Large banking companies represent a significant, but not an insurmountable, challenge for both bank managers and bank supervisors. These companies operate in multiple geographies and engage in a variety of businesses ranging from retail branching and credit card lending to securities underwriting and derivatives trading. However, it is not beyond the capacity of both bank management and bank supervisors to understand these large operations and diverse business lines or to evaluate and, more importantly, to address where necessary the inherent risks posed by such activities.

Large bank supervision requires greater familiarity with the institution's own internal risk measurement and management processes. Examination activities are therefore targeted toward a validation of the adequacy and accuracy of these internal management systems. Such work requires an increasing knowledge base and skill set among supervisors which is being accomplished by greater specialization (subject matter experts) and the augmentation of examination staff through the hiring of economists and other experienced financial industry professionals.

Since bankers, regulators and legislators first began discussing "too big to fail" twenty years ago, bank regulation has evolved to ensure that banks retain adequate capital to absorb unexpected loss commensurate to the risk profile of the institution. Supervisors have the authority to over-ride minimum capital requirements and require increased capital beyond these formulaic capital regulations. Further, the FDIC is taking great strides to ensure that Basel II moves the industry toward a more risk-based capital regulation without degradation of the capital protection levels currently provided within the industry.

Improvements in regulatory authority and employee skills and growth of the insurance funds to record levels do not mean that we have solved the problem of "too big to fail." The failure of a large bank, particularly one of the largest and most complex banks, represents a risk not only to the insurance funds but also to the banking system itself, because of the sheer size of the potential loss. A failure of one of the largest banks would almost certainly cause the fund balance to fall below 1.25 percent, thus causing all fund members to again pay deposit insurance premiums. However, in the event of a "systemic failure," the FDIC has the authority to assess the industry, based on assets, to replenish the funds and to borrow up to $30 billion from the Treasury.

On December 31, 2003, the combined balances of the BIF and SAIF were about $46 billion. The historic loss rate on large failed banks (those with assets greater than $5 billion) has been approximately 7.4 percent of assets at the time of failure. Using this rate, it would take the failure of an institution with $622 billion in assets to exhaust the combined fund. As of December 31, 2003, there were three banking companies with insured institution assets that exceeded the $622 billion threshold, one with assets of $739 billion, one with assets of $669 billion, and one with assets of $666 billion.

Contact:    C.K. Lee    202/898-3673