Evolution of Bank Supervision: 1863–1913

As a banker, McCulloch initially opposed the National Currency Act of 1863, which established the OCC, because of its potential threat to state banks like his. But after the act passed, McCulloch agreed to support it and to help create a federal banking system from scratch. Bank examinations were a critical element of the system he envisioned. Congress agreed and folded that requirement into the National Banking Act of 1864.

Initially, the extent of guidance to bank examiners on how to conduct a bank exam was minimal. Comptroller McCulloch’s inside knowledge of banking—and bankers—was displayed best in his “Instructions and Suggestions of the Comptroller of the Currency Relative to the Organization and Management of National Banks,” written in 1863.

To be a competent examiner of banks, especially of the large banks in our commercial cities, a man should have qualifications which very few men possess. He should have a thorough knowledge of practical banking. He should be a man of strong will and perfect integrity. He should be a hard worker, and so keen and thorough in his investigations as to render imposition difficult, if not impossible. He should be able, as some men are, to tell by the bearing of the officers of a bank, and even its very atmosphere, whether it is faithfully or unfaithfully managed, before he examines it.

National Bank Examiners in the field used to work more like independent contractors, paid directly by the banks they examined at a rate of $5 a day plus $2 for every 25 miles traveled. Assessing banks directly for the cost of their supervision was intended to insulate examiners from the pressures of the federal budgeting and appropriations process.

This pay structure for examiners, combined with the number of banks supervised and their often far-flung locations, left many examiners overwhelmed; a single OCC examiner in 1887 had responsibility for 90 banks in seven states from Florida to Arkansas. Hiring an assistant would have helped with the workload, yet that would have been an out-of-pocket expense for the examiner. Rail travel was grueling; train schedules and connections were erratic. Examiners were sometimes tempted to rush through their work to avoid missing trains and being stranded—and unpaid—for days. The change from a fee-based system to regular salaries was adopted with the passage of the Federal Reserve Act in 1913.

By this time, national bank examinations were commonplace. Examiners were, however, very isolated. Many had never been to their district’s main o­ffice or even talked to another examiner to compare information about their work or what they saw happening in the banks under their purview.

To help standardize exams and improve examiner performance, Comptroller Lawrence O. Murray categorized the OCC’s 80 examiners by capability and consolidated the OCC’s 25 districts into 12.

Each district would be headed by the best examiner available there, and that person would bring everyone together several times a year to discuss examination methods.

It is of the highest importance to the banks themselves, as well as to the public, that the examiners should be expert, vigilant, and trustworthy, and that the examinations should be frequent and unexpected. While the examiners now employed are generally competent, and many of them are excellent, yet in some cases the territory to be covered is too large, and the pay too small, to secure the best men for the work.