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FDIC
Chairman
L.
William
Seidman
today said he thinks it is likely the
next president will take up the future of the deposit
in
a
new
administration.
insurance
system
early
Mr. Seidman said that approach would be in accord
with the traditional advice to new
chief
executives:
"Get
the
tough
ones
behind you in the first 100 days."
Mr.
Seidman,
Institutions,
in
said
remarks
the
FDIC
today
has
to
the
National
made
the
subject
improvements its top research project for 1988.
a
comprehensive
review
in
this
area,
the
Council
of
of
deposit
The FDIC, he said,
results
of
Savings
insurance
has
begun
which will be made
available to the incoming administration after the November elections.
One
of
the
most
important
issues the FDIC study will address, said Mr.
Seidman, is the question of the FDIC and FSLIC insurance
reiterated
that
the
FDIC
does not favor their merger.
funds.
Mr.
Seidman
However, if Congress
and the new administration decide a consolidation of the insurance agencies
necessary,
is
he said, it is important to develop a framework for considering the
issues involved.
Commented
Chairman
Seidman:
"The
FDIC
is in solid shape to handle the
problems in the banking industry, but we do not have resources
to
handle
the
significant problems in both industries."
Mr. Seidman said the FDIC’s study of deposit insurance
other issues.
also
will
examine
They include deposit insurance pricing and the question of risk-
- more -
FEDERAL DEPOSIT INSURANCE CORPORATION, 550 Seventeenth SL, N.W., Washington, D.C. 20429 • 202-898-6996
. 2 -related premiums, supervisory mechanisms and the use of the market
risk,
possible
adjustments
in
to
control
insurance coverage and the use of deductibles
and private coinsurance schemes.
A
final
area of analysis will involve procedures for handling problem and
failing banks.
small
banks,
This review will encompass the
fair
of
large
and
and the possible expansion of the use of open bank assistance in
the manner of the
Reconstruction
approach
involve
would
Finance
providing
Corporation
capital
to
institutions would still be solvent, but clearly
provided until they recovered financial strength.
treatment
m
of
the
salvageable
in
trouble;
1930s.
banks.
help
This
These
would
be
Remarks by
L. W i l l i a m Seidman
Chairman
Federal Deposit Insurance Corporation
Before
The National Council
of Savings Institutions
T o r o n t o , Canada
M a y 10, 1988
fr Federal D e p o s i t Insurance System for the 90s
Thank y o u for i n v i t i n g m e t o address the National Council's 1988
Annual C o n f e r e n c e h e r e in Toronto,
M y topic for this m o r ning is
"Improving D e p o s i t I nsurance Systems."
It has b e e n s a i d t h a t only the foolish and the dead n e ver change
their opinions.
T o p r o v e w e are not dead, we at the FDIC try to
stay o p e n m i n d e d t o t h e need for change.
Change in the deposit
insurance s y s t e m is an area that receives our special attention.
There a r e still indu s t r y executives and government officials who
fail t o r e c o g n i z e t h a t the financial world has changed, and that
the d e p o s i t i n s u r a n c e s y stem needs to adapt to those changes.
They a r e s t ill s a y i n g "Frankly m y dear, I don't give a damn"
about w h a t is h a p p e n i n g out there, when they should be saying;
"I d o n ' t t h i n k w e ' r e in Kansas anymore, Toto."
The N a t i o n a l Council has, and can, play an important role in
providing l e a d e r s h i p in m o d e r n i z i n g our deposit insurance
system.
2
Deposit; insurance could well be called "the issue that has been
studied t o death, b u t still refuses to die."
The s e a r c h f o r i m p r ovement in the deposit insurance system seems
to h a v e a l o t in c o m m o n w i t h the search for a flu vaccine: by
the t i m e y o u t h i n k y o u have a cure, the virus has changed its
spots.
Y o u ' r e b a c k n e a r w h e r e you started.
great Y o g i Berra:
In the words of the
"It's deia v u all over again."
Just s i n c e t h e start of the 1980s, major deposit insurance
studies h a v e b e e n condu c t e d b y Congress, the General Acco u n t i n g
Office, t h e insur a n c e funds themselves, as well as by many
private s e c t o r authorities.
The F D I C ' s last s t u d y on this topic was published in 1983.
At
that time, o u r m a j o r c o n clusion was that to ensure long-term
safety a n d s o u n d n e s s of the banking system, market discipline
needed t o b e increased.
W e explored different mechanisms for
achieving t h a t result, and we actually began to cut our
supervisory s t a f f in a n t i c ipation of success through this
approach.
I t w a s a r g u e d that the "Invisible Hand", to some
extent, c o u l d r e p l a c e the capable hands of our examiners.
3
My f r iend f o r m e r S e c r e t a r y of Treasury Bill Simon, a great
exponent of t h e m a r k e t system, u s e d to say even A d a m Smith's
«Invisible H a n d ” is a n unwarranted intrusion in the market
place*
We d i d n ' t g o q u ite t h a t far, but w e were headed in that
direction.
Some of t h e ideas w e explo r e d included:
—
(1) e x p o s i n g s ome depositors to loss in every b a n k failure?
—
(2) c l o s i n g all b a n k s that failed so that uninsured
depositors w o u l d r e c e i v e no insurance benefit —
Continental
changed o u r t h i n k i n g here;
—
(3) f o r c i n g b a n k s to sell subordinated debt to allow the
market t o e v a l u a t e a b a nk's performance;
—
(4) i m p l e m e n t i n g a system of risk-based premiums in imitation
of p r i v a t e s e c t o r i n surance rates; and
— _(5) r e q u i r i n g g r e a t e r disclosure of information to the
public.
We also e x a m i n e d t h e p o s s i b i l i t y of encouraging the private
sector t o o f f e r e x c e s s insurance coverage, although our
4
conclusion w a s t h a t the FDIC should not take an active position
in the d e v e l o p m e n t of such a market.
Given t h a t t h e F D I C a n d others have completed their studies in
the p a s t f i v e o r s i x years, it might seem that w e have
relatively c u r r e n t findings available w ith which to w o r k today.
But, in reality, a g r eat deal HAS CHANGED for banks, thrifts,
and for t h e d e p o s i t insurance system since these studies were
completed.
A n d t h e s e changes have demonstrated that m a n y of the
earlier s u g g e s t i o n s simply do not seem desirable in today's
environment.
Let m e g i v e s o m e e v i d e n c e of the changed environment:
—
In 1981, j u s t s e v e n banks failed and three large mutual
savings b a n k s w e r e assisted.
By 1985, the numbers grew to 119
failures a n d o n e assi s t e d bank.
or r e c e i v e d a s s i s t a n c e —
A n d in 1987, 201 banks failed
a post-Depression record.
Unfortunately, w e m a y b r e a k that sad record in 1988.
The losses
these b a n k s i n c u r r e d t e n d to indicate it m a y be better to give
than t o l e n d s i n c e it can often cost about the same thing!
—
In 1981, t h e F D I C recorded just 196 problem banks.
In 1987,
that n u m b e r s o a r e d o v e r 1600, but settled b ack to just above
1,500.
I t a p p e a r s t h a t this figure will remain near 1500 in
1988.
5
Ji stra i n s on the b a n k i n g system, combined with the growth of
banking deposits, h a v e reduced the FDIC's ratio of reservesto-insured d e p o s i t s f r o m $1.24 for every $100 of b a n k deposits
in 1981, t o $1.10 l a s t year.
__ T h e p r o b l e m s w i t h Continental Illinois and other large
troubled i n s t i t u t i o n s w i t h significant amounts of uninsured
liabilities h a v e d e m o n s t r a t e d the special problems of handling
failures o f large banks.
For example, using a closing and
modified p a y - o u t t o h a n d l e First Republic w ould have left
billions of d o l l a r s of unin s u r e d liabilities, billions of
dollars of d e p o s i t s t o pay, and billions of dollars w o r t h of
assets for t h e F D I C t o sell.
W h a t a closing and modi f i e d payout
in F i rst R e p u b l i c w o u l d h ave done to the stability of the
system, fortunately, w e w i l l never know.
These problems also
demonstrate t h e n e e d for improvement in the system so that
uninsured d e p o s i t o r s in large banks do not receive better
treatment t h a n t h o s e in smaller banks.
Unfortunately, n o t j u s t the b a n king industry, but also the
thrift i n d u s t r y and t h e FSLIC, have suffered during the last few
years.
Now, I d o n ' t w a n t t o v i o late our eleventh commandment,
"Thou shall n o t s p e a k ill of thou's fellow insurer.'* But I'll
make a few points:
6
_ A t t h e e n d of 1987, the Unit e d States had 3,147 federally
insured t h r i f t s w i t h assets of $1,252 billion.
Of these,
according t o t h e Counc i l ' s numbers, about 443, w i t h $126 billion
in assets, h a d n e g a t i v e n e t w o r t h and negative income under GAAP
p r i ncipals.
T h a t t otal increases to 506 if just negative net
worth is examined.
A p p r o x i m a t e ly 121 of these thrifts, with $47
billion in assets, are in Texas.
—
In 1987, t h e $6.6 b i l l i o n in profits recorded by the
two-thirds o f t h e t h r i f t industry that is making money, was more
than o f f s e t b y the $13.4 b i l l i o n loss recorded by the least
profitable t h i r d of t h e industry.
The h i s t o r y of b o t h t h e FDIC and FSLIC raises the question of
what i m p r o v e m e n t s s h o u l d be proposed for "today," not just for
yesterday's world.
It also demonstrates that some of our
earlier c o n c l u s i o n s are no longer appropriate.
Too much
depositor d i s c i p l i n e u n d e r current conditions can create
unacceptable i n s t a b i l i t y in the system.
The l e s s o n is t h a t as long as federal deposit insurance is
provided so insti t u t i o n s c a n borr o w on the credit of the United
States, s t r i c t gover n m e n t a l s u p e r v i s i o n , as well as market
discipline, m u s t b e in place.
7
Thus, a l m o s t all our p r i o r recommendations designed to increase
market d i s c i p l i n e h a v e n o t been adopted.
Reliance on
subordinated d e b t financing, modified pay-outs, o r coinsurance
were g o o d ideas w h o s e time h a d not come —
will!
and probably never
C u r r e n t p o l i t i c a l realities prevent the reduction of the
federal " s a f e t y net".
People w ant their deposits protected, and
they w a n t t h e g o v e r n m e n t t o do the protecting.
the b a n k i n g s y s t e m t o function at all times.
Government wants
A n d it is not at
all c l e a r t h a t m o r e depos i t o r discipline is good for the
system.
A f t e r all, excess depositor discipline caused the
creation of t h e "safety net".
As Caesar observed,
"All bad
precedents b e g a n as justifiable measures."
What is n e e d e d n o w is t o look for improvements to m eet the world
that c h a n g e h a s wrought.
That is w h y the F D I C has designated a study of h o w to improve
deposit i n surance as its top p riority research project for this
year.
W h i l e o u r s t udy will largely take place in the context of
banking a n d t h e FDIC, m a n y of our thoughts should also be
germane t o t h e F S L I C and the institutions it insures.
This n e w s t u d y follows in the footsteps of our study released
last y e a r t h a t e x a m i n e d r e s tructuring the banking industry.
We
8
called t h a t study our "Mandate For Change."
It played a part in
promoting t h e analy s i s of issues reflected in the banking reform
bills n o w m o v i n g t h r o u g h Congress.
We h o p e t h a t o u r n e w study —
The 90s" “
"A Deposit Insurance System For
w i l l h e l p focus the debate on what we use to call
deposit i n s u r a n c e reform.
In o r d e r t o g e t t h e right answers, you must first ask the right
questions.
I w a n t to take this opportunity to raise some of the
issues f o r t h e 90s w i t h y o u at this time.
—
One p r i o r i t y w i l l b e reexamining deposit insurance p r i c i n g .
Would a s y s t e m of r i s k - related premiums do a better job than our
current s y s t e m of fixed, u n i f o r m pricing?
Would a change to
such a s y s t e m do m o r e h a r m than good to current industry
stability?
Can w e find a formula that will be mechanical,
accurate, and d e f e nsible?
—
S u p e r v i s o r y m e c h a n i s m s to control risk will be another area
explored.
A s w e e n t e r an environment providing banks with
greater powers, h o w will supervision adapt?
supervisory resources,
Are our present
such as examination procedures, off-site
monitoring systems, and supervisory sanctions adequate?
we best e m p l o y t h e s e resources?
H o w can
And, once p r o b l e m banks have
9
been identified, are our present regulatory powers and
procedures a p p r o p r i a t e to deal w i t h institutions that pose a
high r i s k t o t h e insurance fund?
_H o w c a n t h e m a r k e t be u s e d to better control risk in today's
environment?
Is d e p o s i t o r discipline really alive and well
despite i n s u r a n c e and b i g b a n k protection?
Will risk-based
capital s t a n d a r d s control risk-taking, and better maint a i n
financial s t a b i l i t y ?
H o w far should the federal depository
"safety n e t ” b e extended?
In recent m o n t h s one of the key limits on how far the "safety
net" e x t e n d s h a s a l r e a d y come into focus.
The FDIC's treatment
of c e r t a i n l a r g e T e x a s b anks demonstrates our resolve not to
extend t h e " s a f e t y net" t o h o l d i n g companies.
To p a r a p h r a s e H a r r y Truman, our message is:
"The safety net
stops h e r e . • .with t h e bank."
Last m o n t h t h e F D I C g u a r a n t e e d that all depositors and other
general c r e d i t o r s of F irst Republic's banks will be fully
protected, b u t w e m a d e it clear that these guarantees DO NOT
extend t o t h e h o l d i n g c o m p a n y creditors or shareholders.
The w o r l d is n o t s t a n d i n g still as our study progresses —
and
in fact, t h e c h a n g e s t a k i n g p lace out t h ere underline the need
for this t y p e o f review.
10
__W i t h r e g a r d t o h a n d l i n g problem and failing b a n k s , how can we
handle t h e s e failed b a n k s so as t o treat large and small banks
more e q u i t a b l y ?
H o w d o w e mini m i z e the extension of the "safety
net" t o n o n b a n k entities, and, at the same time, uphold the
public's c o n f i d e n c e in t h e b a n k i n g system?
Should the FDIC
yypand its o pen b a n k assistance efforts to banks that are in
^rouble, b u t are not v e t about to fail?
Some people w o uld like
to s e e t h e F D I C o p e r a t e m o r e in the m a n n e r of the Reconstruction
Finance C o r p o r a t i o n
("RFC") of the 1930s.
Such an R F C approach
would i n v o l v e p r o v i d i n g capital to salvage banks and their
holding c o m p a n i e s t h a t are still solvent but are clearly in
trouble.
T h a t c a p ital w o u l d be repaid w h e n these banks can get
back o n t h e i r feet.
T h e forbearance policy and net w orth
certificates w e u s e d for some of the National Council's members
proved c o s t e f f e c t i v e for the FDIC, and they were a m odified
RFC-operation —
—
b u t w i t h no private shareholders involved.
Of c o u r s e n o l o o k at deposit insurance w o uld be "for real"
without a d d r e s s i n g the question of merg e r of the FDIC and FSLIC
funds.
Is the m e r g e r o f t h e t w o funds an adequate and wise solution to
the F S L I C ' s p r o b l e m s ?
night it b e struc t u r e d ?
If such a m e rger needs to take place, how
11
The future of o u r depo s i t insurance system —
the F S L I C —
both the FDIC and
is a p r o b l e m likely to be high on the agenda of our
next President.
at this point,
It is only prudent to examine all the options
inclu d i n g h o w the m e rger issue should be
approached if one is d e emed unavoidable.
A n e w president,
whoever h e is, m a y w a n t t o act on this problem early in his
honeymoon period,
following the good advice,
ones b e h i n d y o u in t h e first 100 days."
"Get the tough
W e h ope our study
suggesting impr o v e m e n t in the federal deposit insurance system
will be h e l p f u l to either Mr. B or Mr. D.
After all w e s h o u l d not forget A b r a h a m Lincoln's sage advice,
"Things m a y come t o t h ose w h o wait, but only those things left
by others w h o hustled."
Some quest i o n s t o b e answered regarding a m e r g e r are:
First, w h a t is the real cost of fixing FSLIC.
Estimates that
start at $20 b i l l i o n and go m u c h higher have been made.
S e c o n d . if a m e r g e r of the funds is pursued, h o w should it be
undertaken?
S h o u l d it be conducted in two or more stages, or
all at once?
—
H o w do w e c r e a t e a p o l i t i c a l l y independent, b alanced
executive b o a r d for the m e r g e d institutions?
12
—
W h a t efficiencies,
-
if any, can be gained by merg e r of
administrative aspects of the funds, such as supervision and
property disp o s a l ?
Third, where are the resources to undertake the task of
restructuring the funds?
The F D I C is in s o l i d shape t o handle the problems in the banking
industry, b u t w e do n o t h a v e resources to handle the significant
problems in b o t h industries.
Is it clear that any combining of
the i n s u r a n c e funds, d o w n the road, will have to involve some
level of t a x p a y e r or o t her assistance?
These are d i f f i c u l t issues that the federal deposit insurance
system m u s t address.
Both b a n k s and t h r i f t s should share a common goal —
joint c o n c l u s i o n s soon —
It has b e e n said,
reach some
before next January at the latest.
"The art of progress is to preserve order amid
change, a n d t o e n h ance change amid order."
That certainly
describes our challenge.
Progress in impr o v i n g the federal deposit system should command
our and y o u r a t t e n t i o n NOW!
- 13 Let us g e t a h e a d of the curve w i t h a plan for improving Federal
Deposit i n s u r a n c e t h a t is d esigned for the financial system of
the 90s.
Once more, I w o u l d like t o t h a n k y o u for inviting m e to address
your group.
@FedFRASER