Federal Deposit Insurance Corporation
Robert Morris Associates
December 12, 1995
President Franklin Roosevelt once began an address to the
Daughters of the American Revolution not too many blocks from
here with the words: "My fellow immigrants."
In the same spirit, I would like to begin today by addressing you
as "my fellow credit underwriting analysts." We have a lot in
common. That is no accident. As a banking regulator -- and a
deposit insurer -- we at the FDIC care about credit underwriting,
The FDIC has been lauded as the most successful program of the
New Deal. It stabilized a financial system under extreme stress.
More recently, it received credit for preventing the banking
crisis of the late 1980s and early 1990s from ending in
catastrophe. Throughout that crisis, it did what Congress
intended the FDIC to do: It maintained confidence in the
financial system. It insured the public's confidence
in banks -- no one lost a single penny of an FDIC-insured deposit
-- and this protection cost the taxpayer nothing whatsoever.
The FDIC assured an orderly process to liquidate failed bank
assets, which prevented panic and maintained the stability of the
The agency has not changed much since Congress created it. It
faces the new millennium doing much of what it did during the New
Deal: examining banks, liquidating the assets of failed banks,
and providing insurance coverage for bank depositors.
From several perspectives, that is a good thing. For example,
over three generations, deposit insurance has brought peace of
mind to tens of millions of depositors, who no longer had reason
to fear the failure of their banks.
More important, by insulating banks from runs and panics, deposit
insurance stabilized the U.S. financial system and helped
facilitate the Federal Reserve's efforts to manage the money
supply. Because of our success, we have become a model to other
nations interested in establishing deposit insurance operations
and particularly so in recent years, a reflection both of the
turn to free markets around the world and of the heightened
awareness that free financial markets are, by definition, built
on assuming risk.
Moreover, as events not too many years ago again reminded us, the
safety and soundness of banks influences the economy. That
influence is substantial, direct, and often immediate.
Therefore, our efforts to strengthen the safety and soundness
of banks are aimed not just at protecting the deposit insurance
funds -- as important as that is -- they also look to stabilizing
and strengthening the economy as a whole.
If the FDIC did not exist, it would be only logical to create it.
Ideas are not like diamonds however -- they are good for a
limited time, not forever.
To stay current and relevant, every organization requires a
periodic reexamination to determine where it needs to adapt to
changing circumstances. Otherwise, organizations become trapped
in the past. Robert Sobel, the business historian, has
pointed out that the British government created a position in
1803 calling for a man to stand on the Cliffs of Dover with a
telescope and to ring a bell if he saw Napoleon coming. The
British government abolished that position 142 years later.
To adapt to a changing financial industry and economy, we at the
FDIC are examining everything we do and viewing the familiar as
if we have never seen it before.
Before I became FDIC Chairman just over a year ago, I looked at
the organization as if it were new -- as if I had never seen it
before -- even though I had been involved in financial issues
including as a bank regulator for more than 15 years. I asked
myself: Would it be better -- for the public, for the financial
system, and for the economy -- if we put our efforts into helping
banks stay open to serve their customers and communities rather
than into liquidating them after they failed? And would it be
better if we took greater advantage of technological and
managerial developments to do our job more effectively? The
answers were clear: yes and yes.
As part of our implementation of the first strategic plan in the
history of the agency, we recognized the need to address new and
growing demands on the FDIC.
We concluded that we needed to expand our perspective by
identifying, monitoring and assessing the macro-risks to the
banking system -- in addition to addressing institution specific
risk as we have traditionally done. We decided that we needed to
use technology and information available from inside and outside
the FDIC more effectively. In addition, we needed to reposition
the FDIC to leverage our considerable expertise in new ways.
To implement the strategic plan, we developed an operating plan
with 151 specific initiatives, some devoted to enhancing our
ability to focus on risks in advance. One of those projects
seeks to determine how we can learn from the experience of the
late 1980s and early 1990s to enhance our understanding of the
causes of bank failures.
In addition, we created a Division of Insurance to monitor risks
and recommend responses to problems so that banks can alter their
behavior before there are failures and losses to the insurance
The new Division of Insurance will ultimately have a small,
highly-trained staff -- probably fewer than 100 in Washington and
our regional offices -- who will analyze economic, financial and
banking developments in order to focus on the macro-problems of
the banking system that have implications beyond individual
To that end, the Division of Insurance will complement other FDIC
efforts -- in supervision, research and elsewhere -- to identify,
monitor and address risks to financial institutions and the
insurance funds. It will look at the big picture by
analyzing data generated by the FDIC, by other government
agencies and by the private sector.
We are not attempting to eliminate all bank failures -- we cannot
-- risk is a part of conducting a business. Zero failures would
suggest too much regulation. Instead, we are trying to avoid the
bank failures that foretell larger losses to the insurance
funds by providing earlier warnings of impending problems. This
approach should give financial institutions the opportunity to
take effective evasive action when we see problems coming and
before significant losses occur. Had our Division of
Insurance been in operation 15 years ago, could we have foreseen
the real estate buildup of the 1980s or warned of how changes in
the federal tax law would help bring the commercial real estate
market down? No one can say for sure, but having the
institutional resources would have made those assessments
In short, what we are trying to do is to make the future more
predictable in order to promote stability and to give bankers
additional analytical tools to use in making decisions. We
expect to be the agency that provides a clear and useful reading
to the public on the industry -- where the problems are, where
the industry is, and where it is going.
We certainly do not begin at zero in our effort -- let me give
you an example of why not.
As you know, every quarter we report on the state of the banking
industry -- as an industry -- in the Quarterly Banking Profile --
which some people have called the report card on banking. We
have done so for 35 consecutive quarters and will issue
our 36th QBP tomorrow. In terms of comprehensive scope and
timeliness, no other publication comes close to portraying the
dynamics of the industry. The QBP divides the industry by size
and geography and reports on 16 analytical ratios and a
host of diagnostic and descriptive measures. You -- and anyone
else -- can get it off our home page on the Internet. The number
of users accessing our commercial web page after the last QBP --
more than 700 -- equaled one-fifth of our mailing list -- a
number sure to grow.
What will we say when we release the third-quarter 1995 QBP
tomorrow? I will give you a preview.
News stories in recent months have noted reports of rising
delinquencies and losses in home mortgage loans and other loans
to consumers. Third-quarter data show some evidence of rising
short-term delinquency rates on bank home mortgage portfolios in
the third quarter, but show little sign of more serious problems.
With the exception of consumer credit, the third quarter Call
Report figures do not substantiate significant increases in
delinquencies or losses at commercial banks.
This may mean that bank loans are stronger than loans made by
nonbanks. However, our economists tell me that it is difficult
to compare banks with other institutions using the available
information. Some of the data is based on samples and some are
based on the number of loans delinquent as compared with the
amount of delinquent loans. Higher delinquency levels may be
explained by these different measurements. Or, it is possible
that banks, which have employed more stringent lending standards
in recent years, now have less in common with nonbank consumer
and mortgage lenders. It is too early to tell.
Recent improvements in commercial bank profitability have
depended increasingly on income from consumer lending, as net
interest margins have come under pressure and gains from reduced
loss provisions have dried up. Credit-cart loans, for example,
account for only 7.8 percent of commercial bank loans, but have
produced 12.1 percent of all loan interest income this year.
They also generate a disproportionate share of noninterest
income. The slight deterioration in the consumer portion of bank
loan portfolios that began in the second half of last year
may not yet be cause for any great concern. Credit card loans
are loans where the credit risk is diverse -- where defaults by a
few borrowers cannot have a significant adverse impact on
lenders. Further, the very high yields on these loans permit
much higher charge-off rates before profitability is threatened.
On the other hand, data obtained from the American Bankruptcy
Institute show a rising trend in individual bankruptcies so far
this year, when economic conditions -- such as unemployment and
interest rates -- have been relatively benign. That rising
trend in individual bankruptcies foretells either greater
deterioration in the future or an increased willingness of
consumers to take personal bankruptcy -- or both.
Further, we must also keep in mind the very rapid growth in the
amount of consumer credit that banks have made available in
recent years. If -- in addition to consumer loans on the books --
we consider credit card loans that have been securitized and
sold, as well as unused credit-card commitments, banks now have
more than $1.6 trillion in actual and potential lending exposure
to consumers, more than double the level just four years ago.
We are watching this trend closely for several reasons. One is
the fact that, over this year, loans to individuals -- that is to
say, credit card and other installment loans -- have been the
only category of loans to experience a significant rise in
delinquencies. By delinquent loans, I mean loans that are 30-89
days past due. As the QBP we will announce tomorrow will report,
the delinquency rate on these loans in the third quarter passed
the 2 percent level for the first time since 1992.
Historically, it is a small uptick, but an uptick nevertheless.
The QBP is a highly visible example of the exemplary work the
I have been told that the saying, "it's good enough for
government work," harkens back to the early industrial era. At
that time, government was an innovator and a research resource.
It was also -- as it is today -- a customer of private
Government's purchasing standards then were as high or higher
than those of business. When contractors produced products that
met the government's standards, they would say that the products
were "good enough for government work."
The story suggests an important point. Nothing but the best is
good enough for government work. As the quality of the Quarterly
Banking Profile illustrates, the men and women of the FDIC are
dedicated to delivering the best. That is our tradition and one
we will carry forward. We will build upon our successes and
enhance our risk assessment skills so we can continue doing our
job well in the face of a rapidly changing financial system.