FEDERAL DEPOSIT INSURANCE CORPORATION, Hon. FRANK H. WEITZEL, Acting Comptroller General, U.S. General Accounting Office, DEAR MR. WEITZEL: This is in response to Assistant Director Neuwirth's letter of August 26, 1965, with which he enclosed a draft of your proposed report to the Congress on your audit of this Corporation for the fiscal year ended June 30, 1964. We appreciate the opportunity to review your draft, and the extension of time which you permitted us. Your proposed draft indicates in effect that our maintenance of the confidentiality of some bank examination data in connection with open banks produces a conflict between our office and yours. We had assumed the 1950 agreement, a copy of which is attached, resolved this conflict. We continue to suggest that our mutual cooperation be based upon that agreement, as suggested in our letter of February 2, 1965, in response to your letter of January 14, 1965. Copies of that correspondence are also attached. In reviewing this position, we conclude that the basic concept of confidentiality as to open bank data is essential to the public interest in the supervision of banks and to the functioning of deposit insurance. The Federal Deposit Insurance Corporation was created to help restore and maintain public confidence in our banking system. In performing this function on the basis of its successful accumulated experience, it acquires and assesses a very large body of data about banks and bank management. By its very nature, much of this information could not be obtained on other than a confidential basis for it is necessarily a mixture of fact, judgment, and personal opinion. If the Federal and State supervisors of banks had not clearly treated most of this material in strict confidence through the years, the sources of essential information would be denied them and effective bank supervision would be severely inhibited. In that context, a public interest and public confidence issue of some magnitude is at stake rather than the sanctity of the Corporation's records during an audit limited by statutory language to records pertaining to financial transactions. In your proposed report, you attach special significance to a series of bank failures in the period under review. Also, you discuss our maintenance of a category of open “problem” banks, and imply that you cannot assess the Corporation's financial condition without an opportunity to judge our supervisory actions in those banks and to reach some conclusion as to the Corporation's potential liability if any of those banks should fail. The Corporation views any bank failure as significant, not only in the light of its own involvement but also from the point of view of the personal and community impact. Nevertheless, it cannot be the function of the supervisory authorities to so supervise as to prevent all bank failures. Any such structure of supervision would be incompatible with the philosophies underlying our economic way of life. Consequently, the human equation coupled with the normal risks involved in our kind of banking system will produce occasional bank failures, notwithstanding the proved general effectiveness of modern-day bank supervision. In actual fact, the public, bankers, and the supervisory authorities learn from the relatively rare bank failures nowadays. In most of the cases you mentioned, we did indeed direct Congressional, public, and banking industry attention to the facts. We did so because the number of banks involved was unusual by current standards and because we discerned a common thread of causation running through several of these cases. These were not economic failures, however. They resulted for the most part from the questionable or illegal actions of individuals. Accordingly, public discussion was a deliberate form of supervisory therapy, along with certain legislative and administrative responses which the facts warranted. One of the results was extensive hearings on these failures before the Senate Permanent Sub-Committee on Investigations and the House Banking and Currency Committee. With respect to these or any closed banks for which we have supervisory authority, our records are available to your representatives as has been the case since our 1950 agreement with your office. As to open "problem" banks, the issue is also one of supervisory therapy. We maintain these internal categories as a means of directing more intensive supervision to banks which, for one reason or another, require it in our judgment. Because an open bank is on our "problem" list, however, it does not follow that the bank is likely to fail. As you realize, a "problem" bank is an open, operating bank in which neither its board of directors nor its immediate supervisory authority, which have authority to close the bank, has determined that its assets are worth less than its liabilities to depositors and other creditors. In general, special supervisory attention tends to save these banks, or otherwise resolve the situations short of failure. It is also true, of course, that a "problem" bank may eventually fail. In a sense, this possibility represents a calculated judgmental risk in seeking to strengthen banks in varying difficulties short of insolvency. There is, however, no basis for assuming failure of a "problem" bank to be the probability, especially in terms of earmarking its deposits as a publicly- or internally-stated contingent liability of the Corporation. More to the point, banks on our "problem" list are clearly the most vulnerable if their status, or the facts and judgment underlying it, becomes a matter of public discussion and knowledge. Had not this status and the relevant elements in it always been maintained in confidence, therapy would have been impossible and some considerable number of open banks would have been forced to close. Entirely aside from the fundamental concept of confidentiality as to bank examination data, the accessibility of information about open "problem" banks would defeat the whole purpose of this supervisory tool. It is for these primary reasons that the confidentiality of the information developed about open banks by bank supervisors has been protected by statute and tradition. We believe any other course would risk consequences of substantial gravity, and we believe it is our statutory responsibility to guard against such consequences. The fact is that our contingent liability cannot be foretold as to banks now open and any attempt to estimate such liabilities on the basis of disclosure of open bank information would erode the fundamental concept of deposit insurance: that is, the maintenance of public confidence in our banking system and medium of exchange. In this context, the Corporation has never attempted the practice of estimating individual allocations of possible "problem bank" losses. As you know, reasonably-based anticipation that such possible contingencies will in fact become actual liabilities is not warranted by our experience. Moreover, our entire deposit insurance fund is available for these relatively isolated contingencies. As I indicated earlier, the primary function of deposit insurance is to instill and maintain public confidence in our banking and monetary system. Bank supervision is directed to that fundamental purpose, on the assumption that national economic and monetary policies will provide a continuing environment of economic strength and liquidity. Given that required assumption and deposit insurance experience, the Corporation's resources provide for the kinds of contingencies for which these resources are intended. Additionally, your draft report states that "the records made available to us were not adequate to permit us to determine the full extent of the action taken by the Corporation or the suitability of these actions in the circumstances existing at the banks involved." We do not believe this is a reasonable interpretation of your statutory responsibility. In effect, it would result in your selective or general review of bank supervisory functions for which this Corporation and the other Federal banking agencies are responsible. It would also extend, as you suggested, to your examination of operating insured banks, whether within the supervisory jurisdiction of the Corporation or that of the Federal Reserve Board and the Comptroller of the Currency. We can find no basis for agreeing that these are appropriate functions of an independent audit of the Corporation. As we have noted previously. you have indicated in recent years that your audit does not go to the adequacy of our deposit insurance fund. You have used the following language: "The Corporation's accumulated net income has been retained as a deposit insurance fund and is available for future deposit insurance losses. We are unable to express an opinion on the adequacy of the deposit insurance fund to meet future losses because the amount that may be needed is dependent on future economic conditions." The fundamental condition of banks and of this Corporation has not changed and, from the point of view of public confidence and effective supervision, we can see no useful purpose in a change of approach. If you feel it would be helpful in resolving this problem, we shall be glad to discuss the subject further with you and your staff. We welcome your annual audit and want to do everything we can to support it consistent with our own responsibilities. In the event you decide to include in your report your claim for access to operating bank records, we request that you include in the report this letter and attachments in recognition of our position. Sincerely yours, K. A. RANDALL, Chairman. COMPTROLLER GENERAL OF THE UNITED STATES, DEAR MR. BARR: In connection with our audit of the Federal Deposit Insurance Corporation for the fiscal year ended June 30, 1964, members of our staff met with you and other officials of the Corporation on November 13, 1964, to request unrestricted access to examination reports, files, and other records maintained by the Corporation relative to the banks which it insures. You advised our staff of your reluctance to give them unrestricted access to the requested data on the basis that such data was confidential. You suggested that our staff attempt to carry out its audit responsibility by reviewing Corporation reports, files, and records, which would be stripped of certain confidential information. The authority and responsibility of the General Accounting Office for making annual audits of the Federal Deposit Insurance Corporation is contained in 12 U.S.C. 1827 which provides in pertinent part: "(b) The financial transactions of the Corporation shall be audited by the General Accounting Office in accordance with the principles and procedures applicable to commercial corporate transactions and under such rules and regulations as may be prescribed by the Comptroller General of the United States. The audit shall be conducted at the place or places where accounts of the Corporation are normally kept. The representatives of the General Accounting Office shall have access to all books, accounts, records, reports, files, and all other papers, things, or property belonging to or in use by the Corporation pertaining to its financial transactions and necessary to facilitate the audit, and they shall be afforded full facilities for varifying transactions with the balances or securies held by depositaries, fiscal agents, and custodians. ✶✶✶ "(c) A report of the audit for each fiscal year ending on June 30 shall be made by the Comptroller General to the Congress not later than January 15 following the close of such fiscal year. *** The report to the Congress shall set forth the scope of the audit and shall include a statement of assets and liabilities and surplus or deficit; a statement of surplus or deficit analysis; a statement of income and expenses; a statement of sources and application of funds and such comments and information as may be deemed necessary to inform Congress of the financial operations and condition of the Corporation, together with such recommendations with respect thereto as the Comptroller General may deem advisable. The report shall also show specifically any program, expenditure, or other financial transaction or undertaking observed in the course of the audit, which, in the opinion of the Comptroller General, has been carried on or made without authority of law.* * *” The full discharge of our audit responsibilities under the cited statute requires that we have unrestricted access to such records of the Corporation as we deem necessary to the making of an independent and objective examination of the financial operations and condition of the Corporation. Such a examination contemplates obtaining a comprehensive understanding of all important factors underlying the decisions and actions of the Corporation which may significantly affect its financial operations and condition. For example, the efforts and reports of the Corporation's examination division constitute an essential and integral part of the management of the Corporation. The reports of the examination division sometimes contain opinions, conclusions, and recommendations of vital impor tance to the conduct of the Corporation's affairs. Without full and complete access to these reports and any supporting records there is no assurance that all important factors underlying the decisions and actions of the Corporation have been made available for our examination, nor are we in a position to evaluate the effectiveness of the examination division's work or the degree of reliance which may be placed upon its efforts. Since the meeting of November 13, copies of the reports, records, and files that have been made available to our representatives have been stripped of all references to names of banks and their locations, names of bank officials, and all other names of any other category wherever they may have appeared in the material made available. Such information is necessary to permit us to make independent verifications of examiners' findings and to enable us to ascertain possible financial relationships of individuals to each other and to the banks. Also, because of the restriction of our access to the files it is not possible for us to determine whether we have all important information which in our judgment is essential to enable us to discharge our audit responsibility as required by law. I am aware of the agreement dated December 13, 1950, whereby the former Comptroller General agreed to accept restricted data concerning certain banks and a code identification system that would retain the anonymity of the banks involved. However, since that time conditions have changed materially as evidenced by the number of bank failures during 1964 and the public statements made by you and other officials of the Corporation with regard to the seriousness of these failures and problems adversely affecting the fiscal soundness of other insured banks. Because the financial condition of the Corporation is inseparably linked with that of the banks it insures, we can no longer follow the 1950 agreement and we insist upon complete and unrestricted access to all of the Corporation's records so that the actual or contingent effect of specific situations upon the financial condition of the Federal Deposit Insurance Corporation can be evaluated. We believe the language of 12 U.S.C. 1827 is plain in its terms and provides ample authority for our right to examine any records of the Corporation which may have a bearing on the financial operations and condition of the Corporation. We shall appreciate your extending to our staff, as soon as possible, unrestricted access to all examination reports, files, and other records maintained by the Corporation relative to the banks which it insures. Please be assured that in carrying out our examinations of this material we will take all necessary precautions to avoid disclosure of the confidential nature of information contained therein. Sincerely yours, JOSEPH CAMPBELL, Comptroller General of the United States. FEDERAL DEPOSIT INSURANCE CORPORATION, Hon. JOSEPH CAMPBELL, Comptroller General of the United States, DEAR MR. CAMPBELL: We have your letter of January 14, 1965, relating to your audit of the Corporation for the fiscal year ended June 30, 1964. You request that the Corporation extend to your staff unrestricted access to all examination reports, files and other records maintained by the Corporation relative to the banks that it insures. Although we wish to cooperate with you in any way consistent with our statutory responsibilities, we cannot accede to your request. Your audit authority, set forth in Section 17 of the Federal Deposit Insurance Act quoted in your letter, is to audit the financial transactions of the Corporation. Your access authority to the records of the Corporation is clearly limited to those "pertaining to its financial transactions" and the statutory direction as to your report to Congress provides for informing Congress of "the financial operations and condition of the Corporation." If you were entitled under Section 17 to access to our examination reports, files and other records relative to insured banks, it would not have been necessary for you to request Congress in connection with the proposed Financial Institutions Act of 1957 for access to such records. We find it necessary to correct your opening statement that we suggested that your staff attempt to carry out its audit responsibility by reviewing Corporation reports, files and records which would be stripped of certain confidential information. Our records are intact and unstripped of any confidential information. When your representatives sought access to records beyond their statutory authority, we discussed with them both the limitations of your statutory authority and the confidentiality of bank examination reports and records pertaining to individual banks. For your information we are enclosing a copy of the Corporation's comments on the confidentiality of bank records in relation to your audit of financial transactions, made to the House Committee on Banking and Currency in connection with the proposed Financial Institutions Act of 1957. It is important that you keep in mind that these records contain information received in confidence by the banking agencies, that such information is available only because of the confidential and privileged nature of these records, and that this source is of invaluable aid in bank supervision and would disappear if its confidentiality were not fully protected. Under our 1950 agreement with your office, your representatives have been furnished with summary reports of problem banks under a code identification system that provides for anonymity of the banks involved. The problem banks are those which require special corrective attention. They are not insolvent banks, because insolvent banks must be closed. Your representatives insisted that it was necesary to see the reports of examination of the problem banks to verify the summary information we furnished regarding problem banks. The implication in the request for access to examination reports that perhaps we were withholding pertinent information in our summaries is no basis for enlarging your limited statutory access to our records. However, as a cooperative effort to set the minds of your representatives at ease about the adequacy and accuracy of the summaries furnished them on problem banks, we did agree to permit them access to copies of the related reports of examinations with the elimination of names to prevent their identification and thereby maintain the recognized confidentiality of such records. As you are aware, the members of the Board of Directors of this Corporation and of the other Federal banking agencies, like you, have been appointed by the President after confirmation by the Senate to carry out their statutory functions. Your function with regard to this Corporation, as we have pointed out. is to audit the Corporation's financial transactions with access to our records pertaining to financial transactions and to report to Congress on the Corporation's financial operations and condition. Congress has not provided you with access to records relating to individual banks, although you sought it in 1957. Congress has not in any way authorized you to review our lawful judgments and decisions in carrying out our statutory function. In your audit reports to Congress in recent years you have emphasized that your audit does not include the matter of the adequacy of our fund, with the following statement: "The Corporation's accumulated net income has been retained as a deposit insurance fund and is available for future deposit insurance losses. We are unable to express an opinion on the adequacy of the deposit insurance fund to meet future losses because the amount that may be needed is dependent on future economic conditions." Congress has given our Board of Directors responsibility for the management of the deposit insurance fund and important bank supervisory functions for maintaining a safe and sound banking system. Congress looks to the Corporation and the other Federal banking agencies for information regarding insured banks and their condition. Your letter states that you must have access to all Corporation records because the financial condition of the Corporation is inseparably linked with the banks it insures. The logical conclusion of this contention would involve your examination of banks. Your letter even asserts authority to make independent verification of examiners' findings to enable you to ascertain possible financial relationships of individuals to each other and to the banks. We regard this as |