CHAIRMAN DONALD E. POWELL
FEDERAL DEPOSIT INSURANCE CORPORATION
REMARKS PREPARED FOR DELIVERY TO THE
NEBRASKA BANKERS ASSOCIATION
May 2, 2003
FOR IMMEDIATE RELEASE
PR-40-2003 (05-02-2003)
Media Contact:
Phil Battey (202) 898-6993
Good morning.
It is wonderful to be here in Nebraska, to enjoy your hospitality and your kindness. I
especially appreciate the friendship of Skip Hove, a distinguished alumnus of Nebraska
banking - he guided our Corporation through some of the darkest days of the banking
crisis, and all of us at the FDIC still have a soft spot in our hearts for him. Thank you,
Skip, for your contribution to America and to the banking industry.
I also appreciate the opportunity to visit with you today about some of the issues on our
plate in Washington, DC. We continue to work hard at our mission of financial stability,
good stewardship of the deposit insurance funds, and sound policy leadership for the
banking community.
Skip indicated that you would be interested in hearing a little about our progress on the
issue of deposit insurance reform and I'd be happy to provide you with an update today
on where things stand.
First, a little about the problem. We operate an insurance company whose practices and
procedures, which are mandated by law, would not pass the requirements of a private
sector insurance firm. For that matter, I'm not sure they would pass an FDIC safety and
soundness examination, either.
Here are a few examples of our current business practices:
• First, our product - deposit insurance - has proved its value by bringing us an
unprecedented 70-year span of banking free of systemic panics or liquidity crises.
Yet, the law currently requires us to provide the product free of charge to more
than 90 percent of our customers.
• Further, the system is unfair. We know that all banks are not created equal. They
have varying business models and risk profiles. Yet, we are unable to charge
more to the riskier institutions, or less to the more conservative ones. Moreover,
more than 1,000 institutions were chartered since 1996 - and none of them has
paid a dime for deposit insurance.
• Finally, we are required to hold a static reserve that bears little relation to what is
going on in the industry or in the broader economy.
FEDERAL DEPOSIT INSURANCE CORPORATION
REMARKS PREPARED FOR DELIVERY TO THE
NEBRASKA BANKERS ASSOCIATION
May 2, 2003
FOR IMMEDIATE RELEASE
PR-40-2003 (05-02-2003)
Media Contact:
Phil Battey (202) 898-6993
Good morning.
It is wonderful to be here in Nebraska, to enjoy your hospitality and your kindness. I
especially appreciate the friendship of Skip Hove, a distinguished alumnus of Nebraska
banking - he guided our Corporation through some of the darkest days of the banking
crisis, and all of us at the FDIC still have a soft spot in our hearts for him. Thank you,
Skip, for your contribution to America and to the banking industry.
I also appreciate the opportunity to visit with you today about some of the issues on our
plate in Washington, DC. We continue to work hard at our mission of financial stability,
good stewardship of the deposit insurance funds, and sound policy leadership for the
banking community.
Skip indicated that you would be interested in hearing a little about our progress on the
issue of deposit insurance reform and I'd be happy to provide you with an update today
on where things stand.
First, a little about the problem. We operate an insurance company whose practices and
procedures, which are mandated by law, would not pass the requirements of a private
sector insurance firm. For that matter, I'm not sure they would pass an FDIC safety and
soundness examination, either.
Here are a few examples of our current business practices:
• First, our product - deposit insurance - has proved its value by bringing us an
unprecedented 70-year span of banking free of systemic panics or liquidity crises.
Yet, the law currently requires us to provide the product free of charge to more
than 90 percent of our customers.
• Further, the system is unfair. We know that all banks are not created equal. They
have varying business models and risk profiles. Yet, we are unable to charge
more to the riskier institutions, or less to the more conservative ones. Moreover,
more than 1,000 institutions were chartered since 1996 - and none of them has
paid a dime for deposit insurance.
• Finally, we are required to hold a static reserve that bears little relation to what is
going on in the industry or in the broader economy.
The current system is also burdensome. We maintain two separate insurance funds - a
vestige of the distant past when there were separate regulators and insurance funds for
banks and thrifts. The practical impact of this is separate accounting in your bank and
separate accounting in Washington. Not to mention the potential for charging different
prices for an identical product.
And the deposit insurance guarantee we've come to depend on as the bedrock of
financial stability is withering away over time. Because of inflation, the $100,000
guarantee is worth less than half of what it was when Congress set it more than 20
years ago. And it is worth less every day.
Finally, there is what I like to call the "off balance sheet" risk. The Bank Insurance Fund
is very close to the 1.25 premium trigger. Indeed, while we don't expect any precipitous
declines, it may well dip a bit below by the end of the year. We can never rule out
surprises that would force the FDIC to charge high premiums on the industry at the
worst possible time.
This may not happen. But then again it might - the ratio certainly dipped below the 1.25
ratio last year during one of the healthiest years the industry ever had. We've also seen
many other good examples in recent years of unexpected events that had huge
consequences for the marketplace. The large-scale corporate failures, the bursting of
the equities bubble, tough new corporate governance standards, the troubles in the Wall
Street institutions - all these arose from events nobody planned for.
It is important to note, however, that the potential liability for banks of steep deposit
insurance premiums is something we have foreseen. We recognized this possibility, and
developed a plan that is responsible, comprehensive and sets the stage for a secure
and affordable deposit insurance program for the next generation. Now we need to go
and pass it.
Our plan is simple. We suggest that Congress approve a meaningful risk-based
premium system for all financial institutions. We believe we should eliminate the "hard
target" for the fund's size and allow the FDIC to manage it within a range - relative to the
risks in the industry and the conditions in the broader economy. We believe we should
merge the two deposit insurance funds. We believe we should have a fair system of
credits to address the institutions that entered the system since 1996 and have paid
nothing at all for deposit insurance. And we believe coverage should be indexed so it
doesn't continue to lose value over time.
We developed these recommendations over years of research, study and outreach. We
worked closely with the industry and with Congress to develop our plan. And, put
simply, we believe the time has come to act - not just on part of it, but all of it.
I'm pleased and grateful to report we've made good progress this year - with the
leadership of fine folks like Chairman Oxley and Congressman Frank. Nebraska's own
Congressional delegation - including Senator Hagel and Congressman Bereuter - has
been a big help as well. The House has already acted, passing its bill with 411
vestige of the distant past when there were separate regulators and insurance funds for
banks and thrifts. The practical impact of this is separate accounting in your bank and
separate accounting in Washington. Not to mention the potential for charging different
prices for an identical product.
And the deposit insurance guarantee we've come to depend on as the bedrock of
financial stability is withering away over time. Because of inflation, the $100,000
guarantee is worth less than half of what it was when Congress set it more than 20
years ago. And it is worth less every day.
Finally, there is what I like to call the "off balance sheet" risk. The Bank Insurance Fund
is very close to the 1.25 premium trigger. Indeed, while we don't expect any precipitous
declines, it may well dip a bit below by the end of the year. We can never rule out
surprises that would force the FDIC to charge high premiums on the industry at the
worst possible time.
This may not happen. But then again it might - the ratio certainly dipped below the 1.25
ratio last year during one of the healthiest years the industry ever had. We've also seen
many other good examples in recent years of unexpected events that had huge
consequences for the marketplace. The large-scale corporate failures, the bursting of
the equities bubble, tough new corporate governance standards, the troubles in the Wall
Street institutions - all these arose from events nobody planned for.
It is important to note, however, that the potential liability for banks of steep deposit
insurance premiums is something we have foreseen. We recognized this possibility, and
developed a plan that is responsible, comprehensive and sets the stage for a secure
and affordable deposit insurance program for the next generation. Now we need to go
and pass it.
Our plan is simple. We suggest that Congress approve a meaningful risk-based
premium system for all financial institutions. We believe we should eliminate the "hard
target" for the fund's size and allow the FDIC to manage it within a range - relative to the
risks in the industry and the conditions in the broader economy. We believe we should
merge the two deposit insurance funds. We believe we should have a fair system of
credits to address the institutions that entered the system since 1996 and have paid
nothing at all for deposit insurance. And we believe coverage should be indexed so it
doesn't continue to lose value over time.
We developed these recommendations over years of research, study and outreach. We
worked closely with the industry and with Congress to develop our plan. And, put
simply, we believe the time has come to act - not just on part of it, but all of it.
I'm pleased and grateful to report we've made good progress this year - with the
leadership of fine folks like Chairman Oxley and Congressman Frank. Nebraska's own
Congressional delegation - including Senator Hagel and Congressman Bereuter - has
been a big help as well. The House has already acted, passing its bill with 411