Remarks by Chairman Donald E. Powell
Federal Deposit Insurance Corporation
The Bankers Club of Chicago
October 31, 2002
FOR IMMEDIATE RELEASE Media Contact:
PR-115-2002 (11-1-02) Phil Battey (202) 898-6993
Phil Battey (202-898-6993)
Thank you for the invitation to speak this evening. It is truly an honor to be here in your
great city and to meet so many of you.
I have had an interesting first year as Chairman of the FDIC. I am always impressed
with the variety of issues faced by bankers today - and with the good job the banking
industry has done in dealing with the economic slowdown. As a former banker - who
barely survived Texas in the late 1980s - I know firsthand that it could be much, much
worse.
I could spend all evening reciting the issues faced by the marketplace and the
Washington regulatory community, and tell you where the FDIC will likely come down.
But tonight, I would rather spend a few minutes discussing the concept of deposit
insurance - and why this part of the financial safety net is important to the American
people, to bankers, and to everyone else who has a stake in a safe, secure, and stable
marketplace.
Let me begin with a confession: I am a capitalist. I love the free market. And there are
occasions when I lie awake at night and think about all the different government
agencies involved in the marketplace today. In thinking about our regulatory structure, I
keep coming back to a fundamental conclusion: all of us involved in bank regulation
should be able to justify our roles to the American people. And we should be able to
prove the benefits we provide are worth more than what we spend on our budgets.
I've thought about this quite a bit - particularly in relation to the FDIC. Boiled down to its
essence, what exactly is deposit insurance? What role has it played in American
financial stability? What role does the FDIC play today, and in the future?
It is good to ask these questions. It is good, on occasion, to re-examine your beliefs and
reaffirm your faith. And that is what I would like to do tonight.
At its core, deposit insurance is nothing more than a simple promise: to provide
insurance coverage up to $100,000 per depositor in each institution insured by the
FDIC.
The promise may be simple, but what lies behind that promise is both complex and
always evolving. We must keep up with the latest changes in the industry, keep pace
Federal Deposit Insurance Corporation
The Bankers Club of Chicago
October 31, 2002
FOR IMMEDIATE RELEASE Media Contact:
PR-115-2002 (11-1-02) Phil Battey (202) 898-6993
Phil Battey (202-898-6993)
Thank you for the invitation to speak this evening. It is truly an honor to be here in your
great city and to meet so many of you.
I have had an interesting first year as Chairman of the FDIC. I am always impressed
with the variety of issues faced by bankers today - and with the good job the banking
industry has done in dealing with the economic slowdown. As a former banker - who
barely survived Texas in the late 1980s - I know firsthand that it could be much, much
worse.
I could spend all evening reciting the issues faced by the marketplace and the
Washington regulatory community, and tell you where the FDIC will likely come down.
But tonight, I would rather spend a few minutes discussing the concept of deposit
insurance - and why this part of the financial safety net is important to the American
people, to bankers, and to everyone else who has a stake in a safe, secure, and stable
marketplace.
Let me begin with a confession: I am a capitalist. I love the free market. And there are
occasions when I lie awake at night and think about all the different government
agencies involved in the marketplace today. In thinking about our regulatory structure, I
keep coming back to a fundamental conclusion: all of us involved in bank regulation
should be able to justify our roles to the American people. And we should be able to
prove the benefits we provide are worth more than what we spend on our budgets.
I've thought about this quite a bit - particularly in relation to the FDIC. Boiled down to its
essence, what exactly is deposit insurance? What role has it played in American
financial stability? What role does the FDIC play today, and in the future?
It is good to ask these questions. It is good, on occasion, to re-examine your beliefs and
reaffirm your faith. And that is what I would like to do tonight.
At its core, deposit insurance is nothing more than a simple promise: to provide
insurance coverage up to $100,000 per depositor in each institution insured by the
FDIC.
The promise may be simple, but what lies behind that promise is both complex and
always evolving. We must keep up with the latest changes in the industry, keep pace
with the rapid evolution of the marketplace, and ensure we are working in concert with
the other regulators - both at the federal and state levels. If we do not adapt, our safety
net will soon be out of date - with potentially disastrous consequences for our economy
and our banking system.
It is easy to forget this when times are good. From time to time, I hear people question
the need for safety-net protections like deposit insurance. They claim it is an
unwarranted intrusion by government into the free market. And you sometimes hear the
argument that deposit insurance presents a "moral hazard" - giving banks an incentive
to take excessive risks.
I hear these arguments, but I do not agree with them. I was a banker for more than 30
years. Most of that time, deposit insurance wasn't on my list of daily, weekly, or even
yearly concerns. But for the three years of the banking crisis in Texas - when failing
banks were in the news every day - the FDIC seal on the door was very, very important.
Why is this important? It is important because in tough times, we rely on banks to make
the kinds of loans that drive the economy. When markets become jittery, market-based
funding mechanisms - like commercial paper - have a tendency to dry up. And without
deposit insurance, the liquidity in banks would dry up during tough times as well - with
severe and escalating impact on the surrounding economy. So, in short, the deposit
insurance guarantee provides a rock-solid foundation of confidence for the economy to
build on - and it is an important defense against systemic collapse.
To understand the importance of confidence, and what happens when it goes away, you
only need to look at the world of 1933 - the world into which the FDIC was born.
While banking panics and crises had been a part of the American financial landscape
for decades before the Great Depression, the crisis of the early 1930s went far beyond
anything the country had seen before. Indeed, it went beyond anything we can imagine
today. From August 1929 to March 1933 the money supply declined by over one third --
vastly more than any prior depression. The safety net put in place over the previous
decades - including the creation of a central bank that would act as a lender of last
resort - proved unable to stem the economic contraction.
As the crisis worsened, depositors began withdrawing money from their banks. In an
attempt to meet these demands, banks sold their bond portfolios. Each such move
drove down the portfolio values of the remaining banks - putting even the healthiest
institutions at risk.
When banks began to fail, depositors panicked. As they rushed to withdraw their
money, 9,000 banks -- a full one third of the U.S. banking system -- failed. This cycle of
panic and withdrawal caused sound and weak banks alike to fail as depositor demands
far outstripped banks' ability to dispense money.
While the consequences of this banking crisis echoed through the economy, the
ordinary American saver was hardest hit. Although there are no official figures of how
many depositors lost their savings in the Depression, it has been estimated that close to
the other regulators - both at the federal and state levels. If we do not adapt, our safety
net will soon be out of date - with potentially disastrous consequences for our economy
and our banking system.
It is easy to forget this when times are good. From time to time, I hear people question
the need for safety-net protections like deposit insurance. They claim it is an
unwarranted intrusion by government into the free market. And you sometimes hear the
argument that deposit insurance presents a "moral hazard" - giving banks an incentive
to take excessive risks.
I hear these arguments, but I do not agree with them. I was a banker for more than 30
years. Most of that time, deposit insurance wasn't on my list of daily, weekly, or even
yearly concerns. But for the three years of the banking crisis in Texas - when failing
banks were in the news every day - the FDIC seal on the door was very, very important.
Why is this important? It is important because in tough times, we rely on banks to make
the kinds of loans that drive the economy. When markets become jittery, market-based
funding mechanisms - like commercial paper - have a tendency to dry up. And without
deposit insurance, the liquidity in banks would dry up during tough times as well - with
severe and escalating impact on the surrounding economy. So, in short, the deposit
insurance guarantee provides a rock-solid foundation of confidence for the economy to
build on - and it is an important defense against systemic collapse.
To understand the importance of confidence, and what happens when it goes away, you
only need to look at the world of 1933 - the world into which the FDIC was born.
While banking panics and crises had been a part of the American financial landscape
for decades before the Great Depression, the crisis of the early 1930s went far beyond
anything the country had seen before. Indeed, it went beyond anything we can imagine
today. From August 1929 to March 1933 the money supply declined by over one third --
vastly more than any prior depression. The safety net put in place over the previous
decades - including the creation of a central bank that would act as a lender of last
resort - proved unable to stem the economic contraction.
As the crisis worsened, depositors began withdrawing money from their banks. In an
attempt to meet these demands, banks sold their bond portfolios. Each such move
drove down the portfolio values of the remaining banks - putting even the healthiest
institutions at risk.
When banks began to fail, depositors panicked. As they rushed to withdraw their
money, 9,000 banks -- a full one third of the U.S. banking system -- failed. This cycle of
panic and withdrawal caused sound and weak banks alike to fail as depositor demands
far outstripped banks' ability to dispense money.
While the consequences of this banking crisis echoed through the economy, the
ordinary American saver was hardest hit. Although there are no official figures of how
many depositors lost their savings in the Depression, it has been estimated that close to