Remarks
by
Ricki Helfer
Chairman
Federal Deposit Insurance Corporation
Before
the
Group of Thirty
Conference
on
International Insolvency in the Financial Sector
London
May 14, 1997
When I glimpsed the Bank of England on the way here this morning, I was reminded
just how great a contribution that institution has made by inventing many of the
practices in finance that are now used around the world. The Bank of England was
founded in 1694, almost a century before the United States became a nation, when a
group of merchants agreed to lend 1.2 million pounds sterling to King William III at eight
percent, in return for a monopoly on bank notes and the right to receive deposits. Over
time, the Bank of England would also invent the role of a central bank.
By contrast, we in the United States did not establish an enduring connection between
our banking system and our federal government until 1864 -- 170 years after the Bank
of England was created. We did not create our own central bank until 1913.
With the Federal Deposit Insurance Corporation (FDIC), however, the United States
created the oldest system of national deposit insurance in the world. Because I believe
strong national systems for resolving failed financial institutions can make international
coordination more effective, today I will talk about the FDIC’s experiences in resolving
two banking crises in the United States as a case study of the issues associated with
the failures of financial institutions. I will also contrast that case study with another case
study: the considerably less successful effort at dealing with savings and loan
insolvencies in the United States in the 1980s and early 1990s.
The FDIC was created in 1933 to halt a banking crisis. Nine thousand banks -- a third of
the industry in the United States -- failed in the four years before the FDIC was
established. The failure of one bank would set off a chain reaction, bringing about other
failures. Sound banks frequently failed when large numbers of depositors panicked and
demanded to withdraw their deposits -- leading to a “run” on a bank. As depositors
began withdrawing their cash in amounts larger than the bank could sustain, banks
suspended operations and states across the country declared moratoria on bank
transactions. The banking system of the United States was on the verge of collapse.
by
Ricki Helfer
Chairman
Federal Deposit Insurance Corporation
Before
the
Group of Thirty
Conference
on
International Insolvency in the Financial Sector
London
May 14, 1997
When I glimpsed the Bank of England on the way here this morning, I was reminded
just how great a contribution that institution has made by inventing many of the
practices in finance that are now used around the world. The Bank of England was
founded in 1694, almost a century before the United States became a nation, when a
group of merchants agreed to lend 1.2 million pounds sterling to King William III at eight
percent, in return for a monopoly on bank notes and the right to receive deposits. Over
time, the Bank of England would also invent the role of a central bank.
By contrast, we in the United States did not establish an enduring connection between
our banking system and our federal government until 1864 -- 170 years after the Bank
of England was created. We did not create our own central bank until 1913.
With the Federal Deposit Insurance Corporation (FDIC), however, the United States
created the oldest system of national deposit insurance in the world. Because I believe
strong national systems for resolving failed financial institutions can make international
coordination more effective, today I will talk about the FDIC’s experiences in resolving
two banking crises in the United States as a case study of the issues associated with
the failures of financial institutions. I will also contrast that case study with another case
study: the considerably less successful effort at dealing with savings and loan
insolvencies in the United States in the 1980s and early 1990s.
The FDIC was created in 1933 to halt a banking crisis. Nine thousand banks -- a third of
the industry in the United States -- failed in the four years before the FDIC was
established. The failure of one bank would set off a chain reaction, bringing about other
failures. Sound banks frequently failed when large numbers of depositors panicked and
demanded to withdraw their deposits -- leading to a “run” on a bank. As depositors
began withdrawing their cash in amounts larger than the bank could sustain, banks
suspended operations and states across the country declared moratoria on bank
transactions. The banking system of the United States was on the verge of collapse.
The behavior of depositors was not irrational. They had learned from hard experience
that if they kept their money in a bank, it might not be available when they needed it,
and they might lose a large portion of it as well. As a general practice, between 1865
and 1933 before the creation of the FDIC, depositors of national and state banks were
treated in the same way as other creditors -- they received funds from the liquidation of
the bank’s assets after those assets were liquidated. The time taken at the federal level
to liquidate a failed bank’s assets, pay the depositors, and close the books averaged
about six years -- although in at least one case, it took 21 years. From 1921 through
1930, more than 1,200 banks failed and were liquidated. From those liquidations,
depositors at banks chartered by the states received, on average, 62 percent of their
deposits back. Depositors at banks chartered by the federal government received an
average of 58 percent of their deposits back.
Given the long delays in receiving any money and significant reductions in deposits
when banks failed, it was understandable why anxious depositors would withdraw their
savings at any hint of problems. With the wave of banking failures that began in 1929, it
became widely recognized that the lack of liquidity that resulted from the process for
resolving bank failures contributed significantly to the economic depression in the
United States.
To deal with the crisis, the government of the United States focused on returning the
financial system to stability by restoring and maintaining the confidence of depositors in
the banking system. When it created the FDIC, the United States Congress addressed
that problem in three ways: it created an agency to insure deposits, it gave that agency
bank supervision responsibilities, and it gave that agency special powers to resolve
failed banks. I will briefly discuss each of these three in turn.
First, the FDIC was established to insure bank deposits, initially up to $2,500. If a bank
failed, its depositors were guaranteed to receive that much of their money from the
government, in many instances within days.
In 1934, coverage was raised to $5,000. With that increase, 45 percent of the deposits
in the banking system were covered by insurance. By providing the public with an
assured source of liquidity, federal deposit insurance restored confidence in the banking
system, insulated banks from runs and panics, and stabilized the financial system. The
year after the FDIC was created, nine insured banks failed -- and total deposits in the
banking system increased by 22 percent.
Today, we insure deposits of up to $100,000 at just under 11,500 institutions. With $27
billion in reserves, our Bank Insurance Fund (BIF) insures about two-thirds of the
deposits at its member institutions. With just under $9 billion in reserves, our Savings
Association Insurance Fund (SAIF) insures about 95 percent of the deposits of the thrift
institutions that belong to it. Our insured institutions pay premiums to the funds based
on the total amount of their insured deposits and the level of risk they present to the
insurance fund. This risk is measured by their capital levels and the supervisory ratings
they receive from bank examinations.
that if they kept their money in a bank, it might not be available when they needed it,
and they might lose a large portion of it as well. As a general practice, between 1865
and 1933 before the creation of the FDIC, depositors of national and state banks were
treated in the same way as other creditors -- they received funds from the liquidation of
the bank’s assets after those assets were liquidated. The time taken at the federal level
to liquidate a failed bank’s assets, pay the depositors, and close the books averaged
about six years -- although in at least one case, it took 21 years. From 1921 through
1930, more than 1,200 banks failed and were liquidated. From those liquidations,
depositors at banks chartered by the states received, on average, 62 percent of their
deposits back. Depositors at banks chartered by the federal government received an
average of 58 percent of their deposits back.
Given the long delays in receiving any money and significant reductions in deposits
when banks failed, it was understandable why anxious depositors would withdraw their
savings at any hint of problems. With the wave of banking failures that began in 1929, it
became widely recognized that the lack of liquidity that resulted from the process for
resolving bank failures contributed significantly to the economic depression in the
United States.
To deal with the crisis, the government of the United States focused on returning the
financial system to stability by restoring and maintaining the confidence of depositors in
the banking system. When it created the FDIC, the United States Congress addressed
that problem in three ways: it created an agency to insure deposits, it gave that agency
bank supervision responsibilities, and it gave that agency special powers to resolve
failed banks. I will briefly discuss each of these three in turn.
First, the FDIC was established to insure bank deposits, initially up to $2,500. If a bank
failed, its depositors were guaranteed to receive that much of their money from the
government, in many instances within days.
In 1934, coverage was raised to $5,000. With that increase, 45 percent of the deposits
in the banking system were covered by insurance. By providing the public with an
assured source of liquidity, federal deposit insurance restored confidence in the banking
system, insulated banks from runs and panics, and stabilized the financial system. The
year after the FDIC was created, nine insured banks failed -- and total deposits in the
banking system increased by 22 percent.
Today, we insure deposits of up to $100,000 at just under 11,500 institutions. With $27
billion in reserves, our Bank Insurance Fund (BIF) insures about two-thirds of the
deposits at its member institutions. With just under $9 billion in reserves, our Savings
Association Insurance Fund (SAIF) insures about 95 percent of the deposits of the thrift
institutions that belong to it. Our insured institutions pay premiums to the funds based
on the total amount of their insured deposits and the level of risk they present to the
insurance fund. This risk is measured by their capital levels and the supervisory ratings
they receive from bank examinations.