Statement of
Diane Ellis, Director,
Division Of
Insurance and Research,
Federal Deposit Insurance Corporation
On
Housing Finance Reform
Powers and Structure of a Strong Regulator
to the
Committee on Banking, Housing,
And
Urban Affairs; U.S. Senate
538 Dirksen Senate
Office Building
November 21, 2013
Chairman Johnson, Senator Crapo and members of the Committee, I appreciate the
opportunity to testify before you today on "Powers and Structure of a Strong Regulator."
As the Committee considers reforms to the nation's housing finance system, including
insurance and supervisory models similar to the Federal Deposit Insurance Corporation
(FDIC), you have requested that we provide you with a description of the elements of
the deposit insurance system that are the most important in achieving our mission.
Many lessons have been learned over the deposit insurance system's 80 years of
operation. Drawing from these lessons, both Congress and the FDIC have made a
number of improvements to the deposit insurance system. During our history, which
includes two serious banking crises in the last few decades, certain authorities and
regulatory tools stand out as particularly important. These include clear and explicit
statutory authority, monitoring to assess risk exposure and to take action in response
when necessary, appropriate pricing of insurance, and adequate funding arrangements.
In addition, the FDIC has experienced the challenges of managing a transition between
agencies, which occurred when the Resolution Trust Corporation, created to resolve
failed savings and loan institutions during the early 1990s, was folded into the FDIC at
the conclusion of that crisis.
My testimony today elaborates on and describes these important authorities and tools
through the lens of the FDIC's experience. In some cases, the elements of our
regulatory and insurance regime may be relevant primarily to the FDIC's unique role
and mission. In other cases, the Committee may determine that the lessons we have
learned over the years provide insights that may be useful to the Committee in this
important work. The FDIC stands ready to provide assistance to the Committee in this
effort.
Explicit Authority
Diane Ellis, Director,
Division Of
Insurance and Research,
Federal Deposit Insurance Corporation
On
Housing Finance Reform
Powers and Structure of a Strong Regulator
to the
Committee on Banking, Housing,
And
Urban Affairs; U.S. Senate
538 Dirksen Senate
Office Building
November 21, 2013
Chairman Johnson, Senator Crapo and members of the Committee, I appreciate the
opportunity to testify before you today on "Powers and Structure of a Strong Regulator."
As the Committee considers reforms to the nation's housing finance system, including
insurance and supervisory models similar to the Federal Deposit Insurance Corporation
(FDIC), you have requested that we provide you with a description of the elements of
the deposit insurance system that are the most important in achieving our mission.
Many lessons have been learned over the deposit insurance system's 80 years of
operation. Drawing from these lessons, both Congress and the FDIC have made a
number of improvements to the deposit insurance system. During our history, which
includes two serious banking crises in the last few decades, certain authorities and
regulatory tools stand out as particularly important. These include clear and explicit
statutory authority, monitoring to assess risk exposure and to take action in response
when necessary, appropriate pricing of insurance, and adequate funding arrangements.
In addition, the FDIC has experienced the challenges of managing a transition between
agencies, which occurred when the Resolution Trust Corporation, created to resolve
failed savings and loan institutions during the early 1990s, was folded into the FDIC at
the conclusion of that crisis.
My testimony today elaborates on and describes these important authorities and tools
through the lens of the FDIC's experience. In some cases, the elements of our
regulatory and insurance regime may be relevant primarily to the FDIC's unique role
and mission. In other cases, the Committee may determine that the lessons we have
learned over the years provide insights that may be useful to the Committee in this
important work. The FDIC stands ready to provide assistance to the Committee in this
effort.
Explicit Authority
Since its founding in 1933, Congress has given the FDIC a clear mandate: to protect
depositors and maintain financial stability. The FDIC has been successful in its mission
in large part because Congress has clearly defined by statute the amount of deposits
covered under the FDIC's deposit guarantee and the condition – bank failure – that
triggers the exercise of that guarantee. At the same time, Congress has allowed the
FDIC flexibility to craft specific regulations to cover the myriad details of its operations.
The clarity of Congress' mandate provides credibility in the eyes of depositors, virtually
eliminating the risk of bank runs and panics, thus providing a foundation of stability to
our banking system during times of financial distress. While the banking industry pays
the costs of deposit insurance, the full faith and credit of the U.S. government ultimately
backs the FDIC's deposit guarantee.
The existence of clear statutory authority over the years also has served as the
foundation of our supervisory approaches. Statutes clearly state congressional
expectations and goals, enabling us to monitor and control for the risk posed to the
Deposit Insurance Fund (DIF). For example, certain laws, such as prompt corrective
action, provide statutory tripwires for supervisory action. At the same time, the statutes
outlining our supervisory authorities provide flexibility to create a robust examination
process within the statutory grant of authority.
Clear statutory authority also has been critical to the FDIC's resolution activities, which
enable us to mitigate losses to the DIF and help maintain financial stability through
timely resolution of failed banks and payment of depositor claims. Our authorizing
statutes delineate the priorities of claims and provide direction to all parties in the claims
process. This clarity enables the FDIC to resolve failed financial institutions efficiently
and effectively, usually over the span of a single weekend.
Monitoring and Controlling Risk
An effective insurance program must include a variety of tools to identify and manage
risk exposure, not only at the time when insurance is granted but also while that
insurance stays in force. As deposit insurer, the FDIC assesses the risk of an institution
at the time that it applies for insurance. After admittance into the system, the FDIC
monitors the condition of that institution through onsite examinations and remote
monitoring, and through our back-up examination authority in the case of an institution
primarily regulated by another federal banking agency. Risk mitigation should include
setting explicit capital standards and must be an ongoing process that allows for
intervention before losses occur and insurance must be paid out. While the FDIC is not
the primary federal regulator of all FDIC-insured institutions, all FDIC-insured institutions
are subject to the same, or very similar, framework of regulations, policies, guidance,
examination protocols, ratings, capital standards, reporting requirements, and
enforcement authority.
In determining membership participation in the deposit insurance system, the FDIC
carefully considers factors prescribed in section 6 of the Federal Deposit Insurance Act
(FDI Act) and implements policies and guidance that supplement the factors when
depositors and maintain financial stability. The FDIC has been successful in its mission
in large part because Congress has clearly defined by statute the amount of deposits
covered under the FDIC's deposit guarantee and the condition – bank failure – that
triggers the exercise of that guarantee. At the same time, Congress has allowed the
FDIC flexibility to craft specific regulations to cover the myriad details of its operations.
The clarity of Congress' mandate provides credibility in the eyes of depositors, virtually
eliminating the risk of bank runs and panics, thus providing a foundation of stability to
our banking system during times of financial distress. While the banking industry pays
the costs of deposit insurance, the full faith and credit of the U.S. government ultimately
backs the FDIC's deposit guarantee.
The existence of clear statutory authority over the years also has served as the
foundation of our supervisory approaches. Statutes clearly state congressional
expectations and goals, enabling us to monitor and control for the risk posed to the
Deposit Insurance Fund (DIF). For example, certain laws, such as prompt corrective
action, provide statutory tripwires for supervisory action. At the same time, the statutes
outlining our supervisory authorities provide flexibility to create a robust examination
process within the statutory grant of authority.
Clear statutory authority also has been critical to the FDIC's resolution activities, which
enable us to mitigate losses to the DIF and help maintain financial stability through
timely resolution of failed banks and payment of depositor claims. Our authorizing
statutes delineate the priorities of claims and provide direction to all parties in the claims
process. This clarity enables the FDIC to resolve failed financial institutions efficiently
and effectively, usually over the span of a single weekend.
Monitoring and Controlling Risk
An effective insurance program must include a variety of tools to identify and manage
risk exposure, not only at the time when insurance is granted but also while that
insurance stays in force. As deposit insurer, the FDIC assesses the risk of an institution
at the time that it applies for insurance. After admittance into the system, the FDIC
monitors the condition of that institution through onsite examinations and remote
monitoring, and through our back-up examination authority in the case of an institution
primarily regulated by another federal banking agency. Risk mitigation should include
setting explicit capital standards and must be an ongoing process that allows for
intervention before losses occur and insurance must be paid out. While the FDIC is not
the primary federal regulator of all FDIC-insured institutions, all FDIC-insured institutions
are subject to the same, or very similar, framework of regulations, policies, guidance,
examination protocols, ratings, capital standards, reporting requirements, and
enforcement authority.
In determining membership participation in the deposit insurance system, the FDIC
carefully considers factors prescribed in section 6 of the Federal Deposit Insurance Act
(FDI Act) and implements policies and guidance that supplement the factors when