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J^C.CAUt'fìi' |i>SU£S
/M
An address by
L. William Seidman, Chairman
Federai Deposit Insurance Corporati
Washington, D.C.
\
X
Before the
NATIONAL COUNCIL
MANAGEMENT CONFERENCE
;
/
New York, New York,
y ) December IO, 1985 ^
Current Issues
I am pleased and honored*to address the National Council Management Conference.
Our meeting today is fortunate 'for me.
my way through the wide range of
industry.
As a new kid on the block, I am working
issues confronting the financial
Regardless of the type of charter your
institution may hold, or
whether we are regulators or regúlateos, we share a common goal:
sound and prosperous financial system.
services
a stable,
Being here gives me an early opportuni
ty to hear some of your views about how that goal can be achieved.
I would like to take a random walk through some current issues in the thrift
industry.
Items
include:
(2) Massachusetts
(I)
the
certificate
Insurance conversion;
program
(3) Funds'
mergers
past
and
future;
(4) risk-related
premiums and capital; and (3) business plans and FDIC.
I. The Certificate Program.
This
audience
scarcely needs to be reminded that thrift
had too many tough years.
institutions
Ironically, many of the industry's problems devel
oped as a result of our Nation's long-standing commitment to housing.
this commitment was
and
sions for the thrift
supply
of
mortgage
is
funds,
interest rates,
laudable,
industry.
lend long and borrow short.
deposit
have
the
it had adverse repercus
To ensure that there would be an adequate
public
As
in practice
While
policy
consciously encouraged thrifts to
long as there was only minimal pressure on
industry's underlying maturity mismatch problem
-
could be
Ignored.
However,
2*
during the
late
1970s, the results of a poorly
managed economy were manifested in a high inflation rate and rising interest
rate levels.
When these pressures resulted in rising deposit interest rates,
the magnitude of the industry's problems became a painful reality.
The trauma faced by the thrift industry beginning in the late 1970s was respon
sible to a great extent for a significant number of legislative initiatives,
including deposit
interest rate
deregulation,
a wider array of permissible
investments available to many thrift institutions and the net worth certificate
program mandated in the Garn-St Germain Act of 1982.
Initially, the FDIC opposed the net worth certificate provisions of Garn-St
Germain on the grounds that the program would provide no "real" capital to
troubled thrifts,
institutions.
and would
Because
of
limit
these
its flexibility
reservations,
in dealing with
savings
banks
failing
participating
in the program were required to enter into an agreement with the FDIC regarding
periodic preparation and submission of meaningful business plans,
on growth
and a commitment to actively seek
sources.
To
Voluntary
Assisted
willingness
provide
to
an
incentive to recapitalize,
Merger
consider
recapitalization
Program
("VAMP"),
whereby
the FDIC
the
FDIC
providing substantive assistance to
limitations
from outside,
instituted
a
expressed
a
facilitate the
merger or acquisition of a participating savings bank.
Under the theory that things always continue in the same direction, the FDIC's
initial fears may have proved to be well founded.
However, as usual, events
-3-
were to the contrary.
Since Garn-St Germain, the interest rate climate gener
ally has been favorable, with the most recent rate decreases bringing virtually
all
FDIC-insured
significance
thrifts
is the
have not observed
above
the
responsibility
savings
banks
break-even
exhibited
level.
Of
by management;
attempting to recoup past
perhaps
greater
generally,
we
losses by means
of excessive growth or by upgrading asset returns by getting into high-risk
ventures.
And, at the risk of praising my predecessor, the FDIC's policies
in the areas of capital adequacy and asset quality may have played some role.
In today's Interest rate environment, thrift institutions have become a more
attractive investment.
Over the past few
thrifts have been acquired,
ass isted basis.
months, some of our most troubled
some with FDIC assistance and others on a non
We currently are evaluating a number of other
proposals.
A common thread that runs through both the completed transactions and the
current proposals
normal
capital
is some degree of forbearance with respect to the FDIC's
requirements.
While we recognize that
It Is unrealistic to
require meeting these requirements immediately, we are uneasy about allowing
an institution to further
returns
to the
investors.
leverage an already thin capital base to increase
We believe that
future asset growth
should be
adequately capitalized.
In past transactions, capital levels and phase-in periods have been negotiated
on an
individual
be handled.
consistency
basis.
However,
is the
This may always be the way matters will
this has
hobgoblin of
led to some degree of
small
minds,
we would
inconsistency.
have to
While
like to develop an
-4-
appropriate policy to deal with these
issues in a consistent manner.
we hope to have a policy in place to guide potential
for
future
savings
bank
acquisitions,
we will
While
investors and ourselves
continue
in the
interim to
deal with sales and mergers on a case-by-case basis.
2.
Massachusetts Conversion.
Another
in
development concerns the
Massachusetts.
Until
deposit
recently,
insurance status of savings banks
deposits
in
many
Massachusetts
mutual
savings banks had been fully insured by the Mutual Savings Central Fund (MSCF),
an independent agency created by the State.
record
during
its more than 50 years
in private and state deposit
MSCF had compiled a distinguished
in operation.
Insurors nearly has been destroyed by problems
of State funds in Nebraska, Ohio and Maryland.
Massachusetts
earlier
this
to apply
federal
deposit
for
But public confidence
year
took the
step
Responding to this situation,
of
requiring
savings
banks
insurance through the FDIC and F S U C .
MSCF
would continue to insure deposits over $100,000.
To facilitate the new
liquidating.
insurance plan,
MSCF
is
in the process of partially
It has committed to provide necessary
funds to* enable those
banks applying to the FDIC to meet FDIC capital standards.
Because Massachu
setts law essentially prohibits MSCF from donating funds to any of the banks,
it was necesssary to develop a capital
assistance plan to get around that
roadblock.
Under the plan that was worked out between MSCF and the FDIC, MSCF will provide
-5-
capltal
meet
assistance to MSCF member
FDIC
capital
issue Mutual
to MSCF.
standards.
Capital
banks
In return
Certificates
(MCCs)
applying to the FDIC that do not
for
this
and/or
assistance,
banks
Subordinated Notes
would
("SNs")
For its part, the FDIC has agreed to count funds obtained through
MCCs as primary capital and funds obtained through SNs as secondary capital.
The proposed MCCs are patterned after the instrument authorized by the Monetary
Control
Bank
Act of
Board.
1980
Terms
for
of
institutions
SNs were
supervised
by the Federal
designed to meet the
Home Loan
definition contained
in FDIC regulations.
Applications for FDIC insurance have been approved for 81 Massachusetts savings
banks.
To
date,
about
13 capital
assistance agreements have been entered
into and capital conditions have been satisfied.
In the time remaining, I would like to touch on two issues that are of interest
to all financial
institutions, regardless of the type of charter they holds
the first relates to the merger of the deposit insurance funds; the second
relates to risk-related premiums.
3.
The Insurance Funds* Merger,
Faced
with
a seemingly
ability to survive.
impossible task,
the
FSLIC has shown
It has had to support a massive industry restructuring.
In dealing with the problems caused by credit risk,
some
irresponsible managements,
a remarkable
the FSLIC has
interest rate risk, and
at times
shown boldness
and
-
imaglnation despite
Its
6-
limited personnel
than one occasion the FDIC has borrowed
and financial resources.
On more
ideas from some of the solutions
forged by FSLIC to treat ailing thrifts.
According to retiring head of the Fund Peter Stearns, the S&L Fund has serious
financial
troubles.
FSLIC will
addressed
He says that it is inescapable that at some point the
require assistance.
is
The
fundamental
question that needs to be
from what source the necessary fundswill be supplied.
There
are three alternatives, none of which represents an easy choice.
One alternative is to raise the funds from the S&L industry itself, in which
case the
principal
with this rather
burden would
painful
fall
alternative,
on the
at
stronger
institutions.
least some of those
Faced
Institutions
might elect to shift charters to avoid a special assessment.
A second
alternative
Is to recapitalize the FSLIC Fund through federal tax
dollars.
As an
It would
be like to * operate
Independent
certainly would be a step
Insurer,
with
I don't want to speculate about
congressionally
appropriated funds.
in the wrong direction in my opinion —
give the government rights which
I would hope could be
what
It
it would
left to the private
sector.
A third alternative —
months —
one which has received considerable press
Is to merge the two deposit insurance funds.
in recent
Frankly, we already
have plenty to do at the FDIC, but we certainly want to do what we can to
-7-
be helpful.
I am sure a merger
is the wrong approach for
insuring finan
cial institutions that undertake minimal commercial loan-making activities.
As far as the FDIC
is concerned,
we shall
we can be under the circumstances.
be ready to be of whatever aid
If Congress decides we should take addi
tional actions to be of assistance, we will be prepared to do so.
4.
Risk-Related Premiums and Capital.
The aversion of policy makers to come to grips with difficult choices extends
beyond the problems confronting the FSLIC.
hensive reform
To date, the enactment of compre
legislation has proved to be an elusive goal.
is any guide, we may have to settle for a piecemeal
eventuality,
enactment of
legislation
authorizing
the
If the past
approach.
In such an
FDIC to
implement a
risk-related premium system would rank high on our "wish list."
For some time, the FDIC has felt that the present flat-rate deposit insurance
premium system has unfairly subsidized riskier banks at the expense of the
better managed
a proposed
institutions.
To this end, we recently sent out for comment
risk-related premium system applicable to commercial
banks.
We
think that what the FDIC is proposing represents a workable system that can
be improved as we all gain further experience in this area.
The FDIC has not made any proposal relating to a risk-related premium structure
for FDIC-insured thrift
a proposal,
institutions.
Before we are able to formulate such
we must come to grips with the realities of the situation —
-
the
problems
facing
many
thrifts
8-
(low
capital
levels,
excessive
interest
rate risk and earnings insufficient to recapitalize within a reasonable time
frame) exist and cannot easily be resolved in a short period of time.
While
we have not resolved many of the relevant issues, the FDIC in the near future
likely will propose a risk-related premium system for thrifts not dissimilar
to the commercial
bank proposal.
However,
implementation may be phased
in
over time, in much the same manner as the FDIC has applied capital regulations
to the thrift industry.
At this
point,
it may be
relating to commercial
objective statistical
informative to briefly
banks.
model,
review the FDIC proposal
Under this proposal, the FDIC would use an
based solely on Call
Report data, to classify
banks as having either normal- or above-normal risk.
In terms of determining
which of the above-normal risk group does or does not get a full assessment
credit, we will distinguish between those banks having composite CAMEL ratings
of
I or 2 and those which are rated 3, 4 or 5.
The latter group —
those
banks rated as above-normal risk and rated 3, 4 or 5 —— will receive no assess
ment credit.
While banks having a composite CAMEL rating of I or 2 and which
are rated as above-normal risk by the statistical test will receive the rebate,
they
will
be
immediately
subject to
analysts are satisfied that the bank
stop there.
it will
will
additional
financial
is indeed a
If our
I or 2, the process will
If the analyst finds significant areas of weakness In the bank,
be promptly scheduled for an FDIC examination.
be available
review.
before the
next risk-related
These exam results
assessment cycle begins
so
-9-
that these banks will
lose their rebate In that next cycle in the event their
CAMEL rating is lowered below a I or 2 and they fail the statistical test.
As
I indicated
earlier,
the
risk-related
premium
likely will parallel this general framework.
system
for
thrifts
most
In fact, we could include savings
banks in our statistical model and apply a uniform system to all FDIC-insured
institutions.
However,
the risks presently
Inherent in the thrift industry
are somewhat different than in commercial banks.
Specifically, the commercial
bank system does not Include a measure of interest rate risk which, we believe,
should be part of a system applied to thrift
to
collect
Information
with the Call
to
measure
savings
Report for year-end
1985.
institutions.
banks'
risk
begin
exposure
beginning
Unlike some proponents,
the FDIC
does not view a risk-based premium system to be a panacea —
improvement over the status quo.
We will
just a substantial
It would be less arbitrary and considerably
more fair than the current system.
It would provide a significant, though
not overwhelming, financial Incentive for banks to avoid excessive risk-taking
and to correct their problems promptly.
Perhaps as important. It would send
a strong signal to a problem bank's management and board of directors.
Another suggestion for regulatory change
requirements.
premiums.
are
not
other
Some
have
posed
this
It seems to me there
mutually
deals
risk-based
with
capital
exclusive.
capital
One
idea
as
a
substitute
for
risk-based
is no reason to take this position;
deals
requirements
requirements
Is a system of risk-based capital
plan
with
of
bases
insurance
depository
an
premiums
while
institutions.
individual
bank's
they
the
The
capital
-
standard
on
the type of
deemed to entail
greater
activities
10-
that
the
risk would require
bank
undertakes.
larger capital
Activities
reserves while
investment in low risk, highly liquid assets would need little or no capital.
It should be recognized that the agencies already employ risk-based capital
standards.
The federal
banking agencies have for the first time in history
adopted a uniform minimum capital standard for banks of all sizes.
standard Is applicable only to well-run banks.
problems,
weak earnings,
a high growth
rate or
poor management,
The minimum
Banks with above-normal
excessive
loan
interest rate exposure,
sizeable off-balance-sheet exposure are required to
meet a higher capital standard on a case-by-case basis.
Proponents of risk-based capital requirements note that It has special merit
in that
manner
It weighs ex ante riskiness
in a bank's operation.
in which risk-based capital requirements would operate are not clear
at this point.
It seems to me its usefulness will depend on how and what
kind of assets are classified for risk.
of the
However, the
other
usefulness
regulators
is
the
on
ability
risk
of
We shall be studying the suggestions
capital
the
very
regulators
carefully.
to
The key to
judge
risk
by
its
asset
classification.
5.
Savings Banks' Business Plans.
An issue
is the
in your
FOIC's
increase capital
industry which has recently been receiving some attention
request
for
business
plans
from
savings
over time to meet minimum standards.
banks
Many
designed
to
have objected
11
to
the
FDIC
request
because
it,
in effect,
requires
an
institution
to
automatically admit to operating in an unsound manner if it does not achieve
the
capital
objection.
goals
Our
set
goal
forth
was
to
in
its
assure
plan.
that
This
is
institutions
progress in achieving their stated business objectives.
an
understandable
would
make
real
We have to work
with you to achieve this objective while avoiding requesting institutions
to make unwarranted admissions against their interests.
We will be working
with your counsel on new language which will be satisfactory to all parties.
This
to be
is
a good
example
of how important
flexible where possible,
by the regulated, while,
maintaining the safety,
promoted.
So,
I look
open and we will listen.
and
it is for a regulatory agency
to listen to the positions expressed
at the same time, assuring that the mission of
stability and economic
forward
success of the system is
to hearing your views.
Our door will be
@FedFRASER