zeal by being transferred to other and less desirable locations. The second conclusion, therefore, is that reform must reach the highest echelons. The Con fault does not lie with examination or supervision narrowly considered. centration of regulatory powers in the hands of a single agency would make such far-reaching reform at least possible, even though it would not assure it. Nothing less is likely to do so. The simple and obvious way to accomplish that degree of concentration would be to relieve the Federal Reserve and the Comptroller of the Currency of duties of examination and supervision and transfer them to the FDIC. Thirdly, there is no reason to assume that the USNB of San Diego, Franklin National, and Security National are isolated instances. Numerous newspaper articles have appeared describing conditions still prevailing which are, to say the least, compromising if not scandalous. One of them involved a sister institution of the ill-fated San Diego bank and touched some of the same individuals. An upshot of the disclosures was the resignation of the president of the holding company of the bank who, not so incidentally perhaps, was a high official of the Comptroller's office at the time of footdragging in the U.S. National Bank case. It would be unfair to regard as proven the ugly rumors that circulate in situations such as these. But it would be callow to suppose that ordinary examination procedures, dealing as they do with slips of paper and bookkeeping entries, can arrive at all the evidence that should be brought to light and assessed. There may be significant information that does not take tangible Sometimes it is known only to employees of the bank or their close associates. Even rumor and guesswork may be important. form. It will be remembered that the notorious Equity Funding scandal surfaced from within the organization. Present arrangements are not well calculated to providing access to such intangible evidence or to transmitting it to the proper authorities if it is come upon. It A former supervisory official was quoted as saying that in today's banking world the examiner needs to be a detective as well as an auditor and accountant. This leads to the third highly subjective conclusion, namely that a new unit should be built into the structure of bank examination and supervision. would be nothing less than a combined detection and ombudsman unit. Its purpose would be to discover and investigate evidence bearing on the conduct of banking which is not reached by the usual techniques of bank examination. The ombudsman might be authorized to report not only to the head of the FDIC but also to certain designated members of Congress or perhaps to one of its standing committees. So forthright a proposal, open to the inference of imputations of criminality, is certain to raise the hackles of bankers. To this there are two answers. One of them is that while banking is unquestionably one of the most respected of occupations it is no stranger to infraction of the law. Records of the Comptroller's office over a period of many years disclose an incidence of admitted criminal offenses (embezzlements, de falcations, and malfeasance) affecting annually as many as a fifth of all national banks in the country. And it may safely be assumed that crimes not publicly disclosed, whether because they were not discovered or were covered up, would add substantially to that number. The other answer is that the regulation of banks, i.e., examination and supervision, is essentially a policing action. All of us in our daily lives 25 stigma attaching to it. are subject to policing of one sort and another and are not conscious of any Detection is recognized as a useful, even necessary, part of such policing. By what legal, moral, or logical right can one object to similar techniques being applied to banks? It was remarked earlier that economic statesmanship, as contrasted with economic engineering, lies in recognizing the need for reforms and making them in time; and "in time" means before a serious crisis arises to compel remedial action to be taken. The history of banking reform in the United States reflects little of statesmanship as thus defined. The Second United States Bank, the Federal Reserve System, and the FDIC were all created in the wake of major crises. Even the National Banking System was established only after recurrent abuses had been allowed to run on for years. The failure of two metropolitan banks and the near failure of a third raises the question of whether this sorry pattern is to be repeated once again. Each of them involved a greater total of bank resources than all the bank failures from the establishment of the FDIC in 1934-36 to the end of 1972. They are a warning that cannot safely be ignored. The full scope and nature of reform are to be determined only after extensive investigation. But it is not difficult to indicate elements that might be incorporated both easily and with the promise of significant results. First and foremost is the consolidation of examination and supervision in the hands of a single agency, preferabley the FDIC. To this fundamental reform could be attached, or added in the course of time, a number of ancillary features. One would be a clear delineation of authority to enforce recommend ations, combined with sanctions and safeguards to prevent them from being suppressed or ignored at either the official or the operating level. Another would be provision for investigating the credit not only of lenders but also of important borrowers. And the suggestion for introducing a unit or units to carry out the duties of ombudsman and detective warrants consideration. Finally it should be said that, while an independent examining and supervising agency has much to commend it, independence should not be carried to the lengths of neutralizing the stabilization efforts of the central bank, as undue preoccupation with set rules and standards might possibly do. time has perhaps come for a broadened approach to problems of banking reform. As a means of coordinating banking reform and monetary policy the Comptroller of the Currency might once again, and the head of the FDIC for the first time, be made ex officio members of the Board of Governors. Or other means might The be sought, such as establishing some sort of supreme economic council that would also embrace the Treasury, the Council of Economic Advisers, and perhaps other agencies. Chapter VI. - Unsound Banking Practices A Paper Dealing With Prepared for Chairman William Proxmire, Timothy D. Naegele* - *Mr. Naegele is a partner in the Washington, D. C. law firm of Brownstein Zeidman Schomer and Chase, and specializes in matters relating to banking and financial institutions. He has written articles on various banking issues, and has undertaken extensive work in the field of banking -- both at the Federal and state levels, before Congress and the bank regulatory agencies including the recodification of state banking laws. Prior to entering private practice, he served as Assistant Counsel to the Committee on Banking, Housing and Urban Affairs, United States Senate; and as Administrative Assistant to Senator Edward W. Brooke of Massachusetts. In addition, he is a member of the District of Columbia and California Bars, and holds an A.B. in Economics from the University of California at Los Angeles, an L.L.B. from the School of Law (Boalt Hall), University of California, Berkeley, and an L.L.M. from Georgetown University. |