The CHAIRMAN. Thank you very much. Mr. LeMaistre. STATEMENT OF GEORGE A. LE MAISTRE, DIRECTOR, FEDERAL DEPOSIT INSURANCE CORPORATION Mr. LEMAISTRE. Mr. Chairman, I also appreciate the opportunity to appear on behalf of the FDIC in connection with these bills and I will try to comment briefly particularly on those points on which we haven't testified before. In regard to S. 71, I point out that it's essentially the same bill as S. 2304 which was introduced in the 94th Congress and which sought to strengthen the enforcement powers of the banking agencies. That bill was jointly recommended by our Corporation, the Federal Reserve Board, and the Comptroller of the Currency, and Chairman Barnett testified before this committee as to the need for this bill on March 26 of last year. I would strongly urge adoption of those provisions of the bill originally recommended, but there is one difference between S. 71 and S. 2304 as it was introduced which I consider to be very significant. That is section 8 of the bill which would subject the FDIC, the Comptroller of the Currency, and the National Credit Union Administration to certain facets of the appropriations process. Because I believe that the existing congressional oversight procedures are quite effective, because no need has been shown for such legislation, and because I think there are risks that are involved in its adoption, I would respectfully urge the deletion of section 8 of this bill. The FDIC has been subject to periodic financial audits by the General Accounting Office for the last 32 years and during that period we have had no substantial criticism of our expenditures or our budget process and GAO has frequently stated that our internal records and controls are excellent. The General Accounting Office assessment in this regard, and the absence of any significant taint since FDIC's creation, seems to me to demonstrate the effectiveness of the present oversight mechanism. But even more important, I think that we have taken the lead among the banking agencies in cooperating with the Congress to expand oversight of the bank regulatory process. We have just recently entered into an agreement with the General Accounting Office which would provide that that arm of Congress might examine our examination reports in order to facilitate a performance audit of the FDIC by the General Accounting Office, and in recent testimony the FDIC indicated that it does not object to the passage of House bill H.R. 2176 which would require these performance audits annually. That is, we have no objection, assuming that amendments are adopted which would safeguard the confidentiality of the materials involved, and we believe that the periodic performance audits coupled with continued General Accounting Office finanical audits and oversight hearings by the Congress provide an effective means for assuring the FDIC's accountability, and we believe that the Congress should evaluate the adequacy of this approach to oversight before undertaking the risks which we see as inherent in section 8 of this bill. To subject the FDIC to the appropriations process is not a new idea. I outline in my written statement details of similar legislative proposals made over the years, all of them rejected by the Congress, and a review of the record shows that the Congress has repeatedly refused to enact such legislation primarily because of its reluctance to tamper with the mechanism which has performed so well its mission of maintaining public confidence in the banking system and thereby in our monetary stability. The concerns which have been expressed in past debates are I think still valid at this time. To review a little bit, American economic history prior to the establishment of FDIC was characterized by recurring bank panics which would result in sharp and precipitous contraction of the money supply and often led to severe economic downturns. This system of Federal deposit insurance was established primarily as a means of restoring and maintaining confidence in the Nation's banking system with the idea that this would eliminate these recurring busts. The wisdom of the Congress I think in the last 4 years has been amply demonstrated. That's the time with which I'm most familiar since I came on as Director in August of 1973, and I would point out that we are right now at the end of the most significant crisis in American banking and in our general economy since the great depression. The eight largest bank failures in our history have taken place in the 39-month period between October of 1973 and December of 1976. Those banks aggregated in their assets more than 32 times the assets of all other insured banks closed in the entire history of this Corporation and in these cases I think the FDIC has quietly and effectively performed its function of minimizing the disruptive effects of bank failures and, as a result, I think the confidence in our banking system has been maintained to a remarkable degree, notwithstanding the stresses and the shock of this difficult period. Consequently, in my judgment, it is singularly inappropriate at this time for the Congress to take action which would suggest a lack of confidence in the stewardship of the agency and which might thereby diminish the public confidence which is so critical to the agency's mission. I think the committee should be aware of the potential effect of prior public knowledge of significant personnel actions by the Corporation. Certainly prior public disclosure of our intention to add 100 new liquidation personnel early in the recent recession might well have created public doubt as to the safety and soundness of our Nation's banks. I don't come before you today to say that the deposit mechanism cannot function under the provisions contained in section 8. What I'm trying to emphasize is that there are potential risks in destroying the insulation of the Federal deposit insurance mechanism, risks which the Congress has consistently and in my judgment wisely refrained from taking in the past. Moreover, I would argue that the record of the agency over the past 42 years fully justifies the faith that Congress placed in it and that existing oversight procedures, especially as recently expanded, are perfectly adequate to assure the agency's accountability to the Congress. So in the light of the risks that are entailed and the extensive oversight currently in place, the expanded oversight likely to be implemented, I would say that section 8 of S. 71 should be enacted only if supported by facts demonstrating the inadequacy of present pro cedures. I do not think such a case has been made. Accordingly, it is my view that section 8 should be deleted from S. 71 and that the remaining provisions of the bill should be adopted. The second bill that we are talking about is S. 73, dealing with interlocks between financial institutions, and I will remind you that in 1971 the FDIC proposed legislation in this area and I have attached to my written statement a copy of that draft for your consideration. I also point out in my written statement the differences between S. 73 and the approach we made in 1971, but if the committee prefers to follow the S. 73 approach, we would recommend one specific change, and that is that one basis for granting exemptions where interlocks are necessary be the scarcity of management talents in smaller communities. The third piece of legislation is S. 895 which I hope is a relatively noncontroversial proposal. One provision would require FDIC's consent prior to the establishment of foreign branches by a nonmember state bank or the acquisition of foreign bank stock by a nonmember insured bank which authority the Federal Reserve System now has with respect to member banks. In addition, we would change the definition of affiliate in section 10 of the Federal Deposit Insurance Act to conform with the definition of the term which is contained now in section 23A of the Federal Reserve Act. Our reason for proposing these changes and other less significant amendments are set forth in my written statement. The fourth bill to be considered, S. 1433, would expand the conflict-of-interest provisions in the Federal Deposit Insurance Act and the Federal Reserve Act. I have no objection to S. 1433, but I would suggest that it be considered in the context of S. 1446, an administration bill recently introduced by Senator Ribicoff which would deal with conflicts of interest on a Government-wide basis. We believe that both logic and equity dictate dealing with such conflicts-ofinterest problems in the broader Government-wide context and not singling out the financial regulatory agencies for special legislation. Potential conflicts of interest are not limited to members of the Board of bank regulatory agencies. In our view, a uniform, effective conflictof-interest law ought to be applied to all senior Government officials, whether they be in the executive branch, the judiciary, the Congress, or the independent regulatory agencies, and we have no objection to the strengthening of existing provisions in a systematic manner. We therefore support the Government-wide approach of the administration's recently introduced bill and urge you to consider S. 1433 provisions in the context of that approach. Now, Mr. Chairman, in your letter you asked that we append certain financial data relating to the income and expenses of our agency for the past 10 years. I have attached that to our statement in the form of a 10-year schedule showing income and expenses for 10 years ending December 31, 1976, a period which saw a tremendous growth in the size and complexity of the operations of the agency and we will be ready to respond to any requests for amplification or explanation of that schedule. Thank you. The CHAIRMAN. Thank you very much, Mr. LeMaistre. [Complete statement follows:] Mr. Chairman, I appreciate this opportunity to appear on behalf of the Federal Deposit Insurance Corporation to testify with respect to four bills relating to the regulation of banking, S. 71, S. 73, S. 895 and S. 1433. S. 71 S. 71, 95th Congress, a bill "To strengthen the supervisory authority of the Federal banking agencies over financial institutions and their affiliates," is basically the same as S. 2304, 94th Congress, which was jointly recommended by the FDIC, the Board of Governors of the Federal Reserve System and the Comptroller of the Currency. One major difference, however, between S. 71 and S. 2304, as recommended by the banking agencies last year, is the addition of section 8 which would subject expenditures of the FDIC, the Comptroller of the Currency and the National Credit Union Administration to the appropriations process. This section was not a subject of hearings during the last Congress, and we had no opportunity to present our opposition before Committee action added it to the original S. 2304. As soon as we discovered what action the Committee had taken, we sent you the attached letter dated April 30, 1976 arguing against this addition to the bill. Because existing congressional oversight procedures have proved adequate, because the FDIC has taken the lead among the banking agencies in expanding oversight procedures, and because proposed section 8 threatens to undermine the critical mission of the FDIC in maintaining public confidence in the Nation's banking system, I urge the deletion of section 8. As far as FDIC activities are concerned, we are presently subject to periodic financial audits by the General Accounting Office pursuant to section 17 of the Federal Deposit Insurance Act (12 U.S.C. 1827). While, as you are aware, there has been a long-standing difference of opinion between the FDIC 91-727 O 77-3 |