insolvency proceedings. It is also inconsistent with the practices followed in State bank insolvencies.

In only two States is there a requirement that the FDIC be appointed a receiver of an insolvent State bank. In most of the remaining States, the FDIC may be so appointed at the discretion of the court or an administrator having authority.

Finally, we are greatly concerned about the public attention which has been drawn to FDIC operations in recent bank failure cases. Deposit insurance works best when it is applied quietly in times of need-not when it heightens public concern and distrust. It is the smaller banks of the country which are most likely to suffer from the adverse effects of such fears. These banks should be encouraged to serve their communities more fully-not subjected to pressures to withdraw further from competition.

In the light of all the considerations which we have described, we would recommend that action on the present bill be deferred to allow time for further study.

(The document entitled "The Role of Deposit Insurance in Bank Regulation" referred to follows:)

THE ROLE OF DEPOSIT INSURANCE IN BANK REGULATION REMARKS OF JAMES J. SAXON, COMPTROLLER OF THE Currency, BEFORE THE SEVENTH DISTRICT TEXAS BANKERS ASSOCIATION, HOTEL TEXAS, FORT WORTH, TEX., FRIDAY, FEBRUARY 22, 1963

A variety of proposals are now being advanced for strengthening the role of deposit insurance in bank regulation. Virtually every significant aspect of banking control and banking operations would be affected by these proposed changes. It is essential that their implications should be fully understood. Proposals for change

The proposals for change are in several different forms. It has been suggested that at the time of chartering new banks, when branches are authorized, and when mergers take place, eligibility for Federal deposit insurance should be determined by the insuring agency-in the case of national banks and other members of the Federal Reserve System as well as nonmembers. For all insured banks, it is proposed that the insuring authority should itself conduct periodic examinations to determine continued eligibility, and not rely entirely on the examinations of the supervisory agencies. It has further been proposed that the coverage of deposit insurance should be substantially increased, and that the insuring authority should have enlarged powers to assist failed or failing banks in order to maintain financial stability in the economy.

Implications of these proposals

If these proposed changes were adopted, the insuring agency would gain critical new powers over banking activities. The authority to grant or to withhold deposit insurance would place in the hands of the insuring agency an effective veto power over chartering, branching, and mergers-together with added power to set the capital requirements and to control the operating policies and practices of banks. Moreover, broader coverage of deposit insurance would alter fundamentally the incentives to prudent bank management, and enlarged emergency powers would assign to the insuring agency added responsibilities for maintaining financial stability in the economy.

A contrast with present policies

Public regulation of banking was undertaken, fundamentally, in order to provide effective instruments for attracting and channeling funds into productive uses, and to provide a satisfactory payments mechanism. For all these purposes, it was essential to maintain confidence in the banking system, and the measures of control were accordingly directed to sustaining the solvency and liquidity of banks, and assuring the provision of adequate banking facilities. Bank entry and bank expansion were subjected to public regulation, and the operating policies and practices of banks were brought under continuing intimate public supervision.

Despite these explicit forms of public control, and the actions or inactions of the monetary authorities, recurrent crises persisted and bank failures continued to Eventually, provision was made for deposit insurance to meet occasional contingencies on a carefully defined, limited basis.

occur.

The critical aspect of the present role of deposit insurance in bank regulation is its subordinate place in the pattern of public control at the Federal level. The basic responsibility for maintaining the solvency and liquidity of banks and the adequacy of banking facilities is entrusted to the bank regulatory and supervisory agencies, and in some respects to the monetary authorities. The broad public purposes of bank regulation and supervision are expressed in the statutes governing the operation of those agencies. Deposit insurance is designed to provide an additional safeguard of limited application in those occasional circumstances in which the basic regulatory and supervisory mechanism fails to provide the needed protection for depositors, or where sufficient liquidity is not provided through monetary action. Although the availability of deposit insurance is regarded by some as exercising a pervasive influence on public confidence in the banking system, reliance is not placed upon the insurance function as such for assuring the fundamental soundness of the banking system.

This interpretation of the role of deposit insurance is borne out by certain basic conditions which were imposed for the issuance of such insurance, and for the operation of the insurance plan. Deposit insurance was introduced without altering significantly the responsibilities of the Comptroller of the Currency and of the Federal Reserve Board for bank regulation and supervision, and without modifying the basic public objectives of such control. This was accomplished by requiring that national banks and other members of the Federal Reserve System, which were under Federal supervision, should automatically be eligible for deposit insurance without further limitations. So that the insurance safeguard would not be narrowly administered according to commercial standards, which were likely to be in conflict with the broader public purposes of bank regulation and supervision, provision was made for access to public funds to underwrite the solvency of the insurance plan. The degree of protection afforded through deposit insurance was explicitly restricted, thus preserving the basic reliance upon direct public supervision and prudent bank management. This restricted coverage of deposit insurance conformed with the special concern displayed for the smaller, lessknowledgeable depositor who had difficulties in reaching independent judgments on the safety of particular banks.

A fundamental transformation

The proposed changes in the role of deposit insurance would be likely to produce a fundamental transformation in this present structure of public control of banking. The probable effects are revealed in the basic supporting argument for these changes which asserts that insurance agencies do not ordinarily accept or continue risks without independent appraisal of the hazards. If this philosphy were followed, deposit insurance would tend to be administered according to commercial standards of insurability, rather than the broader public purposes which now prevail.

Although it is generally agreed that the risks of deposit insurance are not actuarially determinable, and are thus not clearly susceptible to commercial application, it could be expected that commercial concepts of insurability would be introduced if eligibility for deposit insurance were generally to be determined by the insuring authority. Such independent discretion to grant insurance protection would naturally place upon the insuring authority a greater feeling of responsibility to safeguard the solvency of the insurance fund. If this occurred, the tendency would be to appraise applications for bank charters and bank expansion, and proposals to enlarge the latitude of banking operations, principally in terms of their effects upon the insurance risks. Since these risks could be minimized through more rigorous controls over new competition as well as existing competition, the almost inevitable consequence would be the imposition of more severe restrictions upon innovation and new initiative.

Quite apart from the precise standards which an insuring agency would be likely to follow if it were endowed with greater powers over bank expansion and banking operations, the proposed changes would almost certainly give rise to coicts of policy. The standards now applied by the regulatory and supervisory agencies are conceived in broad public interest terms which would be most unlikely to coincide with commercial standards of insurability. Banks seeking to qualify for deposit insurance would be under a strong constraint to conform to the standards set by the insuring agency. As a consequence, the present roles of bank

supervision and deposit insurance in the structure of public control might be entirely reversed, with criteria of insurability becoming predominant over the broader public purposes of bank regulation and supervision.

Emergency situations

The proposals for enlarging the powers of the insuring authority to deal with failed and failing banks would entail added discretion to apply insurance coverage unequally among depositors. Moreover, it seems to be implied under these proposals that the insuring authority would be assigned broader responsibility for the maintenance of financial stability in the economy. Whatever the need may be for such additional emergency powers, they scarcely seem appropriate for an insuring agency. A wiser course would be to confine deposit insurance to precise limits, and to deal with emergency situations affecting the liquidity of the economy as a whole by other means. In this way, these two disparate functions could clearly be separated, and administered according to the individual standards that are appropriate for each.

The incidence of extended deposit insurance

There are three basic considerations which must be taken into account in appraising the desirability of extending the coverage of deposit insurance, apart from the broader issues of public policy which we have noted. These relate to:

(1) the costs of broader coverage; (2) the manner in which these costs would be distributed; and (3) the effects on the competitive position of various classes of banks.

1. It has been asserted that the coverage of deposit insurance could be substantially broadened without a significant increase in cost. These calculations are generally based on the assumption that past experience is a sufficient guide to the future. It should be evident, however, that a broadening of deposit insurance coverage might materially alter the performance of bank management. This would be particularly true where the deposits of a bank were fully covered by such insurance. Should this occur, the record of past experience would not necessarily provide an accurate basis for calculating potential future risks.

2. The effects of broadened insurance coverage upon the competitive position of banks would be dependent upon the role that such insurance plays in attracting deposits. Those banks in which depositors are more heavily reliant upon insurance would be favored over those which have a more secure position in the minds of depositors independent of the insurance coverage. The cost of providing this competitive benefit, which in a sense impairs the advantages of good management, would be borne in significant degree by other banks because of the fact that the insurance assessments are based on total deposits.

3. The broadening of deposit insurance would be likely to have a pervasive effect upon the prudency of bank management. It seems apparent that as the coverage of risks is extended, the incentive to prudent management would likely be diminished. This outcome would be probable because maturing risks under deposit insurance are not borne solely by the affected banks. The effect would be most marked where broadened deposit insurance coverage reached all of the deposits of a bank.

The decision whether to extend deposit insurance coverage would ultimately have to rest on the public purposes sought to be achieved. Support for a substantial increase in such coverage is generally founded on the asserted need to avert disruptions in the economy resulting from the unavailability of balances to commercial and industrial firms. There are sound reasons for protecting the smaller, less knowledgeable depositors. Those who hold larger balances, however, particularly commercial and industrial firms, are better able to select the banks in which their holdings will be secure. Considering the broader implications of extended insurance coverage which we have discussed, it is doubtful that this limited consideration will justify a substantial increase in such coverage. The choices we face

We stand now at a critical juncture in the development of public policy in the field of banking. The pace of our economic growth has persistently outrun the capacity of our banking system to serve emerging needs. We may meet this challenge through enlarged operating powers for banks, and measures designed to overcome harmful impediments to bank expansion. Or we may seek refuge, however uncertain, in new barricades to protect banks against rivalry.

The proposals for enlarging the role of deposit insurance are, I fear, measures of retrenchment. While taken separately, these individual proposals may appear to have some merit, in their entirety they reflect a search for safeguards against competition and the consequences of competition.

Our primary effort should be directed to the maintenance of an active and vibrant banking system, closely attuned to our national purpose of fostering the fullest development of our talents and resources. These critical requirements cannot be met, and indeed would be defeated or greatly impaired, by heightened concern for the risks of enterprise expressed in the pattern of public control of banking. The spirit we should endeavor to engender in our banking system should be one of vitality, and not one of fearful preoccupation with risks.

It may appear that added insurance coverage for depositors would induce greater vitality in the banking system by freeing management from the constraints imposed by the risks of enterprise. Enterprise which is founded upon freedom from risks, however, is not the form of banking activity which we should seek to encourage. Nor should we move to the other extreme of regulating bank expansion and banking operations according to standards which would safeguard an insurance fund. Our aim should be to provide greater latitude for banking operations, while preserving the incentive to prudent management; and to rely upon bank supervision directed to the fulfillment of public needs, rather than to impose standards which are oriented to the minimization of insurance risks.

Viewed in this perspective, deposit insurance should remain as a limited ultimate safeguard against occasional failures, administered according to standards which do not conflict with the broader public purposes which bank regulation and supervision are designed to serve. From the public point of view, deposit insurance works best when it operates, not as a crutch, or as a barrier to initiative, but as a measure which affords restricted and clearly defined protection terms which preserve the incentive and the opportunity for the proper conduct of banking operations.

The CHAIRMAN. Thank you, Mr. Camp.

Mr. Barr, would you like to comment on that? Make your comments as brief as you can, please, so we can then interrogate each of you gentlemen.

Mr. BARR. The only comment that I have, Mr. Chairman; is this, I think there is a basic disagreement between the Comptroller, on one side, the Secretary of the Treasury, the Bureau of the Budget, the Federal Reserve System, and the Federal Deposit Insurance Corporation on the other. All of us except the Comptroller think that the authority to require this information is not clear in the law.

We all agree that when the authority is not clear in the law, before moving into an area of this importance, we should come to the Congress and get a specific congressional mandate. This I think is the main issue.

The second issue involved is the question of submitting the reports of national banks to our office.

Mr. Chairman, our responsibility, as Mr. Camp correctly stated, is not primarily for regulation but for insurance. However, we insure all banks, State nonmember banks, State member banks and National banks.

We have incurred losses in all these categories. I think it is only reasonable to assume that if we are given the responsibility for picking up losses, that we should have the information that any normal insurance function would need to protect itself.

Lastly, in the case of the expenses of this Corporation, I would like to remind the committee that between 1934, when the Corporation was organized and the end of 1963, we have disbursed about $380 million for the protection of depositors in 447 banks. In these banks the deposits were approximately $635 million. In these banks, dating back to desperate cases in the 1930's, we have recovered $347 million of the amount disbursed and our net losses over our 30-year period totaled $32 million. At the end of 1963 only about $4 million or six-tenths of 1 percent of the deposits in these 447 banks were unpaid. It is estimated that an additional $1.5 million will be paid to depositors.

I would stack this record, I think, against any commercial firm of liquidators or receivers in the United States.

I might also add that not all expenses of liquidation, are charged against an insolvent bank. The Corporation provides free of charge the administration costs and expenses of the Washington staff and travel and subsistence expenses of field liquidation staff.

I would also like to add that Director Randall and I have an agreement, when a bank closes, one or the other of us is on the scene immediately. We are on the scene to see that the depositors are paid as quickly as possible.

In California, last week, we worked out an arrangement so that a bank was closed on Friday, Mr. Randall was there Friday night, and Monday morning the depositors had complete access to their money in a branch of another bank in California. There were no checks returned, they were not held up 1 day in getting their money.

This was the most successful experience we have had to date. Our function is not only to insure the deposits of these banks, but to make sure there is a way of paying bills in the United States. Our function is not only to pay off depositors, but to make sure that in any community, when a bank fails, funds are available as quickly as possible and to everyone who has money in the failed bank.

We have reduced it to 1 day. I don't know if we can do that frequently, but our average has been under 5 so far this year.

The CHAIRMAN. Mr. Camp, would you like to make a brief comment on Mr. Barr's statement?

Mr. CAMP. Yes, sir; I would like to speak to the question of whether legislation is needed as far as the national banks are concerned.

Now, I want to stress here that we have had this regulation, almost in its entirety, in operation since December of 1962. It is working very well for us. We have not been questioned on it and nobody has refused information where required. We feel that it has worked very well for us and we do not feel that it is necessary that the national banks be included in the bill.

As far as the State banks are concerned, if they so desire, it can possibly be done by regulation at that level.

The CHAIRMAN. Mr. Barr, you stated, I believe, 400-some-odd banks had resources of $635 million.

Mr. BARR. Right.

The CHAIRMAN. From what period of time, 1934 up to now? Mr. BARR. Since the creation of the Corporation in 1934, Mr. Chairman. These were the closed banks during that period.

The CHAIRMAN. I am amazed that the amounts are so small. If, in liquidation the Corporation recovered $350 million out of $380 million, I just wonder whether or not they were actually broke. If they are a going concern they could certainly overcome $350 million out of $380 million.

Mr. BARR. That is a very good question. In these early days, I dont think many banks were actually broke; not many businesses were broke in the long run. They were broke at this juncture of history. We took the assets, held on to them as long as 10 and 15 years and over this span of time the assets recovered their value as we worked out of the business cycle. So, whether they were broke or not, it was a question of not being able to pay depositors at the time. The CHAIRMAN. Mr. Kilburn?