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FDIC Chairman Speaks...

Posted by Wendell Brock on Thu, Jul 15, 2010

FDIC Chairman Sheila C. Bair said, "Today represents a significant milestone in the history of financial regulation in the United States. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, a meaningful framework is now in place that addresses many of the weaknesses in our financial system that led to the financial crisis.

From the outset of this process, the FDIC has pushed for a credible resolution mechanism that provides the authority to liquidate large and complex financial institutions in an orderly way. The legislation will enforce market discipline by making clear that shareholders and creditors bear the losses for the risks they take. It also will protect taxpayers by empowering the government with the means to end Too-Big-to-Fail and providing substantial new protection to consumers and the financial system.

The responsibility now shifts to regulators to implement this law in a manner that is aligned with its principles. To this end, the FDIC will move swiftly and deliberately through the various rulemakings and studies required under the bill. We will do so in an open, transparent and collaborative fashion. In addition to a dedicated webpage where the public can track key steps in the implementation process, we will also release the names and affiliations of outside individuals and groups that meet with FDIC officials about the bill. We will webcast open Board meetings on implementation issues and provide ready access to comments received for all rulemakings.

As I have often discussed, my vision for financial reform encompasses three key pillars: resolution authority, systemic oversight and consumer protection. On resolution authority, the new law will give the FDIC broad authority to use receivership powers, similar to those used for insured banks, to close and liquidate systemic firms in an orderly manner. On systemic oversight, it creates a Systemic Risk Council — a concept originally advanced by the FDIC — to provide a macro view to identify and address emerging systemic risks and close the gaps in our financial supervisory system. Regulators will also be empowered to provide much-needed oversight to derivatives markets. On consumer protection, the creation of the Consumer Financial Protection Bureau will put a new focus on the unregulated shadow financial sector by setting and maintaining strong, uniform consumer protection rules for both banks and non-bank financial firms.

I am also very pleased that the bill will strengthen the capital requirements of the U.S. banking system. For the first time, bank holding companies will be subject to the same standards as insured banks for Tier 1 capital. Excess leverage and thin capital cushions were primary drivers of the financial crisis, which resulted in severe, sudden contractions in credit and led to the loss of millions of jobs. This provision will bring stability to the financial system, allowing it to support real, sustainable, long-term growth in the real economy. Senator Susan Collins was the sponsor of this key provision, and I commend her efforts in this area.

I would also highlight the new backup authority the FDIC will have over bank holding companies, which will augment our current backup authority for insured institutions. The legislation also will improve our ability to manage our deposit insurance fund and build stronger reserves.

As I have often noted, no set of laws, no matter how enlightened, can forestall the emergence of a new financial crisis somewhere down the road. It is part of the nature of financial markets. However, what this law will do is help limit the incentive and ability for financial institutions to take risks that put our economy at risk, it will bring market discipline back to investing, and it will give regulators the tools to contain the fallout from financial failures so that we will never have to resort to a taxpayer bailout again.

I commend Chairman Dodd and Chairman Frank for their committed leadership in navigating this bill through the legislative process and look forward to the hard work ahead to implement the law."

Now there will be more regulation to absorb and implement increasing the cost to do business.  We are interested in your comments about this legislation...

Topics: FDIC, regulators, Commercial Banks, Credit, Deposit Insurance Fund, Consumer Confidence

Safest Deposits in the World

Posted by Wendell Brock on Fri, Nov 20, 2009

As bank failures mount into a heap of moldering economic stimulus, and the FDIC's Bank Insurance Fund shrinks to its lowest level in many years, FDIC Chairman Sheila Bair tells the public that depositor have nothing to worry about, because, "The FDIC fully guarantees their insured deposits and provides them with seamless access to their money. For the insured depositor, a bank failure is a non-event."

This may be true for many depositors, however it is not true for the bank's "C" level management team, board of directors, and shareholders - they are the losers! In more ways than one! Not only do they lose their bank, but they lose their jobs, careers, and opportunity to associate with a bank in the future. With the FDIC there is no forgiveness, no bankruptcy court to "work out" the problems and reorganize the institution - the only option is failure.

The FDIC has a $100 billion line of credit with the U.S. Treasury - they can close a lot of banks with that much money. So far, all the banks that have been closed, the expense has been paid for by the FDIC's Member Banks through their deposit insurance premiums they have paid in over the years. We can only hope, the FDIC won't have to tap that line of credit. The law states that the FDIC guarantees deposits with the full faith and credit of the U.S. Government, which means borrowing from the U.S. taxpayers. We are the full faith and credit of the U.S. Government.

In most cases when a bank is closed the deposits are available the next business day. This is because the FDIC is usually available to help another institution acquire the deposits and make good on them. Often the FDIC has to give a lot of concessions to the acquiring bank - which costs the insurance fund money. The complexity of these transactions, even for a small bank, takes many hours to iron out - often taking upwards of ninety people from the FDIC two weeks to close a bank.

The amazing thing is that with all the flaws of the system, it seems to work - no FDIC insured depositor one has ever "lost a penny of their deposits" according to Ms. Bair, "and none ever will". Thank goodness for the full faith and credit of the U.S. Government.

Topics: FDIC, Bank Failure, failed banks, regulators, Deposit Insurance Fund

A De Novo Strategy for the FDIC: Prepaid Insurance Premiums

Posted by Wendell Brock on Thu, Oct 01, 2009

The ongoing wave of bank failures related to the financial crisis continues to impact the health of the FDIC's Deposit Insurance Fund (DIF). At the end of the second quarter, the DIF balance was down to $10.4 billion. Compared to a year ago, when the DIF amounted to $45.2 billion, this is a decline of some 77 percent.

As at-risk banks continue to deteriorate, the DIF's growing loss provisions have simply outpaced accrued and collected premiums, including a special assessment that was levied on insured institutions at the end of the second quarter. Rather than demand another special assessment, the FDIC is trying a new tactic to deal with the fund's depletion: prepaid premiums.

According to an FDIC press release, the FDIC Board "has adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012." The prepayments should generate roughly $45 billion in cash, a much-needed infusion for the anemic DIF.

Numbers game

Time Magazine is calling the tactic "an accounting trick," (,8599,1926877,00.html?iid=tsmodule ) but FDIC Chair Sheila Bair sees it as a necessary step in the fund's restoration. The move won't impact banks' profitability, since they won't recognize the expenses any sooner under prepayment. It will impact liquidity, but the FDIC's position is that banks have sufficient cash to absorb these prepayments.

The push for prepayments underscores the FDIC's commitment to manage through this crisis without asking the Treasury or taxpayers to foot the bill.

Assessment increase ahead

The aforementioned NPR also included an assessment increase of three basis points across the board, to be made effective on January 1, 2011.

Topics: FDIC, treasury department, Bank Regulators, Bank Capital, Deposit Insurance, FDIC Insurance Fund, Bank Regulations, Deposit Insurance Fund, Bank Liquiditity, Assessment Plan

Quarterly Banking Profile Shows Industry Loss

Posted by Wendell Brock on Mon, Aug 31, 2009

After a small profit rebound in the first quarter of 2009, insured banking institutions recorded another aggregate net loss in the second quarter. The $3.7 billion loss was primarily related to sharply increased loan-loss provisions, write-downs of asset-backed commercial paper, and increased deposit insurance assessments. The commercial paper write-downs contributed to a $3.3 billion increase in extraordinary losses. And, higher deposit insurance comprised a good part of the industry’s $1.7 billion increase in non-interest expenses.

More than 28 percent of insured institutions recorded a second quarter loss; in the year-ago period, 18 percent were unprofitable.

Bright spots: noninterest income, NIM

Some banks partially offset the rash of higher expenses with improved net interest margins (NIM) and higher noninterest income. The average NIM rose 9 basis points to 3.48 percent, and larger banks were the primary recipients of this improvement. Noninterest income increased by 10.6 percent or $6.5 billion. Other positives included reduced realized losses on securities, higher gains on assets sales, higher servicing fees and improved trading revenues.

Records set: net charge-offs, noncurrent loan rate

Net charge-offs spiked to $48.9 billion in the second quarter, sending the net charge-off rate to a record 2.55 percent. In dollars, charge-offs rose more than 85 percent from the second quarter of last year. Commercial and industrial loans (C&I) and credit card loans were the categories with the largest charged-off amounts in the second quarter.

Noncurrent loans and leases rose 14.3 percent, marking a thirteenth consecutive quarterly increase. The increase was driven by 1-4 family residential mortgages, real estate construction and development loans, and loans backed by nonfarm, nonresidential real estate. The noncurrent loan rate rose to 4.35 percent, the highest level on record, despite a record decrease in loans 30-89 days past due. All major loan categories contributed to this decrease, with real estate loans accounting for 83.5 percent of the improvement.

Capital improves, assets decline

Equity capital grew to 10.56 percent, its highest level since the spring of 2007. On average, capital ratios improved, although this improvement was concentrated in fewer than half of the insured institutions.

While 57 percent of insured institution increased their assets in the quarter, the industry average showed an asset decline of 1.8 percent. More than half of the decline was related to loans and leases. C&I loan balances were down, as were 1-4 family residential mortgages, and real estate construction and development loans. Small business loan balances also declined industry-wide.

Problem list

The FDIC’s problem list now includes 416 institutions, making it the largest problem list since 1994. Twenty-four institutions failed in the second quarter and thirty-nine were merged into other banks. Only twelve new charters were approved.

Insurance fund

At quarter-end, the FDIC imposed a special assessment on insured banks totaling 5 basis points of each institution’s assets less Tier 1 capital. Some 89 institutions with assets of $4 trillion were assessed 10 basis points of their second quarter assessment base.

During the second quarter, total deposits at insured institutions increased by 0.7 percent. Over the prior twelve months, total domestic deposits grew 7.5 percent.  

Brokered deposits exceeding 10 percent of a bank’s domestic deposits are now included in the FDIC’s assessment calculation. At quarter-end, 1488 banks had brokered deposits exceeding 10 percent of their domestic deposits. Aggregate brokered deposits decreased by 5.8 percent in the quarter.

The Deposit Insurance Fund (DIF) declined 20.3 percent during the second quarter to $10.4 billion. Factors that reduced the fund balance included:

•    Increased loss provisions of $11.6 billion
•    Unrealized losses on available-for-sale securities of $1.3 billion

Factors that increased the fund balance included:

•    Accrued assessment income, including the special assessment, of $9.1 billion
•    Interest earned, realized gains on securities, debt guarantee surcharges from TLGP of $1.1 billion

The DIF reserve ratio was 0.22 percent at quarter-end, vs. 1.01 percent at the end of last year’s second quarter.

Topics: Quarterly Banking Report, Deposit Insurance Fund, Quarterly Banking Profile, equity capital

FDIC’s Annual Plan: Insurance Fund and Risk Management

Posted by Wendell Brock on Thu, May 01, 2008

As we know, the FDIC is an insurance company-its primary purpose is to insure the deposits of the banks in the United States. Because the FDIC provides the insurance, the FDIC gets to make many of the rules! (Congress, of course, has its hand in rule-making also.) After all, if a bank fails, this creates a crack in the financial system. If many banks fail or an extremely large bank fails, then we experience a financial earthquake. The FDIC's job is to make sure we do not experience a crack, let alone an earthquake. This is one reason is why starting a new bank is so difficult. The regulations are tough, the experience bar for management to clear is very high, and the barriers to entry are difficult. Again, all of this is to protect the public's trust in where people place their money.

So in difficult times, as we are experiencing now, the strategic plan of the FDIC is in place to guide the regulators in managing the complex issues they experience in the financial/banking environment. The targeted loss reserves are between 1.15 and 1.50 percent of estimated insured deposits. The loss reserve is the insurance fund, which is financed by charging the banks an insurance premium based on the risk exposure of the bank and its insured deposits. This premium is derived from the FDIC's Financial Risk Committee (FRC) assessments, quarterly failure projections and loss estimates. The FRC analyzes the risk exposure of the insurance fund based on the risks of the insured banks. When bank loans go bad, the risk exposure of the bank goes up and the FRC reevaluates the risk of the fund. This, in turn, sets a new premium for the bank and for other similar banks.

The FDIC reviews the assessment history of all failed banks on an ongoing basis to determine if the system is working properly. In 2007, after much research and testing, a new risk-based assessment system was implemented through the modification of FDIC systems and business procedures. This updated system is designed to measure the risk of individual banks more accurately, which allows for the assessment of fees that are more in line with the risk level. Currently, the FDIC is the primary regulator for 5,197 state-chartered banks that are not members of the Federal Reserve System or are national banks or thrifts which are regulated by the OCC and OTS respectively.

Because of the complexity of the analysis that is required to develop accurate pricing and review the effectiveness of new regulations, the FDIC will require additional staff. Further demands will arise from the combining of the Bank Insurance Fund and the Savings Association Insurance Fund; the merger affected 48 information systems and resulted in some changes in deposit coverage. As a result, the FDIC will require new analysis techniques and will be tasked with extensive testing of the systems. All of these systems are necessary to manage the risk of consumers and businesses not being able to pay their debts, while keeping consumer and commercial deposits safe and accessible.

This enormous balancing act adds to the challenge of starting a new bank. The risks to a new bank are great because they have new capital to employ; new banks need assets on the books and many deposits to help fund the new loans. However, because of the strict regulatory controls, new banks succeed more often than not. It is rare that a de novo bank fails. If the right organizers and bank board, management team, business plan and capital are in place, chances are great that a de novo bank will succeed.

By Wendell Brock, MBA, ChFC
De Novo Strategy, Inc. 

Topics: FDIC, Bank Risks, Risk Management, Deposit Insurance Fund

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