioned examiners (totalling approximately 400 people). That is not an official census, and the numbers are not as of a coincidental date, but a number of a 6,000 examiners is accurate within 2 percent. As a rough guide, that means there is one federal examiner for every seven depository institutions. When the approximate number of state examiners is added, that proportion drops to five institutions per examiner. Examination of financial institutions has become a very specialized profession, with most federal agencies now having specialists in electronic data systems, international, trust and consumer examinations. The myriad types of examinations are so complex that it has been estimated that the Office of the Comptroller of the Currency, although the present statutory requirement is for approximately 7, 100 bank examinations annually, actually performs at least 26,000 examinations annually. That includes all consumer, EDP, international and trust examinations as well as all charter and branch investigations, all special visitations, and the bank-by-bank NBSS reviews performed by examiners. The other Federal agencies could develop similar statistics to show the incredible workload for supervising the nation's financial system. The last annual report of the Federal Home Loan Bank Board complains of the increasing load on its examiners and the difficulty of maintaining its examination cycle with its present work force.
The only agency that publishes any statistics regarding cost effectiveness of examinations is the Federal Home Loan Bank Board. In its annual report of 1976, the FHLBB demonstrates conclusively that the cost of examination per million dollars of savings and loan assets drops dramatically as the size of the institution increases. It takes only 14 percent as much time per million dollars of assets to examine the largest savings and loan as to examine associations with less than $25 million in assets. The Comptroller of the Currency's Office has undertaken a similar internal study of examiner productivity. It must be understood that a bank is a much more complex bundle of assets than most savings and loans, but the relationship in examination is similar to that shown by the Federal Home Loan Bank Board. For national banks, examination of the largest banks (those with more than $1 billion in assets) requires only 40 percent as much time per million dollars in assets as does examination of the smallest banks (those with less than $25 million in assets.) It is difficult to compare relative efficiencies of examinations by the Federal Reserve, the FDIC, the Federal Home Loan Banks, the OCC and the NCUA. There are enough small, but significant, differences to affect the cost of examination. For example, each Federal Reserve Bank hires its own examiners. Typically, those bank examiners are domiciled at the head office of the District Bank and they travel the total territory of the District. The Comptroller's productivity studies show that the farther the examiner has to travel, the more expensive the examination becomes. Other things being equal, examinations by the Fed would tend to be more expensive than those of the OCC. As As previously pointed out the cost of examination is primarily a function of the size of the institutions examined. Since the average size of Federal Reserve state member banks is larger than that of insured non-member state banks, the cost of an examination for the Fed would tend to be lower than that for the FDIC. Considering the number and size of credit unions, the relative cost to examine credit unions would probably be the highest of any of the depository institutions. Yet, credit unions are the simplest in structure. The many functions which are performed in commercial examination of banks and the more complex savings and loan holding companies would tend to influence cost totals. Each supervisor has a special group regulatees with differing characteristics
enforcement actions are taken. Such actions typically take the form of written agreements and cease and desist orders. Extreme sanctions, although usually impractical because of their draconian nature, are possible – the Comptroller's revocation of the charter of a national bank, the cancellation of deposit insurance by the FDIC, or cancellation of membership in the Federal Reserve System by the Federal Reserve Board Each agency has its own personnel and set of procedures to administer enforcement actions. Thus, there are different approaches to enforcement according to the practices of the agencies and the nature of the problems. The Comptroller's Office, for example, considers its examining force to be responsible for solving most problems. As a back-up resource, however, there are special are special staffs in Washington (the National Bank Surveillance System, the Special Projects Division, and the Enforcement and Compliance Division in the Law Department). Other agencies also have specialized enforcement personnel The difference in approaches is illustrated by the Government Accounting Office study of the banking agencies (January 1977) which indicates that from 1971 through 1976 the following formal actions were taken: Comptroller Fed FDIC Written Agreements 71 Cease and Desist Orders 20 9 67
The Comptroller's Office has previously supplied to the Congress, in testimony before the Senate Banking Committee, accounts of the formal actions taken by the Office against national banks from 1971 through 1976. (See Annual Report of the Comptroller of the Currency, 1976, pp. 211-214 and pp. 228-230 of this report) Because of the recent publicity in connection with the termination of formal agreements, it would be particularly useful to examine the different termination practices of the financial regulatory agencies. The primary responsibility for monitoring compliance with agreements and orders on national banks is placed with the 14 regional administrators. They are responsible for initiating additional supervisory action when significant areas of noncompliance are discovered. An evaluation form on compliance is also sent to the Special Projects Division in Washington. A decision to modify or terminate an agreement or order must be approved at three different levels within the Comptroller's Office. The modification or termination of agreements or cease and desist orders may originate either in a request from the involved national bank's board of directors to the regional administrator or in a letter from the regional administrator to the First Deputy Comptroller for Operations, with copies to the Special Projects Division and the Enforcement and Compliance Division stating that the bank has progressed to the point where modification or termination of the agreement or cease and desist order may be considered. Those two divisions evaluate the propriety of
Enforcement Activities The financial regulatory agencies deal with problems they uncover in the institutions they regulate with both formal and informal actions. Most of the time informal approaches, such as discussions between examiners and bank officers and directors and requests for periodic progress reports are sufficient to resolve the problems. When such actions are not successful or are not considered feasible, forma!
who has the final responsibility for terminating an order.
Bank Failures One of the major criteria for judging the effectiveness of the financial regulatory system is its ability to prevent bank failures. Even that measure is not without controversy, however. On one occasion, Wright Patman, who was known as a critic of banking and bank regulators, complained that the banking industry was not serving the public because there were not enough bank failures. Other observers have agreed that eliminating failures throughout all phases of economic cycles would severely reduce the amount of credit available to small businessmen, marginal neighborhoods and other borrowers who deserve credit. Nevertheless, financial regulatory agencies endeavor to limit failures with all the tools at their command. The principal causes of bank failure are:
the proposed modification or termination. Based on that evaluation, a joint recommendation is made to the First Deputy Comptroller on the appropriate disposition of the matter. At the direction of the First Deputy Comptroller, the Enforcement and Compliance Division prepares the documents necessary to terminate or modify the existing agreement or order. The Federal Reserve System, in response to a request to modify or terminate a cease and desist order, typically conducts a special examination to determine if the request should be granted. The results of that examination are forwarded to the Division of Banking Supervision and Regulation in Washington which makes a recommendation to the Board for an ultimate decision. Modification and termination of formal written agreements are handled by the various Federal Reserve Banks, subject to the concurrence of the General Counsel and the Director of the Division of Banking Supervision and Regulation in Washington. The FDIC initially handles requests for termination of cease and desist orders and formal written agreements through the appropriate regional office which makes a recommendation to the Director of the Division of Banking Supervision. That recommendation is sent to the Problem Bank Section of the Division of Banking Supervision and to the Enforcement and Compliance Section of the Legal Division for their review. A final joint recommendation is then made by the Associate General Counsel and the Director of the Division of Banking Supervision to the Board of Directors of the FDIC. At the Federal Home Loan Bank Board, the termination process for cease and desist orders begins with a request from a regulated association to either the District Director for Examinations or the Supervisory Agent. The recommendation of that official is reviewed by the Office of General Counsel and the Office of Examinations and Supervision in Washington. The case is then submitted to the Federal Home Loan Bank Board for final determination Supervisory agreements, relating to deficiencies in the federal insurance reserve requirement or in the net worth of a regulated association, can be entered into and terminated by the Supervisory Agent. Finally, at the National Credit Union Administration, the regional office can make a recommendation to either the Assistant Administrator for Examination and Insurance or to the Administrator that a cease and desist order be terminated. The matter is then reviewed by the Office of Examination and Insurance and by the Office of the General Counsel. A joint recommendation is then made to the Administrator,
Improper loans to officers, directors or owners or loans to out-of-territory borrowers. • Defalcations, embezzlement or manipulation. • Managerial weaknesses loan portfolio management
The Comptroller's Office, in testimony to the Senate Banking Committee on March 11, 1977, presented synopses of the causes of the eight national bank failures from 1972 to 1976. Imprudent and improper loans were at least contributory factors in all of those cases. (See pp. 231-234 of this report.) Bank failures are not the entire story. Each year there are banks that become troubled but that do not fail because of the efforts of the bank regulators. Such banks are noted because of their examination reports or through special surveillance techniques set up by their regulators. For some troubled banks, the solution is merely for the regulator to supervise more stringently and to come to agreements with the bank demanding that deficiencies or weaknesses be corrected. Other banks that are in more imminent danger of failure are often rescued through regulators' efforts to arrange mergers, purchases or holding company acquisitions. (See Table 5.) Some decisions are made under emergency provisions of federal law and may be recognized as attempts to rescue potentially failing banks. Table 6 shows such transactions for the Comptroller's Office and the FDIC, eliminating those banks considered to be failures because they required disbursements from the FDIC.
Table 5 Deposits in Failed Banks Requiring Disbursements by the Federal Deposit Insurance Corporation, 1960-1976
Table 6 Mergers or Purchases and Assumptions Consummated to Prevent Probable Failures, Approved by the Comptroller of the Currency or the FDIC, 1970-1975*
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Bank Holding Companies Under the Bank Holding Company Act of 1956 and the amended Bank Holding Company Act of 1970, the Federal Reserve System was granted primary jurisdiction over bank holding companies. Although the OCC has authority under 12 USC 481 to examine bank holding companies and most other entities affiliated with national banks (exceptions are statechartered banks, foreign banks and Edge Act and Agreement corporations), the Federal Reserve Board regulates them, i.e., issues cease and desist orders, approves or disapproves applications and assumes
other supervisory and regulatory responsibilities. National banks held nearly two-thirds of the deposits reported by all holding company groups according to the latest Federal Reserve Board statistics. In addition, national banks accounted for over two-fifths of all banks affiliated with bank holding companies. Both of those figures are considerably higher than the corresponding comparisons between national banks and all commercial banks, and leave little room for doubt that national banks are the most important single element in the overall structure of bank holding companies (see Table 7).
Table 7 Selected Banking Structure Statistics, U.S. National Summary, December 31, 1975
Source: Computed and compiled from data supplied by the Board of Governors of the Federal Reserve System, and from Table 104, FDIC Annual Report, 1975, with data adjusted to remove other areas.
The national bank affiliates of holding companies play an equally significant role in the National Banking System, for one out of every three national banks is a member of a holding company group and, collectively, those banks hold three-fourths of the deposits of all national banks. Hence, there would seem no need to argue further that actions in the holding company field must be monitored closely by the OCC in its role as administrator of national banks. On December 31, 1965, bank holding companies could hardly have been viewed as a major element in the American banking system. Multibank companies did control more than 50 percent of the deposits in a few states, but nationally they accounted for less than 7 percent of the offices and just over 8 percent of the deposits of all commercial banks. At the same time, only about 550 one-bank holding companies were known to exist. Most of those firms were relatively small and they were affiliated with comparatively small banks (average deposits under $30 million). As a result, the deposits of all holding companies, multibank ($28 billion) and one-bank ($15 billion), amounted to less than $43 billion, or 13 percent of the deposits of all U.S. commercial banks at the end of
During the following decade, the importance of the bank holding company in the financial system of this country changed radically. In just 10 years, the number of bank holding companies rose from about 600 (550 one-bank and 48 multibank) to over 1,700, and their deposits climbed from $43 billion to more than $527 billion. Thus, by year-end 1975, bank affiliates of holding companies accounted for nearly 50 percent of the offices and 67 percent of the deposits of all commercial banks in the nation (see Table 8). National banks are the most important single class of affiliates of bank holding companies. They not only hold nearly two-thirds of all holding company bank deposits but also, nearly four out of every five multibank companies includes at least one national bank. National banks play a less significant role in numbers in one-bank holding companies, representing only about one out of every three bank affiliates of those firms. But, given the modest size of most of the one-bank systems (particularly those that do not have a national bank as the banking affiliate), despite their large numbers, they constitute only a relatively small proportion of the total resources of all holding company groups.
Number of Bank Holding Companies, Subsidiary Banks, Total Deposits, and Deposits as a Percent of All Bank Deposits Year-end 1970-1975
* The number on the left includes companies that are subsidiaries of other holding companies, while the figure in parentheses eliminates such double counting and reflects the actual number of holding company groups. NA: Consistent data not available Source: Computed and compiled from data supplied by the Board of Governors of the Federal Reserve System.
National banks affiliated with bank holding companies comprise a greater percentage of each deposit size class above $25 million and a smaller percentage of each class below $25 million than do all national banks. Thus, since national banks on the average are already considerably larger than state
banks, the dominant role of national banks in holding companies is understandable. The percentage breakdown in Table 9 provides some perspective regarding the relative sizes of national banks in holding companies in contrast to all national banks and insured state banks as of year-end 1975.
Relative Sizes of National Banks in Holding Companies, Compared to all National Banks and Insured State Banks, Year-end 1975
Number of banks 1,515 4,741 9.631 Source: Calculated from data supplied by the Board of Governors of the Federal Reserve System, and from Table 104, FDIC Annual Report, 1975, with data adjusted to remove other areas."
From the viewpoint of the operations of the OCC. aggregate data are interesting, but perhaps more important is the regional distribution of the companies and their affiliated national banks. Table 10 gives a breakdown of the number of national banks in holding companies and their total deposits by OCC region. The data in Table 10 reveal that national banks in bank holding companies hold more than one-half of the national bank deposits in each of the 14 OCC regions, ranging from a low of 53 percent in region 4 to a high of 97 percent in region 14. Region 3 has by far the smallest percentage of national banks in holding
companies; yet those few banks hold some 60 percent of the total deposits of national banks in the region. The recommendation of recent Comptrollers of the Currency, and one with which I concur, is that bank holding companies be examined by the agency which is responsible for examining the preponderance of assets in the holding company. In order to determine the practical effect of such a change, Federal Reserve statistics on the individual bank holding companies as of mid-year 1976 were screened. All holding companies in the Federal Reserve report which held 15 banks or more in the holding company (39
Table 10 December 31, 1975 (Dollars in thousands)
Source: Calculated from data supplied by the Board of Governors of the Federal Reserve System and Assets and Liabilities - Commercial and Mutual Savings Banks, December 31, 1975, published by the FDIC.
companies) were selected. Rather interestingly, only one bank holding company of that group, Michigan National, was a totally one-way system. All of its 15 subsidiaries were national banks. All the other 38 holding companies studied were mixed. Of the holding companies selected, six holding companies could switch from one supervisor to another as a result of either a change in size of a subsidiary bank or by a change of charters. For example, Western Bank Corp. had 49 percent of its assets in national banks and a few national banks switching to state charters could tip the control under the proposed system to the Federal Reserve, since the preponderance of assets would then be in state member banks. The Ellis Banking Corporation of Florida has a slight preponderance of state nonmember banks and a few charter switches there could also cause a switch. Of the 39 bank holding companies selected, 32 show either a majority or a plurality of bank assets in national banks. Prior to the implementation of the new commercial examination procedures, the OCC had no national policy with respect to the examination of bank holding companies. No written or uniform policy existed in the regions, and philosophy and approach among regional administrators concerning examinations ranged from blanket coverage to indifference. With the implementation of the new examination procedures, written guidelines and procedures for examining holding companies were established. Minimum standards were specified and if, in the
performance of the financial analysis and review of transactions among affiliates, the full nature and extent of interaction between the bank and its related organizations cannot be determined, the examiner must consider the necessity of an in-depth examination of the related organizations. The examiner-in-charge should confer with the regional administrator before undertaking such an examination. Guidelines and procedures are also in place for the subsequent in-depth examination of parent companies and related organizations. (See "Related Organizations" in the Comptroller's Handbook for National Bank Examiners.) In 1970, the Federal Reserve was still debating its appropriate role as supervisor and regulator of bank holding companies. The debate centered around corporate structure issues - should parent companies and non-bank subsidiaries be viewed as banks and subject to banking-type regulations and review, or should their structure be viewed as separate from that of the affiliated bank(s)? On-site examinations were virtually nonexistent and no stated policies or guidelines were in place for monitoring holding company activities. The Beverly Hills Fidelity Bank case in 1972 and certain other events which occurred during 1972-73 began to resolve the debate for the Federal Reserve (Fed). The link between an affiliated bank, its parent company and non-bank subsidiaries was established and the Fed began expanding its supervisory efforts. As an , interim step, the Fed began on-site
examinations of holding companies on a priority basis. Those that evidenced some problem either from financial review or affiliated bank examinations would be examined first. All holding companies were to be "inspected" or "visited" at least once every 3 years. In 1976 the Board of Governors' Division of Banking Supervision and Regulation was reorganized "to provide for expanded and more effective staff surveillance of bank holding companies, particularly those with problems." On January 20, 1976, the Board sent out written guidelines for on-premises visits or inspections of operations and condition of all parent companies and significant non-bank subsidiaries. The Bank Holding Company Annual Report (FR Y-8) and the Bank Holding Company Financial Supplement (FR Y-6) were revised during 1976 to strengthen their use for monitoring and supervisory purposes. In particular, the FR Y-6 supplement was modified “to provide timely information in a form that will be used for quick monitoring of changes in financial condition of bank holding companies. During 1976, the Federal Reserve completed 395 on-site examinations, i.e., approximately 22 percent of all holding companies were examined during 1976. Of those 395 on-site examinations, 276 were full examinations and 119 were visitations. The OCC and the Federal Reserve System established written communication procedures
whereby prompt notification would be given to the appropriate regional offices of the respective agencies whenever deteriorating condition or questionable actions were revealed. Informal agreements and satisfactory working relationships between OCC regional offices and Federal Reserve District Banks exist in some, but not all, regions. In general, communication between the agencies tends to be better in the OCC regions where regional headquarters and Federal Reserve District Banks are located in the same city. In several OCC regions, the regional administrator would have to maintain a working relationship with two Federal Reserve District Banks. Three OCC regions overlap with three different Federal Reserve Districts. Coordination and communication, by nature of location, is more difficult in those regions.
Change of Regulators By Banks: the "Switching” Issue It has been charged that one of the defects in the present regulatory system is that banks change from one regulator to another on the basis of leniency in regulation Table 11 sets forth the changes in regulatory status from 1970 to 1976. The most obvious conclusion from these figures is that the absolute number of changes is quite small. In 1970, the year with the heaviest activity of this sort, only 0.7 percent of the institutions changed status. Even that figure is inflated because it includes
uninsured banks becoming insured, a change that is considered indispensable in today's banking climate. Another conclusion is that recent exits from the National Banking System and the Federal Reserve System indicate that the cost of Federal Reserve membership, rather than regulatory policies or more liberal laws, weighed heavily in the change. That subject was discussed extensively in a letter of April 6, 1977, from the Acting Comptroller of the Currency to Chairman Proxmire.
Innovations also occur in the regulatory process itself. While all agencies have contributed to advancement in the art of regulating, the following are some of the innovations initiated and implemented by the Office of the Comptroller of the Currency.
Innovations One of the major advantages of our economic system is that business responds to the needs of the public through innovations dictated in the marketplace. Although the financial industry is so closely tied to the public interest that it cannot be left completely to market forces, there should always be maximum opportunity for innovation. There are grounds for skepticism about such opportunities in an industry with a single regulator, but it would be useful to examine some of the advances under a dispersed financial regulatory system. The provision of capital to banks through the issuance of capital notes was first permitted by Comptroller of the Currency James J. Saxon in the early 1960's. In 1963, the Comptroller first authorized national banks to lease personal property to their customers. More recently, the Comptroller approved the Automatic Investment Service which permits persons of moderate incomes to invest systematically in common stocks. The Federal Home Loan Bank Board ushered in the EFTS era with approval of the "Hinky-Dinky" experiment in Nebraska. Those are only a few of the banking improvements authorized by the different agencies, but they are illustrative of alert regulators
1. Examination procedures have been completely revised to meet the requirements of more sophisticated banking practices. Capital adequacy, liquidity, and management factors are more thoroughly and systematically examined than in the past and the results have been very satisfactory 2. An "early warning system" (National Bank Sur veillance System) has been instituted which will use computer data to alert the Office to potentially dangerous positions in particular banks or in the National Banking System as a whole before they would have become apparent by the examination process. 3. An internal performance audit group, acting as our internal Inspector General, continually monitors the performance of the Office. 4. A new Human Resources Division has been es tablished to change the way the Office recruits, trains and rewards professional employees, the most important asset of the Office. 5. Examiners are now required to meet with the board of directors of each national bank at least once a year. 6. On August 11, 1977, Office procedures were revised to provide for the release and publication of interpretative letters issued by the staff so that staff interpretations will receive maximum distribution and be widely available to the public
Various Recommendations for Change
The diverse approaches to bank regulation and supervision, with their occasional lack of symmetry and consistency, have offended the sensibilities of some observers for many years. Recommendations for restructuring federal bank regulation can be traced back at least to 1919 and they continue to this day. Of 23 distinct proposals that have been identified by the Government Accounting Office (GAO) in its study "The Debate On the Structure of Federal Regulation of Banks” (April 14, 1977), five would place all federal bank regulation in the Treasury Department, four would place all in the FDIC, three in the Federal Reserve System and and seven in a federal bank commission. Four proposals would create other new agencies for financial regulation. Some of the suggestions involve savings and loan and credit union regulation, but most concern only commercial banking regulation. Although the GAO study provides a good source for detailed discussions of the proposals, I would
especially cite the Hunt Commission proposal and the so-called "Wille Interim Proposal” as examples. In 1971, the Hunt Commission recommended the establishment of a new agency, the Office of the Administrator of State Banks to examine and supervise state-chartered, insured commercial banks and mutual savings banks. The bank regulatory and supervisory functions of the Federal Reserve System and the FDIC would be transferred to that office. The Comptroller's Office would be renamed the Office of the National Bank Administrator and would be established as an agency independent of the Treasury Department, with the present powers of the Comptroller's Office to charter, examine and supervise federally-chartered commercial banks and would include mutual savings banks. A new agency, the Federal Deposit Guarantee Administration, would be established to incorporate the FDIC, the FSLIC and the insurance functions of the NCUA. The Wille proposal would continue the bank Page 13
Banks requiring special supervisory attention (See "Problem banks'') 237-240 de novo, applications for, by states, calendar 1977, 12 1977, 13 entering and leaving system, calendar 1977, 10, 11 examinations of overseas branches, 33 foreign, by region and country, December 31, 1977, 202 foreign, year-end 1960-1977, 203 number, by states, December 31, 1977, 6, 10, 11
Accountant's opinion, 47 216-218, 218-219, 219-234, 237-240 Action Control System, 212, 222, 222-223 Addresses and testimony of the Comptrollers Office, 205-263 Adequacy of bank capital, 231-232 Administration Department, 35-37 Administrative enforcement actions of OCC. in 1976, 228-230 in 1977, 18-23 for 1971-1976, 254 Ag-Land Fund, 216, 217-218 American City Bank & Trust Co, N.A., Milwaukee, Wisconsin, 232-233 Annual Percentage Rate (APR) disclosure, 241, 243 Anomaly Severity Ranking System, 212 Antitrust Division, 25 Assets of national banks: by asset size, year-end 1977, 196 in domestic offices, 1976 and 1977, 2 of foreign branches, 203 foreign and domestic, of banks with foreign operations, 201 at last report of condition, 1961-1977, 200 by states, December 31, 1977. 169-176 by states, June 30, 1977, 161-168 in trust departments, calendar 1977, 204 year-end 1967-1977, 198 213-216, 240-244, 263-265 234-237 Automated data processing standards for trust departments, 29
Bank examination. for consumer compliance, 24-25, 29, 39-40, 211, 214, 240 Comptroller's procedures for, 207, 208-209, 210, 211, 221-222 and dual banking system 244-245 during 1977, 15 by federal authorities, 253-254 federal council for, 27, 244 frequency of, 15 of holding companies, 260-61 of international operations, 31-32, 33, 210, 234-237 legislation on, 27 purpose of, 15 scheduling of, 210, 239 training for. 18, 23-24, 29, 32, 37, 40, 211, 212, 213, 214 of trust departments, 29, 30 Bank examiners comparison by agency, 245 for national banks, in 1977, 15 Bank failures. 208, 231-234, 255, 256 Bank holding companies: national banks in, year-end 1975, 258, 259, 260 regulation of, 246, 258, 259-260 Bank holding company regulation, 246, 258, 259-261 Banking regulation. and bank holding companies, 246 functions and responsibilities of agencies, 247-248 Bank Organization and Structure Division, 35
Capital adequacy of banks, 231-232 applications for conversion to national bank charter, by states, calendar 1977, 9 applications pursuant to corporate reorganizations, calendar 1977, 8, 148 issued for conversion to national bank charter, by states, calendar 1977, 9 calendar 1977, 8, 152 state-chartered banks converting to national, calendar 1977, 15 Civil money penalties, 26, 239 Clayton Act, 240 Close Supervision" banks, description of, 224 in 1975 and 1976, 225, 226 Competition in Banking Act, 27 Comptroller of the Currency, Office of accountant's opinion of, 47 assets of, 44 audit by GAO of, 26 and bank examination, 15, 210, 211, 240 bank ratings by, 223-224 Bank Organization and Structure Divisions, 35 budget system of, 35, 237-238 cease and desist powers of, 25-26 changes in financial position, 46 and collective investment by national banks, 217 compensation program, 36 Comptrollers' listed, 143 Consumer Affairs Division, 29, 39, 40, 213 and consumer complaints, 39, 214consumer protection activity of, 24, 39-40, 213-215, 240 Corporate activities guidelines, 209 Deputy Comptrollers, listed, 144disclosure by, 17-18 EDP Examination Division, 29 and electronic funds transfers, 216, 263 enforcement activities, 18-23, 212, 228-230, 254 Enforcement Division, 18, 29, 254, 255 equity of, 44 examination procedures of, 207, 208-209, 221-222, 223 expenses of, 45 and fair housing enforcement, 214-215 Finance and Administration Division, 35-36 Financial Accounting and Reporting Division, 35 financial operations of, 43, 46 Foreign Public Sector Credit Review Committee, 32, 234, 235-237
description of, 252 litigation on, 17
descriptions, 223-224 uniform system for, 246 Bank regulation. GAO report on, 207-213, 219, 223, 238, 246, 246-247, 254, 262 Bank regulatory system in U.S., 244, 247-248, 253-255 Banks changing regulatory status, 261-262 Page 14
Treasury Department, Office of the Comptroller of the Currency, Washington, D.C., November 30, 1979
Sirs: Pursuant to the provisions of Section 333 of the United States Revised Statutes, I am pleased to submit the 1978 Annual Report of the Comptroller of the Currency. Respectfully, John G. Heimann, Comptroller of the Currency. The President of the Senate The Speaker of the House of Representatives Page 15
1 Assets, liabilities and capital accounts of national banks, 1977 and 1978 2 Income and expenses of national banks, 1977 and 1978 3 National banks and banking offices, by states, December 31, 1978 4 Applications for national bank charters and charters issued, by states, calendar 1978 5 Applications for national bank charters pursuant to corporate reorganizations and charters issued, by states, calendar 1978..... . 6 Applications for conversion to national bank charter and charters issued, by states, calendar 1978 7 Branches of national banks, by states, calendar 1978 8 CBCT branches of national banks, by states, calendar 1978 9 De novo branch applications of national banks, by states, calendar 1978 10 De novo branches of national banks opened for business, by community size and by size of bank, calendar 1978..... 11 Mergers, calendar 1978. 12 Examinations of overseas branches, subsidiaries and EDP centers of national banks, 1972-1978 13 Outstanding external currency claims of U.S. banks on foreign borrowers, December 31, 1978. 14 Officer of the Comptroller of the Currency: balance sheets 15 Office of the Comptroller of the Currency: statements of revenue, expenses and Comptroller's equity. 16 Office of the Comptroller of the Currency: statement of changes in financial position Page 16
Table 2 1978 4,655 banks 4,564 banks Percent Percent Amount distribution Amount distribution
Operating income Interest and fees on loans $35,446.3 65.9 $45.997.7 67.8 Interest on balances with depository institutions 3,243.0 6.0 4,407.3 6.5 Income on Federal funds sold and securities purchased under agreements to resell.. 1,532.1 2.8 2.1978 3.2 4,532.0 8.4 4,721.6 70 2,929.6 5.4 3.252.1 4.8 640.1 1.2 693.2 1.0 Income from lease financing 5376 1.0 639.4 0.9 Income from fiduciary activities 1.131.3 2.1 1,214.8 1.8 Service charges on deposit accounts 986.9 1.8 1,089.5 1.6 Other service charges, commissions, and fees 1,566.6 2.9 1,932.2 2.8 Other operating income. 1,2433 2.3 1,696.9 2.5 Total operating income 53,788.9 100.0 67,8424 100.0 Operating expenses: Salaries and employee benefits 9,486.9 20.2 10,845.2 18.4 Interest on time certificates of $100,000 or more (issued by domestic offices) 4,031.5 8.6 7.021.9 11.9 Interest on deposits in foreign offices 7,123.0 15.2 10.139.7 17.2 Interest on other deposits 11,956.9 25.5 12,873.9 21.8 Expense of federal funds purchased and securities sold under agreements to repurchase 3,116,1 6.6 4,989.6 8.5 604.0 13 1,0231 1.7 202.7 0.4 234.3 0.4 2.851.1 6.1 3,194.3 5.4 Provision for possible loan loss 1.985.1 4.2 2.131.2 3.6 Other operating expenses 5,598.3 11.9 6,522.5 11.1 46,955.6 100.0 58,975.8 100.0 Income before income taxes and securities gains or losses 6.833.3 8.866.6 Applicable income taxes. 1,767.1 2,591.0 Income before securities gains or losses 5,066.3 6,275.6 Securities gains (losses), gross 52.5 - 253.5 Applicable income taxes. 16.0 - 125.2 Securities gains (losses), net 36.5 - 128.3 Income before extraordinary items 5,102.7 6.147.3 Extraordinary items, net 36.0 26.1 Net income 5,138.7 6.173.4 Cash dividends declared on common stock 1,993.2 2,194.7 Cash dividends declared on preferred stock. 1.1 1.4 Total cash dividends declared. 1.994.3 2.196.1 Recoveries credited to allowance for possible loan losses 503.9 685.9 Losses charged to allowance for possible loan losses 2,179.8 2,124.6 Net loan losses 1.670.9 1,438.7 Ratio to total operating income: Percent Percent Interest on deposits 43.0 44.3 Other interest expense 7.3 9.2 Salaries and employee benefits 17.6 16.0 Other non-interest expense 19.4 17.5 Total operating expenses 873 86.9 Ratio of net income to: Total assets (end of period) 0.64 0.69 Total equity capital (end of period) 11.4 12.5 * In 1978, this category was expanded to include all depository institutions, rather than just banks. † Most demand deposits of the US government were converted to "interest-bearing" demand notes issued to the US Treasury in late 1978 Page 17
South Carolina 5 7 South Dakota 3 3 0 Tennessee 43 6 Texas 0 Utah 0 Vermont Virginia 15 0 Washington 8 1 West Virginia 0 0 0 Wisconsin 64 22 17 Wyoming 0 0 0 District of Columbia - allt 1 0 0 0 * Customer-Bank Communications Terminal branches. t Includes national and non-national banks in the District of Columbia, all of which are supervised by the Comptroller of the Currency. Page 18
IV. Bank Examinations and Related Activities
As of December 31, 1978, the Office employed 2,254 examiners; 2,093 commercial and 161 trust. Included in these numbers are examiners specifically trained in computer operations and consumer affairs and regulation. These specialized areas are a part of the regular examination process.
The Office is responsible for examining all national banks and their affiliates. With the ever increasing demands placed on the OCC's limited resources, the Office has established a national policy on the frequency of on-site examinations. This policy combines on-site examination priorities with an off-site examination program, utilizing National Bank Surveillance System analysis, which will make the most effective contribution to the overall supervisory mission of this Office, Banks requiring special supervisory attention will receive on-site examinations at least twice annually, including at least one full scope general examination. Banks not requiring special supervisory attention, which have assets exceeding $100 million will receive one on-site examination at least annually. Banks with less than $100 million in assets that do not require special supervision will receive one on-site examination at least every 18 months. During the year ended December 31, 1978, the Office examined 3,432 banks, 1,040 trust departments, and 45 affiliates and subsidiaries and conducted 75 special supervisory examinations. During 1978, the condition of the national banking system continued to improve as measured by traditional standards. That improvement reflected the continued strength of the economy over the last 4 years. It must be stressed that the health of our banking system inevitably reflects the basic strength or weakness of the economy. Although the performance of individual banks may and does vary independently of overall economic conditions, the financial condition of the banking system as a whole is inextricably linked to the domestic and, increasingly, the international economy. Examinations of national banks are meant to provide an objective evaluation of a bank's soundness, to permit the Office to appraise the quality of management and directors, and to identify areas where corrective action might be required to strengthen the bank, improve the quality of its performance and enable it to comply with applicable laws, rules and regulations. To accomplish those objectives, the Office employs standardized examination procedures. Because banks are not identical, examiners, drawing on professional judgment and experience, may have to modify the application of those procedures to fit the circumstances encountered in each bank. The use of such procedures provides for the conduct of consistent and objective examinations of varying scope.
EDP Examination The EDP Examination Division and the Trust Examination Division are under the supervision of the Deputy Comptroller for Specialized Examinations. The Trust Examination Division is covered in this report under Fiduciary Activities of National Banks. The EDP Examination Division has made significant achievements during the past year. Supervision of data processing operations have improved through the expansion of the report review process at the regional and national levels. A review assistant has been added to the Washington staff. Quality control reviews have been improved and administrative follow up actions have expanded. For the first time, a formal career development program was initiated for the EDP examiner. A new title of Associate National Bank Examiner - EDP was established and certification in the EDP examination program has been achieved through the use of an associate examination. Training was improved through the use of formalized schools for all levels of examiners. In the area of interagency activities, the EDP Examination Division has cooperated with the other federal financial regulators in many ways. An Interagency Policy Statement was developed and implemented. The policy established joint examination procedures for joint EDP examinations and EDP report distribution guidelines. A Uniform Interagency Rating System for data processing operations was drafted. The OCC has joined with the Federal Reserve System and the FDIC in a major revision of the OCC EDP Examination Handbook and work program. The final products will be adopted by all three agencies as uniform examination procedures for data processing operations. Sister agency requests have also affected this division. The OCC has provided training for selected Federal Reserve and FDIC examiners in the use of OCC EDP examination procedures. In addition the National Credit Union Administration (NCUA) requested individuals within the EDP Examination Division to conduct an examination of NCUA'S computer operation at the Page 19
adopted amendments to 12 CFR 11, "Securities Exchange Act Rules," designed to make the Comptroller's regulations under the 1934 Act substantially similar to rules of the Securities and Exchange Commission (SEC), in a response to statutory mandate. Seven regional conferences were presented in Hershey (Pa), Cleveland, Chicago, Atlanta, Richmond, New York and San Francisco for the benefit of national banks having a class of securities registered with the Comptroller pursuant to the 1934 Act. The conferences were designed to assist banks in complying with the reporting requirements of the 1934 Act, and to inform them of proposed changes in 12 CFR 11 and various regulations of the SEC which will affect banks. The conferences also focused on compliance with the requirements of the Comptroller's "Securities Offering Disclosure Rules," 12 CFR 16, relating to the offering and sale by national banks of their securities. The division assisted the Trust Operations Division of the Comptroller's Office in federal securities law matters. It again participated in a seminar for trust examiners and a fraud seminar designed to help examiners recognize possible violations of Section 10(b) of the 1934 Act and SEC Rule 10b-5. The division assisted in the finalization of amendments to 12 CFR 9, "Fiduciary Powers of National Banks and Collective Investment Funds," relating to variable amount master notes, securities handling procedures, and the use by trust departments of material inside information available to the bank as a result of its commercial banking activities. The revision of 12 CFR 9.7(d), which requires national banks with fiduciary powers to adopt written policies and procedures to ensure that they will not use material inside information in connection with any decision or recommendation to purchase or sell any security, was adopted on February 16, 1978. The division assisted in the drafting of a new proposed regulation, 12 CFR 12, "Recordkeeping and Confirmation Requirements for Certain Transactions Effected by National Banks," in response to recommendations contained in the SEC report on bank securities activities. The proposal addresses the recordkeeping and confirmation requirements to be promulgated for national banks engaged in the purchase or sale of securities on the order of a customer. At the end of the year a final regulation had not been adopted. The division suspended trading in the stock of two national banks pending the public dissemination of information which might affect the market activity in, and the price of, the banks' stocks. The division assisted the SEC in several enforcement actions against national banks alleging violations of the federal securities laws. The division also had numerous meetings and discussions with the SEC on such matters as access to and disclosure of information contained in bank examination reports, activities of trust departments, and 1934 Act filings of bank holding companies which are parents of national banks. The division took a leading role in the initiation and negotiation of a consent decree against two national banks and an individual in a suit filed by the Comptroller as co-plaintiff with the Securities and Exchange Com
mission. This suit established a precedent, concurred in by the Department of Justice, for the Comptroller's Office appearing on its own behalf in civil actions initiated by it under the 1934 Act. Also, the division initiated the Comptroller's first civil injunctive action under the 1934 Act as sole plaintiff, alleging violations of sections 13(d) and 14(d) of that Act. A preliminary injunction was obtained and as of the end of the year the case was pending before the court for determination of final relief. The division, working closely with the Office's Investment Securities Division, instituted and pursued the first private investigation by the Comptroller's Office of the activities of a registered bank municipal securities dealer under the 1934 Act. At the end of 1978 the investigation was still in progress. In the administration of 12 CFR 16, the division processed approximately 120 offering circulars filed by national banks in connection with the public offering and sale of their equity or debt securities. In addition, the division responded to numerous requests filed under the exemptive provisions of the regulation. Regional Counsel have been assisted by the division in reviewing offering circulars of organizing banks. Legislative Counsel The principal responsibilities of the Legislative Counsel Division relate to the legal aspects of legislation. The subject matter covers virtually every area of the Office's jurisdiction and almost every legislative measure of interest to national banks. In addition, the division deals with matters of intergovernmental and operational interest. In connection with those general responsibilities, the division maintains such information as status of bills, reports on bills, press information and primary legislative documents as well as files on Public Laws passed in the current and immediately preceding Congresses. Division attorneys prepare testimony to be given before Congressional committees and letters of comment on pending bills to be sent to members of Congress. They draft legislation and write memoranda and briefing papers concerning various legislation. Division attorneys are in frequent contact with members of Congress and their staffs; personnel in Treasury, Office of Management and Budget and other federal and, occasionally, state agencies; Office staff in the regions and in Washington; and public representatives who want information on banking legislation. They also attend relevant hearings on the Hill and participate in meetings with Treasury and other agencies to consult on and keep abreast of legislation of interest to this Office. In addition, division attorneys speak to various groups, including bar associations, foreign bankers and Office staff, on legislative matters. The following are the legislative activities of the Second Session of the 95th Congress (1978) which are of significance to the Comptroller's Office.
Securities Investor Protection Act Amendment (P.L. 95283; May 21, 1978) - Provides customers of securities broker-dealers protection against losses which might occur as a result of the financial failure of brokerdealers.
Federal Banking Agency Audit Act (P.L. 95-320; July 21, 1978) - Provides for an audit by the General Accounting Office of the Federal Deposit Insurance Corporation and the Comptroller of the Currency.
Title 1--Supervisory Authority Over Depository Institutions This Title, which is the cornerstone of the bill, increases the extent of specific powers the OCC may exercise in supervising national banks. It provides for civil money penalties, cease and desist orders against individuals, expanded grounds for removal of officers and directors and immediate suspension of insiders indicted for crimes involving dishonesty or breach of trust. It restricts overdrafts to executive officers and directors, and places limitations on loans to insiders. It also provides that the Federal Reserve may order divestiture by a bank holding company of subsidiaries which endanger the holding company's safety and soundness.
International Banking Act of 1978 (P.L. 95-369; Sept. 17, 1978) — Establishes a system of federal regulation of foreign banking activities in domestic markets. Chartering and examination of foreign-owned federal branches and agencies are the responsibility of OCC. The law permits interstate branches of foreign banks (1) for branches existing on or before 7/27/78, (2) for branches whose deposit-taking powers are restricted to internationally-related transactions permissible for Edge Act corporations, (3) for federal branches when permitted by the state in which it is to be operated and for state branches with the approval of the state regulatory authority. Federal branches and agencies are to be subject to reserve requirements. FDIC insurance is required for domestic deposits but is limited to foreign banks which accept retail deposits less than $100,000 FDIC may waive that requirement if the branch is exclusively engaged in wholesale banking, even though it accepts deposits under $100,000. The nonbanking activities of foreign banks and foreign companies are subject to the restrictions of the Bank Holding Company Act but such activities, including securities affiliates, in existence prior to July 26, 1978, have been permanently grandfathered. The Federal Reserve Board is authorized to terminate the grandfather status of any company after December 31, 1985, pursuant to its powers under the Bank Holding Company Act. Securities activities of federally chartered foreign branches and agencies are subject to the same restrictions that apply to national banks under the Glass-Steagall Act. The law authorizes a study of the treatment of American banks overseas and a review of the McFadden Act's prohibitions on interstate branching by commercial banks.
Title 11 — Interlocking Directorates This Title prohibits management interlocks among depository institutions in the same SMSA or in the same or adjacent city, town or village. Depository institutions with less than $20 million in assets are restricted only in the same or contiguous or adjacent city, town or village. All management interlocks between depository institutions or holding companies with $1 billion in assets and another institution or holding company with $500 million or more in assets are prohibited regardless of geographical location. Existing interlocks are grandfathered for 10 years. OCC is given rulemaking authority under the Title
Title Ill--Foreign Branching (FDIC Housekeeping Amendments) This Title, which pertains primarily to the FDIC, also contains provisions applicable to OCC. Antidiscrimination standards are extended to foreign banks operating in the U.S., and representation of such compliance must be made to OCC before applications for charters are granted to foreign banks. In addition, this Title brings OCC employees under the federal criminal statute, 18 USC 1114, dealing with assaults on employees engaged in official duties. Finally, the FDIC is given additional general rulemaking authority
Title IV-American Arts Gold Medallions This Title authorizes the public sale of governmentissued gold medals.
Ethics in Government Act of 1978 (P.L. 95-521; Oct. 26, 1978) - The Act contains requirements to file reports disclosing personal financial information on officers or employees of the three branches of the Federal Government at grades GS-16 or above, and certain other employees. It is to take effect January 1, 1979. It establishes a special Office of Government Ethics to direct executive branch policies relating to the prevention of conflicts of interest. It places limitations on postemployment activities of executive branch employees; July 1, 1979 is the effective date for that provision. Finally, the Act sets out new procedures for appointing a special prosecutor whenever the Attorney General believes that high level executive personnel have violated federal criminal laws, and establishes an Office of Senate Legal Counsel to defend the Senate in any court proceedings.
Title V-Credit Union Restructuring This Title establishes the National Credit Union Administration with a board consisting of three members Its activities are to be financed by fees rather than Congressional appropriations.
The Financial Institutions Regulatory and Interest Rate Control Act of 1978 (P.L. 95-630; Nov. 10, 1978) - The following is a brief summary of each title as it affects OCC.
Title VI-Change in Bank Control Act This Title authorizes OCC to disapprove changes in control of national banks within 60 days of filing. Disapproved parties have a right to a formal hearing. The Title sets forth what information will be required and grounds for disapproval. The Title also provides for civil money penalties of $10,000 a day.
Title XI-Right of Financial Privacy This Title protects the financial records of bank customers from certain government seizures. Civil money penalties, damages to the customer and costs are provided for in this Title.
Title XII-Charters for Thrift Institutions This Title permits mutual savings banks to convert to a federal charter and become subject to supervision and regulation by the Federal Home Loan Bank Board.
Legal Advisory Services Division During the year 1978, the Legal Advisory Services Division received approximately 1,900 written inquiries and 3,800 consumer inquiries. Those figures represent only written assignments for which a control sheet was prepared. They do not include the large number of telephone calls, interim correspondence or supporting memoranda required for many inquiries. Members of the division also participated in numerous meetings with bankers, banking lawyers, consumers, federal and staff regulatory authorities and representatives of other branches of the federal government to discuss various topics affecting national banks. During the year the division participated in the writing of regulations and rulings which were published in the Federal Register. Some of the proposed regulations concerned leasing of bank premises, flood insurance, enforcement of Regulation B, separation of the commercial department of a bank from its trust department, hearing procedures for the removal of bank officers (12 CFR 24), Community Reinvestment Act Regulations (12
Title XIII- NOW Accounts NOW accounts are permitted for New York financial institutions, effective upon enactment.
Title XIV-IRA and Keogh Accounts This Title increases deposit insurance on IRA and Keogh Accounts from $40,000 to $100,000.
Title XV - Miscellaneous Provisions The provisions of major interest to OCC in this Title
CFR 25) and application procedures and interpretive rulings on real estate loans, charitable contributions and other real estate owned. The division also assisted in the publication of the amendments to 12 CFR 11 and 12 CFR 12. Toward the end of the year, a proposed revision of 12 CFR 1, governing investment securities, was developed. It was published in the Federal Register on January 3, 1979. The revision, if adopted, should result in a savings to OCC of approximately $13,000 per year in publishing costs. Significant letter rulings issued by the division interpreting OCC statutes, rulings and regulations are issued each month and published by various loose-leaf reporting services. Division attorneys also served on various task forces and committees which considered such areas as the Equal Credit Opportunity Act, Comptroller's conflicts of interest issues, civil service matters, and implementation of the Financial Institutions Regulatory and Interest Rate Control Act of 1978. A number of special assignments were undertaken by members of the division staff. One staff member participated in the President's Personnel Interchange Program as the Treasury Department's representative. Another served as Special Assistant to the Chief Counsel for a 6-month period. The paralegal unit responded to a record number of inquiries from consumers. The unit received 3,760 new consumer inquiries during 1978, of which 1,627 were referred to regional offices. During that same period, 2,061 such inquiries were resolved; 209 remained pending as of the end of the year. Some 4,186 consumer assignments were processed and resolved during 1978 with the help of the paralegal unit. That number includes new inquiries, inquiries pending from 1977, and inquiries referred to regional offices or other agencies.
• Reimbursement by officers and directors for los ses resulting from violations of law or from im proper, self-serving transactions. • Reimbursement for excessive salaries and for im proper expenses. tions, including the violations of consumer laws. • Hiring of independent counsel or auditors to re view questionable insider transactions. • Prohibitions relating to GNMA standby forward placement contracts. As in previous years, the division participated in examinations and investigations of white collar crime leading to criminal referrals to the U.S. Department of Justice. In one particular instance, a national bank examiner uncovered a large volume of unexplained and unsupported travel and entertainment expenses. Through the use of subpoenas and depositions, it was established that the chief executive officer had charged lavish amounts of personal expenses to his bank. This information led to the individual's resignation of his position as chief executive officer and chairman of the board, sale of his controlling interest in the bank, and reimbursement of the bank for personal expenses charged to the bank. The division also coordinated, with several other agencies, an investigation and the institution of a civil action against two national banks and an individual involving violations of federal securities laws. The settlement of the case required the banks and the individual to cease the objectionable practices and to take affirmative actions to correct the conditions resulting from those practices. During the course of 1978, the division conducted three seminars to give national bank examiners intensive exposure to the investigation, documentation and reporting of fraudulent transactions in financial institutions. The seminar included presentations on conducting an examination into fraudulent transactions, criminal statutes; testifying, interviewing and taking depositions; writing criminal referrals; and actual and hypothetical cases involving fraud within banks. The seminars were open to the other federal and state banking agencies. The division established communications with various foreign commissioners of banks to promote cooperation with respect to frauds being perpetrated on United States banks and citizens through the use of offshore shell banks. Listed below is a short summary of each administrative action initiated during 1978. (Similar detail is available for 1977 on pp. 18-23 of the Annual Report for that year.)
Enforcement and Compliance Division For the second consecutive year, the number of formal administrative actions under the Financial Institutions Supervisory Act increased 50 percent over the preceding year. The administrative actions dealt with such areas as violations of laws, rules and regulations; abusive insider transactions; poor managerial practices; and general unsafe and unsound practices and conditions. The actions required such items as: • Reviews of bank correspondent accounts, direc tor and officer remuneration, management capabilities, lending and investing policies, earn ings and capital position. • Prohibitions against preferential transactions by insiders, payment of checks drawn against uncollected or insufficient funds, extensions of credit to particular individuals and extensions of credit out side the bank's trade area. • Increases in equity capital, liquidity and allow ance for possible loan losses. salaries. • Limitations on the lending and investing authority
1. A Notice of Charges and a Temporary Order to Cease and Desist were served which prohibited the bank from violating its legal lending limits; from making loans to any borrower whose loan had been criticized; from granting loans which were unsupported by current and adequate credit information: from violating Federal Reserve Regulation Z or 12 CFR 23; and from allowing the chief executive officer of the bank to grant or approve any extension of credit, to sell or purchase any loan participation, or to make investments on behalf of the bank without the specific, prior written approval of the Board of Directors. While the proceedings were pending the
bank converted to a state charter. 2. An Agreement prohibited violations of the bank's legal lending limits and loans to any borrower with criticized credit. The bank was ordered to hire a qualified and capable chief executive officer and the Board was told to submit a written program to augment capital. The Agreement proscribed favorable treatment in the use of bank assets and facilities by officers, directors, or 10 percent shareholders of the bank. The bank was to reduce concentrations of credit; improve its liquidity position; obtain adequate credit information and collateral before granting new loans; increase reserves; and implement internal control and investment policies. 3. An Agreement required the correction of all viola tions of legal lending limits and prohibited loans to officers and directors in violation of 12 USC 375a. The Board of Directors was called on to raise equity capital; to evaluate the reasonableness of all remuneration to the bank's officers and directors for services rendered; and to review all of the bank's correspondent accounts with other financial institutions. Bank reserves were to be raised; criticized assets and loans were to be curtailed, if not eliminated entirely; and full credit information was to be demanded on loans, as was prompt collection. 4. An Agreement prohibited violations of the bank's legal lending limits; proscribed loans to any borrower whose loan had been criticized; and ordered that no loan be granted unless supported by current satisfactory credit information. Additional capital was considered crucial to the future well-being of the bank. The bank's latitude in declaring dividends was circumscribed and the bank was directed to implement its existing internal audit procedures. An independent accountant was to assess the reasonableness and legitimacy of all remuneration and benefits tendered to bank officers within the preceding 12 months. A new loan and investment policy was to be implemented; a new senior lending officer was to be added to the existing staff; and reserves were to be maintained at an adequate level. 5. An Agreement prohibited violations of the bank's lending limits. Loans in violation of 12 USC 3710 were proscribed and any loans made for the benefit of an affiliate of the bank were to be approved by a majority of the Board of Directors. Elimination of assets from critical status was requested; the further extension of credit to any borrower whose loans had been criticized was severely circumscribed; and improved collection of, and a reduction in the level of, delinquent loans was ordered. Complete credit information was required on all loans, as was a revision of the bank's written lending policy. A program to increase the equity capital of the bank and a program to improve the bank's earnings and liquidity position were also required.
6. An Agreement proscribed loans in excess of the bank's lending limit. The Board of Directors was instructed to raise the equity capital of the bank, to provide the bank with a qualified and capable senior lending officer, and to evaluate the reasonableness of all remuneration and benefits tendered to the bank's executive officers within the prior 2 years. A written forecast of the bank's financial operations for the year was to be submitted, outlining the Board's plans to restore the bank's operations to a sound and profitable basis. Improvement of the bank's liquidity position, augmentation of the bank's reserves for bad debts, and a new loan policy were requested. Current and satisfactory credit information on all loans was required, as was the elimination of all assets from criticized status. An independent audit of the bank was ordered within 120 days. 7. An Agreement prohibited the bank from extending further credit to any borrower whose loan had been criticized and forbade the violation of the bank's legal lending limit. An internal audit of the bank was ordered to assess the reasonableness and legitimacy of all remuneration paid by the bank to its officers during the prior 12-month period and to determine if restitution was appropriate. Elimination of internal control and audit deficiencies was required, as was the adoption of a safe and sound written loan policy and the maintenance of an adequate loan valuation reserve. The Board of Directors was also required to secure additional equity capital for the bank and to remove all assets from classified status, with particular attention to substandard loans to insiders' interests. The Board was to submit the bank's 1978 budget with pro forma financial exhibits and liquidity projections, and was to evaluate all fees paid by the bank to insiders. All correspondent accounts with other financial institu tions were to be reviewed. 8. Violations of the legal lending limits were pros cribed and the Board of Directors was to ensure that the bank obtain indemnification from responsible directors for any losses on loans granted in violation of 12 USC 84. The bank was also prohibited from granting any preferential loans or overdrafts or from holding cash items in abeyance for the benefit of officers, directors or their interests. No transactions from which any officer or director derived personal pecuniary benefit, other than as reasonable compensation for normal services performed in the ordinary course of employment, were permitted without the prior written approval of the regional administrator. A senior executive officer with authority over lending was to be appointed The Board was to develop a program to improve the bank's profitability and its liquidity position and was to review the bank's investment and loan policies. The bank agreed to eliminate criticized assets, to obtain full credit information and to obtain an independent audit. 9. The bank was prohibited from extending credit to any borrower whose residence or principal place of Page 20
24. An Agreement addressed the bank's major prob lems, including a substantial increase in classified assets, numerous violations of law, marginal capit al, earnings and liquidity. 25. A Notice of Charges and a Temporary Order to Cease and Desist required that in the future banking fees for appraisal and loan origination be disclosed pursuant to Federal Reserve Regulation Z and that such fees be paid directly to the bank. 26. A stipulated Cease and Desist Order required the bank to submit a program to increase equity capital, to refrain from paying dividends without prior approval by the regional administrator, and to review and evaluate the reasonableness of salaries paid to directors and executive officers based on their services rendered to the bank. 27. An Agreement was made with the bank to formulate and institute programs to increase equity capital, augment reserves for possible loan losses, improve the bank's asset and liability posture, and eliminate deficiencies in internal and audit control. The bank was prohibited from lending in excess of legal limitations and from lending to borrowers with criticized loans. The bank was further ordered to reduce all excessive loans, correct all violations of law, recover from the directors all losses from loans knowingly made in violation of 12 USC 84, and take all necessary steps to remove loans to officers from criticized status. Loan and investment policies were to be reviewed and supplemented. The bank was forbidden to pay employees on the basis of the bank's gross income without first adjusting for possible loan losses, securities or non-recurring gains or losses, and income taxes. 28. After a Notice of Charges was served, a Temporary Order to Cease and Desist was issued prohibiting a specific bank officer from extending loans, authorizing expenditures, investments, selling or exchanging bank assets, borrowing in the bank's name, participating in the bank's contracts, bookkeeping, and hiring and firing personnel. The bank was forbidden to extend credit to borrowers with criticized loans. The bank contested the issuance and scope of the Temporary Order in federal district court, after a hearing. The court denied the bank's petition for a temporary restraining order against the Comptroller and sustained the issuance of the Comptroller's Order. 29. An Order to Cease and Desist prohibited a specific bank officer from extending loans and employing or removing personnel. The bank was ordered to appoint a new chief executive and a cashier, and to define and limit the duties, salaries and bonuses of executive officers. Loans were to remain within the legal limitations, excessive loans were to be reduced, and all criticized assets were to be removed from criticized status. Loans to borrowers with criticized credit were forbidden. Lending policies were to be reviewed and new ones submitted to the regional administrator. An audit by an independent auditor was ordered and deficiencies in internal control and audit were to be corrected. Capital
structure was to be strengthened and augmented with the incorporation of a budget. Employees were to receive training in consumer law. 30. An Agreement addressed the major problems of low liquidity, poor lending practices, inadequate documentation of loans, loans without repayment schedules, and a high level of classified loans 31. An Agreement ordered the bank to appoint a new chief executive officer, define the duties of senior management and establish a reasonable compensation plan. Policies on loans and overdrafts were ordered to be the same for all persons. Credit concentrations were to be reduced. A new loan policy was to be established limiting the amounts of loans to insiders, preferential interest rates, the bank's trade area, its concentrations of credit, and certain purchases of loan participations. The bank was commanded to eliminate deficiencies in internal control procedures and to prepare a policy for the payment of expenses. Loans were to remain within the legal limitations, and certain loans were to be reduced and collected. Specific questionable expenses were to be examined with compliance reported to the regional administrator. Only legal political campaign contributions were authorized. A shareholder list was to be made and out-of-territory loans were to be reduced. 32. An Agreement was entered into with the bank to augment equity capital, reduce reliance on ratesensitive funding sources and increase core deposits. A budget was to be implemented, major assets were to be removed from criticized status, and loans were not to be made to borrowers with criticized credit. A new senior lending officer was to be hired. All fees, bonuses, salaries, or remunerations paid to Board members were to be eliminated, except those to the full-time president, until the bank's earnings and capital warranted such payments. The validity of certain expense payments was to be examined and the repayment of all expenses unrelated to the bank's business was to be secured. The bank was ordered to increase and maintain adequate reserves for possible loan losses, to eliminate deficiencies in internal control policies, to provide fidelity insurance coverage in the appropriate amounts, and to fill vacancies on the Board of Directors. Loans exceeding the lending limitations were prohibited and excessive loans were to be reduced. 33. An Agreement required an outlining of the authority of the bank's chief executive officer, the removal of all criticized assets, and the prohibition of loans to borrowers with criticized credit. The loan valuation reserve was to be increased, as was the liquidity percentage, and an adequate capital structure was to be maintained. The bank was further ordered to correct the deficiencies in its data processing sub sidiary 34. An Agreement ordered the appointment of a new senior loan officer to formulate a plan detailing the authority and duties of each lending officer. New loan policies and audit procedures were set forth Page 21
the reserve for possible loan losses. The bank was ordered to take action to eliminate assets from the criticized list. A loan policy was to be written, with attention to overdraft handling procedures. Loans made to directors, officers and major shareholders were to be on the same terms as to other persons. A sound investment policy and a budget were to be formulated. Deficiences in internal control and audit were to be eliminated. 52. An Agreement detailed the duties of the chief execu tive officer, ordered the elimination of all criticized assets, and limited loans to borrowers with criticized credit. A review of the loan policy and a strengthening of the capital structure was demanded. A budget to restore earnings to the bank and an assetliabilities plan were to be written. An audit was ordered to correct deficiencies in internal audit and control. 53. A Permanent Cease and Desist Order limited the power of a member of the Board. A determined amount of equity capital was to be added to the bank's funds and the legal lending limit was not to be exceeded. Loans to borrowers with criticized credit were not to be made. A daily liquidity average was ordered. Monthly balance sheets were to be submitted to the regional administrator. 54. An Agreement prohibited violations of the bank's lending limit, required corrective action on outstanding violations, and specified the Board of Directors' liability for ultimate indemnification of the bank for losses on illegal loans. A new chief executive officer and senior lending officer were to be hired and provided with written job descriptions. After a full audit by an independent auditor, the bank was to adopt a written internal audit program. A written lending policy was required and criticized loans were addressed. Finally, certain technical changes were required in the trust department. 55. An Agreement addressed the serious problems the bank faced with high operating expenses and net losses for the previous 2 years. A plan to replace $1 million in subordinated debt was required, as was a program to improve the bank's earnings. Quarterly reviews of reserves for possible loan losses were mandated and further extensions of credit to criticized borrowers were prohibited. Collection efforts were required, as was a review of current management adequacy. Failure to comply with the Agreement within 90 days would require the submission of alternate proposals, including the possibility of sale or merger. 56. Notices of Charges were served on six banks who 57. had rejected prepared Agreements because they 58. were unwilling to admit responsibility for violations 59. of 12 USC 371c. The banks suffered from inadequ60. ate capital, very high criticized assets, violations of & law, poor lending practices, and inadequate re61. serves for possible loan losses. After extensive set tlement negotiations but before administrative hearings commenced, the banks converted to state charters. 62. An Agreement required the appointment of a new
chief officer and the drafting of a new loan policy addressing the restructuring of old loans, geographic limitations, and Regulation B compliance. All criticized assets were to be eliminated and loans to borrowers with criticized credits were prohibited. Collection of charged-off assets was instituted. A review of the reserve for possible loan losses was to be conducted and a new budget and equity capital program were to be written. 63. An Agreement required no further extensions of credit in violation of the legal lending limit and increased collection efforts to reduce excessive loans already outstanding. Criticized assets were addressed and further lending to criticized borrowers was prohibited. A plan to improve earnings and augment capital was mandated and a new lending policy was required. Internal controls were addressed and liquidity was to be increased. The reserve for possible loan losses was to be reviewed quar terly and all violations of law were to be eliminated. 64. An amended Agreement to correct all violations of the law was entered into with the bank. The bank agreed to formulate a program to increase the earnings of the bank; to maintain asset, deposit, and net loan ratios below certain levels; and to improve the capital position of the bank. A review of the trading account policies and accounting and control procedures was required. Criticized assets were to be eliminated and loans to borrowers with criticized credits were prohibited. An audit was to be conducted. The reserve for possible loan losses was to be reviewed and a report on it submitted to the regional administrator. 65. An Agreement dealt with lending policy, criticized assets and reserves for possible loan losses. 66. An Agreement required restitution by specific insid ers, particularly one bank official. The bank's independent auditor was to conduct an investigation into the scope of the abuses and the Board of Directors agreed to seek reimbursement. The President resigned and was prohibited from involvement in bank affairs without the specific approval of this Office. Internal procedures and controls were adopted to prevent future insider abuses and a written policy limiting insider borrowing was adopted. 67. An Agreement required an increase in the capital accounts of the bank and a program for assetliability management. Loans and the level of ratesensitive funds were limited, and an oversight committee was appointed to supervise compliance with this requirement. The bank was prohibited from acquiring obligations for the benefit of insiders. Criticized assets were to be eliminated and loans to borrowers with criticized credit were forbidden. Dividends were not to be paid until the bank had complied with 12 USC 60 and had received approval of the regional administrator. 68. An Agreement required reimbursement of chief ex ecutive officer's salary and of any expense item found to be unrelated to legitimate bank business, the appointment of a new chief executive officer, Page 22
VII. International Banking and Finance
World output and trade continued to increase in 1978 after the most severe recession since the 1930's, but recovery in the domestic economies of the industrial world remained hesitant except in the United States. Unemployment persisted and, despite some easing in Europe and Japan, high rates of inflation continued to impair economic performance in many industrial and primary producer countries. Inequalities in rates of economic growth and inflation, especially between the United States and several other major industrial countries, led to a maldistribution of current account balances among major industrial countries, instability in exchange markets, and depreciation of the U.S. dollar during 1978. Inflation and depreciation of the dollar caused the United States to implement policies of monetary and fiscal restraint and to take action to quell exchange market disturbances. Europe and Japan implemented economic recovery programs during 1978 which, combined with the gradual U.S. economic slowdown and the resultant cut in the American trade deficit and inflation rate, could increase world trade and stabilize world currency values. In the prevailing inflationary environment, however, industrial countries fear expansionary policies might fuel further inflation. Following the late 1973 oil price increases, impetus to increased international business by commercial banks was provided by (1) OPEC countries' investment in the international banking system, especially in the Eurocurrency market and (2) the increase in oil-importing countries' balance of payments financing needs. More recently, the decline in the OPEC countries' current payments surpluses and in the total payments deficits of oil-importing countries outside the United States changed that situation. By 1978, the oil-importing countries had switched from balance of payments financing to borrowing for increasing their monetary reserves. The OPEC countries have been replaced as the main source of funds by several industrial countries where the continuing low economic growth has meant increased commercial bank liquidity and moderate domestic credit demands. Such countries have been looking more to the international sector for profitable outlets. That, along with the international liquidity created by the U.S.'s current payments deficits in 1977 and 1978, has led to a "borrower's market" for international banking funds. The Office of the Comptroller of the Currency has been confronted with the resultant growth in national
banks' foreign assets/deposits/earnings/foreign exchange activities, their substantial lending to foreign public sector borrowers and the problem of the applicability of statutory lending limits to such credits. At year-end 1978, foreign loans of United States banks and bank holding companies aggregated $217 billion. Sixty-three percent of that total represented credit extensions to borrowers in industrialized developed countries and offshore banking centers. Credits to borrowers in non-oil producing, developing nations totaled $52 billion, or 24 percent of the total. By the end of 1978, the international assets of national banks were $182 billion, up 14 percent from $160 billion on December 31, 1977. Total assets of the 646 foreign branches of national banks aggregated $181 billion, a 12 percent increase over the $162 billion held at the end of 1977. The International Examinations Division of the Office of the Comptroller of the Currency is delegated the responsibility of supervising the international activities of national banks. The Office's primary supervisory tool is the bank examination function. Examinations of international divisions, foreign branches and foreign affiliates are especially tailored to the organizational, geographical and reporting structure of the banks under examination. Examiners evaluate the quality of international loan and investment portfolios and analyze foreign exchange activities, reporting procedures, accounting and bookkeeping systems, and the adequacy of internal controls and audit programs. During 1978, approximately 175 national bank examiners participated in examinations of international banking divisions in the 14 regions. Over the same period, 142 examiners traveled to 19 countries to examine 61 foreign branches. The assets of the other foreign branches, including "Shell" branches, were examined using records maintained at the banks' head offices or elsewhere. Three foreign subsidiaries and ten electronic data processing centers were examined on-site. The Office maintains a permanent staff of six examiners in London who are responsible for continuously supervising the activities of the branches of 26 national banks located there. In late 1978, the Comptroller's Office, the Federal Reserve Board and the Federal Deposit Insurance Corporation adopted uniform procedures for evaluating and commenting on "country risk" factors in international lending by U.S. banks. Under the new system, to be Page 23
In 1978, an internal requisition control system was established to monitor the status of requisitions from the date of receipt to issuance of purchase orders. That management tool insures that the status of any requisition may be readily ascertained Procurement and contracting also installed a microfilm cassette system to provide ready access to all government-wide General Services Administration schedules. That system provides the Office with up-todate ordering information. The Distribution Services Branch provides printing and supply operations and mail and messenger services for the Office. The branch continued consolidating mailings and improved folding procedures in 1978 to avoid increased postal costs. A new folder-inserter should allow automated mailings of circulars, speeches and bulletins and, thus, reduce postal costs in 1979. The Administrative Services Branch consists of two sections – Facilities Management and Publications and Records Management. In 1978, the Facilities Management Section directed several construction management and space design projects to renovate and relocate several Washington headquarters departments. The section also implemented new Washington Office security procedures and a new parking policy which reduced parking expenses and improved parking availability. The Publications and Records Section coordinated the printing and distribution of Office manuals, such as the Comptroller's handbooks for national bank examiners and trust examiners. The section also headed a task force to analyze regional word processing requirements and to propose equipment which will be implemented in 1979. During 1978, Publications and Records developed a monthly reporting system to provide senior management with information to enable them to monitor the status of certain bank supervision, financial and administrative activities.
Advanced Trust Examiners School (Level III) • ANBE School for Advanced Study – Revised (Level V) • OCC Management Seminar (Level VI) Put-It-In-Writing Workshop Supervisory Development Seminar • Career Development Program for Secretaries The Compensation Program is to determine, for each professional, administrative and managerial position, a salary level which is competitive with the financial community and is equitable relative to other positions in OCC. During 1978, activities toward that goal included a survey of over 600 professional, administrative and managerial positions from which descriptions were prepared for the more than 24 distinct jobs identified. A point factor evaluation plan for rating covered positions was also completed. That plan was applied to all of the jobs in the survey and preliminary evaluations were submitted to the line management committee for review. A salary survey of positions in national banks, other federal regulatory agencies, Federal Reserve District Banks, major accounting firms and state bank regulatory agencies was also completed. Preliminary analysis of all salary data gathered was completed to be used as a base for a new salary schedule. Policy implementation issues were identified and are being developed into a work plan to complete the Salary Administration Program The Human Resources Information System (HRIS) is a computer-based system designed to provide OCC management with accurate and timely personnel information, including data on employee skills, experience and training and on applicant, project, and position history. A system for retrieving information stored in the Treasury Payroll/Personnel Information System (TPPIS) was installed in 1978. Over 400 highly qualified individuals were successfully recruited to fill bank examiner positions during 1978. Increased emphasis was placed on minority recruitment and hiring. Several steps were taken to increase the number of minority, female, handicapped and veteran applicants for OCC positions. Those steps included development of a comprehensive minority and female recruitment plan, increased advertising in minority sponsored publications, and recruitment trips to key minority organizations and educational institutions. Also during 1978, the position of Manager, Minority and Special Emphasis Programs was established to promote minority recruitment, career development for lower level employees and other special programs. The OCC Career Development Program proceeded in 1978 with the development of policies for Career Development Levels I and II which were then formally issued. Regional and Washington panels met and selected 23 participants for the 1978 Career Development Level Il Program. Those individuals are being developed for future managerial positions with the OCC. The Human Resources Division assisted management with the several reorganization plans. Among those were the proposal and the subsequent implementation of the Washington Office reorganization, the reorganization of the OCC's regional structure and the elimi
Human Resources Division The Human Resources Division continued the successful implementation of the human resources programs approved by the Department of the Treasury in January 1977. Major accomplishments were made in the areas of personnel development, compensation, staff analysis, national recruitment, employee relations and staffing and operations. During 1978, 77 training sessions were conducted by the Human Resources Division. Over 2,100 Washington and regional participants attended courses in bank examination policies and procedures, supervisory and management development, instructor training techniques, report writing and clerical skills, The following new programs were developed: • Regional ANBE Examining School (Level 1) • Basic International Examining School (Level II) Electronic Data Processing School (Level 11) • Financial Analysis School (Level III) Page 24
Notes to Financial Statements December 31, 1978 and 1977
Note 1-Organization The Comptroller of the Currency (Comptroller's Office) was created by an Act of Congress for the purpose of establishing and regulating a national banking system. The National Currency Act of 1863, rewritten and re-enacted as The National Banking Act of 1864, created the Comptroller's Office and provided for its supervisory functions and the chartering of banks. No funds derived from taxes or federal appropriations are allocated to or used by the Comptroller's Office in any of its operations. The revenue of the Comptroller's Office is derived principally from assessments and fees paid by the national banks and interest on investments in U.S. government obligations. Assessments paid by national banks are not construed to be government funds. The Comptroller's Office is exempt from federal income taxes.
31, 1978, income has exceeded direct expenses by approximately $2,670,000 (including $159,000 and $180,000 in 1978 and 1977, respectively), which excess amount is included in the Comptroller's equity. An analysis of allocable indirect expenses has not been made. In its reexamination of the legal status of Closed Receivership Funds and related excess income earned thereon, the Comptroller's legal staff has been unable to locate any definitive statutory or case law which specifies the ultimate disposition of such funds. In the absence of legal precedent, the legal staff is unable to currently give a definitive opinion as to the appropriate disposition of either the unclaimed receivership funds or the excess income from investment of such funds. The Comptroller is in the process of seeking legislative resolution of these matters. Pending a resolution of the legal uncertainties and legislative action surrounding these funds, the Comptroller's Office has included a liability for Closed Receivership Funds in its balance sheets and recognized income from investment of such funds as revenue in its statements of revenue, expenses and Comptroller's equity. In recognition of these uncertainties, the Comptroller has administratively restricted a portion of the Comptroller's equity in an amount that approximates the excess income earned from investment of Closed Receivership Funds since custody of the funds commenced.
Note 2-Significant Accounting Policies The accounting policies of the Comptroller of the Currency conform to generally accepted accounting principles. The financial statements are prepared on the accrual basis of accounting. Obligations of the U.S. government are valued at amortized cost. For the current portion of obligations of the US government, this approximates market value. The market value of the long-term U.S. government obligations owned at December 31, 1978 and 1977 was $16,656,000 and $17,419,000, respectively. It is the intention of the Comptroller's Office to hold these securities until their maturity, which ranges from 1980 through 1984. Therefore, no valuation reserve has been provided for in either 1978 or 1977. Premiums and discounts on investments in U.S. government obligations are amortized or accreted ratably over the terms of the obligations. Furniture, equipment and software are valued at cost. Expenditures for maintenance and repairs or relatively minor items are charged to earnings as incurred. Renewals of significant items are capitalized. Depreciation is computed using the straight-line basis over the estimated useful lives of the assets, which range from 5 to 10 years. Leasehold improvements are valued at cost and are amortized over the terms of the related leases (including renewal options) or the estimated useful lives, whichever is shorter.
Note 4–Commitments and Contingencies The Comptroller's Office occupies office space in Washington, D.C. under a lease agreement which provided for an initial 5-year term with five consecutive 5-year renewal options. As of December 31, 1978, the first of these options, expiring in 1984, has been exercised. In addition, regional and sub-regional offices lease space under agreements which expire at various dates through 1992. Minimum rental commitments under leases in effect at December 31, 1978 are as follows: 1979, $3,838,274; 1980, $3,675,517; 1981, $3,484,326; 1982, $3,057,764; 1983, $3.014,052; 1984 and after, $4,485,182 – a total of $21,555,115. Certain of the leases provide that annual rentals may be adjusted to provide for increases in taxes and other related expenses. Total rental expense under operating leases was $4,219,810 and $3,512,347 for the years ended December 31, 1978 and 1977, respectively. The Comptroller's Office contributes to the Civil Service retirement plan for the benefit of all its eligible employees. Contributions aggregated $4,133,000 and $3,698,000 in 1978 and 1977, respectively. The plan is participatory, with 7 percent of salary being contributed by each party The accompanying balance sheets include a liability for annual leave, accumulated within specified limits, which if not taken by employees prior to retirement is paid at that date. Various banks in the District of Columbia have deposited securities with the Comptrolier's Office as collateral for those banks entering into and administering trust activities. These securities, having a par or stated value of $13,593,000 are not assets of the Comptroller's Office and accordingly are not included in the accompanying financial statements The Comptroller's Office is a defendant, together with other bank supervisory agencies and other persons, in litigation generally related to the closing of certain national banks. In the opinion of the Comptroller's legal staff, the Comptroller's Office will be able to defend successfully against these complaints.
Note 3-Closed Receivership Funds Prior to the assumption of closed national bank receivership functions by the Federal Deposit Insurance Corporation in 1936, the Comptroller of the Currency appointed individual receivers for all closed national banks. After settling the affairs of the closed banks and issuing final distributions to the creditors of the banks (principally depositors), the receivers transferred to the custody of the Comptroller's Office all remaining funds which represented distributions which were undeliverable or had not been presented for payment. Closed Receivership Funds in the accompanying balance sheets represent the potential claims for such funds by the original creditors of the receiverships. Since inception of the receivership function, unclaimed funds have been invested in U.S. government securities. The income from investments has been applied as an offset to expenses incurred by the Comptroller's Office in performing this function and accordingly has been recorded as revenue in the statements of revenues, expenses and Comptroller's equity. Through December
OPINION OF INDEPENDENT ACCOUNTANT
To the Comptroller of the Currency In our opinion, the accompanying balance sheets, the related statements of revenues, expenses and Comptroller's equity and of changes in financial position present fairly the financial position of the Comptroller of the Currency at December 31, 1978 and 1977, and the results of its operations and the changes in its financial position for the years then ended, in conformity with generally accepted accounting principles consistently applied. Our examinations of these statements were made in accordance with generally accepted auditing standards and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances, including confirmation of securities owned at December 31, 1978 and 1977, by correspondence with the custodians. Price Waterhouse & Co. Washington, D.C. April 18, 1979. 55 Page 25
1. Mergers consummated, involving two or more operating banks
Jan. 1, 1978: Page Clearwater, Fla. Merger 63 Jan. 1, 1978: Indian Head National Bank of Portsmouth, Portsmouth, N.H. 63 Jan. 10, 1978 Zions First National Bank, Salt Lake City, Utah First State Bank, Salina, Utah Richfield Commercial and Savings Bank, Richfield, Utah Merger 64 Jan. 28, 1978: First Alabama Bank, N.A., Notasulga, Lee County, Ala. Ala. Purchase Feb. 6, 1978: Southeast First National Bank of Maitland, Maitland, Fla. 66 Feb. 13, 1978 Wells Fargo Bank, National Association, San Francisco, Calif. ciation, San Francisco, Calif. Purchase 66 Feb. 20, 1978: Florida First National Bank of Jacksonville, Jacksonville, Fla Florida National Bank at Arlington, Jacksonville, Fla. Florida National Bank at Lake Shore, Jacksonville, Fla. Florida Dealers and Growers Bank at Jacksonville, Jack- sonville, Fla. 68 Feb. 21, 1978: First National Bank of Catawba County, Hickory, N.C. son, N.C. Merger 69 Mar. 8, 1978: Town-Country National Bank, Camden, Wilcox County, Ala Wilcox County Bank, Camden Wilcox County, Ala. Purchase 70 Mar. 13, 1978 Southwest National Bank of Pennsylvania, Greensburg, Pa. 71 Mar. 30, 1978 The American National Bank and Trust Company of Michigan, Kalamazoo, Mich. 73
Mar. 31, 1978: Mich. Merger The First National Bank in Huntington, Huntington, Ind. Roanoke State Bank, Roanoke, Ind. Merger The Detroit Bank-Sterling, N.A., Sterling Heights, Mich. Trust Company, Detroit, Mich. Purchase .. Apr. 1, 1978 The First National Bank of Maryland, Baltimore, Md. Merger Apr. 20, 1978: Flagship First National Bank of Miami Beach, Miami Beach, Fla. Gables, Fla. Merger Apr. 20, 1978: Michigan National Bank--Port Huron, Port Huron, Mich. Lansing, Mich. Purchase Apr. 30, 1978: Atlantic National Bank of West Palm Beach, West Palm Beach, Fla. Palm Beach, Fla. Purchase The First National Bank of Convoy, Convoy, Ohio Merger The Trotwood Bank, Trotwood, Ohio tional Association, Dayton, Ohio Merger May 6, 1978: Wells Fargo Bank, National Association, San Francisco, Calif. The First National Bank of Orange County, Orange, Calif. Merger May 31, 1978: Drovers & Mechanics National Bank of York, York, Pa. York Haven State Bank, York Haven, Pa. Merger May 31, 1978: First National Bank of Jackson, Jackson, Miss. Merger June 29, 1978: Concord National Bank, Concord, NH.
June 30, 1978: Century National Bank of Broward, Fort Lauderdale, Fla. Fla. Merger June 30, 1978: Flagship Bank of Melbourne, National Association, Mel bourne, Fla. Flagship Bank of West Melbourne, National Association, West Melbourne, Fla. Merger July 14, 1978: Gallatin National Bank, Uniontown, Pa. Purchase July 31, 1978 Crocker National Bank, San Francisco, Calif. ciation, San Francisco, Calif. Purchase Aug 31, 1978 Eaton National Bank and Trust Co., Eaton, Ohio Purchase Aug. 31, 1978 Virginia National Bank, Norfolk, Va. Virginia National Bank/Richmond, Richmond, Va. Virginia National Bank/Lynchburg, Lynchburg, Va. Virginia National Bank/Henry County, Henry County, Va. Merger Sept. 30, 1978: First & Merchants National Bank, Richmond, Va. County, (P.O. Williamsburg), Va. sapeake, Va. corporated Area of Prince William County, Va. Merger Oct. 13, 1978: The Citizens and Southern National Bank of S.C., Char- leston, S.C. Hilton Head National Bank, Hilton Head, S.C. Purchase Oct. 20, 1978 Security Pacific National Bank, Los Angeles, Calif. Humboldt National Bank, Eureka, Calif. Merger Nov. 3, 1978: United National Bank, Sioux Falls, S. Dak. Rosholt Community Bank, Rosholt, S. Dak. Purchase
Dec. 1, 1978: Zions First National Bank, Salt Lake City, Utah Merger .. Dec. 8, 1978 Gallatin National Bank, Uniontown, Pa. Purchase Dec. 29, 1978: Barnett Bank of Tampa, National Association, Tampa, Fla porated Area of Brandon, Fla. Merger Dec. 29, 1978: National Central Bank, Lancaster, Pa. Merger The Chester National Bank, Chester, N.Y. Merger Dec. 29, 1978: The National Bank and Trust Company of Norwich, Nor- wich, N.Y. First National Bank in Sidney, Sidney, N.Y. Merger Dec. 31, 1978: Adams County National Bank, Cumberland Township (P.O. Gettysburg), Pa. The National Bank of Arendtsville, Arendtsville, Pa. Merger Dec. 31, 1978: Century National Bank of Palm Beach County, West Palm Beach, Fla. Century National Bank, Boynton Beach, Fla. Merger. Dec. 31, 1978 Lincoln First Bank of Rochester, Rochester, NY cuse, NY. First-City National Bank of Binghamton, N.Y., Bingham ton, N.Y. The First National Bank of Jamestown, Jamestown, N.Y. Consolidation Dec. 31, 1978: Southeast First National Bank of Sarasota, Sarasota, Fla.
II. Mergers consummated, involving a single operating bank
Jan. 3, 1978; Peoples Bank and Trust, N.A., Trenton, Mich. PBT, National Association, Trenton, Mich. Consolidation The First National Bank of Cassopolis, Cassopolis, Mich. Consolidation ... Feb. 6, 1978: Blackstone Valley National Bank, Northbridge, Mass. bridge, Mass. Merger Feb. 15, 1978; The Central Security National Bank of Lorain County, Lo rain, Ohio Association, Lorain, Ohio Merger ..
Apr. 1, 1978: Capitol National Bank, Raleigh, N.C. New Capitol Bank, National Association, Raleigh, N.C. Merger Apr. 7, 1978: First National Bank of McAllen, McAllen, Tex. McAllen Commerce Bank National Association, McAllen, Tex. Merger Apr. 14, 1978: City National Bank in Wichita Falls, Wichita Falls, Tex. City Bank, National Association, Wichita Falls, Tex. Merger May 12, 1978 Kelly Field National Bank of San Antonio, San Antonio, Tex, American Servicemen's National Bank, San Antonio, Tex. Merger
May 15, 1978 Page 113 July 15, 1978 Community National Bank, Flushing, Ohio Second National Bank, Flushing, Ohio Merger.. 114 July 31, 1978 The Citizens National Bank of Emporia, Emporia, Va. Greensville-Emporia National Bank, Emporia, Va. Merger. 114 July 31, 1978: National Bank of Marshall, Marshall, Mich. CFC National Bank, Marshall, Mich. Merger 115 Aug. 1, 1978: Bexar County National Bank of San Antonio, San Antonio, Tex. North St. Mary National Bank, San Antonio, Tex. Merger 116 Aug. 17, 1978: The First National Bank & Trust Company of Augusta, Augusta, Ga. 116 Aug. 17, 1978: The First National Bank & Trust Company in Macon, Macon, Ga. 117 Aug. 17, 1978 The First National Bank of Rome, Rome, Ga. 117 Aug. 17, 1978: The National Bank and Trust Company of Columbus, Ga., Columbus, Ga. 117
Aug. 17, 1978 Savannah, Ga Merger Sept. 11, 1978: Eastern Shore National Bank, Daphne, Ala. Merger The First National Bank of Dalton, Dalton, Ga. Merger Oct. 2, 1978: The First National Bank in Mineral Wells, Mineral Wells, Tex. Hubbard National Bank, Mineral Wells, Tex. Merger Nov. 14, 1978: The Herget National Bank of Pekin, Pekin, III. HNB Bank, N.A., Pekin, III. Merger Nov. 27, 1978: The Brooks Field National Bank of San Antonio, San Anto- nio, Tex. San Antonio, Tex. Merger .. Nov. 30, 1978: Guaranty National Bank, Houston, Tex. ton, Tex. Merger Dec. 14, 1978: Colonial National Bank, Unincorporated Area of Harris County, Tex
III. Mergers approved, but abandoned pursuant to litigation
Feb. 14, 1978; Page Lexington, Ky 123 Page 26
1. Mergers consummated, involving two or more operating banks.
EXCHANGE NATIONAL BANK OF PINELLAS COUNTY,
Names of banks and type of transaction
In To be operation operated
The Exchange Bank and Trust Company of Clearwater, Clearwater, Fla., with .
COMPTROLLER'S DECISION Application has been made to the Controller of the Currency seeking prior permission for the Exchange Bank and Trust Company of Clearwater, Clearwater, Fla. ("Clearwater Bank"), and The Exchange Bank of Dunedin, Dunedin, Fla. ("Dunedin Bank") (collectively, "Merging Banks"), to merge into The Exchange National Bank of Pinellas County, Largo, Fla. ("ENB"), the charter bank, under the charter and title of The Exchange National Bank of Pinellas County, with corporate headquarters in Clearwater, Fla. The subject application rests upon an agreement executed between the proponent banks, incorporated herein by reference, the same as if fully set forth. Clearwater Bank was established in 1962 as an independent state-chartered commercial banking institution. As of December 31, 1976, it had total deposits of $57.9 million. Dunedin Bank was established de novo in September 1973, by its parent bank holding company, Exchange Bancorporation, Inc., Tampa, Fla., the 12th largest multi-bank holding company headquartered in the state. As of year-end 1976, Dunedin Bank's deposits totaled approximately $11 million.
ENB was also established de novo by its parent holding company, and commenced operations in 1974. As of the aforementioned date, the charter bank's total deposits were $8.8 million. Inasmuch as all three of the proponent banks are subsidiaries of the same bank holding company, no meaningful competition exists among them, nor is there any potential for increased competition. This application essentially represents a corporate reorganization whereby Exchange Bancorporation, Inc., is consolidating its banking interests located within Pinellas County. Furthermore, the proposal appears to be in accord with the recently enacted state branching statutes. The application does not give the appearance of being adverse to the public interest, and should be, and hereby is, approved. August 3, 1977.
SUMMARY OF REPORT BY ATTORNEY GENERAL The merging banks are wholly-owned subsidiaries of the same bank holding company. As such, their proposed merger is essentially a corporate reorganization and would have no effect on competition.
INDIAN HEAD NATIONAL BANK OF PORTSMOUTH,
Names of banks and type of transaction
In To be operation operated
Indian Head National Bank of Portsmouth, Portsmouth, N.H. (1052), with
COMPTROLLER'S DECISION
of Portsmouth, Portsmouth, N.H. ("Merging Bank'), into Indian Head National Bank of Rochester, Rochester, N.H. ("Charter Bank'), under the charter of Indian Head National Bank of Rochester, with the title of "Indian Head Bank, National Association," and with corporate headquarters in Portsmouth, N.H. The subject application rests upon an agreement executed between the proponent banks, incorporated herein by reference, the same as if fully set forth.
Charter Bank was issued national banking association charter number 15652 on May 23, 1968. As of June 30. 1977. Charter Bank held total commercial bank deposits of $8.8 million. Merging Bank was chartered as a national banking association on April 25, 1865, and as of June 30, 1977, its total deposits were $34.6 million. Both of the proponent banks are subsidiaries of Indian Head Banks, Inc., Nashua, N.H., a registered multibank holding company. Accordingly, this application is regarded as essentially a corporate reorganization whereby Indian Head Banks, Inc. is consolidating a portion of its banking interests in the hopes of produc
ing a more efficient and more economically profitable unit. Due to the common ownership and control of the proponent banks, there will be produced no adverse impact upon competition. The Rochester community particularly should be better served by the combination of Charter Bank with Merging Bank as a result of some economies of scale and larger legal lending limits. This application is therefore deemed to be in the public interest, and should be, and hereby is, approved December 2. 1977.
SUMMARY OF REPORT BY ATTORNEY GENERAL We have reviewed this proposed transaction and conclude that it is essentially a corporate reorganization and would have no effect on competition.
ZIONS FIRST NATIONAL BANK, Salt Lake City, Utah, and First State Bank, Salina, Utah, and Richfield Commercial and Savings Bank, Richfield, Utah Banking offices Total assets In To be operation operated
Richfield Commercial & Savings Bank, Richfield, Utah, with and First State Bank, Salina, Utah, with. and Zions First National Bank, Salt Lake City, Utah (4341), which had merged Jan. 10, 1978, under charter and title of the latter bank (4341). The merged bank at date of merger had
Pursuant to 12 USC 1828(c), an application has been filed with the Office of the Comptroller of the Currency requesting prior consent to merge Richfield Commercial and Savings Bank, Richfield, Utah ("RCSB"), and First State Bank, Salina, Utah ("FSB) (collectively, "Merging Banks"), into Zions First National Bank, Salt Lake City, Utah ("Charter Bank"), under the charter and title of Zions First National Bank. The subject application rests upon an agreement executed between the proponent banks, incorporated herein by reference, the same as if fully set forth. Charter Bank, the second largest commercial bank in Utah, was granted national banking association charter number 4341 by this Office on June 12, 1890. As of June 30, 1977, Charter Bank held total deposits of $702.3 million. Additionally, Charter Bank is a subsidiary of Zions Utah Bancorporation, Salt Lake City, Utah, a registered multi-bank holding company. Both of the Merging Banks are state-chartered commercial banking institutions. RCSB is a unit bank, with no branches and June 30, 1977, total deposits of $18.1 million. FSB operates its main office and a total of three branches; one each in Panguitch, Kanab, and
Manti. As of June 30, 1977, FSB had total deposits of $36.5 million. Both Charter Bank and FSB have branch offices in Kanab. The application reflects that it is not Charter Bank's intent to combine the two offices in Kanab, but rather to sell its present branch in Kanab to another non-affiliated bank, and thereby preserve two banking facilities within that community. Also, inasmuch as there are only 15 banking offices domiciled within the entire four-county area served by Merging Banks, approval of this application does not give the appearance of having an adverse effect upon existing competition. The banking community presently served by Merging Banks should be better served through the introduction of new and expanded banking services. The legal lending limit of the resulting bank will be able to accommodate larger loan requests of banking customers. Considerations relating to convenience and needs benefits are deemed to be positive in considering approval of the application. The financial and managerial resources of Charter Bank are regarded as satisfactory, and are enhanced by the same factors present in its parent bank holding company. Likewise, the financial and managerial re
FIRST ALABAMA BANK, N.A.,
Names of banks and type of transaction
In To be operation operated
First Bank of Macon County, Notasulga, Macon County, Ala., with...
On January 28, 1978, application was made to the Comptroller of the Currency for prior written approval for First Alabama Bank, N.A., Notasulga, Lee County, Ala. (“Assuming Bank"), to purchase certain of the assets and assume certain of the liabilities of First Bank of Macon County, Notasulga, Macon County, Ala. ("First") On January 26, 1978, First was a state-chartered bank operating through its main office with deposits of approximately $3.8 million. On January 26, 1978, at 4:30 PM, Central Standard Time, First was declared insolvent and the Federal Deposit Insurance Corporation ("FDIC") was appointed as receiver. The present application is based upon an agreement, which is incorporated herein by reference, the same as if fully set forth, by which the FDIC, as receiver, has agreed to sell certain of First's assets to the Assuming Bank, and the Assuming Bank has agreed to assume certain of the former liabilities of First. For the reasons stated hereafter, the Assuming Bank's application is approved, and the purchase and assumption transaction may be consummated immediately Under the Bank Merger Act, 12 USC 1828(c), the Comptroller cannot approve a purchase and assumption transaction which would have certain proscribed anticompetitive effects unless he finds those anticompetitive effects to be clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served. Additionally, the Comptroller is directed to consider the financial and managerial resources and future prospects of the existing and proposed institution, and the convenience and needs of the community to be served. When necessary, however, to prevent the evils attendant upon the failure of a bank, the Comptroller can dispense with the uniform standards applicable to usual acquisition transactions and need not consider reports on the competitive consequences of the transaction ordinarily solicited from the Department of Justice and other banking agencies. He
is authorized in such circumstances to act immediately, in his sole discretion, to approve an acquisition and to authorize the immediate consummation of the transaction. The proposed acquisition will prevent disruption of banking services to the community, and potential losses to a number of uninsured depositors. The Assuming Bank, as a new banking subsidiary of First Alabama Bancshares, Inc., Birmingham, Ala, a registered multi-bank holding company, has sufficient financial and managerial resources to absorb First and to enhance the banking services it offers within the Notasulga market. The Comptroller thus finds that the proposed transaction will not result in a monopoly, be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any part of the United States, and that the anticompetitive effects of the proposed transaction, if any, are clearly outweighed in the public interest by the probable effect of the proposed transaction in meeting the convenience and needs of the community to be served. For those reasons, the Assuming Bank's application to purchase certain assets and assume certain liabilities of First as set forth in the agreement executed with the FDIC, as receiver, is approved. The Comptroller further finds that the failure of First requires him to act immediately, as contemplated by the Bank Merger Act, to prevent disruption of banking services to the community. The Comptroller thus waives publication of notice, dispenses with the solicitation of competitive reports from other agencies, and authorizes the transaction to be consummated immediately. January 28, 1978
Due to the emergency nature of the situation, no Attorney General's report was requested
Asset figures are as of call dates immediately before and after transaction.
SOUTHEAST FIRST NATIONAL BANK OF MAITLAND,
Names of banks and type of transaction
In To be operation operated
Southeast First National Bank of Maitland, Maitland, Fla. (15237), with.
Pursuant to the Bank Merger Act of 1966 (12 USC 1828(c)), an application has been filed with the Office of the Comptroller of the Currency requesting prior consent to merge Southeast First National Bank of Maitland, Maitland, Fla. ("Maitland Bank'), and Southeast Bank of East Orange, Orlando, Fla. ("East Orange Bank") (collectively, "Merging Banks"), into Southeast National Bank of Orlando, Orlando, Fla. ("Charter Bank"), under the charter and title of Southeast National Bank of Orlando. The subject application rests upon an agreement executed between the proponent banks, incorporated herein by reference, the same as if fully set forth. Maitland Bank was granted national banking association charter number 15237 by this Office on January 3, 1964, and as of June 30, 1977, held total commercial bank deposits of $53.7 million. East Orange Bank is a state-chartered commercial banking institution that, as of June 30, 1977, had total deposits of $8.4 million. Charter Bank has operated as a national bank under
charter number 15814 since July 20, 1970, and as of mid-year 1977, its total deposits were $23.6 million. Both of the Merging Banks and Charter Bank are banking subsidiaries of Southeast Banking Corporation, Miami, Fla., the largest multi-bank holding company headquartered in the state of Florida. Accordingly, due to the common ownership and control existing among the proponent banks, there is no meaningful degree of existing competition between any of these subsidiaries of Southeast Banking Corporation. The application must, therefore, be regarded essentially as a corporate reorganization. Applying the statutory criteria, it is the conclusion of this Office that this application is not adverse to the public interest, and should be, and hereby is, approved January 6, 1978.
SUMMARY OF REPORT BY ATTORNEY GENERAL
The merging banks are wholly-owned subsidiaries of the same bank holding company. As such, their proposed merger is essentially a corporate reorganization and would have no effect on competition.
WELLS FARGO BANK, NATIONAL ASSOCIATION,
Names of banks and type of transaction
In To be operation operated
Eight Branches of The Bank of California, National Association, San Francisco, Calif. (9655), with....
Application has been made to the Comptroller of the Currency by Wells Fargo Bank, National Association, San Francisco, Calif. ("Purchasing Bank'), requesting prior permission to purchase the assets and assume the liabilities of eight branches ("Branches") of The Bank of California, National Association, San Francisco, Calif. (''Selling Bank''). The subject application
rests upon an agreement executed between the proponent banks, incorporated herein by reference, the same as if fully set forth. Selling Bank was granted national banking association charter number 9655 and, as of June 30, 1977, held total deposits of $2.5 billion. Purchasing Bank was granted national banking association charter number 15660 on February 5, 1910, and as of June 30, 1977, its total deposits were $11.4 billion. In an attempt to consolidate its position on a more regional banking concept, Selling Bank, on May 11,
Asset figures are as of call dates immediately before and after transaction t Assets are for the entire bank.
1977, announced its intention to sell 30 of its branches which are located in areas where Selling Bank does not possess a significant relevant geographic market penetration. The eight branches being considered as the subject of this application, are located in southern California; six of the branch offices are domiciled in San Bernadino County, and one each is located in Fresno and Orange counties. The Fresno Branch is approximately 260 miles north of the Santa Ana Office, the nearest of the other branches being purchased, and the Santa Ana Branch is almost 35 miles southwest of the nearest of the six San Bernadino County branches. Because Purchasing Bank did not commence its market expansion and penetration of the southern California area until approximately 10 years ago, well after its significantly larger competitors had successfully established their presences outside their San Francisco Bay Area home bases, Purchasing Bank's presence in the three market areas relevant to this application is negligible. Accordingly, approval of this application would result in no adverse effect upon existing competition. The fortified presence of Purchasing Bank within the relevant geographic markets should better serve the banking public with a more viable competitor that is a more meaningful banking alternative capable of providing new and expanded banking services. Considerations relating to convenience and needs benefits are consistent with approval. The financial and managerial resources of Purchasing Bank and Selling Bank are generally satisfactory, and Purchasing Bank has the capacity to operate the branches in an efficient and profitable manner. The sale of the branches will increase Selling Bank's capital and should have a favorable impact on that bank's earnings by lowering overhead operational costs related to the branches. The future prospects of the proponent banks appear favorable and consistent with approval of this proposal. Accordingly, applying the statutory criteria, it is the conclusion of the Office of the Comptroller of the Currency that this application is not adverse to the public interest, and should be, and hereby is, approved. January 10, 1978.
30, 1976. After the acquisition, Applicant would hold approximately 2.5 percent of the county's bank deposits and would rank seventh among banks operating there. Applicant has no offices in the "primary service areas," as defined in the application, of any of the six branches it proposes to acquire. It therefore appears that the acquisition of these branches by Applicant would not have an adverse effect on existing competition. (2) Orange County. Applicant proposes to acquire one of the two offices Bank operates in Orange County-Bank's Santa Ana office which holds total deposits of approximately $23 million (including $3 million in large certificates of deposit which Applicant will not acquire), or 0.54 percent of total Orange County bank deposits. Bank will retain its office in Newport Beach, Orange County, which holds total deposits of approximately $6.4 million. Applicant has 12 offices in the county with deposits of approximately $92 million, or 2.1 percent of total county bank deposits. After the acquisition, it would hold approximately 2.6 percent of total county bank deposits and would move to a ranking of eighth from its current position of ninth. While Applicant has two offices in Santa Ana, neither is within the "primary service area," as defined in the application, of the branch to be sold. In addition, there are several other banks in the area surrounding the branch and located closer to it than Applicant's closest office It therefore appears that the acquisition of this branch by Applicant would not have an adverse effect on existing competition. (3) Fresno County. The final branch Applicant proposes to acquire is in Fresno. The branch, which is Bank's only office in Fresno County has total deposits of $16.6 million, or 1.3 percent of total county bank deposits. Applicant has eight offices in the county with total deposits of approximately $85 million, or 6.5 percent of total county bank deposits. It ranks fourth among banks operating there. After the acquisition, it would hold 7.8 percent of total county bank deposits and rank about equal with Crocker National, which holds the third largest share of the county's bank deposits. Banking is highly concentrated in Fresno County; the top four banks (including Applicant) control over 82 percent of total county bank deposits. Both the branch Applicant proposes to acquire and its "Fresno Main Office" are located on the same block in downtown Fresno, and one of Applicant's other offices is located within a short distance of the branch. It therefore appears that the proposed acquisition would eliminate a substantial amount of existing competition between Applicant and Bank. Bank holds 2.6 percent and Applicant 5.9 percent of the total deposits held by banks operating in the "primary service area' of Bank's Fresno branch as defined in the application. Since Bank's share includes $5.2 million in large certificates of deposit which it will retain, Applicant will actually acquire approximately $11.4 million in deposits, increasing its share of local deposits to 7.7 percent. Accordingly, the proposed acquisition of Bank's Fresno branch would have an adverse effect on competition inasmuch as it would eliminate existing com
SUMMARY OF REPORT BY ATTORNEY GENERAL
The eight branches covered by this application are located in three different areas of the state. Consequently, we have analyzed the effect on competition in each of these areas. Existing Competition (1) San Bernardino County. Six of the eight branches Applicant proposes to acquire are in San Bernardino County which is part of the Riverside-San Bernardino-Ontario SMSA. The six offices have total deposits of $40.2 million, or 1.5 percent of total county deposits. Bank will retain five other offices in San Bernardino County with total deposits of just under $100 million. Applicant currently has three offices in the county (one of which was opened since June 30, 1976) which held approximately $30 million in total deposits as of June |
What is the name of the approach used by the Department when conducting a compliance examination
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