TESTIMONY OF
RICKI HELFER, CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
ON
FINANCIAL MODERNIZATION AND H.R. 268,
THE DEPOSITORY INSTITUTION AFFILIATION
AND THRIFT CHARTER CONVERSION ACT
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS & CONSUMER CREDIT
COMMITTEE ON BANKING AND FINANCIAL SERVICES
UNITED STATES HOUSE OF REPRESENTATIVES
10:00 A.M.
FEBRUARY 13, 1997
ROOM 2128, RAYBURN HOUSE OFFICE BUILDING
Madam Chairwoman and members of the Subcommittee, I appreciate this opportunity
to present the views of the Federal Deposit Insurance Corporation on financial
modernization, H.R. 268, the Depository Institution Affiliation and Thrift Charter
Conversion Act, and related issues. I commend you, Madam Chairwoman, and
Congressman Vento for placing a high priority on the need to modernize and strengthen
the nation's banking and financial systems. H.R. 268 represents a thoughtful approach
toward meaningful reform that will serve us well in developing balanced, constructive
legislation.
On behalf of the FDIC, I also want to express our sincere gratitude to you, to members
of this Subcommittee, and to other members of the Congress for passing legislation
providing immediate financial stability to the Savings Association Insurance Fund (the
SAIF). The health and stability of the financial industry are in the interest of everyone --
participants, regulators, banks and thrifts. Sound deposit insurance funds contribute to
that health and stability.
The Deposit Insurance Funds Act of 1996 (the Funds Act) capitalized the SAIF and
solved its immediate financial problems. The Funds Act also recognized the need for a
merger of the deposit insurance funds. The FDIC strongly supports a merger of the
Bank Insurance Fund (the BIF) and the SAIF as soon as practicable. The SAIF insures
far fewer, and more geographically concentrated, institutions than does the BIF, and,
therefore, faces potentially greater long-term risks.
A merger of the BIF and the SAIF is a necessary component of a solution to long-term
structural problems facing the thrift industry, and consequently the industry's deposit
insurance fund. A combined BIF and SAIF would have a larger membership and a
broader distribution of geographic and product risks; a combined fund would be stronger
than the SAIF alone. Under the Funds Act, Congress has made the merger of the BIF
and the SAIF contingent upon the creation of a common bank charter.
RICKI HELFER, CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
ON
FINANCIAL MODERNIZATION AND H.R. 268,
THE DEPOSITORY INSTITUTION AFFILIATION
AND THRIFT CHARTER CONVERSION ACT
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS & CONSUMER CREDIT
COMMITTEE ON BANKING AND FINANCIAL SERVICES
UNITED STATES HOUSE OF REPRESENTATIVES
10:00 A.M.
FEBRUARY 13, 1997
ROOM 2128, RAYBURN HOUSE OFFICE BUILDING
Madam Chairwoman and members of the Subcommittee, I appreciate this opportunity
to present the views of the Federal Deposit Insurance Corporation on financial
modernization, H.R. 268, the Depository Institution Affiliation and Thrift Charter
Conversion Act, and related issues. I commend you, Madam Chairwoman, and
Congressman Vento for placing a high priority on the need to modernize and strengthen
the nation's banking and financial systems. H.R. 268 represents a thoughtful approach
toward meaningful reform that will serve us well in developing balanced, constructive
legislation.
On behalf of the FDIC, I also want to express our sincere gratitude to you, to members
of this Subcommittee, and to other members of the Congress for passing legislation
providing immediate financial stability to the Savings Association Insurance Fund (the
SAIF). The health and stability of the financial industry are in the interest of everyone --
participants, regulators, banks and thrifts. Sound deposit insurance funds contribute to
that health and stability.
The Deposit Insurance Funds Act of 1996 (the Funds Act) capitalized the SAIF and
solved its immediate financial problems. The Funds Act also recognized the need for a
merger of the deposit insurance funds. The FDIC strongly supports a merger of the
Bank Insurance Fund (the BIF) and the SAIF as soon as practicable. The SAIF insures
far fewer, and more geographically concentrated, institutions than does the BIF, and,
therefore, faces potentially greater long-term risks.
A merger of the BIF and the SAIF is a necessary component of a solution to long-term
structural problems facing the thrift industry, and consequently the industry's deposit
insurance fund. A combined BIF and SAIF would have a larger membership and a
broader distribution of geographic and product risks; a combined fund would be stronger
than the SAIF alone. Under the Funds Act, Congress has made the merger of the BIF
and the SAIF contingent upon the creation of a common bank charter.
I am pleased to have this opportunity to testify on financial modernization against the
backdrop of two fully capitalized deposit insurance funds and record bank earnings.
Although final numbers are still being tabulated, early indications are that annual
earnings for commercial banks surpassed $50 billion for the first time in 1996. Average
equity ratios are at their highest levels in more than 50 years, and nonperforming assets
are well under one percent of total assets, the lowest level in the 15 years that banks
have reported nonperforming assets.
Private sector thrifts have earned more than $6 billion each year since 1991, when the
industry returned to profitability. Thrift earnings in 1996 may have exceeded the record
$7.6 billion of 1995 if thrifts had not paid a special assessment to capitalize the SAIF.
Equity ratios remain near 40-year highs, and nonperforming assets are down to
approximately one percent of total assets, the lowest level in the seven years that thrifts
have reported nonperforming assets.
Only six insured institutions, with aggregate assets of $220 million, failed in 1996. Also,
the number and aggregate assets of institutions on the FDIC's "problem" institution list
have declined sharply over the past five years. At the end of 1991, there were 1,426
institutions with total assets of $819 billion on the "problem" list. This was the highest
level of "problem" list assets in the history of the FDIC. Since 1991, the "problem" list
has steadily declined. As of September 30, 1996, only 125 institutions, with assets of
$15 billion, were on the list -- a fraction of the highest level.
From 1980 through 1994, 1,617 banks failed or received financial assistance from the
FDIC. These banks accounted for almost three-fourths of the failures that have occurred
since the inception of federal deposit insurance in 1933. These failed banks had
combined assets of $317 billion, and cost an estimated $36.4 billion to resolve. The
number of failures reached an annual record level of 221 in 1988, while the losses and
combined assets of failed banks peaked in 1991. The five bank failures in 1996 were
the fewest since four banks failed in 1974, and demonstrate the significantly improved
financial condition of the banking industry.
In recent years, banks and thrifts have benefited from continued economic expansion
and low inflation. These favorable conditions have produced strong loan demand and
have contributed to wider net interest margins. The resulting growth in revenues has
enabled banks and thrifts to reduce their inventories of bad assets while boosting
profits.
Although banks have been making record profits recently, evidence suggests that
increasing numbers have turned to somewhat riskier investments as they have lost
business to competitors. Loan-loss rates in today's favorable environment remain
significantly higher than in pre-1980 nonrecessionary periods. Bank performance has
varied greatly during the past ten years. Figures 1 and 2 illustrate annual returns on
assets and net charge-offs as a percentage of average loans since 1960. The volatility
of earnings in the 1980s is readily apparent, as is the relationship between recessionary
backdrop of two fully capitalized deposit insurance funds and record bank earnings.
Although final numbers are still being tabulated, early indications are that annual
earnings for commercial banks surpassed $50 billion for the first time in 1996. Average
equity ratios are at their highest levels in more than 50 years, and nonperforming assets
are well under one percent of total assets, the lowest level in the 15 years that banks
have reported nonperforming assets.
Private sector thrifts have earned more than $6 billion each year since 1991, when the
industry returned to profitability. Thrift earnings in 1996 may have exceeded the record
$7.6 billion of 1995 if thrifts had not paid a special assessment to capitalize the SAIF.
Equity ratios remain near 40-year highs, and nonperforming assets are down to
approximately one percent of total assets, the lowest level in the seven years that thrifts
have reported nonperforming assets.
Only six insured institutions, with aggregate assets of $220 million, failed in 1996. Also,
the number and aggregate assets of institutions on the FDIC's "problem" institution list
have declined sharply over the past five years. At the end of 1991, there were 1,426
institutions with total assets of $819 billion on the "problem" list. This was the highest
level of "problem" list assets in the history of the FDIC. Since 1991, the "problem" list
has steadily declined. As of September 30, 1996, only 125 institutions, with assets of
$15 billion, were on the list -- a fraction of the highest level.
From 1980 through 1994, 1,617 banks failed or received financial assistance from the
FDIC. These banks accounted for almost three-fourths of the failures that have occurred
since the inception of federal deposit insurance in 1933. These failed banks had
combined assets of $317 billion, and cost an estimated $36.4 billion to resolve. The
number of failures reached an annual record level of 221 in 1988, while the losses and
combined assets of failed banks peaked in 1991. The five bank failures in 1996 were
the fewest since four banks failed in 1974, and demonstrate the significantly improved
financial condition of the banking industry.
In recent years, banks and thrifts have benefited from continued economic expansion
and low inflation. These favorable conditions have produced strong loan demand and
have contributed to wider net interest margins. The resulting growth in revenues has
enabled banks and thrifts to reduce their inventories of bad assets while boosting
profits.
Although banks have been making record profits recently, evidence suggests that
increasing numbers have turned to somewhat riskier investments as they have lost
business to competitors. Loan-loss rates in today's favorable environment remain
significantly higher than in pre-1980 nonrecessionary periods. Bank performance has
varied greatly during the past ten years. Figures 1 and 2 illustrate annual returns on
assets and net charge-offs as a percentage of average loans since 1960. The volatility
of earnings in the 1980s is readily apparent, as is the relationship between recessionary