Statement Of
Martin J. Gruenberg, Chairman,
Federal Deposit Insurance Corporation
on
Mitigating Systemic Risk Through Wall Street Reform
before the
Committee on Banking, Housing,
And
Urban Affairs of the U.S. Senate
538 Dirksen Senate
Office Building
July 11, 2013
Chairman Johnson, Ranking Member Crapo and members of the Committee, thank you
for the opportunity to testify today on the Federal Deposit Insurance Corporation's
(FDIC) actions to implement the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act).
With the three-year anniversary of the Dodd-Frank Act approaching, the FDIC has
made significant progress in implementing the new authorities granted by the Act, 1
particularly with regard to the authorities to address the issues presented by institutions
that pose a risk to the financial system. We also have moved forward in our efforts to
strengthen the Deposit Insurance Fund and to improve the resiliency of the capital
framework for the banking industry.
My written testimony will address three key areas. First, I will provide a brief overview of
the current state of the banking industry and the federal deposit insurance system.
Second, I will provide an update on our progress in implementing the new authority
provided to the FDIC to address the issues posed by systemically important financial
institutions. Finally, I will discuss the Act’s impact on our supervision of community
banks.
Overview of the Banking Industry
The financial condition of the banking industry in the United States has experienced
three consecutive years of gradual but steady improvement. Industry balance sheets
have been strengthened and capital and liquidity ratios have been greatly improved.
Industry net income has now increased on a year-over-year basis for 15 consecutive
quarters. FDIC-insured commercial banks and savings institutions reported aggregate
net income of $40.3 billion in the first quarter of 2013, a $5.5 billion (15.8 percent)
increase from the $34.8 billion in profits that the industry reported in the first quarter of
2012. Half of the 7,019 FDIC-insured institutions reporting financial results had year-
over-year increases in their earnings. The proportion of banks that were unprofitable fell
to 8.4 percent, down from 10.6 percent a year earlier.
Martin J. Gruenberg, Chairman,
Federal Deposit Insurance Corporation
on
Mitigating Systemic Risk Through Wall Street Reform
before the
Committee on Banking, Housing,
And
Urban Affairs of the U.S. Senate
538 Dirksen Senate
Office Building
July 11, 2013
Chairman Johnson, Ranking Member Crapo and members of the Committee, thank you
for the opportunity to testify today on the Federal Deposit Insurance Corporation's
(FDIC) actions to implement the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act).
With the three-year anniversary of the Dodd-Frank Act approaching, the FDIC has
made significant progress in implementing the new authorities granted by the Act, 1
particularly with regard to the authorities to address the issues presented by institutions
that pose a risk to the financial system. We also have moved forward in our efforts to
strengthen the Deposit Insurance Fund and to improve the resiliency of the capital
framework for the banking industry.
My written testimony will address three key areas. First, I will provide a brief overview of
the current state of the banking industry and the federal deposit insurance system.
Second, I will provide an update on our progress in implementing the new authority
provided to the FDIC to address the issues posed by systemically important financial
institutions. Finally, I will discuss the Act’s impact on our supervision of community
banks.
Overview of the Banking Industry
The financial condition of the banking industry in the United States has experienced
three consecutive years of gradual but steady improvement. Industry balance sheets
have been strengthened and capital and liquidity ratios have been greatly improved.
Industry net income has now increased on a year-over-year basis for 15 consecutive
quarters. FDIC-insured commercial banks and savings institutions reported aggregate
net income of $40.3 billion in the first quarter of 2013, a $5.5 billion (15.8 percent)
increase from the $34.8 billion in profits that the industry reported in the first quarter of
2012. Half of the 7,019 FDIC-insured institutions reporting financial results had year-
over-year increases in their earnings. The proportion of banks that were unprofitable fell
to 8.4 percent, down from 10.6 percent a year earlier.
Credit quality for the industry also has improved for 12 consecutive quarters. Delinquent
loans and charge-offs have been steadily declining for over two years. Importantly, loan
balances for the industry as a whole have now grown for six out of the last eight
quarters. These positive trends have been broadly shared across the industry, among
large institutions, mid-size institutions, and community banks.
The internal indicators for the FDIC also have been moving in a positive direction over
this period. The number of banks on the FDIC's "Problem List" – institutions that had our
lowest supervisory CAMELS ratings of 4 or 5 – peaked in March of 2011 at 888
institutions. By the end of last year, the number of problem banks stood at 651
institutions, dropping further to 612 institutions at the end of the first quarter 2013. In
addition, the number of failed banks has been steadily declining. Bank failures peaked
at 157 in 2010, followed by 92 in 2011, and 51 in 2012. To date in 2013, there have
been 16 bank failures compared to 31 through the same period in 2012.
Despite these positive trends, the banking industry still faces a number of challenges.
For example, although credit quality has been improving, delinquent loans and charge-
offs remain at historically high levels. In addition, tighter net interest margins and
relatively modest loan growth have created incentives for institutions to reach for yield in
their loan and investment portfolios, heightening their vulnerability to interest rate risk
and credit risk. Rising rates could heighten pressure on earnings at financial institutions
that are not actively managing these risks. The federal banking agencies have
reiterated their expectation that banks manage their interest rate risk in a prudent
manner, and supervisors continue to actively monitor this risk.
Condition of the FDIC Deposit Insurance Fund
As the industry has recovered over the past three years, the Deposit Insurance Fund
(DIF) also has moved into a stronger financial position.
Restoring the DIF
The Dodd-Frank Act raised the minimum reserve ratio for the DIF (the DIF balance as a
percent of estimated insured deposits) from 1.15 percent to 1.35 percent, and required
that the reserve ratio reach 1.35 percent by September 30, 2020. The FDIC is currently
operating under a DIF Restoration Plan that is designed to meet this deadline, and the
DIF reserve ratio is recovering at a pace that remains on track under the Plan. As of
March 31, 2013, the DIF reserve ratio stood at 0.59 percent of estimated insured
deposits, up from 0.44 percent at year-end 2012 and 0.22 percent at March 31 of last
year. Most of the first quarter 2013 increase in the reserve ratio can be attributed to the
expiration of temporary unlimited deposit insurance coverage for noninterest-bearing
transaction accounts under the Act on December 31, 2012
The fund balance has grown for thirteen consecutive quarters and stood at $35.7 billion
at March 31, 2013. This is in contrast to the negative $21 billion fund balance at its low
loans and charge-offs have been steadily declining for over two years. Importantly, loan
balances for the industry as a whole have now grown for six out of the last eight
quarters. These positive trends have been broadly shared across the industry, among
large institutions, mid-size institutions, and community banks.
The internal indicators for the FDIC also have been moving in a positive direction over
this period. The number of banks on the FDIC's "Problem List" – institutions that had our
lowest supervisory CAMELS ratings of 4 or 5 – peaked in March of 2011 at 888
institutions. By the end of last year, the number of problem banks stood at 651
institutions, dropping further to 612 institutions at the end of the first quarter 2013. In
addition, the number of failed banks has been steadily declining. Bank failures peaked
at 157 in 2010, followed by 92 in 2011, and 51 in 2012. To date in 2013, there have
been 16 bank failures compared to 31 through the same period in 2012.
Despite these positive trends, the banking industry still faces a number of challenges.
For example, although credit quality has been improving, delinquent loans and charge-
offs remain at historically high levels. In addition, tighter net interest margins and
relatively modest loan growth have created incentives for institutions to reach for yield in
their loan and investment portfolios, heightening their vulnerability to interest rate risk
and credit risk. Rising rates could heighten pressure on earnings at financial institutions
that are not actively managing these risks. The federal banking agencies have
reiterated their expectation that banks manage their interest rate risk in a prudent
manner, and supervisors continue to actively monitor this risk.
Condition of the FDIC Deposit Insurance Fund
As the industry has recovered over the past three years, the Deposit Insurance Fund
(DIF) also has moved into a stronger financial position.
Restoring the DIF
The Dodd-Frank Act raised the minimum reserve ratio for the DIF (the DIF balance as a
percent of estimated insured deposits) from 1.15 percent to 1.35 percent, and required
that the reserve ratio reach 1.35 percent by September 30, 2020. The FDIC is currently
operating under a DIF Restoration Plan that is designed to meet this deadline, and the
DIF reserve ratio is recovering at a pace that remains on track under the Plan. As of
March 31, 2013, the DIF reserve ratio stood at 0.59 percent of estimated insured
deposits, up from 0.44 percent at year-end 2012 and 0.22 percent at March 31 of last
year. Most of the first quarter 2013 increase in the reserve ratio can be attributed to the
expiration of temporary unlimited deposit insurance coverage for noninterest-bearing
transaction accounts under the Act on December 31, 2012
The fund balance has grown for thirteen consecutive quarters and stood at $35.7 billion
at March 31, 2013. This is in contrast to the negative $21 billion fund balance at its low