Remarks by
Martin J. Gruenberg Chairman, FDIC
Third Annual American Banker
Regulatory Symposium
Arlington, VA
September 23, 2013
Good afternoon. I appreciate the opportunity to take part in this third annual American
Banker Regulatory Symposium. I intend to touch on two subjects in my remarks this
afternoon. The first is the condition of the banking industry based on the results of the
FDIC’s recent second quarter 2013 Quarterly Banking Profile (QBP). The second is the
recent rulemakings by the banking agencies on risk- based and leverage capital
requirements.
Condition of the Industry
The FDIC released second quarter results for insured commercial banks and savings
institutions on August 29th. The report provided further evidence of the gradual recovery
that has been underway in the banking industry for almost four years now. Net income
for the industry was $42.2 billion, marking the sixteenth consecutive quarter that
earnings posted a year-over-year increase. Average return on assets was 1.17 percent
for the quarter -- still well below the highs we saw in the early 2000s, but the highest in
over six years. Asset quality improved, loan balances grew, fewer institutions were
unprofitable, and the number of failing banks and problem banks continued to fall.
These improvements were shared across the banking industry, from small to large
institutions.
Commercial and industrial lending continued to be relatively strong during the quarter
and nonmortgage consumer lending trended up, while real estate loans declined
slightly. Importantly, small business loans were up, with community banks leading the
increase. The number of problem banks declined for a ninth consecutive quarter, to
553, bringing the “Problem List” down to a level that is nearly 40 percent below its peak
of 888 institutions in the first quarter of 2011. So far this year 22 banks have failed. That
compares to 42 at this time last year. To provide further perspective, failing banks
peaked in 2010 at 157 institutions, fell to 92 in 2011, and declined to 51 last year.
The Deposit Insurance Fund (DIF) balance rose to $37.9 billion as of June 30, up from
$35.7 billion at the end of March. Assessment income continues to drive the growth in
the Fund balance. I would note that at its low point during the crisis, the DIF was over
$20 billion in the red. The reserve ratio—which is the Fund balance as a percent of
estimated insured deposits—increased to 0.63 percent at June 30 from 0.59 percent at
March 31. The Deposit Insurance Fund must achieve a minimum reserve ratio of 1.35
percent by 2020, and we remain on a pace to meet that objective.
Martin J. Gruenberg Chairman, FDIC
Third Annual American Banker
Regulatory Symposium
Arlington, VA
September 23, 2013
Good afternoon. I appreciate the opportunity to take part in this third annual American
Banker Regulatory Symposium. I intend to touch on two subjects in my remarks this
afternoon. The first is the condition of the banking industry based on the results of the
FDIC’s recent second quarter 2013 Quarterly Banking Profile (QBP). The second is the
recent rulemakings by the banking agencies on risk- based and leverage capital
requirements.
Condition of the Industry
The FDIC released second quarter results for insured commercial banks and savings
institutions on August 29th. The report provided further evidence of the gradual recovery
that has been underway in the banking industry for almost four years now. Net income
for the industry was $42.2 billion, marking the sixteenth consecutive quarter that
earnings posted a year-over-year increase. Average return on assets was 1.17 percent
for the quarter -- still well below the highs we saw in the early 2000s, but the highest in
over six years. Asset quality improved, loan balances grew, fewer institutions were
unprofitable, and the number of failing banks and problem banks continued to fall.
These improvements were shared across the banking industry, from small to large
institutions.
Commercial and industrial lending continued to be relatively strong during the quarter
and nonmortgage consumer lending trended up, while real estate loans declined
slightly. Importantly, small business loans were up, with community banks leading the
increase. The number of problem banks declined for a ninth consecutive quarter, to
553, bringing the “Problem List” down to a level that is nearly 40 percent below its peak
of 888 institutions in the first quarter of 2011. So far this year 22 banks have failed. That
compares to 42 at this time last year. To provide further perspective, failing banks
peaked in 2010 at 157 institutions, fell to 92 in 2011, and declined to 51 last year.
The Deposit Insurance Fund (DIF) balance rose to $37.9 billion as of June 30, up from
$35.7 billion at the end of March. Assessment income continues to drive the growth in
the Fund balance. I would note that at its low point during the crisis, the DIF was over
$20 billion in the red. The reserve ratio—which is the Fund balance as a percent of
estimated insured deposits—increased to 0.63 percent at June 30 from 0.59 percent at
March 31. The Deposit Insurance Fund must achieve a minimum reserve ratio of 1.35
percent by 2020, and we remain on a pace to meet that objective.
Despite these positive overall trends, challenges remain. Narrow net interest margins
and modest loan growth have made it difficult for banks to increase revenue. And the
rise in interest rates during the second quarter contributed to a decline of $51 billion in
the value of available-for-sale securities, which was the largest such decline since
banks started reporting these data in 1994. Unrealized gains and losses on available-
for-sale securities do not affect current earnings, but they have implications for future
earnings if the securities are sold. These gains and losses also do not currently affect
regulatory capital. But that will change under the new Basel III capital rules at large
banking organizations that are subject to the advanced approaches requirements, as
well as other institutions that choose not to opt out of that provision of the new rules as
is permitted.
These developments underscore the importance of managing interest rate risk, an issue
that has been an ongoing concern to the banking agencies. It will continue to be a focus
of attention in FDIC safety and soundness examinations, as well as guidance we
provide to insured institutions.
Recent Capital Rulemakings
As we continue to see gradual but steady improvement in the banking industry from the
recent financial crisis and ensuing recession, I thought I would take a few moments to
talk about the two important regulatory capital rulemakings that the federal banking
agencies acted on earlier this year. At its July 9th meeting, the FDIC Board issued an
interim final rule that significantly revises and strengthens risk-based capital regulations,
adopting with revisions three notices of proposed rulemaking from 2012 – the Basel III
NPR, the Basel III Advanced Approaches NPR, and the Standardized Approach NPR.
The FDIC also issued a separate, complementary notice of proposed rulemaking to
strengthen the leverage requirements for the largest, most systemically significant
banking organizations and their insured banks. I’ll discuss first the risk-based capital
rule, and then, in particular, the reasoning behind the proposed increase in the leverage
capital requirement.
Risk-Based Capital Rule
The rule implementing the Basel III international accord substantially strengthens both
the quality and the quantity of risk-based capital for all banks in the United States by
placing greater emphasis on Tier 1 common equity capital. Tier 1 common equity capital
is widely recognized as the most loss-absorbing form of capital, and the Basel III
changes are expected to result in a stronger, more resilient industry better able to
withstand periods of economic stress in the future.
While there has been general recognition in the aftermath of the financial crisis that
higher capital levels as a buffer against economic stress would be appropriate,
community banks in particular raised a number of concerns regarding the potential
impact of some of the proposed changes to regulatory capital. I should mention that
given the complexity of the proposed rules, the FDIC engaged in significant outreach
and modest loan growth have made it difficult for banks to increase revenue. And the
rise in interest rates during the second quarter contributed to a decline of $51 billion in
the value of available-for-sale securities, which was the largest such decline since
banks started reporting these data in 1994. Unrealized gains and losses on available-
for-sale securities do not affect current earnings, but they have implications for future
earnings if the securities are sold. These gains and losses also do not currently affect
regulatory capital. But that will change under the new Basel III capital rules at large
banking organizations that are subject to the advanced approaches requirements, as
well as other institutions that choose not to opt out of that provision of the new rules as
is permitted.
These developments underscore the importance of managing interest rate risk, an issue
that has been an ongoing concern to the banking agencies. It will continue to be a focus
of attention in FDIC safety and soundness examinations, as well as guidance we
provide to insured institutions.
Recent Capital Rulemakings
As we continue to see gradual but steady improvement in the banking industry from the
recent financial crisis and ensuing recession, I thought I would take a few moments to
talk about the two important regulatory capital rulemakings that the federal banking
agencies acted on earlier this year. At its July 9th meeting, the FDIC Board issued an
interim final rule that significantly revises and strengthens risk-based capital regulations,
adopting with revisions three notices of proposed rulemaking from 2012 – the Basel III
NPR, the Basel III Advanced Approaches NPR, and the Standardized Approach NPR.
The FDIC also issued a separate, complementary notice of proposed rulemaking to
strengthen the leverage requirements for the largest, most systemically significant
banking organizations and their insured banks. I’ll discuss first the risk-based capital
rule, and then, in particular, the reasoning behind the proposed increase in the leverage
capital requirement.
Risk-Based Capital Rule
The rule implementing the Basel III international accord substantially strengthens both
the quality and the quantity of risk-based capital for all banks in the United States by
placing greater emphasis on Tier 1 common equity capital. Tier 1 common equity capital
is widely recognized as the most loss-absorbing form of capital, and the Basel III
changes are expected to result in a stronger, more resilient industry better able to
withstand periods of economic stress in the future.
While there has been general recognition in the aftermath of the financial crisis that
higher capital levels as a buffer against economic stress would be appropriate,
community banks in particular raised a number of concerns regarding the potential
impact of some of the proposed changes to regulatory capital. I should mention that
given the complexity of the proposed rules, the FDIC engaged in significant outreach