Statement of
Martin J. Gruenberg, Acting Chairman,
Federal Deposit Insurance Corporation
On
Enhanced Oversight after the Financial Crisis
Wall Street Reform at One Year
before the
Committee on Banking, Housing
And
Urban Affairs, United States Senate
538 Dirksen Senate Office Building
Washington, D.C.
July 21, 2011
Chairman Johnson, Ranking Member Shelby and members of the Committee, thank
you for the opportunity to testify today on the one year anniversary of the passage of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
In the wake of the most severe episode of financial distress and the longest economic
recession since the 1930s, the Dodd-Frank Act provides regulators with important new
authorities to enhance financial stability and to respond to the regulatory challenges
posed by large, complex systemically-important financial institutions (SIFIs). For
example, the Dodd-Frank Act grants the Federal Deposit Insurance Corporation (FDIC)
new authorities to manage the Deposit Insurance Fund (DIF) in a way that will make it
more resilient in any future crisis. The Act also provides for a new SIFI resolution
framework, including an Orderly Liquidation Authority and a requirement for SIFI
resolution plans, which will give regulators much better tools with which to manage the
failure of large, complex institutions. Finally, the Dodd-Frank Act also contains
provisions that will complement the ongoing Basel III reforms that will make capital
requirements more uniformly strong across the banking system.
My testimony today will focus specifically on the implementation of these Dodd-Frank
provisions to enhance the future stability of our financial system.
Promoting Stability by Strengthening the Deposit Insurance Fund
The FDIC has moved quickly to implement the Dodd-Frank Act changes in the FDIC
deposit insurance program. These changes will help to ensure that coverage is
sufficient to preserve public confidence in a crisis, that premiums are proportional to
insurance risks, and that the fund itself is restored to long-term health and maintained at
levels that will withstand future periods of financial distress. The following sections
highlight important developments in the financial condition of the DIF and changes to
the management of the fund, assessment system, and coverage limits.
Martin J. Gruenberg, Acting Chairman,
Federal Deposit Insurance Corporation
On
Enhanced Oversight after the Financial Crisis
Wall Street Reform at One Year
before the
Committee on Banking, Housing
And
Urban Affairs, United States Senate
538 Dirksen Senate Office Building
Washington, D.C.
July 21, 2011
Chairman Johnson, Ranking Member Shelby and members of the Committee, thank
you for the opportunity to testify today on the one year anniversary of the passage of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
In the wake of the most severe episode of financial distress and the longest economic
recession since the 1930s, the Dodd-Frank Act provides regulators with important new
authorities to enhance financial stability and to respond to the regulatory challenges
posed by large, complex systemically-important financial institutions (SIFIs). For
example, the Dodd-Frank Act grants the Federal Deposit Insurance Corporation (FDIC)
new authorities to manage the Deposit Insurance Fund (DIF) in a way that will make it
more resilient in any future crisis. The Act also provides for a new SIFI resolution
framework, including an Orderly Liquidation Authority and a requirement for SIFI
resolution plans, which will give regulators much better tools with which to manage the
failure of large, complex institutions. Finally, the Dodd-Frank Act also contains
provisions that will complement the ongoing Basel III reforms that will make capital
requirements more uniformly strong across the banking system.
My testimony today will focus specifically on the implementation of these Dodd-Frank
provisions to enhance the future stability of our financial system.
Promoting Stability by Strengthening the Deposit Insurance Fund
The FDIC has moved quickly to implement the Dodd-Frank Act changes in the FDIC
deposit insurance program. These changes will help to ensure that coverage is
sufficient to preserve public confidence in a crisis, that premiums are proportional to
insurance risks, and that the fund itself is restored to long-term health and maintained at
levels that will withstand future periods of financial distress. The following sections
highlight important developments in the financial condition of the DIF and changes to
the management of the fund, assessment system, and coverage limits.
Restoring the Deposit Insurance Fund. Since year-end 2007, the failure of 377 FDIC-
insured institutions has imposed total estimated losses of $84 billion on the DIF. In the
recent crisis, as in the banking crisis of two decades ago, the sharp increase in bank
failures caused the fund balance (the fund's net worth) to become negative. In the
recent crisis, the DIF balance turned negative in the third quarter of 2009 and hit a low
of negative $20.9 billion in the following quarter.
As the DIF balance declined, the FDIC adopted a statutorily required Restoration Plan
and increased assessments to handle the high volume of failures and begin
replenishing the fund. The FDIC increased assessment rates at the beginning of 2009,
which raised regular assessment revenue from $3 billion in 2008 to over $12 billion in
2009 and almost $14 billion in 2010. In June 2009, the FDIC imposed a special
assessment that brought in an additional $5.5 billion from the banking industry.
Furthermore, in December 2009, to increase the FDIC's liquidity, the FDIC required that
the industry prepay almost $46 billion in assessments, representing over three years of
estimated assessments.
While the FDIC had to impose these measures at a very challenging time for banks,
they enabled the agency to avoid borrowing from the U.S. Treasury. The measures also
reaffirmed the longstanding commitment of the banking industry to fund the deposit
insurance system.
Since the FDIC imposed these measures, the DIF balance has steadily improved. It
increased throughout 2010 and stood at negative $1.0 billion as of March 31 of this
year. We expect to report that the DIF balance is once again positive when we release
second quarter results next month. Under the Restoration Plan for the DIF, the FDIC
has put in place assessment rates necessary to achieve a reserve ratio (the ratio of the
fund balance to estimated insured deposits) of 1.35 percent by September 30, 2020, as
the Dodd-Frank Act requires.
Expanding the Assessment Base. The FDIC has also implemented the Dodd-Frank Act
requirement to redefine the base used for deposit insurance assessments as average
consolidated total assets minus average tangible equity. The FDIC does not expect this
change to materially affect the overall amount of assessment revenue that otherwise
would have been collected. However, as Congress intended, the change in the
assessment base will generally shift some of the overall assessment burden from
community banks to the largest institutions, which rely less on domestic deposits for
their funding than do smaller institutions. The result will be a sharing of the assessment
burden that better reflects each group's share of industry assets. The FDIC estimates
that aggregate premiums paid by institutions with less than $10 billion in assets will
decline by approximately 30 percent, primarily due to the assessment base change.
Raising Deposit Insurance Coverage Limits. In retrospect, it appears clear that
expanding the coverage of deposit accounts during the crisis helped maintain public
confidence in the banking system and particularly helped community banks maintain
deposits. In the aftermath of the crisis, the Dodd-Frank Act made permanent the
insured institutions has imposed total estimated losses of $84 billion on the DIF. In the
recent crisis, as in the banking crisis of two decades ago, the sharp increase in bank
failures caused the fund balance (the fund's net worth) to become negative. In the
recent crisis, the DIF balance turned negative in the third quarter of 2009 and hit a low
of negative $20.9 billion in the following quarter.
As the DIF balance declined, the FDIC adopted a statutorily required Restoration Plan
and increased assessments to handle the high volume of failures and begin
replenishing the fund. The FDIC increased assessment rates at the beginning of 2009,
which raised regular assessment revenue from $3 billion in 2008 to over $12 billion in
2009 and almost $14 billion in 2010. In June 2009, the FDIC imposed a special
assessment that brought in an additional $5.5 billion from the banking industry.
Furthermore, in December 2009, to increase the FDIC's liquidity, the FDIC required that
the industry prepay almost $46 billion in assessments, representing over three years of
estimated assessments.
While the FDIC had to impose these measures at a very challenging time for banks,
they enabled the agency to avoid borrowing from the U.S. Treasury. The measures also
reaffirmed the longstanding commitment of the banking industry to fund the deposit
insurance system.
Since the FDIC imposed these measures, the DIF balance has steadily improved. It
increased throughout 2010 and stood at negative $1.0 billion as of March 31 of this
year. We expect to report that the DIF balance is once again positive when we release
second quarter results next month. Under the Restoration Plan for the DIF, the FDIC
has put in place assessment rates necessary to achieve a reserve ratio (the ratio of the
fund balance to estimated insured deposits) of 1.35 percent by September 30, 2020, as
the Dodd-Frank Act requires.
Expanding the Assessment Base. The FDIC has also implemented the Dodd-Frank Act
requirement to redefine the base used for deposit insurance assessments as average
consolidated total assets minus average tangible equity. The FDIC does not expect this
change to materially affect the overall amount of assessment revenue that otherwise
would have been collected. However, as Congress intended, the change in the
assessment base will generally shift some of the overall assessment burden from
community banks to the largest institutions, which rely less on domestic deposits for
their funding than do smaller institutions. The result will be a sharing of the assessment
burden that better reflects each group's share of industry assets. The FDIC estimates
that aggregate premiums paid by institutions with less than $10 billion in assets will
decline by approximately 30 percent, primarily due to the assessment base change.
Raising Deposit Insurance Coverage Limits. In retrospect, it appears clear that
expanding the coverage of deposit accounts during the crisis helped maintain public
confidence in the banking system and particularly helped community banks maintain
deposits. In the aftermath of the crisis, the Dodd-Frank Act made permanent the