Chairman Donald E. Powell
Federal Deposit Insurance Corporation
Remarks Before the
Institute of International Bankers
Washington, D.C.
March 1, 2004
Good morning. It is a privilege to be here and I am honored you asked me to speak to
you today. I appreciate the fact that so many of you took time out of your busy
schedules to come to Washington and participate in this gathering. Some of you came
from great distances to be here and it is good to see you.
There are many different perspectives represented in this room. Economic conditions
around the world are not identical. The business of banking is conducted, and
regulated, in different ways around the world. My perspective is that of a former banker
who has experienced both boom times, and devastating local economic conditions.
Based on my experience as a banker and a regulator, I know how regulators relate to
banks, and I can tell you that relationship is not the same during the boom as it is during
the crisis. Today I want to share some ideas about striking the right regulatory balance,
and the challenge of regulating banks during expansionary times.
My idea of good regulation is straightforward. Ensure adequate capital, enforce the
laws, but do not over-regulate. My remarks today will simply elaborate on what this
should mean for regulators, particularly during expansionary times.
This topic is relevant because the economic expansion in the United States that began
several years ago is picking up steam. Economic growth accelerated during 2003 to
more than 3 percent – and came on strong particularly in the last two quarters of the
year. Growth was more balanced, investment picked up, and trade balance was
improved to the point where exports are now growing faster than imports.
As we settle into this period of economic growth, U.S. banks are performing at record
levels. The banking industry reduced provisions, improved efficiency and improved
gains on asset sales, offsetting margin compression, and banks are posting record
earnings. Asset quality remains strong and has remained so throughout the recent
recession, disproving the old adage I was taught that banks mirror the overall economy.
Further, it is important to note that capital ratios – a critical concern for us at the FDIC –
remain at record levels.
While there are many reasons why U.S. banks have fared so well through the recent
recession, one set of factors merits particular attention – namely, the legislative and
regulatory changes that eased regulatory barriers in this country and allowed our banks
to diversify their income streams. Diversification of the income stream clearly helped
buffer credit losses during the recent recession. The aggressive use of technology and
the growth of nationwide credit provision have opened up remarkable avenues for
Federal Deposit Insurance Corporation
Remarks Before the
Institute of International Bankers
Washington, D.C.
March 1, 2004
Good morning. It is a privilege to be here and I am honored you asked me to speak to
you today. I appreciate the fact that so many of you took time out of your busy
schedules to come to Washington and participate in this gathering. Some of you came
from great distances to be here and it is good to see you.
There are many different perspectives represented in this room. Economic conditions
around the world are not identical. The business of banking is conducted, and
regulated, in different ways around the world. My perspective is that of a former banker
who has experienced both boom times, and devastating local economic conditions.
Based on my experience as a banker and a regulator, I know how regulators relate to
banks, and I can tell you that relationship is not the same during the boom as it is during
the crisis. Today I want to share some ideas about striking the right regulatory balance,
and the challenge of regulating banks during expansionary times.
My idea of good regulation is straightforward. Ensure adequate capital, enforce the
laws, but do not over-regulate. My remarks today will simply elaborate on what this
should mean for regulators, particularly during expansionary times.
This topic is relevant because the economic expansion in the United States that began
several years ago is picking up steam. Economic growth accelerated during 2003 to
more than 3 percent – and came on strong particularly in the last two quarters of the
year. Growth was more balanced, investment picked up, and trade balance was
improved to the point where exports are now growing faster than imports.
As we settle into this period of economic growth, U.S. banks are performing at record
levels. The banking industry reduced provisions, improved efficiency and improved
gains on asset sales, offsetting margin compression, and banks are posting record
earnings. Asset quality remains strong and has remained so throughout the recent
recession, disproving the old adage I was taught that banks mirror the overall economy.
Further, it is important to note that capital ratios – a critical concern for us at the FDIC –
remain at record levels.
While there are many reasons why U.S. banks have fared so well through the recent
recession, one set of factors merits particular attention – namely, the legislative and
regulatory changes that eased regulatory barriers in this country and allowed our banks
to diversify their income streams. Diversification of the income stream clearly helped
buffer credit losses during the recent recession. The aggressive use of technology and
the growth of nationwide credit provision have opened up remarkable avenues for
bankers and customers to design, market and consume new banking products and
services. As the industry consolidates – and the press for a truly nationwide banking
platform continues – banks are using the resulting economies of scale and scope to
provide services to their customers in new and profitable ways. Bank managers have
capitalized on all these developments to transform their business and are well-
positioned to enter the next economic expansion.
As we look to the future, we see continued great opportunity for banks in the
marketplace, a continued pace of breathtaking change, and a new view of how we
regulate that most fundamental indicator of banking confidence and stability: capital. All
of this raises an important question for policymakers and regulators alike: what policies
should we pursue to ensure the stream of great news out of the banking sector
continues? How can we ensure that great market experiments are allowed to happen –
but without endangering the stability of our financial system?
In short, what should be the broad contours of the regulators’ policy agenda during the
next expansion?
Perhaps the greatest challenge for regulators is deciding when to step in and when to
stand on the sidelines. And as institutions grow larger and more complex, the stakes
involved in that decision – the consequences of ill-conceived action or inaction – are
greater than they have ever been. Striking this regulatory balance is not easy. In many
ways an economic expansion is the most challenging time for bank regulators. During
crisis, the urgency of the demands from elected officials and the restive marketplace
ensure supervisors are highly attuned to the importance of the fundamentals – strong
capital, sound asset values, proficient management and a solid business plan. We are
more inclined to look under rocks, question assumptions, and look at the mechanics
and motivations behind major decisions.
By contrast, during expansions there can be a tendency for supervisors to be less
assertive about bedrock capital, asset valuations, and the assumptions underlying
profitable lines of business. It can be much more difficult, during good times, for
supervisors to come into the bank in an adversarial role and demand change when
times are good and risks seem few and well-managed.
None of this is to say that regulators go away during good times. Far from it. At least
here in the U.S., we continue to issue reams of paper instructing banks on how to run
their businesses – describing guidance for this or that, issuing reminders of best
practices, responding to whatever the latest scandal may be.
There is a tendency for these things to become the primary manifestation of regulatory
presence during an expansion and I would argue that it is exactly the opposite of what
we should be doing. In my view, we should issue fewer pieces of paper telling banks
how to govern themselves, and instead spend more effort on ensuring capital adequacy
and sound asset values, and enforcing the laws and regulations we do have. We should
be questioning the underlying assumptions of the marketplace and ensuring banks are
services. As the industry consolidates – and the press for a truly nationwide banking
platform continues – banks are using the resulting economies of scale and scope to
provide services to their customers in new and profitable ways. Bank managers have
capitalized on all these developments to transform their business and are well-
positioned to enter the next economic expansion.
As we look to the future, we see continued great opportunity for banks in the
marketplace, a continued pace of breathtaking change, and a new view of how we
regulate that most fundamental indicator of banking confidence and stability: capital. All
of this raises an important question for policymakers and regulators alike: what policies
should we pursue to ensure the stream of great news out of the banking sector
continues? How can we ensure that great market experiments are allowed to happen –
but without endangering the stability of our financial system?
In short, what should be the broad contours of the regulators’ policy agenda during the
next expansion?
Perhaps the greatest challenge for regulators is deciding when to step in and when to
stand on the sidelines. And as institutions grow larger and more complex, the stakes
involved in that decision – the consequences of ill-conceived action or inaction – are
greater than they have ever been. Striking this regulatory balance is not easy. In many
ways an economic expansion is the most challenging time for bank regulators. During
crisis, the urgency of the demands from elected officials and the restive marketplace
ensure supervisors are highly attuned to the importance of the fundamentals – strong
capital, sound asset values, proficient management and a solid business plan. We are
more inclined to look under rocks, question assumptions, and look at the mechanics
and motivations behind major decisions.
By contrast, during expansions there can be a tendency for supervisors to be less
assertive about bedrock capital, asset valuations, and the assumptions underlying
profitable lines of business. It can be much more difficult, during good times, for
supervisors to come into the bank in an adversarial role and demand change when
times are good and risks seem few and well-managed.
None of this is to say that regulators go away during good times. Far from it. At least
here in the U.S., we continue to issue reams of paper instructing banks on how to run
their businesses – describing guidance for this or that, issuing reminders of best
practices, responding to whatever the latest scandal may be.
There is a tendency for these things to become the primary manifestation of regulatory
presence during an expansion and I would argue that it is exactly the opposite of what
we should be doing. In my view, we should issue fewer pieces of paper telling banks
how to govern themselves, and instead spend more effort on ensuring capital adequacy
and sound asset values, and enforcing the laws and regulations we do have. We should
be questioning the underlying assumptions of the marketplace and ensuring banks are