Remarks
By
Donna Tanoue
Chairman
Federal Deposit Insurance Corporation
Before
The
Lawyers Council
Of
The
Financial Services Roundtable
Washington, D.C.
May 10, 2001
Thank you.
It is a pleasure to be here today with so much high-powered legal talent, including the
FDIC's own Bill Kroener. Bill has been a valuable counsel to the FDIC over many years
of great change in banking.
I'm here today to make the case for deposit insurance reform. I know it's hard to talk
about paying new insurance premiums -- a new bill to pay that comes right out of the
bottom line. But the truth is that there has never been a better time to talk about these
kinds of reforms. The banking industry's return on assets -- a basic yardstick of industry
profitability -- has been above 1 percent for eight years now -- and it never reached that
height before in the 68-year history of the FDIC.
But good times don't last forever, as we were reminded last year when several large
banks experienced earnings setbacks, and the industry's net income declined slightly
from 1999's record level. And 22 of the top 25 banking companies reported an increase
in nonperforming assets during the first half of this year -- primarily in syndicated
lending.
The best reason to fix the flaws in our deposit insurance system now, while conditions
are good, is that the earnings problems that bad times bring won't be made even worse
by the imposition of large deposit insurance premiums.
The truth is that the current system could exacerbate an economic downturn by raising
premiums at the worst possible time -- pulling funds from banks and limiting credit
availability when it is needed most. It would take a toll on the safety and soundness of
the banking industry because a premium increase would hit when banks are less
healthy and losses are depleting the insurance funds. All these reasons argue for taking
action now.
By
Donna Tanoue
Chairman
Federal Deposit Insurance Corporation
Before
The
Lawyers Council
Of
The
Financial Services Roundtable
Washington, D.C.
May 10, 2001
Thank you.
It is a pleasure to be here today with so much high-powered legal talent, including the
FDIC's own Bill Kroener. Bill has been a valuable counsel to the FDIC over many years
of great change in banking.
I'm here today to make the case for deposit insurance reform. I know it's hard to talk
about paying new insurance premiums -- a new bill to pay that comes right out of the
bottom line. But the truth is that there has never been a better time to talk about these
kinds of reforms. The banking industry's return on assets -- a basic yardstick of industry
profitability -- has been above 1 percent for eight years now -- and it never reached that
height before in the 68-year history of the FDIC.
But good times don't last forever, as we were reminded last year when several large
banks experienced earnings setbacks, and the industry's net income declined slightly
from 1999's record level. And 22 of the top 25 banking companies reported an increase
in nonperforming assets during the first half of this year -- primarily in syndicated
lending.
The best reason to fix the flaws in our deposit insurance system now, while conditions
are good, is that the earnings problems that bad times bring won't be made even worse
by the imposition of large deposit insurance premiums.
The truth is that the current system could exacerbate an economic downturn by raising
premiums at the worst possible time -- pulling funds from banks and limiting credit
availability when it is needed most. It would take a toll on the safety and soundness of
the banking industry because a premium increase would hit when banks are less
healthy and losses are depleting the insurance funds. All these reasons argue for taking
action now.
But there's one more bottom-line reason to support reform now. Banks, like all other
businesses, will always be concerned about their profitability. Our proposal will make
this one piece of bank expenses and therefore, earnings, more predictable without
increasing expenses in the longer term. And we all know that the market values costs
that are more predictable and easier to manage -- leading to less volatile earnings.
I also want to talk with you about making good public policy, and about the potential
costs and benefits of deposit insurance reform - to your institutions in particular.
First, public policy.
As you know, last month we made a number of recommendations to Congress that
would improve our deposit insurance system - recommendations to address the flaws in
our system.
One question is, What do we do to prevent premiums from hitting your bottom line at the
worst possible time?
The first problem to address is the way insurance premiums are charged Today, 92
percent of the industry gets federal deposit insurance for free. As a result, some
brokerage firms have recently moved a large amount of funds - very quickly - into
insured deposit accounts at their affiliate banks. That was a good business decision for
them.
However, other banks can rightly say that they are subsidizing insurance costs for these
and other fast-growing banks.
Free insurance distorts market discipline. And at a time when financial regulators
around the world are coalescing around the idea that government should create
incentives for the industry to manage risk appropriately - the Basel proposal, for
example - the U.S. deposit insurance system is out of step.
All insured institutions should pay for insurance - and they should pay based on risk.
That is to say, their probability of failure.
So how would the FDIC differentiate based on risk? In the example detailed in our
recommendations, the FDIC used a statistical failure-prediction model as the basis for a
scorecard that assigns depository institutions into risk categories. The scorecard
example, which uses examination ratings and financial ratios, appears to work well for
the great majority of depository institutions and could form a sound basis for risk
differentiation for the thousands of small banks whose historical experience underlies
the analysis.
This approach will be modified in order to assign large, complex institutions to
appropriate risk classes for deposit insurance. The risk characteristics of large, complex
businesses, will always be concerned about their profitability. Our proposal will make
this one piece of bank expenses and therefore, earnings, more predictable without
increasing expenses in the longer term. And we all know that the market values costs
that are more predictable and easier to manage -- leading to less volatile earnings.
I also want to talk with you about making good public policy, and about the potential
costs and benefits of deposit insurance reform - to your institutions in particular.
First, public policy.
As you know, last month we made a number of recommendations to Congress that
would improve our deposit insurance system - recommendations to address the flaws in
our system.
One question is, What do we do to prevent premiums from hitting your bottom line at the
worst possible time?
The first problem to address is the way insurance premiums are charged Today, 92
percent of the industry gets federal deposit insurance for free. As a result, some
brokerage firms have recently moved a large amount of funds - very quickly - into
insured deposit accounts at their affiliate banks. That was a good business decision for
them.
However, other banks can rightly say that they are subsidizing insurance costs for these
and other fast-growing banks.
Free insurance distorts market discipline. And at a time when financial regulators
around the world are coalescing around the idea that government should create
incentives for the industry to manage risk appropriately - the Basel proposal, for
example - the U.S. deposit insurance system is out of step.
All insured institutions should pay for insurance - and they should pay based on risk.
That is to say, their probability of failure.
So how would the FDIC differentiate based on risk? In the example detailed in our
recommendations, the FDIC used a statistical failure-prediction model as the basis for a
scorecard that assigns depository institutions into risk categories. The scorecard
example, which uses examination ratings and financial ratios, appears to work well for
the great majority of depository institutions and could form a sound basis for risk
differentiation for the thousands of small banks whose historical experience underlies
the analysis.
This approach will be modified in order to assign large, complex institutions to
appropriate risk classes for deposit insurance. The risk characteristics of large, complex