Statement of
John F. Bovenzi,
Deputy to the Chairman
And
Chief Operating Officer,
Federal Deposit Insurance Corporation
On
Priorities for the Next Administration:
Use of TARP Funds Under the
Emergency Economic Stabilization
Act of 2008; Committee on Financial Services
U.S. House of Representatives,
Room 2128,
Rayburn House Office Building
January 13, 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 the use of funds under the Emergency Economic
Stabilization Act of 2008 (EESA). The incoming Administration will face a number of
serious economic challenges and the effective and efficient use of the funds provided by
Congress under EESA will be an essential element for maintaining stability in the
financial markets and returning them to more normal operations. In addition, EESA
provides statutory authority and funding that could be effective in reducing unnecessary
foreclosures which have contributed substantially to our current economic problems.
On November 18, Chairman Bair testified before this Committee on efforts to stabilize
the nation's financial markets and to reduce foreclosures. While some additional steps
have been taken, credit remains tight and more needs to be done for homeowners in
distress. Credit markets have not been functioning normally, contributing to a rising level
of distress in the economy. In addition, high levels of foreclosures are contributing to
downward pressure on home prices. Troubled assets continue to mount at insured
commercial banks and savings institutions, placing a growing burden on industry
earnings. As reported in the third quarter 2008 FDIC Quarterly Banking Profile,
expenses for credit losses topped $50 billion for the second consecutive quarter. Third
quarter income totaled only $1.7 billion, a decline of $27 billion (94 percent) from the
third quarter of 2007. Almost one in four institutions (24.1 percent) reported a net loss
for the quarter. However, as discussed further below, programs implemented by the
Federal Reserve Board (FRB), the FDIC, and the U.S. Treasury Department to boost
liquidity appear to be making a positive impact.
Returning the economy to a condition where it can support normal economic activity
and future economic growth will require a number of strategies, including providing
access to additional funds under the Troubled Asset Relief Program (TARP). We
understand that many Members of Congress have concerns about the past use of
John F. Bovenzi,
Deputy to the Chairman
And
Chief Operating Officer,
Federal Deposit Insurance Corporation
On
Priorities for the Next Administration:
Use of TARP Funds Under the
Emergency Economic Stabilization
Act of 2008; Committee on Financial Services
U.S. House of Representatives,
Room 2128,
Rayburn House Office Building
January 13, 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 the use of funds under the Emergency Economic
Stabilization Act of 2008 (EESA). The incoming Administration will face a number of
serious economic challenges and the effective and efficient use of the funds provided by
Congress under EESA will be an essential element for maintaining stability in the
financial markets and returning them to more normal operations. In addition, EESA
provides statutory authority and funding that could be effective in reducing unnecessary
foreclosures which have contributed substantially to our current economic problems.
On November 18, Chairman Bair testified before this Committee on efforts to stabilize
the nation's financial markets and to reduce foreclosures. While some additional steps
have been taken, credit remains tight and more needs to be done for homeowners in
distress. Credit markets have not been functioning normally, contributing to a rising level
of distress in the economy. In addition, high levels of foreclosures are contributing to
downward pressure on home prices. Troubled assets continue to mount at insured
commercial banks and savings institutions, placing a growing burden on industry
earnings. As reported in the third quarter 2008 FDIC Quarterly Banking Profile,
expenses for credit losses topped $50 billion for the second consecutive quarter. Third
quarter income totaled only $1.7 billion, a decline of $27 billion (94 percent) from the
third quarter of 2007. Almost one in four institutions (24.1 percent) reported a net loss
for the quarter. However, as discussed further below, programs implemented by the
Federal Reserve Board (FRB), the FDIC, and the U.S. Treasury Department to boost
liquidity appear to be making a positive impact.
Returning the economy to a condition where it can support normal economic activity
and future economic growth will require a number of strategies, including providing
access to additional funds under the Troubled Asset Relief Program (TARP). We
understand that many Members of Congress have concerns about the past use of
TARP funds. The FDIC does not serve on the TARP Oversight Board and has no
statutory role in the administration of its programs. However, we will support Treasury's
request for the release of the second $350 billion. We believe that these funds -- with
appropriate transparency and accountability -- could provide important and necessary
support to prevent additional contractions in lending, assist financial institutions in
providing credit to creditworthy borrowers and provide incentives to avoid unnecessary
foreclosures.
My testimony will discuss the FDIC's efforts to provide additional liquidity to insured
institutions through our Temporary Liquidity Guarantee Program (TLGP), as well as our
participation in the Capital Purchase Program implemented by the Treasury Department
under EESA. Though the TLGP is funded through industry assessments and does not
rely on TARP funding, it is an important component of combined interagency efforts to
combat the financial crisis. I also will discuss the continuing need for a program to
provide a means for financial institutions to sell troubled assets to free up additional
balance sheet capability to engage in prudent lending. We believe a program is needed
that is capable of managing these assets until the economy and the banking industry
are stabilized, and that institutions of all sizes should be allowed to participate if they
otherwise qualify. In addition, I will reiterate the need for more robust mortgage loan
modification efforts, such as those previously proposed and implemented under the
auspices of the FDIC. Finally, I will discuss measures that financial institutions should
take to ensure that TARP/EESA funds are used responsibly and effectively.
Efforts to Improve the Liquidity and Capital at Insured Depository Institutions
Temporary Liquidity Guarantee Program
The FDIC Board of Directors adopted the TLGP on October 13, 2008 in response to
credit market disruptions, particularly in the interbank lending market. The FDIC's action
in establishing the TLGP is unprecedented and necessitated by the crisis in our credit
markets, which has been fed by a rising aversion to risk and serious concerns about the
effects this will have on the real economy. The FDIC's action was authorized under the
systemic risk exception of the FDIC Improvement Act of 1991 and followed similar
actions by the international community. If the FDIC had not acted, guarantees for bank
debt and increases in deposit insurance by foreign governments would have created a
competitive disadvantage for U.S. banks. Along with Treasury's actions to inject more
capital into the banking system, the combined coordinated measures to free up credit
markets have had a stabilizing effect on bank funding.
The TLGP is designed to help stabilize the funding structure of financial institutions and
expand their funding base to support the extension of new credit. 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. It is important to note that the TLGP does not rely on taxpayer funding
or the Deposit Insurance Fund. Instead, both aspects of the program will be paid for by
statutory role in the administration of its programs. However, we will support Treasury's
request for the release of the second $350 billion. We believe that these funds -- with
appropriate transparency and accountability -- could provide important and necessary
support to prevent additional contractions in lending, assist financial institutions in
providing credit to creditworthy borrowers and provide incentives to avoid unnecessary
foreclosures.
My testimony will discuss the FDIC's efforts to provide additional liquidity to insured
institutions through our Temporary Liquidity Guarantee Program (TLGP), as well as our
participation in the Capital Purchase Program implemented by the Treasury Department
under EESA. Though the TLGP is funded through industry assessments and does not
rely on TARP funding, it is an important component of combined interagency efforts to
combat the financial crisis. I also will discuss the continuing need for a program to
provide a means for financial institutions to sell troubled assets to free up additional
balance sheet capability to engage in prudent lending. We believe a program is needed
that is capable of managing these assets until the economy and the banking industry
are stabilized, and that institutions of all sizes should be allowed to participate if they
otherwise qualify. In addition, I will reiterate the need for more robust mortgage loan
modification efforts, such as those previously proposed and implemented under the
auspices of the FDIC. Finally, I will discuss measures that financial institutions should
take to ensure that TARP/EESA funds are used responsibly and effectively.
Efforts to Improve the Liquidity and Capital at Insured Depository Institutions
Temporary Liquidity Guarantee Program
The FDIC Board of Directors adopted the TLGP on October 13, 2008 in response to
credit market disruptions, particularly in the interbank lending market. The FDIC's action
in establishing the TLGP is unprecedented and necessitated by the crisis in our credit
markets, which has been fed by a rising aversion to risk and serious concerns about the
effects this will have on the real economy. The FDIC's action was authorized under the
systemic risk exception of the FDIC Improvement Act of 1991 and followed similar
actions by the international community. If the FDIC had not acted, guarantees for bank
debt and increases in deposit insurance by foreign governments would have created a
competitive disadvantage for U.S. banks. Along with Treasury's actions to inject more
capital into the banking system, the combined coordinated measures to free up credit
markets have had a stabilizing effect on bank funding.
The TLGP is designed to help stabilize the funding structure of financial institutions and
expand their funding base to support the extension of new credit. 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. It is important to note that the TLGP does not rely on taxpayer funding
or the Deposit Insurance Fund. Instead, both aspects of the program will be paid for by