Federal Deposit Insurance Corporation
Conference of State Bank Supervisors
San Diego, CA
May 3, 1997
When I grew up in a small town in Tennessee, nothing
seemed as stable and as enduring as the bank on Main Street, and
my early experience was probably the same as many of yours. In
small towns across the state, banks anchored the town squares. In
brick and stone, each sought to assure the public that its financial
condition was as impressive as its solid architecture. Often, the
vault was visible from the lobby to underscore the security that the
bank offered. One of the cliches of the time was to say that
something "was as solid as the bank on the corner."
Historically, that stability could have been an anomaly.
From the founding of the Republic until the early 1930s, American
banking -- and consequently bank supervision -- was frequently
transformed by dramatic, and sometimes tumultuous, events: The
births and deaths of the First and Second Banks of the United
States, "wildcat" banking, and waves of failures associated with
periodic financial panics, to name just a few.
While we have not returned to the turmoil that
characterized the American banking system before 1933, in the
past twenty years banking has changed beyond recognition from
what it was when many of us were growing up and going to
college. Technology is redefining the business of banking from the
largest institutions in the country to the smallest. Many of the old
limits -- and the old certainties -- are fading or are gone.
I addressed the Conference of State Bank Supervisors in
Washington in December 1994 -- two months after becoming
Chairman of the Federal Deposit Insurance Corporation. It was my
first public speech as Chairman -- and I pledged to enhance the
working relationship among state supervisors, the CSBS, and the
FDIC to prepare ourselves for the changes that we all faced. I
wanted to have a closer working relationship than we had ever had.
I said we needed to work closely with state supervisors in
adapting to new realities -- in banking structure, banking
supervision, and technology -- and we stayed true to this goal. As
a result, today we have a framework for dealing with change that is
based on communication, cooperation, coordination, and
consistency -- a framework that enables us to look to the future
with confidence and assurance.
In 1994, the issue of banking structure demanded our
attention. Our most urgent task was to adapt to the new interstate
banking environment created by the Interstate Banking and
Branching Act, which Congress enacted earlier that year. Our goal
was to build a structure for interstate banking that would permit the
state charter to remain relevant and dynamic. Within two months
of becoming FDIC Chairman, I created a Task Force within the
FDIC to analyze the impact of the interstate banking law on the
FDIC, the banking industry, and the financial system.
The Task Force looked at issues ranging from the adequacy
of off-site supervisory information to the effect of interstate
banking on the Bank Insurance Fund. The work of that Task Force
supported our common effort to establish a seamless regulatory
structure that would harmonize supervision among the states.
At the annual meeting of CSBS in the spring of 1995, state
supervisors unanimously approved the historic protocol that would
allow state-chartered banks that operate across state lines to work
with a single state regulator, while providing other state and federal
regulators the information necessary to monitor safety and
soundness. Five months later, the FDIC joined colleagues from the
Federal Reserve System and state regulators from California, New
York, Utah and Washington state in a State-Federal Working
Group -- under the aegis of CSBS -- to iron out the details of
creating a system of seamless state supervision for interstate
banking operations. Last November, state supervisors reached
agreement among themselves, and separately, with federal
supervisors, on how seamless supervision will operate in practice --
based on designating a point of contact with a single state
At the FDIC, we have changed our own approach to
interstate supervision in a way that dovetails into the host
state/home state protocols of the CSBS. Under our new approach,
case managers will oversee all the risk analysis and examination
functions for an entire bank or banking company, regardless of the
number of regions in which its subsidiary banks and branches
operate. This approach differs from the past where supervision of
multi-state banking organizations was broken down by geographic
region and where more than one FDIC regional office often was
responsible for oversight and supervision of those organizations.
Developing a comprehensive structure for state supervision
in an interstate environment in so short a time could not have been
achieved without the dedication of all of us to that goal. We at the
FDIC have worked with state supervisors every step of the way to
assure that the new system of interstate supervision will be
effective, that it will provide the greatest possible degree of
responsiveness to the needs of banks, and that it will recognize the
individual, local, and regional differences in the banking industry.
I have no doubt that the FDIC will continue to devote considerable
resources to assuring that the structure works in practice.
In 1994, it was also clear to us that our traditional approach
to banking supervision had to be enhanced so that we would be
able to respond to new and emerging risks more quickly and more
In early 1996, the FDIC announced new efforts to monitor
and assess risks, in part by developing a tiered-examination
approach that targets the level of risk and risk management
practices of specific institutions. Full-scope examinations will
continue to be performed, and this approach will allow examiners
to concentrate their resources on those areas of a bank that present
the most risk. Ultimately, the approach will cover 14 areas ranging
from management of the loan portfolio to electronic banking.
We also implemented similar examination procedures for
interest rate risk last October. At that time we offered training in
the new procedures for assessing interest rate risk to all the state
banking departments -- and, to date, 1,366 examiners from 48 state
banking departments have taken our training with an additional 88
examiners from two states scheduled to do so, for a total of more
than 1,450 examiners from 50 state banking departments. In
addition, we participated last year in 10 seminars that trained more
than 1,000 bankers on preparing for examinations under these
Moreover, in December, the FDIC and the other banking
regulators approved the first change to the Uniform Financial
Institution Rating System since 1979 -- adding an "S" to CAMEL
for sensitivity to market risks. For most institutions, the sensitivity
component reflects exposure to changing interest rates.
The training we have given state examiners in the new
interest rate risk procedures not only will enable them to assess this
risk more effectively, it increases consistency between state and
I have no doubt that the FDIC will continue to devote
substantial resources to increasing that effectiveness and
consistency -- particularly in the area of training. In the past two
years, more than 740 state examiners have participated in FDIC
schools, and we estimate that 454 will do so this year.
Providing training to state bank examiners is a long
tradition at the FDIC. Soon after he became FDIC Chairman in
1934, Leo Crowley addressed the annual convention of state
banking supervisors -- telling them that "the facilities and
resources of the Corporation will be freely placed at your disposal"
for achieving strong supervision. And, to achieve greater
coordination, he announced that the FDIC would conduct training
for state examiners. He concluded: "We have the same
responsibility you have in building and strengthening a strong state
banking system. Let us meet it together."
We did it then -- we are doing it now -- and we will do it
In 1994, it also was clear to us that -- in the long run -- our
shared interest in leveraging the use of computer technology in
banking supervision could be just as important as the banking
structure and examination issues with which we needed to deal.
This technology offers the simultaneous benefits of making the
supervisory process less burdensome for banks and more effective
and efficient for bank regulators. Over the past two years, the
FDIC has worked closely and cooperatively with CSBS, state
supervisors, and the Federal Reserve to develop the tools we need
to automate the examination process. Currently, three products are
in use or are in development.
The first tool -- which we call ALERT-- has been used by
the FDIC in 900 bank examinations over this past year. It is an
automated system that extracts loan information from the data
bases of banks and allows examiners to review the loan data
offsite. It reduces the amount of time that examiners spend
transcribing data -- time that the examiners can more productively
use doing analyses. We have trained 29 states to use it, as well,
and 20 states currently rely on it. We have an upgraded version of
ALERT scheduled for release later this month, and we plan to
provide training in the next few weeks to supervisors from 20
states -- representing all of the Districts of CSBS. In total, 44
states have expressed an interest in using the upgraded version and
have requested training materials, which we will provide at no cost
to them. In June, the FDIC, the Federal Reserve and CSBS will
begin considering whether it is possible to merge ALERT and the
Fed's equivalent, WORK STATION, into one loan tool.
The second tool -- which is in development -- is an
automated examination package that draws analytical data from
agency mainframes, provides examiners with new ways to analyze
the data by computer, and produces an examination report. The
FDIC calls this tool GENESYS. We have been working with the
Federal Reserve and CSBS to produce a product that we all can
use, either individually or in joint examinations -- in other words, a
product that can draw data from either the FDIC or the Federal
Reserve's mainframes in a common form. Just last week, we
decided that the FDIC will complete development of GENESYS
for use in community banks, and the Federal Reserve will focus on
how best to develop a common approach for an automated
examination package for larger banks. The FDIC plans to have
GENESYS completed and ready for use in the first quarter of
The third tool -- also in development -- is a common
automated format for assessing the risk management programs of
banks. It will be used primarily in small community banks. On
Thursday, FDIC and Federal Reserve staff displayed this
automated format in a presentation at this conference. We plan to
begin using this tool for all 14 risk areas in the tiered examination
approach in late fall.
We are currently developing a means to provide
examination and other confidential information to state banking
departments over the Internet through a secure connection. This
service will allow any authorized party to download financial
institution information via an in-house Internet connection, and it
will make the information available to state authorities earlier than
through current, more traditional means.
At the FDIC, we have made a commitment to enhance
communications, not only with state bank supervisors, but also
with bankers and the public, through the Internet. At the end of
last year, our Division of Research and Statistics began a new
service on the FDIC's Web site, an electronic Institution Directory
(I.D.), that provides significant financial information drawn from
Call Report data for every insured bank and thrift institution in the
country. To date this year, this electronic directory has been
accessed more than 40,000 times by people seeking to obtain
financial information on nearly 10,000 of the 11,500 banks and
thrifts insured by the FDIC -- or 87 percent of all insured
institutions. Currently, people are using the I.D. System to obtain
more than 4,000 financial reports on banks and thrifts each week.
We recently added an early notification feature to our Web site. If
you sign up, we will e-mail you ahead of time to let you know the
dates when new industry and bank statistics will be provided on
our Web site.
Later this morning, Don Inscoe, associate director of our
Division of Research and Statistics, will present a demonstration of
the I.D. System at this conference, including enhancements we will
make to it later this month. Among those enhancements, we are
expanding the financial information the I.D. System provides so
that users can compare any FDIC-insured bank or thrift with peer
group statistics published in the Quarterly Banking Profile, which
we also provide on-line. Another new feature will allow users to
download information into a spreadsheet to create custom reports.
This is another example of how we at the FDIC constantly try to
improve what we do.
One thread ties together our efforts at coordinating our
approaches to interstate banking, banking supervision, the
leveraging of technology, and, generally, more effective
communication of information and ideas. We are all seeking to
change with a changing world to assure the strength and viability
of our dual banking system.
Why is that important?
FDIC Chairman Leo Crowley was succinct when he
answered that question in 1934. Establishing only one authority
for bank supervision "places too much power in the hands of one
individual," he said. In other words, the dual banking system
mirrors our form of government in providing checks and balances.
It is the American way.
In addition, the dual banking system promotes innovation.
Another one of my predecessors as FDIC Chairman, Frank Wille,
said eloquently 20 years ago: "Without new ideas, persistently
applied, nurtured and absorbed, any bureaucracy can go through an
ossification process just like petrified forests that long ago stopped
producing living trees. This hasn't happened in bank regulation --
or at least not for long -- largely because the number of regulators
is so large . . . that new ideas, sooner or later, will have to be
considered by even the most resistant of regulatory authorities."
The recent movement away from burdensome regulation
has come because of the healthy process by which regulators learn
from each other -- despite the inability of the Congress to move
legislation that would make much needed, common-sense changes
to the statutory structure under which federal regulators function.
As a nation we choose to have a dual banking system because we
believe that intellectual competition, like economic competition,
One person -- or one small group of people -- does not have
all the answers. Moreover, the right answers are more likely to be
discovered outside the Beltway than inside, in Washington state
rather than in Washington, D.C. Under state authority, the first
bank branches were established. Under state authority, banks first
offered fiduciary services to customers. Most recently, federal
supervisors, following the practice of banking departments in 13
states, began disclosing the components of CAMEL ratings to
We believe by disclosing the components, we will enhance
the communications process, improve report quality, and give
bankers an early warning of problems. We have learned from you
and we continue to learn from you. In our dual banking system,
the states provide the most valuable resource of all -- ideas.
Two-and-a-half years ago, I was proud to tell the CSBS that
I value and support the dual banking system. We have been
through much together since then. I will always be proud of our
The state banking half of the dual banking system has come
under attack many times over the years. After the Civil War, its
opponents tried to tax it out of existence -- but it survived. In the
early 1930s, its opponents tried to replace it with national branch
banking -- but the dual banking system survived, in large part
because of the creation of the FDIC, as well as the refusal of state
bankers to accept its demise.
For more than 60 years, the FDIC has supported -- in word
and in deed -- the dual banking system. For that support to
continue, the political independence of the FDIC must be
preserved. Our ability to do our job rests on our independence.
We must make unbiased assessments of risk in the financial system
and act upon them without fear or favor. The integrity of the
insurance funds rests ultimately on the integrity of the people who
manage them and of the people who assess the risks in the
financial system to which the funds are exposed.
Any attempts to compromise our independence are
necessarily attempts to compromise our mission of promoting a
safe and sound banking system and providing stability in the
financial markets. Whether through regulatory consolidation,
stripping the FDIC of the authority it needs to protect the insurance
fund, or privatizing the deposit insurance system, the result would
be the same: to destroy the FDIC's independence -- and to damage
or fatally injure the dual banking system.
Some people seem to think that the day of the dual banking
system is over -- that new legal and technological realities will
make the state charter an anachronism. Despite my Calvinist
upbringing, I believe the future is not predestined. We can,
through our actions and hard work, shape the future that we desire.
Over the past two-and-a-half years, we have worked together to
create a future in which the dual banking system will endure -- and
our nation is stronger for our efforts. Over 132 years, the dual
banking system has provided us with a precious resource -- the
flexibility to adapt to change. Never has banking needed that
flexibility more than it needs it now. Never has the dual banking
system been more necessary. Never have our efforts to preserve
the dual banking system been more necessary.