respect to providing acceptable management, eliminating and reducing adversely classified assets, correction of internal control deficiencies, adoption of and compliance with an internal audit program, correction of and future compliance with all applicable laws, rules and regulations, and adoption of and compliance with a written loan policy.

The most recent examinations of January 1974 and November 1975 indicate substantial compliance with the agreement. The most recent report of examination is being reviewed in the Review Section and consideration is being given to recommending that the agreement be terminated.

Bank No. 2.-Deposits-$13,957,000

Written agreement entered into on 3-2-72. Bank agreed for purposes of effecting correction of unsafe and unsound practices to take affirmative action with respect to providing acceptable management, eliminating and reducing adversely classified assets, adoption of and compliance with a written loan policy, injection of new capital, establishment of an unearned income account, adoption of and compliance with an internal audit program, correction of internal control deficiencies, and correction of and future compliance with all applicable laws, rules and regulations. The agreement is outstanding; however, the 7-14-75 FDIC examination report indicates the bank appears to be in substantial compliance with the agreement. Bank No. 3.-Deposits-$1,958,000

Written agreement entered into on 2-14-73. Bank agreed for purposes of effecting correction of unsafe and unsound practices to take affirmative action with respect to the controlling shareholder purchasing for a period of three years from date and within 60 days after the completion of any FDIC examination of the bank, any loan which was classified Loss or Doubtful in subject bank that originated in the controlling shareholder's chain of banks, other than subject bank, and any loan held by and originating outside subject bank's regular trade area, and subject bank was to divest itself of any loan originated in any of the controlling shareholder's banks which were held in subject bank that had been classified Substandard at another of the affiliated banks and purchased by subject bank. The agreement is outstanding, however, stock control has changed and the most recent examination as of 2-27-76 is being processed in the Regional Office and indicates substantial compliance. Consideration is being given by the Regional Office to recommend termination of the agreement.

APPENDIX C-2.-FEDERAL DEPOSIT INSURANCE CORPORATION FEDERAL DEPOSIT INSURANCE ACT-SECTION 8(a)

(Actions to Terminate Insured Status)

Attached is a case-by-case summary of 19 Termination of Insurance actions issued by the Corporation since January 1971. It should be noted that several such actions are now in various stages of processing.

In addition to the listing, it should also be noted a number of other Termination of Insurance actions have been recommended but were withdrawn prior to action by our Board because of favorable interim affirmative actions on the part of either the banks or management-shareholders. As in the case of Cease and Desist actions, the threat of Termination of Insurance has caused many favorable affirmative action programs on the part of banks which negated the need for finalizing the actions.

SUMMARY

Bank No. 1.-Deposits-$11,143,000

Notice of Intention to Terminate Insured Status issued 1-22-71. Bank was found in an unsafe and unsound condition and ordered to provide an active and capable management, eliminate by charge-off or otherwise certain classified assets, correct all violations of law listed in the report of examination, and to adopt and strictly follow written loan policies if continued insured status was desired. The action was terminated 6-30-71 when subject was merged with another bank.

Bank No. 2.-Deposits-$13,419,000

Notice of Intention to Terminate Insured Status issued 3-12-71. Bank was found in an unsafe and unsound condition and ordered to provide an active and capable management, eliminate from its books certain assets, by charge-off or otherwise, correct all violations of law listed in the examination report, adopt and strictly follow written loan policies, pay no cash dividends without the prior consent of the Banking Commissioner and the FDIC, reduce the loan-to-deposit ratio, not accept or acquire, directly or indirectly, brokered deposits, eliminate from its

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capital accounts all income collected but not earned, and to provide adequate capital and reserves if continued insured status was desired.

The action was terminated 12-17-71 based upon substantial compliance with the corrective orders.

Bank No. 3.-Deposits-$3,827,000

Notice of Intention to Terminate Insured Status issued 6-30-71. Bank was found in an unsafe and unsound condition and ordered to provide an active and capable management, eliminate from its books certain assets, by charge-off or otherwise, reduce the remaining classified assets, correct all violations of law listed in the report of examination, adopt and strictly follow satisfactory written loan policies, pay no cash dividends without the prior consent of the Commissioner of Banking and the FDIC, and put the assets of the bank in such form and condition as to be acceptable to the Commissioner of Banking and the FDIC if continued insured tatus was desired.

The action was terminated 4-6-73 based upon substantial compliance with the corrective orders.

Bank No. 4.-Deposits-$5,925,000

Notice of Intention to Terminate Insured Status issued 11-19-71. Bank was found in an unsafe and unsound condition and ordered to provide an active and capable management, eliminate from its books certain assets, by charge-off or otherwise, refrain from extending credit, directly or indirectly for the benefit of a director, reduce the remaining classified assets, adopt and strictly follow satisfactory written loan policies, pay no cash dividends without the prior consent of the Commissioner of Banking and the FDIC, and the assets of the bank were to be put in such form and condition as to be acceptable to the Commissioner of Banking and the FDIC if continued insured status was desired.

The action was terminated 7-7-72 based upon substantial compliance with the corrective orders.

Bank No. 5.-Deposits-$12,609,000

Notice of Intention to Terminate Insured Status issued 12-17-71. Bank was found in an unsafe and unsound condition and ordered to eliminate from its book assets, by charge-off or otherwise, certain classified assets, and other assets of the bank were to be put in a satisfactory form and condition if continued insured status was desired.

The action was terminated 7-14-72 based upon substantial compliance with the corrective orders.

Bank No. 6.-Deposits-$8,202,000

Notice of Intention to Terminate Insured Status issued 1-27-72. Bank was found in an unsafe and unsound condition and ordered to provide acceptable management, eliminate or reduce adversely classified assets, adopt acceptable loan policies, correct violations of law, and provide acceptable capital funds if continued insured status was desired.

The action was terminated 5-14-73 based upon substantial compliance with the corrective order.

Bank No. 7.-Deposits-$4,079,000

Notice of Intention to Terminate Insured Status issued 3-17-72. Bank was found in an unsafe and unsound condition and ordered to provide acceptable management, eliminate or reduce adversely classified assets, adopt acceptable loan policies, correct violations of law, and provide acceptable capital funds if continued insured status was desired.

The action was terminated 12-4-72 based upon substantial compliance with the corrective order.

Bank No. 8.-Deposits-$1,857,000

Notice of Intention to Terminate Insured Status issued 5-1-72. Bank was found in an unsafe and unsound condition and ordered to provide acceptable management, eliminate or reduce adversely classified assets, adopt acceptable loan policies, and provide acceptable capital funds if continued insured status was desired.

The action was terminated 6-11-73 based upon substantial compliance with the corrective order.

Bank No. 9.-Deposits-$12,649,000

Notice of Intention to Terminate Insured Status issued 10-30-72. Bank was found in an unsafe and unsound condition and ordered to eliminate or reduce adversely classified assets, obtain supporting documents prior to extending credits, adopt acceptable loan policies, and provide acceptable capital funds if continued insured status was desired.

The action was terminated 3-1-74 based upon substantial compliance with the corrective order.

Bank No. 10.-Deposits-$5,540,000

Notice of Intention to Terminate Insured Status issued 11-21-72. Bank was found in an unsafe and unsound condition and ordered to provide acceptable management, eliminate or reduce adversely classified assets, obtain supporting documents prior to extending credits, strictly adhere to its written loan policies, correct violations of laws and provide acceptable capital funds if continued insured status was desired.

The action was terminated 5–29–74 based upon substantial compliance with the corrective order.

Bank No. 11.-Deposits-$3,913,000

Notice of Intention to Terminate Insured Status issued 5-14-73. Bank was found in an unsafe and unsound condition and ordered to eliminate or reduce adversely classified assets, adopt acceptable loan policies, correct violations of law, and provide acceptable capital if continued insured status was desired.

The action was terminated 8-11-75 based upon substantial compliance with the corrective orders and the termination of affiliation with the bank by the control ownership.

Bank No. 12.-Deposits-$81,555,000

Notice of Intention to Terminate Insured Status issued 6-28-74. Bank was found in an unsafe and unsound condition and ordered to provide acceptable management, eliminate or reduce adversely classified assets, adopt acceptable loan policies, and correct violations of law if continued insured status is desired. The action to terminate insured status is in the hearing stage.

Bank No. 13.-Deposits-$13,765,000

Notice of Intention of Terminate Insured Status issued 8-12-74. Bank was found in an unsafe and unsound condition and ordered to provide acceptable management, eliminate or reduce adversely classified assets, adopt acceptable loan policies, pay no cash dividends without prior written consent, provide acceptable capital, and correct violations of law if continued insured status was desired.

The action was terminated 8-11-75 because of temporary compliance; however, due to further deterioration and the length of time since the issuance of the initial order, a new order was simultaneously issued.

Bank No. 14.-Deposits-$6,557,000

Notice of Intention to Terminate Insured Status issued 8-12-74. Bank was found in an unsafe and unsound condition and ordered to provide acceptable management, eliminate or reduce adversely classified assets, adopt acceptable lcan policies, limit investment in securities to U.S. Government and/or Agency obligations maturing within five years, cease paying preferential rates of interest on certificates of deposit or other obligations to ownership interests, and correct violations of law if continued insured status was desired.

The Commission of Banking closed the bank on 5-30-75.

Bank No. 15.-Deposits-$4,174,000

Notice of Intention to Terminate Insured Status issued 6-19-75. Bank was found in an unsafe and unsound condition and ordered to provide acceptable management, eliminate or reduce adversely classified assets, reduce its loan volume, adopt and comply with a loan policy, discontinue cash dividends, and obtain a certain level of capital if continued insured status was desired. Bank closed on 1-12-76.

Bank No. 16.-Deposits-$821,000

Notice of Intention to Terminate Insured Status issued 7-25-75. Bank was found in an unsafe and unsound condition and ordered to provide acceptable management, eliminate or reduce adversely classified assets, define an acceptable trade area, curtail direct and indirect loans to insiders, restrict its loan volume, comply with certain investment restrictions, comply with all applicable laws, rules, and regulations, discontinue cash dividends, and obtain a certain level of capital in continued insured status is desired.

An examination to determine the extent of correction was made on 11-25-75 and the bank was found not to be in compliance with the order. A recommendation to continue the action is in process.

Bank No. 17.-Deposits-$13,849,000

Notice of Intention to Terminate Insured Status issue 8-11-75. Bank was found in an unsafe and unsound condition and ordered to provide acceptable management, eliminate or reduce adversely classified assets, reduce and maintain loan volume at a certain level, eliminate all adversely classified insider loans and reduce and maintain all such loans at a certain level, adopt and comply with a loan policy, discontinue cash dividends, obtain a certain level of capital, comply

with all applicable laws, rules, and regulations, and refrain from participating in any transactions with a certain affiliate if continued insured status is desired. An examination to determine the extent of correction was made on 10-31-75 and the bank was found not to be in compliance with the order. The action is now in the hearing stage.

Bank No. 18.-Deposits-$16,089,000

Notice of Intention to Terminate Insured Status issued 9-16-75. Bank was found in an unsafe and unsound condition and ordered to provide acceptable management, eliminate or reduce adversely classified assets, adopt and comply with a loan policy, provide for an orderly liquidation of certain stock holdings, comply with applicable laws, rules and regulations, appoint a committee to approve and control expenses, discontinue cash dividends, and obtain a certain level of capital if continued insured status is desired.

An examination to determine the extent of correction has just been completed and a determination will be made as to whether the action should be continued. Bank No. 19.-Deposits-$15,883,000

Notice of Intention to Terminate Insured Status issued 10-9-75. Bank was found in an unsafe and unsound condition and ordered to provide acceptable management, eliminate or reduce adversely classified assets, reduce and maintain loan volume at a certain level, reduce its overdue loans not to exceed a certain percentage of outstanding loans, maintain a primary and secondary reserve position equal to a certain percentage of total resources, adopt and comply with loan and investment policies, and obtain a certain level of capital if continued insured status was desired.

Bank closed on 10-24-75.

The CHAIRMAN. Mr. Murphy, Deputy Comptroller for Law and Chief Counsel of the Comptroller's office.

STATEMENT OF C. WESTBROOK MURPHY, DEPUTY COMPTROLLER FOR LAW AND CHIEF COUNSEL; ACCOMPANIED BY ROBERT B. SERINO, DIRECTOR OF ENFORCEMENT AND COMPLIANCE, OFFICE OF THE COMPTROLLER OF THE CURRENCY

Mr. MURPHY. Thank you, Mr. Chairman.

The Comptroller's office is deeply appreciative of the committee's willingness to hold these hearings and we hope the committee will report favorably on the bill.

I am accompanied today Mr. Chairman, by Mr. Robert B. Serino, our Director of Enforcement and Compliance. I have asked him to accompany me because of his unique experience with the cease-anddesist legislation.

According to the numbers which have been submitted to the committee by all three agencies on cease and desist proceedings, and relying on the best of my memory as to who did what within the Comptroller's office, I think Mr. Serino has participated personally in 56 cease and desist proceedings. That number is approximately half of all cease and desist proceedings that have been brought since the statute was passed in 1966. For that reason, I have asked him to join us this morning.

The chairman was quite correct in pointing out that it's examination that is the principal enforcement tool for all three banking agencies. Most of the work of the banking agencies takes place in the bank between the examiner and the bank management, and reference to that mode of operation is necessary to put this bill in perspective. This is an important piece of legislation. We think it will be useful, but it still is one that is used on comparatively few occasions. Most problems are handled in the banking agencies by the examiner and,

in our case, the regional administrators. In the case of the Fed and the FDIC, by their regional officers.

But occasionally we get a particularly difficult problem. I'm reminded of a line in a play by Tom Stoppard, "Jumpers." It was a murder mystery and the problem was how to dispose of the dead body, one of the characters said, "There's no problem that can't be solved by a large enough plastic bag," and then they produced a plastic bag and put the body in it and disposed of it.

Well, in 1966 we finally got a large enough plastic bag for what we thought would take care of our problems then. I was interested-in preparing for this testimony-to find out that the Comptroller of the Currency, as early as 1917, had recommended to the Congress cease and desist legislation such as was passed in 1966, and civil monetary penalty legislation such as is being discussed today. I understand, Mr. Chairman, that you were the floor manager on the 1966 legislation and we are deeply appreciative that, after half a century, due to your efforts, we finally got some legislation passed. That legislation has been quite useful to us.

As the numbers show, I think we have used that legislation in the last 5 years, that is calendar years 1971 through 1975, a total of 61 times. We have used it some this year. I think we used it a total of five times before 1971.

We also find that these orders have been quite effective in curing the problems. By definition, we are dealing with extraordinarily difficult problems, ones that cannot be taken care of in the usual course of business and

The CHAIRMAN. Did you say you requested this legislation-not you, of course, because you're not that old-your office requested this in 1917?

Mr. MURPHY. That's correct. I'd be glad to-I happened to bring that with me.

The CHAIRMAN. Including civil money penalties?

Mr. MURPHY. Yes.

The CHAIRMAN. I knew this had been a sleepy committee, but I didn't realize it had been that sleepy.

Mr. MURPHY. These are some recommendations made by the Comptroller of the Currency for legislation in his Annual Report to Congress for 1917.

First. That the officers of a national bank be prohibited from borrowing funds of the banks by which they are employed.

Second. That no loan be made by any national bank to any of its directors or to a firm in which a director may be a partner without formal authority of the board of directors of the bank, expressed by affirmative vote of at least two-thirds of directors present.

Fourth. That the penalty for an excessive loan be the disqualification of the officer making or granting the loan, or the imposition of a suitable fine, or both, in addition to the civil liability incurred by reason of making such loan.

Fifth. That the Comptroller of the Currency be authorized to bring proceedings against directors of a national bank for losses sustained by the bank through violations of the provisions of the National Bank Act or the Federal Reserve Act. Sixth. That the Comptroller of the Currency be empowered, with the approval of the Secretary of the Treasury, to require the removal of a director or directors or any officer of a bank guilty of the violation of any of the more important provisions of the Act, and to direct that suit be brought in the name of the bank against such director or directors, after they cease to be connected with the bank, for losses sustained by their malfeasance or misfeasance in office.