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The FDIC Can Now Resolve Any Size Bank Failure

Posted by Wendell Brock on Mon, Sep 27, 2010

The latest words from FDIC Chairman Bair on the implementation of the Dodd-Frank Act…

With the enactment of the Dodd-Frank Act on July 21st of this year, the FDIC was given the tools to resolve a failing financial company that poses a significant risk to the financial stability of the United States. We now have the framework in place to resolve any financial institution, no matter how large or complex. Implementation of Dodd-Frank is designed to end "too big to fail," and the new resolution authority is a major reason why it will do so. The orderly liquidation process established under Title II of the Dodd-Frank Act imposes the losses on shareholders and creditors, while also protecting the economy and taxpayer interests.

If appointed as receiver for a failing systemic financial company, the FDIC has broad authority under the Dodd-Frank Act to operate or liquidate the business, sell the assets, and resolve the liabilities of the company immediately after its appointment as receiver or as soon as conditions make this appropriate. This authority will enable the FDIC to act immediately to sell assets of the company to another entity or, if that is not possible, to create a bridge financial company to maintain critical functions as the entity is wound down. In receiverships of insured depository institutions, the ability to act quickly and decisively has been found to reduce losses to creditors while maintaining key banking services for depositors and businesses. The FDIC will similarly be able to act quickly in resolving non-bank financial companies under the Dodd-Frank Act.

This is a major new responsibility for the FDIC. As you know, on August 10th we created the new Office of Complex Financial Institutions to help ensure that we are always ready to meet this responsibility.

The Notice of Proposed Rulemaking is one step forward in this process. The proposed rule is intended to provide greater clarity and certainty about how certain key components of the resolution authority will be implemented and to ensure that the liquidation process under Title II reflects the Dodd Frank Act’s mandate of transparency. With the US financial system now stable and healing, it is important to move ahead with rules to make clear how the orderly liquidation process would be implemented to restore greater market discipline and promote clear understanding among shareholders and unsecured creditors that they, not taxpayers, are at risk.

The FDIC is consulting with the Financial Stability Oversight Council members in accordance with the Dodd-Frank Act. In order to provide some additional time for Council members to offer their views and allow further consultation, today's meeting will provide a briefing for the Board members. We plan to ask for a notational vote next week after the FSOC has had its first meeting.

A special issue of concern during consideration of Dodd-Frank was how the FDIC might use its authority in a liquidation to pay certain creditors of a receivership more than similarly situated creditors if certain criteria are met. This proposal re-affirms that all equity share holders and unsecured creditors are at risk for loss and that the general rule will be that their claims will be processed in accordance with the priorities established under the bankruptcy code which are the same priorities that we use in our bank receiverships. The authority to differentiate among creditors will be used rarely and only where such additional payments are "essential to the implementation of the receivership or any bridge financial company." This cannot be a bail-out – that is clear from the statute. The NPR proposes to confirm that long-term bondholders, subordinated debt holders, and shareholders of a financial company will in no circumstances receive payments above their share to which they are entitled under the priority of payments in the statute. They can never be "essential" to the receivership or the bridge. This is consistent with the clear intent of the statute and we believe it is important that creditors have clarity in their treatment in a future liquidation. This is also consistent with the approach we have taken in our receivership process for banks. We have authority now to differentiate among creditors where it will maximize recoveries and have never found the need to use it except to compensate employees and other general creditors necessary to maintain essential operations.

The other issues addressed by the NPR will, likewise, clarify how we will apply the liquidation authority in key, discrete areas – and provide important clarity to the markets.

Equally important parts of the publication of the proposed rule are the background description of the orderly liquidation authority and the series of questions on which we are seeking comment for 90 days.

The background information provided in the NPR gives an overview of the powers and different options that the FDIC may use in liquidating a large, complex non-bank financial company. We think this will be helpful to market participants who are less experienced with the bank closing process on which the liquidation authority is modeled.

We look forward to comments on the broader questions posed in the NPR. Given the importance of the new liquidation authority – and the need for clarity in how it could be applied – the responses to the questions posed will inform a future, broader regulation to be proposed early next year to define key issues in the liquidation of large, complex financial institutions.

As part of our public rulemaking, this NPR will facilitate communication between the FDIC and the financial services industry, as well as the general public, on implementing the new resolution authority. I look forward to the comments.

Topics: Bank, FDIC, regulators, Too-Big-To Fail

Banks, Small Business and Risk

Posted by Wendell Brock on Thu, Sep 16, 2010

In the recently passed legislation, the Dodd Frank Law, the FDIC is given the mandate to change the way it assesses deposit insurance premiums from banks, mostly based on risk. This will greatly impact small businesses, by limiting their access to capital through loans. Perhaps as much or more than the recent health care bill will.

First the Law

The law “defines a risk-based system as one based on an institution’s probability of causing a loss to the Deposit Insurance Fund (the Fund or the DIF) due to the composition and concentration of the institutions assets and liabilities, the likely amount of any such loss, and the revenue needs of the DIF. …allowing the FDIC to establish separate risk-based assessment systems for large and small members of the Deposit Insurance Fund.

“Over the long-term, institutions that pose higher long-term risk will pay higher assessments when they assume those risks. …should provide incentives for institutions to avoid excessive risk.” (the information quoted is found in the following paper about the new score card produced by the FDIC located at: http://www.denovostrategy.com/new-fdic-score-card/)  The new assessments will be based on a performance score, which will be comprised of three main elements: 1) CAMELS Score, 30%; 2) Ability to withstand asset-related stress, 50%; and 3) Ability to withstand funding-related stress 20%. It is the asset-related stress that has the regulators concerned and if an institution has too much risk in that category, it will also affect the CAMELS rating, as the regulators will perceive that management is not doing their job – that of taking care of the bank.

The banker’s number one job now it to make sure that the bank never becomes a problem bank, that may cause the regulators to pay on deposits; everything else is now ancillary to that goal.

Small Businesses

All small businesses are risk rated, based on their credit score, (or the owners credit score), which becomes the basis for easy or difficult access to credit at a financial institution. At times bankers make loans to small businesses, because they understand the business, the risk associated with the business and they know the owner, even though the credit may be simply o.k. (not great, but not terribly bad either).

This new way of assessing deposit insurance will now cause the banker to ask the question – how will this loan affect the bank’s portfolio and ultimately it’s DIF assessment? As bankers ask this question more loans will be turned down. This is not to say, that all loans should be written as applied for, but as the bell curve moves towards safety, it will certainly leave a larger percentage of good small business loans unfulfilled and business owners without the much needed capital to continue in business or to grow. And we all know that when small businesses don’t continue, or fail to grow, then lay-offs occur and unemployment lines increase.

Did Congress and the regulators think this one through completely? Is there a better way to asses risk?

Topics: Bank, FDIC, banks, Regulations, FDIC Insurance Fund, Loan Grading, Risk Management, Bank Regulations, Growth, small business

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

Small-dollar Loan -- Pilot Study Results Are In

Posted by Wendell Brock on Wed, Jul 07, 2010

Creation of Safe, Affordable and Feasible Template for Small-Dollar Loans

Small-dollar loan pilot

The Small-dollar Loan Pilot Project was a study to find if it is profitable for banks to offer small-dollar loans to their customers. Small-dollar loans were created as an option to expensive payday loans, or heavy fee-based overdraft programs.  This study opened up opportunities for small-dollar loans to be more affordable.    

Small-dollar loans have created a way to maintain associations with current costumers and opportunities to attract unbanked new customers.

Goals: The main goal the FDIC had in mind for small-dollar loans was for banks to create long-lasting relationships with their customers using the product of small-dollar loans. Many banks had another goal in mind in addition to the FDIC’s goal. Some banks wanted to become more profitable by producing the product while other banks produced the product to create more goodwill in their community. 

Where and how the study started: The FDIC found 28 volunteer banks with total assets from $28 million to nearly $10 billion to use the new product, offering of small-dollar loans. All were found in 450 offices in 27 states. Now, in the pilot study there have been over 34,400 small-dollar loans that represent a balance of $40.2 million. 

Template for small-dollar loans: Loans are given with an amount of $2,500 or less, with a term of 90 days or more. The Annual Percentage Rate is 36 percent or less depending on the circumstances of the borrower. There are little to no fees and, underwriting follows with proof of identity, address, income, and credit report to decide the loan amount and the ability to pay. The loan decision will usually take less than 24 hours. There are also additional optional features of mandatory savings and financial education.  

Long loan term success: Studies found that having a longer loan term increased the amount of success in small-dollar loans. This allowed the customer to recover from any financial emergency by going through a few pay check cycles before it was time to start paying the loan back.  Liberty Bank in New Orleans, Louisiana offered loan terms to 6 months in order to avoid continuously renewed “treadmill” loans.  The pilot decided that a minimum loan term of 90 days would prove to be feasible.

Often the bank will require the customer to place a minimum of ten percent of the loan in a savings account that becomes available when the loan is paid off.

Delinquencies: In 2009 the delinquency rates by quarter for small dollar loans were 6.2 in the fourth, 5.7 in the third, 5.2 in the second, and 4.3 in the first.

How to be most successful when producing small-dollar loans: The FDIC is reporting that the participating banks have found much success through small-dollar loans. But the most success came from long term support from the bank’s board, and the senior management. It is critically important to have strong support coming from senior management.

The small-dollar loan pilot has proven to be a great addition to bank’s loan portfolio, the FDIC hopes that it will spread to banks outside the pilot.

Profitability may depend on location: The FDIC has found the most successful programs are in banks located in communities with a high population of low- and moderate-income, military, or immigrant households. Banks in rural areas that did not have many other financial service providers also saw feasibility because of the low amount of competition.

Improving performance: Automatic repayments are a way to improve performance for all products not just the small-dollar loans.

 

 

Topics: Bank, FDIC, banks, Pay Day Loans, Banking, Bank Risks, Small Dollar Loans, Bank Executives, Loans, market opportunity, bank customers, Bank Asset

Unbanked and Underbanked Americans - Who Are They?

Posted by Wendell Brock on Thu, Dec 03, 2009

The U.S. Census Bureau conducted a National survey this year on behalf of the FDIC to ascertain the level of Unbanked and Underbanked households in the United States. The survey was designed to help the FDIC understand who is outside the banking system. The study which is the most comprehensive to date, reveals that just over a fourth (25.6 percent) of the households in the U.S. are unbanked or underbanked and those households are largely low-income and/or minority.

The survey additionally collected more accurate estimates of the Unbanked and Underbanked Households, and reasons why the people remain unbanked or underbanked. The survey estimates, represent the first time this kind of data has been collected in large metropolitan statistical areas (MSA), states, and across the nation.

"Access to an account at a federally insured institution provides households with an important first step toward achieving financial security - the opportunity to conduct basic financial transactions, save for emergency and long-term security needs, and access credit on affordable terms," stated Sheila Bair, Chairman of the FDIC. "By better understanding the households that make up this group - who they are and their reasons for being unbanked or underbanked, we will be better positioned to help them take that first step."

Terms

Unbanked is determined by households who answered "no" to the question "Do you or does anyone in your household currently have a checking or a savings account?"

Underbanked households were determined by those who have a checking or savings account but rely on alternative financial services. Specifically, using money orders, nonbank check-cashing services, payday loans, rent-to-own agreements, or pawn shops at least once or twice a year or tax refund anticipation loans at least once in the past five years.

Key Findings of the Study

  • Of the households surveyed, 7.7 percent were unbanked, which translates nationally to 9 million households - approximately 17 million adults. An additional 17.9 percent - or 21 million households nationally (approximately 43 million adults) - were found to be underbanked.
  • The proportion of U.S. households that are unbanked varies considerably across racial and ethnic groups with certain racial and ethnic groups being more likely to be unbanked than the population as a whole. Minorities more likely to be unbanked include blacks (21.7 percent of black households), Hispanics (19.3 percent), and American Indian/Alaskans (15.6 percent). Racial groups less likely to be unbanked are Asians (3.5 percent) and whites (3.3 percent).
  • Certain racial and ethnic minorities are more likely to be underbanked than the population as a whole. Minorities more likely to be underbanked include blacks (an estimated 31.6 percent), American Indian/Alaskans (28.9 percent), and Hispanics (24.0 percent). Asians and whites are less likely to be underbanked (7.2 percent and 14.9 percent, respectively).
  • Households with income under $30,000 account for at least 71 percent of unbanked households. As income increases, the share of households that are unbanked declines considerably. Nationally, nearly 20 percent of lower-income U.S. households - almost 7 million households earning below $30,000 per year - do not currently have a bank account. In contrast, only 4.2 percent of households with annual income between $30,000 and $50,000 and less than 1 percent of households with yearly income of $75,000 or higher are unbanked.
  • Households with an annual income between $30,000 and $50,000 are almost as likely as lower-income households to be underbanked.

This survey goes hand in hand with a survey the FDIC conducted earlier in the year of bankers efforts to serve the unbanked and underbanked households in their community, see FDIC's Unbanked Survey. The survey is of such important information to the FDIC that they created a special website to display the findings at online at www.economicinclusion.gov.

It appears that the unbanked and underbanked households are close to the same number of estimates of those without proper medical insurance. Is there a correlation here? Is this something congress should be addressing - making sure that every American has proper banking and financial services?

Topics: FDIC, underserved communities, underserved areas, Pay Day Loans, Banking, Unbanked customers, FDIC’s, Unbanked, Underbnked, banker's survey

Third Quarter 2009 FDIC Banking Profile

Posted by Wendell Brock on Wed, Nov 25, 2009

FDIC member institutions' earnings improved this quarter to a modest $2.8 billion, which is significant over last quarter's net loss of $4.3 billion and third quarter of 2008 of $879 million. Loan loss provision continued to affect the profitability of the industry as banks continued to cover their bad assets. Growth in securities and operating income helped the industry realize the profit, with 43 percent of the institutions reporting higher profits this quarter over the same quarter last year.  Just over one in four banks reported losses this quarter of 26.4 percent, which is slightly up from 24.6 percent a year ago.

Net Interest Margin, ALLL

Net interest was higher this quarter, rising to a four-year high of 4.6 billion. The average net interest margin (NIM) was 3.51 percent, slightly higher than last quarter. Most banks, 62.1 percent, reported higher NIM than last quarter; however only 42.2 percent had an NIM increase year over year. Provisions for loan and lease losses increased and total set aside, remained over $60 billion for the fourth straight quarter, rising to $62.5 billion. While the quarterly amount banks set aside was only 11.3 billion, $4.2 billion less than the second quarter, it was 22.2 percent higher than last year. Almost two out of three institutions, 62.6 percent, increased their loan loss provisions.

Net Charge Offs Remain High

Loan losses continued to mount, as banks suffered year over year increases for 11 straight quarters. Insured institutions charged off a net of $50.2 billion this quarter, a $22.6 billion increase or an 80.5 percent increase compared to third quarter of 2008. This is the highest annual charge off rate since banks began reporting this information in 1984. All major categories of loans saw significant increases in charge offs this quarter, but losses were largest amongst commercial and industrial (C&I) borrowers. While noncurrent loans continued to increase, the rate of increase slowed; noncurrent loans and leases increased $34.7 billion or 10.5 percent to $366.6 billion, which is 4.94 percent of all loans and leases. This is the highest level of noncurrent loans and leases in 26 years. The increase of noncurrent loans was the smallest in the past four quarters.

Eroding reserves

The reserve ratio increased as noncurrent loans increased, however the spread continued to widen. While the industry set aside 9.2 billion, 4.4 percent in reserves, which increased the reserve level from 2.77 percent to 2.97 percent. This increase was not enough to slow the slide - it was the smallest quarterly increase in the past four quarters and the growth in reserves lagged the growth of noncurrent loans, which caused the 14th consecutive quarterly decline in this ratio from 63.6 percent to 60.1 percent.

Loan Balances Decline Deposits Are Up

Loan and lease balances saw the largest quarterly decline since the industry started keeping track of these numbers in 1984; they fell by $210.4 billion or 2.8 percent. Total assets fell for the third straight quarter; assets at insured institutions fell by $54.3 billion, which follows a decline of $237.9 billion in the second quarter and a $303.2 billion decline in the first quarter. Deposits increased $79.8 billion or 0.4 percent during the third quarter, allowing banks to fund more loans with deposits rather than other liabilities. At the end of the quarter deposits funded bank assets was 68.7 percent, the highest level since second quarter 1997.

Troubled Banks Increase

The number of reporting insured institutions at the end of the quarter was down to 8,099  from 8,195; there were fifty bank failures and forty-seven bank mergers. This is the largest number of banks to fail since fourth quarter of 1992, when 55 banks failed. The number of banks on the FDIC's problem list increased from 416 to 552 at the end of the second quarter.

During the quarter, the number of new banks chartered was three.  This is the lowest level since World War II. This begs the question on what is the best way to get new capital into the banking industry. Should we recapitalize the existing banks including those in trouble? Or, should we start fresh with a new bank that can build a new, clean loan portfolio?

Another Item

CREED - a 501(c)3 nonprofit has started a Crowdfunding project/contest to help a small business - Look at the opportunity to be a part of something truly great! We will follow this closely as we are strong supporters of CREED.

4M5EDCNY9JWB

Topics: Interest Rates, FDIC, banks, Community Bank, FDIC’s, Loans, Bank Capital, CREED, capital, equity capital, De Novo Banks, Noncurrent loans, community banks, Crowfunding

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

Bair Says More Regulation is Needed

Posted by Wendell Brock on Mon, Nov 02, 2009

Sheila Bair argued to Congress last week that the government should "impose greater market discipline on systemically important institutions." Her rationale for the argument was that those large firms have been funded by the market as if they were too big to fail, while their management teams depended on faulty risk management practices; these circumstances, combined with ineffective regulation, created a the bulk of our current economic problems. Bair's commentary indicates that we will ultimately have much more regulation throughout the financial industry, simply because what happens to large institutions will trickle down to impact the smaller community banks.

Bair went on to say:

In a properly functioning market economy there will be winners and losers, and some firms will fail. Actions that prevent firms from failing ultimately distort market mechanisms, including the market's incentive to monitor the actions of similarly situated firms. The most important challenge now is to find ways to impose greater market discipline on systemically important financial organizations.

Shareholders, creditors to take losses

It is true that we need to create an effective, bailout-free system to unwind large failing institutions - and to do so without creating a financial tsunami that wipes out the rest of the economy. But the reality is that everyone will feel the impact of a large institution's failure. It is impossible that a CitiBank, Wells Fargo, Bank of America or Chase failure could result in only a slight ripple through the economy. Those closest to the institution will feel the pain the most and people on the far fringe, the least -- but it will be felt by all nonetheless. The government needs to stop trying to make our lives pain-free in all aspects of life. We simply cannot be shielded from ALL risks.

In the current meltdown, for example, shareholders felt the brunt of the financial crisis pain. Investing is an inherently risky enterprise, and to devise regulation that would soften the impacts of investment failure runs contrary to the tenants of our economic system. Because shareholders voluntarily took risks with the companies they invested in and supported, they should absorb the repercussions when those firms fail.

Bair agrees with this argument. She advises:

Under the new resolution regime, Congress should raise the bar higher than existing law and eliminate the possibility of open assistance for individual failing entities. The new resolution powers should result in the shareholders and unsecured creditors taking losses.

Bair also addresses the current priority given to secured creditors. Such creditors have, in the past, made credit decisions based on collateral value without thoughtfully considering creditworthiness as well. This puts the creditor at risk of default and forced liquidation, while encouraging lack of discipline in the market. Addressing this issue can help to minimize costs to receivership and spread out losses related to failures more broadly.

Other key points in Blair's testimony included:

  • Resolution of systemically important financial firm failures is currently managed through the bankruptcy process, where there is no protection for public interest.
  • Holding company affiliates are often dependent on the ongoing operations of systemically important firms. Regulation is needed to require these affiliates to have greater autonomy. Holding companies should have wind-down plans.
  • Open company assistance benefitting shareholders and creditors should be banned by Congress.
  • A Financial Company Resolution Fund should be established and pre-funded through assessments against large financial firms.
  • The FDIC should have authority to resolve "systemically important and non-systemically important depository institution holding companies, affiliates and majority-owned subsidiaries." This authority would allow the FDIC to maximize the value of the assets, particularly in cases where certain functions lie outside the FDIC's current authority.
  • The FDIC supports the creation of a powerful Financial Services Oversight Council to monitor and manage system-wide risks. The Council should be given a minimum rulemaking authority "that must be met and could be exceeded." The Council should oversee a group of regulators, but also have its own power to act if the regulators do not.
  • The full text of Sheila Bair's testimony can be found at: http://www.fdic.gov/news/news/speeches/chairman/spoct2909.html

    Topics: FDIC, FDIC’s, Bank Regulators, Commercial Banks, Bank Regulation, Bank Regulations, Troubled Banks

    The FDIC’s NEW Advisory Committee on Community Banking

    Posted by Wendell Brock on Fri, Oct 16, 2009

    In May of 2009, the FDIC authorized the creation of an Advisory Committee Community Banking with the purpose that this committee would help the FDIC understand the particular issues that small rural and urban community banks face in the ever-changing financial landscape.

    The committee is consists of no more than 20 volunteer members from the community banks around the country along with small business, education, non-for-profit organizations and other individuals that use the services of these community banks. It is expected that the committee will have an annual budget of $300,000 and two full time FDIC staff people committed to serving their needs. The committee charter will last for two years unless it is renewed by the FDIC. The committee will also report directly to the Chairman of the Board of Directors of the FDIC.

    The committee's first meeting was this week and below is the press release from that meeting. At the bottom is a link to the FDIC website where more information may be obtained about the meeting. We hope this positive for the community banking sector as they struggle under the weight of very difficult regulations, limited budgets, and with razor thin margins. They are scheduled to meet twice a year, so the next meeting should be in April.

    Press Release from the Advisory Committee on Community Banking

    At its first meeting since being established by the FDIC Board in May, the FDIC's Advisory Committee on Community Banking today discussed the impact of the financial crisis on community banks. Other issues addressed were regulatory reform proposals under consideration by Congress and their effect on community banks, the impact of FDIC supervisory proposals on these banks, and community banks' perspectives on funding the FDIC's Deposit Insurance Fund.

    "I was extremely pleased with the robust discussion among our committee members on issues that are so critical to both the FDIC and our nation's community banks," said FDIC Chairman Sheila C. Bair. "The committee members voiced a number of interesting ideas that they will pursue."

    The Advisory Committee was formed to provide the FDIC with advice and recommendations on a broad range of policy issues with particular impact on small community banks throughout the nation, and the local communities they serve. The committee is comprised of 14 community bankers from across the country, and one representative from academia.

    "We are fortunate to have so many highly respected professionals who are willing to volunteer their time and talents to help the FDIC analyze the issues most important to community banks," said Paul Nash, Deputy to the Chairman for External Affairs, and the Designated Federal Official for the Advisory Committee on Community Banking.

    The members' opinions on the FDIC's proposed rulemaking to prepay three years of deposit insurance assessments will be included in the public comment file.

    For more information on the Advisory Committee on Community Banking please visit http://www.fdic.gov/communitybanking/index.html.

    Topics: FDIC, Community Bank, Banking industry, Bank Regulators, Commercial Banks, Regulations, Bank Regulations, FDIC Advisory Committee

    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," (http://www.time.com/time/business/article/0,8599,1926877,00.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

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