1
Statement of FDIC Chairman Jelena
McWilliams on the Oversight of Financial
Regulators before the Committee on
Banking, Housing, And Urban Affairs, U.S.
Senate
Chairman Crapo, Ranking Member Brown, and members of the Committee, thank you
for the opportunity to testify before the Senate Committee on Banking, Housing, and
Urban Affairs.
Exactly 18 months ago, I began serving as the 21st Chairman of the Federal Deposit
Insurance Corporation (FDIC). During this period, the FDIC has undertaken a significant
amount of work with a particular emphasis on three overarching goals:
• Strengthening the banking system as it continues to evolve;
• Ensuring that FDIC-supervised institutions can meet the needs of consumers and
businesses; and
• Fostering technology solutions and encouraging innovation at community banks
and the FDIC.
The FDIC has made significant progress in each of these areas, and I appreciate the
opportunity to share with the Committee how we will continue to move each of them
forward.
I. State of the U.S. Banking Industry
Before discussing the FDIC's work to strengthen the banking system, I would like to
begin by providing context regarding the current state of the industry.
The U.S. banking industry has enjoyed an extended period of positive economic growth.
In July, the economic expansion became the longest on record in the United States. By
nearly every metric – net income, net interest margin, net operating revenue, loan
growth, asset quality, loan loss reserves, capital levels, and the number of "problem
banks" – the banking industry is strong and well-positioned to continue supporting the
U.S. economy.
With respect to profitability, banks of all sizes are performing well. In the third quarter of
2019, the 5,256 FDIC-insured banks and savings institutions reported net income of
$57.4 billion.i Nearly 62 percent of institutions reported annual increases in net income,
and only about 4 percent of institutions were unprofitable. Notably, community banks
reported net income of $6.9 billion, an increase of 7.2 percent from a year earlier. Net
Statement of FDIC Chairman Jelena
McWilliams on the Oversight of Financial
Regulators before the Committee on
Banking, Housing, And Urban Affairs, U.S.
Senate
Chairman Crapo, Ranking Member Brown, and members of the Committee, thank you
for the opportunity to testify before the Senate Committee on Banking, Housing, and
Urban Affairs.
Exactly 18 months ago, I began serving as the 21st Chairman of the Federal Deposit
Insurance Corporation (FDIC). During this period, the FDIC has undertaken a significant
amount of work with a particular emphasis on three overarching goals:
• Strengthening the banking system as it continues to evolve;
• Ensuring that FDIC-supervised institutions can meet the needs of consumers and
businesses; and
• Fostering technology solutions and encouraging innovation at community banks
and the FDIC.
The FDIC has made significant progress in each of these areas, and I appreciate the
opportunity to share with the Committee how we will continue to move each of them
forward.
I. State of the U.S. Banking Industry
Before discussing the FDIC's work to strengthen the banking system, I would like to
begin by providing context regarding the current state of the industry.
The U.S. banking industry has enjoyed an extended period of positive economic growth.
In July, the economic expansion became the longest on record in the United States. By
nearly every metric – net income, net interest margin, net operating revenue, loan
growth, asset quality, loan loss reserves, capital levels, and the number of "problem
banks" – the banking industry is strong and well-positioned to continue supporting the
U.S. economy.
With respect to profitability, banks of all sizes are performing well. In the third quarter of
2019, the 5,256 FDIC-insured banks and savings institutions reported net income of
$57.4 billion.i Nearly 62 percent of institutions reported annual increases in net income,
and only about 4 percent of institutions were unprofitable. Notably, community banks
reported net income of $6.9 billion, an increase of 7.2 percent from a year earlier. Net
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interest margin also remained stable, with an average of 3.35 percent across the
industry and a particularly strong average of 3.69 percent among community banks.
Finally, net operating revenue totaled over $208 billion, an increase of 2.2 percent from
a year earlier.
Key balance sheet indicators are similarly robust. Total loan balances increased by 4.6
percent, up from the 4.5 percent growth rate reported the previous quarter. Again,
community banks performed particularly well in this area, with an annual rate of loan
growth that was stronger than the overall industry. Asset quality also remained strong,
as the rate of noncurrent loans (i.e., loans that are 90 days or more past due) declined
to 0.92 percent. Finally, the industry's capacity to absorb credit losses improved from a
year earlier, as the reserve coverage ratio (i.e., loan-loss reserves relative to total
noncurrent loan balances) rose to 131 percent.
Although the current interest rate environment may result in new challenges for banks in
lending and funding, the industry is well-positioned to remain resilient throughout the
economic cycle, principally as a result of greater and higher-quality equity capital. Equity
capital across the industry rose to $2.1 trillion, up $3.5 billion from the previous quarter.
This capital increase translated to an aggregate common equity tier 1 capital ratio of
13.25 percent.
The number of institutions on the FDIC's "Problem Bank List" declined from 56 to 55,
the lowest number since the first quarter of 2007, and four new banks opened during
the third quarter for a total of 10 new banks in 2019.
Four banks failed during 2019 – the first failures since December 2017. It is important to
recognize that, even in a healthy economy, some banks will inevitably fail. The
economic expansion we have experienced resulted in an anomalous stretch in which
there were zero bank failures. This expansion and consequent absence of failures
cannot endure forever. It is normal – and indeed expected – for some banks to fail, and
our job at the FDIC is to protect depositors and ensure that banks can fail in an orderly
manner.
The key to the FDIC's ability to protect depositors is the administration of the Deposit
Insurance Fund (DIF), which increased to a record $108.9 billion in the third
quarter.ii The DIF's reserve ratio (i.e., the fund balance as a percent of estimated
insured deposits) increased to 1.41 percent, the highest level since 1999.
In 2010, Congress instituted the DIF Restoration Plan, which required the FDIC to raise
the DIF minimum reserve ratio from 1.15 percent to 1.35 percent by September 30,
2020. Although we continue to work toward our 2 percent target, the FDIC has met the
statutory requirement and formally exited the DIF Restoration Plan. Accordingly, we
have awarded $764.4 million in credits to banks with less than $10 billion in assets for
the portion of their assessments that contributed to the increase.iii
interest margin also remained stable, with an average of 3.35 percent across the
industry and a particularly strong average of 3.69 percent among community banks.
Finally, net operating revenue totaled over $208 billion, an increase of 2.2 percent from
a year earlier.
Key balance sheet indicators are similarly robust. Total loan balances increased by 4.6
percent, up from the 4.5 percent growth rate reported the previous quarter. Again,
community banks performed particularly well in this area, with an annual rate of loan
growth that was stronger than the overall industry. Asset quality also remained strong,
as the rate of noncurrent loans (i.e., loans that are 90 days or more past due) declined
to 0.92 percent. Finally, the industry's capacity to absorb credit losses improved from a
year earlier, as the reserve coverage ratio (i.e., loan-loss reserves relative to total
noncurrent loan balances) rose to 131 percent.
Although the current interest rate environment may result in new challenges for banks in
lending and funding, the industry is well-positioned to remain resilient throughout the
economic cycle, principally as a result of greater and higher-quality equity capital. Equity
capital across the industry rose to $2.1 trillion, up $3.5 billion from the previous quarter.
This capital increase translated to an aggregate common equity tier 1 capital ratio of
13.25 percent.
The number of institutions on the FDIC's "Problem Bank List" declined from 56 to 55,
the lowest number since the first quarter of 2007, and four new banks opened during
the third quarter for a total of 10 new banks in 2019.
Four banks failed during 2019 – the first failures since December 2017. It is important to
recognize that, even in a healthy economy, some banks will inevitably fail. The
economic expansion we have experienced resulted in an anomalous stretch in which
there were zero bank failures. This expansion and consequent absence of failures
cannot endure forever. It is normal – and indeed expected – for some banks to fail, and
our job at the FDIC is to protect depositors and ensure that banks can fail in an orderly
manner.
The key to the FDIC's ability to protect depositors is the administration of the Deposit
Insurance Fund (DIF), which increased to a record $108.9 billion in the third
quarter.ii The DIF's reserve ratio (i.e., the fund balance as a percent of estimated
insured deposits) increased to 1.41 percent, the highest level since 1999.
In 2010, Congress instituted the DIF Restoration Plan, which required the FDIC to raise
the DIF minimum reserve ratio from 1.15 percent to 1.35 percent by September 30,
2020. Although we continue to work toward our 2 percent target, the FDIC has met the
statutory requirement and formally exited the DIF Restoration Plan. Accordingly, we
have awarded $764.4 million in credits to banks with less than $10 billion in assets for
the portion of their assessments that contributed to the increase.iii