PROMOTING SOUND BANKING

The Corporation has some supervisory authority with respect to all insured banks, and has general supervisory responsibilities for insured banks that are not members of the Federal Reserve System. It also has authority, implemented in Part 329 of its Regulations, with respect to noninsured mutual savings banks to establish maximum rates of interest payable on time deposits. There has been rapid growth in the number, size, and complexity of the banks falling within the Corporation's supervisory mandate over the past decade. Between year-end 1966 and year-end 1976, the number of insured nonmember commercial and mutual savings banks increased from 7,724 to 9,009. Assets of insured nonmember commercial banks totaled $234.8 billion as of December 31, 1976, representing 23.2 percent of all insured commercial bank assets (domestic) compared with just 16.6 percent in 1966. In December 1976, there were 329 mutual savings banks insured by the FDIC, with total assets of $115.3 billion.

Examinations. In 1976, the Corporation changed its policy of examining every insured nonmember bank every year and put into effect a system that recognizes the basic differences among banks associated with size and allocates more time to the examination of banks that require more attention. General Memorandum No. 1 set forth the new examination policy on examination priorities, frequency, and scope and clarified areas which allow the FDIC Regional Directors some discretion while still maintaining some uniformity of approach.

Top priority is accorded the examination of banks with known supervisory or financial problems. They will receive a full-scale examination at least once every 12 months. For banks with assets of less than $100 million that do not present supervisory or financial problems, and that meet criteria indicating satisfactory

management, adequate capital, acceptable fidelity coverage, good earnings, and adequate internal routine and controls, a modified examination is permitted for alternate examinations. The time between examinations will be stretched out so there will be one examination in each 18-month period, with no more than 24 months between examinations. Emphasis in such modified examinations will be placed on management policies and performance; the evaluation of asset quality, distribution, and liquidity; capital adequacy; and compliance with laws and regulations. Banks with assets of $100 million or more that do not present supervisory or financial problems will continue to receive a full-scale examination during each 18-month period, again with no more than 24 months between examinations. But the examination is designed to make full use of the bank's own reporting capabilities and generally is tailored more to the size and the complexity of the bank than was the case heretofore.

The program of bank examination outlined in General Memorandum No. 1 appears to be a better solution to effective allocation of examiner resources than the FDIC selective examination withdrawal program. This program, which was initiated in Georgia, Iowa, and Washington in 1974, was continued on a modified basis in 1976. Under this program, the Corporation had withdrawn in these three States from its usual examination of insured State nonmember banks and, for a specified number of such banks in each of the three States, agreed to rely heavily upon 1974 and 1975 examinations by the respective State banking departments for determination of their financial condition. In 1976, the Corporation examined the approximately 60 percent of insured nonmember banks in Georgia it had not examined in the previous 2 years, and also the 50 percent in lowa and the 80 percent in Washington it had not examined in 1974 or 1975. During these examinations in 1976, the FDIC analyzed