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PR-126-88 (6-24-88)

Although its insurance fund could experience a decline of as much as 10
percent this year —

the first in its history —

the Federal Deposit Insurance

Corporation will continue to have sufficient resources to perform its mission,
FDIC Chairman L. William Seidman said today.
In a speech to the annual meeting of the Oregon Bankers Association, Mr.
Seidman discounted claims that the FDIC faces unmanageable problems, including
one suggestion that losses in Texas alone could deplete the insurance fund.









this year,"

he said,

referring to First Republic, Texas American Bancshares and National Bancshares

"Once these transactions are consummated,

the main financial

cost should be behind us and the insurance fund should begin to grow again in
Chairman Seidman noted that the insurance fund was $18.3 billion at the
beginning of the year, despite a record number of bank failures and assistance
transactions in 1987. He pointed out that the fund grew last year by $50



the FDIC accounted for major assistance transactions

involving BancTEXAS Group Inc. and First City Bancorporation of Texas.
Chairman Seidman said: "The main banking problems in the U.S. have been,
and continue to be, concentrated in those sections of the country suffering
severe economic problems.

Almost 90 percent of the failed banks, as well as

80 percent of the banks with


last year were

located west of


Roughly 85 percent of last year's bank failures were caused at

least in part by troubles in the farm and energy economies."
- more FEDERAL DEPOSIT INSURANCE CORPORATION, 550 Seventeenth St., N.W., Washington, D.C. 20429 • 202-89^6996


Remarks by

L. William Seidman
Federal Deposit Insurance Corporation


Oregon Bankers Association Annual Meeting
June 24, 1988

June 24, 1988

It's a pleasure to speak today with members of the Oregon
Bankers Association.

Throughout your history, from Chief Joseph to Mary Decker
Slaney, Oregon has been known for both fighters and leaders.
The remarkable improvements in Oregon's economy testifies to
those attributes.

At the start of this decade, your state's economy was taking it
on the chin, largely because of the nationwide falloff in the
housing market and increased imports of foreign timber. That
reduced demand for Oregon forest products at a time when your
mining, agriculture, and fishing industries were also suffering.

This meant tough times for Oregon's banks.

I'm glad to be able to say that recovery is now underway.—


Return on Assets for all Oregon banks last year was slightly
higher than the average ROA for all U.S. banks, even when the
extraordinary reserving for LDC that took place last year is
factored out of the comparison. (.70 /.72)

Oregon's banks also


did better than the average banks in the West.

Your smaller

banks have shown especially encouraging improvement.


The percentage of Oregon banks reporting earnings losses has

dropped bv a third since 1984 (31.9/22.2), although 1986 was
even better than 1987.


Nonperforming assets at Oregon banks have dropped by nearly

half since 1984 (4.02/2.30), at a time when your Western
neighbors problems are still getting worse (4.02/4.45).


your capital ratios are also getting better.


Bank failures have dropped to one a year from a rate of 5 per

year in 1983 and 1984.

That's the kind of news that makes the

banker's insurance company feel warm all over!

Improvements in Oregon's economy have certainly helped your
banking industry.
of the decade.

Your economy is showing its best performance

Improvements have been noted in the agricultural

and natural resource sectors.
and tourism are also up.

Exports to Pacific Rim countries


There were more than 200,000 people employed in manufacturing
jobs in Oregon in March of this year, the greatest number since

Construction, trade, and retail store employment also

shoved gains.

Today it is expected that Oregon's economy, and the personal
income of its residents, will both grow faster than the U.S.
average in 1988.

In fact, your personal income for the last

three months of 1987 grew at a rate of 8.4 percent!

Your state association is also to be congratulated for the gains
made for banking in the Oregon legislature last year.

Oregon law now authorizes wider insurance and real estate powers
for state chartered banks.

Expanded bank powers will help

Oregon banks better compete with other financial intermediaries,
as well as provide a new level of service and convenience to
bank customers.

Oregon also has a depositor preference statute, which makes the
FDIC's job easier.

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


Deposit insurance vas created as a reaction to severe problems
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,

deregulation, disintermediation, new technologies, and
geographic expansion combine to make the banking business a
different, and unfortunately, more risky business.

Let's 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

critical 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 Chemoble 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
SfiS", 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 jis 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 questions 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?

How can we avoid the cost of

another Southwest debacle.


How 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

aarket 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


HPW-fflr Should the "safety net" 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

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


Should the FDIC operate more in the manner of a


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
FDIC 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 we have said many times, we do not favor a merger under




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 —


want to act on this problem early in his honeymoon period,
following the good advice, «Get the tough ones behind you in the
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, as we keep in mind the
advice of a great Oregonian, Dr. Linus Pauling, who said: "Take

- 13 -

time to study and deliberate, but when the time for action
arrives, stop thinking and go!"

Thank you, and I would be pleased to respond to any questions.