Statement of
John F. Bovenzi, Deputy to the Chairman
and
Chief Operating Officer,
Federal Deposit Insurance Corporation
On
Promoting Bank Liquidity and Lending Through Deposit Insurance,
Hope for Homeowners, and Other Enhancements
before the
Committee on Financial Services;
U.S. House of Representatives,
Room 2128, Rayburn
House Office Building
February 3, 2009
Chairman Frank, Ranking Member Bachus and members of the Committee, I
appreciate the opportunity to testify on behalf of the Federal Deposit Insurance
Corporation (FDIC) regarding efforts to promote bank liquidity and lending. As
discussed in previous statements before this committee, asset quality deterioration,
especially among residential mortgages, played a large role in triggering the current
crisis. However, it has become increasingly apparent that a lack of liquidity in the
financial services sector has emerged as a major obstacle to efforts to return the
economy to a condition where it can support normal economic activity and future
economic growth.
My testimony will discuss the reasons why measures are needed to enhance liquidity
sources for financial institutions and the FDIC's efforts to provide additional liquidity to
institutions through our Temporary Liquidity Guarantee Program (TLGP), as well as
through maintaining a strong and flexible deposit insurance system. In addition, I will
discuss the role of programs funded though the Emergency Economic Stabilization Act's
(EESA) Troubled Asset Relief Program (TARP) in promoting stability and liquidity.
The Importance of Liquidity
Sufficient sources of liquidity are necessary to ensure appropriate funding of financial
institutions' ongoing financial obligations to depositors, debtors and creditors. The most
extreme examples of financial institution's inability to meet their obligations were seen in
several of the financial institution failures that occurred during the latter part of 2008.
While several institutions had significant asset quality problems, their reported book
capital had not yet reached the Critically Undercapitalized threshold typically seen in
failing banks. While the assets of these institutions were quickly deteriorating, their
liquidity positions were deteriorating at a faster rate. This deterioration was brought on
in part by significant deposit outflow over a relatively short period of time that resulted in
a funding shortfall, which ultimately caused their failure.
John F. Bovenzi, Deputy to the Chairman
and
Chief Operating Officer,
Federal Deposit Insurance Corporation
On
Promoting Bank Liquidity and Lending Through Deposit Insurance,
Hope for Homeowners, and Other Enhancements
before the
Committee on Financial Services;
U.S. House of Representatives,
Room 2128, Rayburn
House Office Building
February 3, 2009
Chairman Frank, Ranking Member Bachus and members of the Committee, I
appreciate the opportunity to testify on behalf of the Federal Deposit Insurance
Corporation (FDIC) regarding efforts to promote bank liquidity and lending. As
discussed in previous statements before this committee, asset quality deterioration,
especially among residential mortgages, played a large role in triggering the current
crisis. However, it has become increasingly apparent that a lack of liquidity in the
financial services sector has emerged as a major obstacle to efforts to return the
economy to a condition where it can support normal economic activity and future
economic growth.
My testimony will discuss the reasons why measures are needed to enhance liquidity
sources for financial institutions and the FDIC's efforts to provide additional liquidity to
institutions through our Temporary Liquidity Guarantee Program (TLGP), as well as
through maintaining a strong and flexible deposit insurance system. In addition, I will
discuss the role of programs funded though the Emergency Economic Stabilization Act's
(EESA) Troubled Asset Relief Program (TARP) in promoting stability and liquidity.
The Importance of Liquidity
Sufficient sources of liquidity are necessary to ensure appropriate funding of financial
institutions' ongoing financial obligations to depositors, debtors and creditors. The most
extreme examples of financial institution's inability to meet their obligations were seen in
several of the financial institution failures that occurred during the latter part of 2008.
While several institutions had significant asset quality problems, their reported book
capital had not yet reached the Critically Undercapitalized threshold typically seen in
failing banks. While the assets of these institutions were quickly deteriorating, their
liquidity positions were deteriorating at a faster rate. This deterioration was brought on
in part by significant deposit outflow over a relatively short period of time that resulted in
a funding shortfall, which ultimately caused their failure.
Clearly, even absent the immediate liquidity issues that led to the closure of these
institutions, the continued viability of these institutions was unlikely. However, liquidity
failures result in more complicated resolutions. Also, the timeframes necessary to
gather deposit and loan information as well as to solicit bids from interested acquirers,
become compressed, which can place greater demands on the resources of the FDIC.
Stabilizing liquidity could potentially avoid unnecessary costs to the Deposit Insurance
Fund (DIF) by eliminating the need to close, or prematurely close, otherwise viable
institutions.
In addition, a combination of adequate liquidity and capital buttresses financial
institutions' ability to lend. Higher capital, resulting from TARP capital injections or
private equity, enables financial institutions to lend more from their funding sources --
with deposits now being the most important. However, institutions need both liquidity
and capital. Liquidity alone does not help if capital is insufficient and capital alone is not
enough if the institution cannot obtain funds to lend.
Efforts to Improve Liquidity at Insured Depository Institutions
Temporary Liquidity Guarantee Program
In October, the FDIC Board of Directors approved the TLGP to unlock inter-bank credit
markets and restore rationality to credit spreads. This voluntary program is designed to
free up funding for banks to make loans to creditworthy businesses and consumers.
The TLGP has two components: 1) a program to guarantee senior unsecured debt of
insured depository institutions and most depository institution holding companies, and 2)
a program to guarantee noninterest bearing transaction deposit accounts in excess of
deposit insurance limits. The TLGP has a high level of participation. Of about 8,300
FDIC-insured institutions, nearly 7,000 have opted in to the transaction account
guarantee program, and nearly 7,100 banks and thrifts and their holding companies
have opted in to the debt guarantee program.
The TLGP's first component -- the guarantee of senior unsecured debt of insured
depository institutions -- is designed to help stabilize the funding structure of financial
institutions and expand their funding base to support the extension of new credit.
Indications to date suggest the program has improved access to funding and lowered
banks' borrowing costs. As of January 28, outstanding debt covered by a TLGP
guarantee totaled about $221 billion. Data show that FDIC-guaranteed debt is trading at
considerably lower spreads than non-guaranteed debt issued by the same companies.
Since the inception of the TLGP program and the other interagency measures
announced in mid-October, interbank lending rates have declined. For example, the
LIBOR -- Treasury (TED) spread declined from 464 basis points on October 10 to 94
basis points on January 29.
institutions, the continued viability of these institutions was unlikely. However, liquidity
failures result in more complicated resolutions. Also, the timeframes necessary to
gather deposit and loan information as well as to solicit bids from interested acquirers,
become compressed, which can place greater demands on the resources of the FDIC.
Stabilizing liquidity could potentially avoid unnecessary costs to the Deposit Insurance
Fund (DIF) by eliminating the need to close, or prematurely close, otherwise viable
institutions.
In addition, a combination of adequate liquidity and capital buttresses financial
institutions' ability to lend. Higher capital, resulting from TARP capital injections or
private equity, enables financial institutions to lend more from their funding sources --
with deposits now being the most important. However, institutions need both liquidity
and capital. Liquidity alone does not help if capital is insufficient and capital alone is not
enough if the institution cannot obtain funds to lend.
Efforts to Improve Liquidity at Insured Depository Institutions
Temporary Liquidity Guarantee Program
In October, the FDIC Board of Directors approved the TLGP to unlock inter-bank credit
markets and restore rationality to credit spreads. This voluntary program is designed to
free up funding for banks to make loans to creditworthy businesses and consumers.
The TLGP has two components: 1) a program to guarantee senior unsecured debt of
insured depository institutions and most depository institution holding companies, and 2)
a program to guarantee noninterest bearing transaction deposit accounts in excess of
deposit insurance limits. The TLGP has a high level of participation. Of about 8,300
FDIC-insured institutions, nearly 7,000 have opted in to the transaction account
guarantee program, and nearly 7,100 banks and thrifts and their holding companies
have opted in to the debt guarantee program.
The TLGP's first component -- the guarantee of senior unsecured debt of insured
depository institutions -- is designed to help stabilize the funding structure of financial
institutions and expand their funding base to support the extension of new credit.
Indications to date suggest the program has improved access to funding and lowered
banks' borrowing costs. As of January 28, outstanding debt covered by a TLGP
guarantee totaled about $221 billion. Data show that FDIC-guaranteed debt is trading at
considerably lower spreads than non-guaranteed debt issued by the same companies.
Since the inception of the TLGP program and the other interagency measures
announced in mid-October, interbank lending rates have declined. For example, the
LIBOR -- Treasury (TED) spread declined from 464 basis points on October 10 to 94
basis points on January 29.