Statement of
Arthur J. Murton, Director, Division
of
Insurance and Research Federal Deposit Insurance Corporation
on
Current Issues in Deposit Insurance
before the
Subcommittee on Financial Institutions Committee on Banking, Housing
and
Urban Affairs, U.S.
Senate Room 534
Dirksen Senate Office Building
March 19, 2009
Chairman Johnson, Ranking Member Crapo and members of the Subcommittee, I
appreciate the opportunity to testify on behalf of the Federal Deposit Insurance
Corporation (FDIC) on current issues in deposit insurance.
Since the creation of the FDIC during the Great Depression, deposit insurance has
played a crucial role in maintaining the stability of the banking system. By protecting
deposits, the FDIC ensures the security of the most important source of funding
available to insured depository institutions -- funds that can be lent to businesses and
consumers to support and promote economic activity.
Under the current severe economic conditions, the FDIC's deposit insurance guarantee
has proven to be more valuable than ever. While many sources of bank funding have
disappeared during the past six months, deposits have not. They remain a stable
source of funding because depositors know that insured deposits are absolutely safe.
No one has ever lost a penny on an insured deposit.
My testimony will discuss the current condition of the Deposit Insurance Fund (DIF) and
the reasons for the recent decision by the FDIC Board of Directors (Board) to increase
deposit insurance premiums and impose a special assessment on insured institutions.
In addition, I will discuss the need for an increase in the FDIC's borrowing authority with
the Treasury Department, which has not been permanently increased in almost 20
years. I will also comment on legislative proposals to make permanent the temporary
increase in the deposit insurance coverage, to extend the time period for restoring the
DIF to the statutorily mandated range for the reserve ratio and to improve the systemic
risk provisions of the Federal Deposit Insurance Act. Finally, I will discuss whether we
should reexamine the mandatory rebate provisions that were enacted as part of the
Deposit Insurance Reform Act in 2006.
Condition of the Deposit Insurance Fund
Arthur J. Murton, Director, Division
of
Insurance and Research Federal Deposit Insurance Corporation
on
Current Issues in Deposit Insurance
before the
Subcommittee on Financial Institutions Committee on Banking, Housing
and
Urban Affairs, U.S.
Senate Room 534
Dirksen Senate Office Building
March 19, 2009
Chairman Johnson, Ranking Member Crapo and members of the Subcommittee, I
appreciate the opportunity to testify on behalf of the Federal Deposit Insurance
Corporation (FDIC) on current issues in deposit insurance.
Since the creation of the FDIC during the Great Depression, deposit insurance has
played a crucial role in maintaining the stability of the banking system. By protecting
deposits, the FDIC ensures the security of the most important source of funding
available to insured depository institutions -- funds that can be lent to businesses and
consumers to support and promote economic activity.
Under the current severe economic conditions, the FDIC's deposit insurance guarantee
has proven to be more valuable than ever. While many sources of bank funding have
disappeared during the past six months, deposits have not. They remain a stable
source of funding because depositors know that insured deposits are absolutely safe.
No one has ever lost a penny on an insured deposit.
My testimony will discuss the current condition of the Deposit Insurance Fund (DIF) and
the reasons for the recent decision by the FDIC Board of Directors (Board) to increase
deposit insurance premiums and impose a special assessment on insured institutions.
In addition, I will discuss the need for an increase in the FDIC's borrowing authority with
the Treasury Department, which has not been permanently increased in almost 20
years. I will also comment on legislative proposals to make permanent the temporary
increase in the deposit insurance coverage, to extend the time period for restoring the
DIF to the statutorily mandated range for the reserve ratio and to improve the systemic
risk provisions of the Federal Deposit Insurance Act. Finally, I will discuss whether we
should reexamine the mandatory rebate provisions that were enacted as part of the
Deposit Insurance Reform Act in 2006.
Condition of the Deposit Insurance Fund
During 2008, 25 FDIC-insured institutions with assets of $372 billion failed, the largest
number of failures since 1993 when 41 institutions with combined assets of $3.8 billion
failed (excluding thrifts resolved by the RTC). So far this year, 17 FDIC-insured
institutions with combined assets of $7.7 billion have failed. In addition, two banking
organizations have received assistance under a systemic risk determination over the
past six months. As part of its restoration plan and recent final rulemaking on
assessments, the FDIC is estimating a range of possible failure cost estimates over the
2009-2013 period, with $65 billion considered the most likely outcome.
In 2008, the DIF balance fell by more than $33.5 billion (64 percent), primarily because
of over $40 billion in loss provisions.1 The industry funded Deposit Insurance Fund
(DIF) decreased by almost $16 billion during the fourth quarter to $19 billion. This fund
balance is net of loss reserves totaling $22 billion set aside for failures anticipated in
2009, which are subject to adjustments based on changing economic and financial
conditions.
The DIF's reserve ratio equaled 0.40 percent on December 31, 2008, which was 36
basis points lower than the previous quarter. During 2008, the reserve ratio decreased
by 82 basis points, from 1.22 percent at year-end 2007. The December figure is the
lowest reserve ratio for a combined bank and thrift insurance fund since June 30, 1993,
when the reserve ratio was 0.28 percent.
Recently, the FDIC's Board of Directors made a series of very difficult decisions to
ensure that our nation's deposit insurance system maintains the integrity of its industry
funded assessment base. First, they extended the period in which the DIF reserve ratio
must return to 1.15 percent from five to seven years, due to the extraordinary
circumstances facing the banking industry. Second, they set an assessment rate
schedule under which most insured institutions would pay between 12 and 16 basis
points before certain adjustments, effective the second quarter of 2009. These rates are
in line with the rates we had signaled would be necessary last October to bring the
reserve ratio back up to the statutorily mandated minimum of 1.15 percent over the
restoration plan horizon. Finally, and most importantly, the Board adopted an interim
rule setting a special assessment of 20 basis points for June 30, to be collected
September 30. We welcome comments on the interim rule that will be considered in any
final rulemaking.
The FDIC realizes that these assessments are a significant expense, particularly during
a financial crisis and recession when bank earnings are under pressure. Banks face
tremendous challenges right now even without having to pay higher assessments. We
also recognize that assessments reduce the funds that banks can lend in their
communities to help revitalize the economy. However, the reality is that these increases
in assessments are necessary to ensure the adequacy of the FDIC's industry funded
resources to resolve projected bank failures. The FDIC's guarantee has always been
funded by the industry. All banks benefit from the FDIC's industry funded status and
deposit insurance has been one key component of addressing our current financial
crisis that has not relied on taxpayer funding.
number of failures since 1993 when 41 institutions with combined assets of $3.8 billion
failed (excluding thrifts resolved by the RTC). So far this year, 17 FDIC-insured
institutions with combined assets of $7.7 billion have failed. In addition, two banking
organizations have received assistance under a systemic risk determination over the
past six months. As part of its restoration plan and recent final rulemaking on
assessments, the FDIC is estimating a range of possible failure cost estimates over the
2009-2013 period, with $65 billion considered the most likely outcome.
In 2008, the DIF balance fell by more than $33.5 billion (64 percent), primarily because
of over $40 billion in loss provisions.1 The industry funded Deposit Insurance Fund
(DIF) decreased by almost $16 billion during the fourth quarter to $19 billion. This fund
balance is net of loss reserves totaling $22 billion set aside for failures anticipated in
2009, which are subject to adjustments based on changing economic and financial
conditions.
The DIF's reserve ratio equaled 0.40 percent on December 31, 2008, which was 36
basis points lower than the previous quarter. During 2008, the reserve ratio decreased
by 82 basis points, from 1.22 percent at year-end 2007. The December figure is the
lowest reserve ratio for a combined bank and thrift insurance fund since June 30, 1993,
when the reserve ratio was 0.28 percent.
Recently, the FDIC's Board of Directors made a series of very difficult decisions to
ensure that our nation's deposit insurance system maintains the integrity of its industry
funded assessment base. First, they extended the period in which the DIF reserve ratio
must return to 1.15 percent from five to seven years, due to the extraordinary
circumstances facing the banking industry. Second, they set an assessment rate
schedule under which most insured institutions would pay between 12 and 16 basis
points before certain adjustments, effective the second quarter of 2009. These rates are
in line with the rates we had signaled would be necessary last October to bring the
reserve ratio back up to the statutorily mandated minimum of 1.15 percent over the
restoration plan horizon. Finally, and most importantly, the Board adopted an interim
rule setting a special assessment of 20 basis points for June 30, to be collected
September 30. We welcome comments on the interim rule that will be considered in any
final rulemaking.
The FDIC realizes that these assessments are a significant expense, particularly during
a financial crisis and recession when bank earnings are under pressure. Banks face
tremendous challenges right now even without having to pay higher assessments. We
also recognize that assessments reduce the funds that banks can lend in their
communities to help revitalize the economy. However, the reality is that these increases
in assessments are necessary to ensure the adequacy of the FDIC's industry funded
resources to resolve projected bank failures. The FDIC's guarantee has always been
funded by the industry. All banks benefit from the FDIC's industry funded status and
deposit insurance has been one key component of addressing our current financial
crisis that has not relied on taxpayer funding.