Remarks of
Martin J. Gruenberg, Acting Chairman, FDIC
To
The Clearing House
New York, NY
November 10, 2011
In my remarks today, I will comment briefly on the condition of the banking system and
then discuss the FDIC's new responsibilities for the resolution of systemically important
financial institutions.
Condition of the Banking Industry
The FDIC and the banking industry are only now emerging from the most severe
financial crisis since the 1930s. The latest data, released by the FDIC in its Quarterly
Banking Profile in August, indicate that banks' balance sheets have continued to make
gradual but steady progress in recovering from the financial market turmoil and severe
recession that unfolded from 2007 through 2009.
The economic recovery, now entering its third year, has been marked by continued
distress in real estate markets and a slow, painful process of balance-sheet repair by
households, financial institutions, small businesses, and, now, governments at all levels.
The result has not only been sub-par growth compared with previous recoveries, but
also a persistent uncertainty about the future prospects for the economy, for jobs, and
for the banking industry.
More recently, financial market turmoil related to government finances in Europe has
further contributed to concerns about the future pace of growth.
All of these trends are, of course, of concern to policymakers and to the public. The
FDIC remains highly alert to these challenges going forward.
There is also positive news in the financial services industry. FDIC data show an overall
improvement in the condition of insured financial institutions in the second quarter.
Industry earnings have grown over the past eight quarters. The percent of noncurrent
loans on the books of FDIC-insured institutions has declined for five consecutive
quarters, reflecting improved credit quality. The number of institutions on the FDIC's
problem-bank list declined in the second quarter for the first time in nearly five years.
The Deposit Insurance Fund returned to positive territory as of June 30. The FDIC is
forecasting substantially fewer failing banks this year than last year.
FDIC-insured institutions are generally well positioned to continue working through this
difficult episode. Industry capital ratios have been restored to record-high levels. This
Martin J. Gruenberg, Acting Chairman, FDIC
To
The Clearing House
New York, NY
November 10, 2011
In my remarks today, I will comment briefly on the condition of the banking system and
then discuss the FDIC's new responsibilities for the resolution of systemically important
financial institutions.
Condition of the Banking Industry
The FDIC and the banking industry are only now emerging from the most severe
financial crisis since the 1930s. The latest data, released by the FDIC in its Quarterly
Banking Profile in August, indicate that banks' balance sheets have continued to make
gradual but steady progress in recovering from the financial market turmoil and severe
recession that unfolded from 2007 through 2009.
The economic recovery, now entering its third year, has been marked by continued
distress in real estate markets and a slow, painful process of balance-sheet repair by
households, financial institutions, small businesses, and, now, governments at all levels.
The result has not only been sub-par growth compared with previous recoveries, but
also a persistent uncertainty about the future prospects for the economy, for jobs, and
for the banking industry.
More recently, financial market turmoil related to government finances in Europe has
further contributed to concerns about the future pace of growth.
All of these trends are, of course, of concern to policymakers and to the public. The
FDIC remains highly alert to these challenges going forward.
There is also positive news in the financial services industry. FDIC data show an overall
improvement in the condition of insured financial institutions in the second quarter.
Industry earnings have grown over the past eight quarters. The percent of noncurrent
loans on the books of FDIC-insured institutions has declined for five consecutive
quarters, reflecting improved credit quality. The number of institutions on the FDIC's
problem-bank list declined in the second quarter for the first time in nearly five years.
The Deposit Insurance Fund returned to positive territory as of June 30. The FDIC is
forecasting substantially fewer failing banks this year than last year.
FDIC-insured institutions are generally well positioned to continue working through this
difficult episode. Industry capital ratios have been restored to record-high levels. This
capital cushion represents not only the wherewithal to absorb additional loan losses, if
needed, but also to back new lending as the demand for credit recovers.
However, reductions in loan-loss provisions -- the money that banks set aside against
expected loan losses -- account for most of the improvement in industry earnings to this
point. As the levels of loan-loss provisions approach their historic norms, the prospects
of earnings improvement from this source will diminish. That's why increased lending
will be essential for future revenue growth.
The FDIC will be releasing the Quarterly Banking Profile for the Third Quarter on
November 22, so we will soon have updated data to share with you.
Putting the FDIC's New Systemic Resolution Responsibilities in Perspective
The FDIC has been given significant new responsibilities under the Dodd-Frank Act to
resolve systemically important financial institutions. Specifically, these include an
Orderly Liquidation Authority to resolve the largest and most complex bank holding
companies and non-bank financial institutions, if necessary, and a requirement for
resolution plans that will give regulators additional tools with which to manage the failure
of large, complex enterprises.
Before discussing our efforts to carry out these new responsibilities, I wanted to try to
place these responsibilities within the broader framework of the way the FDIC's
resolution activities regularly work together with bank supervision in responding to the
financial difficulties of FDIC-insured institutions.
It is important to recognize up front that resolution is always the option of last resort.
The purpose of the supervisory process is to make sure that institutions manage their
risks so that the risk of failure is minimized. The goal is to have a supervisory process
that can recognize problems early and encourage management to address problems in
a proactive way. When an institution's supervisory rating or capital adequacy is
downgraded, the institution is subject to a variety of supervisory responses intended to
encourage management to take prompt action. These supervisory actions may include:
specific criticisms of risk management practices;
formal or informal enforcement actions;
orders to raise capital or seek merger partners that can bring in new capital and
management expertise.
Under the current arrangement, should the condition of the institution deteriorate, the
FDIC begins its resolution planning process in conjunction with the ongoing supervisory
process and in close coordination with the primary supervisor of the institution. This
would include undertaking a deposit download for deposit insurance purposes, and
developing a detailed resolution plan for the institution. The goal is to have an integrated
needed, but also to back new lending as the demand for credit recovers.
However, reductions in loan-loss provisions -- the money that banks set aside against
expected loan losses -- account for most of the improvement in industry earnings to this
point. As the levels of loan-loss provisions approach their historic norms, the prospects
of earnings improvement from this source will diminish. That's why increased lending
will be essential for future revenue growth.
The FDIC will be releasing the Quarterly Banking Profile for the Third Quarter on
November 22, so we will soon have updated data to share with you.
Putting the FDIC's New Systemic Resolution Responsibilities in Perspective
The FDIC has been given significant new responsibilities under the Dodd-Frank Act to
resolve systemically important financial institutions. Specifically, these include an
Orderly Liquidation Authority to resolve the largest and most complex bank holding
companies and non-bank financial institutions, if necessary, and a requirement for
resolution plans that will give regulators additional tools with which to manage the failure
of large, complex enterprises.
Before discussing our efforts to carry out these new responsibilities, I wanted to try to
place these responsibilities within the broader framework of the way the FDIC's
resolution activities regularly work together with bank supervision in responding to the
financial difficulties of FDIC-insured institutions.
It is important to recognize up front that resolution is always the option of last resort.
The purpose of the supervisory process is to make sure that institutions manage their
risks so that the risk of failure is minimized. The goal is to have a supervisory process
that can recognize problems early and encourage management to address problems in
a proactive way. When an institution's supervisory rating or capital adequacy is
downgraded, the institution is subject to a variety of supervisory responses intended to
encourage management to take prompt action. These supervisory actions may include:
specific criticisms of risk management practices;
formal or informal enforcement actions;
orders to raise capital or seek merger partners that can bring in new capital and
management expertise.
Under the current arrangement, should the condition of the institution deteriorate, the
FDIC begins its resolution planning process in conjunction with the ongoing supervisory
process and in close coordination with the primary supervisor of the institution. This
would include undertaking a deposit download for deposit insurance purposes, and
developing a detailed resolution plan for the institution. The goal is to have an integrated