The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
0
STATEMENT ON THE EFFECTS OF THE
DEFICIT REDUCTION ACT OF 1985
(GRAMM-RUDMAN-HOLLINGS ACT)
ON
THE FEDERAL DEPOSIT INSURANCE CORPORATION
SUBCOMMITTEE ON GENERAL OVERSIGHT
AND INVESTIGATIONS o 4
f f o U S C COMMITTEE ON BANKING, FINANCE
AND URBAN AFFAIRS,)
HOUSE Of-REPRESENTAfiVES-
/
/
n
L. WILLIAM SEIDMAN
CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
Room 2128, Rayburn House Office Building
June 17, 1986#
10:00 a.m.
I.
INTRODUCTION
Mr. Chairman, I appreciate the opportunity to be here today to testify on the
impact of the Gramm-Rudman-Hol1ings Act ("GRH") and the Antideficiency Act
upon the FDIC.
We are greatly concerned about the adverse effects the imposition of GRH would
have on FDIC operations.
upon our agency.
If applicable, GRH would impose major budget cuts
Those reductions would hamper effective bank supervision and
thereby result in increased exposure of the deposit insurance fund.
Last year, 120 banks failed or needed FDIC assistance, and we expect 140 to
160 more this year.
The number of banks on the FDIC1s problem list currently
stands at more than 1,300 and continues to grow.
Our need for flexibility and
adequate resources, particularly in our supervisory and enforcement programs,
is greater now than ever before.
First, I will address the sources of FDIC funding.
After discussing GRH, I
will comment briefly on the proposed applicability to the FDIC of the
Antideficiency Act's apportionment provisions.
Like GRH, the Antideficiency
Act poses a real threat to the FDIC‘s ability to carry out its mission.
-
II.
2
-
DISCUSSION
A.
FDIC1s Funding
The FDIC receives no appropriations from Congress.
Insurance assessments from
insured banks and investment income are, and always have been, the agency's
exclusive sources of funds.
The Federal Deposit Insurance Act ("FDI Act")
authorizes an annual assessment on insured banks of one-twelfth of one percent
of a bank's assessable deposits.
It also provides that, with certain
exceptions, the FDIC must annually rebate 60 percent of its net assessment
income (assessment income less operating and insurance expenses and insurance
losses) to those insured banks.
The remaining forty percent of net assessment
income, plus the investment income earned by the FDIC, is added to the FDIC
trust fund, which is available to meet the insurance obligations of the FDIC.
The FDIC is required by section 13(a) of the FDI Act to invest its funds in
United States securities or obligations guaranteed by the United States
Government.
Given the nature of the FDIC's funding, any reduction in our expenditures will
have no real effect on federal expenditure levels, though for reporting
purposes the additions to our reserve for insurance losses will be treated as
a reduction of the d e f i c i t . S u c h expense reductions will,
The fact that 0MB uses the annual change in the FDIC's unobligated
balances (cash flows) as a line item to reduce the overall deficit is an
accounting artifact that has no practical significance. As a matter of law,
FDIC funds are not available for use by other government agencies.
-3however, undercut our supervisory efforts and thus contribute to an increased
incidence of bank failures.-'
More failures mean our total costs will
increase, not decrease.
B.
FDIC's Statutory Exemption from GRH
Despite the compelling legal and policy reasons for exempting the FDIC from
GRH, the Office of Management and Budget ("0MB") and the General Accounting
Office have concluded that GRH is applicable to "administrative expenses" of
the FDIC.
0MB reached that conclusion despite the fact that the statutory
language and legislative history clearly support excluding the FDIC from GRH.
Senator Packwood, Chairman of the Senate Finance Committee and head of the GRH
Senate conferees, stated that "[w]e also exempted numerous other programs on
which there was no argument, such as the Federal Deposit Insurance
Corporation."¿f
The activities that 0MB considers to be subject to sequestration include
classifying supervisory expenditures as administrative expenses subject to
reduction.
Supervisory costs alone, without these support activities, amount
to over two-thirds of the total expenses 0MB deems "sequestrable" as
administrative.
In addition to undermining safety and soundness examinations,
supervisory cutbacks would hinder our ability to determine compliance with
consumer laws, including the Truth-in-Lending Act, the Fair Credit Reporting
Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage
Disclosure Act, the Fair Debt Collection Practices Act, the Electronic Funds
Transfer Act, and the Equal Credit Opportunity Act.
131 Cong. Rec. S. 14782 (Dec. 11, 1985).
-4The language of GRH belies OMB's interpretation of what constitutes
"sequestrable" expenses.
That statute lists the FDIC among those entities
whose "legal obligations" are exempt from sequester orders.
The FDIC's "legal
obligation" is to provide deposit insurance and operate the deposit insurance
system, including liquidating failed banks' assets, handling failing and
troubled banks, and supervising banks to protect the insurance fund.
Accordingly, OMB should not be able to sequester these activities as
"administrative expenses."
Impact of GRH on the FDIC
In keeping with the spirit of GRH, we have voluntarily reduced our
expenditures by 4.3 percent or $8.5 million.
As shown on Table I, this
required making cutbacks in a number of important areas.
We curtailed hiring
and training of personnel, reduced travel, postponed building improvements,
and deferred a number of important projects.
These projects included
developing better management information systems and other computer programs
that would faciliate bank supervisory activities and other insurance-related
functions.
We are most concerned about the potential impact of GRH on our supervisory
capabilities including the examination and oversight of troubled and failing
banks.
To appreciate the extent of our concerns, let me explain where our
supervisory program stands now.
The FDIC has a force of about 1,670 field examiners.
These are the
individuals who actually go out to examine banks, and they account for 85% of
-5the professional staff of our Division of Bank Supervision.
The size of the
field force is almost exactly where it was five years ago, but a lot has
happened since then.
In 1981, commercial banks earned a return on assets of
81 basis points, 27 percent more than the 64 basis points earned in 1985.
Three times more banks lost money in 1985 than in 1981.
Today we have about
1,300 problem banks —
In 1981, ten banks
six times what we had back then.
failed; we average more than that in a month now.
This increase in problem and failing banks has put a major strain on our field
examiners, a force which, because of self-imposed restrictions, was allowed to
shrink in recent years.
As Table II shows, our field force was down to only
1389 by the end of 1984.
Moreover, during the last three years, we have had
to detail 10 to 15 percent of our examiners to assist in the liquidation of
failed banks.
The combination of increasing work demands and a shrinking work force caused
major cutbacks in examinations.
We have relied much more on brief visitations,
which are much less comprehensive than exams.
A number of specialty
examinations (consumer compliance, trust departments, and data processing
facilities) were cut
back as well (see Table II). Still, we continued to fall
behind while the banking problems
grew.
No longer
were we able to meet our
minimum policy guidelines, which call for examinations of marginal and problem
banks (CAMEL ratings
3, 4, and 5) at least once ayear with visitations in
between.
our regions, we're averaging 20 months between exams.
In some of
for satisfactory banks (CAMEL ratings 1 and 2), our visitation period was
extended to three years.
We're not always able to do even that, and we are
not comfortable with three year intervals.
Experience has shown us that
examinations two to three years old quickly lose their value.
As
-
6
-
Beginning in 1985, the FDIC started to rebuild its examination force.
target is to reach 1,800 examiners by year's end.
Our
Since our field examiner
turnover rate has been running about 11-12°/«, we have had to hire about 450
examiners over the last year to get where we are now.
Currently, about
one-third of our field force has less than one and one-half year's
experience.
This imbalance impacts our productivity.
Training these people,
most of which is done on the job, takes a substantial amount of time away from
our seasoned examiners —
time needed to examine.
It's taking longer to
complete examinations, particularly in marginal and problem institutions where
we've had to utilize many of these people.
In 1985, for example, the
examinations of such banks averaged 24% longer than in 1984.
In today's increasingly competitive deregulated environment, strong
supervision is needed more than ever.
We must continue our efforts to
strengthen our examiner force if we are to stay on top of our supervisory
problems.
We are still evaluating our total examiner needs but preliminary
figures indicate we should have over 2,000 field examiners by the end of
1987.
This would allow us to meet our goal of shortening the interval for
examining banks.
It would also allow us to increase our involvement in the
examination of all problem banks we insure.
Finally, we would be able to
resume a more reasonable schedule for conducting examinations specializing in
consumer compliance, trust departments, and data processing facilities.
-7The more drastic cutbacks anticipated under GRH for 1987 and beyond would undo
any progress we have made thus far in rebuilding our examiner force.
As we
have done this year, we would attempt to minimize the impact on our field
force; but assuming GRH cuts in the order of 10-20%, major examiner reductions
would be unavoidable.
For every 100 examiner reduction, we would lose the
capability to conduct about 225 examinations a year.
We estimate that
examiner cutbacks in the order of 15% would eliminate over 600 of the nearly
4,000 safety and soundness examinations budgeted for the year.
Longer range
goals of upgrading examination efforts would have to be abandoned.
Stretching out examination intervals any further in this banking environment
would be counterproductive. A reduction in bank examination activity will
diminish our ability to detect unsound banking practices and fraud, and take
timely corrective measures.
The net effect of these "savings" will be higher
insurance costs and less stability in the financial system.
Vital automated services supporting bank supervision also would suffer as
well.
Even extremely modest cuts in the order of 10% would indefinitely delay
integrating bank performance data sources into our offsite surveillance
system.
This would also prevent the maintenance and upgrading of data bank
software relied on by the FDIC, the Comptroller of the Currency, and the
Federal Reserve.
Such cutbacks would seriously undermine our ability to
perform cost-effective off-site monitoring.
III.
THE ANTIDEFICIENCY ACT
On several previous occasions 0MB has attempted to assert control over our
budget, but has been repeatedly rebuffed by Congress.
Now 0MB is raising for
-
8
-
the first time the novel claim that a 36 year-old law -- the 1950
Antifeficiency Act —
authorizes it to apportion our budget.
With this
authority they intend to deal with substantive issues facing the FDIC.
We are
convinced that their claim is without legal merit (see our legal opinion,
attached).
Nevertheless, if 0MB is allowed to go forward, the FDIC Board and
the Congress would lose control of our budget.
Control of the budget will
inevitably permit the policy control 0MB seeks (see letter from 0MB Director
Miller to Chairman St Germain of the House Banking Committee, attached).
The
application of the Antideficiency Act would change the historic position of
the FDIC as a bipartisan independent agency, and would do so not by any
current expression of congressional will but by applying a 36 year-old statute
to give 0MB powers the Congress has repeatedly denied to the agency in the
past.
The unfortunate experience of the Home Loan Bank Board when 0MB
controlled its supervisory budget indicates that loss of budget control by the
FDIC Board could lead to even more serious problems than those created by
GRH.
In fact, the Bank Board has sought to put its supervision beyond the
reach of 0MB by placing its examiners in the regional Federal Home Loan Banks
in order to achieve an effective supervisory force.
This alternative is not
available to the FDIC.
Congress has on several occasions reviewed the FDIC's budgetary process and
has always concluded that our budget should remain outside Executive Branch
review and the appropriations process.
Congress has concluded that the FDIC's
functional independence is tied to its budgetary independence.
We recognize
that independence carries with it the responsibility to meet the highest
standards of accountability and financial reporting.
We acknowledge that the
-9FDIC is a creature of the Congress and, through the Congress, ultimately
accountable to the banking industry and the American public.
At the same
time, the legitimate objectives of disclosure and accountability can best be
achieved within a framework of independent budgetary treatment.
Experience with thrifts in states such as Ohio and Maryland —
control over the Federal Home Loan Bank Board's budget —
and with OMB's
clearly demonstrates
that the lack of adequate supervision can lead to massive failures with
excessive costs to all concerned.
Ne cannot project for you what the costs of
inadequate bank supervision would be.
what can occur.
But you have seen from past experience
Past problems are dwarfed by the size of the problems we
might face if our supervisory functions were to lose flexibility and the
ability to act speedily.
Imposing new 0MB budget controls on the FDIC
constitutes a false economy that the nation can ill afford.
In these days of
great strains in the financial system of the country, fundamental changes
should be attempted only if a major problem can be identified, and none has
been.
The risk of such a change in regulatory operations simply is not
justified, and we believe the Congress should act to insure that none is
mandated.
Mr. Chairman, that concludes my prepared remarks.
answer any questions you may have.
Attachment
I would be pleased to
-
10
-
TABLE I
GRAMM-RUDMAN-HOLLINGS REDUCTIONS
(Dollars in Thousands)
By
Expense
Category
Salaries
Outside Services
Travel
Bui 1ding/Leased Space
Equipment
Supplies
Other Expenses (Postage)
Total
*Reduction in DBS only.
Reduction
in
Expense
Percent
of
Reduction
$ 1,100*
860
3,085
2,565
555
160
200
$ 8,525
13%
10
36
30
7
2
2
100 %
-
11
-
TABLE II
Field Examiner Force
and Supervisory Examination Activity
1981 to Present
1981
1982
1983
1984
1985
1986*
Number of
Exami nations
Number of
Vi stations
Specialty
Exami nations
6,383
5,625
4,352
3,339
2,940
1,106
1,605
2,516
2,677
2,891
11,909
9,501
5,895
3,723
* 2,673
*As of 5/31/86
Field Examiner
Force
1,655
1,544
1 ,481
1 ,389
1,547
1 ,670
Number of
Problem Banks
223
369
642
848
1,140
1 ,306
@FedFRASER