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FDIC Active in Economic Repair Efforts

When times are good, the FDIC’s role in maintaining trust in the U.S. banking system goes unnoticed. But now, as the country struggles to emerge from economic crisis, the FDIC’s activities are receiving a lot attention.

FDIC Chair Sheila Bair recently delivered a keynote speech to the John Hopkins Carey Business School. Her presentation was part of the school’s “Leaders and Legends” monthly lecture series. She used the opportunity to discuss measures the FDIC is taking to unlock the credit markets and restore faith in the banking system.

“To reinforce public confidence in banks and to preserve liquidity”

In October, the FDIC issued a temporary rule authorizing the Temporary Liquidity Guarantee Program or TLGP, which will guarantee qualified senior unsecured debt issued between October 14, 2008 and June 30, 2009; this guarantee will be in place until June 30, 2012. A second component of the TLGP guarantees non-interest bearing payment accounts.

The TLPG will be a self-funded program, and it will not tap the existing deposit insurance fund. Fees are structured to cover estimated costs; should there be a shortfall, it will be addressed with a special assessment charged to all insured institutions.

After the temporary rule was announced, the FDIC asked for and received feedback from the industry; that commentary was taken into consideration as the final rule for the TLGP was drafted. The FDIC Board is scheduled to vote on the final rule on Friday, November 21.

In another measure, Congress raised the deposit insurance limit from $100,000 to $250,000. This authorization was included in the Emergency Economic Stabilization Act of 2008.

Bair communicated that these “changes will create significant investor demand, and dramatically reduced funding costs for eligible banks and bank holding companies…provide longer maturities to secure a more stable liquidity base to support healthy and sustained lending.”

Bair also cautioned that the new programs would need time to make an impact. The TLPG, for example, will be felt to a greater degree after the final rule is approved. Thereafter, the program could potentially provide up to “$1.4 trillion of longer term, low-cost funding” to the banking system.

“We warned about sub-prime mortgage lending and the problems caused by a lack of proper underwriting standards”

The FDIC has also been vocal and active with respect to the issues surrounding the foreclosure crisis. Since the failure of IndyMac Bank, FSB in July, the FDIC has worked closely with IndyMac Federal to modify non-performing mortgages into performing assets.

The modification program involves restructuring distressed mortgages by way of interest rate reductions, amortization extensions and principal deferrals. The maximum housing-to-income ratio is 38 percent, and borrowers must document their income to qualify. This framework was designed to serve two primary objectives: to maximize loan values for investors and to allow borrowers to keep their homes.  

Bair says the program is effective. So far, IndyMac Federal has modified 5300 mortgages and has several thousand more modifications in process. From this experience, the FDIC has produced a “Mod in a Box” guide—to provide the industry with a how-to guide on initiating and managing a systemic loan modification program. The IndyMac Loan Modification Model is now available on the FDIC’s website (http://www.fdic.gov/consumers/loans/loanmod/loanmodguide.html).

Quarterly Banking Profile

The FDIC will hold a press conference to discuss third quarter earnings for the bank and thrift industry on Tuesday, November 25 at 10 a.m. Bair will speak first on industry earnings and policy issues. After a question-and-answer session, FDIC Chief Economist Richard Brown, Associate Director for Financial Risk Management Diane Ellis, Senior Banking Analyst Ross Waldrop and Associate Director for Large Bank Supervision John Corston will highlight the details of the FDIC’s Quarterly Banking Profile.