TESTIMONY OF
ANDREW C. HOVE, JR., ACTING CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
ON
FINANCIAL MODERNIZATION
BEFORE THE
SUBCOMMITTEE ON FINANCE AND HAZARDOUS MATERIALS
COMMITTEE ON COMMERCE
UNITED STATES HOUSE OF REPRESENTATIVES
10 A.M.
JULY 17, 1997
ROOM 2125, RAYBURN HOUSE OFFICE BUILDING
Mr. Chairman and members of the Subcommittee, I appreciate this opportunity to
present the views of the Federal Deposit Insurance Corporation on efforts to modernize
the nation's banking laws and specifically on H.R. 10, the Financial Services
Competition Act of 1997.
The FDIC brings a unique perspective to the analysis of financial modernization
proposals. The FDIC is an independent agency that insures approximately $2.7 trillion
in deposits at 11,368 commercial banks, savings institutions, and U.S. branches of
foreign banks. These institutions hold assets totaling approximately $5.7 trillion. The
FDIC insures deposits for up to $100,000 through two insurance funds, the Bank
Insurance Fund (the BIF) and the Savings Association Insurance Fund (the SAIF). The
FDIC also serves as the primary federal regulator for 6,308 state-chartered institutions
that are not members of the Federal Reserve System. Since its inception in 1933, the
federal deposit insurance system has contributed to the health and stability of the
banking industry, and to the larger financial services industry, by providing assurance to
depositors that their funds are completely safe.
Last year, in the Deposit Insurance Funds Act of 1996 (the Funds Act), Congress
recognized the need to merge the deposit insurance funds. The SAIF insures far fewer,
and more geographically concentrated, institutions than does the BIF, and consequently
faces greater long-term structural risks. A combined BIF and SAIF would have a larger
membership and a broader distribution of geographic and product risks and would be
stronger than the SAIF alone. Because we believe that merging the funds is an
important element of financial modernization, we strongly support the provisions in H.R.
10 that will merge the funds.
Today, the banking and thrift industries are experiencing robust earnings. Annual net
income for commercial banks surpassed $50 billion for the first time in 1996. Thrift
earnings in 1996 were $7.0 billion and would have exceeded the record of $7.6 billion
set in 1995 if thrifts had not paid a special assessment to capitalize the SAIF, as
required by the Funds Act.
ANDREW C. HOVE, JR., ACTING CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
ON
FINANCIAL MODERNIZATION
BEFORE THE
SUBCOMMITTEE ON FINANCE AND HAZARDOUS MATERIALS
COMMITTEE ON COMMERCE
UNITED STATES HOUSE OF REPRESENTATIVES
10 A.M.
JULY 17, 1997
ROOM 2125, RAYBURN HOUSE OFFICE BUILDING
Mr. Chairman and members of the Subcommittee, I appreciate this opportunity to
present the views of the Federal Deposit Insurance Corporation on efforts to modernize
the nation's banking laws and specifically on H.R. 10, the Financial Services
Competition Act of 1997.
The FDIC brings a unique perspective to the analysis of financial modernization
proposals. The FDIC is an independent agency that insures approximately $2.7 trillion
in deposits at 11,368 commercial banks, savings institutions, and U.S. branches of
foreign banks. These institutions hold assets totaling approximately $5.7 trillion. The
FDIC insures deposits for up to $100,000 through two insurance funds, the Bank
Insurance Fund (the BIF) and the Savings Association Insurance Fund (the SAIF). The
FDIC also serves as the primary federal regulator for 6,308 state-chartered institutions
that are not members of the Federal Reserve System. Since its inception in 1933, the
federal deposit insurance system has contributed to the health and stability of the
banking industry, and to the larger financial services industry, by providing assurance to
depositors that their funds are completely safe.
Last year, in the Deposit Insurance Funds Act of 1996 (the Funds Act), Congress
recognized the need to merge the deposit insurance funds. The SAIF insures far fewer,
and more geographically concentrated, institutions than does the BIF, and consequently
faces greater long-term structural risks. A combined BIF and SAIF would have a larger
membership and a broader distribution of geographic and product risks and would be
stronger than the SAIF alone. Because we believe that merging the funds is an
important element of financial modernization, we strongly support the provisions in H.R.
10 that will merge the funds.
Today, the banking and thrift industries are experiencing robust earnings. Annual net
income for commercial banks surpassed $50 billion for the first time in 1996. Thrift
earnings in 1996 were $7.0 billion and would have exceeded the record of $7.6 billion
set in 1995 if thrifts had not paid a special assessment to capitalize the SAIF, as
required by the Funds Act.
Although banks have been earning record profits recently, bank performance has varied
greatly over the past ten years. During this period, for example, the banking industry
achieved both its highest annual return on assets (1.20 percent in 1993) and its lowest
return on assets (0.10 percent in 1987) since 1934. Moreover, by some measures, the
banking industry has been shrinking. For example, bank commercial and industrial
loans represent a declining proportion of the credit market debt of nonfinancial
corporations; bank loans now stand at 21 percent of corporate debt, down from 28
percent in 1985.
Modernization is essential if our nation is to achieve an efficient and competitive
financial services industry capable of meeting the needs of a growing and changing
economy. Financial markets have changed dramatically since many of our nation's laws
governing financial services were enacted during the 1930s. Modernizing the financial
system will benefit not just banks but also other financial businesses, such as insurance
companies and securities firms. Equally as important, consumers should benefit from a
wider array of products, services, and providers.
Events of the past decade have demonstrated how costly bank and thrift failures can be
for the deposit insurance funds, for communities across America, and for our economy.
The banking industry, through the BIF, spent approximately $36.4 billion to resolve
failing banks from 1980 through 1994. The General Accounting Office has estimated
that, from 1986 through 1995, the thrift crisis cost the thrift industry and taxpayers an
estimated $160 billion to resolve (including tax benefits granted in connection with the
crisis).
To help ensure that we learn from the banking and thrift crises of the 1980s and early
1990s and do not repeat them, the FDIC initiated a history project that we called the
"Lessons of the Eighties." We have learned many lessons from this project. Two are
particularly germane: (1) geographic and product constraints can result in inadequate
diversification of income sources; and (2) rapid expansion into unfamiliar activities,
without adequate supervision, can have undesirable consequences.
In the remainder of my testimony, I will first summarize principles that must govern any
financial modernization legislation. Next, I will address several key issues raised by
financial modernization proposals and H.R. 10. These are: the extent to which banking
and commerce should be allowed to mix; the proper role of the proposed National
Council on Financial Services; customer protection; and capital requirements.
PRINCIPLES OF FINANCIAL MODERNIZATION
Any financial modernization proposal must allow for equitable competition in an evolving
marketplace while maintaining the safety and soundness of insured depository
institutions. Financial modernization should also permit financial organizations to
generate sufficient returns to attract capital essential for normal growth and expansion.
greatly over the past ten years. During this period, for example, the banking industry
achieved both its highest annual return on assets (1.20 percent in 1993) and its lowest
return on assets (0.10 percent in 1987) since 1934. Moreover, by some measures, the
banking industry has been shrinking. For example, bank commercial and industrial
loans represent a declining proportion of the credit market debt of nonfinancial
corporations; bank loans now stand at 21 percent of corporate debt, down from 28
percent in 1985.
Modernization is essential if our nation is to achieve an efficient and competitive
financial services industry capable of meeting the needs of a growing and changing
economy. Financial markets have changed dramatically since many of our nation's laws
governing financial services were enacted during the 1930s. Modernizing the financial
system will benefit not just banks but also other financial businesses, such as insurance
companies and securities firms. Equally as important, consumers should benefit from a
wider array of products, services, and providers.
Events of the past decade have demonstrated how costly bank and thrift failures can be
for the deposit insurance funds, for communities across America, and for our economy.
The banking industry, through the BIF, spent approximately $36.4 billion to resolve
failing banks from 1980 through 1994. The General Accounting Office has estimated
that, from 1986 through 1995, the thrift crisis cost the thrift industry and taxpayers an
estimated $160 billion to resolve (including tax benefits granted in connection with the
crisis).
To help ensure that we learn from the banking and thrift crises of the 1980s and early
1990s and do not repeat them, the FDIC initiated a history project that we called the
"Lessons of the Eighties." We have learned many lessons from this project. Two are
particularly germane: (1) geographic and product constraints can result in inadequate
diversification of income sources; and (2) rapid expansion into unfamiliar activities,
without adequate supervision, can have undesirable consequences.
In the remainder of my testimony, I will first summarize principles that must govern any
financial modernization legislation. Next, I will address several key issues raised by
financial modernization proposals and H.R. 10. These are: the extent to which banking
and commerce should be allowed to mix; the proper role of the proposed National
Council on Financial Services; customer protection; and capital requirements.
PRINCIPLES OF FINANCIAL MODERNIZATION
Any financial modernization proposal must allow for equitable competition in an evolving
marketplace while maintaining the safety and soundness of insured depository
institutions. Financial modernization should also permit financial organizations to
generate sufficient returns to attract capital essential for normal growth and expansion.