Statement of Donald E. Powell Chairman Federal Deposit Insurance Corporation
Oversight Hearing on the Federal Deposit Insurance Corporation Before the
Subcommittee On Oversight And Investigations of the Committee On Financial
Services U.S. House Of Representatives
March 4, 2004
Room 2128, Rayburn House Office Building
Chairwoman Kelly, Congressman Gutierrez and members of the Subcommittee, thank
you for the opportunity to testify at today's oversight hearing on the Federal Deposit
Insurance Corporation. My testimony will briefly discuss the condition of the deposit
insurance funds, the need for deposit insurance reform, the condition of the banking
industry, and our efforts to reshape the FDIC for the future. Much of my testimony will
focus on the issues facing the industry and the regulatory community and the initiatives
the FDIC is taking to address these issues.
The Condition of the Deposit Insurance Funds
The strong performance of FDIC-insured institutions is reflected in the strength and
soundness of the FDIC insurance funds. As of December 31, 2003, the balance 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 yearend 2003. The BIF reserve
ratio rose during 2003 as expected losses fell, while the SAIF reserve ratio remained
essentially unchanged from yearend 2002.
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 1.25 percent during this
period. As a result, most FDIC insured institutions will not pay deposit insurance
premiums during the first-half of 2004.
However, the FDIC does not expect the BIF and SAIF reserve ratios to continue to rise
going forward. Although the FDIC forecasts little in the way of insurance losses in the
near term, we expect at least moderate deposit growth. BIF and SAIF reserves for
expected bank failures are already at low levels and the funds will not benefit from
unrealized gains on their portfolios of Treasury securities in a moderately increasing or
stable interest rate environment. Thus, it is likely that the interest income generated by
the funds will not support the expected rate of BIF- and SAIF-insured deposit growth,
and the reserve ratios will decline even in the absence of significant bank failure activity.
Deposit Insurance Reform
An effective deposit insurance system contributes to America's economic and financial
stability by protecting depositors. For more than three generations, our deposit
insurance system has played a key role in maintaining public confidence.
Oversight Hearing on the Federal Deposit Insurance Corporation Before the
Subcommittee On Oversight And Investigations of the Committee On Financial
Services U.S. House Of Representatives
March 4, 2004
Room 2128, Rayburn House Office Building
Chairwoman Kelly, Congressman Gutierrez and members of the Subcommittee, thank
you for the opportunity to testify at today's oversight hearing on the Federal Deposit
Insurance Corporation. My testimony will briefly discuss the condition of the deposit
insurance funds, the need for deposit insurance reform, the condition of the banking
industry, and our efforts to reshape the FDIC for the future. Much of my testimony will
focus on the issues facing the industry and the regulatory community and the initiatives
the FDIC is taking to address these issues.
The Condition of the Deposit Insurance Funds
The strong performance of FDIC-insured institutions is reflected in the strength and
soundness of the FDIC insurance funds. As of December 31, 2003, the balance 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 yearend 2003. The BIF reserve
ratio rose during 2003 as expected losses fell, while the SAIF reserve ratio remained
essentially unchanged from yearend 2002.
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 1.25 percent during this
period. As a result, most FDIC insured institutions will not pay deposit insurance
premiums during the first-half of 2004.
However, the FDIC does not expect the BIF and SAIF reserve ratios to continue to rise
going forward. Although the FDIC forecasts little in the way of insurance losses in the
near term, we expect at least moderate deposit growth. BIF and SAIF reserves for
expected bank failures are already at low levels and the funds will not benefit from
unrealized gains on their portfolios of Treasury securities in a moderately increasing or
stable interest rate environment. Thus, it is likely that the interest income generated by
the funds will not support the expected rate of BIF- and SAIF-insured deposit growth,
and the reserve ratios will decline even in the absence of significant bank failure activity.
Deposit Insurance Reform
An effective deposit insurance system contributes to America's economic and financial
stability by protecting depositors. For more than three generations, our deposit
insurance system has played a key role in maintaining public confidence.
While the current system is not in need of a radical overhaul, flaws in the system could
actually prolong an economic downturn, rather than promote the conditions necessary
for recovery. As you know, there are three elements of deposit insurance reform that the
FDIC regards as most critical: merging the funds, improving the FDIC's ability to
manage the fund and pricing premiums properly to reflect risk. These changes are
needed to provide the right incentives to insured institutions and to improve the deposit
insurance system's role as a stabilizing economic factor, while also preserving the
obligation of banks and thrifts to fund the system. There is widespread general
agreement among the bank and thrift regulators for these reforms and the House of
Representatives has demonstrated its agreement twice by passing reform legislation. I
am hopeful that deposit insurance reform legislation will be enacted this year, and I
thank you for your efforts in this regard.
The Condition of the Industry
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 has 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 and a steep yield curve helped boost the net operating income of the industry. As
a result, the banking industry has been one of the leading sectors of the economy in the
current economic recovery.
But we cannot simply 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. The FDIC sees several trends that could pose
difficulties for the banking industry in the future. One potential difficulty arises from
future higher interest rates. It is inevitable that interest rates will eventually rise from
their current, historically low levels, and this will pose a particular challenge to mortgage
lenders. The sharp slowdown in mortgage refinancing in recent months has the effect of
making mortgage lenders even more vulnerable than usual to the effects of higher
interest rates.
Another potential difficulty for the industry arises from a rapid increase in household
indebtedness. The lowest mortgage rates in more than a generation have prompted
households to take out $1.4 trillion in new mortgage debt since the end of 2001. This
unprecedented level of borrowing raises concerns not about credit quality, but about the
actually prolong an economic downturn, rather than promote the conditions necessary
for recovery. As you know, there are three elements of deposit insurance reform that the
FDIC regards as most critical: merging the funds, improving the FDIC's ability to
manage the fund and pricing premiums properly to reflect risk. These changes are
needed to provide the right incentives to insured institutions and to improve the deposit
insurance system's role as a stabilizing economic factor, while also preserving the
obligation of banks and thrifts to fund the system. There is widespread general
agreement among the bank and thrift regulators for these reforms and the House of
Representatives has demonstrated its agreement twice by passing reform legislation. I
am hopeful that deposit insurance reform legislation will be enacted this year, and I
thank you for your efforts in this regard.
The Condition of the Industry
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 has 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 and a steep yield curve helped boost the net operating income of the industry. As
a result, the banking industry has been one of the leading sectors of the economy in the
current economic recovery.
But we cannot simply 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. The FDIC sees several trends that could pose
difficulties for the banking industry in the future. One potential difficulty arises from
future higher interest rates. It is inevitable that interest rates will eventually rise from
their current, historically low levels, and this will pose a particular challenge to mortgage
lenders. The sharp slowdown in mortgage refinancing in recent months has the effect of
making mortgage lenders even more vulnerable than usual to the effects of higher
interest rates.
Another potential difficulty for the industry arises from a rapid increase in household
indebtedness. The lowest mortgage rates in more than a generation have prompted
households to take out $1.4 trillion in new mortgage debt since the end of 2001. This
unprecedented level of borrowing raises concerns not about credit quality, but about the