One responsibility of the evolving Federal Reserve System was to regularly
examine member banks to ensure that the banks were being operated properly.
The following vignettes provide insight into a Minneapolis Fed examiner's
"life on the road."
During World War II, plane travel was limited and Fed examiners
from Minneapolis had to travel by train and car. That wasn't so bad
for trips in Minnesota, but the Ninth District extends about 1,500 miles
east-to-west and 600 miles north-to-south. Minneapolis examiners were
also auditing Montana banks at that time, and often the trip would be
more grueling than the exam.
One Fed examiner of the '30s and '40s likened the occupation to
that of a traveling salesman because of all the time spent on the road.
Likewise, the examiner said, the job was probably best suited for the
young and single. Later, a policy was adopted at the Minneapolis Fed
to allow examiners to return home on weekends, whenever possible, during
long trips (some Montana trips could last six weeks, though most lengthy
trips averaged from two to four weeks).
Cribbage was the game of choice during idle time for one group of
examiners in the '30s and '40s who spent many hours in trains and hotel
rooms, although occasionally a small-ante poker game was introduced
for a little variety.
Winter storms would sometimes delay exams. Once, two examiners were
trapped in their car for half a day in western Minnesota during a Red
River Valley blizzard. Also, sickness once canceled a planned exam to
western Montana in the 1950s. Diphtheria had overtaken the town, and
the examiners, both with families, had little desire to expose themselves
to the illness.
At times events tended to be a little off-center, for example:
One morning, sometime in the early 1960s, a group of dark-suited
Fed examiners was waiting for a bank to open in a small southern
Minnesota town. Upon noticing the well-dressed men standing in the
town's Main Street, the local mortician asked if they would do him
the favor of serving as pallbearers for an early-morning funeral.
The examiners obliged.
In Belle Fourche, S.D., at about the same time, examiners were
also asked to aid the community, although in a decidedly less formal
manner. A celebration was taking place in the town and contestants
were needed for a Main Street bed race that evening. The town banker,
a strong local booster, asked the Fed examiners if they would participate.
Once again, the examiners obliged (no word on how the examiners
finished, but the banker was reportedly pleased with their effort).
About 10 years later, in Ashland, Mont., Fed examiners were also
caught up in a peculiar situation: when they entered the bank's
lobby they discovered a bank robbery in progress. The robbers ordered
them to the floor with the rest of the employees and customers,
where they remained until the robbers fled and the situation was
Prior to the dawning of the computer age, examiners arriving back in
Minneapolis from a trip were greeted by piles of reports to preparewith
the "modern" conveniences of paper, pencils and carbon copies. Today,
examiners use computers, the Helena branch examines all Montana banks
and modern transportation is the only way to go. Together, the Helena
and Minneapolis banks employ 60 examiners (including in-house examiners
who review bank holding company applications, among other things) and
in 1987 they conducted 323 various exams and inspections.
While their lives on the road may not always be the stuff of adventure
movies, Fed examiners perform an important function. Although banks are
independent businesses operated for profit, banking in the United States
has always been a guarded privilegetreated as a matter of public
interesthence, the historical concern for effective supervision
of the banking industry. Indeed, the call for strong bank supervision
is one of the cornerstones of the Federal Reserve Act: "... to establish
a more effective supervision of banking in the United States . .." An
ambitious goal, to be sure, and one that is still sought today.
As in other matters of concern to the banking industry, the Federal
Reserve Act was not the final word on bank supervision. Legislation throughout
the past 75 years, including the formation and involvement of additional
government agencies, helped shape the existing nature of the Fed. Since
the 1930s, banking supervision on a federal level has included three regulators:
the Fed, the Office of the Comptroller of the Currency (OCC) and the Federal
Deposit Insurance Corporation (FDIC). In addition each state has its own
supervisory department, and similar agencies also exist for the regulation
of other financial institutions like credit unions and savings and loans.
The need for more effective bank supervision was urgent in 1913. In testimony
before the House that year, the comptroller of the currency said bluntly:
"The whole question of bank examination is illogical, unscientific, and
simply impossible under the present laws." National bank examiners, clearing-house
examiners and state examiners were all clamoring for the same information,
sharing some with their counterparts and jealously guarding other bits
of information. The split in regulatory functions was one of the results
of the country's firmly entrenched dual banking system. That banking system,
which recognized the sovereignty of both national and state charters,
affected all subsequent legislation aimed at regulating the banking industry
and frustrated attempts to unify bank supervision. Indeed, an unrealized
goal of the Federal Reserve Act was to bring all banks under one supervisory
While the Fed was required under the Federal Reserve Act to supervise
state member banks, its role has expanded through the years. The Banking
Acts of 1933 and 1935, which gave additional supervisory powers to the
Fed, were spawned by the Great Depression and the apparent inability of
the existing financial structureincluding the Federal Reserve Systemto
prevent such an event from occurring. About 10,000 banks failed during
the Great Depression, and along, with repairing a damaged banking system
Congress also had to mend consumers confidence in the banking industry.
It went a long way toward meeting that goal and easing bank depositors'
fears by creating the Federal Deposit Insurance Corp. The FDIC established,
for the first time, insurance on bank deposits.
But the bill that had, perhaps, an even greater impact on the operations
of the central bank was the Bank Holding Company Act of 1956 (bank holding
companies are legal entities that own one or more banks). By circumventing
geographic and business restrictions normally applied to individual banks,
bank holding companies were becoming large, multifaceted institutions
with little regulation. The Bank Holding Company Act not only put the
Federal Reserve System in charge of supervising multibank holding companies,
but also required the Fed to regulate the formation of the companies and
The key word in that 1956 act was "multi-bank"it wasn't until
1970 that Congress amended the act to include one-bank holding companies.
By 1970, one-third of all commercial bank deposits were held by one-bank
holding companies. Still further, bank holding companies of all kinds
held 89 percent of all bank deposits by 1984. Clearly, the Fed's supervisory
umbrella was expanding.
In addition to industry regulation, the Federal Reserve has also been
called upon to regulate consumer legislation. For example, the Fed is
the primary regulator of the Truth in Lending Act of 1968, which requires
the Fed to ensure that lending institutions properly disclose interest
rates and other information on consumer credit. That Act was followed
by a number of laws in the 1970s that regulated consumer credit. Most
recently, in 1987, Congress passed the Competitive Equality Banking Act
which, among other things, requires banks to reduce the float time normally
applied to deposited checks.
In large part, the Fed's supervisory role has mirrored the growth of
the financial services industry. As the banking industry has evolved to
meet consumer demands and business challenges, so has the Fed accommodated
those changes. Other legislation has helped shape the Fed's role in supervising
the banking industry, and more legislation will surely pass in the future.
The latter half of the 1980s found the financial services industry engaged
in a bitter debate over interstate bankingallowing bank holding
companies to purchase banks out of their home stateand the proposed
expansion of banking powers. Many of the expansion proposals, for example,
allowing banks to get into the real estate and insurance business, include
the Federal Reserve in an even larger supervisory role. While the bank
powers debate was far from settled at the time of this writing, the issue
provided another example of how far the Fed has evolved as a bank supervisorand
as a central banksince 1913.