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Remarks by
Rlcki Heifer
Chairman
Federal Deposit Insurance Corporation
Before
Robert Morris Associates
Washington, D.C.
December 12,1995

President Franklin Roosevelt once began an address to the Daughters of the American
Revolution not too many blocks from here with the words: “My fellow immigrants.”
In the same spirit, I would like to begin today by addressing you as “my fellow credit
underwriting analysts.” We have a lot in common. That is no accident. As a banking
regulator —and a deposit insurer —we at the FDIC care about credit underwriting, too.
The FDIC has been lauded as the most successful program of the New Deal. It stabilized a
financial system under extreme stress. More recently, it received credit for preventing the
banking crisis of the late 1980s and early 1990s from ending in catastrophe. Throughout
that crisis, it did what Congress intended the FDIC to do: It maintained confidence in the
financial system. It insured the public’s confidence in banks —no one lost a single penny of
an FDIC-insured deposit —and this protection cost the taxpayer nothing whatsoever.
The FDIC assured an orderly process to liquidate failed bank assets, which prevented panic
and maintained the stability of the financial system.
The agency has not changed much since Congress created it. It faces the new millennium
doing much of what it did during the New Deal: examining banks, liquidating the assets of
failed banks, and providing insurance coverage for bank depositors.
From several perspectives, that is a good thing.
For example, over three generations, deposit insurance has brought peace of mind to tens
of millions of depositors, who no longer had reason to fear the failure of their banks.
More important, by insulating banks from runs and panics, deposit insurance stabilized the
U.S. financial system and helped facilitate the Federal Reserve’s efforts to manage the
money supply. Because of our success, we have become a model to other nations interested




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in establishing deposit insurance operations and particularly so in recent years, a reflection
both of the turn to free markets around the world and of the heightened awareness that
free financial markets are, by definition, built on assuming risk.
Moreover, as events not too many years ago again reminded us, the safety and soundness of
banks influences the economy. That influence is substantial, direct, and often immediate.
Therefore, our efforts to strengthen the safety and soundness of banks are aimed not just at
protecting the deposit insurance funds —as important as that is -- they also look to
stabilizing and strengthening the economy as a whole.
If the FDIC did not exist, it would be only logical to create it.
Ideas are not like diamonds however —they are good for a limited time, not forever. To
stay current and relevant, every organization requires a periodic reexamination to
determine where it needs to adapt to changing circumstances. Otherwise, organizations
become trapped in the past. Robert Sobel, the business historian, has pointed out that the
British government created a position in 1803 calling for a man to stand on the Cliffs of
Dover with a telescope and to ring a bell if he saw Napoleon coming. The British
government abolished that position 142 years later.
To adapt to a changing financial industry and economy, we at the FDIC are examining
everything we do and viewing the familiar as if we have never seen it before.
Before I became FDIC Chairman just over a year ago, I looked at the organization as if it
were new —as if I had never seen it before —even though I had been involved in financial
issues including as a bank regulator for more than 15 years. I asked myself: Would it be
better —for the public, for the financial system, and for the economy ~ if we put our efforts
into helping banks stay open to serve their customers and communities rather than into
liquidating them after they failed? And would it be better if we took greater advantage of
technological and managerial developments to do our job more effectively? The answers
were clear: yes and yes.
As part of our implementation of the first strategic plan in the history of the agency, we
recognized the need to address new and growing demands on the FDIC.
We concluded that we needed to expand our perspective by identifying, monitoring and
assessing the macro-risks to the banking system —in addition to addressing institution
specific risk as we have traditionally done. We decided that we needed to use technology
and information available from inside and outside the FDIC more effectively. In addition,
we needed to reposition the FDIC to leverage our considerable expertise in new ways.
To implement the strategic plan, we developed an operating plan with 151 specific
initiatives, some devoted to enhancing our ability to focus on risks in advance. One of




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those projects seeks to determine how we can learn from the experience of the late 1980s
and early 1990s to enhance our understanding of the causes of bank failures.
In addition, we created a Division of Insurance to monitor risks and recommend responses
to problems so that banks can alter their behavior before there are failures and losses to the
insurance funds.
The new Division of Insurance will ultimately have a small, highly-trained staff —probably
fewer than 100 in Washington and our regional offices —who will analyze economic,
financial and banking developments in order to focus on the macro-problems of the
banking system that have implications beyond individual institutions.
To that end, the Division of Insurance will complement other FDIC efforts —in supervision,
research and elsewhere —to identify, monitor and address risks to financial institutions and
the insurance funds. It will look at the big picture by analyzing data generated by the
FDIC, by other government agencies and by the private sector.
We are not attempting to eliminate all bank failures —we cannot —risk is a part of
conducting a business. Zero failures would suggest too much regulation. Instead, we are
trying to avoid the bank failures that foretell larger losses to the insurance funds by
providing earlier warnings of impending problems. This approach should give financial
institutions the opportunity to take effective evasive action when we see problems coming
and before significant losses occur. Had our Division of Insurance been in operation 15
years ago, could we have foreseen the real estate buildup of the 1980s or warned of how
changes in the federal tax law would help bring the commercial real estate market down?
No one can say for sure, but having the institutional resources would have made those
assessments more likely.

In short, what we are trying to do is to make the future more predictable in order to
promote stability and to give bankers additional analytical tools to use in making decisions.
We expect to be the agency that provides a clear and useful reading to the public on the
industry -- where the problems are, where the industry is, and where it is going.
We certainly do not begin at zero in our effort —let me give you an example of why not.
As you know, every quarter we report on the state of the banking industry —as an industry
-- in the Quarterly Banking Profile -- which some people have called the report card on
banking. We have done so for 35 consecutive quarters and will issue our 36th OBP
tomorrow. In terms of comprehensive scope and timeliness, no other publication comes
close to portraying the dynamics of the industry. The OBP divides the industry by size and
geography and reports on 16 analytical ratios and a host of diagnostic and descriptive
measures. You —and anyone else —can get it off our home page on the Internet. The




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number of users accessing our commercial web page after the last OBP —more than 700 -equaled one-fifth of our mailing list -- a number sure to grow.
W hat will we say when we release the third-quarter 1995 OBP tomorrow? I will give you a
preview.
News stories in recent months have noted reports of rising delinquencies and losses in home
mortgage loans and other loans to consumers. Third-quarter data show some evidence of
rising short-term delinquency rates on bank home mortgage portfolios in the third quarter,
but show little sign of more serious problems. With the exception of consumer credit, the
third quarter Call Report figures do not substantiate significant increases in delinquencies
or losses at commercial banks. This may mean that bank loans are stronger than loans
made by nonbanks. However, our economists tell me that it is difficult to compare banks
with other institutions using the available information. Some of the data is based on
samples and some are based on the number of loans delinquent as compared with the
amount of delinquent loans. Higher delinquency levels may be explained by these different
measurements. Or, it is possible that banks, which have employed more stringent lending
standards in recent years, now have less in common with nonbank consumer and mortgage
lenders. It is too early to tell.
Recent improvements in commercial bank profitability have depended increasingly on
income from consumer lending, as net interest margins have come under pressure and
gains from reduced loss provisions have dried up. Credit-cart loans, for example, account
for only 7.8 percent of commercial bank loans, but have produced 12.1 percent of all loan
interest income this year. They also generate a disproportionate share of noninterest
income. The slight deterioration in the consumer portion of bank loan portfolios that
began in the second half of last year may not yet be cause for any great concern. Credit
card loans are loans where the credit risk is diverse —where defaults by a few borrowers
cannot have a significant adverse impact on lenders. Further, the very high yields on these
loans permit much higher charge-off rates before profitability is threatened.
On the other hand, data obtained from the American Bankruptcy Institute show a rising
trend in individual bankruptcies so far this year, when economic conditions —such as
unemployment and interest rates —have been relatively benign. That rising trend in
individual bankruptcies foretells either greater deterioration in the future or an increased
willingness of consumers to take personal bankruptcy -- or both. Further, we must also
keep in mind the very rapid growth in the amount of consumer credit that banks have
made available in recent years. If —in addition to consumer loans on the books —we
consider credit card loans that have been securitized and sold, as well as unused credit-card
commitments, banks now have more than $1.6 trillion in actual and potential lending
exposure to consumers, more than double the level just four years ago.
We are watching this trend closely for several reasons. One is the fact that, over this year,




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loans to individuals —that is to say, credit card and other installment loans —have been the
only category of loans to experience a significant rise in delinquencies. By delinquent loans,
I mean loans that are 30-89 days past due. As the OBP we will announce tomorrow will
report, the delinquency rate on these loans in the third quarter passed the 2 percent level
for the first time since 1992. Historically, it is a small uptick, but an uptick nevertheless.
The OBP is a highly visible example of the exemplary work the FDIC performs.
I have been told that the saying, “it’s good enough for government work,” harkens back to
the early industrial era. At that time, government was an innovator and a research
resource. It was also —as it is today —a customer of private enterprise. Government’s
purchasing standards then were as high or higher than those of business. When
contractors produced products that met the government’s standards, they would say that
the products were “good enough for government work.”
The story suggests an important point. Nothing but the best is good enough for
government work. As the quality of the Quarterly Banking Profile illustrates, the men and
women of the FDIC are dedicated to delivering the best. That is our tradition and one we
will carry forward. We will build upon our successes and enhance our risk assessment
skills so we can continue doing our job well in the face of a rapidly changing financial
system.
Thank you.




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