Federal Deposit Insurance Corporation
before the Annual Convention
Independent Bankers Association of America
Las Vegas, Nevada March 6, 1996
Today is the sixty-third anniversary of the bleakest day for
banking in American history. Sixty-three years ago today -- March 6,
1933 -- all banking activities in the United States were suspended by
In closing the nation's banks, the White House merely confirmed
reality. By failure or by state action, almost every bank in the country
had already been closed -- it was Nevada, in fact, that in late 1932
began a wave of statewide banking moratoria that culminated in the
federal banking holiday. From January 1, 1930, to January 1, 1933,
more than 5,000 banks suspended operations -- most of them small,
state-chartered, and independent. Banking had hit bottom.
Congress specifically and intentionally threw small, independent
banks a life-line -- saving the independent bank and, with it, the dual
banking system. Its means of rescue was the Federal Deposit Insurance
You do not have to take my word for that -- you have the words
of Congressman Henry Steagall of Alabama, Chairman of the House
Banking and Currency Committee, the father of the FDIC, who in May,
1933, on the floor of the U.S. House of Representatives, argued for
passage of legislation to create deposit insurance.
He said: "This bill will preserve independent, dual banking in the
United States to supply community credit, community service, and for
the upbuilding of community life. That is what this bill is intended to
Of course, it did more. It met the public's need for a basic
measure of economic security -- savings would be safe. It restored
public confidence in the financial system, and in doing so averted likely
financial catastrophe and social upheaval. In 1934 -- the year after the
FDIC was created -- nine insured banks failed.
More recently, bank deposit insurance allowed the American
economy to absorb the failure of almost 1,500 banks since 1982 with no
runs, no panics, and no banking holiday.
Unique among the banking agencies, the FDIC was created by
popular demand. It enjoys widespread popular support -- in the minds
of many bank customers, what separates you from your competitors is
the FDIC seal on your window and your door. In that regard, Federal
deposit insurance puts every bank in the country on the same
competitive footing -- from the largest in New York and California to
the banks of Clarinda, Iowa, population 5,000, the hometown of Dennis
Geer, the FDIC's chief operating officer -- and the banks of Hershey,
Pennsylvania, population 12,000, the hometown of William Longbrake,
the FDIC's chief financial officer -- and the banks of Ada, Oklahoma,
population 16,000, the hometown of Leslie Woolley, the FDIC's
director of policy.
Our people remember where they came from -- and remember
where the FDIC came from, too -- Congressman Henry Steagall's desire
to preserve the independent banks of this country.
The commercial banks we regulate -- 6,044 of them -- on
average have $154 million in assets and half of them have 25 or fewer
employees. These state-chartered, nonmember banks remind us -- every
day -- of the importance of community banking in America -- or rather,
the importance of community banking to America.
The banking crisis of the late 1980s and early 1990s reminded
all of us that our banking system rests on the public confidence that
federal deposit insurance provides. In one way or another, everything
we are doing at the FDIC is aimed at assuring the viability of the
deposit insurance system.
First and foremost, we are working to make sure that we have
the funds to make the system solid. Thanks to you and your colleagues,
the Bank Insurance Fund is in the strongest position since 1971, the last
time bank deposit insurance covered 1.25 percent of insured deposits. Your recapitalization of the BIF reflects both idealism and realism --
idealism because of your contribution to the common good -- and
realism because you realized that as long as the fund remained
undercapitalized, a shadow of uncertainty fell over banking.
I have always been straight-forward and direct with you -- after
all, banking itself is built on trust and you deserve nothing less than
honesty in return -- so I will come directly to the point. When in 1989
Congress gave the FDIC the responsibility for the Savings Association
Insurance Fund, it joined the future of the BIF and the SAIF together.
They became sister funds -- and what affects one fund affects the other.
That is what "insured by the FDIC" is all about.
As long as the SAIF is weak -- absolutely and in relation to the
BIF -- the shadow of uncertainty remains over banking. Regardless of
whether anyone intended it to be so -- and no one did -- the SAIF is a
flaw in the deposit insurance system. Whether the effects are obvious
or not, its weakness undermines the FDIC seal you have on your door.
I have to worry about that, not only because the SAIF's
weakness affects its members, but also because its weakness affects you
and the 63-year-old reputation of the FDIC for operating a sound
deposit insurance fund. We have spent more than a year designing and
constructing a solution to the SAIF problem.
Parts of that solution are the least bad choices we could make
among worse alternatives. We had to work with the alternatives given
us -- and could not work with alternatives denied us, such as the $14
billion in unused funds left when the Resolution Trust Corporation
closed, which I favored using and the IBAA favored using. The
solution is the best of the possible worlds. Once it is done, the shadow
of uncertainty over the insurance fund will fade.
As part of the solution, banks have been asked to pay
two-and-a-half cents, the lowest premium in the FDIC's history prior to
the new premium structure that took effect on January 1, under which
many of you pay an effective on-going premium of zero. In return for
the banks participation in the solution, they would avoid the dilution of
the BIF as SAIF members accelerate a shift in deposits from SAIF to
BIF in response to the current significant premium differential, a shift
that increases the structural unsoundness of the SAIF.
To be blunt, every time a thrift deposit shifts to the BIF, it goes
without any reserves. Bankers must pay for the reserves the thrift
deposits do not carry.
In the end, given the available alternatives, we put together a
solution for the SAIF that works, both in the short term and the long
term, a solution based on the merger of the two FDIC funds and the
development of a common charter for insured institutions. Everyone
will win from this approach. And, significantly for the FDIC, the
stability of the deposit insurance system will be assured.
We are addressing the viability of the deposit insurance system
in a number of other ways as well. Two big examples are: one,
reforming regulation and supervision to enhance safety and soundness
while reducing burden and cutting costs, and, two, managing the FDIC
as if it were a business, in part by bringing cost/benefit analyses into
everything we do.
We are quite aware that everything we do is a cost for you. Of
course, reducing the premiums that banks pay for insurance lightened
the costs and the burden for banks.
In contrast, the regulatory burden on the banking industry grew
incrementally over time -- rule by rule, requirement by requirement,
report by report.
The cumulative effect of this incremental growth makes it
difficult for banks to perform their job -- the job of supporting a strong
and competitive economy.
Further, the costs of complying with regulations hit smaller
banks harder than larger banks. In fact, an informal survey we
conducted last year found that the cost of regulatory compliance for the
very small institutions we questioned equaled more than 16 percent of
their net income -- while the cost of compliance equaled just over one
percent of net income at the largest banks we surveyed.
As I noted earlier, one half of the banks that the FDIC
supervises have 25 or fewer full-time employees. One-quarter have the
equivalent of 13 or fewer. Because of these limited staff resources, the
complexity and sheer volume of regulatory and legislative requirements
necessarily weighs more heavily on smaller institutions than on larger
The time has come to scrape off the barnacles that have attached
to banking regulation over time.
As I have said many times, I enthusiastically support much of
the legislation pending in Congress that would reduce the regulatory
burden on banks. We need to hold regulation to a strict cost/benefit
The Congress and the regulators must identify those laws and
regulations that can be modified, streamlined or eliminated without
adversely affecting the safety and soundness of the banking industry or
necessary protections for consumers of financial services.
As you know, Congress in 1994 told the bank regulators to
review the rules and requirements they have on their books. Early last
year, I initiated a complete review of the FDIC's 120 regulations and
policies to identify those that have become obsolete or those where the
cost to comply substantially outweighs the intended benefits. I am
committed to having a set of regulations and policies devoid of
To seek public participation in this effort -- to give you the
opportunity to participate in the review at the earliest possible time --
we published a notice in the Federal Register that provided a schedule
for completing the reviews of each regulation and policy -- and we sent
that notice to the CEOs of FDIC-supervised banks.
The FDIC's review project is a large and complex undertaking,
but we are making significant progress. We already have proposals
under review for 116 of the 120 regulations and policies. The other
four are expected shortly. I have asked our new director on the FDIC
Board, Joe Neely, to shepherd the review effort to completion so that
it receives constant attention and direction at the Board level. Joe began
his 15-year career as a banker in Grenada, Mississippi, population
11,000, and he earned a reputation as a strong state Commissioner of
Banking in Mississippi before coming to the FDIC.
By September 23, when we report to Congress on our progress,
Joe expects to be able to say what specific steps we have taken -- or
will take -- for each and every one of the 120 regulations and policies
As important as this effort is, however, regulatory relief means
more than cleaning out what is no longer needed. It also means
improving what is left. We are doing that, too, and we are doing it by
using common sense.
Common sense is shaping the approach we are taking to risk
assessment -- reducing the regulatory burden and making our risk
assessment process more effective, while promoting safety and
I want to stress one important point here. The changes I am
talking about today do not replace our traditional approach -- they
We are leading with our strength. The FDIC has a remarkable
resource -- a treasury of historical and current data on the banking
industry. We also have a wealth of economic and analytical expertise.
As you know, the FDIC -- and our sister agencies, the Comptroller of
the Currency and the Federal Reserve -- generate this data on the
banking and thrift industries as a by-product of regulatory and monetary
Historically, however, we have all found it difficult to bridge the
gap that separates the macro -- or big picture -- perspective of
economics from the micro perspective of bank examinations to translate
data into directions that examiners can use in institutions with differing
levels and types of risk exposures. We are bridging that gap -- to
enhance our examination process and the useful information we provide
to you -- in a number of ways.
In terms of regulatory burden, leveraging our statistical and
analytical resources will help examiners focus their efforts so that they
can increase the effectiveness of examinations and stay on site only as
long as necessary to address the risks that individual institutions present.
It will also provide a basis for notices to banks on economic and other
macro trends that may affect the way that you do business so you will
have an opportunity to respond to changing circumstances before
As a first step in bridging the gap, I created a Division of
Insurance at the FDIC that will collect, analyze, and disseminate
information -- both internally and externally -- on current and emerging
risks. The new division will work closely with our examiners,
economists, financial analysts and other FDIC staff -- as well as with
the same types of analysts at the other regulatory agencies and in the
private sector -- to monitor, assess and address risks in the banking
system. It will send economic and analytical information to banks to
help management address trends or weaknesses before they become
We are engaged in a loan underwriting survey of our examiners
to develop information on the level of -- and trends in -- credit risk.
This survey will result in a forward assessment of current credit
underwriting standards. We are pulling together systematically the data
we have on bank failures in the 1980s and 1990s and are developing a
new, improved model on bank failure rates that takes economic factors
We are field testing an automated examination package that will
allow us to do a significant amount of analysis off-site. This package
will produce at least four benefits. One, bankers will have us on-site
for a shorter time. Two, examiners will spend less time traveling away
from home and more time comparing notes with colleagues in field
offices. Three and four, by leveraging technology, this approach will
improve the quality of supervision and hold down the FDIC's costs of
That is where we are today.
Where we are headed is toward a diagnostic approach to bank
examinations -- a combination of observation with factual findings from
our analytical and technological innovations that together will be similar
to what evolved in medicine over decades.
The result will be a more effective and accurate assessment of an
institution's ability to identify, measure, monitor and control its risks, as
well as a structured framework for discussing specific strengths,
weaknesses, and possible improvements with management and boards of
To that end, we are developing "decision charts" for our
examiners to use that will provide more structure and consistency to the
risk assessment process. The decision charts -- for credit risk, interest
rate risk, operational risk, and so on -- outline a diagnostic process.
This involves a graduated approach to examinations based upon the
level of risk at the institution -- on a risk by risk basis. If no symptom
is found in one risk area, the examiner would shift attention to the next
area. The charts are a tool that will lead to more analytical and more
fact-based thinking. In short, using this approach, the scope and focus
of our bank examinations will become more a flow of risk evaluations
-- some based on economic data and all based on the individual facts of
each financial institution -- and less a checklist of procedures to be
Just as practitioners in medicine specialize, we are creating "risk
specialists" on emerging risk areas. We will enhance our supervisory
expertise by making these specialists available where new risk areas
emerge in the course of an examination or in analyzing aggregate
examination information. We will start by creating risk specialists in
the areas of interest rate risk management and capital market accounting
-- events in those areas are moving so quickly, it is a full time job for
someone to keep up with them.
We are also creating "case managers" in our supervisory regions
who will specialize in specific institutions. They will review all off-site
data and regulatory findings concerning these institutions to assess the
risk they pose to the insurance fund. They will also provide one contact
with FDIC for a bank's management.
Just as medical literature, the X-ray machine, and the CAT-scan
did not replace the physician, but allowed the physician to do his or her
job better and faster, the innovations I have talked about today will
allow us to do our job better and faster.
In talking about examinations, I want to point out that -- for a
number of years -- proposals that the FDIC explicitly charge for its
examinations have been made. We charge now -- the costs of our
examinations have always been included in the insurance assessment. I
have opposed -- and will continue to oppose -- the idea that we
explicitly charge banks for our examinations.
In all of the efforts I have discussed, we -- and you -- have
benefitted from the continuing dialogue the FDIC is now having with
the industry. Experience in the last year has shown that dialogue
between banks and the FDIC enhances -- not impedes -- supervision and
regulation by assuring that everything we do comports with the facts
and the real world.
Assuring the viability of the deposit insurance system is of
critical importance -- and we will do the best job we can in assuring it.
I may be biased, but I believe that federal deposit insurance is an asset
for every banker in this room -- every banker in the industry -- every
bank depositor in the country.
Sixty-three years ago today -- on March 6, 1933 -- banking hit
bottom -- public confidence in banking had melted as wax melts in a
fire -- but banking began to rebound. Years of drift ended. The search
for practical answers to the banking crisis began with a desire to
preserve the existing banking system. The FDIC was one of the
answers -- and some have said the most important one.
For three generations of Americans, federal deposit insurance --
with the full faith and credit backing of the U.S. government -- has
provided a reason for unconditional faith in the banking system. It is a
certainty in an uncertain world. Proposals to privatize deposit insurance
are not likely to provide that certainty. The FDIC will continue to
make sure that faith in the banking system is justified.