Remarks by
FDIC Acting
Chairman Martin J. Gruenberg
to
George Washington University
Law School
March 2, 2012
Thank you for that very kind introduction.
In my remarks today, I will comment briefly on the condition of the banking system and
then discuss the FDIC's new responsibilities under the Dodd-Frank Act for the resolution
of systemically important financial institutions.
Condition of the Banking Industry
2011 represented the second full year of improving performance by the banking system.
The latest data, released by the FDIC in its Quarterly banking Profile earlier this week,
indicate that banks have continued to make gradual but steady progress in recovering
from the financial market turmoil and severe recession that unfolded from 2007 through
2009.
During the past two years, the banking industry has undergone a difficult process of
balance sheet strengthening. Capital has been increased, asset quality has improved,
and banks have bolstered their liquidity. The industry is now in a much better position to
support the economy through expanded lending. However, levels of troubled assets and
problem banks are still high. And while the economy is showing signs of improvement,
downside risks remain a concern.
The FDIC data does show a continuation in the fourth quarter of last year of a trend in
overall improvement in the condition of insured financial institutions. Industry earnings
have grown over the past eight quarters. The percent of noncurrent loans on the books
of FDIC-insured institutions has declined for seven consecutive quarters, reflecting
improved credit quality. The number of institutions on the FDIC's problem bank list
declined for the third consecutive quarter. The Deposit Insurance Fund moved into
positive territory as of June 30 of last year, and continued to increase in the third and
fourth quarters. The FDIC is forecasting significantly fewer failing banks this year than
last year.
However, most of the improvement in earnings over the last two years has been the
result of lower loan-loss provisions reflecting improved credit quality. But future earnings
gains will have to be based to a greater extent on increased lending, consistent with
sound underwriting. Prudent loan growth is a necessary condition for a stronger
economy.
FDIC Acting
Chairman Martin J. Gruenberg
to
George Washington University
Law School
March 2, 2012
Thank you for that very kind introduction.
In my remarks today, I will comment briefly on the condition of the banking system and
then discuss the FDIC's new responsibilities under the Dodd-Frank Act for the resolution
of systemically important financial institutions.
Condition of the Banking Industry
2011 represented the second full year of improving performance by the banking system.
The latest data, released by the FDIC in its Quarterly banking Profile earlier this week,
indicate that banks have continued to make gradual but steady progress in recovering
from the financial market turmoil and severe recession that unfolded from 2007 through
2009.
During the past two years, the banking industry has undergone a difficult process of
balance sheet strengthening. Capital has been increased, asset quality has improved,
and banks have bolstered their liquidity. The industry is now in a much better position to
support the economy through expanded lending. However, levels of troubled assets and
problem banks are still high. And while the economy is showing signs of improvement,
downside risks remain a concern.
The FDIC data does show a continuation in the fourth quarter of last year of a trend in
overall improvement in the condition of insured financial institutions. Industry earnings
have grown over the past eight quarters. The percent of noncurrent loans on the books
of FDIC-insured institutions has declined for seven consecutive quarters, reflecting
improved credit quality. The number of institutions on the FDIC's problem bank list
declined for the third consecutive quarter. The Deposit Insurance Fund moved into
positive territory as of June 30 of last year, and continued to increase in the third and
fourth quarters. The FDIC is forecasting significantly fewer failing banks this year than
last year.
However, most of the improvement in earnings over the last two years has been the
result of lower loan-loss provisions reflecting improved credit quality. But future earnings
gains will have to be based to a greater extent on increased lending, consistent with
sound underwriting. Prudent loan growth is a necessary condition for a stronger
economy.
That is why we view the fourth quarter growth in the industry's loan portfolio, the third
consecutive quarter of growth, as a hopeful sign.
The loan growth that has occurred so far has been led by lending to commercial
borrowers. Loans to medium and large commercial and industrial borrowers have
increased in each of the last six quarters. In the fourth quarter, we saw growth in small
C&I loans as well. The FDIC began collecting quarterly data on small loans to
businesses with the March 2010 Call Report; since that time, this is the first quarterly
increase in small C&I loans.
This is a trend the FDIC will be following closely going forward.
Putting the FDIC's New Systemic Resolution Responsibilities in Perspective
The FDIC has been given significant new responsibilities under the Dodd-Frank Act to
resolve systemically important financial institutions. Specifically, these include an
Orderly Liquidation Authority to resolve the largest and most complex bank holding
companies and non-bank financial institutions, if necessary, and a requirement for
resolution plans that will give regulators additional tools with which to manage the failure
of large, complex enterprises.
Before discussing our efforts to carry out these new responsibilities, I wanted to try to
place these responsibilities within the broader framework of the way the FDIC's
resolution activities regularly work together with bank supervision in responding to the
financial difficulties of FDIC-insured institutions.
It is important to recognize up front that resolution is always the option of last resort.
The purpose of the supervisory process is to make sure that institutions manage their
risks so that the risk of failure is minimized.
The goal is to have a supervisory process that can recognize problems early and
encourage management to address problems in a proactive way. When an institution's
supervisory rating or capital adequacy is downgraded, the institution is subject to a
variety of supervisory responses intended to encourage management to take prompt
action. These supervisory actions may include:
specific criticisms of risk management practices;
formal or informal enforcement actions;
orders to raise capital or seek merger partners that can bring in new capital and
management expertise.
Under the current arrangement, should the condition of the institution deteriorate, the
FDIC begins its resolution planning process in conjunction with the ongoing supervisory
consecutive quarter of growth, as a hopeful sign.
The loan growth that has occurred so far has been led by lending to commercial
borrowers. Loans to medium and large commercial and industrial borrowers have
increased in each of the last six quarters. In the fourth quarter, we saw growth in small
C&I loans as well. The FDIC began collecting quarterly data on small loans to
businesses with the March 2010 Call Report; since that time, this is the first quarterly
increase in small C&I loans.
This is a trend the FDIC will be following closely going forward.
Putting the FDIC's New Systemic Resolution Responsibilities in Perspective
The FDIC has been given significant new responsibilities under the Dodd-Frank Act to
resolve systemically important financial institutions. Specifically, these include an
Orderly Liquidation Authority to resolve the largest and most complex bank holding
companies and non-bank financial institutions, if necessary, and a requirement for
resolution plans that will give regulators additional tools with which to manage the failure
of large, complex enterprises.
Before discussing our efforts to carry out these new responsibilities, I wanted to try to
place these responsibilities within the broader framework of the way the FDIC's
resolution activities regularly work together with bank supervision in responding to the
financial difficulties of FDIC-insured institutions.
It is important to recognize up front that resolution is always the option of last resort.
The purpose of the supervisory process is to make sure that institutions manage their
risks so that the risk of failure is minimized.
The goal is to have a supervisory process that can recognize problems early and
encourage management to address problems in a proactive way. When an institution's
supervisory rating or capital adequacy is downgraded, the institution is subject to a
variety of supervisory responses intended to encourage management to take prompt
action. These supervisory actions may include:
specific criticisms of risk management practices;
formal or informal enforcement actions;
orders to raise capital or seek merger partners that can bring in new capital and
management expertise.
Under the current arrangement, should the condition of the institution deteriorate, the
FDIC begins its resolution planning process in conjunction with the ongoing supervisory