Statement of
Sheila C. Bair, Chairman,
Federal Deposit Insurance Corporation
on
Turmoil in the U.S. Credit Markets
Examining Recent Regulatory Responses
to the
Committee on Banking, Housing
and
Urban Affairs, U.S. Senate
October 23, 2008
Room 538, Dirksen Senate Office Building
Chairman Dodd, Senator Shelby, and Members of the Committee, I appreciate the
opportunity to testify on behalf of the Federal Deposit Insurance Corporation (FDIC)
regarding recent efforts to stabilize the nation's financial markets and reduce
foreclosures. The events of the past several weeks are unprecedented.
Conditions in the financial markets in recent weeks have shaken the confidence of
people around the world in their financial systems. Losses in the stock markets have
reduced the valuations of publicly-traded companies and have imposed losses on
individual investors. Credit markets have not been functioning properly, threatening
grave harm to the economy.
The loss of confidence created by the cumulative impact of these events has required
the government to take extraordinary steps to bolster public confidence in our financial
institutions and the American economy.
Achieving this goal requires a sustained and coordinated effort by government
authorities. Congress is to be commended for passing the Emergency Economic
Stabilization Act of 2008 (EESA), which provides authority for the purchase of troubled
assets and direct investments in financial institutions, a mechanism for reducing home
foreclosures, and a temporary increase in deposit insurance coverage. Working with our
colleagues at the Treasury Department and our fellow bank regulators, the FDIC is
prepared to do whatever it takes to preserve confidence in the financial system.
Despite what we hear about the credit crisis and the problems facing banks, the bulk of
the U.S. banking industry is healthy and remains well-capitalized. What we do have,
however, is a liquidity problem. This problem is largely caused by uncertainty about the
value of mortgage assets, which is making banks reluctant to lend to each other or lend
to consumers and businesses.
In my testimony, I will detail recent actions by the FDIC to restore confidence in financial
institutions. I also will discuss the FDIC's continuing efforts to address the root cause of
Sheila C. Bair, Chairman,
Federal Deposit Insurance Corporation
on
Turmoil in the U.S. Credit Markets
Examining Recent Regulatory Responses
to the
Committee on Banking, Housing
and
Urban Affairs, U.S. Senate
October 23, 2008
Room 538, Dirksen Senate Office Building
Chairman Dodd, Senator Shelby, and Members of the Committee, I appreciate the
opportunity to testify on behalf of the Federal Deposit Insurance Corporation (FDIC)
regarding recent efforts to stabilize the nation's financial markets and reduce
foreclosures. The events of the past several weeks are unprecedented.
Conditions in the financial markets in recent weeks have shaken the confidence of
people around the world in their financial systems. Losses in the stock markets have
reduced the valuations of publicly-traded companies and have imposed losses on
individual investors. Credit markets have not been functioning properly, threatening
grave harm to the economy.
The loss of confidence created by the cumulative impact of these events has required
the government to take extraordinary steps to bolster public confidence in our financial
institutions and the American economy.
Achieving this goal requires a sustained and coordinated effort by government
authorities. Congress is to be commended for passing the Emergency Economic
Stabilization Act of 2008 (EESA), which provides authority for the purchase of troubled
assets and direct investments in financial institutions, a mechanism for reducing home
foreclosures, and a temporary increase in deposit insurance coverage. Working with our
colleagues at the Treasury Department and our fellow bank regulators, the FDIC is
prepared to do whatever it takes to preserve confidence in the financial system.
Despite what we hear about the credit crisis and the problems facing banks, the bulk of
the U.S. banking industry is healthy and remains well-capitalized. What we do have,
however, is a liquidity problem. This problem is largely caused by uncertainty about the
value of mortgage assets, which is making banks reluctant to lend to each other or lend
to consumers and businesses.
In my testimony, I will detail recent actions by the FDIC to restore confidence in financial
institutions. I also will discuss the FDIC's continuing efforts to address the root cause of
the current economic crisis – the problems caused by the failure to effectively deal with
unaffordable loans and unnecessary foreclosures.
Recent Actions to Restore Confidence
The FDIC has been a participant in several actions by Congress, the Treasury
Department and the federal regulators in recent weeks designed to restore confidence
in insured financial institutions. These have included temporarily increasing deposit
insurance coverage and providing guarantees to new, senior unsecured debt issued by
banks, thrifts or holding companies. These measures will help banks fund their
operations.
Increased Deposit Insurance
With the enactment of the EESA, deposit insurance coverage for all deposit accounts
was temporarily increased to $250,000, the same amount of coverage previously
provided for self-directed retirement accounts. Temporarily raising the deposit insurance
limits should bolster public confidence and provide additional liquidity to FDIC-insured
institutions.
The FDIC implemented the coverage increase immediately upon enactment of EESA.
The FDIC website and deposit insurance calculators were updated promptly to reflect
the increase in coverage and ensure that depositors understand the change. The two
bank failures since the change in the coverage level were resolved by healthier banks
acquiring all of the failed institutions' deposits. These two failures did not require
individual deposit insurance determinations, although the FDIC was fully prepared to
implement the $250,000 coverage limit.
It is important to note that the increase in coverage to $250,000 is temporary and only
extends through December 31, 2009. The FDIC will work closely with Congress in the
coming year to ensure that consumers are fully informed of changes to the deposit
insurance coverage level and understand the impact on their accounts.
Temporary Liquidity Guarantee Program
Last week, the FDIC Board of Directors approved a new Temporary Liquidity Guarantee
Program (TLGP) to unlock inter-bank credit markets and restore rationality to credit
spreads. This voluntary program is designed to free up funding for banks to make loans
to creditworthy businesses and consumers.
The program has two key features. The first feature is a guarantee for new, senior
unsecured debt issued by banks or thrifts and bank holding companies and most thrift
holding companies, which will help institutions fund their operations. Eligible entities
include: 1) FDIC-insured depository institutions, 2) U.S. bank holding companies, 3)
U.S. financial holding companies, and 4) U.S. savings and loan holding companies that
unaffordable loans and unnecessary foreclosures.
Recent Actions to Restore Confidence
The FDIC has been a participant in several actions by Congress, the Treasury
Department and the federal regulators in recent weeks designed to restore confidence
in insured financial institutions. These have included temporarily increasing deposit
insurance coverage and providing guarantees to new, senior unsecured debt issued by
banks, thrifts or holding companies. These measures will help banks fund their
operations.
Increased Deposit Insurance
With the enactment of the EESA, deposit insurance coverage for all deposit accounts
was temporarily increased to $250,000, the same amount of coverage previously
provided for self-directed retirement accounts. Temporarily raising the deposit insurance
limits should bolster public confidence and provide additional liquidity to FDIC-insured
institutions.
The FDIC implemented the coverage increase immediately upon enactment of EESA.
The FDIC website and deposit insurance calculators were updated promptly to reflect
the increase in coverage and ensure that depositors understand the change. The two
bank failures since the change in the coverage level were resolved by healthier banks
acquiring all of the failed institutions' deposits. These two failures did not require
individual deposit insurance determinations, although the FDIC was fully prepared to
implement the $250,000 coverage limit.
It is important to note that the increase in coverage to $250,000 is temporary and only
extends through December 31, 2009. The FDIC will work closely with Congress in the
coming year to ensure that consumers are fully informed of changes to the deposit
insurance coverage level and understand the impact on their accounts.
Temporary Liquidity Guarantee Program
Last week, the FDIC Board of Directors approved a new Temporary Liquidity Guarantee
Program (TLGP) to unlock inter-bank credit markets and restore rationality to credit
spreads. This voluntary program is designed to free up funding for banks to make loans
to creditworthy businesses and consumers.
The program has two key features. The first feature is a guarantee for new, senior
unsecured debt issued by banks or thrifts and bank holding companies and most thrift
holding companies, which will help institutions fund their operations. Eligible entities
include: 1) FDIC-insured depository institutions, 2) U.S. bank holding companies, 3)
U.S. financial holding companies, and 4) U.S. savings and loan holding companies that