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TESTIMONY OF
L. WILLIAM SEIDMAN
CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C.
ON
THE CONDITION OF THE BANKING INDUSTRY AND THE FDIC FUND
AND
THE SUPERVISORY AND ASSISTANCE ACTIVITIES OF THE FDIC
library
AUG031988
BEFORE THE
ftOERALOOTSn IHSUKMlCt corporwwh
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
10:00 a.m.
August 3, 1988
Room 2128, Rayburn House Office Building
Good afternoon, Mr. Chairman and members of the Committee.
I am pleased to
have the opportunity to testify today on the condition of the banking industry
and the Federal Deposit Insurance Corporation fund, as well as on the
supervisory and assistance activities of the FDIC.
In these challenging times, we believe the FDIC has functioned well and in
full accord with Congressional intentions —
Deposit Insurance Act —
Of the Corporation.
as embodied in the Federal
with respect to the purpose, function and operations
In developing FDIC policies, we are guided by the
following goals and principles:
t
to maintain a safe and sound banking system and public confidence in
that system;
•
to enforce applicable laws, rules, and regulations governing banking;
•
to reduce the cost to, and thus to preserve the financial viability of,
the FDIC insurance fund;
•
to emphasize private-sector resolution of banking problems;
•
to enhance competition;
•
to increase consumer services and protection; and
•
to maintain the dual banking system.
With these guiding principles as background, our statement today details the
FDICs views and procedures regarding the changing role of deposit insurance,
the status of the insurance fund, the condition of the banking industry, the
role of bank supervision, the resolution of failed and failing banks, the need
for additional legislation and deposit, insurance reform.
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2
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THE CHANGING ROLE OF DEPOSIT INSURANCE
Deposit insurance was established some 55 years ago and today is at a
watershed period.
It was originally created as a reaction to severe problems
the banking industry faced during the Depression.
without controversy.
That beginning was not
Small depositors and small banks supported the plan,
while larger institutions opposed anything that would help put smaller
institutions on a more equal footing.
The role and form of deposit insurance as conceived in the 1930s have changed
dramatically as the structure of the banking system has evolved.
New
competition, deregulation, disintermediation, new technologies and geographic
expansion have combined to make banking a decidedly different business than it
once was.
Significant changes in the operation of the deposit insurance
system have occurred, revealing stark differences from the original concept.
For example:
•
Some small banks contend that the FDIC's use of the deposit insurance
safety net gives unfair advantages to large institutions by not allowing
the largest institutions to fail —
the "too-big-to-fail" doctrine.
Granted, protection of depositors and creditors in large failing banks has
distorted the system.
However, no major industrial nation has allowed its
largest banks to fail since the depression because the financial fallout is
so difficult to predict.
Moreover, the failure of a large bank likely
would have significant international competitive ramifications.
now have an insurance system —
compete with big banks —
favoring big banks.
Thus, we
which was designed to help small banks
that is criticized by some small banks as
•
Another example is that, the Federal Reserve System, traditionally
considered the lender of last resort, has become the next-to-last-resort
lender.
The deposit insurance system has become the last resort for
protecting failing banks and, thus, the stability of the system.
For
example, when First Republic went to the Fed window last winter,
withdrawals increased because depositors and creditors were fully aware of
the Federal Reserve's policy of requiring collateral for its liquidity
lending.
i
However, when the FDIC arranged a loan of $1 billion and stated
unequivocally its intention to protect depositors and creditors, the run
stopped.
So the FDIC has become the back up source for insolvent banks
that need to be protected.
The creators of the fund could not have
envisioned such a role for the FDIC.
t
Third, the status of the holding company in the banking system has been
drawn into question by recent FDIC policy.
For example, when the FDIC
assured that all depositors and other general creditors of the First
Republic banks of Texas would be fully protected, such protection was NOT
extended to the holding company's creditors or shareholders.
This FDIC
policy is critical when considering such issues as whether and what new
activities should be permitted to holding companies and whether it is
appropriate to apply the proposed risk-based capital standards to holding
companies.
Again, the current role of bank holding companies in the
banking system was not envisioned under the original deposit insurance
system.
Recent experience with deposit insurance —
industries —
in both the banking and thrift
indicate that, while the FDIC continues to fulfill its mission,
substantial improvements are necessary to the system.
necessary in order to:
Improvements are
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o
contain potential insurance losses;
o
restrict the scope of the federal safety net;
o
improve supervision; and
o
provide more efficient and fairer handling of failed banks.
What started as a simple protection for small depositors (and small banks) has
become, in the current environment, a major factor in the operation of the
financial depository system.
Federal deposit insurance, improperly controlled,
has. the potential to severely damage the entire financial system.
STATUS OF THE FUND
The financial condition of the FDIC remains strong despite recent record
numbers of bank failures and assistance transactions, including the second
largest in our history in 1987.
At year-end 1987, the insurance fund's net
worth was $18.3 billion, a modest increase of roughly $50 million over the
previous year.
As announced previously, based on current estimates of loss in
1988 —
including the loss on First Republic and two other large banks in
Texas —
we expect a modest decline in the net worth of the fund in 1988.
Once those transactions are consummated, however, the main financial cost
should be behind us and the insurance fund should begin to grow again in 1989.
The composition of the fund also is an important barometer of the fund's
condition.
At year-end 1987, nearly 87 percent of the fund balance, or $16.1
billion, was represented by cash and liquid U.S. Treasury securities.
The
amount of these liquid assets declined by only about $500 million in 1987 even
though record demands were made upon our fund.
The flexibility and capacity
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represented by what is essentially cash is one reason we are confident that
the FDIC fund remains adequate to handle any foreseeable problems in the
banking system.
CONDITION OF THE BANKING INDUSTRY
Qvervi ew
The condition of the banking industry and its future prospects are vitally
dependent on the state of the economy and particular economic sectors and
geographic areas.
Consequently, some general observations on the economy seem
appropriate.
In 1987 problems in the agricultural industry bottomed out and a slow, gradual
improvement began.
Continued improvement in that economic sector is expected
to continue in 1988, barring serious problems resulting from the current
Midwest drought.
Nonetheless, the problems of agriculture and agricultural
banks are not over.
The upturn is slow and banks' performance normally lags
the economy both on the way up and on the way down.
However, even though
problems still exist, the trend is in the right direction.
It is perhaps arguable whether problems in the energy sector bottomed out in
1987.
So far this year energy problems do not appear any worse than last
year, but certainly no one would describe that industry to be experiencing
robust recovery.
There is no doubt that the ripple effect, particularly in
the real estate markets, continues to cause serious problems for banks.
Office vacancy rates in energy-centered areas are among the highest in the
a
-
nation.
-
A large volume of property is being withheld from the market to
prevent oversupply.
The FDIC is carefully arranging its property sales to
ensure fair market value.
end.
6
Hopefully, property value declines are nearing an
Even in that event, the adverse effect on the economy and on banks in
these areas will continue.
For some time, we have expressed concern over the aggregate levels of debt
outstanding, especially consumer debt, with much of it owed to commercial
banks.
While we are still concerned, the rate of increase in this debt has
been reduced, thus decreasing the probability that it will become a major
banking problem.
Another area of concern is interest rates, particularly the effect a rise in
rates would have upon the thrift industry.
are having problems with asset quality.
Many of these institutions already
If interest rates increase, the
resulting impact on thrift earnings may well exacerbate the financial
difficulties of that industry.
Fortunately, interest-rate risk in the banking
industry is not large at this time.
Despite increased competition from all sectors of the financial community,
severe regional economic problems, and an unprecedented pace of change in the
industry, the banking system as a whole is sound and improving.
Given a
reasonable ability for the system to evolve and adapt through a prudent
restructuring of the financial services Industry, that assessment should
continue to be true over the long run.
Although the condition of the banking system is generally sound, there
continue to be areas of strain.
Bank failures are at record levels.
In 1987,
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184 FDIC-insured banks failed and another 19 received financial assistance to
avert failure, including 11 in the BancTexas group.
Unfortunately, we have
been setting new records each year, and this year is not*expected to be an
exception.
Historical data on failures and assistance transactions are
provided by Tables 1, 2 and 3.
As of June 30, there have been 87 failures.
In addition, there have been 15
*/
assistance transactions which, inclusive of the First CityRepublic transactions, involve approximately 146 banks.
and First
If the individual
banks in First City and First Republic are not counted separately, the total
number of failed- and assisted-bank transactions are about on a par with last
year's but with more assistance transactions in the current mix.
If the
current pace continues, we can anticipate more than 200 failures and
assistance transactions this year as well.
Importantly, over 90 percent of
the failures thus far in 1988 have been west of the Mississippi River, and
banks in Texas alone have accounted for over 40 percent of those failures.
Although the trend is finally downward, the number of problem banks also is
near the record level.
Table 4.
Historical data on problem banks are contained in
As of May 31, there were 1,495 FDIC-insured problem banks with total
deposits of $288 billion, 'down from 1,575 as of year-end 1987 but still over
the year-end 1986 number of 1484.
In mid-1987, the number of problem banks
peaked at 1,624 with deposits of $300 billion.
Of the problem banks,
approximately 433 are agricultural.banks and 158 are energy banks.
-^Although not consummated until 1988, the cost of the First City
transaction was fully reflected in our 1987 financial statements.
Eighty-
-
8
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nine percent of the banks on the current problem list are west of the
Mississippi River and 64 percent are in the six states of Colorado, Louisiana,
Kansas, Minnesota, Oklahoma and Texas.
There is considerable turnover in the specific banks on the problem bank list
—
a fact that sometimes goes unnoticed.
Since the number of problem banks
peaked in mid-1987, there have been 496 banks added to the problem bank list
and 625 deleted from the list through May 31.
Of the 625 deleted, 168 were
the result of closings or receipt of FDIC assistance, 85 were the result of
mergers and 372 were the result of improvements.
The decline in the number of
problem banks is attributed primarily to two factors —
gradual improvement in
the agricultural areas of the country and merger activity, particularly in
Texas.
We expect the number of problem banks to decline slowly, although
problems will continue to be severe in those areas dependent on the energy
sector.
The pattern of increases and decreases in the number of problem banks
correlates with economic conditions.
While much of the country and most
sectors of the economy now are experiencing relative prosperity, the
differences among areas are much broader than in the past.
The areas west of the Mississippi River, with economies that are based on
energy and agriculture, have pockets of severe recession or even depression.
Most of the FDIC*s problem banks today, and those anticipated for the rest of
1988, are located in these distressed regions.
Many of the involved states
have unit banking laws which tend to limit opportunities for diversification
geographically and by economic sector.
The statistics contained in our
Qyflrtgrly gfrnkinq Profi1e (Appendix A) indicate problems by geographic area.
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Kev Indicators
Capital. Aggregate primary capital of all insured commercial banks grew from
$214 billion at year-end 1986 to $234 billion at year-end 1987, a 9.4 percent
increase.
Increases in the reserve for losses made by the large money-center
banks for troubled loans to developing countries accounted for nearly all the
growth in primary capital.
Smaller banks continue to have higher capital-
to-asset ratios than larger banks.
The Southwest Region, dominated by the
energy industry and once comprised of banks with some of the strongest capital
ratios, experienced sizable declines in capital during 1987, and now exhibits
some of the weakest capital ratios.
The growth in capital outpaced the less than two percent growth in assets
during 1987.
capital.
The industry as a whole currently has an adequate level of
In fact, as of year-end 1987, only 115 banks —
about $11 billion —
with total assets of
of the approximately 13,500 FDIC-insured commercial banks
had primary capital ratios of three percent or below.
Current minimum capital rules set substantially similar capital requirements
for all banks, regardless of asset size or the Identity of the bank's primary
Federal supervisory authority.
These capital-to-assets, or leverage, ratios
continue to serve as useful tools in assessing capital adequacy, especially
for banks that are not particularly active in off-balance-sheet activity.
However, the FDIC believes there is a need for a capital measure that is more
explicitly and systematically sensitive to the risk profiles of individual
banking organizations.
While a risk-based system may require certain
individual institutions to increase capital, these increases will help to
further stabilize and strengthen the banking system.
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10
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The FDIC joined the OCC and Federal Reserve in issuing for comment a
risk-based capital proposal based on an internationally agreed outline.
This
proposal is part of an ongoing effort by the bank regulatory authorities, both
in the United States and in foreign countries, to encourage the establishment
and convergence of international capital standards that would apply to all
international banking organizations.
Imposing risk-based capital standards is
an important initiative designed to reduce risk in the banking system.
An;important question with respect to international capital standards is
whether they should apply only to banks (as they do in foreign countries), or
to banks m d bank holding companies as proposed in the United States.
This is
a difficult question since the United States is the only country that
regulates holding companies. •
Insofar as FDIC-insured savings banks are concerned, as of year-end 1987, all
FDIC-insured savings banks reported positive net worths, even when their
outstanding net worth certificates were not taken into account.
This is an
improvement over 1983 when five institutions with $11.5 billion in total
assets reported negative net worths when their net worth certificates were not
counted.
Capital levels in savings banks have increased over the last five
years due to improved earnings performance and conversions to a stock form of
ownership.
From 1982 to 1985, net worth certificates totaling $710 million
were issued to 29 savings banks that were experiencing severe losses due to
interest rate mismatches.
At year-end 1987, three banks had remaining net
worth certificates outstanding aggregating $315 million.
-
Earninas.
11
Earnings are the lifeblood of any business and commercial banks in
1987 had their worst year for profitability since the Great Depression.
Commercial banks earned $3.7 billion, down nearly 80 percent from $17.5
billion earned in 1986.
Their return on assets of 0.12 percent and return on
equity of 2.02 percent were at the lowest levels since 1934.
A soaring loan
loss provision, over 67 percent higher than 1986, fully accounted for the
industry's year-to-year drop in earnings.
Loan-loss provisions attributable
to the international operations of U.S. banks were $20.6 billion, $18 billion
higher than a year earlier.
Absent the extraordinary reserving for LDC loans,
net income would have been roughly equal to the 1986 level.
In fact,
excluding loan loss provisions, only 695 banks in the United States —
assets of $54 billion —
with
failed to generate sufficient earnings in 1987 to
cover their operating expenses.
Texas banks accounted for 60 percent of those
assets.
Earnings performance ratios for commercial banks have not been consistent
among asset size groups or geographic locations.
The largest banks reported
poor earnings for 1987 due to their sizable loss provisions for international
credits.
After the large money-center banks are excluded, the results for
those banks west of the Mississippi River are poorer than those far east of
the Mississippi.
Poor economic conditions in the energy States and Farm Belt
are the primary contributor to the West's poor results.
The Southwest Region is a major area of earnings weakness.
The region's
banking sector is operating at a loss, with 36 percent of the banks in the
region unprofitable for 1987 and the return on assets a negative 0.64
percent.
A persistent high level of problem assets, despite high levels of
charge-offs, points to a continuation of this problem for the region.
The
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12
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region's earnings also are depressed by the effect of the lowest net interest
margin in the country.
The region's well-publicized thrift and economic
problems influence the banks' cost of funds which, coupled with a weak loan
demand and high levels of nonperforming assets, compresses the net interest
margin.
Notwithstanding regional banking problems, 1988 earnings prospects for the
industry as a whole are very promising.
We expect that for 1988 the
commercial banking industry's aggregate income will exceed the previous '
historic high of $18.1 billion earned in 1985.
Although the earnings will be
dampened by continuing banking problems in the Southwest, those losses will be
offset by improvements in other areas, especially by the collection of $1.6
billion of income foregone on Brazilian loans since early 1987.
Assets-
Nonperforming assets at year-end 1987 are highest in the largest 25
banks and in the Southwest Region with 3.46 and 4.18 percent, respectively, of
their total assets in nonperforming status.
Insured commercial banks as-a
group have 2.11 percent of their total assets in non-performing status as of
year-end 1987.
Problem assets (i.e.. assets subject to adverse classification
by the regulators) reflect trends and concentrations similar to nonperforming
assets, with problem assets being 1.16 percent of total assets in the largest
25 category and 1.95 percent of total assets in the Southwest Region.
All
insured commercial banks had 0.91 percent of total assets classified as
problem assets at both year-end 1987 and 1986.
We believe that the asset-quality problems have for the most part been
identified and steps are being taken to reduce banks' risk exposure.
However,
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recovery will be slow.
There are further losses to be recognized in these
acknowledged problem areas and the high levels of problem assets will remain
until the economic conditions are markedly improved.
Bank exposure to LDCs continues to decline as a percentage of capital.
During
1987, most major U.S. banks significantly increased their bad-debt reserves
against loans to lesser developed countries.
The money-center banks have
reserves against approximately 25-30 percent of their non-trade LDC exposures.
The large regional banks took additional reserves or charge-offs and now have
reserves covering approximately 50 percent of their non-trade LDC exposures.
Based on the use of 25 percent of export income to service debt, this level of
reserving appears reasonable for present conditions.
Asset growth, which was less than two percent during 1987, showed the smallest
annual increase in almost 40 years.
Banks experienced shrinkage in those loan
categories suffering quality problems, !.£., agricultural, energy, commercial
real estate, and international.
These shrinkages were essentially offset by
growth in home equity loans, which stood at $33 billion at year-end, and other
consumer lending.
areas.
Banks continue to strive to expand lending in these new
However, competition remains intense.
Banks realize the possible
adverse affects of heavy concentrations of assets.
Most strive to minimize
this risk while continuing to serve their customers' legitimate credit needs.
New products and services are being developed to help spread this risk and to
take advantage of commercial banks' strengths.
"Securitization" is one such
practice which allows banks to emphasize one of their strengths —
efficient originator of loans.
being an
Securitization activities, initially used in
14 -
the mortgage banking area, are now expanding into other markets.
They provide
banks with additional sources of revenue without the capital requirements and
costs associated with the warehousing of loans.
Securitization also allows
diversification of portfolio by region and thus helps to avoid concentration
problems such as those currently being experienced in the Southwest.
Liquidity.
During the latter part of 1987,
deposits at lower interest rates.
stock market decline.
banks enjoyed a large inflow of
This resulted partially from the October
Up until that time, banking sector deposits had
increased at a steady, albeit slow, pace.
However, fourth-quarter deposits in
1987 grew at an annualized rate of 11.7 percent.
Overall, sources of banks' funds appear stable and liquidity is adequate.
However, in the Southwest Region, institutions with sizable amounts of
uninsured deposits are vulnerable to sudden deposit outflows.
As evidenced by
First Republic, funding sources can be influenced by poor operating results
and uncertain conditions.
This demonstrates that market discipline by
depositors and creditors still exists despite insurers' actions to protect all
depositors in large institutions.
However, we believe that the potential
trouble spots have been Identified and the FDIC has shown it is willing and
able to be a stabilizing Influence when the need arises.
The FDIC was generally satisfied with the banking system's support of the
securities market during the October stock market decline.
We believe the
banks' response was consistent with safe and sound banking practices and they
were able to assist in providing liquidity where needed.
shown by a fourth quarter surge in loan demand.
This support can be
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BANK SUPERVISION
Given the commitment of the federal government to the safety of insured
deposits, it is clear that we must find ways of limiting or controlling the
risks assumed by insured banks.
Certainly market discipline has a role to
play but it cannot be relied on exclusively or even substantially to protect
the government's interest.
We believe that interest must be protected
primarily and directly through effective bank regulation and supervision with
á decided emphasis on the flexibility of supervision.
Our experience in the Southwest to date has been instructive.
From a
supervisory standpoint, it is difficult to fault anyone for failing to
anticipate the precipitous decline in oil prices and the effects that would
have on the economy of the Southwest.
when everything is booming.
It is hard to be an effective naysayer
On the other hand, it is also clear that in the
euphoria of the oil boom many bankers failed to heed, and the regulators
failed to adequately enforce, certain prudential lending standards that might
have moderated the effects of the subsequent economic decline on individual
banks.
These standards include risk diversification, cash flow and market analyses,
sound collateral margins and the individual liability of borrowers with
substantial net worth as additional support for indebtedness.
Such standards
are appropriate for all banks, including well-capitalized banks who-se capital
can be quickly dissipated in an economic downturn, particularly when the bank
has concentrated its lending activities in one economic sector or geographic
region.
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Even though economic problems now are of greater importance than normal in
explaining bank, problems, management remains an important cause of most banks'
difficulties.
Deficiencies in bank management and policy exacerbate the
natural tendency for banks to suffer from weaknesses in the economy.
Wherever
the circumstances warrant, the FDIC initiates formal enforcement actions.
In
1987, we initiated 91 insurance termination proceedings, issued 107
cease-and-desist orders, and began 18 removal actions.
The downturn in the agricultural and energy industries has been so severe and
protracted that today, in certain depressed areas of the country, some banks
with good records and acceptable management are having financial
difficulties.
As regulators, we are using new approaches in supervising these
institutions.
We believe that formal enforcement actions —
and appropriate in many situations —
while very useful
are counterproductive in those cases
where management is acceptable, the bank's problems are the result of adverse
market conditions, and the prospects for recovery are good, given a reasonable
economic cycle.
The FDIC seeks to work cooperatively with the management of
such banks in a joint effort to restore the financial stability of their banks.
Capital Forbearance and Loan Loss Deferral
The capital forbearance program adopted by the banking agencies is an example
of the approach we believe has been useful and beneficial to both the FDIC and
participating banks.
This is a program for solvent banks with below expected
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capital and which have reasonable prospects for long-term viability.
\
As of
j May 31, the FDIC has approved 155 applications for capital forbearance, while
denying 68.
There have been 30 banks that have been terminated from the
[ j capital forbearance program.
Two of these institutions were removed because
of improved financial condition and five others merged into healthier
institutions.
An additional six more of these banks failed and the remaining
17 were removed due to noncompliance with their capital plan.
Banks participating in the program outside the West and Southwest are
improving.
Many other banks in the program throughout the country also are
making good progress.
Restoring financial health does not occur overnight but
we believe this program has been effective in accomplishing its purpose.
We
will be evaluating the program and measuring its results carefully in the
future.
A somewhat similar program (loan-loss deferral) was authorized for
r
agricultural banks by Congress last year.
¡I
to the FDIC for the program, with 18 applications approved, 10 denied and 28
||
still under review.
As of May 31, 66 banks have app-lied
Nine banks were determined to be ineligible and one
application was withdrawn.
It is too early to determine the success of this
program.
Fraud and Insider Abuse
Fraud and insider abuse are frequent elements in bank failures.
We believe
that such misconduct contributed significantly to about one-third of the bank
failures in 1986, 1987 and so far in 1988.
We estimate that outright criminal
- 18 -
conduct was responsible for 12 percent to 15 percent of bank failures.
For
example, from January 1985 through 1987, 98 of the 354 banks that failed were
cited by examiners as having at least some element of fraud or insider abuse.
Those 98 failed banks had assets of $2.7 billion and cost the FDIC nearly $675
million.
Our experience since 1985, however, suggests a somewhat lessened
impact of fraud and abuse compared to the late 1970s and early 1980s.
The FDIC recognized a need to strengthen efforts to deal with fraud and abuse
and has taken several major steps since 1984 to improve the situation.
We
published a list of time-tested "Red Flags" and other warning signs of fraud
and abuse to be used as an aid to examiners and auditors.
We designated some
60 examiners as bank fraud specialists to receive specialized training in bank
fraud and insider abuse.
Later this year, an intensive, highly specialized
training session will be held for these examiners.
It will focus on criminal
motivation, early detection and investigative techniques.
Other training
courses for examiners and liquidators have been developed or improved.
We have published guidelines for banks to use in setting up or revising their
codes of conduct and, earlier this year, we mailed to all of the banks under
FDIC supervision our Pocket Guide for Directors, a copy of which is attached
as Appendix B.
The Guide provides directors with practical guidance in
meeting their duties and responsibilities.
These initiatives with respect to the bank fraud problem will help contain
this ever-present problem by fostering public confidence and deterring future
abuses.
19 -
Examination and Examiners
One of the FDIC’s primary goals has been to increase the level of onsite bank
supervision by reducing the time intervals between onsite examinations.
After
evaluating our overall examination projections in terms of staff resources,
operating procedures and the appropriate level of onsite examination, we have
decided to move toward more frequent examinations.
Our goal now is to have an
onsite examination every 24 months for well-rated institutions (those rated 1
<jr 2) and an onsite examination every 12 months for problem and near problem
institutions (those rated 3, 4 or 5).
Unfortunately, this goal cannot be
accomplished overnight, but we have made considerable progress.
Currently, we
are averaging once every 34 months for satisfactory banks, once every 23
months for marginal banks and about once every 19 months for problem banks.
We recently have initiated a new program for coordinating FDIC supervision
with state supervision —
(SAFE) Program.
known as the Supervisors Annual Flexible Examination
Under this program the FDIC sets annual plans for supervisory
activities with state authorities.
results.
It is a flexible program that emphasizes
Basically, we envision treating many examinations conducted by state
examiners as our own.
These state exams would be placed on our examination
cycle database, and would be counted as examinations by the FDIC for purposes
of tracking adherence to our examination schedule guidelines.
Where state
examinations are accepted as our own, FDIC presence in these banks for
full-scope examinations would be delayed —
possibly for up to an additional
two years for 1- and 2-rated banks, and an additional one year for 3-rated
banks.
In the case of 3-rat-ed banks, our presence would depend on trends in
the individual banks.
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20
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At year-end 1987, the FDIC employed roughly 1,900 field bank examiners.
1 ptend
to increase this number to about 2,100 by the end of 1988.
We
Our
/examiner force had declined to only 1,389 in 1984 from the previous high of
J
11,760 examiners in 1978 when we had only 342 problem banks and 7 bank
failures.
In contrast, there are currently nearly 1,500 problem banks and the
possibility of more than 200 failures this year.
Once we reach our goal of
2,100 we will decide whether we should expand our force further.
We have changed our recruiting methods and standards since deciding in 1985
and 1986 to increase the field staff by 30 percent.
By improving our
recruitment techniques and hiring the best possible candidates, we were able
to hire 421 new trainee examiners in 1987 with a collective college grade
point average of 3.4 out of a possible 4.0.
It will be some time, however,
before these new people are sufficiently trained to be able to carry a full
load of examination responsibility.
We also are building a new training
center at Virginia Square, Virginia, to improve our ability to train our field
forces.
Even though we are not at our goal for examination frequency, the expanded
work force has enabled us to complete more examinations in 1987 than in 1986.
The number of safety and soundness examinations increased 14 percent and the
number of compliance examinations increased 97 percent during the past year.
A major innovation in our examination program has been the expanded use of
automation and personal computers.
We have developed automated examination
reports that are now utilized for all safety and soundness, trust, compliance
and EDP examinations.
Additionally, several specialty programs are available
-
21
to assist our examiners with tasks ranging from APR calculations in consumer
compliance examinations to analyses of capital adequacy.
Personal computers
have given our field staff immediate access to the data on the Corporation's
mainframe computer and the tools to present current data in typewritten or
graphic form.
The automated report also provides the means to gauge more
accurately overall time utilization and productivity trends.
FAILED- AND FAILING-BANK RESOLUTION
A1ternatives
When a bank's failure is imminent, the FDIC must consider how it will
discharge its obligations as both the insurer of the bank's deposits and the
likely receiver of the failed bank.
Although the response of the FDIC to each
•possible bank failure may be somewhat different, there are generally three
categories of alternatives available.
Generally the FDIC will make each
alternative available to an interested investor.
First, direct financial assistance may be available to keep the bank from
failing.
This approach is available only if the Board of Directors of the
FDIC finds that either the assistance required is less costly to the FDIC fund
than any other alternatives available to the FDIC or that continued operation
of the bank is essential to provide adequate banking service in the community.
Since assistance transactions are the product of negotiation, each has its own
unique characteristics. „ The FDIC, however, imposes certain uniform
requirements.
The assistance required must be less than that required under
other alternatives.
In addition, the failing bank must provide all interested
22
-
-
qualified investors an opportunity to present alternative assistance
proposals.
Generally, our philosophy is that the assistance provided should
be no greater than the amount required to offset any deficiency between
realizable asset values and liabilities.
Furthermore, failing banks almost
invariably have unrecognized losses to the extent they are capital deficient.
For this reason, we require that new Investors be found to recapitalize the
bank and that the effect on existing shareholders be comparable to closing the
bank.
In cases involving widely held banks, existing shareholders may be left
with a residual ownership interest —
such as one to two percent —
to induce a favorable shareholder vote.
in order
In other cases, shareholders are left
with no ownership interest.
The tax consequences of FDIC assistance for the revitalized institution (as
well as the extent to which tax attributes of the preassisted institution
carry over) are issues that invariably arise during negotiations with new
capital investors.
Investors generally have not been able to work out the tax
issues with the Internal Revenue Service until well after the assistance
transaction with the FDIC has been negotiated.
The uncertainty surrounding
the tax consequences of assistance transactions is a real detriment to
attracting new capital for troubled banks.
Resolving tax issues beforehand —
ideally through a clear legislative mandate —
would be very useful.
Thus,
the FDIC has been actively pursuing clarification of these tax issues with the
tax-writing committees of the Congress.
We would appreciate any support this
committee can provide in this area.
The second alternative available in addressing failing banks is a direct
payoff of the insured deposits.
FDIC is named receiver.
In this situation the bank is closed and the
The depositors are paid up to the $100,000 limit of
3 3<i ?(aC
- 23 -
insurance protection and the institution is liquidated.
Depositors above the
insurance limit are paid, to the extent possible, only after the failed bank's
assets are liquidated.
A variation of a direct payoff (called "an insured
deposit transfer") is when insured deposits are transferred to another bank
which acts as paying agent for the FDIC.
A direct payoff is the least
desirable, and usually most costly, alternative.
It results in an
interruption of vital banking services to the community served by the failed
bank.
In addition, because the failed bank's main office and branches are
permanently closed, virtually all the failed bank's employees lose their jobs.
The third and most prevalent alternative is a "purchase-and-assumption"
("P&A") transaction.
Under this alternative, which can be structured in
several ways, a healthy bank assumes all the failed bank's deposit
liabilities, including uninsured deposits, and agrees to acquire some or all
of the failed bank's assets.
The assuming bank receives an infusion of cash
from the FDIC to make up the difference between the value of the assets and
the liabilities assumed.
The current FDIC policy is to try to arrange,
wherever possible, so-called "whole bank" transactions where the assuming bank
acquires all the assets of the failed bank, including the bad loans, with the
minimum contribution from the FDIC.
A new temporary solution now available to the FDIC is a "bridge bank."
In
this case, the FDIC can operate the failed institution, for up to three years,
until a buyer can be found.
The open-bank assistance.transaction and the P&A have proven to be highly
effective means of providing a cost-effective resolution for failing and
failed banks, and have been used in the overwhelming majority of bank
- 24 -
failures.
They minimize disruption to depositors and the community generally,
and maintain confidence in the system.
These transactions, as well as being
cost-effective, also generally protect all depositors, regardless of amount,
and often general creditors as well.
Because of the benefits associated with these two means of dealing with
failing and failed banks, the FDIC attempts to engage in such transactions
wherever possible.
In 1986, when a total of 145 banks either failed or were
assisted, 98 P&A transactions were consummated and 7 open-bank assistance
transactions were undertaken.
In 1987 there were 133 P&As and 19 assistance
transactions out of a total of 203 transactions.
102 failed or assisted banks, 66 were P&As —
transactions —
As of June 30, of a total of
including 38 "whole bank"
and 15 were open-bank assistance transactions. ^>In a
relatively small number of cases, however, we have no choice under current law
but to pay off insured depositors up to the statutory maximum.
However,
uninsured deposits in these cases amounted to only a little over $80 million
last year, or less than one percent of the total deposits of all banks that
failed or received open-bank assistance.
Current Objectives
In light of the record numbers of bank failures over the past few years, we
have been especially concerned with maintaining a sound cash position.
This
objective requires the prompt resolution of failing-bank cases in a manner
that minimizes our costs and cash outlays and results in the FDIC's
acquisition of as few bank assets as possible.
Thus, as mentioned above, we
are actively pursuing whole bank transactions whenever possible.
This
- 25 -
approach permits us to realize maximum value on the assets of the failed or
failing bank., with only minimal disruption to existing borrower and depositor
relationships and the community at large.
In addition, more recently and as
part of our SAFE cooperative program with state regulators, we have arranged
to give purchasers up to four weeks to examine a failing bank and decide
whether they want to purchase it on an open or closed basis.
In keeping with our desire to conserve cash while maximizing our recoveries on
acquired assets, we have developed new initiatives to obtain maximum net
present value from liquidation assets in the shortest possible time.
initiatives include an aggressive marketing program —
These
including bulk sales —
designed to move loans and other assets back into the private sector; a
stepped-up management review of assets in litigation and large dollar assets;
and an increased emphasis on settling outstanding claims whenever practical
rather than pursuing protracted litigation.
However, our policy and practice
is to not "dump" assets for below-current appraised values.
As a result of these initiatives, the FDIC collected $2.4 billion by
liquidating assets from failed banks last year, a 38 percent increase over the
$1.7 billion collected in 1986.
These efforts have enabled us to hold our
inventory of managed assets from failed banks steady at about $11 billion
despite a record number of bank failures that involved even greater record
numbers in terms of dollars of failed assets involved.
The "Too-Big-to-Fai 111 Issue
As mentioned above, the "too-big-to-fai1" matter is another important issue
currently facing the FDIC in resolving the problems associated with failing
-
and failed banks.
26
-
It may be that governmental protection of the largest banks
in the major industrialized countries is a premise which, in the United
States, tends to be defined in terms of the extent of deposit insurance
protection.
In resolving several large failing bank cases we have deemed it
unacceptable to fail to fully protect certain bank depositors and creditors
because of the resultant economic costs and dislocations.
Because the failure
of banks over a certain size threatens the stability of a region —
possibly the entire banking system —
or
it may be prudent to consider instead
how to extend comparable protection to smaller institutions.
Appendix C provides some thoughts on various alternatives, all of which
unfortunately have some undesirable side effects.
The greatest threat to the
sufficiency and viability of the deposit insurance fund is posed by the
largest banks.
If depositors in these banks are to be fully protected, there
would seem to be relatively little more cost to the fund in extending that
protection to smaller banks as well.
However, this would further reduce the
market's ability to discipline the system and thus could further increase the
burden of government supervision.
As yet, we have found no alternative which
satisfies the criteria of providing a level playing field between larger and
smaller banks, maintains what is left of depositor discipline and protects our
system when big banks fail.
As a matter of policy, and consistent with statutory criteria, we are
attempting to resolve smaller failing bank cases in a manner that protects all
depositors whenever possible.
This means that we are committed to providing
open bank assistance or some variation of the purchase-and-assumption
transaction as preferred alternatives.
Use of these alternatives tends to
- 27 -
minimize some of the perceived disparity of treatment between large and small
banks.
By attempting to extend full protection to depositors of smaller banks
we also tend to reap the full benefits of stability to the banking system that
such an approach entails.
In fact, when considered as a whole, our treatment of large and small failing
banks is in most important respects remarkably similar.
In virtually all
cases, equity holders and subordinated creditors are substantially wiped out
or suffer severe losses and senior management and directors are replaced.
Bank depositors and creditors receive ALL their funds in the vast majority of
cases.
In fact in 1987, 72 percent of failed banks were handled by purchase-
and-assumption transactions, assuring all depositors 100 percent of their
funds.
First City and First Republic
Two failing bank cases, First City and First Republic (which is still
pending), warrant special comment because of their recency, size, and the
lessons they provide.
They also demonstrate our commitment to promoting
stability without extending the safety net to bank holding companies, bank
managers and shareholders.
First Citv. The recapitalization of the subsidiary banks of First City
Bancorporation, Houston, Texas, was consummated in mid-April, 1988 and
involved approximately $970 million of FDIC assistance accompanied by
approximately $500 million in new equity capital from private investors.
The
transaction was an open-bank assistance transaction and, accordingly, required
- 28 -
the consent of common and preferred shareholders.
As a condition of the FDIC
assistance, and in order to insure viability of the recapitalized institution
for the private investors, substantial concessions also were required from
creditors of the First City holding company in accordance with our existing
policy statement on open-bank assistance.
Because First City was an open-bank transaction, the concessions by the
shareholders and creditors were voluntary.
Any shareholder not wishing to
participate in the restructuring could vote against the plan.
Similarly, any
creditor refusing to participate could refrain from tendering the debt
security held by such creditor.
Unlike the decisions involving shareholders,
where the approval of the holders of two-thirds of the outstanding shares
basically would bind all shareholders to the restructuring, the decisions of
the debtholders were individual decisions.
That is, each debtholder could
make his or her own determination of whether or not to participate in the
restructuring, unaffected by decisions of other debtholders.
The holders of approximately 67 percent of the outstanding debt voluntarily
participated in the restructuring in which they received a cash payment of
less than the face value of their debt obligation in exchange for the
obligations.
The holders of approximately 33 percent did not voluntarily
exchange their indebtedness for cash, and thus continued to hold their debt.
However, they did not receive a cash payment from First City of 100 cents on
the dollar.
They merely continue to hold their debt security under the
preexisting terms.
In our view, participation in the debt concessions was substantial and
sufficient for the private investors to inject $500 million of new equity into
- 29 -
First City.
While certain individual creditors might have received greater
benefit than if the insolvent First City banks had failed, it is our view that
the aggregate concessions on the indebtedness comported with the guidelines
contained in our policy statement.
It is unclear what the creditors would
have received in the event the insolvent First City banks actually had
failed.
As of March 31, 1988, of the 60 banks then in the First City system,
52 still had positive net worths and 56 had positive primary capital.
Furthermore, the advantage of an open-bank transaction like First City is that
the disruptions resulting from bank closings are avoided.
Another point also should be made clear.
When originally announced, the
recapitalization proposal contemplated that 90 percent of the debt would be
exchanged for the cash payment, while 10 percent of the debt would remain
outstanding on its original terms.
The FDIC did not increase its financial
commitment to the restructured First City when the ultimate debt concessions
obtained were less than originally contemplated.
This increased debt burden
was assumed by the new investors, not the FDIC.
First Republic. On March 17, 1988, the FDIC announced an interim assistance
plan for First RepublicBank Corporation, Dallas, Texas, involving a $1 billion
loan to the two largest banks in the First Republic system.
The announcement
included an assurance to depositors and general creditors of the First
Republic banks that in resolving the First Republic situation, bank depositors
and banks creditors would be protected and that services to customers would
not be interrupted.
The FDIC specifically provided no assurance to creditors
of the First Republic holding company or other non-banking subsidiaries.
Further, these assurances related only to depositors and creditors other than
- 30 the First Republic banks themselves.
That is, the Inter-bank funding from one
First Republic bank to another is not protected by the FDIC assurances.
In exchange for the assistance, the First Republic holding company guaranteed
the $1 billion loan and collateralized that guarantee by pledging the shares
of 30 of its bank subsidiaries.
the First Republic banks.
This loan was further guaranteed by each of
First Republic also agreed to substantial
restrictions on its operations, management, and policies.
At the time of the assistance, First Republic had total assets of $33 billion,
was the largest bank holding company in Texas, and was the largest bank
holding company outside New York, Chicago, and California.
It is a major
clearing bank, dependent to a substantial degree upon continued relationships
with other banks, major corporate customers and others.
Due primarily to
major losses, First Republic suffered a severe erosion of confidence during
the first quarter of 1988.
As a result, it was losing net only deposits and
other funding, but equally important, it was losing or was in danger of losing
significant corporate and other banking relationships that would'be difficult,
it not impossible, to replace.
The situation became so severe that First
Republic requested the assistance package from the FDIC and was willing to
pledge virtually its entire equity to the FDIC in exchange.
The FDIC, in
turn, determined that the assistance package was the most appropriate method
of lessening the ultimate risk to the insurance fund posed by the situation.
The FDIC assured depositors and general creditors of the Republic banks that,
as it acted to provide a long-term solution for the First Republic situation,
the FDIC would arrange for a transaction that resulted in the depositors and
- 31
creditors continuing to have deposits in and claims against an operating bank
as a result of open-bank assistance transactions or a variation of one of its
traditional purchase-and-assumption transactions.
It is important to understand the legal basis for the granting of such
assurances.
Section 13 of the Federal Deposit Insurance Act specifies the
various alternatives available to the FDIC in assisting failing or failed
tttnks.
Among the alternatives are providing direct assistance to the banks to
prevent their closing or providing assistance to another entity to facilitate
the acquisition of the banks.
Such alternatives generally have the effect of
protecting depositors and other creditors of the banks.
If any alternative
other than paying off insured depositors and liquidating the assets of the
failed bank is to be exercised, normally the cost of exercising such
alternative must be no greater than the cost of liquidating the banks.
However, the FDIC may also grant assistance in those instances where the
failing bank is found to be essential to the community in which it operates.
In our opinion, a determination of essentiality is available whenever severe
financial conditions exist which threaten the stability of a significant
number of insured banks or of insured banks possessing significant financial
resources, and the Board of Directors of the FDIC determines that the
assistance will lessen the risks to the deposit insurance fund.
With respect to First Republic, the FDIC, in consultation with the Comptroller
of the Currency and the Board of Governors of the Federal Reserve System,
determined that severe financial conditions existed that threatened the
stability of a significant number of insured banks, as well as insured banks
possessing significant financial resources.
In making this determination, the
- 32 -
FDIC Board of Directors did not, and could not, extend deposit insurance
coverage to all depositors and insured creditors.
Instead, the Board
committed itself to accomplishing a long-term resolution of the First Republic
problem in a manner that would not result in loss to depositors or other
general creditors of the bank.
In providing such assurances to depositors and
general creditors, the Board of Directors of the FDIC acted in order to lessen
the risk posed to the insurance fund.
Clearly the size of the First Republic system, the multibank holding company
situation so predominant in Texas, and the attendant intra- and inter-company
funding relationships played an important role in assessing the risks to the
deposit insurance fund.
The Board examined and took into consideration the
impact of the failure of First Republic on other bank holding companies
located outside the state.
In the view of the Board, the potential costs of
allowing the lead bank of this major regional bank holding company to fail
without taking into account the impact on the banking system woulo have been
extremely shortsighted and imprudent, given the critical goal of preserving
the insurance fund and the greater responsibilities of providing stability and
confidence to the banking system generally.
At the time that a long-term solution is found for First Republic, the actual
transaction (be it an open-bank assistance transaction or a purchase-andassumption transaction) ultimately may be less expensive to the FDIC than the
liquidation of the bank and paying off the insured deposits, and thus may
satisfy the cost test provided in Section 13(c) of the FDI Act.
Our
preliminary analysis of First Republic and our general experience lead us to
believe that this may be true.
make such calculations.
However, at the present time we are unable to
- 33 -
PROPOSED EMERGENCY CONSOLIDATION LEGISLATION
Multibank, holding companies generally coordinate their banks' activities so
closely that the bank holding company system effectively operates as a single
banking enterprise.
Yet when a bank within the system fails, the FDIC must
deal with that bank individually.
In effect, the FDIC must act as if there is
no connection between the failed bank and the rest of the system.
Some bank holding companies and their creditors have seen a way to turn this
situation to their advantage.
Most multibank holding companies exist in
states that have restricted branching.
In most cases, the bank subsidiaries
are commonly named and are commonly advertised.
The bank subsidiaries support
their lead bank to the same extent as if they were branches of that bank.
For
instance, individual "downstream" (or subsidiary) banks frequently deposit
many times over their capital account in the lead bank and these amounts often
are well over the $100,000 coverage limit.
unsecured loans to the lead bank.
The subsidiary banks also may make
This captive funding is used by the lead
bank to finance its lending activities.
This arrangement concentrates the bank holding company's assets in a single
bank (usually the lead bank).
If the lead bank's lending practices are
inferior, the bank holding company effectively isolates its poor-quality
assets in that bank.
Moreover, the bank has the resources to make far more
poor-quality loans than would be the case if the bank did not serve as the
conduit for its affiliated banks' funds.
When the lead bank's assets
deteriorate sufficiently to threaten its solvency, the affiliated banks may
- 34 -
withdraw their deposits— 1eaving the FDIC with the losses.
This technique
amounts to a misuse of the FDIC's resources, which can do substantial harm to
the Federal safety net for depositors.
Recent experience also has shown that creditors and shareholders can interfere
with the Federal safety net in other ways as well.
In many cases it is 1n the
best interest of the local community and of the banking system for the FDIC to
arrange open-bank assistance transactions.
These transactions are designed to
avoid the disruption that a bank failure would inflict on a community.
However, open-bank transactions require the consent of creditors and
shareholders of the holding company.
In a number of cases the creditors and
shareholders have delayed these transactions in an attempt to receive greater
consideration than they would have been entitled to if the bank had failed.
These creditors and shareholders have imposed added costs on the Federal
safety net because of the FDIC's desire to prevent the closing of the bank.
We are seeking legislation, that previously has been submitted to all members
of this committee, to address these problems.
This legislation would
establish a special procedure for dealing with failing banks that belong to
multi bank holding companies.
The procedure would allow the FDIC —
in
conjunction with the Federal Reserve and the banks' primary regulators'—
to
require the consolidation of a failing bank with other banks in the holding
company.
It is designed to protect the public interest by ensuring that the
banking assets of a holding company system are appropriately applied towards
solving problems in a subsidiary bank prior to requiring the expenditure of
FDIC funds.
We hope this committee will adopt this measure.
- 35 -
DEPOSIT INSURANCE - A SYSTEM FOR THE 90s
Deposit insurance has successfully protected depositors and helped to maintain
the stability of our banking system.
Today, deposit insurance protects some
$2.5 trillion of deposits held by large and small depositors in approximately
14,000 banks of all sizes, including 330 with deposits in excess of a billion
dollars.
Deposit insurance is now firmly entrenched as a part of our economic
landscape and it is unlikely the public would countenance any serious
diminution of the protection afforded.
Nevertheless, the deposit insurance scheme is facing serious new challenges to
the sound operation of the system which must be addressed in order to assure
its continued viability.
That is why the FDIC is 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
90s11. has been underway for several months.
We expect to have the study
completed by year-end and believe it will be a useful contribution to the
future of the deposit insurance system.
Here are some of the fundamental questions to be answered in constructing a
better deposit insurance system.
Can supervisorv mechanisms control risk?
system.
This is key to the future of the
If supervision doesn't work, the ability to borrow on the credit of
the United States can be misused and abused.
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,
- 36 -
personnel, examination procedures, offsite 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 the market be used to control risk in today's environment?
Is
depositor discipline really alive and well despite Insurance and big bank
protection?
statutory and
Can we increase market discipline and thus promote safety by
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 insured deposits, or provide
insurance only for individuals and not corporations?
How far 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.
How can we improve the wav we handle failing banks?
depositors be protected, and if so, by whom?
Should large bank
How can we handle failed banks
so as to treat large and small banks more equitably?
Should the FDIC operate more in the manner of a Reconstruction Finance
Corporation ("RFC") of the 1930s?
An 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 marketplace.
the use of FDIC funds in this manner.
Currently we have opposed
- 37 -
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?
Should foreign deposits be subject to assessment?
Of course, no study of deposit insurance can avoid addressing the issue of a
merger of the FDIC and FSLIC funds. We do not favor a merger under current
conditions.
If such a merger is mandated by Congress, we believe that an
administrative merger might provide some cost savings.
While changes may be needed in view of the highly competitive and broad-based
markets in which banks operate today, we should not lose sight of the success
of deposit insurance to date and the essential soundness of the system now.
Since the FDIC was founded, we have resolved over 1,300 failed or failing bank
situations.
Not one depositor has lost a penny of his or her insured deposits
and the vast majority of all depositors have received all of their deposits,
insured and uninsured.
paid by the banks.
This result has been paid for by the use of premiums
This is a record of which we all can be justifiably proud.
Mr. Chairman, I would be pleased to respond at this time to any questions you
or the other members of the Committee may have.
TABLE 1
CLOSED BANKS
FDIC INSURED INSTITUTIONS
BY SIZE (000 omitted)
YearEnd
0 - $300
Mi 11i on
Total
Assets
$300 - 1.000
Mi 11ion
Total
#
Assets
86
$2,825,835
1
1987
181
5,644,359
1986
136
4,787,971
1985
116
2,851,969
1984
77
2,371,211
1
391,800
1983
43
1,954,397
1
778,434
1982
31
749,647
2
1,497,159
1981
7
1980
Total
Assets
Total
Total
Assets
0
590,700
87
$3,416.535
3
1.277,618
184
6,921,977
1
561,013
138
6,965,800
116
2,851,969
78
2,763,011
45
4,136,923
33
2,246,806
103,626
7
103,626
10
236,164
10
236,164
1979
10
132,988
10
132,988
1978
6
281,495
7
994,035
1977
6
232,612
6
232,612
1976
15
627,186
16
1,039,293
1975
13
419,950
13
419,950
1974
3
166,934
1
3,655,662
4
3,822.596
1973
5
43,807
1
1,265,868
6
1,309,675
1972
1
22,054
1
22,054
1971
6
196,520
6
196,520
1970
7
62,147
7
62,147
6/30/88
Source:
FDIC Annual Reports
1
1
$
Over $1
Billion
1
1
$1,616,816
1,404,092
712.540
412.107
TABLE 2
OPEN BANK ASSISTANCE
FOIC INSURED FINANCIAL INSTITUTIONS
BY SIZE (000 omitted)
Year-
6/30/88
4
0 - $300
14i 11 ion
Total
Assets
$300 - 1,000
Million
#
Total
Assets
n
$599,289
2
$1,285,107
Over $1
Billion
Total
Assets
0
2 $41,200,000
2
Total
Total
Assets '
0
15
$43,084,396(4
9
2,551,098(8
7
720,694
2,428,518
1987
7
122.580
1986
6
220.694
1
500,000
1985
2
197,879
1
413,948
1
5,277,472
4
5,889.299
1
513,400
1
35,900,000
2
36,413.400
1
2,500,000
3
2,890,000
1984
1983
2
390,000
1982
2
205.203
1981
4
2.642,682
3
6,537.724
9
9,385,609
1
899,029
2
3,856,405
3
4,755,434
1
5,500,000
1
5,500,000
1
; 350,000
1
1,300,000
1
9,300
1980
1979
1978
1977
1
1976
305,000
1975
1974
1973
•
1
1972
1
1971
1,300,000
9,300
1970
Source:
FOIC Annual Reports
(A)
Includes the 74 banks of First RepublicBank Corporation and the 59 banks of
First City Bancorp System as one institution each.
(B)
Includes the 11 banks of BancTexas System as one institution.
TABLE 3
CLOSED BANKS ANO OPEN BANK ASSISTANCE BY FDIC
PDIC INSURED INSTITUTIONS
BY SIZE (OOO omitted)
YearEnd
0 - $300
Mi 11ion
$300 - 1,000
Mi 1li on
Over $1
Billion
Total
Assets
#
Total
Assets
97
$3,425,124
3
$1,875,807
2 $41,200.000
102 $46.500,931(A)
1987
188
$5,766.939
3
$1,277,618
2
2,428,518
193
1986
142
5,008,665
2
1,061,013
1
1,616,816
' 145
7,686,494
1985
118
3,049,848
1
413,948
1
5,277,472
120
8.741.268
1984
77
2,371,211
2
905,200
1
35,900.000
80
39.176,411
1983
45
2,344,397
1
778,434
2
3.904,092
48
7,026,923
1982
33
954,850
6
4,139,841
3
6,537,724
42
11,632,415
1981
7
103,626
■ 1
899,029
2
3,856,405
10
4,859.060
1980
10
236,164
1
5,500,000
11
5,736.164
1979
10
132,988
10
132,988
1978
6
281,495
7
994,035
1977
6
232,612
6
232,612
1976
15
627,186
17
1,389,293
1975
13
419.950
13
419.950
1974
3
166,934
1
3,655,662
4
3,822,596
1973
5
43,807
1
1.265,868
6
1,309,675
1972
1
22,054
1
1,300,000
2
1,322,054
1971
7
205,820
7
205,820
1970
7
62,147
7
62,147
#
6/30/88
Source:
1
2
#
Total
Assets
Total
Assets
#
712,540
762,107
9.473.075(B)
FDIC Annual Reports
(A)
Includes the 74 banks of First RepublicBank Corporation and the 59 banks 0f
First City Bancorp System as one institution each.
(B)
Includes the 11 banks of BancTexas System as one institution.
TABLE 4
Number and total deposits of troubled (CAMEL rating of 4 and 5
and pre-CAMEL equivalents) institutions
TOTAL NUMBER OF FDIC-INSURED PROBLEM
COMMERCIAL BANKS AND THRIFTS AND AGGREGATE
TOTAL DEPOSITS BY YEAR (000,000 omitted)
YearEnd
#
0 - $300
Million
Total
Deposi ts
$300 - 1,000
Million
Total
#
Deposi ts
Over $1
Billion
Total
Oeposi ts
#
Total
#
Total
Deposi ts
5/31/88
1,435
$ 60,330
38
$ 21,222
22
$206,362
1.495
$287,914
1987
1,509
63,743
42
22,461
24
196,246
1,575
282,450
1986
1.412
55,289
46
24,348
26
191,683
1.484
271,320
1985
1,069
41,317
41
23,217
30
132,593
1,140
197,127
1984
778
31,031
38
20,129
32
134,949
848
186,109
1983
591
26,838
'31
16,513
20
85,740
642
129,081
1982
332
12,759
21
10,119
16
34,460
369
57,338
1981
197
5,659
15
9,423
11
27,482
223
42,564
1980
206
4,599
7
4,860
4
12,185
217
21.644
1979
274
6,995
11
6,559
2
6,763
287
20,317
1978
322
8,404
14
7,668
6
48,069
342
64,142
1977
348
10,036
13
7,307
7
44,561
368
61,904
1976
361
11,286
10 .
6,037
8
41,830
379
59,153
1975
303
7,641
7
3,955
2
6,517
312
18,113
1974
177
4,525
5
3,116
1
1,420
183
9,061
1973
154
2,806
2
1,499
0
0
156
4,305
1972
189
3,141
3
2,192
0
0
192
5,333
1971
239
3,504
2
1.453
0
0
241
4,957
1970
251
3,613
0
0
1
1,076
252
4,689
Source:
FDIC Problem Bank List.
COMMERCIAL BANKING PERFORMANCE -
FIRST QUARTER 1988
• First RepubilcBank Losses Prevent Quarterly Earnings Record
• Number o f Unprofitable Banks Declines Modestly
e Insolvencies Running at Same Rate as a Year Ago
• Midwest Banks Show Greatest Improvement
U.S. com m ercial banka earned $5.0 billion in the
firat quarter of 1968, compared to $5.3 billion in
the first quarter of 1967. Earnings improved in ail
areas of the country except the Southw est. But
fo r the $1.49 billion aggregate loss reported by
First RepubilcBank Corp. banks, first quarter
results would have established a new quarterly
earnings high. N ationw ide, over half of all banks
reported higher first quarter earnings in 1968 than
a year ago, and the percentage of unprofitable
banks fell to less than 13 percent from alm ost
15 percent in the first quarter last year.
Nonperform ing assets were slightly below yearago levels, but were up about $1 billion from yeaend 1967, despite first quarter charge-offs of $5.0
billion. The Industry's ratio of non performing
assets to assets rose to 2.48 p ercen t The ag
gregate loan-loss allowance also was up n s A
$1 billion In the first three months of 1968^f
$50.3 billion, representing 7 8 4 percent of noncur
rent loans and leases.
The Industry's net interest incom e grew 1 9 per
cent over last year's first quarter, and noninterest
Incom e continued to grow strongly, up 17.3 per
cent. First quarter noninterest expenses were up
11 percent over last year. However, employment
at com m ercial banks continued to decline, and
the rate of growth in noninterest expense may
subside as cost-cutting moves begin to take ef
fect. Net nonrecurring gains contributed a single
quarter record $165 m illion to the industry's bot
tom line in the first quarter.
Loan growth continued to be led by increases In
real estate and consumer lending, as commercial
loan growth remained sluggish. Real estate lo w s
were $15.7 billion higher at the end of March than
at year-end, accounting for 90 percent of ag
gregate asset growth in the quarter. The increase
in real estate lending was distributed among con
struction and development and other commercial
real estate loans (up $6.6 billion), home equity
loans (up $1.6 billion), and 1-4 fam ily residential
m ortgage loans (up $& 5 billion). Loans to In
dividuals were up 6.8 percent from year-ago
leveis, but down $0.4 billion from year end.
The banking sector's equity capital base grew by
$1.9 billion in the first quarter, after casft
dividends of $ 1 3 billion. The industry's ratio of
equity capital to assets rose slightly to 6.07 per
cent, up from 6.04 percent at year-end.
Chart A — Com petition of Total Loans Outstanding
March 3 1 ,19M
Chart B — Distribution of Noncunrent Loan*
March 3 1 ,1SM
8.6H
13.9*
f
Chart C — Quarterly Nat Incorna of FDIC-lnsurBd
Commarciai Banks, 19S4-19S8
significantly from improving economic trends in
that part of the country.
Im provem ent among M idwest banks is much
more apparent. Aggregate profits increased 26
percent. The levels of nonperforming assets and
loan-loss expense, as well as the number of
banks losing money, all dropped significantly.
The percentage o f M idwest banks reporting first
quarter losses fell from 13.5 percent a year ago
to only 7.6 percent.
Fifty-four banks either failed or received FDIC
assistance during the first quarter, the same
num ber as in last year's first quarter. The number
of “Problem ” banks has continued to decline
from its peak of over 1,600 institutions in the mid
dle of 1987, reaching 1,491 at the end of March.
Im provem ent was most pronounced among
banks in the agricultural M idw est. In the
Southw est, banks rem ain mired in asset-quality
problem s, m ainly in real estate loans, and banks
in that region account for a disproportionately
large share of the “Problem Bank" list.
Im provem ent was also evident in the W est.
Nonperform ing assets fell by 15 percent and net
income jumped by 59 percent over last year's first
quarter. W hile the percent of assets in nonperform ing status (3.26% ) and the percent of un
profitable banks (19.3% ) remain relatively high,
both showed im provem ent when compared to
last year.
Chart 0 — Percentage of Banka In Each Region
P tfn t
on “Problem Bank” Ust
Southwest banks reported aggregate first quarter
losses representing 2.4 percent of total assets,
on an annualized basis; however, over 90 percent
of these losses were concentrated in the sub
sidiaries of First RepublicBank Corp. W hile far
from rosy, the picture of banking in the
Southwest looks far less bleak when the First
Republic banks are excluded.
Impact of the Southwest Region on
First Quarter 19S8 U.S. Banking Aggregates
S ou thw est R egion
esc).
w ith
FRBC
F R 8C
R etu rn on aasets
N ot cñ arg e-o tfs te to o n *
& leaoes
Non perform ing te s e ti to
asseta
E quity cap ital to assets
-2 .3 7 %
-0 .2 8 %
Southeast and Central banks continued to exhibit
strong performance in the first quarter. Earnings
remained high and nonperforming assets remain
ed low. Banks in the Northeast showed a
dramatic 35 percent increase in earnings, yielding
an aggregate return on equity of 17.4 percent.
Nonperforming assets grew only 2 percent. Equi
ty, however, was 3.5 percent lower than a year
ago, reflecting the loss provisioning taken by the
region’s large banks last year.
R est of
tn e U .S .
0.97%
2.14
1.50
0.75
6.28
S.43
5.31
6.20
2.10
6.13
Apart from First RepublicBank subsidiaries, the
region's banks still registered an aggregate first
quarter loss. During the quarter, 27 percent of the
region’s banks reported losses, and nonperfor
ming assets reached disturbingly high levels.
Southwest banks have boosted their loan-loss
provisions, but reserves against noncurrent loans
are still low, especially in comparison to other
regions. Sm aller banks in the Southwest have
begun to show modest im provem ent, but it like
ly w ill take some tim e before banks benefit
Overall, the industry should continue to enjoy im
proved profitability through the rest of the year.
Large banks w ill benefit from lower loss provi
sioning, and banks in the East w ill continue to
b enefit from a strong regional econom y.
Although it appears that the Southw est’s
econom ic problems have bottomed out, that
region will continue to dom inate 1988 banking
news and numbers.
2
Table L
Se le cte d Indicators, FDIC*lnsured Com m ercial Banks
Return on assets ................................... .......
Return on equity..................................... .......
Equity capital to assets.......................... .......
Primary capital n e » ............................... .......
Nonperforming assets to assets.............
Net chargeoffs to loans.......................... .......
Asset growth n ta ................................... .......
Net operating income growth ................. .......
Percentage of unprofitable banks........... .......
Number of problem banks...................... .......
Number of faMedfassistad banks............. .......
790*
1987*
087%
11.00
687
7.74
2.48
088
486
204
1284
1,491
54
072%
1139
6.43
7S7
261
075
025
931
1486
1809
54
1987
0.12%
200
004
789
246
092
203
-8027
1786
1869
201
1988
1988
1984
1983
063%
094
630
722
184
096
7.71
•2086
1079
1,457
14«
070%
1131
62}
6.91
187
084
886
630
1789
1896
118
086%
1073
815
891
187
076
7.11
240
1286
800
78
086%
1070
600
689
187
067
6.75
<489
1056
803
46
— Througn Maron 31; nboe annualise wheni appropries
Table II.
A ggrega te Condition and Incom e D ata, FD IC-Insured Com m ercial Banks
(dollar figurât In mUUona)
Pradmawy
1st Otr
1988
Number of banks reporting.............
Tote employees (full-time equivalent)
401 Otr
1987
1st Otr
1987
% Change
87:1881
13841
1831367
13899
1864894
14873
1866320
•38
-15
33818230
615871
596316
360819
aaan
257888
1840234
50303
1.796831
471,707
392473
354,119
32018230
430069
1880123
w p?
17,474
104389
183353
237,428
74890
tro tns
2868406
432824
1888466
332727
2864,111
1877,456
33800814
599804
589875
351316
20426
TBfpip
1820263
40458
1.779825
461,199
396867
373323
33800914
477,797
1857,104
361,447
17892
105806
181369
234813
73806
794898
2575379
425836
1893393
341806
2827891
1840222
32800886
532184
585897
325897
20216
263822
1338816
20729
1,700187
460861
386813
374,424
4.1
15.7
18
68
-28
-22
63
602
S3
48
72
-5.4
32800886
462773
1,770520
340464
17382
106892
186864
210637
75862
752860
2477.493
423892
1800873
t p nan
4.1
-5.1
5.7
138
1.1
-24
-18
01
-08
68
4.4
23
48
04
58
04
CONOmON DATA
Total assets....................................
Real estate loans......................
Commercial & industrial loans .
Loans to individuals..................
Farm loans.......
...............
Other loans and laaaaa.............
Total loans and laaaaa...............
LESS; Reserve for losaae .........
Nat loans and leases....................
Temporary investments .................
Securities om 1 year.......
AD other assets...........
Total liabilities and capital.................
Nonintereat-bearing deposits.........
Interest-baamg deposits ...............
Other borrowed funds........
Subordinated debt........................
All oth
Equity capital
Primary capital .
Nonperforming
Loan commitments and letten of credit....... .........................................
Domestic dffloe assets ...................................................
.................
Foreign office assets........................................................ .........
Domestic office deposits.............................................................. ..........
Foreign office deposits ........................ .............. .................................
Earning assets.......................... ........U .............................................
Votattie liabKibaa ........... ....................................... ..........................
INCOME DATA
FuU Yarn
Full Yarn
1987__________ 1986
Total interest Income....... .................
Total interest expense........................
Net interest income........................
Provisions for loan losses..................
Total noninterest income....................
Total noninterest expense..................
Applicable income taxes....................
Net operating income......................
Securities gains, net............................
Extraordinary gains, n et......................
Net income.....................................
3244,891
144,921
99,970
36,999
41,459
97,053
5,424
3237,808
14232S
94,981
22,075
fo ggp
90,247
1,953
1,445
13^61
218
3,916
272
17,483
Net chargedffs...................................
Net additions to capital stock.............
Cash dividends on capital stock.........
16360
2561
10,648
16.550
3,244
a rm
3,950
% Change
20
18
5.3
67.6
15.5
7.5
2.6
•85.3
-63.4
•29.9
-79.3
-1.1
-21.1
15.4
1st Otr
1988
364,147
38815
25832
4,698
11,024
25,030
2371
4,457
390
166
5812
4,031
129
3396
2820161
993,706
1st Otr
1987
58,426
34311
24.115
4,107
9399
23,144
1,896
4368
795
89
5352
3369
40
2334
% Change
98
128
89
14.4
173
01
25.1
20
-50.9
86.4
•4.6
233
2225
412
T able III.
F irs t Q u arter Bank D ata (Dottar figuras in billions, ratios in %)
Asset Sia Distnbution
Lass
than $100 $1011,000
Ail Banks Million
Million
$1-10
Billion
11541
$3,0185
23195
1012
128%
Gsogncnic Distnbution
Graarar
than $10
Won
Ny nual
________ .
________ _________ WEST________
sy tfta—1 Centra Mkfrest Sousüwä
West
Ragion
Repon Rayon
Ragion
fegen
• CURR8HT Q U A R T »
Pniiminary (Ths way it is . . . )
Number of banks reporting.......................
. Total assets.................................................
'Total deposits................................. ........
Net income e» m m .................................
Percentage of banks losing money............
Performance redos (annuatlaad)
Yield on ssming assets.............................
Cost of funding earning assets..................
Net interest msrgin.....................................
Net noninterest expense to ssming assets
Adjusted net operating income to assets..
Net operating income to assets................
Return-on assets .......................................
Return on equity.........................................
Net charge-offs to loans and leases..........
Loon loss provision .to net charge-offs___
10506
$3915
349.1
731
14.1%
2379
$6618
487.0
998
11%
320
Rank
704.0
1.725
16%
37
$1,124.7
779.1
1568
27%
1,006
$1,203.9
881.9
2831
7.9%
1,927
$4105
326.1
1531
115%
$477.4
3845
1535
45%
170%
959%
184
127
106
452
212
279
154
159
059
059
0.67
175
1180
171
164
0.68
11658
127.47
951%
134
457
266
1.46
164
0.71
167
0.60
14754
953%
146
4.17
253
152
168
0.74
1204
0.96
101.16
198%
170
358
1.43
157
147
056
1264
1.01
117.71
9.99%
150
149
153
1j63
087
0.96
1709
0.69
9181
953%
142
451
144
157
094
953%
149
184
158
157
156
8458
1002
1.01
1.12
14.75
1658
0.78
7557
0.68
1181
$204.0
159.9
541
75%
2511
$274.7
224.7
-1544
278%
1534
$447.9
3623
918
195%
192%
120%
160
556
452
135
207
380
201
050
182
•248
1.07
-257
1454
-4151
1.39
214
81.45
22215
980%
116
4.74
CondMon Redos
Loss allowance ta
Loans and leases...................................
Noncurrent loons and leases..................
Nonperforming assets to assets................
Equity capital ratio .....................................
Primary capital ratio ...................................
Net loans and lasses to deposits..............
272%
79.73
246
6.07
7.74
7178
1.68%
5132
216
172
9.49
61.41
1.66%
70.03
1.93
7.31
114
69.77
1.91%
86.17
1.81
6.19
758
81.73
454%
8957
342
4.41
752
8237
108%
82.49
2.40
682
754
86.11
153%
9653
1.06
6.94
756
7756
117%
11104
156
6.74
7.99
74.40
213%
7958
157
7.43
856
71.06
4.12%
5180
658
143
7.45
6756
Growth Rates (ysar-ioysar)
Assets.......................................................
Equity capital .............................................
4.1%
-15
11%
17
105%
11
125%
110
11%
-145
5.1%
-15
9.0%
104
4.9%
04
-05%
1.4
-15%
-225
Net interest income.............. ..................
Net income ..............................................
19
-4.6
45
05
14
-117
110
-45
17
17
65
36.1
65
15
7.9
235
4.7
265
Nonperfotming assets . . . ' .......................
Net changeoffs...........................................
Loan loss provision ...................................
-0.9
213
14.4
-05
-110
-145
113
1.4
245
205
71.9
37.0
-35
285
21.9
1.9
31.1
-195
12
•14.9
86.7
15
•110
725
15
-15
•29.1
-7 5
200
158
076
0.83
.1451
076
10656
111%
7752
126
176
7.96
63JB
15%
15
NIM
17
516
275
305
1619
-14.7
-214
•245
PRIOR FIRST Q U A R T » «
(Ths way it was
...
)
Return on assets............................... 1987
................................1906
................................1983
172%
175
178
172%
192
154
056%
191
193
184%
178
057
055%
160
154
0.73%
0.78
072
1.06%
1.14
1.03
0.96%
053
079
054%
082
1.14
059
189
052%
052
040
Equity capital ratio .......
...1987
................................ 1906
................................ 1903
143
129
682
154
856
168
759
755
7.14
116
196
173
132
482
450
8.01
166
127
656
653
192
706
191
170
759
752
753
656
780
199
196
557
107
Nonperforming assets to assets___1987
................................ 1986
....................... .....1 9 8 3
251
209
206
256
206
153
1.98
156
1.74
152
1.74
202
173
257
253
258
154
1.63
1.10
1.12
157
156
1.73
254
255
252
156
453
248
215
190
134
145
Net chargeoffs to loans and leases . 1987
................................ 1906
................................ 1983
175
058
052
186
172
144
176
050
056
162
054
054
183
050
0.46
056
057
058
045
035
057
045
0.48
056
1.43
158
047
153
093
075
180
082
052
REGIONS: Northeast — Connecticut, Dataware, District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York,
Puerto Rico, Rhode island, Vermont
Southeast — Alabama. Rorida Georgia Mississippi, North Carolina South Carolina Tennessee, Virginia West Virginia
Central — Illinois, Indiana Kentucky, Michigan, Ohio, Wisconsin
Midwest — Iowa Kansas, Minnesota Missouri, Nebraska North Oakota South Ottota
Southwest — Arkansas, Louisiana New Mexico, Oklahoma Tex«
West — Alaska Arizona California Colorado, Hawaii, Idaho, Montana Nevada Oregon, Pacific islands, Utah, Washington, Wyoming
4
010%
Pennsytwna.
T ab le IV .
F u ll Y ear 1987 Bank D ata (Dollar figuras in billions, ratios in %)
As m Sea Distribution
AN B ra
trian $100 $100-300
MHKon Million
Numotf of banks
«porting..................
11698 I 10,927
Tote s to a ts ................ y3,qty)9 $ « 3 9
Total Papoaits..............
1334.9
3611
Nat inoomt a> m w . .
1616
2120
Psreantaga of banks
loaing m onty..............
17.7%
19.4%
YMO on taming masts.
Coat of funding
taming aaaats..........
N tt intarast margin . . .
Nat noninttrstt tipsnat
to taming aaaats........
N tt opanttng
inoomt to aaaats . §
Rstum on aaaats........
Rstum on tgurty ........
Ntt criargtoffs to
loans and laaaas___
CondMon Ratoa
Lost atiowanco to
loans and laaaas___
Nonparfomring aaaats
to aaaats....................
Lost aitowanos to
noncunant loans
Equity capital « tto ___
Primary capital ratio . . .
Nat loans and laaaas
to aaaats....................
Nat aaaats raprtcasbia
in ona yaar or lass
to aaaats....................
$3001000
$1<5
Million
BNiion
16B4
$304.0
267.1
2337
536
$2726
226.7
1.725
268
S58B6
4511
in «
14%
116%
Caogru/Hc attribution
Graraar
Irian $5
Bilton
74
$7616
m i
Tsn
largasi
Baño
WEST
Nortnaaat
flagon
Soutriaaat
flagon
Cant«
flagon
5
10
$679.9
4966
•1619
1,081
$1,180.1
8612
•1636
1,924
$4066
3236
naan
1063
$4806
387.7
2029
123%
246%
900%
17%
14%
Saura—
%
flagon
1232
fcg
1619
1677
2873
$280.4
2296
-1,77»
18%
126%
811%
24
1002%
120%
U
»Ton#
1'
tu
31
964%
966%
159%
166%
962%
966%
199%
180%
174%
969%
566
169
122
4.43
117
4.41
123
4.43
134
467
173
182
182
117
126
154
128
446
142
187
566
436
569
151
ij
4j
217
266
266
264
238
168
161
1.74
262
216
203
257
¿9
007
012
200
052
057
162
075
061
1056
062
067
960
051
056
160
•006
-600
-601
•069
-061
-1129
•062
-013
-267
091
066
1196
040
044
151
068
170
969
-070
•066
-1003
■08
12
092
1.15
062
096
092
1.04
078
068
0.70
069
163
211
10
269%
1.64%
160%
1.60%
165%
292%
462%
115%
168%
224%
220%
109%
11!
246
209
1.75
166
1.92
268
188
244
1.03
167
166
180
7100
6.04
7.81
6163
160
142
7.81
142
70.68
186
7.75
7136
140
7.41
88.06
111
7.12
7172
464
7.75
8363
143
761
10017
181
762
11762
662
7.78
8085
7.45
867
4160
106
764
5960
51.11
5161
60.92
6109
6161
5119
5960
6012
5767
5115
5190
O li
-722
-969
-762
-7.40
-118
-101
-4.06
-107
-1206
-460
-1367
-1167
•a n
20%
11
4.1
71.1
-1.1
29.0
23
-05
10
1.5
13
67.8
115
7.5
-613
-713
46%
4.6
19
11.1
-209
06
4.1
12
-1 2
-1 8
46
-23.1
105
12
402
11.4
19%
7.0
104
166
-104
12
14
17
13
-1 6
13
•119
11.4
10
286
108
16%
46
7.0
666
15
16
46
•06
16
-1 6
66
914
19
10
•44.1
-476
16%
16
14
17.1
-22 2
-66
16
18
-16
-46
28
•111
125
42
1
171
7.91
Qroarih Raias
(yaar-toyar)
Aaaats..........................
Earning asasts............
Loans and laasas........
Loss raasrvt................
Nat chargaoffa............
Nonparforming aaaats .
Oapoafts......................
Equity capital..............
intaraat inoomt ..........
Intarast axpanaa..........
Nat intarast inoom t. . .
Loan lots prwtaion . . .
Noninttrstt inoomt . . .
Nonintarast axpanaa ..
Nat oparsting Inooms .
Nat inoomt..................
7.7%
10
120
21.0
111
203
11
86
10
16
116
13
110
107
115
-16
9.4%
107
14.9
414
24.4
416
11
116
116
* 7.4
115
310
216
115
•1 9
-14.0
14%
100
96
91»
406
SU
10
08
116
116
121
1416
186
119
N/M
N/M
-16%
-16
-10
141.7
-114
417
02
•116
18
66
-1.1
1718
236
11
N/M
N/M
4.1%
11
19
1219
19.0
646
47
-27
102
11.7
7.7
204.0
27.4
127
N/M
N/M
16%
76
11.4
112
249
114
10
106
11
1.4
9.9
218
116
7.1
104
04
77A
•16
-7.1%
-76
•13
200
-124
320
•1 8
-120
-116
-127
-1 9
176
47
-0.1
N/M
N/M
-20
03
-0.4
63J
-112
11|
•22
•O i
•24
12
4.S
410
21
4i
N/M
N/M
t
5
FDIC
Federa) Deposit Insurance Corporation
Washington, DC 20*29.
OFFICIAL BUSINESS
Ptnwty tor Pnv** Um . OQO
Fostage and Faas pai
Fadarai Deposit
Inaurane* corporation
F0IC416
NOTES TO USERS
CONFUTATION METHODOLOGY FOR FERFORNANCC AND CONOIDON RATIOS
Ail Incoma figures uaad in calculating parformanea ratios rapraaant amounts for that partod. annuwized (muitlpiiad try the numpar of periods in a yaw).
Ail aasat and iiaoillty figure* uaad in calculating parformanea ratio* rapraaant averaga amounts for the period (beginmng-of-penod amount plus end-of-period mount
plus any panoda in between, divided Py tha total numpar of periods).
Ail aasat and liapility figures uaad in calculating the condition ratios rapraaant amounts as of tha and of tha guwtw.
DCFmmoMs
"Frablam” lenka—Federal regulator« assign to each financial institution a uniform composite rating, Paaad upon an evaluation of flnwicial and operational entana.
Tha rating la Paaad on a scale of 1 to S in ascending order of supervisory concern. “Ftooiem" banks w * those institutions with financial, operational or manaoenai
weaknesses that threaten their continued financial viability. Depending upon tha degree of risk and supervisory concern, they are rated either “a” or MS”.
taming Assets—ail loans and ether investments that «am internet, dividend or faa income.
Yield an faming Assets—total Interest, dividend and faa income earned on loans and investments as a percentage of average earning assets.
Cast of Funding taming Assets—total interest expense paid on deposits and other borrowed money as a percentage of average earning aunts.
Net Interest Margin—the difference between the yield on earning assets and the cost of funding them, io Mthe profit margin a bank earns on its lewis wtd investments.
Net Noninterest fapsnes total noninterest expense, excluding the expense of providing for loan leases, less total noninterest income. A memuro of banks' overhead
costs.
Net Operating income—income after taxes and before gains (or losses) from securities transactions and from nonrecurring items. The profit »anted on bwtks' reouiar
banking business.
^
Rehert on Aaaets—net income (including securities transaction* and nonreeuntng hems) as a percentage of average total assets. The basic yardstick of bank profttMiiity
Return an faulty—net income as a percentage of average total epuity capital.
Net Charga efts—total loans and leaees charged off (removed from baianca sheet because of uncoiieetibUity) during the Quarter, lee* amounts raooisieu on loan*
and lease* previously charged off.
Nonperforming Assets—the sum of loans past-due 90 days or mors, loans in nonaccrual status, and noninvestment real estate owned other than bwtk premises.
Nencurrent Loans A Leasee—the sum of loans past-due 90 days or more and loans In nonaccrual status.
Frtmary Capital—total equity capital plus the allowance for loan and lease losses plus minority interests In consolidated subsidiaries plus qualifying mwtdatory conver.
tlbie debt (cannot exeaed 20 percent of total primary capital), less intangible assets except purchased mortgage servicing ngnts.
* * Loans and Leases—total loans and leases less unearned income and the allowance for lowi wid lease losses.
Net Assets Reprtcaabie in One Yew w Laos—all assets with interest rates that are repnceabfe in one yew or less plus assets with remaining maturity of on* year
or less, minus Ml liabilities that arc repriced or due to mature within one yew of the reporting oat*. A posittvs valu* indicates mat banks' income from assets is mors
sensitive to movements in interest rates tnan is the expense of their liabilities, and vie* versa for a negative value
Temporary Investments—tha sum of interest-bearing balances due from depository institutions, federM funds sold and resold, trading-account aaaets wid investment
securities with remaining maturities of one yew or less.
Voiettte LlabiHtlaa—the sum of large denomination time deposits, foreign office deposits, federal funds purchased, and other borrowed money.
RGquGtts for eopfog of and subscriptions to tha FDIC Ouarlarty Banking Proflla should be mads through tha FDIC'a Office of
Corporate Communications, 550 17th Street N.W„ Washington, D.C. 20429; telephone (202) SM 4996.
Financial Institution
Directors
Change in the financial marketplace has
seated a more competitive and challenging en
vironment for all financial institutions. As a con
sequence of this change, the role of the
financial institution board member has grown
*
in importance and com plexity.
This Pocket Guide has been developed by
the Federal Deposit Insurance Corporation to
provide directors of financial institutions with
accessible and practical guidance in meeting
their duties and responsibilities in a changing
environment. These guidelines have been en
dorsed by the Board of Governors of the
Federal Reserve System , the Office of the
Comptroller of the Cu n ency and the Federal
Hom e Loan Bank Board.
We hope this Pocket Guide will help to make
the director's job one that can be approached
with darity, assurance and effectiveness. H you
are helped in meeting these goals, then the
larger goal of maintaining confidence in the
safety and soundness of our financial system
will also be achieved.
Sincerely,
L W ttm Satdman
Roben L. C M f
C. C. Hope. Jr.
federal deposit insurance corporation
W«»«ngton. DC
Fatevary. 1988
Generai Guidelines
A financial institution’s board o f directors
oversees the conduct of the institution's
business. The board o f directors should:
• select and retain com petent
m anagem ent;
• establish, with m anagem ent, the
institution’s long and short term
business objectives, and adopt opera
ting policies to achieve these objec
tives in a legal and sound manner;
• monitor operations to ensure they are
controlled adequately and are in
com pliance with laws and policies;
• oversee the institution’s business
performance; and
• ensure that the institution helps to
meet its com munity’s credit needs.
These responsibilities are governed by a
com plex framework of federal and state
law and regulation. The guidelines do not
modify the legal framework in any way
and are not intended to cover every con
ceivable situation that may confront an in
sured institution. Rather, they are intended
only to offer general assistance to directors
in meeting their responsibilities. Underlying
these guidelines is the assumption that
directors are making an honest effort to
deal fairly with their institutions and to
com ply with all applicable laws and regula
tions, and follow sound practices.
Maintain Independence
T he first step both the board and in*
statutory and regulatory developm ents per
dividual directors should take is to establish
tinent to their institution. Directors should
and maintain the board's independence.
work with management to develop a pro
Effective corporate governance requires a
gram to keep members informed. Periodic
high level of cooperation between an
briefings by m anagem ent, counsel, auditors
institution’s board and its management.
or other consultants might be helpful, and
Nevertheless, a director’s duty to oversee
more formal director education seminars
the conduct of the institution’s business
should be considered.
necessitates that each director exercise
independent judgment in evaluating
m anagem ent’s actions and com petence.
Critical evaluation of issues before the
board is essential. Directors who routinely
approve m anagem ent decisions without
The pace of change in the nature of
financial institutions today makes it par
ticularly important that directors commit
adequate time in order to be informed
participants in the affairs of their institution.
exercising their own informed judgment
are not serving their institutions, their
stockholders, or . their communities
adequately.
Keep Informed
Ensure Qualified
Management
The board of directors is responsible for
ensuring that day-to-day operations of the
institution are in the hands of qualified
Directors must keep themselves informed
management, if the board becomes
of the activities and condition of their institu
dissatisfied with the performance of the chief
tion and of the environment in which it
executive officer or senior management, it
operates. They should attend board and
should address the matter directly. If hiring a
assigned committee meetings regularly, and
new chief executive officer is necessary, the
should be careful to review doseiy all
board should act quickly to find a qualified
meeting materials, auditor’s findings and
replacement. Ability, integrity, and experi
recommendations, and supervisory com
ence are the most important qualifications for
a chief executive officer.
munications. Directors also should stay
abreast of general industry trends and any
Supervise Management
Supervision is the broadest o f the
These policies should be formulated
board’s duties and the most difficult to
to further the institution's business plan
describe, as its scope varies according to
in a manner consistent with safe and
the circumstances o f each case. Con se
sound practices. They should contain
quently, the following suggestions should
procedures, induding a system of inter
be viewed as general.
nal controls, designed to foster sound
practices, to com ply with laws and
Establish Policies. The b6ard of
regulations, and to protect the institution
directors should ensure that all signifi
against external crimes and internal
cant activities are covered by dearly
fraud and abuse.
com m unicated written polides which
can be readily understood by all
em ployees. All poliaes should be
monitored to ensure that they conform
with changes in laws and regulations,
econom ic conditions, and the institu
tion’s circumstances. Specific poliaes
should cover at a minim um :
M onitor im plem entation. The board's
policies should establish mechanisms for
providing the board the information
I
needed to monitor the institution’s
operations. In most cases, these
mechanisms will indude management
reports to the board. These reports
should be carefully framed to present in
• loans, induding internal loan
review procedures
• investments
• asset-Bability/funds management
• profit planning and budget
formation in a form meaningful to the
board. The appropriate level of detail
and frequency of individual reports will
vary with the circumstances of each in
stitution. Reports generally will indude
information such as the following:
• capital planning
• the income and expenses o f the
• internal controls
institution
• com pliance activities
• capita] outlays and adequacy
• audit program
• loans and investments m ade
• conflicts o f interest
• past due and negotiated loans and
• code of ethics
investments
i
Experience has shown that certain
• problem loans, their present status
aspects of lending are responsible for a
and workout programs
great .number of the problems ex
• allowance for possible loan loss
perienced by troubled institutions. The
• concentrations of oedit
Importance o f policies and reports that
• losses and recoveries on sales, col
reflect on loan documentation, perform ance, and review cannot be overstated.
lection, or other dispositions of
assets
«
Provide for independent review s. T he
• funding activities and the m anage
board also should establish a mechanism
ment of interest rate risk
for independent third party review and
• performance in all of the above
testing of compliance with board policies
areas com pared to past per-
and procedures, applicable laws and
form ance as well as to peer groups'
regulations, and accuracy of information
performance
provided by m anagem ent. This might
• all insider transactions that benefit,
be accomplished by an internal auditor
directly or indirectly, controlling
reporting directly to the board, or by an
shareholders, directors, officers,
examining committee of the board itself.
em ployees, or their related interests
In addition, a comprehensive annual
audit by a C P A is desirable, h is highly
• activities undertaken to ensure com
recommended that such an audit in
pliance with applicable laws (in
clude a review of asset quality. The
cluding am ong others, lending
board should review the auditors* find
Emits, consumer requirements, and
ings with management and should
the Bank Secrecy Act) and any
monitor management's efforts to resolve
significant com pliance problems
• any extraordinary development Eke-
any identified problems.
j
ly to impact the integrity, safety, or
I
profitability of the institution
*
,
to allow for meaningful review. M anage
ment should be asked to respond to
any questions raised by the reports.
audit committee should have direct
responsibility for hiring, firing, and
Reports should be provided far
enough in advance of board meetings
In order to discharge its general over
sight responsibilities, the board or its
,
evaluating the institution's auditors, and
Avoid Preferential
Transactions
should have access to the institution’s
Avoid all preferential transactions involv
regular corporate counsel and staff as
ing insiders or their related interests. Fmaij
required. In some situations, outside
d al transactions with insiders must be
directors m ay wish to consider em ploy
beyond reproach. They must be in full
ing independent counsel, accountants or
com pliance with laws and regulations con
other experts, at the institution’s ex
pense, to advise then^ on
cerning such transactions, and be Judged
prob
according to the same objective criteria
lem s arising in the exercise o f their
used in transactions with ordinary
oversight function. Su ch situations might
customers. The basis for such decisions
include the need to develop appropriate
must be fully docum ented. Directors and
responses to problems in important
officers who permit preferential treatment
areas o f the institution’s performance or
operations.
o f insiders breach their responsibilities, «
expose themselves to serious dvil and
criminal liability, and m ay expose their in
H eed supervisory reports. Board
stitution to a greater than ordinary risk of
loss.
members should personally review any
reports of examination or other super
visory activity, and any other cor
respondence from the institution’s
supervisors. A n y findings and recom
mendations should be reviewed careful
ly. Progress in addressing identified
problems should be tracked. Directors
should discuss issues of concern with
the exam iners.
t
Copies o f this publication, P o c k e t G u id e
fo r D ire cto r» — Guidelines for Financial
Institution Directors, arc available from the
Office of Corporate Communications,
Federal Deposit Insurance Corporation,
550 Seventeenth Street, NW , Washington,
D .C . 20429, or through the Board of
Governors of the Federal Reserve System ,
the Federal Hom e Loan Bank Board and
the Office of the Comptroller of the
Currency.
A more detailed discussion of a director's
role and responsibilities is available in the
Office of the Comptroller of the Currency’s
new book, 77»e D ire ctor*# B o o k — The
Pole o f a National Bank Director, which is
available from the Communications
Division, Office of the Comptroller of the
Currency, Washington, D .C . 20219.
APPENDIX C
INEQUITIES IN THE DEPOSIT INSURANCE SYSTEM
Thert always has bean some degree of Inequity In tht deposit Insurance treat
ment of large and small falling banks. Specifically, there has been a tendency
to handle large falling banks In a manner that protects uninsured depositors
and other general creditors from loss while smaller falling banks are more
frequently subject to a statutory payoff, thus uninsured creditors are exposed
to loss.
In recent years, the FOIC has occasionally placed a de facto "guarantee"
on the liabilities of certain Institutions (more accurately, the FOIC has
made a commitment to handle the bank(s) In a manner that would not result
1n losses to general creditors).
This action has been taken 1n situations
where there 1s a perceived threat to the stability of the banking system.
This "guarantee" has been limited to three cases:
Continental Illinois 1n
1984; First City and First Republic 1n 1988.
The FOIC Is well aware of the competitive distortions that result from taking
an action that permits an Institution to Issue liabilities "guaranteed" by
the U.S. Government. Thus, such action has not been taken lightly.
A variety of suggestions have been made that are designed to ameliorate the ^
distortions associated with an outright guarantee. While each of the suggestlons Is Intended to achieve equity, each also would have some negative
Impacts.
The following 1s a brief simmary of the pros and cons of each
proposal.
e
Depositor Discipline. The ability of the FOIC to provide more protection
than the statutory limit would be restricted. This suggestion would
remove Inequity between large and small banks.
However, 1t could lead
to an unacceptable level of Instability In the banking system.
e
Raise Insurance Premiums for Laroe Banks. Premiums would be based on
total liabilities that fa)) in the same creditor class as deposits. This
suggestion would bring the Insurance cost for large Institutions more
1n line with de ‘facto coverage, thus reducing inequities.
However,
these added costs may overly restrict large banks' ability to compete
1n global markets.
Larger banks may respond by shifting business to
noninsured subsidiaries, thereby reducing premium income.
e
Provide 100 Percent Deposit Insurance To All Banks. This would be the
most straightforward way of providing all depositors with the same treat
ment regardless of the size of their bank. The cost to the FOIC fund
would be negligible (at least 1n the short run) because most depositors
are already protected. Furthermore, 1t would be easier to handle failures
because there would be no need to compute Insured deposits on payoff;
an entire deposit base could be transferred easily, leaving behind credi
tors and contingent claims.
I
A full Insurance approach, however, would completely eliminate depositor
discipline and might raise longer-term insurance costs.
It also would
rtmove incentives for spreading deposits to smaller banks to maximize
insurance coverage.
•
Modified 100 Percent Deposit Insurance Coverage. This suggestion would
not extend 100X coverage to certain deposits such as negotiable time
deposits. Only transaction accounts and consumer and local business-type
time deposits would get full coverage.
Such an approach would reduce big bank/small bank Inequity without com
pletely - eliminating depositor discipline.
It does reduce depositor
discipline, and 1t doesn't eliminate big bank/small bank inequities.
Therefore, this suggestion represents only a partial solution.
•
Limit Business Activities of Banks Operating Under 100 Percent Guarantee.
This approach would require that rates on deposits be kept below market
rates; business solicitation (letters of credit, etc.) would be restricted
to existing customer base.
If used, it would minimize damage to bank competitors.
However, some
customers might still be attracted by the insurance guarantee without
added solicitation.
Moreover, this suggestion does not resolve the
big bank/small bank equity Issue.
•
Restrict the Full Insurance Guarantee to Existing Oeoosit Accounts. This
suggestion would not permit a bank to use an insurance ^guarantee" to
attract new business, therefore minimizing damage to bank competitors.
However, 1t would limit the ability of a bank to replace outflows with
new deposits.
It also would create massive recordkeeping problems for
the bank, and for the FDIC if the bank 1s ultimately paid off. Further
more, 1t may lead to market confusion over what 1s, and what 1s not,
Insured. It does not resolve the small bank/large bank equity issue.
e
Extend Guarantee to Other Banks in State. Providing a full insurance
guarantee to all banks operating in the same state would preserve intra
state equity.
However, Inequities would remain with respect to out-ofstate competitors.
Furthermore, banks within the state operating with
100X Insurance might raise new supervisory issues.
@FedFRASER