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Home > About FDIC > Advisory Committee on Banking Policy |
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Advisory Committee on Banking Policy |
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As a follow up to my January 7, 2003 memorandum to theAdvisory Committee titled Selling the BIF and SAIF's AFS securities and Broadening Investment Authority for the BIF and SAIF, I wanted to apprise you of recent Treasury market conditions impacting the BIF and SAIF investment portfolios. I also wanted to let you know of recent efforts by the FDIC to reach out to other capital market participants to get input on broadening the FDIC's investment authority. As many of you are aware, the current environment for longer-term Treasury security investments continues to look unattractive. Our belief is that Treasury yields will eventually rise once there is a reduction in the level of geopolitical uncertainty and sustainable economic growth has resumed. This belief is shared by the market (attached are recent graphs of the U.S. Treasury market forward yield curves demonstrating current market expectations). Hence, over the near term and until such conditions evolve, we expect to remain cautious in committing significant sums to the longer-term Treasury market. In light of recent market conditions, it appears that holding (and not selling) the AFS portfolio has worked to the advantage of the BIF and the SAIF. Had we sold the BIF and SAIF AFS portfolios at year-end 2002 and re-deployed the proceeds solely in overnight investments, we would have foregone approximately $250 million in net comprehensive income (BIF and SAIF combined) through the end of March 2003 (approximately $136 million of the $250 million is due to additional unrealized market gains on AFS securities while the remainder is largely due to enhanced interest revenue from continuing to hold higher yielding securities). Of course this analysis is largely academic since the Treasury Secretary must approve any major restructuring of the FDIC's investment portfolio, and it remains our view that the Secretary would be reluctant to do so absent a compelling funding requirement. The Treasury Department's policy is that federal investors should not restructure their portfolios in order to take advantage of actual or projected market conditions. Unfortunately, as higher-yielding, longer-term investments continue to mature in the deposit insurance fund investment portfolios, the FDIC's coverage ratio (that is, the ratio of the combined BIF and SAIF interest revenues to estimated total FDIC expenses) continues to decline. Should Treasury security yields remain at these historically low levels for several more years, our historically comfortable coverage ratio will drop significantly. The coverage ratio will also decline if the deposit insurance fund investment portfolios are reduced because of the need to fund bank and thrift failures. Attached is a graph showing the BIF and SAIF coverage ratio over the last several years and projecting it forward to 2007 assuming a 1.25 percent federal funds rate and a static yield curve in place through year-end 2007. While we realize these are extraordinarily conservative assumptions, the impact of the overall decline on the FDIC's coverage ratio is a matter we monitor. Fortunately, the Corporation's recent efforts to downsize and streamline its operations are already benefiting the bottom line, better enabling the FDIC to maintain its coverage ratio without undue reliance on non-interest revenue. With respect to broadening the FDIC's existing investment authority, staff continues to dialogue with various market participants. In early March 2003, FDIC staff met with representatives of the Federal Reserve Bank of New York's (FRB-NY) Federal Open Market Desk Operations. The Open Market Desk Operations' staff has extensive experience trading publicly held Treasury securities in the secondary market. Among the topics discussed, we explored with the bank's staff their views regarding the likelihood of maintaining confidentiality of the FDIC's investment security trading patterns in advance of a major bank failure if the FDIC insurance fund portfolios were invested in public market securities. FRB-NY staff concurred with FDIC staff's conclusion delineated in my January 7, 2003 memorandum that sales in anticipation of funding a large bank resolution may be difficult to mask, depending of course on the timing and amount of such sales.
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| Last Updated 03/21/2003 | communications@fdic.gov |
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April 4, 2003