Andrew C. Hove, Jr.
Federal Deposit Insurance Corporation
Condition of the Banking and Thrift Industries
Subcommittee on Financial Institutions and Regulatory Relief
Committee on Banking, Housing, and Urban Affairs
United States Senate
October 21, 1997
Thank you, Mr. Chairman and members of the Subcommittee. I
appreciate this opportunity to testify on behalf of the Federal
Deposit Insurance Corporation on the condition of the banking
industry and the deposit insurance funds.
I have a detailed written statement for the record. This
morning I want to briefly describe where the industry stands
In short, commercial banks and savings institutions are
experiencing a period of unprecedented prosperity.
Banks have enjoyed record earnings since 1993. In the first
six months of this year, they earned $29.1 billion, which is 14.2
percent higher than for the same period last year.
If this pace is sustained in the second half, earnings will
result in an annualized return on assets (ROA) of 1.25 percent,
surpassing 1 percent for the fifth year in a row. In the sixty
years from the founding of the FDIC in 1933 until 1993, the
industry had never achieved an average ROA of above 1 percent.
As a consequence of these earnings in recent years, the
industry's equity capital as a percentage of total assets is now
at its highest level since 1941 -- 8.44 percent of industry
assets. About 98 percent of the banks meet or exceed the highest
regulatory capital standard. As a result, only a handful of
banks pay premiums for FDIC insurance. In addition, our problem
list is down to 74 banks -- an all-time low -- and more than a
year has passed since the last bank failure.
The good times for the banking industry have contributed
greatly to building strong deposit insurance funds. As of June,
1997, the Bank Insurance Fund totaled $27.4 billion and the
Savings Association Insurance Fund totaled $9.1 billion.
Turning to the future, it appears that this period of
unprecedented profitability is likely to continue, at least in
the near term. The greatest potential threat to the status quo
would be from a resurgence of asset-quality problems, but there
are few signs that such a resurgence is imminent.
The traditional business activities of banks, however, are
coming under greater competitive pressure than ever before.
Competition is narrowing yields from loans made to high quality
borrowers. Meanwhile, an expanding array of options available to
savers is increasing the cost of bank liabilities.
In this highly competitive environment, some banks may take
more risks to increase short-term profits. To sustain profits
over the long term, however, banks must allow for the possibility
of a decline in the economy, and prudently balance risks and
My written statement discusses several such areas of concern
in detail. We point out that there are some areas where banks
are expanding now, in good times, that could pose significant
risks if the economy declines.
For the next few minutes, I would like to focus on one area
where the Chairman has expressed concern: high loan-to-value
(LTV) home-equity lending in general.
Four trends in the home lending area capture attention.
One, market participants have recently sought higher returns
in the riskier sectors of the mortgage lending and home-equity
lending businesses. As a result, the percentage of conventional
mortgages with LTVs greater than 90 percent has grown
Two, home-equity lending is a high-growth business for many
banks. One in four banks increased their home-equity lines by
more than 30 percent during the year ending mid-1997.
Three, debt consolidation apparently has become the most
frequent reason for home-equity borrowing. Nonbanks that
expanded their mortgage lending capacity during 1993 have been
aggressively marketing to an increasing number of borrowers who
desire to consolidate their growing debt burdens, some now
offering loans in excess of collateral value -- so-called 125
percent loan-to-value programs. Moreover, according to the
Consumer Bankers' Association's 1996 Home-Equity Loan Study, debt
consolidation accounted for 35 percent of home-equity lines of
credit and 40 percent of closed-end loans.
Prior to 1992, home improvement was the primary reason for
home-equity borrowing. Unlike funds lent for home improvement,
the proceeds of a debt consolidation loan do not enhance a
lender's collateral value. Also, funds are extended to many who
may be facing difficulties in meeting their existing consumer
Four, rapid growth in home-equity lending has been
accompanied by signs of relaxed underwriting. While the data we
are looking at are based mostly on pools originated by nonbank
subprime lenders, the sharp increase in delinquency rates for
loan pools originated in 1995 and 1996 is worth noting.
In our effort to monitor and control potential problems in
high LTV and home-equity lending, the FDIC has implemented an
ongoing underwriting standards survey, which examiners complete
at the conclusion of each safety and soundness examination. The
survey assesses changes in the bank's underwriting standards and
compares those standards with those of other area banks. While
our survey results show few weaknesses in the banks we directly
supervise, any trends toward loosening underwriting standards
will be closely monitored.
In addition, the FDIC's Regulation on Real Estate Lending
Standards sets forth specific guidance on real estate lending
policies that banks should employ. For example, we define
maximum loan-to-value limits for different types of real estate
loans and specify that loans exceeding such limitations should be
reported to the institution's board of directors at least
In conclusion, Mr. Chairman and members of the Subcommittee,
I am pleased to say today that the condition of the banking
industry is excellent. Record profits, accompanied by strong
capital ratios and an absence of failures, make for a healthy
industry. The FDIC sees no immediate threat to this situation.
However, we will continue to closely monitor trends in the
financial industry -- such as high loan-to-value mortgage lending
-- for potential problems to ensure that institutions are
prepared to respond if problems arise in the future.
Thank you -- I would be happy to answer your questions.