Remarks by
Chairman Donald E. Powell
Federal Deposit Insurance Corporation
Before the Federal Reserve Bank of Atlanta
Thank you for the opportunity to speak tonight.
There can be no doubt that we are living in remarkable and challenging times – times
that are full of risk and uncertainty. We are at war. And this war has made real, for many
of us, our nation's struggle to understand, define, and react to the challenges of a new
century. We are also in a period of economic uncertainty – uncertainty fueled by
geopolitical concerns, to be sure, but uncertainty also fueled by continued concerns
about the state of corporate America. Just as 9/11 forced us to rethink the geopolitical
landscape, the corporate governance scandals of the past two years are forcing us to
rethink the economic landscape. Learning and applying the lessons of both these
events is critical to overcoming the challenges we face and maintaining our unmatched
prosperity as a nation.
In spite of the continued sluggishness of our economy, there remains a bright spot on
the economic horizon: the performance of FDIC insured financial institutions. Last year,
banks in this country posted record earnings of more than $100 billion dollars. And while
we continue to monitor risks in the subprime sector, and in isolated pockets of
commercial real estate, it is fair to say banks have come through a severe corporate
recession relatively unscathed. This is a remarkable accomplishment and we should
take a moment and be thankful – we all know how bad things can get for our industry.
As a Texas banker in the 1980s, I remember well what it is like to live through a crisis.
So, how is it that banks have escaped? How have they done so well in the face of such
stiff headwinds? I think there are several answers. First of all, we had to take some
bitter medicine. The Congress and the regulators put in place reforms – like prompt
corrective action and more stringent capital regulations – to prevent a recurrence of the
systemic problems that plagued the industry during the 1980s. In response to the
widespread bank and thrift failures of that era, the FDIC and the RTC worked hard to
quickly and efficiently move half-a-trillion dollars worth of failed bank assets off the
government's books and back into the private sector where they belong.
Second, the bankers themselves learned the vitally important lessons of the crisis. They
managed their growth and their portfolios better. They instituted tighter and more
effective internal control systems. They diversified their holdings to avoid hitching their
institutions to any one sector of the economy. And they took advantage of new
technologies and new innovations to better manage their banks and their risks.
One banker even told me recently that he attributed part of this remarkable strength to
the fact that banking is a regulated industry. Some would question that – I'm sure – but I
Chairman Donald E. Powell
Federal Deposit Insurance Corporation
Before the Federal Reserve Bank of Atlanta
Thank you for the opportunity to speak tonight.
There can be no doubt that we are living in remarkable and challenging times – times
that are full of risk and uncertainty. We are at war. And this war has made real, for many
of us, our nation's struggle to understand, define, and react to the challenges of a new
century. We are also in a period of economic uncertainty – uncertainty fueled by
geopolitical concerns, to be sure, but uncertainty also fueled by continued concerns
about the state of corporate America. Just as 9/11 forced us to rethink the geopolitical
landscape, the corporate governance scandals of the past two years are forcing us to
rethink the economic landscape. Learning and applying the lessons of both these
events is critical to overcoming the challenges we face and maintaining our unmatched
prosperity as a nation.
In spite of the continued sluggishness of our economy, there remains a bright spot on
the economic horizon: the performance of FDIC insured financial institutions. Last year,
banks in this country posted record earnings of more than $100 billion dollars. And while
we continue to monitor risks in the subprime sector, and in isolated pockets of
commercial real estate, it is fair to say banks have come through a severe corporate
recession relatively unscathed. This is a remarkable accomplishment and we should
take a moment and be thankful – we all know how bad things can get for our industry.
As a Texas banker in the 1980s, I remember well what it is like to live through a crisis.
So, how is it that banks have escaped? How have they done so well in the face of such
stiff headwinds? I think there are several answers. First of all, we had to take some
bitter medicine. The Congress and the regulators put in place reforms – like prompt
corrective action and more stringent capital regulations – to prevent a recurrence of the
systemic problems that plagued the industry during the 1980s. In response to the
widespread bank and thrift failures of that era, the FDIC and the RTC worked hard to
quickly and efficiently move half-a-trillion dollars worth of failed bank assets off the
government's books and back into the private sector where they belong.
Second, the bankers themselves learned the vitally important lessons of the crisis. They
managed their growth and their portfolios better. They instituted tighter and more
effective internal control systems. They diversified their holdings to avoid hitching their
institutions to any one sector of the economy. And they took advantage of new
technologies and new innovations to better manage their banks and their risks.
One banker even told me recently that he attributed part of this remarkable strength to
the fact that banking is a regulated industry. Some would question that – I'm sure – but I
do think he has a point. The scrutiny received by the industry can sometimes be a
blessing as well as a curse.
The transformation of banking a decade ago was critical to the industry's future
success. Had bankers failed to digest and remedy the problems exposed by the crisis,
they would have been doomed to repeat their mistakes. As it happened, they positioned
themselves not only to weather the current downturn, but weather it in record fashion.
That is no small achievement.
We are now emerging from an altogether different crisis. The corporate scandals that
emerged in the wake of the stock market collapse, and the large bankruptcies that
followed, exposed new weaknesses in our system. Aside from the failure of some big-
named companies – and, in some cases, the ethical failings and criminal behavior of the
people running them – we've seen an increasing wave of scrutiny aimed at third parties:
accounting firms, rating agencies, lawyers, and sometimes banks themselves in their
capacity as financial advisors.
The abuses have been well-documented. There will probably be more before this is all
over. The reforms enacted last year have been – and continue to be – pored over and
carefully interpreted. I will confess to you that I am haunted, from time to time, by the
fact that it often seems to take a full-blown crisis to lay bare the weaknesses in the
system. Without Enron and the others, would we even be discussing this today?
Probably not. I would like us to be more vigilant – every day, not just during a crisis –
about how we spot and root out problems before they dissolve into a full-blown front
page embarrassment to our capitalist system.
At any rate, what remains to be seen is how well these affected industries will work
these reforms into their day-to-day practices. This will be key to ensuring the abuses do
not re-emerge. We all know the vast majority of American businesses and business
people are honest and straightforward in their dealings. But while we are not all
responsible for the problems, we all do have a hand in the solutions – each of us,
individually must take on this responsibility by keeping to high standards of corporate
and professional behavior.
This transformation of law and regulation into fundamental industry practice is a vitally
important part of the process of re-establishing confidence – and I know many of you
are doing just that. Will the reforms of the past year result in an improved culture of
transparency and disclosure in these firms? Will the corporate governance reforms
result in corporate boards that are more effective, competent and better informed – or
will these measures simply make it harder to recruit good board members? Some of you
may be experiencing this, and I am sympathetic. All of this would be an academic
debate for me – and for the FDIC – were not these third parties so critical to the
continued health of the banking industry.
It is no secret to anyone in this room that we are living in a time of increasing
complexity. Capital is flowing around the world with the greatest of ease – searching
blessing as well as a curse.
The transformation of banking a decade ago was critical to the industry's future
success. Had bankers failed to digest and remedy the problems exposed by the crisis,
they would have been doomed to repeat their mistakes. As it happened, they positioned
themselves not only to weather the current downturn, but weather it in record fashion.
That is no small achievement.
We are now emerging from an altogether different crisis. The corporate scandals that
emerged in the wake of the stock market collapse, and the large bankruptcies that
followed, exposed new weaknesses in our system. Aside from the failure of some big-
named companies – and, in some cases, the ethical failings and criminal behavior of the
people running them – we've seen an increasing wave of scrutiny aimed at third parties:
accounting firms, rating agencies, lawyers, and sometimes banks themselves in their
capacity as financial advisors.
The abuses have been well-documented. There will probably be more before this is all
over. The reforms enacted last year have been – and continue to be – pored over and
carefully interpreted. I will confess to you that I am haunted, from time to time, by the
fact that it often seems to take a full-blown crisis to lay bare the weaknesses in the
system. Without Enron and the others, would we even be discussing this today?
Probably not. I would like us to be more vigilant – every day, not just during a crisis –
about how we spot and root out problems before they dissolve into a full-blown front
page embarrassment to our capitalist system.
At any rate, what remains to be seen is how well these affected industries will work
these reforms into their day-to-day practices. This will be key to ensuring the abuses do
not re-emerge. We all know the vast majority of American businesses and business
people are honest and straightforward in their dealings. But while we are not all
responsible for the problems, we all do have a hand in the solutions – each of us,
individually must take on this responsibility by keeping to high standards of corporate
and professional behavior.
This transformation of law and regulation into fundamental industry practice is a vitally
important part of the process of re-establishing confidence – and I know many of you
are doing just that. Will the reforms of the past year result in an improved culture of
transparency and disclosure in these firms? Will the corporate governance reforms
result in corporate boards that are more effective, competent and better informed – or
will these measures simply make it harder to recruit good board members? Some of you
may be experiencing this, and I am sympathetic. All of this would be an academic
debate for me – and for the FDIC – were not these third parties so critical to the
continued health of the banking industry.
It is no secret to anyone in this room that we are living in a time of increasing
complexity. Capital is flowing around the world with the greatest of ease – searching