Imágenes de páginas
PDF
EPUB

Lending to such insiders and their enterprises follows naturally and, in the case of smaller financial institutions in smaller communities, is almost inevitable. Such lending, to the extent it is made on an armslength basis to creditworthy borrowers, is not objectionable in and of itself, and in fact such loans may well help the community and at the same time benefit the bank.

If an insider is prepared to abuse his banking connections, however, and the bank is compliant, he may effectively pyramid the resulting risks to the bank by exploiting his position to obtain credit for or through firms he controls. Accordingly, the Board has concluded that on balance it would be wise to place aggregate limits on the amount of lending on behalf of any insider by his bank in order to prevent the incurring of excessive risk through such lending.

The proposed legislation would therefore place a limitation on loans to any officer, director, or shareholder who owns more than 5 percent of the stock of the lending bank. This limitation would aggregate all loans or extensions of credit to such an officer, director, or shareholder and his controlled corporations and provide that the aggregate may not exceed the statutory limit on loans to any one borrower established by Federal or State law. I should alert the committee that, among the three kinds of insiders I have just mentioned-officers, directors, and important shareholders-public policy considerations weigh least heavily toward adoption of these restrictions when it comes to aggregating loans of all interests of an "outside director." Such restrictions might well discourage some individuals from serving as directors who would otherwise provide valuable experience and advice for the bank. On balance, however, the Board believes that the establishment of such a limitation for each of these insiders is a prudent step.

The third problem area which this bill addresses is a strengthening of supervisory power to take remedial actions once difficulties have been discovered in a financial institution. We see a particular need to strengthen the remedial powers provided in the Financial Institution Supervisory Act of 1966, and we have recommended a number of changes in that act.

The most important of these changes relates to the ability of the banking agencies to remove an officer or director, or prohibit a shareholder from participating in the conduct of the affiairs of a bank, when such individual's conduct is causing or is likely to cause substantial financial harm to the bank. Under present law, to take such action, the agencies must establish that the individual: (1) Has participated in a violation of law or of a final cease-and-desist order, breaches of fiduciary duty, or unsafe and unsound practices; (2) that his action is seen as causing substantial financial loss to the bank or damage to depositors and, further; (3) that the acts complained of constitute personal dishonesty on the part of such individual. The Board believes that, if an individual is grossly negligent or inept in the operation of a banking institution, and the findings set forth in (1) and (2) above are made, he should be removed regardless of whether his actions constitute personal dishonesty. Accordingly, we recommend the adoption of the proposed provisions, which would authorize the appropriate regulatory agencies to remove the offending individuals in such circumstances. We believe that the present hearing and judicial review provisions of the act are sufficient to shield innocent individuals from arbitrary and capricious agency action.

69-710 - 76-4

We have also recommended a number of other technical changes to the Financial Institutions Supervisory Act which we believe would increase its effectiveness. I would be happy to answer questions about any of them at the conclusion of my statement.

Another urgent remedial power requested for the Board is that it be given the power under the Bank Holding Company Act to order the divestitute of a banking or nonbanking subsidiary whenever it has reasonable cause to believe that the continuation of that nonbanking activity or ownership of a banking or nonbanking activity constitutes a serious risk to the financial safety, soundness, or stability of a bank holding company's subsidiary banks.

We recognize that such a remedy is an extreme one. However, we believe that a key function of a bank holding company is to contribute to, rather than detract from, the financial stability of its subsidiary banks. Several instances have come to the Board's attention in which adverse developments and publicity with respect to a bank holding company's nonbanking activities have had a very adverse impact upon, and even caused the failure of, a banking subsidiary.

We therefore believe that it is important for the Board to have such legislation available in order to protect banking subsidiaries in appropriate instances. The proposed legislation provides for due notice and opportunity for hearing. It provides that the diverstiture may be by sale or by pro rata distribution and, in order to assure that the activity threatening the bank is terminated as rapidly as possible, sets a relatively short time frame within which this is to be accomplished. A final remedial provision that I would call to your attention lies outside the bill presently before the committee. That is our proposal to allow a failing bank to be acquired by an out-of-State holding company when no satisfactory alternative for preseving the bank's services exists. This proposal was earlier introduced as part of S. 890, but it has generated some opposition from observers concerned over breaching the traditional bar to interstate banking. Yet since that bill was introduced, two significant instances have arisen requiring sales of a failing bank when the communities involved might have been better off if an emergency interstate acquisition of that size had been permissible. I urge this committee to consider and act favorably on this proposal, even as it already has on the companion bill to eliminate the statutory 30-day delays in emergency bank holding company acquisitions.

I believe the people in the few unfortunate communities affected would be well served.

We realize that each one of the proposals I have mentioned this morning can be said to involve certain costs or burdens as well as benefits. We have tried to aim only at demonstrated problems, not hypothetical ones. We have designed the proposed legal powers so as to minimize unwanted side effects, and we have included provisions that give protection or room for accommodation to legitimate business needs. The remaining inconveniences or inefficiencies that this legislation may cause we believe are justified by the added protection it affords to banks and the banking system.

In conclusion, we believe that these proposals zero in on specific identified weaknesses in the regulation and supervision of bank holding companies and banks. Adoption of these proposals would, in the Board's opinion, have a deterrent effect and thus decrease the

number of occasions on which supervisory action would be necessary in order to correct problems existing in banking institutions. Furthermore, in those instances where the problems do occur, these provisions would increase the effectiveness of agency response. We urge favorable consideration by this committee.

[The following additional information was received for the record:]
BOARD OF GOVERNORS,
FEDERAL RESERVE SYSTEM,
Washington, D.C., March 26, 1976.

Hon. WILLIAM PROXMIRE,
Chairman, Committee on Banking, Housing and Urban Affairs, U.S. Senate,
Washington D.C.

DEAR MR. CHAIRMAN: As requested in your letter to Chairman Burns dated March 15, 1976, I am enclosing a schedule showing a short summary of each Cease and Desist Order and Written Agreement issued by the Federal Reserve System during the past five years, together with the total deposits or assets of each bank or bank holding company against which such order or agreement was issued. The summary contains only those cases where formal action was taken. In addition to the Cease and Desist Orders and Written Agreements listed herein, the Federal Reserve has, on numerous occasions, obtained written assurances for corrective action from State member banks and bank holding companies. Such written assurances are obtained routinely, thus we have not attempted to set forth each such instance where this procedure has been used.

We hope the enclosed will be helpful to you. Please let us know if we can be of further assistance.

Sincerely yours,

Enclosures.

ROBERT C. HOLLAND.

WRITTEN AGREEMENTS EXECUTED BY FEDERAL RESERVE BANKS FROM

1972: None

1972-1976

1973: 1. Bank-total deposits: $10 million.1

Agreement: Required immediate steps to be taken to employ an experienced executive officer, required the charge-off of overdrafts and cash items listed as loss in the previous examination; checks could no longer be held to prevent overdrafts, unsecured loans would no longer be made without adequate financial data supporting the credit, no secured loans without necessary supporting papers, new loans would have established repayment programs, steps would be taken to bring current all past due paper, loan entries would be reflected on general books each day, audit would be arranged with independent CPA firm, Reserve Bank would be furnished with monthly progress report.

2. Holding company-total assets: $5 million.

Agreement: Holding company agreed to remove indebtedness of two individuals from bank, to conform to permissible status or charge-off two additional loans, to divest of certain real estate acquired as a debt previously contracted, not to make additional bank stock loans at less than prime, to make a good faith effort to bring existing bank stock loans up to prime.

3. Bank-total deposits: $30 million.

Agreement: Required bank to immediately furnish plans to bring the bank into compliance with conditions placed upon the bank by the Board of Governors in connection with the bank's issuance of capital notes.

4. Bank-total deposits: $25 million.

Agreement: Required charge-off of assets classified loss by year-end; adoption of formal lending policy; expansion of collection department with definition of policies and assignment of responsibilities; definition of responsibilities of credit department; discontinuance of Master Charge if delinquencies and costs not reduced within 6 months; adoption of formal investment policy; arrange for the sale of bank building; submit status reports regarding the sale of other real estate; specific measures to improve earnings; adoption of resolution requiring bank's former president to relinquiish his office in the bank; submission of progress reports to Federal Reserve Bank outlining accomplishments under the Agreement. 1974: 1. Bank-total deposits: $4 million.

1 Deposit and asset figures are approximate.

Agreement: Required that loans be kept less than 70% of deposits, no credit extensions outside the trade area, no loans to directors or shareholders without prior approval, bank would not engage in link financing, bank would not make any nonconforming loans, would have regular loan committee meetings and maintain minutes, required monthly reports to Reserve Bank on classified loans, maintenance of credit information and collateral on each loan, bank would not accrue interest on loans more than 6 months past due, investment in non-U.S. Government obligations would not exceed 3.2% of total deposits, increase capital within 30 days, furnish Reserve Bank with daily financial statement and weekly reports showing loan/deposit ratio and participations placed.

2. Bank holding company-total assets: $2 billion.

Agreement: Holding company subsidiary was engaging in nonpermissible activities and the agreement required that these activities be discontinued. 1975: 1. Holding company-total assets: $250 million.

Agreement: Prohibited subsidiary banks from funding affiliated mortgage company; subsidiary banks could not honor repurchase commitments of holding company or other subsidiaries; precluded further sale of loan participations among banking subsidiaries and holding company; no further transfer of real estate loans, or participations in or agreements to repurchase such loans from affiliated mortgage company, either to holding company or banking subsidiaries; subsidiary banks could not declare further dividends; limited fees charged to banking subsidiaries to those reasonably related to services actually provided.

2. Holding company-total assets: $150 million.

Agreement: No further sale of assets from holding company or non-banking subsidiaries to banking subsidiaries; no transfer of assets held by one banking subsidiary to other banking subsidiaries; no extensions of credit to holding company or non-banking subsidiaries by banking subsidiaries.

3. Bank-total deposits: $600 million.

Agreement: Discontinue granting overdraft credit to borrowers with classified loans; no increase in aggregate credit extensions unless advance is demonstrably in best interests of bank; no credit extensions in excess of legal lending limits; restrict further credit advances to customers in local community; charge-off assets classified "loss" by next call report; make prompt arrangements to provide bank with additional management support; stop accruing interest on loans classified "doubtful" and "loss".

4. Holding company-total assets: $300 million.

Agreement: No fees, dividends, or tax payments would be paid by banking subsidiaries to the holding company in excess of any bank's obligation if filing a separate return; no salary increases; no dividends would be paid to the holding company by subsidiary banks while those banks remained undercapitalized. 5. Holding company-total assets: $150 million.

Agreement: Proceeds of a loan from outside sources to the holding company would be used first to increase the capital of subsidiary banks and to meet equity capital commitments made to the Board of Governors in connection with the approval of an application to acquire a banking subsidiary; operations of a currently dormant non-banking subsidiary would not be resumed without the permission of the Federal Reserve Bank; no dividends without permission of the Federal Reserve Bank; quarterly statements, the aforementioned loan documentation and debt service projections would be supplied to the Federal Reserve Bank.

6. Holding company-total assets: $80 million.

Agreement: No action would be taken by holding company management to force any member of the subsidiary bank board of directors to resign or be removed. 7. Bank-total deposits: $1.5 billion.

Agreement: No increase in credit extensions to loan accounts that are currently in excess of legal lending limits; act expeditiously to reduce the above loans below legal lending limits; charge-off loans classified loss or increase reserves to cover such loans; state assets net of all reserves; maintain valuation reserves commensurate with expected losses in loan portfolio; charge-off immediately or maintain specifically allocated reserves for both accrued but uncollected interest on loans that are now in nonaccrued status, and accounts receivable that are now uncollectable; no cash dividends on common shares without permission of Federal Reserve Bank; submit monthly progress reports and information on all material changes in condition.

ORDERS AND AGREEMENTS EXECUTED BY BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

1976: 1. Holding company-total assets: $50 million. 1

Subject: Violations of Regulation Y, unsafe and unsound practices in the form of insider loans and letters of credit to borrowers who were not creditworthy, and the placement of some of these credits into subsidiary banks.

Order: Prohibited the issuance of letters of credit and making, guaranteeing, or participating in loans without Board approval; prohibited further lending to insiders who were not creditworthy; provided for a Committee to proceed with the collection of bad debts, and a trustee if the Committee did not discharge its duties. 2. Bank-total deposits: $7 million.

3. Bank-total deposits: $8 million.

Subject: Loans to insiders who were not creditworthy, insufficient documentation on loans, failure to institute aggressive loan collection program.

Orders: Prohibited further insider lending; set up a loan committee and required it to submit collection progress reports to FRB periodically; provision for appointment of trustee if collection program was not successful.

4. Holding company-total assets: $2 million.

Subject: Holding company was involved in a bootstrapping transaction whereby it repurchased sufficient quantities of its own shares to render itself insolvent; violations of Regulation Y.

Order: Required principals responsible for bootstrap to make capital injections; the sale of treasury shares; dividends were prohibited for a finite period; lending to affiliates was prohibited.

5. Holding company-total assets: $11 million.

6. Holding company-total assets: $1 million.

7. Holding company-total assets: $1 million.

All Written Agreements had same subject and terms as #4 above.

1975: 1. Holding company-total assets: $1 million.

2. Holding company-total assets: $4 million.

3. Holding company-total assets: $4 million.

Subject: Failure to file required financial information (Y-6's) in violation of Regulation Y and Bank Holding Company Act.

Order: Information filed within 30 days, and cease and desist from future violations.

4. Holding company-total assets: $1 million.

Subject: Issuing commercial paper without ability to repay, insider lending, the payment by the holding company of fees for services not rendered to the holding company.

Order: Discontinue sale of commercial paper and payment of fees, collection of notes to insiders, program to retire the commercial paper currently outstanding. 5. Bank-total deposits: $6 million.

Subject: Questionable accounting practices concerning bond transactions, failure to collect past due loans, sale of holding company paper without full disclosure, excessive dividends, insider lending.

Order: No dividends without prior approval, limitation of funds passing to holding company, bank salaries frozen, no further sale of holding company paper, creation of a loan committee to collect delinquent credits and present written loan collection program to Federal Reserve Bank, correct books to reflect loss on bond transaction, collection of insider loans.

6. Holding company-total assets: $500 million.

Subject: Failure to maintain back-up lines on commercial paper, excessive dividends, share redemption that was resulting in serious capital depletion, unsound lending practices to insiders.

Order: Precluded loans to insiders, required the maintenance of back-up lines of credit, limited dividends and share redemption, placed a ceiling on salaries and fees.

7. Bank-total deposits: $120 million.

8. Bank-total deposits: $70 million.

9. Holding company-total assets: $5 million.

Three Orders removing individuals from banks or holding company after indictment.

1972: 1. Bank-total deposits: $10 million.

1 Deposit and asset figures are approximate.

« AnteriorContinuar »