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TESTIMONY OF
L. w i l l i a m \ e i d m a n
CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C.
CURRENT ACTIVITIES OF THE "FEDERAL DEPOSIT INSURANCE CORPORATION
.CONCERNING BANKS AND SAVINGS AND LOANS
»
)
j
BEFORE THE
■tiesse,
XOMMITTEEiON 'BANKING, FINANCE AND URBAN AFFAIRS
UNITED STATES HOUSE OF REPRESENTATIVES
CD
9:00 a.m.
11, 1989
Centro Del Artes Del Mercado
San Antonio, Texas
CD March
Good morning, Mr. Chairman and members of the Committee.
I am pleased to be
here today in San Antonio to testify on the current activities of the Federal
Deposit Insurance Corporation ("FDIC") concerning both banks and savings and
loans ("S&Ls").
This is a city I remember with great affection.
My
grandfather spent his winters here in the 1930s and I was privileged to visit
him on occasion.
loved them.
They were my first trips out of the snows of Michigan and I
So it is nice to be back, Mr. Chairman, in your beautiful
hometown.
My testimony will address banking conditions and failures in the Southwest,
the FDIC's approach to asset disposition, the ongoing interagency oversight
effort relative to insolvent S&Ls, and the FDIC's supervisory practices and
capabilities.
Before turning to these topics, however, I would like to state our support for
President Bush4s Reform Plan for the S&L industry.
enacted promptly.
We believe it should be
In addition to providing for prompt action to resolve the
S&L situation, the President's plan proposes structural and regulatory reforms
designed to make the federal deposit insurance system cost-effective.
The
FDIC's detailed views on the proposed legislation, including changes we
believe are desirable, are contained in our testimony of this past Wednesday
before the Financial Institutions Subcommittee.
Many of the reforms in the Bush Reform Plan are consistent with the
recommendations made in the FDIC's recently released study, Deposit Insurance
for the Nineties: Meetina the Challenge. A draft of our study has been
provided to each member of the Committee previously.
BANKING CONDITIONS AND FAILURES IN THE SQUTHNEST
FDIC Efforts.
In recent years the FDIC has devoted a tremendous amount of its
financial and personnel resources to dealing with bank problems and failures
in the Southwest.
For example, as shown in the attached Table 1 ("Table 1"),
in 1988 the Dallas Region (which consists of Colorado, New Mexico, Oklahoma
and Texas) accounted for about seventy percent of all bank failures and
assistance transactions.
Texas banks alone comprised over fifty percent of
the total.
Over the past three years, the FDIC has handled 206 bank failures and
assistance transactions in Texas, resulting in cash outlays totalling $7.7
billion.
In 1988 alone, the FDIC made cash outlays totalling $6.0 billion
for the 118 Texas bank failures and assistance transactions.
Mainly because of these significant outlays, in 1988 the FDIC suffered an
operating loss of $4.3 billion —
history.
the first operating loss in its 55-year
That means the FDIC insurance fund dropped from $18.3 billion at
year-end 1987 to about $14 billion at the end of last year.
By the end of 1989, we anticipate that the recapitalization of nine of Texas'
ten largest banking organizations will have been accomplished during the
preceeding three years.
The FDIC has or will have provided substantial
financial assistance in seven of those transactions.
Notably, in 1988 we
handled First RepublicBank Corporation with total assets of approximately $30
billion and First City Bancorporation with total assets of $11 billion.
Also,
in 1987 we provided assistance to the BancTexas Group, Inc. with total assets
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of $1.2 billion.
We feel that this injection of new capital into the Texas
economy will help provide the financial strength needed to foster future
growth in Texas.
Recent Trends,
Recent statistics show that banks in the Southwest were the
only regional group whose 1988 profitability was lower than in 1987.
Credit
quality problems continued to plague banks in the Southwest, especially in
Texas.
For example, more than one in three Southwestern banks lost money in
the fourth quarter of 1988.
Nonperforming asset levels decreased in 1988 for
the first time in three years, however., indicating that loss levels might be
stabi1izi ng.
As shown in the attached Table 2, the number of problem banks in the Dallas
Region remains high, even as the total problem banks nationwide appears to be
declining steadily.
However, the-rate of increase in the number of problem
banks appears to have abated and the total seems to have peaked.
Bank failures escalated to new highs in the Region, as well as nationally, in
each of the last three years.
As shown in Table 1, Texas failures increased
substantially each year since 1985.
In fact, last year Texas failures
exceeded the combined total for the rest of the country.
So far this year,
with seventeen failures and one assistance transaction, the pace is running
slightly behind the same time last year.
Thus, banking problems and failures in Texas and the Southwest are still very
substantial, but it is our best estimate that they reached their peak in 1988.
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FAILED INSTITUTION AND PROPERTY DISPOSITION
We frequently are asked about the FDIC's program for handling failed
institutions.
Our efforts are directed toward returning those institutions to
the private sector as rapidly as possible.
institutions, if possible.
will absorb them.
We seek to sell them as going
If not, we dispose of them in pieces as the market
In this process we have real estate for sale and certainly
will have more in the future.
Recently the real estate disposition issue has become even .more prominent
given the FDIC's pending new responsibilities over S&Ls, and the anticipated
need to dispose of a very significant additional pool of assets.
As we have
stated in the past, the FDIC's position on this issue is that all the assets
we take over will be for sale.
We will sell property, however, only at the
current appraised fair market value.
No sales will be made on a "whatever we
can get" basis and we do not engage in "dumping."
If we are unable to sell
property at the appraised value, we will hold it.
Our auctions are on a
reserved-price basis.
We believe a government-subsidized warehousing of large amounts of property
actually can be detrimental to the rea-1 estate market and local economy.
Having large amounts of property hanging over the real estate market, under
asset maintenance agreements, creates uncertainty and only delays the return
of this property to true private-sector management.
No one knows when the
government might open the floodgates of warehoused property, and markets can
be expected to react to this uncertainty.
- 5 Further, if held by private institutions with government subsidies, the
subsidies provide an unfair competitive advantage.
The way the private sector
can make rational economic decisions is to get property back into private
hands as promptly as possible.
Unfortunately, however, even with such a
policy, sales will not be accomplished over night.
Some people have expressed support for our asset disposition program including
If -
businessmen‘in the real estate and construction" businesses: ’ Others;' primarily
property owners, disagree with our program —
sometimes violently.
Obviously,
it is a difficult question and requires judgmental decisions.
In 1988 we achieved considerable success in limiting the increase in the
FDIC's acquisition of loans and other assets of failed banks.
may be helpful here.
Some background
Traditionally the FDIC had taken over the poor and
charged-off assets of failed banks and, when consistent with our statutory
cost test, sold the remaining healthy part of those banks intact.
However,
the dramatic increase in the number of failures caused a reappraisal of that
approach.
As I have pointed out, now we attempt to structure sales so that the purchaser
acquires substantially all of the failed bank's assets (referred to as a
"total asset purchase and assumption," "TAPA" or "whole bank" transaction).
These whole bank transactions leave property in the private sector, reduce the
FDIC's overall outlays and costs and, we believe, are best for the local
economies.
When unresolved issues about commercial loans or other assets prevent us from
marketing a TAPA transaction, we attempt to structure a sale whereby the
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purchaser takes all of the small loans and nonloan assets (generally referred
to as a "SLAPA").
Among other things, TAPAs and SLAPAs must meet the
statutory requirement of being less costly to the FDIC than paying off insured
deposi tors.
In 1988, nationwide, we completed sixty-nine whole bank transactions (counting
the First Republic banks as one transaction), equaling approximately one-third
of all failed bank and assistance transactions for that year.
In the Dallas
Region, we started with six whole bank transactions in 1987 and increased to
45 (again, counting the First Republic banks as one transaction) in 1988.
Additionally, we structured 26 SLAPAs in 1988.
So far this year, in the
Dallas Region we completed nine whole bank transactions and five SLAPAs.
INTERAGENCY OVERSIGHT EFFORT
I now would like to turn to the interagency oversight effort underway to deal
with the S&Ls that are currently insolvent under regulatory accounting
principles ("RAP").
As part of the Bush Reform Plan announced February 6th, the President
requested that the FDIC lead a joint effort to evaluate and oversee most of
the RAP insolvent thrifts.
In addition to the FDIC and the FSLIC, the Federal
Home Loan Bank Board, the Federal Reserve, and the Office of the Comptroller
of the Currency are participating in this interagency initiative.
The purpose of this interagency effort is to limit the growth of problems in
our nation's insolvent thrifts until a comprehensive reform of the deposit
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insurance system and the necessary funding are authorized by the Congress.
Insured deposits will remain fully protected throughout this process.
Since the program was announced by the President, a joint task force of
regulators, led by the FDIC, iias taken control of approximately 120 of the RAP
insolvent thrifts and expects to assume oversight of the rest of the over 200
RAP insolvent thrifts in the next three-to-five weeks.
FDIC examiners are
presently managing more than 50 thrifts In the.Dalias Region and that total
will reach in excess of 80 in the next few weeks.
The FSLIC has contracted with the FDIC to take control of these institutions
that are being placed in conservatorship or receivership.
That means the FDIC,
with the help of other regulators, will oversee operations of the insolvent
thrifts.
Managements of the various institutions are subject to the
regulators1 authority.
From the customer's perspective, however, the only
visible difference will be a few more people in each institution.
Day-to-day
operations will continue to preserve basic services to deposit and loan
customers.
One of the first priorities of these oversight efforts will be to evaluate the
losses at each S&L.
Another top priority is to identify and stop any abuse,
waste, or fraud that may be present.
We seek cost reduction and increased
liquidity through consolidations, sales of property, and more efficient
operations.
While in control of these institutions, we and the other regulators will seek
to stop any unsafe or unsound practices.
We will limit their growth, and
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downsize them through asset liquidations where practical.
However, we will
avoid firesales of assets and emphasize the need to sell at values that
reflect current appraised values.
Finally, we will develop longer-term solutions to these problems.
Our staff
will recommend different approaches —
from liquidating the institutions to
selling them to qualified purchasers.
But our current job is a holding action
only.
The FDIC has established four task groups to address these responsibilities.
These task groups are designed to ensure stable operations in the insolvent
thrifts and to evaluate options for permanently resolving their insolvency
once funding is approved by Congress.
One of our most important task groups is our new Fraud Squad.
As President
Bush has said, "unconscionable risk-taking, fraud and outright criminality
have also been factors [in the thrift problem]."
this Fraud Squad will constitute a mobile unit.
Investigators assigned to
Whenever our on-site teams
discover evidence that fraud or insider abuse may have occurred, the Squad
will be sent to conduct a full-scale investigation.
This includes looking for
ways to get back misappropriated assets when possible, and helping send some
to jail when appropriate.
Our three other task groups have separate but complementary assignments.
Our Oversight and Evaluation task group will take control of these
institutions, assess their condition and take steps to reduce operating costs
where possible.
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Our Planning and Restructuring task group will recommend steps to restructure
and consolidate institutions where appropriate.
And our Transaction and Acquisition task group will begin the process of
seeking out buyers for institutions, real estate and other assets.
We will
seek to reach agreements with purchasers subject to resources being made
available to provide assistance.
The FDIC and the FHLBB have agreed that, until the agencies review the status
of the insolvent thrift institutions placed under joint regulatory oversight,
only unassisted or cash assistance transactions will be undertaken by the
FSLIC.
We have no authority to issue notes or enter into income maintenance
agreements.
We also must note that these additional responsibilities will* place some
strain on FDIC resources.
As discussed below, we believe that this will not
substantially interfere with our responsibilities as a bank regulator.
We did
not ask for this job, but we are dedicated to succeeding in this new task.
We
do expect to experience growing pains and recognize our need to climb a
learning curve in the process.
FDIC SUPERVISORY PRACTICES AND CAPABILITIES
We now would like to address the FDIC1s supervisory capabilities under the
current thrift interagency oversight effort and our bank supervisory practices
and capabilities.
Interagency Oversight Effort. The FDIC's current principal role under the
Bush Reform Plan entails the FDIC's additional responsibilities just discussed
as management agent of thrifts that are now RAP insolvent and those to become
insolvent before the Bush Reform Plan is enacted.
While there is no doubt
that this new responsibility will have an impact on FDIC resources, we
anticipate that the large call on FDIC personnel will be for a relatively
short period of time, perhaps two-to-three months.
During the peak-time period we anticipate the need for approximately 1,200 to
2,000 interagency personnel.
Considering that we are receiving substantial
assistance from the other federal regulatory agencies and state supervisory
agencies, we anticipate that we will have to detail approximately 800 FDIC
employees to this task during that peak period.
Of these, approximately half,
or 400 employees, will be from our examiner force —
Bank Supervision ("DBS").
Liquidation ("DOL").
namely, the Division of
The other half will be from the Division of
After that peak period, when agency personnel in each
institution will be cut back to a minimum, we anticipate that the number of
FDIC employees being used will level off at around 400.
will be from DOL, we expect about 200 of our examiners —
percent of our supervisory workforce —
Since half of those
or only about ten
will continue to be detailed to this
effort.
During the two-to-three month peak period we have set priorities for our bank
examiners to assure that all banks will continue to receive adequate
supervision.
We believe the FDIC can handle this additional burden for a
time, in part because the number of problem banks is decreasing (currently
under 1,400 —
down from a peak of 1,624 in 1987), the number of examiners
11
continues to increase (our goal is 2,200 examiners by year-end 1989), and our
examination efficiency is improving.
examiner force rapidly —
In fact, we have been increasing our
from a low of 1,389 in 1984 to 2,029 at the present
time.
While the FDIC does not underestimate the magnitude of the responsibility
facing it, we believe we are up to the task.
The sooner the Congress acts to
restructure the system and provide the necessary funds to resolve these
insolvent thri fts, the sooner the resource strain can be al 1evi ated. In the
meantime, we will not let our major bank-supervision responsibilities slip.
Bank Supervision Practices and Capabilities. The overriding goal of
supervision is maintaining a safe-and-sound banking system.
examinations have great importance in effective supervision.
On-site
This process
puts the examiner in the best possible1position to throughly evaluate the
qua! ity of bank as sets,; estimate the 1evel and trend of earnings ; determine
whether capital levels are adequate; evaluate liquidity, review for adherence
to Taws and regulations, analyze internal policy and controls; and evaluate
management.
Among other things, the examination results in the bank being
assigned a composite rating which measures the bank’s level of risk:
sound
and stable institutions are rated 1 or 2 and near problem and problem banks
are rated 3, 4 or 5.
Because the FDIC is the only agency directly responsible for maintaining the
soundness of the bank insurance fund, protecting insured depositors and
handling bank failures, the FDIC has authority to examine all insured banks.
However, the FDIC traditionally has relied largely on the OCC and the Federal
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Reserve for safety-and-soundness information on national and state member
banks, and has limited its examinations of such banks to specific problem
institutions.
In this regard it is important to note that the FDIC has very
limited rule-making or enforcement authority over national and state member
banks.
We have discontinued the traditional routine of examining all banks with the
same frequency.
Instead, we have raised the effectiveness of our supervision
by examining problem and near problem banks more frequently.
Last July, the FDIC adopted a new policy for examination priorities and
frequency.
For safety and soundness examinations, the new policy essentially
requires an examination every 24 months for 1- and 2-rated banks and every 12
month for 3-, 4-, and 5-rated banks.
These intervals can be extended up to 48
months for 1- and 2-rated banks and 24 months for 3-rated banks providing
there is an interim state examination that meets FDIC's needs and our off-site
monitoring system confirms the current rating of the bank.
Every effort is
being made to coordinate examination schedules of all FDIC-supervised
institutions with state authorities to take advantage of state resources and'
to minimize duplication of effort and burden on the institutions.
undertaking —
authority —
Program.
in which we use acceptable examinations conducted by State
is called the Supervisors Annual Flexible Examination ("SAFE")
We have found that the SAFE Program —
last summer —
This joint
which was formally initiated
provides additional flexibility and efficiencies.
In addition to examinations, we also make extensive use of on-site visitations
and off-site monitoring programs.
Off-site monitoring involves analysis of
accurate and timely information from a variety of sources.
At present, our
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most important source of information for supervisory purposes is the quarterly
Call Report.
The FDIC's principal off-site monitoring system is called CAEL,
an acronym for Capital, Asset quality, Earnings performance and Liquidity.
It
compares ratios calculated from bank-provided Call Report data to comparable
information taken from the last report of examination and to ratios for the
bank’s peer group.
Based on the results of these comparisons, the model
computes a rating for each of the four components and compares them to the
component ratings-assigned at the last examination.
A "significant difference
will trigger appropriate follow-up.
We also recently changed internal procedures so that examiners will not be
tied up with lengthy and routine tasks i_n connection with bank closings.
It
had been standard practice to dispatch a team of examiners to a failing bank
shortly before its demise to compile extensive data pertinent to prospective
purchasers.
These assignments were frequent, on short notice and disruptive
to planned examinations. We were successful in eliminating this problem by
establishing routines that enable interested buyers to gather most of the
information themselves.; Also, 00L has assisted DBS by assuming responsibility
for compiling most of the information that may be required in advance of
prospective bidders' on-site investigations and taking over the largest part
of the manpower requirements when an institution fails.
In anticipation of increased demands on examiners, we increased our staff in
the past two years at a pace consistent with the need to properly integrate
the new people into the system.
Our number of field examiners increased from
1,726 at year-end 1986 to the present number of 2,029.
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In 1987 and 1988 we increased our Dallas Regional Office and field examination
staff by a net total of 48 and 27 people, respectively, and so far this year
have increased examiners by another 22 people.
Current plans in Dallas call
for hiring approximately 70 additional examiners by the end of this year.
We
now have 81 people assigned to our regional office and 323 examiners in the
field and plan to have a total of 393 by year-end, or about eighteen percent
of the FDIC's projected total examination force.
In addition to our regular staff in the Dallas Regional Office, we have relied
to a significant degree upon the assistance given by examiners from other FDIC
regions.
Generally these individuals come to us on temporary assignments of
two-to-three months.
This has allowed us to deal with problem situations on a
more timely and efficient basis with our regularly assigned people who are
already familiar with the situations.
CONCLUSION
In conclusion, the banking and S&L problems in the Southwest —
particularly in Texas —
and
will continue to place strains on the financial
institutions industry, the economy in general and the federal bank and S&L
regulators.
The FDIC will strive to succeed in continuing its current
regulatory and supervisory responsibilities over insured banks and in assuming
its new duties over insolvent S&Ls.
I would be pleased, at this time, to answer any questions the Committee may
have.
Attachment
Table 1
DISTRIBUTION OF FDIC-INSURED BANK FAILURES*
1985
1986
1987
1988
Colorado
New Mexico
Oklahoma
Texas
6
4
13
11
7
2
17
16
13
33
62
TOTALS
35
52
108
154
145
203
221
Dallas Region:
—
10
1
25
118**
All Regions:
TOTALS
120
‘Includes open bank assistance transactions.
“ Includes 41 failures and one assistance transaction for banks in the First
Republic system.
Table 2
DISTRIBUTION OF FDIC-INSURED PROBLEM BANKS
12/85
12/86
12/87
9/88
12/88
120
233
292
291
288
195
289
- 413
440
444
TOTALS
315
522
705
731
732
Colorado
New Mexico
Oklahoma
Texas
54
8
85
168
81
10
128
303
99
17
147
442
89
19
131
492
91
18
121
502
TOTALS
315
522
705
731
732
1,140
1,484
1,575
1,442
1,406
Dallas Region:
State nonmember
banks
National and
state member banks
All Regions:
TOTALS
@FedFRASER