Federal Deposit Insurance Corporation
Institute of International Bankers
March 3, 1997
Money knows no boundaries, and therefore bank
supervisors around the world face common problems and common
issues, which in turn call on us to take common approaches to
international supervision over a range of institutions and national
regulatory issues. With the elimination of distance brought about
by telecommunications and computer technology, the safety and
soundness of our financial institutions rests on cooperation and
coordination among international supervisors. Certainly the failure
-- two years ago last week -- of Baring Brothers and Company,
then the oldest merchant bank in London, brought down -- half the
world away -- by a 27-year-old securities trader with a computer,
reminded all of us how technology has made globalization a fact.
This globalization makes it in all our best interests for national
authorities to cooperate and coordinate banking supervision around
Our common interests and common issues also imply that
we can learn from each other -- the experience of one holds
meaning for all.
Bank supervisors everywhere face the same difficult
question: How are we to recognize problems early so that we can
address them before they irreparably damage institutions, strain the
safety nets that we have created for banking systems, and threaten
the stability of those systems and of the economies they serve? In
addressing that question, we must steer a balanced course between
the theoretical extreme where there are no problems and the
extreme where everything is a problem. In other words, we must
steer the course that is justified by contemporary facts. This
balanced course recognizes that when things are going badly, the
pendulum has a way of swinging back -- and when things are
going well, the pendulum may swing the other way.
This balanced course is charted through critical analysis
and sound judgment -- it requires us regulators to be skeptical of
conventional wisdom and never to be wholly optimistic or
pessimistic. To steer a balanced course, we must develop our
expertise and expand our knowledge by benchmarking where
banking is now -- and where it has been previously -- to give us a
better perspective of where it could be going in the future and
where we should focus our attention.
I am here today to talk about some of the efforts that we at
the Federal Deposit Insurance Corporation are making to learn
from the lessons of the past so that we can find answers to the
question of how to recognize problems early. Our experience over
the past 20 years has made the search for the answers all the more
pressing. We hope that others can learn from that experience.
When I became Chairman of the FDIC in late 1994, I
initiated a study of the lessons of the 1980s and early 1990s, when
the United States experienced a prolonged banking and thrift
institution crisis. This project is now nearing completion. During
1997, we plan to publish 14 papers detailing our findings. Last
month, the first papers from the project were presented at a
symposium we sponsored.
From the beginning of this project, it seemed obvious that
the past holds lessons for the future. This is true not so much
because history might repeat itself -- which I consider unlikely --
but rather in the sense of whether we can learn broader lessons that
may help us mitigate future problems.
From the beginning of 1980 through 1994, 1,617 banks
insured by the FDIC were closed or received our financial
assistance. That number -- 1,617 -- constituted nine percent of all
the banks in this country. Their assets totaled more than $316
billion. To put that total in perspective, it is more than seven
percent of the assets of FDIC-insured commercial banks today. In
looking back at these failures, one pattern was extremely clear --
credit problems of U.S. banks in the 1980s and early 1990s were
generally preceded by waves of rapid growth and speculation in
lending -- lending to the agricultural, energy, and commercial real
estate sectors, as well as lending to sovereign borrowers. Banks
that were aggressive lenders in a boom period with little regard for
credit quality suffered when a bust followed.
Fueled by export growth and rising commodity prices, U.S.
agriculture in the 1970s enjoyed a boom. Banks began to make
loans to agricultural producers that were secured by the inflated
values of farm land. When the boom ended in the early 1980s as
farm prices turned down, land values declined and cash flow was
insufficient to repay the debt. Agricultural lenders experienced
large loan losses -- and agricultural banks accounted for more than
a third of bank failures from 1984 through 1987.
Substitute the words "oil boom" for "agricultural boom"
and you have a similar story. Strong worldwide demand for oil
and restrictions on supply created by the Organization of
Petroleum Exporting Countries brought on a sharp rise in oil prices
and rapid economic expansion in the Southwestern United States.
The weakening of oil prices after 1981 and the sharp
collapse in 1985 -- brought on chiefly by recession in oil-consuming nations
and the collapse of the international oil cartel --
resulted in the first of two sharp economic downturns in the
Southwest during the 1980s.
The real estate "boom" came during this period, too.
Commercial bank real estate loans more than tripled over the
decade of the 1980s, while commercial loans nearly quadrupled.
These increases were accompanied by a pervasive relaxation in
underwriting standards for construction and commercial real estate.
Borrowers frequently had no equity at stake and all of the risks
were borne by lenders.
As many of the people in this room remember only too
well, in August 1982, Mexico announced that it would be unable to
meet its principal payments to foreign creditors. Thereafter, Brazil,
Argentina, and many other borrowing countries followed suit.
This came after the banks were actively encouraged by some
policymakers in the 1970s to recycle petrodollars. The banks
unfortunately concluded that the fastest way to lend dollars was
through balance of payments financing without any clear source of
repayment -- and with too much faith in optimistic expectations
about the economic and financial prospects of many developing
countries. By 1982, the non-trade exposure of the average U.S.
money-center bank to non-OPEC developing countries was 227
percent of equity capital and reserves. The problem went well
beyond the borders of this country to the major banks of other
One feature that all of the borrowers in these various credit
crises shared was the widespread belief in the unlimited potential
of their economic interests, and lenders came to share that
perspective. Sometimes government officials and so-called experts
did, too. In the 1970s, two U.S. Secretaries of Agriculture told
American farmers that demand would absorb whatever they could
supply. Some analysts predicted in the 1980s that the price of
petroleum would rise as high as $100 a barrel. One prominent
banker said countries might run into liquidity problems but would
never default. As late as 1990 and 1991, some economists were
discounting the prospect of a real-estate bust in California.
All of this, of course, is an old story. Why am I telling it?
Because memories can be short and because we can draw several
enduring lessons from our experience.
One is that inflated expectations provided a false sense of
A second is that in each case we thought the crisis of the
moment was unique and there was a tendency not to draw from
each experience the broader implications. We did not notice until
it was too late the warning signs of inflated expectations, rapid
growth, speculative activity, weak capital, and credit
concentrations. By the time most of us working on these issues
realized that the individual crises were linked by common forces
that were pushing financial institutions to exploit new areas of
lending beyond sustainable levels, the problems had become
A third lesson was that banking authorities needed a means
to take greater account of economic data in bank examinations and
supervision, and to monitor trends in the industry and the economy
for warning signs.
Neither we nor the industry we supervise can afford to be
as wrong as we were in the 1980s again. To avoid being that
wrong again, we need a means to monitor trends more broadly and
to take specific action on the information we receive.
To that end, at the FDIC we have begun to include current
economic and financial data more broadly in the examination and
supervision process. More than a year ago, I created the Division
of Insurance to analyze these and other data so that we can stay on
top of emerging trends and alert the banking industry to new and
existing risks more effectively. Such notices can be purely
economic -- such as analyses of recessions of the kind that rolled
across the United States in the 1980s and the 1990s.
These notices may also discuss the effects of other types of
events on financial institutions -- such as legislation. Early and
thorough analysis of rapid interest rate deregulation and the sudden
shift in the real estate investment climate brought about by the Tax
Reform Act of 1986 might have alerted lawmakers to the need to
give banks time to react to changing statutory requirements and
Our analysts also provide and use economic and other data
to help examiners assess the risks to which individual banks are
exposed and they analyze international, national and regional
economic trends that can affect individual institutions. These
analyses can help us take a balanced approach to bank supervision
where our actions are justified by current realities.
Our Division of Insurance is producing quarterly reports on
developments in each of the eight supervisory regions of the FDIC,
and we will soon make these reports public.
One example of our efforts to identify particular problem
areas dates from last June when we highlighted problems in
consumer credit card lending at banks. Lines of credit offered by
commercial banks through credit cards, including loans
outstanding and unused commitments, had more than doubled in
the previous four years. Credit card loans held by commercial
banks had increased by 56 percent. As we learned in the 1980s,
rapid loan growth is a red flag. Losses on credit card loans were
also growing rapidly -- to $2.2 billion in the first quarter of 1996 --
up from $1.35 billion in the first quarter of 1995. Net charge-off
rates neared the peak of 4.97 percent experienced in the aftermath
of the 1990-91 recession. In addition, we were the first agency to
make the connection between rising personal bankruptcies and
higher credit card loan charge-offs.
While these credit problems do not signal a return to the
banking crisis of the 1980s, they can be addressed before they
become more significant. We want banks to give attention to small
problems before they become large problems that can cause losses
to the deposit insurance funds. There are signs that banks with
significant credit card lending are taking steps to help mitigate
exposure to an economic downturn.
There have been reports that banks have tightened
underwriting standards on credit cards, and the volume of credit
card mail solicitations apparently has slowed. According to a
company that tracks credit card activity, mail solicitations were
down almost 11 percent in 1996 from 1995, the first decrease in
annual credit card mailings since 1991.
More recently, we have been closely watching trends in
syndicated lending, also a rapidly growing area. In 1993,
syndicated loans totaled $389 billion. In 1996, they totaled $888
billion -- more than doubling in just three years. In light of this
dramatic growth, analysts and market participants have raised
concerns about narrowing interest rate spreads and relaxation of
underwriting terms. For example, for the best non-investment
quality loans, the spread over LIBOR has declined from
approximately 120 basis points in June of 1993 to approximately
70 basis points currently. Are lenders being adequately
compensated for risk or -- as was the case in the 1980s -- do
narrowing spreads suggest a lack of differentiation for different
degrees of risk?
Foreign banks purchased more than half of the total
syndicated loans originated last year, according to the Office of the
Comptroller of the Currency, and smaller commercial banks
outside the money market centers -- the kinds of banks the FDIC
regulates -- purchased 17 percent of them.
There has been some anecdotal evidence that downstream
lenders have become more willing to accept these loans without
receiving full documentation or making independent credit
analyses -- a disturbing sign that memories are short.
The question I want to raise is whether syndicated loans at
narrower spreads and under relaxed terms can be justified if we
should experience a harsher economic climate?
While it appears that syndicated lending has yet to result in
major problems, and while the economy and corporate earnings
remain strong, bankers still cannot afford to be complacent. No
one has repealed the business cycle.
I am not suggesting that we are returning to the 1980s, but
our experiences then should have taught us -- along with the need
to be alert to warning signs such as rapid growth and fewer credit
distinctions -- that we must take into account the potential effect of
an economic downturn in assessing risks.
I urge bankers to look closely at their businesses to
determine whether they are receiving a return adequate for the risks
they are taking, if the economies in which they operate --
especially regional and local economies -- should weaken.
Experience gives us the basis of fact that allows us to take a
balanced approach to bank supervision. More broadly, we can
learn from our differing experiences in other ways as well. The
Basle Committee on Banking Supervision is currently pooling the
expertise and knowledge of its 12 member-countries to develop a
set of universal minimum standards for sound bank supervision --
principles that are fundamental to an effective bank supervisory
system in any country, anywhere in the world. These standards are
being developed in concert with regulators from other developed
and developing countries. The subjects of these standards range
from accounting to risk management to corporate governance.
Because bank supervisors face the same challenges
everywhere, the importance of having common minimum
standards cannot be overstated. Such standards will give us a
foundation on which to develop solutions to common problems in
the globalized economy in which we all function. Common
standards will allow us to provide balanced bank supervision --
across national boundaries -- that would protect the public from
harm, while allowing financial institutions the maximum freedom
to perform their functions. Without sound bank regulation to
undergird their financial systems, some countries -- particularly
newly democratic countries -- will not enjoy the level of foreign
investment that they may need for sustained economic growth.
Ultimately, the purpose of balanced bank supervision is to
create a climate in which everyone -- banks and bank customers
alike -- feels secure. These minimum standards will significantly
contribute to creating a safer global banking marketplace that is
better for the international economy, your institutions, and the
customers you serve.