Remarks by
FDIC Chairman Sheila Bair,
The Johns Hopkins University
Carey Business School Leaders & Legends Lecture Series
Baltimore, MD
November 20, 2008
The FDIC has been as prepared as anybody for what's come our way. We saw a storm
brewing over two years ago as the "Golden Age of banking" was coming to an end. We
started preparing by taking a number of actions.
We warned about sub-prime mortgage lending and the problems caused by a lack of
proper underwriting standards.
We told our banks to build reserves to cover potential losses. We told them to watch for
concentrations of residential housing and construction loans. We said: "be ready if
things took a turn for the worse."
We encouraged wide-scale loan modifications to keep people in their homes and
reduce the negative fallout from escalating foreclosures on the economy.
We successfully launched a protocol for systematically modifying loans at IndyMac
Federal Bank, a bank we took over in July. Using this as a model for a "Loan Mods in a
Box" national program, we could help 1.5 million families avoid foreclosure using $24
billion in government financing.
This would get at the root cause of the credit crunch and the economic downturn, and
would be a stimulus for the economy. If we could stop the decline in home prices by just
3 percentage points, we could preserve over a half a trillion dollars in home equity,
translating into more than $40 billion in consumer spending
So where do we stand now?
The FDIC will announce third quarter industry results next Tuesday. Earnings will again
be substantially below the prior year. But despite the problems facing our economy, the
vast majority of banks remain well-capitalized, profitable, and in sound condition.
The number and assets of problem banks, though rising, remain well below the levels
seen in the early 1990's. Today's industry – especially larger institutions – is much
better capitalized than the industry was back then.
More institutions are geographically diversified. Banks have more sources of income,
thanks to product innovation and expanded powers. And the industry has become
significantly more efficient.
FDIC Chairman Sheila Bair,
The Johns Hopkins University
Carey Business School Leaders & Legends Lecture Series
Baltimore, MD
November 20, 2008
The FDIC has been as prepared as anybody for what's come our way. We saw a storm
brewing over two years ago as the "Golden Age of banking" was coming to an end. We
started preparing by taking a number of actions.
We warned about sub-prime mortgage lending and the problems caused by a lack of
proper underwriting standards.
We told our banks to build reserves to cover potential losses. We told them to watch for
concentrations of residential housing and construction loans. We said: "be ready if
things took a turn for the worse."
We encouraged wide-scale loan modifications to keep people in their homes and
reduce the negative fallout from escalating foreclosures on the economy.
We successfully launched a protocol for systematically modifying loans at IndyMac
Federal Bank, a bank we took over in July. Using this as a model for a "Loan Mods in a
Box" national program, we could help 1.5 million families avoid foreclosure using $24
billion in government financing.
This would get at the root cause of the credit crunch and the economic downturn, and
would be a stimulus for the economy. If we could stop the decline in home prices by just
3 percentage points, we could preserve over a half a trillion dollars in home equity,
translating into more than $40 billion in consumer spending
So where do we stand now?
The FDIC will announce third quarter industry results next Tuesday. Earnings will again
be substantially below the prior year. But despite the problems facing our economy, the
vast majority of banks remain well-capitalized, profitable, and in sound condition.
The number and assets of problem banks, though rising, remain well below the levels
seen in the early 1990's. Today's industry – especially larger institutions – is much
better capitalized than the industry was back then.
More institutions are geographically diversified. Banks have more sources of income,
thanks to product innovation and expanded powers. And the industry has become
significantly more efficient.
Asset quality has deteriorated since the exceptionally strong performance we saw in
2006. Erosion has been concentrated in two major loan types: residential mortgages,
and construction and development loans. But delinquency rates for most other loan
types, while rising, have remained well below their historic peaks.
We expect bank failures to continue at a higher rate than we've seen in the previous few
years. But the industry's problems are manageable, and the FDIC has sufficient
resources to deal with them.
Liquidity problems
While the banking industry overall remains in good condition and has ample capital,
liquidity has been a problem. The credit markets have been experiencing problems.
Interest rate spreads have been very wide.
However, recent coordinated actions taken by the government, including Treasury's
Trouble Assets Relief Program (TARP) that commits to injecting $250 billion of capital
into the banking system, the Federal Reserve's Commercial Paper Funding Facility, and
the FDIC's Temporary Liquidity Guarantee Program (TLGP), all have had a positive
effect. They've succeeded in stabilizing the systemically important financial institutions.
There are several measures that show this.
Yields on short-term Treasury instruments, which had approached zero in mid-
September, have been more in line with longer-maturity instruments.
Quotes for Libor, the London Interbank Offer Rate, have declined in relation to
Treasury yields -- indicating a slow thaw in the interbank lending market.
The TED Spread – the difference between the three month T-bill and three
month Libor – was 2.11 percent earlier this week – down from a peak of 4.63
percent on October 10.
Interest rates on short-term commercial paper have fallen to their lowest levels
since mid-September, indicating that liquidity is also starting to return to that
market.
The TLGP
As part of the new Stabilization Act, Congress temporarily raised the deposit insurance
limit to $250,000. And on October 14, we announced the TLGP.
The TLGP gives a 100 percent guarantee for unsecured debt and a 100 percent
guarantee for non-interest bearing transaction accounts, such as business payroll
accounts. The purpose of the increase in the deposit insurance limit and the additional
guarantees through the TLGP was to reinforce public confidence in banks and to
preserve liquidity.
We issued an Interim Rule on the TLGP on October 23 that was well received by the
industry. We asked for and received many comments, which we have taken to heart.
2006. Erosion has been concentrated in two major loan types: residential mortgages,
and construction and development loans. But delinquency rates for most other loan
types, while rising, have remained well below their historic peaks.
We expect bank failures to continue at a higher rate than we've seen in the previous few
years. But the industry's problems are manageable, and the FDIC has sufficient
resources to deal with them.
Liquidity problems
While the banking industry overall remains in good condition and has ample capital,
liquidity has been a problem. The credit markets have been experiencing problems.
Interest rate spreads have been very wide.
However, recent coordinated actions taken by the government, including Treasury's
Trouble Assets Relief Program (TARP) that commits to injecting $250 billion of capital
into the banking system, the Federal Reserve's Commercial Paper Funding Facility, and
the FDIC's Temporary Liquidity Guarantee Program (TLGP), all have had a positive
effect. They've succeeded in stabilizing the systemically important financial institutions.
There are several measures that show this.
Yields on short-term Treasury instruments, which had approached zero in mid-
September, have been more in line with longer-maturity instruments.
Quotes for Libor, the London Interbank Offer Rate, have declined in relation to
Treasury yields -- indicating a slow thaw in the interbank lending market.
The TED Spread – the difference between the three month T-bill and three
month Libor – was 2.11 percent earlier this week – down from a peak of 4.63
percent on October 10.
Interest rates on short-term commercial paper have fallen to their lowest levels
since mid-September, indicating that liquidity is also starting to return to that
market.
The TLGP
As part of the new Stabilization Act, Congress temporarily raised the deposit insurance
limit to $250,000. And on October 14, we announced the TLGP.
The TLGP gives a 100 percent guarantee for unsecured debt and a 100 percent
guarantee for non-interest bearing transaction accounts, such as business payroll
accounts. The purpose of the increase in the deposit insurance limit and the additional
guarantees through the TLGP was to reinforce public confidence in banks and to
preserve liquidity.
We issued an Interim Rule on the TLGP on October 23 that was well received by the
industry. We asked for and received many comments, which we have taken to heart.