Statement
Martin J. Gruenberg, Acting Chairman,
Federal Deposit Insurance Corporation
On
Implementation of the Dodd-Frank Act
before the
Committee on Banking, Housing and Urban Affairs,
United States Senate; 538 Dirksen
Senate Office Building
December 6, 2011
Chairman Johnson, Ranking Member Shelby and members of the Committee, thank
you for the opportunity to testify on the Federal Deposit Insurance Corporation's
continued implementation of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act).
It has now been nearly 17 months since enactment of the Dodd-Frank Act. The Act
gives financial regulators important authorities to enhance financial stability and to
manage the regulatory challenges posed by large, complex systemically important
financial institutions (SIFIs). The Act also provides for a new SIFI resolution framework
that includes an orderly liquidation authority and a requirement for SIFIs to submit
resolution plans that demonstrate how they can be resolved through the bankruptcy
process. These changes give regulators better tools to manage the potential risks and
failure of complex financial institutions. A credible capacity to place a SIFI into an
orderly resolution process is essential to subjecting these companies to meaningful
market discipline.
The Act specifically provides the FDIC new enhanced authority to manage the deposit
insurance fund (DIF) as well as to oversee the orderly resolution of systemically
important financial institutions. My testimony today will focus on the progress the FDIC
has made in implementing these important provisions of the Dodd-Frank Act, including
international efforts on systemic resolution planning. The testimony will also provide an
update on implementation of bank capital provisions of the Dodd-Frank Act, as well as
an overview of progress on important interagency rulemaking efforts.
Core FDIC Rulemakings
The Dodd-Frank Act granted the FDIC sole rulemaking authority in two primary areas:
orderly liquidation authority and deposit insurance reforms. Within a year after passage
of the Dodd-Frank Act, the FDIC had completed five major final rules for which the Act
granted it sole rulemaking authority.1 I will discuss these completed rules in more detail
below.
Deposit Insurance Reforms and Strengthening the Deposit Insurance Fund
Martin J. Gruenberg, Acting Chairman,
Federal Deposit Insurance Corporation
On
Implementation of the Dodd-Frank Act
before the
Committee on Banking, Housing and Urban Affairs,
United States Senate; 538 Dirksen
Senate Office Building
December 6, 2011
Chairman Johnson, Ranking Member Shelby and members of the Committee, thank
you for the opportunity to testify on the Federal Deposit Insurance Corporation's
continued implementation of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act).
It has now been nearly 17 months since enactment of the Dodd-Frank Act. The Act
gives financial regulators important authorities to enhance financial stability and to
manage the regulatory challenges posed by large, complex systemically important
financial institutions (SIFIs). The Act also provides for a new SIFI resolution framework
that includes an orderly liquidation authority and a requirement for SIFIs to submit
resolution plans that demonstrate how they can be resolved through the bankruptcy
process. These changes give regulators better tools to manage the potential risks and
failure of complex financial institutions. A credible capacity to place a SIFI into an
orderly resolution process is essential to subjecting these companies to meaningful
market discipline.
The Act specifically provides the FDIC new enhanced authority to manage the deposit
insurance fund (DIF) as well as to oversee the orderly resolution of systemically
important financial institutions. My testimony today will focus on the progress the FDIC
has made in implementing these important provisions of the Dodd-Frank Act, including
international efforts on systemic resolution planning. The testimony will also provide an
update on implementation of bank capital provisions of the Dodd-Frank Act, as well as
an overview of progress on important interagency rulemaking efforts.
Core FDIC Rulemakings
The Dodd-Frank Act granted the FDIC sole rulemaking authority in two primary areas:
orderly liquidation authority and deposit insurance reforms. Within a year after passage
of the Dodd-Frank Act, the FDIC had completed five major final rules for which the Act
granted it sole rulemaking authority.1 I will discuss these completed rules in more detail
below.
Deposit Insurance Reforms and Strengthening the Deposit Insurance Fund
The FDIC moved expeditiously to implement changes to the FDIC's deposit insurance
program required by the Dodd-Frank Act. In August 2010, the FDIC issued a final rule to
make permanent the increase in the standard coverage limit to $250,000. In December
2010, the FDIC adopted a final rule amending its deposit insurance regulations to
provide for unlimited deposit insurance for "noninterest-bearing transaction accounts"
through December 31, 2012.
Changing the Assessment Base. In February 2011, the FDIC adopted a final rule
redefining the deposit insurance assessment base as average consolidated total assets
minus average tangible equity. The deposit insurance assessment base was previously
defined as domestic deposits.
As Congress intended, the change in the assessment base reduced the share of
assessments paid by community banks compared to the largest institutions, which rely
less on domestic deposits for their funding than do smaller institutions. Second quarter
2011 assessments for banks with less than $10 billion in assets were about a third
(about $340 million) lower in aggregate than first quarter assessments. This shift in the
share of assessments better reflects each group's share of industry assets. The change
in the assessment base did not materially affect the overall amount of assessment
revenue collected. In fact, assessments for the second quarter of 2011 (the quarter
when the new rule took effect) were nearly the same as assessments for the prior
quarter.
Deposit Insurance Fund Management. Since year-end 2007, 412 FDIC-insured
institutions failed resulting in total estimated losses of $86 billion to the DIF. The DIF
balance hit a low of negative $20.9 billion in the fourth quarter of 2009. The FDIC took a
number of actions to stabilize the DIF and deal with the losses associated with the high
volume of failures, including increasing assessment rates, imposing a special
assessment and requiring that the industry prepay assessments.
The DIF balance increased throughout 2010 and turned positive again as of June 30 of
this year. As of September 30, 2011, the fund balance was $7.8 billion (0.12 percent of
estimated insured deposits). The Dodd-Frank Act requires that the DIF reserve ratio
reach 1.35 percent by September 30, 2020.
The actions undertaken to stabilize the DIF were taken before passage of the Dodd-
Frank Act. The Dodd-Frank Act, however, gave the FDIC enhanced authority to manage
the DIF. In particular, the Act gave the FDIC substantial flexibility to set reserve ratio
targets and pay dividends. Using this flexibility, the FDIC has adopted a long-term fund
management plan designed to maintain a positive fund balance even during a banking
crisis while preserving steady and predictable assessment rates through economic and
credit cycles. In December 2010, the FDIC set a long-term reserve ratio target of 2
percent. In February 2011, also pursuant to the plan, the FDIC adopted lower
assessment rates that will take effect when the DIF reserve ratio reaches 1.15 percent,
with progressively lower assessment rates if the reserve ratio exceeds 2 percent or 2.5
percent.
program required by the Dodd-Frank Act. In August 2010, the FDIC issued a final rule to
make permanent the increase in the standard coverage limit to $250,000. In December
2010, the FDIC adopted a final rule amending its deposit insurance regulations to
provide for unlimited deposit insurance for "noninterest-bearing transaction accounts"
through December 31, 2012.
Changing the Assessment Base. In February 2011, the FDIC adopted a final rule
redefining the deposit insurance assessment base as average consolidated total assets
minus average tangible equity. The deposit insurance assessment base was previously
defined as domestic deposits.
As Congress intended, the change in the assessment base reduced the share of
assessments paid by community banks compared to the largest institutions, which rely
less on domestic deposits for their funding than do smaller institutions. Second quarter
2011 assessments for banks with less than $10 billion in assets were about a third
(about $340 million) lower in aggregate than first quarter assessments. This shift in the
share of assessments better reflects each group's share of industry assets. The change
in the assessment base did not materially affect the overall amount of assessment
revenue collected. In fact, assessments for the second quarter of 2011 (the quarter
when the new rule took effect) were nearly the same as assessments for the prior
quarter.
Deposit Insurance Fund Management. Since year-end 2007, 412 FDIC-insured
institutions failed resulting in total estimated losses of $86 billion to the DIF. The DIF
balance hit a low of negative $20.9 billion in the fourth quarter of 2009. The FDIC took a
number of actions to stabilize the DIF and deal with the losses associated with the high
volume of failures, including increasing assessment rates, imposing a special
assessment and requiring that the industry prepay assessments.
The DIF balance increased throughout 2010 and turned positive again as of June 30 of
this year. As of September 30, 2011, the fund balance was $7.8 billion (0.12 percent of
estimated insured deposits). The Dodd-Frank Act requires that the DIF reserve ratio
reach 1.35 percent by September 30, 2020.
The actions undertaken to stabilize the DIF were taken before passage of the Dodd-
Frank Act. The Dodd-Frank Act, however, gave the FDIC enhanced authority to manage
the DIF. In particular, the Act gave the FDIC substantial flexibility to set reserve ratio
targets and pay dividends. Using this flexibility, the FDIC has adopted a long-term fund
management plan designed to maintain a positive fund balance even during a banking
crisis while preserving steady and predictable assessment rates through economic and
credit cycles. In December 2010, the FDIC set a long-term reserve ratio target of 2
percent. In February 2011, also pursuant to the plan, the FDIC adopted lower
assessment rates that will take effect when the DIF reserve ratio reaches 1.15 percent,
with progressively lower assessment rates if the reserve ratio exceeds 2 percent or 2.5
percent.