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J Ulli ■V/VA I (J /% iC STATEMENT ON STATE OF THE BANKING INDUSTRY AND FDIC ABILITY TO HANDLE PROBLEMS PRESENTED TO COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS HOUSE OF REPRESENTATIVES BY IRVINE H. SPRAGUE, CHAIRMAN FEDERAL DEPOSIT INSURANCE CORPORATION 9:30 a . m . Tuesday, Room 2128, July 14, 1981 Rayburn House Office Building It is good to be here today to give you our view of the state of the banking industry and our ability to handle p ro blems that might arise. I can report that our n a t i o n ’s banking system is funda mentally sound. But we need Americans can continue to bank with confidence. to remain vigilant. larly in the savings banks, There are problems, as you know. particu We must improve our capacity to respond to any eventuality. You specifically asked me to discuss "current contingency planning efforts and a statement as to adequacy of resources available to you to respond to all predictable contingencies." Your request is most timely. We would be derelict saying that this matter is uppermost in our minds too. to the need to expand our powers in not I refer to deal with failed bank and failing bank situations. We have been working under virtually the same provisions of law for 31 years. In these three decades, our insurance fund has grown from $1.2 billion to $11.5 billion. The amount of assets in the banking s y stem has increased from $192 billion to more than $2 trillion. The total of insured deposits has risen from $91.4 b i l lion to $948.7 billion. The statutory amount of deposit insurance has been increased from $10,000 to $100,000. In 1950, in assets. there were 262 banks of m ore than $100 million In 1981 there are 1,919. T hirty-one years ago - 2 - there were just 18 banks of more than $1 billion in assets. Today there are 228. Banking has taken on enormous new dimensions of complexity and sophistication. Technology, in transportation systems, including vast improvements telecommunications, has revolu t i o n i z e d the banking industry. and computers, And there is no indi cation that the pace of change w ill slow down. contrary, intense, To the worldwide c ompetitive pressures and the continuing volatile economic environment make it m ore likely than ever that precipitous change will continue. Yet, we are being asked to m o n i t o r the banking world in the jet age with nothing more than the tools that served us in banking's horse and buggy days. We are at present in the process of ma n a g i n g the phase out of interest rate ceilings as ma n d a t e d in the Depository tions D e r e g ulation and Monetary Control Act of 1980. Dep o s i t o r y I n s titu The Institutions Deregulation Committee three weeks ago voted to take actions effective August steps in that direction. 1 that will make long An important part of our task is to oversee the transition of thrifts to a d e r e gulated environment, the likes of which they have never experienced. Yet, we have had no m a j o r changes in a fundamental area of FDIC j u risdiction since the enactment of the Federal Deposit Insurance Act of 1950, 13(c) power which included for the first time Section to make capital infusions to failing banks under very r e s t ricted circumstances. The only other change in - 3- this area since then occurred with passage of the Inter national Banking Act of 1978, which extended our failed and failing bank authority to insured branches of foreign banks. FAILED OR N E A R - F A I L I N G BANK OPTIONS The FDIC now has seven options for handling failed or near failing banks. F i r s t , FDIC can pay off insured depositors of a failed bank. This was done, for example, in the failure of The Des Plaines Bank, earlier this year Des Plaines, Illinois, and it was done in three bank failures in 1980 and three in 1979. In the Des Plaines case, the bank had total deposits of $42.9 mi l l i o n in 15,000 accounts. In a payoff, are paid to the statutory limit of $100,000. depositors Account holders with deposits exceeding the limit and other creditors receive a pro rata share of the proceeds from the liquidation of the b a n k ’s assets over a period of years. F D I C 's second option is what we call a purchase and a s s u mption (P&A) the same State. transaction between banking o r g a n i zations in Healthy existing banking organizations or new o r g a n i zations bid to assume the deposit liabilities of the failed bank and to purchase certain assets and the failed b a n k ’s goodwill. Such transactions have been arranged in three cases this year and seven times each in 1980 and 1979. One notable example of this procedure occurred in 1973 when the $1.3 billion United States National There, FDIC as Receiver of the bank, Bank of San Diego, California, failed. a r r anged a p u r chase and - 4 - assumption transaction in which Crocker National Bank was the successful bidder. A purchase and ass u m p t i o n transaction by law must be projected to be less expensive than a payoff. practice, In such transactions have also proved to be less disruptive. Depositors and other general creditors recover all their funds, and banking service continues with little or no interruption, normally at the same location. A third option takes the form of a purchase and a s s u m p tion transaction involving foreign interests. occurred six times, This has the most highly publicized in 1974 after the failure of the Franklin National Bank in New York. Franklin, at the time of its failure, had over $3.6 billion in assets and $1.4 billion in deposits. Europ e a n American Bank & Trust Company, It was sold to which is owned by a con s o r t i u m of European banks. A fourth option, assumption procedure, also a v a r i a t i o n of the purchase and is to partition the failed bank's assets and liabilities and arrange for the transfer of assetliability packages to more than one parti c i p a t i n g bank. This occurred after the 1978 failure of the $607.6 mi l l i o n Banco Credito y Ahorro Ponceno of Ponce, Puerto Rico. FDIC divided the bank b e t ween two assuming banks which lessened the a n t i competitive effects of the transaction. FDIC's fifth option, u n der very limited circumstances, is to provide assistance in order to prevent the failure of a troubled bank. This has occurred only five recei v e d the power in 1950, times since FDIC most r e c ently last year when FDIC, - along with 27 banks, subject As a condition to receiving all directors and principal to FDIC approval, sation. - loaned the First P e n n s y l v a n i a Bank $500 m i l l i o n to avert its failure. FDIC assistance, 5 officers serve and FDIC must approve their c o mpen FDIC also must sanction any dividends and the bank's "plans and objectives". FDIC also received warrants for the purchase of First P e nnsylvania C o r p o ration's common stock. These are some of the key conditions which we tailored for the First Penns y l v a n i a assistance. would expect In another such case, we to develop a similar but separate set of terms and conditions as necessary to meet the situation. A sixth option, involves assistance under Section 13(e) of the FDI Act, to facilitate the m e rger of a failing bank into a healthy bank p r ior to actual failure, procedure is rarely used for a variety of reasons. most recent instance was in November, but this The 1975, when the C o r p o r a tion authorized a loan of up to $10 m i llion to facilitate the m e r g e r of Palmer First National Bank and Trust Company of Sarasota, Florida, into a newly formed national bank subsidiary of Southeast Banking C orporation of Miami, after w r i tten con firmations were received from the C o m p t roller of the Currency and the Board of Governors of the Federal Reserve System that such ass i s t a n c e was essential to effect the propo s e d a c q u i s i tion and to prevent the imminent failure of the Palmer Bank. A seventh option is a Deposit (DINB). payoff Insurance National Bank The DINB would serve solely as a vehicle of insured deposits. for the orderly In 1975 the C o r p o ration established - 6 - two DINB's in connection with the closings of the Swope Parkway National Bank, the V i rgin Kansas City, Islands, Missouri, St. Thomas, and The Peoples Bank of Charlotte Amalie, Virgin Islands. PROPOSED L E G I S L A T I O N We have proposed to the Congress and solicit your active and aggressive support for legislation to provide an eighth and ninth option: to modify the statutory Section 13(c) enable us to make capital in the N ew York thrifts, infusions more easily, test to p a r t i cularly and to permit FDIC as the R e c eiver of a large failed FDIC-insured bank to arrange a Section 13(e) purchase and assumption transaction with an o u t-of-State institution, but only if the failed bank had $2 b i l lion or more in assets. Only 107 banks in the Nati o n would be eligible __ 89 commercial and 18 savings banks in 26 S t a t e s , concentrated in N ew York, P e n n s y l v a n i a and Illinois. California, Ohio, Texas, The qualifying size is indexed so inflation will not a rtificially increase the universe of eligible institutions. s m a ller banks The other 15,000 in the nation w o uld not be affected and have no reason whatsoever to oppose our seeking a large bank solution. Our legislation is designed to give FDIC powers which are similar to those that the Federal Savings and Loan Corporation Currently, (FSLIC) already has. Insurance FSLIC may provide assistance to an insured S&L even if the a ssociation is not essential to its community and FSLIC may assist the m e r g e r of a failing insured S&L with an o u t - o f-State Federal proposed S&L. legislation gives FDIC similar capabilities. The Because -7- of the unique nature of the various financial institutions, total comparability between FSLIC and FDIC powers probably is not desirable. Our legislation, however, will provide greater comparability between the two insuring agencies. In the case of the failure of a bank of q u a l ifying size, FDIC could consider this new a lternative chase and assumption transaction, possible courses of action. for arranging a p u r together with all the other The interstate option would permit the FDIC to consider a course that would produce a meaningful purchase pr e m i u m for assets, avoid anticom p e t i t i v e effects and continue banking service. Under the interstate option the FDIC w o u l d be required to inform the State banking s u perintendent in advance whenever the FDIC determines that the interstate option m i ght be used. This is true whether a national or Sta t e - c h a r t e r e d bank is involved. If the State superintendent objects to an o ut-of-State transaction and FDIC agrees with the s u p e r i n t e n d e n t ’s reasons, then FDIC would abandon the interstate option and attempt arrange an in-State purchase and assumption proceed with an insurance pay off. with the interstate option, notwithstanding. m ay be made, However, to transaction or The FDIC can go forward the s u p e r i n t e n d e n t ’s objections before any o u t - o f - S t a t e transaction the Board of Directors of the FDIC must u nanimously agree on the decision. The Board also m ust provide the s u p e r intendent with a written certi f i c a t i o n of its determination. Under the interstate option, FDIC as the R e c eiver of a failed bank of qua l i f y i n g size would solicit offers from any - 8 - bank and bank holding companies in the country that the FDIC determines are qualified and capable of acquiring assets and liabilities of the failed bank. If the highest acceptable bid is from an o u t-of-State bank or bank holding company, the FDIC must provide the highest in-State offeror an opportunity to make a higher offer. must accept. If the in-State offeror offers more, If the in-State offeror does not, then FDIC FDIC must give the same opportunity to the highest offeror from a State a d j o i n ing the State in which the closed bank was located. adjacent State offeror also declines, the high bid, If the then the FDIC may accept regardless of the location of the bidder. This section of the bill w o u l d provide that a winning out- of-State bidder may reopen a closed bank only as a subsidiary so that no interstate branching will result. State banking law will prevail in the operation of the subsidiary. w o uld authorize operation of the subsidiary, ment notwithstanding. The section the Douglas A m e n d The section also would require that before any sale may be accomplished, appr o p r i a t e State and Federal approvals must be obtained. For instance, ing company must have approval a bank h o l d of the Federal Reserve to acquire assets of a closed bank as a subsidiary. The section would p r o hibit FDIC from making any sale that w o uld have serious a n t i c o m p etitive results. Finally, the section has a five-year sunset provision. The other basic change in our law would enable to provide assistance the FDIC to institutions whose problems stem p r i n c i p a l l y from such causes as the interest rate squeeze. -9- Currently, the FDIC can provide assistance to a bank only when it is in danger of failing and its continued operation is essential to provide adequate banking services in the community. The bill would modify FDIC powers to permit it also to act when it finds that severe financial conditions exist which threaten the stability of a significant number of insured banks and it is probable that any assistance to one of these threatened banks will su b s t a n t i a l l y reduce the risk of loss or avert a threatened loss to the FDIC. This new test for assistance provides the FDIC with the needed flexibility to react to severe financial c o n d i tions as they arise. Unlike the current test which focuses e x c l usively on the essentiality of a single failing institution, the proposed new test focuses on severe financial conditions a f f e cting the stability of a significant number of insured banks. S i g n i ficance may be m e a sured not only in terms of the total number of institutions, but also in terms of the total resources of the threatened institutions. In every instance, assistance only where such action risk of loss or avert a threatened Essentially, FDIC could provide "will s u b s t a n t i a l l y reduce the loss to the Corporation". this means that to q u a lify for a s s i stance a bank must be among a significant number of banks whose stability is t hreatened by severe financial conditions, there must be a clear threat that without assistance the bank will fail, probable that assistance will be "substantially" and it is less expensive to the FDIC than other methods of handling the potential faillure . - 10 - In addition to the two basic FDIC provisions, the proposed legislation makes related changes in our law to make the total process more workable. (A) . These are: A p r o v ision that would clarify that foregone earnings resulting from FDIC loans to insured institutions are insurance losses. Currently, FDIC may deduct from a s s e s s m e n t s received from insured banks any insurance losses it experiences before calculating the p r o p ortion of the a ssessments to rebate to the banks. For example, in a typical p u r chase and assumption trans action, that portion of projected losses not recovered by the purchase premium would be established as a reserve account and charged against assessment income. In other words, the FDIC would experience an insurance loss that m ay be deducted from assessments. A b e l ow-market-rate loan also would result in a loss to the FDIC of the difference b e t ween what FDIC could earn on the funds if left in FDIC's po r t f o l i o and what it is e a r ning from the loan. This o p p o r tunity loss is no different from a loss arising from a P&A. The structure of the t r ans action should not determine whether a loss can be recognized for insurance fund purposes. The FDIC seeks to clarify that this oppo r t u n i t y loss also is deductible from assessments. The FDIC is totally self-funded — that is, funded by bank a s s e s sments and interest income rather than by public monies. This amendment will facilitate that result continuing. (B) . A provision that would b r o aden the field of i n s t i tutions which may purchase the assets and assume the liabilities of a failed bank. In addition to FDIC- i n s u r e d banks, under the - 11 - proposal associations or banks insured by the Federal Savings and Loan Insurance Corporation would become eligible bidders. BUD G E T A R Y PROBLEMS We are fully aware of the budget problems facing our government and we believe our proposed legislation will m i n i mize the budgetary impact have a separate fund, a Federal of future bank failures. every expenditure of the FDIC represents e x p e nditure and has a budgetary impact. the powers we are asking for will result the alternatives now available to us. we will, in turn, minimize We believe in a smaller outlay and lower cost to the FDIC than if we are forced costs, While we to use only By m i n i m i z i n g FDIC's the potential budgetary impact of future failures. NEED TO ACT N OW We are talking today about e m e r gency legislation to meet a specific need. The Congress will also be considering broad, c o m p r ehensive and certainly controversial legislation to greatly expand the authority of thrift institutions with c o m mercial bank powers and to address such questions as due on sale clauses, insurance limits, usury ceilings, plus possibly export trading companies and other matters. We urge you to keep the issues separate: limited e m e rgency bill needed now; the m o r e comprehensive act now on the deliberate and act later on long term legislation. - 12 - THE STATE OF THE FDIC Both the financial and human resources of the FDIC remain strong, and we believe capable of dealing with any foreseeable eventuality, bility. given the requisite statutory f l e x i Net income to our $11.5 billion insurance fund last year topped the billion dollar m ark for the first time with a record $1.2 billion gain. $1.3 billion. This year we project net income of We also are entitled the Treasury if needed, to b o r r o w $3 b i l lion from although we do not a n t i cipate it will be Our m a j o r resource is our corps of 3,500 skilled and dedicated employees who remain committed to fulfillment of our statutory mandate of promoting the safety and soundness of the banking system while at the same time cont i n u a l l y seeking ways to do our job more efficiently. The Corp o r a t i o n is well managed In 1979 our administrative expenditures increased just 3.4 p e r cent, compared to 9.5 percent Government-wide. increase was 10.7 percent, Government. In 1980 our compared to 17.3 percent throughout Our 1981 outlays are well b e low our budget. One example of the effort of our people to improve efficiency is in the area of travel expenditures. e s t i mated 16 mi l l i o n miles duties in 1981, to carry out their bank examination a reduction of 12 percent itself a r e d u ction of nine percent achieve from 1980, from 1979. which was We are able to these savings by more careful sch e d u l i n g of examina tions and by more efficient car pooling, from our wor k force. Our staff will travel an and a spirit of cooperation -13- S u p e rvisory Innovations! Some examples of supe r v i s o r y i n n o v a tions we have undertaken in recent years are as follows: (a) our Division of Bank Supervision and the Division of Management Systems and Financial system, Statistics developed a computerized which we call our Integrated Mon i t o r i n g System, for the primary purpose of m o n i toring the activities of banks between examinations to help us decide where best to allocate our examiner time and resources. With this system we have been able to reduce the number of examinations conducted. (b) the development of a m o d ified e xamination concept, which provides for the r e view of the safety and soundness essentials of a well managed bank without requiring the comprehensive detail of a full-scope examination. This p r o g r a m has enabled us to reduce the time required to p e r f o r m most examinations. (c) in c o o p e ration with individual States, cantly expanded we have s i g n i f i the divided examination p r o g r a m so that we presently p a r t icipate with 20 States in divided examination a r r a n g e m e n t s covering 3,400 banks, just over one— third of 3*11 insured State nonmember banks with resultant substantial savings. (d) last year our D i v ision of Ban k S u p e rvision d e v eloped s treamlined common application forms. These are n ow in joint use by the C orporation and 22 States, r e q u iring a bank to complete only one form — requires only essential tion. This effort, a form that information for any p a r t i c u l a r a p p l i c a together with closer coop e r a t i o n with the State in the processing of applications, thereby has enabled us to -14- render more expeditious decisions on these applications and reduced the time required by banks to complete the application. Bank examination is the heart of our s u p e r visory program to p r o m o t e the safety and soundness of the banking system. The FDIC will continue to exercise a strong bank examination function. In 1981 we expect to conduct 5,800 safety and s o u n d ness examinations. Recent economic circumstances have created new and serious problems for thrift institutions, savings banks which we supervise. i n c l uding the insured mutual Late last year we established an ongoing project team to monitor conditions in the thrift industry and develop strategies and polic i e s situation. for addressing the We have increased our s u p e rvision of these i n s t i t u tions through increased examinations and visitations, more timely and thorough reporting of financial d e v e l opments by the banks to the FDIC, and more frequent m e e t i n g s and discussions with the trustees of those institutions e x p e r iencing difficulties. This has placed added burdens u pon our resources; however, we are able to meet the challenge largely because of our efforts to develop a total supervisory p r o g r a m which has the built-in flexibility to handle such situations when they arise. EXPERIENCE OF 1980 The year 1980 was marked by substantial the n a t i o n ’s economy and credit markets. turbulence in Output and e m p l o y ment declined s ubstantially in some vital sectors of the economy. The housing and auto industries were p a r t i cularly -15- hard hit. Inflation, produ c e r prices, as measured by indexes of consumer and continued to soar at doubl e - d i g i t rates. These developments in the economy cont r i b u t e d to instability in the financial sector, as reflected most notably in the movement of interest rates. The pattern of interest rate changes last year was u n p r e c e dented in recent h i s t o r y , both with respect and f r e q uency of change. from 13.25 percent The prime rate, to the m a g n itude for example, to a record 20 percent, declined to less than 11 percent and ended the year at a new record cent. rose level of 21.5 p e r These wide fluctuations and the unprec e d e n t e d levels to which interest rates rose imposed stresses on the economy and the banking industry. a substantial The high interest rates contributed to growth in money market mutual funds during the year. During the first half of this year, reduction in the inflation rate and, we have seen a slight d u ring the second quarter, some evidence of a slowing in the rate of economic activity. Nevertheless, levels, interest rates have remained at or near record thereby providing an u ncomfortable environment for some commercial banks and most thrift institutions. MUTUAL SAVINGS BANKS The m u tual savings banks pr o b l e m is centered in New York City but not limited to that city. Higher interest rates have si g n i f i c a n t l y increased the cost of savings ban k deposits. While yields on savings bank earning assets have risen, they -16- have done so much more slowly than deposit costs. heavily concentrated in long-term, bonds which turn over slowly. Assets are fixe d - r a t e mortgages and The p r o b l e m has been exacerbated by slow deposit growth resulting from such causes as a low p e r sonal savings rate and increased c ompetition funds and market instruments. limited savings banks' Indeed, from money market These conditions have severely ability to acquire hig h e r - y i e l d i n g assets. many savings banks are forced to use funds generated from mortgage amortization payments to finance deposit outflows and operating losses with little left over to invest in higher yielding assets available in today's market. Last y e a r , FDIC-insured mutual savings banks aggregate lost money. 1 in the The loss amounted to about 0.17 percent of average assets compared with net income of about 0.45 p e r cent of assets in 1979 and 0.59 percent in 1978. not evenly spread banks, throughout which account FDIC-insured the country. The loss was New York City savings for about 40 percent of the deposits of thrift institutions, average assets last year. lost about 0.62 percent of However, the rest of the industry had net income of about 0.17 percent. The w e a k e r p e r f ormance of m a n y of the N ew York City savings banks reflects a c o m b i n a tion of factors, the most significant being inflation and the resultant high interest rates, tions on p e r m issible lending, but also i n c l uding past r e s t r i c past restrictive usury ceilings, u n f a vorable State and city tax treatment, gage activity, r e l a t i v e l y low m o r t and a high degree of c o m p e t i t i o n from large money center institutions and money market funds. 0 -17- During the first half of this year, have further deteriorated — that is, savings bank earnings losses have increased. The FDIC has been collecting monthly income and deposit data from those savings banks with deposits of $500 m i l l i o n or more in order to m o n i t o r their p e r f o r m a n c e closely. tutions account deposits. These 79 insti for about 75 percent of all savings bank During the first five months-of 1981, only 14 of the large savings banks had positive net income and by May only 11 had positive operating income. Overall, these 79 savings banks lost a net $400 million even after taking account of Federal tax credits and security gains from very selective asset sales. If this loss were annualized, of assets. of the loss. it would amount to 0.82 percent Savings banks in New York City accounted for much On an annualized basis, their loss for the first five m o n t h s of this year was over 1.3 percent of assets and for the month of May, of assets. the annualized loss was 1.55 percent It should be noted that smaller savings i n s t i t u tions not included in our monthly survey generally are doing better than the larger institutions though their perf o r m a n c e has also d eteriorated this year. Interest rate and deposit flow data for June suggest that savings bank performance that month was at least as bad as in May. Savings bank earnings during the balance of the year will be importantly affected by interest rates. remain constant, If rates or if they decline only slightly, deposit costs will continue to rise as low-cost p a s sbook accounts and -18- 7-1/2 and 7-3/4 percent certificates shift into higher-cost deposits or leave institutions altogether. There still remains an extremely large pool of mutual savings bank capital available to sustain the industry for a considerable period of years, although individual institutions may well be troubled earlier if the present inflation and interest rate environment continues. If interest rates decline q u i ckly and m a r k e d l y and remain low for a sustained period, most savings banks should be able to adjust portfolio returns to bring them into line with the market and make appropriate adjustments to attain a profitable position. Savings banks then would have the opportunity to take advantage of the broadened lending powers authorized under the D e p o sitory Institutions Deregulations and Monetary Control Act of 1980 and State laws to reduce their exposure to future interest swings. Thus far, prevailing financial m a rket c o n ditions and other factors have made it difficult for savings banks to take advantage of these broadened powers to any s i g nificant degree. If unfavorable conditions persist in financial m a r k e t s for a prolonged period, then some savings banks are likely to need assistance if they are to continue Since we cannot predict rates or other variables, requested, to operate. the future course of interest we are unable if any large savings banks to predict, as you face the prospect of failure or when such a prospect might begin to materialize. -19- CQNDITION OF INSURED COM M E R C I A L BANKS Despite the conditions that prevailed in financial markets throughout last year and the sharp drop in economic activity during the second quarter of the year, most c o mmer cial banks performed quite well in 1980. In the aggregate, net income and assets grew by 10 percent. Despite our earlier concerns and those of many financial m a rket observers regarding the po s i t i o n of smaller commercial banks, most small banks — $100 m i l l i o n — those with deposits of less than performed quite well in 1980. We should note, however, that smaller banks have e xperienced a sizable transfer of funds from low-cost d e p osits to money market certificates and other more expensive deposits. Also, many small banks hold large amounts of mor t g a g e s and other lon g - t e r m assets that would prevent them from raising their return on assets sufficiently in the short run to compensate for increased money costs. Apparently, however, this was not a p r o blem in 1980. For 1981, in addition to the rising costs of time and savings deposits, on bank costs. retail deposits, universal N OW accounts have also put pressure Smaller banks, with a larger c o ncentration in seem more v u l n erable to the increased costs and competition associated with NOW accounts. Another factor that has become increasingly important is c o m p etition from money market funds. Growth in retail time and savings deposits at commercial banks has slowed m a r k e d l y this year, although not as d r a m a tically as at thrifts, and competition - 20 - from money market funds undoubtedly played a very important role in this development. Again, small banks with a greater emphasis on retail deposits may be more affected by this development. In assessing developments thus far in 1981, capped by the availability of data, banks. we are h a n d i parti c u l a r l y for small We are just beginning to process m i d - y e a r reports which should give us a better reading on their perf o r m a n c e thus far in 1981. We are able to make some general observations based on income reports for the first quarter of 1981, by banks with assets of $300 m i l l i o n and over, financial statements of banks, which are filed and from published although these tend to be more available for the larger, pu b l i c l y traded institutions. First quarter data for the larger banks suggest that they were able to m a i ntain net interest ma r g i n s despite the rising costs of deposits. Returns on assets appear to a p p r o x imate those realized in 1980 and pub l i s h e d financial reports indicated that year-to-year earnings improvement between the first quarter of 1980 and the first quarter of 1981 a p p r o x i m a t e d increases in assets. For the second quarter of 1981, we look for a m i xed p e r formance for larger commercial banks. C o m p a r i n g the second quarter of 1981 to the second q u a rter of 1980 may well show almost as many minuses as pluses. To some degree, this appears to reflect the fact that the second q u a r t e r of 1980 was a very strong quarter for large banks. When interest rates declined rapidly in the second quarter of 1980, reduced money costs - 21 - actually widened interest margins at the money center banks. That appears to be showing up now in the form of unfavorable y ear-to-year comparisons. As I indicated, we do not have as precise a reading on the p erformance of smaller commercial banks. Weaker deposit perf o r m a n c e and some of the other d e velopments that m e n t i o n e d suggest that 1981 may not be quite as good a year for small banks as 1980. received, offices, However, including the comments the information we have from our various regional indicates that most small banks continue performing well. I have to be They apparently have been less vulnerable to interest rate risk, at least as a group, than anticipated. We must remain alert to any continued i nstability in the economy, further competition for bank and thrift funds from the u n r e g ulated sector of the financial markets, weakened condition of other types of financial institutions which will test the capabilities of bank managers, and and the regulators, legislators throughout the year. CONCLUSION The banking scene today is fast-changing. FDIC remain f irm in our commitment We at the to the people in m onitoring the safety and soundness of the banking system. We believe that the situation today warrants the revision in the tools of our trade that we have outlined. We urge your q u ick action. 97th Cong. 1st Sess. July 14, 1981 TEXT OF LEGISLATION TO ACCOMPANY STATEMENT ON STATE OF BANKING INDUSTRY AND FDIC ABILITY TO HANDLE PROBLEMS A BILL To provide flexibility to the Federal Deposit Insurance Corporation to deal with financially distressed banks. Be it enacted by the Senate and House of Representatives of the United States of America in Congress as sentoled, ASSISTANCE TO INSURED BANKS SEC. 1. Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. 1823(c)) is amended to read as follows: " (c) (1) • In order to reopen a closed insured bank or, when the Corpora tion has determined that 'an insured bank is in danger of closing, in order to prevent such closing, the Corporation, in the discretion of its Board of Directors, is authorized to make loans to, or purchase the assets of, or make deposits in, such insured bank, upon such terms and conditions as the Board of Directors may prescribe, when in the opinion of the Board of Directors the continued operation of the bank is essential to provide- adequate banking service in the community. " (2) Whenever severe financial conditions exist which threaten the sta bility of a significant nurrtoer of insured banks, the Corporation, in the discre tion of its Board of Directors, is authorized to make loans to, or purchase the assets of, or make deposits in, any insured bank so threatened, upon such terms and conditions as the Board of Directors may prescribe, if it is prctoable such .action will substantially reduce the risk of loss or avert a threatened loss to the Corporation. " (3) Any loans and deposits made pursuant to the provisions of this para graph may be in subordination to the rights of depositors and other creditors.". - 2 ( - PURCHASES OF INSURED BANKS SEC. 2. (a) Section 13(e)" of the Federal Deposit Insurance Act (12 U.S.C. 1823(e)) is amended to read as follows: ** Whenever in the judgment of the Board of Directors such action will reduce the risk of loss or avert a threatened loss to the Corporation and will facilitate a merger or consolidation of an insured bank with another insured de pository institution or will facilitate the sale of the assets of an open or closed insured bank to and assumption of its liabilities by another insured depository institution, ’ the Corporation may, upon such terms and conditions as it may deter mine, make loans secured in whole or in part by assets of an open or closed insured bank, which loans may be in subordination to the rights of depositors and other creditors, or the'Corporation may purchase any such assets or may guarantee any other insured depository institution against loss by reason of its assuming the liabilities and purchasing the assets of an open or closed insured bank. Any insured national bank or District bank, or the Corporation as receiver thereof, is authorized to contract for such sales or loans and to pledge any assets of the bank to secure such loans. (2)(A) Whenever an insured bank that had total assets equal to or greater than 0.12 percent of aggregate assets in domestic (U.S.) offices of in sured banks (as determined from the most recently compiled Reports of Condition filed by insured banks) is closed and the Corporation is appointed receiver, •then, the Receiver may, in its discretion and upon such terms and conditions as it may determine, and with such approvals as may elsewhere be required by any State or Federal courts and supervisory agencies, sell assets of the closed bank to and arrange for the assumption of the liabilities of the closed bank by an insured depository institution located in the same State as that in which the closed bank was chartered but owned by an out-of-State bank or bank holding com pany. Notwithstanding subsection (d) of Section 3 of the Bank Holding Company Act of 1956 or any other provision of law, State or Federal, the acquiring institution is authorized to be and shall be operated as a subsidiary of the out-of-State bank or bank holding company; except that an insured bank may operate the assuming institution as a subsidiary only if specifically authorized by law other than this paragraph. (B) In determining whether to arrange a sale of assets and assumption of liabilities of a closed insured bank under the authority of. this paragraph (2), the Receiver may solicit such offers as ’is practicable from any prospective purchasers it determines, in its sole discretion, are both qualified and capable of acquiring the assets and the liabilities of the closed bank. (i) If, after receiving offers, the highest acceptable offer is from a subsidiary of an out-of-State bank or bank holding company, the Receiver shall permit the highest acceptable offeror of any-existing in-State insured deposi tory institutions and subsidiaries of in-State bank holdinq companies to submit a new offer for the assets and liabilities of the closed bank. If this institu- tion reoffers a greater amount than the previous highest acceptable of¿.er, then i-he Receiver shall sell the assets and transfer the liabilities of the closed bank to that institution. (ii) If there is no acceptable offer received from an existing in state depository institution or subsidiary of an in-State bank holding company, or if there is no reoffer greater than the highest acceptable offer, then the Receiver shall permit the highest acceptable offeror 01. the subsioiaries of the insured barite chartered in States adjoining the State in which the closed bank was chartered and bank boldina companies whose banking subsidiaries' operations are principally conducted in States adjoining the State in which the closed bank was chartered (if its offer was rot the highest received by the Receiver) to make a new offer for the assets and liabilities of the closec banx. u. wnis subsidiary reoffers a greater anount than the previous highest acceptable offer then the Receiver shall sell the assets and transfer the liabilities of the closed bank to that institution. (iii) ‘if no offer under subparagraphs (i) or (ii) is received which exceeds the original highest acceptable offer, then the Receiver shall sell the assets and transfer the liabilities of the closed bank to the hiqhest acceptable offeror. / (3), (C) In making a determination to solicit offers under subparagaraph , , supervisor aJB JMloj. the bc]-=fp the State banx t^ e in in which w.uui the ^ closed insures bank was chartered shall be consulted. The State bank supervisor shall be given a rea- sonable opportunity, an! in » instance a period of less than twenty-four hours, to object to the 'use of the provisions of this paragraph (2). If the State supervisor objects, the Receiver may use the authority of this paragraoh (2) only by a unanimous vote of the Board of Directors. Ihe Eoard of Directors shall provide to the State supervisor, as scon as practicaole, a w r i ^ e n certi fication of its determination. - 5 - (D) The Receiver shall not make any sale under the provisions of this paraaraoh (2) — (i) which would result in a monopoly, or which would be in fur therance of any combination or conspiracy to monopolize or to attempt to monopo lize the business of banking in any part of the United States; or (ii) whose effect in any section of the country may be substantially to lessen competition, or to tend to créa re a monopoly, or which in any other manner would be in restraint of trade, unless it finds that the anticompetitive effects of the pro posed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served. (E) Nothing contained in this paragraph (2) shall be construed to liir.it the Corporation’s powers in paragraph (1) to assist a transaction under this paragraph. (3) As used in this subsection — (i) the term "Receiver shall mean the Corporation when it has been appointed the receiver of a closed insured bank;' (ii) the term "insured depository institution" shall mean an insured tank or an association or bank insured by the Federal Savings and loan Insurance II Corporation; (iii) the term "existing in-State insured depository institution shall mean an insured depository institution that is chartered in the same State as the State in which the closed bank was chartered; (iv) the term "in-State bank holding company” shall mean a bank holding company whose banking subsidi aries' operations are principally conducted in the same State as the State m which the closed bank was chartered; and (v) the term "out-of-State bank or bank - 6 - holding company" shall mean an insured bank having its principal place of bank ing business in a State other than the State in which the closed bank was chartered or a bank holding company whose banking subsidiaries’ operations are principally conducted in a State other than the State in which the closed bank was chartered." (b) The provisions of paragraph 2 of section 13 (e) of the Federal Deposit Insurance Act shall oease to be effective five years from the date of its enact ment. The expiration of the effectiveness of section 13(e) (2) , however, shall have no effect on the continued legality of any sale or operation authorized while it was effective. / - 7 - AGREEMENTS DIMINISHING THE RIGHTS OF THE CORPORATION SEC. 3. Section 13 of the Federal Deposit Insurance Act is amended by adding at the end thereof the following new subsection: " (ft) No agreement which tends to diminish or defeat the right, title or interest of the Corporation in any asset acquired by it under this section, either as security for a loan or by purchase, shall be valid against the CorDoration unless such agreement (1) shall be in writing, (2) shall have been exe cuted by the bank’and the person or persons claiming an adverse interest there under, (3) shall have been approved by the board of directors of the bank or its loan committee, and (4) shall have been, continuously, from the time of its execution, an official record of the bank. 1 - 8 - FDIC ASSESSMENTS SEC. 4. The third sentence of section 7(d) (1) of the Federal Deposit Insurance Act (12 U.S.C. 1817(d) (1)) is amended — (a) by striking out ’’and" the second place it appears; and (b) by inserting before the period at the end thereof the following: "? and (4) any lending costs for the calendar year, which shall be the difference between the rate of interest earned, if any, fran each loan made by the Corpora tion pursuant to section 13 after January 1, 1981 and the Corporation's average investment portfolio yield for the calendar year.". THE BANK HOLDING COMPANY ACT OF 1956 SEC. 5. Section 3(d) of the Bank Holding Company Act of 1956 (12 U.S.C. 1842(d)) is amended by adding after, the word "application" the following: " (except an application filed as a result of a transaction to be accomplished under section 13 (e) (2) of the Federal Deposit • / Insurance Act (12 U.S.C. 1823(e) (2))". j,
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