Remarks by
Andrew C. Hove, Jr.
Chairman
Federal Deposit Insurance Corporation
before the
Annual Convention
of the
American Bankers Association
Boston, MA
October 5, 1997
Thank you and good morning.
Every so often, experience reminds me that careful planning and consideration often do
not survive contact with reality. Life is unpredictable.
For example, a lot of thought must have gone into the signature system used with credit
cards. The system is simple and, you might think, effective. But several weeks ago, I
was signing a receipt for a bank credit card purchase at a supermarket when the
checker noticed that I had never signed my name on the back of the card. He informed
me that he could not complete the transaction unless the card was signed. He explained
that it was necessary to compare the signature on the credit card with the signature I
just signed on the receipt.
So I signed the credit card in front of him. He carefully compared that signature to the
one I had signed on the receipt. As luck would have it, they matched.
Not only is reality unpredictable, it can also be dangerous. You might think that the
chances of being killed by a flood of molasses on the streets of Boston would be zero --
but you would be wrong. In January, 1919, a storage tank exploded near the sites
where the world famous Faneuil Hall and the New England Aquarium stand today.
Thirty-foot high walls of molasses flooded down the surrounding streets at up to 35
miles per hour. They moved with a force of two tons per square foot, smashing
buildings, crushing cars and knocking over elevated train trestles. The flood killed 21
people, and injured another 150. Even today, no one in Boston ever says that anything
is "as slow as molasses."
Federal deposit insurance was created sixty-four years ago to address an unpredictable
and potentially dangerous reality -- the reality that banking rests on public confidence.
When public confidence has not been anchored in the absolute certainty that the
public's deposits were backed by the resources of the government, depositors under
stress in a financial crisis have panicked again and again. Panic, however, is the wrong
word to describe withdrawing funds from a bank if there is sudden uncertainty they will
be safe there. Withdrawals in those conditions are rational.
Andrew C. Hove, Jr.
Chairman
Federal Deposit Insurance Corporation
before the
Annual Convention
of the
American Bankers Association
Boston, MA
October 5, 1997
Thank you and good morning.
Every so often, experience reminds me that careful planning and consideration often do
not survive contact with reality. Life is unpredictable.
For example, a lot of thought must have gone into the signature system used with credit
cards. The system is simple and, you might think, effective. But several weeks ago, I
was signing a receipt for a bank credit card purchase at a supermarket when the
checker noticed that I had never signed my name on the back of the card. He informed
me that he could not complete the transaction unless the card was signed. He explained
that it was necessary to compare the signature on the credit card with the signature I
just signed on the receipt.
So I signed the credit card in front of him. He carefully compared that signature to the
one I had signed on the receipt. As luck would have it, they matched.
Not only is reality unpredictable, it can also be dangerous. You might think that the
chances of being killed by a flood of molasses on the streets of Boston would be zero --
but you would be wrong. In January, 1919, a storage tank exploded near the sites
where the world famous Faneuil Hall and the New England Aquarium stand today.
Thirty-foot high walls of molasses flooded down the surrounding streets at up to 35
miles per hour. They moved with a force of two tons per square foot, smashing
buildings, crushing cars and knocking over elevated train trestles. The flood killed 21
people, and injured another 150. Even today, no one in Boston ever says that anything
is "as slow as molasses."
Federal deposit insurance was created sixty-four years ago to address an unpredictable
and potentially dangerous reality -- the reality that banking rests on public confidence.
When public confidence has not been anchored in the absolute certainty that the
public's deposits were backed by the resources of the government, depositors under
stress in a financial crisis have panicked again and again. Panic, however, is the wrong
word to describe withdrawing funds from a bank if there is sudden uncertainty they will
be safe there. Withdrawals in those conditions are rational.
Certainly, one of the purposes of deposit insurance was to protect the small depositor.
Federal deposit insurance has allowed tens of millions of Americans to sleep more
soundly at night than would have otherwise been the case by erasing the fear that their
savings would evaporate if their banks failed. In creating the FDIC, our government
made a promise to the American people -- they would have a haven of security and of
certainty in the uncertain financial world. We have kept that promise to three
generations of Americans.
In protecting depositors, insurance has achieved other important objectives. By
maintaining confidence, deposit insurance has preserved the integrity of the payments
system and the ability of banking organizations to continue to perform the intermediation
that supports much of our economic activity. Along with prudential supervision and the
lender of last resort role played by the central bank, deposit insurance is a critical thread
in the safety net that prevents our financial system and our economy from hitting bottom
when under stress.
Large banks benefit from that safety net along with small banks -- money center banks
along with community banks -- in fact, everyone in the economy.
By assuring financial stability, continued intermediation by diverse banking
organizations, and the continued efficient operation of the payments system, deposit
insurance has had an enduring value for all Americans, depositors and nondepositors
alike.
Federal deposit insurance, therefore, has a purpose in the public interest beyond the
peace of mind it provides depositors. One might even say that the peace of mind we
provide is the means to a greater end.
I remember how deposit insurance held the financial system together during the thrift
and banking crisis of the 1980s and early 1990s -- and I know that many of you
remember that, too. I came to the FDIC in 1990, after a 30-year career as a banker in
an agricultural town in Nebraska.
In 1991, the United States had 124 bank failures, and the assets of those banks totaled
$63 billion. The banking system continued to operate throughout the crisis without a
shudder. There were no panics. The anchor for public confidence that deposit insurance
provides held. During good times -- like those we have enjoyed over the past five years
-- it is tempting to underestimate the value of a safety net and to focus on the costs that
go with it, rather than on the security it provides.
There has been a lot of talk lately about possible changes to the deposit insurance
system.
Some of this talk is inspired by the ongoing revolution in our industry -- a revolution that
has been reshaping banking for more than twenty years. One side of that revolution is
Federal deposit insurance has allowed tens of millions of Americans to sleep more
soundly at night than would have otherwise been the case by erasing the fear that their
savings would evaporate if their banks failed. In creating the FDIC, our government
made a promise to the American people -- they would have a haven of security and of
certainty in the uncertain financial world. We have kept that promise to three
generations of Americans.
In protecting depositors, insurance has achieved other important objectives. By
maintaining confidence, deposit insurance has preserved the integrity of the payments
system and the ability of banking organizations to continue to perform the intermediation
that supports much of our economic activity. Along with prudential supervision and the
lender of last resort role played by the central bank, deposit insurance is a critical thread
in the safety net that prevents our financial system and our economy from hitting bottom
when under stress.
Large banks benefit from that safety net along with small banks -- money center banks
along with community banks -- in fact, everyone in the economy.
By assuring financial stability, continued intermediation by diverse banking
organizations, and the continued efficient operation of the payments system, deposit
insurance has had an enduring value for all Americans, depositors and nondepositors
alike.
Federal deposit insurance, therefore, has a purpose in the public interest beyond the
peace of mind it provides depositors. One might even say that the peace of mind we
provide is the means to a greater end.
I remember how deposit insurance held the financial system together during the thrift
and banking crisis of the 1980s and early 1990s -- and I know that many of you
remember that, too. I came to the FDIC in 1990, after a 30-year career as a banker in
an agricultural town in Nebraska.
In 1991, the United States had 124 bank failures, and the assets of those banks totaled
$63 billion. The banking system continued to operate throughout the crisis without a
shudder. There were no panics. The anchor for public confidence that deposit insurance
provides held. During good times -- like those we have enjoyed over the past five years
-- it is tempting to underestimate the value of a safety net and to focus on the costs that
go with it, rather than on the security it provides.
There has been a lot of talk lately about possible changes to the deposit insurance
system.
Some of this talk is inspired by the ongoing revolution in our industry -- a revolution that
has been reshaping banking for more than twenty years. One side of that revolution is