Statement of
Richard J. Osterman, Jr.,
Acting General Counsel,
Federal Deposit Insurance Corporation
On
Regulatory Activity of the FDIC
Before the
Committee on Financial Services,
United States House of Representatives
2128 Rayburn House Office Building
April 8, 2014
Chairman Hensarling, Ranking Member Waters, and members of the Committee, thank
you for the opportunity to testify today on the recent regulatory activity of the Federal
Deposit Insurance Corporation (FDIC).
My testimony will address several topics. First, I will discuss the improving state of the
industry following the financial crisis. I will then address recent regulatory activity of the
FDIC, including actions related to capital and liquidity requirements, and credit risk
retention. Finally, I will describe our efforts to tailor regulations and our supervisory
approaches for community banks in recognition of the unique role they play in the
financial system.
Improving State of the Industry
The banking industry in the United States continues to experience gradual but steady
improvement since the financial crisis. Asset quality has improved; there are fewer
troubled institutions; and capital and liquidity ratios are stronger.
Annual earnings in the industry have increased for the past four years. FDIC-insured
commercial banks and savings institutions reported aggregate net income of $40.3
billion in the fourth quarter of 2013, a $5.8 billion (16.9 percent) increase from a year
ago. Over half (53.0 percent) of the 6,812 FDIC-insured institutions in the fourth quarter
reported a year-over-year increase in earnings. The proportion of banks that were
unprofitable in the fourth quarter fell to 12.2 percent from 15.0 percent a year earlier.
Balance sheets in the industry also have improved. Net charge-offs have posted a year-
over-year decline for 14 consecutive quarters, and noncurrent loan balances have
declined for 15 consecutive quarters. Importantly, loan balances for the industry as a
whole have grown in nine out of the last 11 quarters. These positive trends have been
broadly shared across the industry among large institutions, mid-size institutions, and
community banks.
Other indicators of industry conditions have been moving in a positive direction. The
number of banks on the FDIC "Problem List"—those institutions with the lowest
supervisory CAMELS ratings of 4 or 5—peaked in March 2011 at 888 institutions. By
Richard J. Osterman, Jr.,
Acting General Counsel,
Federal Deposit Insurance Corporation
On
Regulatory Activity of the FDIC
Before the
Committee on Financial Services,
United States House of Representatives
2128 Rayburn House Office Building
April 8, 2014
Chairman Hensarling, Ranking Member Waters, and members of the Committee, thank
you for the opportunity to testify today on the recent regulatory activity of the Federal
Deposit Insurance Corporation (FDIC).
My testimony will address several topics. First, I will discuss the improving state of the
industry following the financial crisis. I will then address recent regulatory activity of the
FDIC, including actions related to capital and liquidity requirements, and credit risk
retention. Finally, I will describe our efforts to tailor regulations and our supervisory
approaches for community banks in recognition of the unique role they play in the
financial system.
Improving State of the Industry
The banking industry in the United States continues to experience gradual but steady
improvement since the financial crisis. Asset quality has improved; there are fewer
troubled institutions; and capital and liquidity ratios are stronger.
Annual earnings in the industry have increased for the past four years. FDIC-insured
commercial banks and savings institutions reported aggregate net income of $40.3
billion in the fourth quarter of 2013, a $5.8 billion (16.9 percent) increase from a year
ago. Over half (53.0 percent) of the 6,812 FDIC-insured institutions in the fourth quarter
reported a year-over-year increase in earnings. The proportion of banks that were
unprofitable in the fourth quarter fell to 12.2 percent from 15.0 percent a year earlier.
Balance sheets in the industry also have improved. Net charge-offs have posted a year-
over-year decline for 14 consecutive quarters, and noncurrent loan balances have
declined for 15 consecutive quarters. Importantly, loan balances for the industry as a
whole have grown in nine out of the last 11 quarters. These positive trends have been
broadly shared across the industry among large institutions, mid-size institutions, and
community banks.
Other indicators of industry conditions have been moving in a positive direction. The
number of banks on the FDIC "Problem List"—those institutions with the lowest
supervisory CAMELS ratings of 4 or 5—peaked in March 2011 at 888 institutions. By
December 2013, the number of problem banks had dropped to 467. The number of
bank failures also has been declining steadily. Bank failures peaked in 2010 at 157. In
2013, there were 24 bank failures.
Another sign of the improving health of the banking industry is the decline in the number
of enforcement actions by the FDIC. The total number of FDIC enforcement actions,
both formal and informal, decreased by 27 percent last year, from 775 in 2012 to 567 in
2013. Last year, for the first time since 2008, the total number of enforcement actions
terminated outpaced the number of enforcement actions issued.
Despite these positive trends, the banking industry still faces a number of challenges.
For example, although credit quality has improved, delinquent loans and charge-offs
remain at elevated 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, which has heightened their vulnerability to interest rate risk. The
federal banking agencies have reiterated their expectation that banks manage risk in a
prudent manner. Interest rate risk is an ongoing concern for bank regulators, and it will
continue to be a focus of attention in safety and soundness examinations.
The Deposit Insurance Fund
As the industry has recovered over the past few years, the Deposit Insurance Fund
(DIF) also has moved into a stronger financial position.
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
December 31, 2013, the DIF reserve ratio stood at 0.79 percent of estimated insured
deposits, up from 0.68 percent at September 30, 2013, and from 0.44 percent at year-
end 2012.
The fund balance has grown every quarter for the past four years and stood at $47.2
billion at December 31, 2013. This is in contrast to the negative $21 billion fund balance
at its low point at the end of 2009. Assessment revenue, fewer anticipated bank failures,
and lower estimated losses on failed bank assets have been the primary drivers of the
growth in the DIF balance.
Regulatory Activity
Capital and Liquidity Requirements
Interagency Rulemakings on Basel III and the Supplementary Leverage Ratio
In July 2013, the FDIC Board acted on two important regulatory capital rulemakings.
First, the FDIC joined the Federal Reserve Board and the OCC in issuing rules that
significantly revise and strengthen risk-based capital regulations through
bank failures also has been declining steadily. Bank failures peaked in 2010 at 157. In
2013, there were 24 bank failures.
Another sign of the improving health of the banking industry is the decline in the number
of enforcement actions by the FDIC. The total number of FDIC enforcement actions,
both formal and informal, decreased by 27 percent last year, from 775 in 2012 to 567 in
2013. Last year, for the first time since 2008, the total number of enforcement actions
terminated outpaced the number of enforcement actions issued.
Despite these positive trends, the banking industry still faces a number of challenges.
For example, although credit quality has improved, delinquent loans and charge-offs
remain at elevated 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, which has heightened their vulnerability to interest rate risk. The
federal banking agencies have reiterated their expectation that banks manage risk in a
prudent manner. Interest rate risk is an ongoing concern for bank regulators, and it will
continue to be a focus of attention in safety and soundness examinations.
The Deposit Insurance Fund
As the industry has recovered over the past few years, the Deposit Insurance Fund
(DIF) also has moved into a stronger financial position.
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
December 31, 2013, the DIF reserve ratio stood at 0.79 percent of estimated insured
deposits, up from 0.68 percent at September 30, 2013, and from 0.44 percent at year-
end 2012.
The fund balance has grown every quarter for the past four years and stood at $47.2
billion at December 31, 2013. This is in contrast to the negative $21 billion fund balance
at its low point at the end of 2009. Assessment revenue, fewer anticipated bank failures,
and lower estimated losses on failed bank assets have been the primary drivers of the
growth in the DIF balance.
Regulatory Activity
Capital and Liquidity Requirements
Interagency Rulemakings on Basel III and the Supplementary Leverage Ratio
In July 2013, the FDIC Board acted on two important regulatory capital rulemakings.
First, the FDIC joined the Federal Reserve Board and the OCC in issuing rules that
significantly revise and strengthen risk-based capital regulations through