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Remarks by

L. William Seidman
Federal Deposit Insurance Corporation


New Mexico Bankers Association Meeting
Albuquerque, New Mexico
June 25, 1988


It gives me great pleasure to speak with the members of the New
Mexico Bankers Association.

I feel a special pleasure speaking with this group.

Not only

because, as bank regulator and banker, we share many
professional concerns, but because I try to spend as much time
as I can here in the "Land of Enchantment” on my ranch near
Wagon Mound.

A biography of Kit Carson, another sometime resident of this
area, says something about Carson's time that is still very true
about this state.

The biography pointed out that this great scout and frontier
diplomat "discovered in New Mexico that there was room at the
top, even for a rough mountain man."

A lot of things have changed since Kit Carson's days.

But the

fact that New Mexico is still a land of opportunity is not one
of them!

Consider these facts about our state's economy:



New Mexico has a diversified economy, from space and nuclear

research, to lumber and stone products, to electrical and glass


As a former CFO of Phelps Dodge, I am well aware that our

state boasts mining resources in natural gas, petroleum,
copper, and potassium salts.


The agricultural extension service says that net farm income

has been growing steadily for over four years.

New Mexico's

mining and manufacturing sectors also reported significant gains
last year.


And even though employment in oil and gas is still far below

1985 levels, last year jobs in this sector of New Mexico's
economy grew by ten percent.

Employment in manufacturing jobs

also increased by an estimated 2.7%.

The Four Corners Region has economically outperformed the
rest of the nation, according to the Arizona Business Gazette.

In the next few years, Dona Ana and Luna Counties are poised
to become the site of an important, developing border economy
with Mexico.




And Albuquerque is one of the vest's, and the nation's,

fastest growing cities.

As your motto goes, "Crescit Eundo" ("It grows as it goes.")

It won't be news to anyone here that because of the troubled oil
economy, most of the southwest has not been having an easy time
of it.

And, unfortunately, not all is bright and shiny for our


New Mexico's income and general employment growth has

lately trailed the national average.

But as the Indians say, "Never criticize a man until you've
walked a mile in his moccasins."

So we at the FDIC are focusing on the fact that New Mexico's
banks are working hard in this challenging environment, and
deserve an "A" for effort:


Last year the Return on Assets of New Mexico banks was the

best in the Southwest Region (.77 / -.47), and ahead of the
national average, even if the effect of extraordinary LDC debt
reserving is factored out.(National average was .12, but without
LDC reserving was .70, compared to .77 for New Mexico)


achievement was especially impressive for your 24 institutions
with assets over $100 million. (.92)


Net charge-offs fell by nearly 30 percent last year for your
larger banks.


Your nonperforming assets were half the regional average

(4.20 / 8.83).

Your ratio of primary capital to assets is higher than that
for U.S. banks in general (8.61 / 7.58)? as is your ratio of
equity capital to assets (7.74 / 6.13).


And unlike most other states in the southwest, bank failures

have not been a major problem in New Mexico.

Only five New

Mexico banks have failed over the last 6 and a half years.
Given your company, that's the kind of news that makes the
bank's insurance corporation feel warm all over.

I would say if there is an area of concern, it is with some
of your smaller banks.

These institutions earned an average

annualized ROA of .46 last year, a significant decline from the
reported in 1986.

Nonperforming assets for these size

banks are also up, as are the number of small banks reporting
operating losses. (20%)

Moreover, while your banks did well

compared to the rest of the southwest, they generally lagged


behind national averages in the net charge-off, earnings losses,
and nonperforming asset areas.

The New Mexico Bankers Association should be congratulated for
its efforts to encourage the expansion of branching privileges
for state chartered banks.

When S&Ls have the power to branch statewide, while banks can
only branch in their hone counties, it presents a conpetitive
inequality that should be addressed.

The Association should also be pleased with your new law
authorizing nationwide nonreciprocal banking in 1990.

I would like to take this opportunity today to tell you why I
think our deposit insurance systen is at a watershed period in
its 55 year history.

Deposit insurance was created as a reaction to severe problens
the banking industry faced during the Depression.
beginning was not without controversy.


Small depositors and

small banks supported the plan, while larger institutions stood
against anything that would help put smaller institutions on


more equal footing.

The role and form of deposit insurance as

conceived in the 1930's has changed dramatically as the
structure of the banking system has evolved.

New competition,

^®^®9n*lation, disintermediation, new technologies, and
geographic expansion combine to make the banking business a
different, and unfortunately, more risky business.

^ “
t*® look at a few of the significant changes in the operation
of the deposit insurance system -- significant difference from
the original concept are apparent.

First, small banks complain about the insurance system.
contend that the deposit insurance safety net —


"the too big to

fail doctrine” --gives unfair advantages to large institutions
by not allowing the largest institutions to fail.

Protection of depositors and creditors in failing large banks
has distorted the system.

However, no major industrial nation

allows its banks to fail because the financial fallout is so
hard to predict.

The international competitive ramifications

alone make it unlikely this policy will be changed.

So now an insurance system designed to help small banks compete
with big banks now operates to favor big banks over small


Alas, Ceasar lamented, "All bad precedents began as justifiable

Second, the Federal Reserve Board, traditionally considered the
lender of last resort, has become the next to last resort.


deposit insurance system has become the last resort for
protecting the failing banks, and thus the stability of the

When First Republic went to the Fed window last winter,

withdrawals increased.

Depositors and creditors were aware of

the Fed's policy of taking collateral for its liquidity

When FDIC gave an unlimited guarantee to depositors

and creditors, and a loan of $1 billion, the run was stopped.
So the FDIC has become the back up source for banks that need to
be protected even though they are insolvent.

This is a role not

even dreamed about by the creators of the Fund.

Third, the status of the holding company in the banking system
itself has been drawn into question by recent FDIC policy.

When "to big to allow depositors or creditors to suffer” is
applied, it is applicable to banks, but not to holding

This spring the FDIC guaranteed that all depositors

and other general creditors of First Republic's banks will be
fully protected, but these guarantees were NOT extend to the



holding company creditors or shareholders.

This FDIC policy is

when considering what new activities holding companies
should be permitted, as well as such issues as whether it is
appropriate to apply the proposed risk-based capital standards
to holding companies.

Again, this is a role in the banking system not originally
envisioned as part of the deposit insurance system.

And finally, our experience, especially in the Southwest, has
taught us that deposit insurance is a powerful tool, which if
misused, has the potential to severely damage the financial
A concept that was argued by some at the creation of
the deposit insurance system, but which was rejected by the
Congress in enacting the system.

Deposit insurance effectively gives banks and thrifts the
ability to borrow on the credit of the federal government.


must be properly safeguarded or it can threaten the system.
Deposit insurance is like a nuclear power plant, it is dangerous
that it exists at all.

Only appropriate safety precautions can

keep it from going out of control.

Out of control, it can blow

up, with great damage to the entire country.


One has only to look at the problems of the savings and loan
industry to see the financial results of deposit insurance

And, lest we become satisfied with our bank

supervision as the answer, look at the losses the FDIC is
incurring in Texas despite supervision by federal and state bank
be rescued —

In Texas all but one of the major banks has had to
either by the FDIC or private resources.

We are dealing with our Chernoble right now in the Southwest,
and its time to reflect on what we should do about it.

Thus, we are undertaking a complete review of deposit insurance
and its role and operation in the current banking environment.
Our study on this subject, "A Deposit Insurance System for the
£Qs"r has been underway for several months.

It will be

completed before year-end.

In order to get the right answers in a study of this sort, you
must first ask the right questions.

I want to raise some of

these issues with you now.

And I want to ask you to help us provide some answers for policy
makers of our country.

Today's banking environment requires a new look at deposit
insurance in a world of deregulation in rates and territories,


of expanded international financial markets, and of evolving
computer based technologies.
factors loomed large —

Ten years ago none of these

now they are overpowering.

And think for a minute on the effect on banking —
Congressional mail offices —

no less

if we withdrew the entire deposit

insurance or reduced it to $2500, as it originally began.

Here are some of the fundamental guestions to be answered in
constructing a better deposit insurance system.


Can Supervisory mechanisms control risk?

future of the system.

This is key to the

If supervision doesn't work, the ability

to borrow on credit of the U.S. can destroy.

As we enter an

environment providing banks with greater powers, how will
supervision need to adapt to keep the system safe and sound?
Are our present supervisory resources, such as examination
procedures, off-site monitoring systems, and supervisory
sanctions adequate?

And, once problem banks have been identified, are our present
regulatory powers sufficient to deal with institutions that pose
a high risk to the insurance fund?
another Southwest debacle.

How can we avoid the cost of



Hov can the market be used to control risk in today/s


Is depositor discipline really alive and well

despite insurance and big bank protection?

Can we increase

market supervisions and thus promote safety by statutory and de
facto deposit insurance coverage ceilings, changes in coverage
to include only short-term deposits, or the introduction of
private coinsurance.

Should we control rates paid on insurance

deposits, or provide insurance only for individuals and not


How far should the "safety net11 extend?

The FDIC's treatment

of certain large Texas banks demonstrates our present position
that we will not extend the "safety net” to holding companies.

So, the world is certainly not standing still as our study
progresses —

and in fact, the changes taking place out there

underline the need for this type of review.


How can we improve the wav we handle failing banks?

large bank depositors be protected, and if so, by whom.

How can

ve handle failed banks so as to treat large and small banks more


Should the FDIC operate more in the manner of a

Reconstruction Finance Corporation ("RFC") of the 1930s?



RFC approach would involve loaning capital to banks that are
still solvent but clearly in trouble.

This approach might save

us losses by preventing failures, but on the other hand this
means greater government intrusion into the market place.


the government probably would have told Texas bankers in the
early 1980's to diversify into oil, cattle and real estate!


Do we price deposit insurance appropriately?

Would a system

of risk-related premiums do a better job than our current system
of explicit and implicit pricing?

Can we find a formula that

will be mechanical, accurate, and defensible?

Of course no look at deposit insurance would be "for real"
without addressing the question, should there be a merger of the
FPIC and FSLIC funds?

The difficulties of the thrift industry and the FSLIC are having
negative ramifications on the banking industry.

These problems

are creating a higher cost of funds, forcing banks to compete in
an unfair environment against insolvent institutions, and
undermining sound credit analysis.

Therefore, the resolution of

the FSLIC/s problems is important to the banking system and the
entire financial system.



As ., have— said many times, ve do not favor a merger under
current conditions.

But to be fair, we need to be ready to deal with the many
suggestions that a merger is needed to save the system.

If such

a merger is to take place, how might it be structured?

We have suggested that an administrative merger might be cost
effective, but a financial merger is not possible under present

If we have one regulator of banks and thrifts, it would be a
real challenge to keep supervision fair and even handed.

The future of our deposit insurance system —

both the FDIC and

the FSLIC —— depends on how we deal with these issues.

We need

an improved system if deposit insurance is to be viable in the

This is a problem likely to be high on the agenda of our

next President.

The new president —

Mr. D or Mr. B —


act on this problem early in his honeymoon period,
following the good advice, "Get the tough ones behind you in the
first 100 days."

We hope our study suggesting improvement in

the federal deposit insurance system will be helpful.

And we ask for your suggestions and help.


In many ways, New Mexico is still as much of a frontier state as
it was in Kit Carson's time.

Although, now, the frontiers to be

won are as much economic as geographic, with financial cycles
replacing environmental changes as the day's greatest

New Mexicans have long been famous for their ability to weather
challenging times.

You can see this in the wartime cartoons of New Mexico native
Bill Mauldin, whose G.I.s Willie and Joe always triumphed over
the worst situations with humor and ingenuity.

You can also see this in the story of a

of a much earlier


That WG.I.W was General Lew Wallace, a famous battlefield
commander of the Civil War.

His days in uniform had ups and downs.

He was severely

criticized for his actions at Shiloh, and his career was thought
to be over.

In the late 1870s, he was appointed military

governor of the territory of New Mexico, and many in Washington
thought that he would not be heard from again.



But Wallace refused to stay down.

Self educated, General Wallace had long been interested in
history, particularly the history of the Roman Empire.

While he

served as military governor, he was constantly reminded how
closely New Mexico resembled territory described in the Bible.
So inspired, he sat down and used his historical knowledge to
write a powerful story that has rarely been out of print in the
century since.

If you've never read the novel, I'm sure you've

seen the movie.

It's called Ben Hur.

There is a moral here for New Mexico's bankers and for bank
regulators struggling with the challenges of a evolving
financial system.

You're in the right place, with the right heritage and
traditions, to succeed.

So as your convention theme suggests, let's make some waves.

Thank you.