Statement of
Sheila C. Bair, Chairman,
Federal Deposit Insurance Corporation
on the
State of the FDIC: Deposit Insurance,
Consumer Protection, and Financial Stability
before the
Committee on Banking, Housing and Urban Affairs
United States Senate
538 Dirksen Senate Office Building
June 30, 2011
Chairman Johnson, Ranking Member Shelby, and members of the Committee, thank
you for the opportunity to testify today on the state of the Federal Deposit Insurance
Corporation. The past five years, marking my tenure as FDIC Chairman, have been
among the most eventful for U.S. financial policy since the 1930s. During this time our
nation has suffered its most serious financial crisis and economic downturn since the
Great Depression. The aftereffects are still being felt and will likely persist in some
measure for years.
Despite the challenges, I am pleased to report significant progress in the recovery of
FDIC-insured institutions and the Deposit Insurance Fund (DIF), as well as in
implementing regulatory reform measures as authorized under the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). Following
through on these reforms will be crucially important to the type of long-term financial
stability that will be necessary to support economic growth in the years ahead.
In my testimony today, I would like to summarize the progress that the FDIC has made
in ensuring the safety and soundness of our banking system, protecting depositors,
resolving failed institutions, and rebuilding the financial health of the DIF. I will highlight,
in particular, efforts we are making to enhance consumer protection in the wake of a
crisis where risky retail lending practices played a leading role. I will briefly summarize
our progress in implementing the resolutions framework for systemically-important
financial institutions (SIFIs) that was authorized under the Dodd-Frank Act, and
conclude with some additional thoughts on the importance of financial regulatory reform
to the nation's long-term economic health.
Condition of the Industry and the Deposit Insurance Fund
Since my term began in June 2006, the landscape of the banking industry has
undergone dramatic change. When I arrived, the industry was in the midst of its sixth
consecutive year of record earnings. The ratio of noncurrent loans to total loans was a
record-low 0.70 percent.1 There were only 50 problem banks, and we were in the midst
of a record period of 952 days without a bank failure. However, as we soon learned, the
apparently strong performance of those years in fact reflected an overheated housing
Sheila C. Bair, Chairman,
Federal Deposit Insurance Corporation
on the
State of the FDIC: Deposit Insurance,
Consumer Protection, and Financial Stability
before the
Committee on Banking, Housing and Urban Affairs
United States Senate
538 Dirksen Senate Office Building
June 30, 2011
Chairman Johnson, Ranking Member Shelby, and members of the Committee, thank
you for the opportunity to testify today on the state of the Federal Deposit Insurance
Corporation. The past five years, marking my tenure as FDIC Chairman, have been
among the most eventful for U.S. financial policy since the 1930s. During this time our
nation has suffered its most serious financial crisis and economic downturn since the
Great Depression. The aftereffects are still being felt and will likely persist in some
measure for years.
Despite the challenges, I am pleased to report significant progress in the recovery of
FDIC-insured institutions and the Deposit Insurance Fund (DIF), as well as in
implementing regulatory reform measures as authorized under the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). Following
through on these reforms will be crucially important to the type of long-term financial
stability that will be necessary to support economic growth in the years ahead.
In my testimony today, I would like to summarize the progress that the FDIC has made
in ensuring the safety and soundness of our banking system, protecting depositors,
resolving failed institutions, and rebuilding the financial health of the DIF. I will highlight,
in particular, efforts we are making to enhance consumer protection in the wake of a
crisis where risky retail lending practices played a leading role. I will briefly summarize
our progress in implementing the resolutions framework for systemically-important
financial institutions (SIFIs) that was authorized under the Dodd-Frank Act, and
conclude with some additional thoughts on the importance of financial regulatory reform
to the nation's long-term economic health.
Condition of the Industry and the Deposit Insurance Fund
Since my term began in June 2006, the landscape of the banking industry has
undergone dramatic change. When I arrived, the industry was in the midst of its sixth
consecutive year of record earnings. The ratio of noncurrent loans to total loans was a
record-low 0.70 percent.1 There were only 50 problem banks, and we were in the midst
of a record period of 952 days without a bank failure. However, as we soon learned, the
apparently strong performance of those years in fact reflected an overheated housing
market, which was fueled by lax lending standards and excess leverage throughout the
financial system.
The industry quickly shifted from a period of apparently strong performance to record
credit losses and some of the worst earnings quarters in U.S. banking history. The
deterioration began with the onset of recession in late 2007. The trend worsened after
the peak of the financial crisis, and the industry reported a record loss of $37 billion in
the fourth quarter of 2008. By early 2010, the ratio of noncurrent loans to total loans had
risen nearly eight-fold to 5.5 percent. The FDIC went from a long stretch of no failures to
resolving 373 institutions since the start of 2007, including the largest bank failure in
U.S. history. In addition, the federal government and U.S. banking regulators had to
provide assistance to our largest financial organizations to prevent their failure from
causing an even more severe economic disaster.
After showing signs of a turnaround in 2010, performance of FDIC-insured institutions
continued to strengthen in the first quarter of 2011. Earnings have recovered to levels
that remain lower than their pre-recession highs, and asset quality indicators have also
improved somewhat. However, problem assets remain at high levels, and revenue has
been relatively flat for several quarters.
Banks and thrifts reported aggregate net income of $29 billion in the first quarter, an
increase of 67 percent from first quarter 2010 and the industry's highest reported
quarterly income in nearly three years. Industry earnings have registered year-over-year
gains for seven consecutive quarters. More than half of institutions reported improved
earnings in the first quarter from a year ago, and fewer institutions were unprofitable.
The main driver of earnings improvement continues to be reduced provisions for loan
losses. First quarter 2011 provisions for losses totaled $20.6 billion, which were about
60 percent below a year ago. Reduced provisions for losses reflect general
improvement in asset quality indicators. The volume of noncurrent loans declined for the
fourth consecutive quarter, and net charge-offs declined for the fifth consecutive
quarter. All major loan types had declines in volumes of noncurrent loans and net
charge-offs. However, the ratio of noncurrent loans to total loans of 4.71 percent
remains above levels seen in the crisis of the late 1980s and early 1990s.
The positive contribution from reduced loan-loss provisions outweighed the negative
effect of lower revenue at many institutions. Net operating revenue – net interest income
plus total noninterest income – was $5.6 billion lower than a year ago. This was only the
second time in the more than 27 years for which data are available that the industry has
reported a year-over-year decline in quarterly net operating revenue. Both net interest
income and total noninterest income reflected aggregate declines. More than half of all
institutions reported year-over-year increases in net operating revenue, but eight of the
ten largest institutions reported declines.
The relatively flat revenues of recent quarters reflect, in part, reduced loan balances.
Loan balances have declined in ten of the past eleven quarters, and the 1.7 percent
financial system.
The industry quickly shifted from a period of apparently strong performance to record
credit losses and some of the worst earnings quarters in U.S. banking history. The
deterioration began with the onset of recession in late 2007. The trend worsened after
the peak of the financial crisis, and the industry reported a record loss of $37 billion in
the fourth quarter of 2008. By early 2010, the ratio of noncurrent loans to total loans had
risen nearly eight-fold to 5.5 percent. The FDIC went from a long stretch of no failures to
resolving 373 institutions since the start of 2007, including the largest bank failure in
U.S. history. In addition, the federal government and U.S. banking regulators had to
provide assistance to our largest financial organizations to prevent their failure from
causing an even more severe economic disaster.
After showing signs of a turnaround in 2010, performance of FDIC-insured institutions
continued to strengthen in the first quarter of 2011. Earnings have recovered to levels
that remain lower than their pre-recession highs, and asset quality indicators have also
improved somewhat. However, problem assets remain at high levels, and revenue has
been relatively flat for several quarters.
Banks and thrifts reported aggregate net income of $29 billion in the first quarter, an
increase of 67 percent from first quarter 2010 and the industry's highest reported
quarterly income in nearly three years. Industry earnings have registered year-over-year
gains for seven consecutive quarters. More than half of institutions reported improved
earnings in the first quarter from a year ago, and fewer institutions were unprofitable.
The main driver of earnings improvement continues to be reduced provisions for loan
losses. First quarter 2011 provisions for losses totaled $20.6 billion, which were about
60 percent below a year ago. Reduced provisions for losses reflect general
improvement in asset quality indicators. The volume of noncurrent loans declined for the
fourth consecutive quarter, and net charge-offs declined for the fifth consecutive
quarter. All major loan types had declines in volumes of noncurrent loans and net
charge-offs. However, the ratio of noncurrent loans to total loans of 4.71 percent
remains above levels seen in the crisis of the late 1980s and early 1990s.
The positive contribution from reduced loan-loss provisions outweighed the negative
effect of lower revenue at many institutions. Net operating revenue – net interest income
plus total noninterest income – was $5.6 billion lower than a year ago. This was only the
second time in the more than 27 years for which data are available that the industry has
reported a year-over-year decline in quarterly net operating revenue. Both net interest
income and total noninterest income reflected aggregate declines. More than half of all
institutions reported year-over-year increases in net operating revenue, but eight of the
ten largest institutions reported declines.
The relatively flat revenues of recent quarters reflect, in part, reduced loan balances.
Loan balances have declined in ten of the past eleven quarters, and the 1.7 percent