Remarks by
Sheila C. Bair, Chairman,
Federal Deposit Insurance Corporation
Before the
California Bank Presidents Seminar
Santa Barbara, California
January 12, 2007
Good morning and Happy New Year, everyone. It is a pleasure to be with you today. I
would like to use our time together to hear from you as well. Before I take your
questions, which I am sure will have me looking ahead to the changes we both will have
to navigate in 2007, I would like to take a quick look back at what was truly a whirlwind
2006. It is hard for me to believe that it has only been seven months since I became
Chairman of the FDIC as I recall the issues that we confronted and made progress on
during the year.
Deposit Insurance Reform
In many ways, 2006 was dominated by the implementation of the Deposit Insurance
Reform Act. Congress gave the FDIC just 270 days to complete the final rulemaking,
which we accomplished on November 2. The new law provided for a comprehensive
overhaul of the deposit insurance system, including the merger of the bank and thrift
insurance funds, an increase in coverage for retirement accounts, an award of $4.7
billion of assessment credits to recognize the contributions that established institutions
made to build the insurance funds, and a method for charging risk-based deposit
insurance premiums.
The new rule will enable the FDIC to more closely tie each bank's premiums to the risk it
poses to the deposit insurance fund. The FDIC will evaluate each institution's risk based
on three primary sources of information — supervisory ratings for all insured institutions,
financial ratios for most institutions, and long-term debt issuer ratings for large
institutions that have them. The ability to differentiate on the basis of risk will improve
incentives for effective risk management and will reduce the extent to which safer banks
subsidize riskier ones.
The Board also established a base rate schedule and approved a somewhat higher rate
schedule that will take effect at the beginning of 2007. The rates for well-capitalized and
well-run institutions will be between five and seven cents per $100 of assessable
deposits. Based on recent data, we estimate that about 40 percent of institutions would
initially be charged the minimum five cent rate.
Institutions will see the effect of the new rates on their June 2007 invoices. I know
bankers are not looking forward to paying something for deposit insurance after years of
receiving this benefit for free. However, it is important to keep in mind that even without
the new law, all institutions would have been assessed premiums next year because the
Sheila C. Bair, Chairman,
Federal Deposit Insurance Corporation
Before the
California Bank Presidents Seminar
Santa Barbara, California
January 12, 2007
Good morning and Happy New Year, everyone. It is a pleasure to be with you today. I
would like to use our time together to hear from you as well. Before I take your
questions, which I am sure will have me looking ahead to the changes we both will have
to navigate in 2007, I would like to take a quick look back at what was truly a whirlwind
2006. It is hard for me to believe that it has only been seven months since I became
Chairman of the FDIC as I recall the issues that we confronted and made progress on
during the year.
Deposit Insurance Reform
In many ways, 2006 was dominated by the implementation of the Deposit Insurance
Reform Act. Congress gave the FDIC just 270 days to complete the final rulemaking,
which we accomplished on November 2. The new law provided for a comprehensive
overhaul of the deposit insurance system, including the merger of the bank and thrift
insurance funds, an increase in coverage for retirement accounts, an award of $4.7
billion of assessment credits to recognize the contributions that established institutions
made to build the insurance funds, and a method for charging risk-based deposit
insurance premiums.
The new rule will enable the FDIC to more closely tie each bank's premiums to the risk it
poses to the deposit insurance fund. The FDIC will evaluate each institution's risk based
on three primary sources of information — supervisory ratings for all insured institutions,
financial ratios for most institutions, and long-term debt issuer ratings for large
institutions that have them. The ability to differentiate on the basis of risk will improve
incentives for effective risk management and will reduce the extent to which safer banks
subsidize riskier ones.
The Board also established a base rate schedule and approved a somewhat higher rate
schedule that will take effect at the beginning of 2007. The rates for well-capitalized and
well-run institutions will be between five and seven cents per $100 of assessable
deposits. Based on recent data, we estimate that about 40 percent of institutions would
initially be charged the minimum five cent rate.
Institutions will see the effect of the new rates on their June 2007 invoices. I know
bankers are not looking forward to paying something for deposit insurance after years of
receiving this benefit for free. However, it is important to keep in mind that even without
the new law, all institutions would have been assessed premiums next year because the
reserve ratio is already below the 1.25 percent reserve ratio target. What would have
been different is that without the reform law, institutions would not have received credits
for their past contributions to offset these rates.
Congress intended the fund to grow in good economic times so that it could withstand
periods of financial stress without the need to raise premium rates sharply. Keeping the
fund strong now, when industry conditions are favorable, will help ensure that
assessment rates remain stable and moderate over the longer term.
Capital Reform
It would have been a very busy year if deposit insurance reform implementation was the
only thing we worked on, but as you know, it was not. The FDIC continued to be active
in the implementation of Basel II, with the Board voting in early September to publish
the proposed rule for public comment.
I encourage you, as community bankers, not to dismiss Basel II as simply a large bank
issue. Basel II banks would most likely face lower risk-based capital requirements in all
the major asset categories in which community banks are most active. We are
concerned about the effect this could have on community banks. The U.S. financial
system benefits from a balance between large complex banks, regionally focused banks
and community banks. Community banks are integral to their local economies and to
the customers they serve – individuals and businesses alike. Our capital framework
should not place community banks at a competitive disadvantage.
We address these issues first by including a number of essential safeguards in the
Basel II proposal to mitigate capital reductions. Second, in conjunction with Basel II, we
are developing a more risk sensitive capital framework for non-Basel II banks. The
Basel I-A proposal has also been published for comment. I hope you will take the time
evaluate both the Basel II and the Basel I-A proposals and add your thoughts to the
debate. The comment period for both proposals is open until March 26.
Affordable Small Dollar Lending
Another initiative I want to tell you about – and ask for your help on – is making the
mainstream financial system available to more consumers and promoting economic
inclusion. In 2006, the FDIC took two very important steps in this area – focusing
attention on the need for affordable small-dollar loan products and creating the Advisory
Committee on Economic Inclusion.
In early December, the FDIC hosted a conference to highlight a serious gap in
consumer lending – the shortage of responsibly priced small-dollar loans. The
conference focused specifically on meeting the needs of military personnel and their
families, who are frequently turning to high-cost providers for short-term loans and other
financial services. Our conference was especially timely, given the recent passage of
the Talent/Nelson amendment restricting interest rates on loans to military personnel
been different is that without the reform law, institutions would not have received credits
for their past contributions to offset these rates.
Congress intended the fund to grow in good economic times so that it could withstand
periods of financial stress without the need to raise premium rates sharply. Keeping the
fund strong now, when industry conditions are favorable, will help ensure that
assessment rates remain stable and moderate over the longer term.
Capital Reform
It would have been a very busy year if deposit insurance reform implementation was the
only thing we worked on, but as you know, it was not. The FDIC continued to be active
in the implementation of Basel II, with the Board voting in early September to publish
the proposed rule for public comment.
I encourage you, as community bankers, not to dismiss Basel II as simply a large bank
issue. Basel II banks would most likely face lower risk-based capital requirements in all
the major asset categories in which community banks are most active. We are
concerned about the effect this could have on community banks. The U.S. financial
system benefits from a balance between large complex banks, regionally focused banks
and community banks. Community banks are integral to their local economies and to
the customers they serve – individuals and businesses alike. Our capital framework
should not place community banks at a competitive disadvantage.
We address these issues first by including a number of essential safeguards in the
Basel II proposal to mitigate capital reductions. Second, in conjunction with Basel II, we
are developing a more risk sensitive capital framework for non-Basel II banks. The
Basel I-A proposal has also been published for comment. I hope you will take the time
evaluate both the Basel II and the Basel I-A proposals and add your thoughts to the
debate. The comment period for both proposals is open until March 26.
Affordable Small Dollar Lending
Another initiative I want to tell you about – and ask for your help on – is making the
mainstream financial system available to more consumers and promoting economic
inclusion. In 2006, the FDIC took two very important steps in this area – focusing
attention on the need for affordable small-dollar loan products and creating the Advisory
Committee on Economic Inclusion.
In early December, the FDIC hosted a conference to highlight a serious gap in
consumer lending – the shortage of responsibly priced small-dollar loans. The
conference focused specifically on meeting the needs of military personnel and their
families, who are frequently turning to high-cost providers for short-term loans and other
financial services. Our conference was especially timely, given the recent passage of
the Talent/Nelson amendment restricting interest rates on loans to military personnel