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/ o OUR MISSION AND THE CONGRESS r u2) Boca R aton , F lo r id a , Sep tem b er 19, 1986^ Jfh Good morning la d ie s and gentlemen and thank you fo r in v itin g me here. I t is an honor to come before you, particularly during t h i s prosperous y e a r f o r s a v in g s i n s t i t u t i o n s . A few days ago The Wall Street Journal reported operating p r o fit of state-chartered savings banks in New York more than doubled during th e second quarter to $115 mill ion. The Jo u rn al also noted th e n e t worth to deposit r a t i o r o s e t o a p o s it iv e 6.57 p e r c e n t. Things have come a long way since 1981, when only 7 p ercen t o f th e F D IC -in su re d s a v in g s b an k s in t h i s s t a t e re p o r te d any e a r n in g s . I'm delighted to say a ll of th e savings banks th e FDIC insures in New York reported net income during th e f i r s t quarter o f 1986. I'm hopeful th is tr e n d w ill c o n tin u e . The good fortune you are experiencing tie s in with th e main to p ic o f my discussion today. On September 15, th e n et worth c e r t if ic a t e program expired along with some emergency powers I w ill be d iscu ssin g in a moment. But, f i r s t l e t me sh are some thoughts about th e n e t worth c e r t i f i c a t e program . As you know, th e FDIC was authorized to o ffer net worth c e r t if ic a te s in 1982. You may not remember though, th e FDIC s tr o n g ly r e s i s t e d th e concept. Fortunately, Congress showed th e wisdom not to agree with u s— th e program p ro b a b ly saved th e in s u r a n c e fund b i l l i o n s . In th is state alone, 25 savings banks with over $40 b illio n in a s se ts received $674 million in n e t worth c e r t if ic a te s . For many o f th e s e banks, t h e ir a s s e ts were worth 20 to 30 p ercen t le s s than book— a bad tim e to liquidate. Now n et worth c e r t if ic a t e s are being repaid; only 13 New York institutions are participating and n et worth c e r t if ic a t e s are down to $512 m illio n . I'm convinced th e n e t worth c e r t if ic a t e program proved t o b e a valuable tool, helping you and th e FDIC through some p re tty tough tim es. But, th e FDIC lo st more than th e c e r t if ic a t e program on September 15. Another important t o d which helped reduce th e FDIC's c o s ts in dealing with ailing commercial banks also expired. That to o l i s our au th ority to cross state boundaries, when n ecessary , to seek bid d ers fo r la rg e fa ilin g b a n k s. As many of you know, we are encountering an in creasin g number of cases where few o r no b id s to acqu ire a fa ile d bank are submitted to th e FDIC. A p ay off o f insured d e p o s ito rs i s u n s e t t lin g f o r t h e a ffe c t e d community. And i t i s c o stly to th e in su rance fund. The option to seek buyers from cut of state can reduce our c o sts, which d ir e c tly b e n e fits you. The Senate Banking Committee has agreed to lower th e $ 5 0 0 m illion size threshold to $250 million. The $ 500 mi l l i on th resh old i s to o high of a h u rd le , a s most tr o u b le d b an k s a r e c o n s id e r a b ly s m a lle r . In addition, upon determination by th e pertinent chartering au th ority th at a bank is failing, th e FDIC would be authorized to arrange an open bank acquisit i on. Such an opportunity means franchise value would be le s s eroded by th e flighty of bank customers and tax benefits may be retained. This would be reflected in bids from potential purchasers, thereby reducing th e c o sts to y o u r in s u r a n c e fu nd . The Senate b ill also recognizes situations where a f a i l i n g bank i s an integral part of a larger banking organization. I t would expand th e scope of in terstate acquisition authority to include bank holding companies when th e failing bank is over $250 million and represents a sig n ifica n t portion o f th e o r g a n iz a tio n . Today, potential bidders may be discouraged from bidding on a fa ilin g bank i f they cannot also acquire key affiliates. The value o f a fa ilin g bank i s diminished when separated from i t s network. T his r a is e s th e Fu n d 's costs. Moreover, th e dismemberment of an estab lish ed system could be very d is r u p tiv e t o t h e a f f e c t e d l o c a l community. Seme in Washington have viewed th e proposal on emergency acquisitions as le g is la tio n intended t o help o il patch and farm s ta te s . With T e x a s, California and others moving toward in te r s ta te banking, th e s e sk e p tics are wondering whether th e power to arrange in terstate mergers is actually needed. Certainly many of the troubled banks now confron ting th e FDIC are lo cated in o il patch and farm s ta te s . But i t wasn't lo n g ago t h a t New England*—now a booming region — su ffered widespread unemployment as i t s industrial base shrunk. The great steel towns of Pennsylvania have weathered many econom ic c y c le s . And t h e boom and b u s t c y c le t y p i c a l o f an in d u s t r ia liz e d re g io n i s n o t unknown in t h i s s t a t e . No region of th e country i s immune when i t comes to changing economic c y c le s . Nor a r e b a n k s now t h a t th e y a r e o p e r a tin g w ith in a h ig h ly c o m p e titiv e en v iro n m en t. Even with new emergency acq u isitio n au th o rity , however, p u ttin g together a satisfactory solution fo r a failing bank in a sh o rt period o f time w ill not alw ays b e p o s s ib le . In su ch s it u a t io n s a b r id g e b an k — an institution owned and operated fo r a limited time by th e FDIC— would help us arrange an orderly return of the bank to th e private sector. The Senate b i l l would l e t u s e s t a b l is h such b r id g e b a n k s. With more time, potential buyers would have an opportunity to a sse ss th e ir risk s and hopefully acquire more of a failed bank's a s s e ts . This would minimize disruption to banking services and keep funds flowing t o borrowers u ntil a more permanent solu tion can be arranged. C red itors, th e affected community, th e insurance fund and th e banking in d u stry a l l would b e n e fit. 3 B efore clo sin g , I would lik e to touch on one more fe a tu re o f th e Senate b i l l which may n o t b e c r i t i c a l t o th e FD IC 's o p e r a tio n s b u t n onetheless should be supported by t h e b an k in g in d u s tr y . I t i s th e recapitalization plan fo r the Federal Savings and Loan Insurance Corporation. Many commercial bankers have taken t h e i r sh o ts a t t h e i r fin a n c ia l i n s t i t u t i o n c o m p e tito rs in th e S & L in d u s tr y . R e g a r d le s s o f th e differences—or lack of—between commercial banks and S & Ls, th e public today looks primarily to what rate an institution is paying an deposits and whether i t is a fed erally insured in s titu tio n . L it t le e f f o r t i s made t o determine whether th e seal displayed on a fin a n c ia l in s titu tio n 's door belongs to th e FSLIC o r t h e FDIC. The plan now in th e S e n a te would b e a w orkab le ap p roach f o r recapitalizing FSLIC without requiring a d ir e c t in fu sion o f tax p ay er funds. C ritical dollars would be contributed to the FSLIC fund. This in fu sion would replenish past losses and provide th e Bank Board with th e resources i t needs t o d e a l w ith i t s tr o u b le d i n s t i t u t i o n s . The FSLIC recapitalization plan is a workable approach fo r preserving confidence, in a ll federally insured fin a n c ia l in s titu tio n s . Moreover, i t i s fa r p referab le to another a lte rn a tiv e — a forced merger o f th e FSLIC and FDIC. I f FSLIC is not allowed to work out i t s own problems th e r e are few a lte r n a tiv e s . A merger o f th e in su rance funds may become u navoid able. I hope I have impressed upon you th e importance of th e Senate b i ll to th e FDIC— and t o th e banking in d u stry. We would lik e t o see t h i s b i l l quickly enacted, unfortunately, any banking b i l l runs th e r is k o f g ettin g bogged down i f Congress renews th e debate over th e question o f nonbank banks. For a ll p ractical purposes, th e nonbank bank issu e has been delayed u ntil th e next Congress by th e agreement of th e Comptroller o f th e Currency t o d e f e r any new c h a r t e r a p p ro v a ls u n t i l t h a t tim e. Debate on nanbank banks would only delay enactment of th is e s s e n tia l legislation . I t would not achieve nonbank bank le g is la tio n , fo r th e r e i s li t t l e chance of an agreement being struck on th a t issu e . The debate would on ly s p o il p a s s a g e o f a v e ry d e s ir e a b le b i l l . In concluding, I want to s tr e s s th a t you have a d ir e c t in te r e s t in each feature of th e b ill sent by Senator Gam to Congress. T h is le g is la tio n will reduce th e operating c o s ts o f our in su rance fund a t a tim e when th e demands being placed on th e Fund and the FDIC s ta ff are increasing. I t also would make clear th a t th e FDIC insurance fund is intended to serve th e needs of th e banking industry. I encourage you to l e t your congressmen know you su p p o rt t h i s c r u c i a l l e g i s l a t i o n . Thank you. 5
