RECENT BANK CLOSINGS TUESDAY, MARCH 9, 1971 HOUSE OF REPRESENTATIVES, COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The committee met, pursuant to notice, at 10 a.m., in room 2128, Rayburn House Office Building, Hon. Wright Patman (chairman) presiding. Present: Representatives Patman, Barrett, Sullivan, Reuss, Ashley, Moorhead, St Germain, Gonzalez, Minish, Hanna. Gettys, Rees, Bevill, Griffin, Hanley, Brasco, Koch, Cotter, Widnall, Dwyer, Johnson, Stanton, Blackburn, Brown, Williams, Wylie, Crane, Rousselot, McKinney Archer, and Frenzel. Also present: Representative Sam Steiger of Arizona. Yes, Mr. Brown. Mr. BROWN. What is the Chair's intent with respect to any area of discussion which Mr. Wille or any member of the committee may think should not be discussed in a public meeting? In other words, may I ask how does the Chair-where does the Chair view the prerogative to determine that the discussion of the matter shall not be in a public meeting but rather should be in a closed meeting? The CHAIRMAN. We will take his word for it, the way I understand, and then we can immediately go into executive session if you desire to do that and then we would not necessarily have to have a quorum. Mr. BROWN. Mr. Chairman, therefore, it is my understanding that Mr. Wille may be quite liberal in his application of the-well, his application of his objection to testify in a public meeting to matters that he thinks should be in a closed meeting; is that correct? The CHAIRMAN. I didn't get the last part of that. Mr. BROWN. I said it is my understanding, then, that Mr. Wille is the one that should indicate whether or not he thinks anything he might say should be in a closed meeting rather than an open meeting, and that he may be most liberal in his construction of that privilege; is that correct? The CHAIRMAN. He may be liberal or conservative, either way you want. I don't see how he could be progressive, though, as a witness. Mr. JOHNSON. Mr. Chairman. The CHAIRMAN. Yes. Mr. JOHNSON. So the committee will know just the purpose of this hearing, are we trying to find out some things we haven't read in the paper, is this a fishing expedition or inquisition, or just what are we driving at and what do you hope to accomplish by these hearings so (1) that we will be able to conduct ourselves within the realm of your ideas as to just what you are trying to ascertain by calling this witness today? The CHAIRMAN. Well, I have my statement that I would like to read, which I believe will answer your questions. If it doesn't, if you have further questions, we will try to answer them. I would like to read. the statement at this time. This morning the committee is meeting to discuss the problem of bank supervision and regulation in general and bank failures in particular. The number of bank failures, while low in comparison to the total number of banks, does not represent a crisis. But to individuals who have lost funds in closed banks, it is in every sense of the word a crisis. It is my own feeling that not enough is being done by the bank regulatory agencies to prevent failures. But instead, these agencies are more interested in placating the banking industry than they are in protecting banks. Congress has gone out of its way to provide the bank regulatory agencies with all of the tools that they need to perform their job. For instance, in 1966. Congress passed the Financial Institutions Supervisory and Insurance Act, providing cease and desist and removal of officer and director powers for the bank regulatory agencies. We were told that this legislation was necessary to safeguard the banks of the country and the legislation had to be enacted on a rush basis. In commenting on this legislation, the then FDIC Chairman, K. A. Randall, wrote to the committee: The legislation would provide the basis for substantial improvement in the supervision of insured banks and savings and loan associations. It is needed to equip the Federal supervisory agencies better to protect the public and, accordingly, the Corporation recommends its enactment. That legislation was enacted nearly 5 years ago, but an informal check of the agency shows that FDIC has not exercised the authority under this act in a single case. I cannot understand why the agency pressed for the urgent enactment of this legislation and then has failed to use it, unless the banking industry has brought pressure against the use of these powers. The recent closing of the Sharpstown State Bank in Houston, Tex., has received a great deal of publicity and has focused attention on the problems connected with bank failures. However, even if the Sharpstown bank had not mailed, the overall question of bank failures would be a subject of legitimate inquiry because of the marked increase in the number and size of banks that have failed in recent years. Since January of 1969, 19 banks have failed. They range in asset size from the $1 million bank at Petersburg, Ky., to the $113 million Birmingham-Bloomfield bank of Birmingham, Mich. The Sharpstown bank had assets of $81 million and deposits of $66 million, making it the largest closed bank, as far as deposits are concerned, insured by the Federal Deposit Insurance Corporation. In fact, the total deposits in Sharpstown and Birmingham are greater than the deposits in all other banks that have failed in the past 3 years. One of the aspects of bank closings that has been of concern to me, and I know to other members of this committee, has been the use of brokered deposits. Since 1964, 10 banks have failed due in large part to the use of brokered deposits. Until the Sharpstown failure, the amount of brokered deposits in these banks, with the exception of one, never amounted to more than $2.7 million. However, in the Sharpstown situation, of the $66.7 million on deposit in that bank when it closed, $31.6 million was in brokered deposits. The previous high for brokered deposits in a closed bank was $17 million in the San Francisco National Bank failure. I am quite concerned that the bank regulatory agencies, particularly the FDIC, have not taken action to control brokered deposits even though they have the power to do this. If the regulatory agencies will not take action to correct these abuses, then it will be up to the Congress to do it on a legislative basis, and if the 19 bank failures. since 1969 are not enough to excite the congressional interest, then we should also consider the increase in the number of problem banks insured by the Federal Deposit Insurance Corporation. A problem bank, in the simplest terms, is one that needs to be closely watched by the regulatory authorities since there may be a possibility of its failure. On June 30, 1969, the FDIC listed 212 banks in its problem category, but by June 30, 1970, that figure had reached 244 problem banks, of which 54 were classified as serious problem banks, defined as "one that threatens ultimately to involve the Corporation in a financial outlay unless drastic changes can be brought about." The 54 serious problem banks at the end of fiscal year 1970 marked an increase of 23 banks over the previous year. It is also interesting to note that many of the problem banks carried on the roster during 1969 were not the names on the roster in 1970. During fiscal year 1970, 108 banks were removed from the classification of problem banks, either because of improvement in their management or financial condition or, to a far lesser extent, because they failed. During the same period, 140 new banks were added to the FDIC problem list. It is also my hope that we can explore with our witness the question of bank failures that do not result in closings. In this situation, the failing bank is merged into another bank on perhaps a Friday afternoon and on Monday morning it opens up with a new name. The same general type of situation exists where the bank name is maintained, but management or ownership is changed. A number of such cases have come to my attention in recent years, and it is my hope that during these hearings we can find out exactly how often this practice is used. In this connection, the committee may wish to look into the situation of the Bank of Wheeling, Wheeling, W. Va., which in 1966 was in a virtually failing condition and was recapitalized under FDIC guidance. The former president of that bank has raised some serious charges concerning FDIC's conduct in the case, and I have attempted to obtain information on this bank from FDIC. I have been less than satisfied with the answers provided by the FDIC and I am not entirely satisfied that that agency acted to protect the innocent parties in the bank case. Our witness this morning is Hon. Frank Wille, Chairman of the Federal Deposit Insurance Corporation. If it is not possible to finish with Mr. Wille this morning, we plan to recall him at a time convenient to the committee and Mr. Wille. Although we will observe the 5-minute rule as is the committee's practice, I want to assure the members that they may have as much time as they desire on the second round so that we can get a full and complete record in this important area. I will ask unanimous consent that the gentleman from Arizona, Mr. Steiger, who is here and would like to have the privilege of sitting with the other members. He, of course, would not be exercising the rights that the members have except when the other members have completed. If it is in accord with the wishes of the members of the committee, we will permit him to ask questions since he is familiar with this case. Any objection to that? The Chair hears none. Mr. Widnall. Mr. WIDNALL. As we start this hearing today, I think it is quite important to read into the record a copy of your letter to Frank Wille, Chairman of the Federal Deposit Insurance Corporation, dated February 24, 1971, and his answer to that letter. They are both rather brief, but it seems to me that they should be part of the record. The CHAIRMAN. You may read them if you desire, sir. Hon. FRANK WILLE, Federal Deposit Insurance Corporation, Washington, D.C. FEBRUARY 24, 1971. DEAR MR. CHAIRMAN: The Committee will look forward to your appearance on Monday, March 8, 1971, at 10 a.m., room 2128, Rayburn House Office Building, to discuss the situation regarding banks which have been closed over the last several years in which the FDIC is involved. Among other things we wish to hear from you the number of banks closed, the amount of assets involved, the reasons for closing the banks, and whether or not any trends as the result of these banks closing are discernible which would indicate a need for legislative action. It is anticipated that we will be able to conclude this inquiry within one day, but if not I am sure you will make yourself available for subsequent appearances before the Committee. DEAR MR. PATMAN: This is in response to your letter of March 1, 1971, concerning my pending appearance before your Committee on March 8, 1971. In order to discuss the issues that may be of interest to you and your Committee and to answer as completely as possible the various questions that may be asked of me, it may become necessary to consider a number of matters that involve pending law suits, both criminal and civil. For instance, with respect to several closed banks, there are pending criminal indictments, directors' liability cases, and complex civil litigation. Public discussion of these legal matters may well be prejudicial to the rights of the parties involved. Discussion relating to closed banks may also involve interrelationships and transactions with banks which are continuing in operation, and the discussion of problems involving such open and operating banks may adversely affect public confidence. This Corporation intends to cooperate with you and your Committee during the course of these hearings to the fullest extent. With your permission, I will be prepared to release publicly at the start of the hearings a fairly detailed summary statement as to the insured banks which have been closed since January 1, 1969 (a copy of which will be furnished you sometime Friday). However, on the basis of the factors cited in preceding paragraphs, I request that any testi |