CHAIRMAN'S STATEMENT

The last few years have been traumatic ones for the United States banking industry. The worst recession since the Great Depression of the 1930s, combined with double-digit inflation, imposed great strains on the banking system. More bank failures occurred in 1976 than in any year since 1942. The eight largest bank failures in the FDIC's history took place in the 39-month period from October 1973 to December 1976-banks whose assets aggregated over 31⁄2 times as many assets as all the other insured banks that have been closed during the entire history of the FDIC. Yet, despite these strains, and the generation of a great deal of unfavorable publicity, the public's basic confidence in the banking system and the deposit insurance system appears to be unshaken. At all times during 1976, for example, at least 97-98 percent of all the insured banks in the country were not on the FDIC problem list; only around 2-3 percent of them were.

The strains on the banking system in the last few years were not at all insignificant. Not only did they lead to 16 insured bank failures in 1976, but they also raised the number of banks on our problem list to the highest level in 28 years. At the end of the year, there were 379 FDIC-insured banks on our list of banks we feel supervisors should be paying particular attention to, the list we call our "problem" list, or about 21⁄2 percent of all insured banks. While this is a very low percentage, far fewer than that, considerably less than 1 percent of all banks in the country, are in our serious problem categories.

One new aspect of the problem list now, as distinct from a few years ago, is that the list includes some large banks (banks with over $500 million in deposits) and a few very large banks (over $1 billion in deposits). Of course, there are many more banks in those size categories now than there were in the past, so

the appearance of some of these banks on a problem list is more likely now than previously. But it must be recognized that in recent years larger banks assumed greater risks on both sides of their balance sheets. That fact, combined with the unsatisfactory performance of the economy, has led to problem status for a few of these larger banks.

The FDIC was not established, of course, to eliminate bank failures or to prevent banks from assuming risks. During periods such as the one we have been passing through, the FDIC has as its major function that of assuring that an individual bank failure does not lead to drastic repercussions. Our major function in these circumstances is one of maintaining confidence in the banking system so that the occasional failure, which is an essential part of a free enterprise system, can be handled with a minimum of disruption to the economy and the community.

The FDIC has successfully met the test which recent events have thrust upon it. If, 5 years ago, we could have forecast the most severe recession since the Depression of the '30s, simultaneous high unemployment and rapid inflation, the collapse of the multi-billion dollar REIT industry, bankruptcies of major industrial corporations, as well as failures of some larger banks, we might have had great concern about the ability of the banking system to avoid a major crisis of confidence.

Such a crisis has not developed. To be sure, this required massive action on an unprecedented scale by the FDIC. The concept of a "clean bank" purchase and assumption transaction, one in which a take-over bank purchases only good assets from the estate of the failed bank, with the FDIC substituting cash for the assets not taken by the take-over bank, has been applied in the past 3 years by the Corporation to larger banks. By doing so, the Corporation has removed from the banking system between October of 1973 and

December 31, 1976, over $3.7 billion of questionable assets, including all the worst assets of all the failed insured banks. This represents a substantial removal of poor quality assets from the banking system.

Just as important as the "clean bank" purchase and assumption approach has been the Corporation's determination to attempt to arrange a purchase and assumption in each failed bank situation, rather than pay depositors their insured amounts. This approach, and our ability to implement it not only in all larger bank failures but in nearly all failures regardless of bank size, has contributed significantly to customer confidence in the banking system. Only three banks whose total deposits aggregated only about $18 million, were paid out in 1976.

The size and complexity of the Corporation have grown dramatically during the past few years. The Corporation now supervises 9,009 commercial and mutual savings banks, an increase of 86 during 1976 and an increase of 798 during the past 5 years. These banks at year-end 1976 had assets totaling $355.6 billion, an increase of $34.1 billion in assets of banks supervised by the Corporation from the end of 1975, and an increase of $151.4 billion during the preceding 5 years. We now supervise three times as many banks with deposits over $100 million as the Federal Reserve System, and are approaching the number of banks of this size supervised by the Comptroller of the Currency. More banks with deposits of over $1 billion are supervised by the FDIC than by the Federal Reserve System.

We are currently liquidating over $2.6 billion of assets in our Division of Liquidation. These assets are considerably larger and more difficult to liquidate than those in earlier liquidations and our recovery record will not be as high when the books are finally closed on these liquidations as it has been in the past.

The number of Corporation employees

now totals 3,535, an increase of 261 during 1976, and an increase of 928 during the past 5 years. Our expenditures, of which at least 83 percent are for employee compensation and examiners' travel, totaled $75 million for 1976, an increase of $8 million from the previous year and an increase of $33 million from 5 years ago. The increase in expenditures during the past 5 years is directly traceable to governmental pay and reimbursement increases, increases in number of employees, and inflation.

The largest part of the increase in number of employees is directly related to the increase in the number and size of banks supervised and to the number and size of liquidations we are administering. In addition, a number of employees have been added to deal with relatively new responsibilities that the Corporation has been given during the past few years. For example, while it is difficult to estimate precisely, it appears that the Corporation is spending the equivalent of 230 thousand man-hours each year in enforcing consumer laws.

There has not been a fundamental change in the deposit insurance system since its inception. The performance of the banking industry and the FDIC during this recent difficult economic period has been good and suggests that drastic change may be unnecessary. Nevertheless, in an attempt to confirm or refute this and to review systematically our entire operations, we launched during 1976 a major analysis of the premises and procedures of our system of Federal deposit insurance. This review covers the extent of deposit insurance, the financing of the deposit insurance system, and our methods of handling bank failures. In addition, we are giving special attention to the international aspects of deposit insurance to determine whether that change in the nature of that important segment of the banking business requires some change in the deposit insurance system. Any recommendations arising from our study will

be reported during 1977.

We have also been reviewing the process of bank examination, which is our major tool for preventing bank failures. Some changes, which had been initiated by the FDIC on an experimental basis in 1975, were implemented more fully in 1976 and will be accelerated in 1977. A dramatically revised procedure for examining and supervising banks was adopted in November when amended General Memorandum No. 1 was approved. The new approaches to the examination function are designed to deploy more effectively the resources needed to meet an increasing work load, to marshal efforts in the appropriate areas, and to maintain technical competence in the face of increasing sophistication in operating and management systems of banks. Specific changes include the use of modified examination for smaller banks that do not present supervisory problems, both computerized and manual monitoring techniques to anticipate problem bank situations and to keep banks under surveillance between examinations, more intensive use of statistical sampling techniques, and automated bank examination packages.

The FDIC has been experimenting since 1974 with the elimination of some FDIC bank examinations in three States deemed to have appropriate and effective State bank examination procedures, Georgia, Iowa, and Washington. At the conclusion of that experiment in 1976, and as a result of what was learned, an agreement has been reached with the State of Georgia whereby examinations of a large portion of the total nonproblem State-chartered banks in Georgia will be conducted by the State and the FDIC on an alternate year basis. While it appears at this time that lowa does not wish to continue the experimental program and instead wants the FDIC to return to the examination status that was in effect before the first year of the withdrawal experiment, the Corporation is in the proc

ess of discussing programs similar to the one to be begun in Georgia with Washington and other States. Agreements with other States should save substantial examination time by eliminating some duplication of State and FDIC examinations, it will permit State banking departments to improve both the quality and size of their examination staffs at a rate that can be absorbed by State budgets, and it will permit the FDIC to deploy its resources more vigorously in examining problem or more difficult banks.

This improved cooperation and coordination with the States, as well as the other changes in our examination procedures, are designed to permit the redeployment of more of our resources to banks that have problems, or that because of their size and scope of operations are of particular concern to the FDIC. Banks that warrant it will be examined more frequently and more intensively than in the past, while banks in good condition will be examined less frequently by the FDIC but will still be monitored through careful review of information supplied by the bank itself.

When our examination process detects weakness in a bank, we have several means of dealing with the situation, both formal and informal. Over the last few years, there has been a trend in the direction of more frequent initiation of formal actions, generally cease-and-desist orders issued pursuant to section 8(b) of the Federal Deposit Insurance Act. While informal approaches are often successful, the trend toward greater use of formal actions was accelerated in 1976. There were 41 cease-and-desist proceedings initiated in 1976, compared with 8 in 1975 and only 7 as recently as 1971.

Section 8(a) orders, withdrawal of insurance, have remained rather constant in numbers during similar periods with 8 being initiated during 1976 and 5 each in the years 1975 and 1972. Federal deposit insurance was terminated in one bank during 1976, First State Bank & Trust

Co., Rio Grande City, Texas, and the bank failed shortly thereafter.

Major steps were taken by the FDIC during 1976 to increase efforts at enforcing bank customer oriented laws and regulations. Not only was a director for the Office of Bank Customer Affairs selected and the efforts of that office begun to be felt during 1976, but section 8(b) ceaseand-desist orders for violations of the Truth in Lending Law were issued for the first time since 1973. Also instituted was a sample survey aimed at improving enforcement of Fair Housing Lending (Title VIII of the Civil Rights Act of 1968), and based on what is learned from analysis of the sample survey, we plan to extend that program during 1977. Increased training for examiners was part of our program during 1976, as were changes and improvements in our consumer complaint investigation procedure.

Our analysis of bank problems in the past has led us to conclude that an increasing responsibility for bank safety and success must lie with the board of directors of the bank. During 1976 members of the Board of Directors of the Corporation and members of the FDIC staff participated in educational programs aimed at directors of banks and we have announced a policy of conducting meetings between the bank examiner and the board of directors of banks on a more frequent basis than previously. Since we have found that a number of bank failures and bank problems have resulted from improper dealings between the bank and its insiders, we issued a new regulation in 1976 requiring approval of significant insider transactions by the board of directors of each nonmember bank.

Under the present bank regulatory structure, the FDIC does not directly supervise all the banks it insures. Even though the Federal Deposit Insurance Act permits the Corporation to examine member banks "for insurance purposes," the Senate Banking Committee in its report accompanying the 1950 amend

ments to the FDI Act made it clear that this was not to mean that the Corporation would conduct any systematic examination program of member banks. Thus, the FDIC has a need for coordination between itself and the other supervisory agencies. There are several mechanisms for assuring this needed cooperation, one obvious one being the membership of the Comptroller of the Currency on the Board of Directors of the FDIC. This gives the Comptroller a good understanding of the status of major matters at the FDIC and provides the opportunity on a regular basis for other FDIC Board members to ask questions of the Comptroller concerning his operations. During 1976 meetings were held on an approximate monthly basis of the Interagency Coordinating Committee, consisting of the Chairman of the Federal Deposit Insurance Corporation, the Comptroller of the Currency, the Chairman of the Federal Home Loan Bank Board, the Vice Chairman of the Board of Governors of the Federal Reserve System, and a representative of the Secretary of the Treasury. The Coordinating Committee considers all matters that involve more than a single agency's activities, and during 1976 considered such issues as interest rate ceilings, supervisory treatment of certain bank assets, regulations on pooling of deposits, transfers from savings to checking accounts, new deposit instruments, and many others.

The FDIC might know more about all the banks it insures if it had a representative in the offices or on the boards of the other bank regulatory agencies. But even absent such representation, we believe the opportunity for extensive cooperation and coordination not only exists but is taken frequently and extensively. Because of this, we feel that we have, in general, an accurate and current knowledge of banks not supervised by us that present a significant risk to the deposit insurance fund.

In the interest of consistency and uni

formity, the Comptroller of the Currency launched a program in 1975 aimed at providing a uniform classification of certain large credits participated in by several banks in which a national bank was the lead bank. This assures that a loan to a given company will be treated in a consistent fashion by all national bank examiners. The FDIC had observers at the loan discussions in this program in 1976 and has concluded that the reviews were generally consistent with reviews Corporation examiners would have made were they faced with the same loans. We anticipate participating in such reviews in 1977 and are now applying the results to the same credits when they appear in State nonmember banks.

The FDIC has long had an extensive and sophisticated training program for examiners, including the most modern, spacious, and useful classrooms, as well as the most extensive curriculum, of all the banking agencies. Our long-run planning indicates a need for increased facilities to handle our growing needs for examiner training. In the interest of coordination and efficiency, we have proposed to the Comptroller of the Currency and the Federal Reserve that they consider participating with us in an expanded joint training facility. Along the same lines, we have proposed to the Comptroller of the Currency consideration of a joint computer facility. We have received responses from both agencies which encourage us to believe that some useful joint facility can be developed.

The process of bank supervision is facilitated by contact with executives of the supervised institutions and representatives of bank customer groups. In 1975

the FDIC began a series of meetings between officials of the FDIC and chief executive officers of insured nonmember banks. During 1976 two such meetings were held on a regional basis with commercial bankers and two with mutual savings bank officers. While these meetings covered a variety of topics, we gained a clear impression of the controversial matters that most concern bankers around the country. Payment of interest on demand deposits and NOW accounts, as well as interest rate ceilings on time deposits and competition between commercial and thrift institutions, appeared to be the most important concern of the banking community. A close second was concern about the growth of regulations pertaining to consumer protection and the burden of government paperwork requirements generally. Preservation of the dual banking system also was a matter of great importance to the bankers who attended these meetings.

As yet, a program to get systematic input from bank customers has not been developed. We do hear frequently from customers (over 4,000 inquiries or comments were received during 1976 from bank customers), and FDIC representatives have both attended and hosted meetings of consumer groups. We hope that a more regular means of communication with bank customers can be developed in 1977.

Robel E. Barnett

Robert E. Barnett

Chairman