Statement Of
Donald E. Powell Chairman
Federal Deposit Insurance Corporation
on the
Condition of the Banking Industry
Before the
Committee on Banking, Housing and Urban Affairs U.S. Senate
April 20, 2004
Room 538, Dirksen Senate Office Building
Mr. Chairman, Senator Sarbanes and members of the Committee, thank you for the
opportunity to testify on behalf of the Federal Deposit Insurance Corporation regarding
the condition of FDIC-insured institutions and the deposit insurance funds. My testimony
will briefly review the recent record earnings and outstanding financial performance of
FDIC-insured institutions and the condition of the deposit insurance funds, touch upon
potential risks to the industry, and discuss the implications of industry consolidation and
some related questions that we believe will drive discussions among banking
policymakers going forward.
Condition of FDIC-Insured Institutions and the FDIC Insurance Funds
I am pleased to report that FDIC-insured institutions are as healthy and sound as they
have ever been. The industry earned a record $31.1 billion in the fourth quarter of 2003,
marking the fourth quarter in a row that earnings set a new high. The results for the
fourth quarter also brought the industry's earnings for the full year to a record $120.6
billion, surpassing the previous annual record of $105.1 billion set in 2002. The return
on assets (ROA) in the fourth quarter and for the entire year was 1.38 percent, equaling
the quarterly record set earlier in the year and easily surpassing the previous all-time
annual high of 1.30 percent in 2002.
Underlying the current financial strength of the industry have been the cumulative
effects of the ten-year economic expansion of the 1990s and certain factors that tended
to insulate banks from the most severe effects of the 2001 recession. Improvements in
underwriting and risk management practices helped to limit the effect of credit losses on
industry earnings during and after the recession. Meanwhile, strong growth in mortgage
loans, a steep yield curve, new sources of fee income and cost containment efforts by
banks helped boost the net operating income of the industry. Record earnings two years
in a row, record returns-on-assets, and a strong capital foundation are all indicators that
banks not only weathered the recent economic downturn - but have been a source of
significant strength for the economy and for the American consumer.
This strength is mirrored in the strength of the FDIC's insurance funds. As of December
31, 2003, the balance of $33.8 billion in the Bank Insurance Fund (BIF) represented
1.32 percent of estimated BIF-insured deposits, well above the statutory target reserve
ratio of 1.25 percent. The Savings Association Insurance Fund (SAIF) ratio stood at
1.37 percent at year-end 2003, with a balance of $12.2 billion. The BIF reserve ratio
Donald E. Powell Chairman
Federal Deposit Insurance Corporation
on the
Condition of the Banking Industry
Before the
Committee on Banking, Housing and Urban Affairs U.S. Senate
April 20, 2004
Room 538, Dirksen Senate Office Building
Mr. Chairman, Senator Sarbanes and members of the Committee, thank you for the
opportunity to testify on behalf of the Federal Deposit Insurance Corporation regarding
the condition of FDIC-insured institutions and the deposit insurance funds. My testimony
will briefly review the recent record earnings and outstanding financial performance of
FDIC-insured institutions and the condition of the deposit insurance funds, touch upon
potential risks to the industry, and discuss the implications of industry consolidation and
some related questions that we believe will drive discussions among banking
policymakers going forward.
Condition of FDIC-Insured Institutions and the FDIC Insurance Funds
I am pleased to report that FDIC-insured institutions are as healthy and sound as they
have ever been. The industry earned a record $31.1 billion in the fourth quarter of 2003,
marking the fourth quarter in a row that earnings set a new high. The results for the
fourth quarter also brought the industry's earnings for the full year to a record $120.6
billion, surpassing the previous annual record of $105.1 billion set in 2002. The return
on assets (ROA) in the fourth quarter and for the entire year was 1.38 percent, equaling
the quarterly record set earlier in the year and easily surpassing the previous all-time
annual high of 1.30 percent in 2002.
Underlying the current financial strength of the industry have been the cumulative
effects of the ten-year economic expansion of the 1990s and certain factors that tended
to insulate banks from the most severe effects of the 2001 recession. Improvements in
underwriting and risk management practices helped to limit the effect of credit losses on
industry earnings during and after the recession. Meanwhile, strong growth in mortgage
loans, a steep yield curve, new sources of fee income and cost containment efforts by
banks helped boost the net operating income of the industry. Record earnings two years
in a row, record returns-on-assets, and a strong capital foundation are all indicators that
banks not only weathered the recent economic downturn - but have been a source of
significant strength for the economy and for the American consumer.
This strength is mirrored in the strength of the FDIC's insurance funds. As of December
31, 2003, the balance of $33.8 billion in the Bank Insurance Fund (BIF) represented
1.32 percent of estimated BIF-insured deposits, well above the statutory target reserve
ratio of 1.25 percent. The Savings Association Insurance Fund (SAIF) ratio stood at
1.37 percent at year-end 2003, with a balance of $12.2 billion. The BIF reserve ratio
rose during 2003 as expected losses fell, while the SAIF reserve ratio remained
essentially unchanged from year-end 2002. A combined BIF and SAIF fund would total
$46 billion with a reserve ratio of 1.33 percent of estimated insured deposits.
In November 2003, the FDIC Board of Directors voted to maintain the existing BIF and
SAIF premium rate schedules for the first half of 2004. The FDIC's analysis indicates
that it is unlikely the reserve ratio for either fund will fall below the statutory target of
1.25 percent in the near future. For example, with the BIF ratio at 1.32 percent,
assuming no deposit growth, insurance losses on the order of $1.8 billion dollars would
be required to drop the ratio to 1.25 percent. For insured deposit growth alone to reduce
the ratio to this level, assuming no change in the BIF fund balance, growth of nearly six
percent would be required. Neither BIF insurance losses nor BIF deposit growth has
approached these magnitudes recently, and we do not foresee any combination of
insurance losses and deposit growth that would drive the reserve ratio near 1.25
percent in the coming months, although these forces could result in a decline from
current ratios. As a result, we do not foresee a need for additional premium income at
this time.
As you are aware, the FDIC's concerns about the deposit insurance system relate to the
way it is structured. We cannot price deposit insurance based on risk, we cannot
manage the fund's size relative to our exposure, and we maintain two funds even
though the historic rationale for doing so has gone away. There is broad agreement on
the key elements of a deposit insurance reform package and the FDIC remains willing
to work with this Committee to achieve reform as soon as possible.
Potential Risks
We cannot assume that the economic environment of the next decade will necessarily
be as favorable to the industry as our recent experience. The world is changing in
unprecedented ways and the FDIC continuously monitors economic conditions and
emerging risks in the banking industry in order to maintain its preparedness. The
primary vehicle for monitoring and addressing risk is the supervisory process, which has
been enhanced significantly over the past decade. Moreover, as the banking industry
has become more sophisticated, the FDIC has created cutting edge risk management
techniques to identify, measure, and manage risk to the insurance funds. The
cornerstone of FDIC’s risk management philosophy and practice is an integrated,
multidisciplinary approach that brings together economists, examiners, financial
analysts and others to analyze and respond to risks in the system.
Using this approach, the FDIC expects continued good performance for the banking
sector, based on the industry’s solid fundamentals and generally favorable economic
conditions. The economy grew at a six percent annual rate during the last half of 2003
and is expected to grow at a four percent pace this year.
Despite the generally positive recent economic news, our integrated analysis reveals
several trends that could pose difficulties for the banking industry and the FDIC in the
future. The FDIC analyzes risks that are generally known to exist as well as risks that
essentially unchanged from year-end 2002. A combined BIF and SAIF fund would total
$46 billion with a reserve ratio of 1.33 percent of estimated insured deposits.
In November 2003, the FDIC Board of Directors voted to maintain the existing BIF and
SAIF premium rate schedules for the first half of 2004. The FDIC's analysis indicates
that it is unlikely the reserve ratio for either fund will fall below the statutory target of
1.25 percent in the near future. For example, with the BIF ratio at 1.32 percent,
assuming no deposit growth, insurance losses on the order of $1.8 billion dollars would
be required to drop the ratio to 1.25 percent. For insured deposit growth alone to reduce
the ratio to this level, assuming no change in the BIF fund balance, growth of nearly six
percent would be required. Neither BIF insurance losses nor BIF deposit growth has
approached these magnitudes recently, and we do not foresee any combination of
insurance losses and deposit growth that would drive the reserve ratio near 1.25
percent in the coming months, although these forces could result in a decline from
current ratios. As a result, we do not foresee a need for additional premium income at
this time.
As you are aware, the FDIC's concerns about the deposit insurance system relate to the
way it is structured. We cannot price deposit insurance based on risk, we cannot
manage the fund's size relative to our exposure, and we maintain two funds even
though the historic rationale for doing so has gone away. There is broad agreement on
the key elements of a deposit insurance reform package and the FDIC remains willing
to work with this Committee to achieve reform as soon as possible.
Potential Risks
We cannot assume that the economic environment of the next decade will necessarily
be as favorable to the industry as our recent experience. The world is changing in
unprecedented ways and the FDIC continuously monitors economic conditions and
emerging risks in the banking industry in order to maintain its preparedness. The
primary vehicle for monitoring and addressing risk is the supervisory process, which has
been enhanced significantly over the past decade. Moreover, as the banking industry
has become more sophisticated, the FDIC has created cutting edge risk management
techniques to identify, measure, and manage risk to the insurance funds. The
cornerstone of FDIC’s risk management philosophy and practice is an integrated,
multidisciplinary approach that brings together economists, examiners, financial
analysts and others to analyze and respond to risks in the system.
Using this approach, the FDIC expects continued good performance for the banking
sector, based on the industry’s solid fundamentals and generally favorable economic
conditions. The economy grew at a six percent annual rate during the last half of 2003
and is expected to grow at a four percent pace this year.
Despite the generally positive recent economic news, our integrated analysis reveals
several trends that could pose difficulties for the banking industry and the FDIC in the
future. The FDIC analyzes risks that are generally known to exist as well as risks that