Remarks by
Donna Tanoue
Chairman
Federal Deposit Insurance Corporation
Before
The
Annual Convention
Independent Community Bankers of America
Las Vegas, Nevada
March 7, 2001
Good morning. A year ago, in front of this gathering, I announced that the FDIC would
be undertaking a comprehensive review of the deposit insurance system. We looked at
the deposit insurance system and found three fundamental problems that needed
correcting.
Deposit insurance was crudely priced.
We were charging for deposit insurance at the wrong point in the business cycle.
And the value of insurance coverage was shrinking over time.
Now, the FDIC insures some $3 trillion in deposits. Operating a program of that
magnitude has certain costs, and much of what I have to say relates to how those costs
are allocated. We do not see deposit insurance reform as a revenue-raising exercise.
Let me explain.
The cost of operating the insurance system should be spread out across insured
institutions. However, today it is financed by the subset of the industry that existed prior
to 1996. We should collect premiums in good times that cover losses in bad times. But
now we collect most of the costs when times are bad. And, on the matter of insurance
coverage for bank customers, the value of deposit insurance should be predictable and
reliable -- and approximate the effects of inflation on American savings.
Yet changes in value have been large and sudden. We do not think this is the way FDIC
insurance should work.
In a few weeks, the FDIC will issue our recommendations for reform. We believe these
reforms are necessary to make our system stronger, more efficient, and better able to
meet the future needs of Americans.
One need only look at the Bank Insurance Fund itself to see how these problems affect
you. Despite the economic boom we've all enjoyed, the BIF reserve ratio has been
treading water since 1997. And our preliminary data show it at 1.35 percent of insured
deposits at the end of the year 2000 -- 10 basis points above the legal requirement.
Donna Tanoue
Chairman
Federal Deposit Insurance Corporation
Before
The
Annual Convention
Independent Community Bankers of America
Las Vegas, Nevada
March 7, 2001
Good morning. A year ago, in front of this gathering, I announced that the FDIC would
be undertaking a comprehensive review of the deposit insurance system. We looked at
the deposit insurance system and found three fundamental problems that needed
correcting.
Deposit insurance was crudely priced.
We were charging for deposit insurance at the wrong point in the business cycle.
And the value of insurance coverage was shrinking over time.
Now, the FDIC insures some $3 trillion in deposits. Operating a program of that
magnitude has certain costs, and much of what I have to say relates to how those costs
are allocated. We do not see deposit insurance reform as a revenue-raising exercise.
Let me explain.
The cost of operating the insurance system should be spread out across insured
institutions. However, today it is financed by the subset of the industry that existed prior
to 1996. We should collect premiums in good times that cover losses in bad times. But
now we collect most of the costs when times are bad. And, on the matter of insurance
coverage for bank customers, the value of deposit insurance should be predictable and
reliable -- and approximate the effects of inflation on American savings.
Yet changes in value have been large and sudden. We do not think this is the way FDIC
insurance should work.
In a few weeks, the FDIC will issue our recommendations for reform. We believe these
reforms are necessary to make our system stronger, more efficient, and better able to
meet the future needs of Americans.
One need only look at the Bank Insurance Fund itself to see how these problems affect
you. Despite the economic boom we've all enjoyed, the BIF reserve ratio has been
treading water since 1997. And our preliminary data show it at 1.35 percent of insured
deposits at the end of the year 2000 -- 10 basis points above the legal requirement.
That sounds like a big cushion. But it can disappear - and disappear rapidly in today's
uncertain and fast-moving market economy. The insurance system then would revert to
the way it collected premiums and recapitalized at the height of the S&L crisis.
It doesn't have to be that way. A year ago I spoke to you about the importance of reform
and quoted the old adage: Fix the roof when the sun shines.
Well, in most ways the sun is still shining on our deposit insurance system. But we can
see some clouds on the horizon. If they darken and grow - if they come together - the
banking industry may end up paying premiums for deposit insurance like those
premiums you paid in the early 1990s.
Looking out at the horizon, one concern we have is the condition of the banking industry
- and what worsening conditions could mean in increasing bank failures. As it happens,
today the FDIC is releasing our fourth-quarter and full-year earnings results for the
commercial banking industry.
The numbers show a continuation of recent trends. Specifically, the vast majority of
banks remain highly profitable, and their performance indicators remain strong. While
bank earnings in 2000 were a mixed picture, more than two out of three banks reported
higher earnings.
Some of the factors that have helped to sustain the string of record industry earnings --
low expenses for credit problems, strong growth in noninterest revenues, and a steady
contribution from net interest income -- are still evident in the most recent data.
Times are still good. Nevertheless, signs of stress are emerging. A few large banks
continue to struggle with asset-quality problems, and their difficulties are reflected in
industry totals. As a result, for the first time in nine years, banking industry earnings did
not set a new annual record in the year 2000. Commercial banks earned $71.2 billion in
2000, a decline of $380 million -- or one-half of 1 percent -- compared to their earnings
in 1999.
Problems in commercial and industrial loans have been limited to a few large banks but
the severity of these problems has been increasing. Growth in noninterest revenues,
especially those that are sensitive to conditions in the stock and financial markets, lost
some of its momentum in the past year. But banks have managed to sustain increases
in net interest income in the face of declining net interest margins, thanks to rapid
growth in interest-earning assets, particularly loans.
The recent slowdown in the economy casts doubt on banks' ability to sustain recent
growth rates in the face of softening loan demand. The distant cloud is a reminder that
good times don't last forever. When bad times return, more banks will naturally fail. If
banks fail in greater numbers, the insurance fund will decline.
uncertain and fast-moving market economy. The insurance system then would revert to
the way it collected premiums and recapitalized at the height of the S&L crisis.
It doesn't have to be that way. A year ago I spoke to you about the importance of reform
and quoted the old adage: Fix the roof when the sun shines.
Well, in most ways the sun is still shining on our deposit insurance system. But we can
see some clouds on the horizon. If they darken and grow - if they come together - the
banking industry may end up paying premiums for deposit insurance like those
premiums you paid in the early 1990s.
Looking out at the horizon, one concern we have is the condition of the banking industry
- and what worsening conditions could mean in increasing bank failures. As it happens,
today the FDIC is releasing our fourth-quarter and full-year earnings results for the
commercial banking industry.
The numbers show a continuation of recent trends. Specifically, the vast majority of
banks remain highly profitable, and their performance indicators remain strong. While
bank earnings in 2000 were a mixed picture, more than two out of three banks reported
higher earnings.
Some of the factors that have helped to sustain the string of record industry earnings --
low expenses for credit problems, strong growth in noninterest revenues, and a steady
contribution from net interest income -- are still evident in the most recent data.
Times are still good. Nevertheless, signs of stress are emerging. A few large banks
continue to struggle with asset-quality problems, and their difficulties are reflected in
industry totals. As a result, for the first time in nine years, banking industry earnings did
not set a new annual record in the year 2000. Commercial banks earned $71.2 billion in
2000, a decline of $380 million -- or one-half of 1 percent -- compared to their earnings
in 1999.
Problems in commercial and industrial loans have been limited to a few large banks but
the severity of these problems has been increasing. Growth in noninterest revenues,
especially those that are sensitive to conditions in the stock and financial markets, lost
some of its momentum in the past year. But banks have managed to sustain increases
in net interest income in the face of declining net interest margins, thanks to rapid
growth in interest-earning assets, particularly loans.
The recent slowdown in the economy casts doubt on banks' ability to sustain recent
growth rates in the face of softening loan demand. The distant cloud is a reminder that
good times don't last forever. When bad times return, more banks will naturally fail. If
banks fail in greater numbers, the insurance fund will decline.