Maintaining Confidence and Stability in the United States: The FDIC’s Role in Deposit Insurance and Bank Supervision Regulación E Impacto Del Sector Financiero Público En El Desarrollo Socio-económico Quito, Ecuador Marzo 2012 Galo Cevallos, Senior International Advisor Office of International Affairs Federal Deposit Insurance Corporation
An independent agency of the United States government created to maintain stability and public confidence in thenations financial system by providing insurance protection for depositors, supervising financial institutions, and managing receiverships
1933 2007- 1934 1935 Today 2012• 4,000 Banks Fail, • 9 Banks Fail • 27 banks fail • 426 bank • Post Frank-Dodd $1.3 billion failures YTD Act FDIC • Insurance: • FDIC made depositor losses • Enhanced Initially - permanent • Sweeping• FDIC created in $2,500 Supervision and changes Banking Act of Raised to Responsibilities 1933 $5,000 • Deposit• FDIC Authorized • FDIC opens Insurance to Regulate and for business raised to Supervise Banks $250,000 • FDIC pays first insured depositor
U.S. Banking System FDIC Insurer & Regulator Federal Reserve Central Bank & Regulator Office of theComptroller of the Currency State National Banks Banking Supervisors Banks & Thrifts
U.S. Banking SystemInteragency Cooperation, Coordination, CommunicationRisk AssessmentsAn interagency effort Total FDIC – Supervised 4,641 2.31 Trillion Total OCC – Supervised 1,969 9.65 Trillion Total FRB – Supervised 826 1.85 Trillion Division of labor without duplication Insured Foreign Branches 9 35.5 Billion Total Insured Institutions 7,445 13.84 Trillion *As of September 2011 As insurer, FDIC has access to examination records produced by Examination Sharing Arrangements other federal and state banking agencies Examination ratings and capital positions determined by agencies Critical for deposit insurance pricing are used to price deposit insurance premiums and gauge adequacy of deposit insurance fund.
Key Functions of the FDIC • Supervise and enforce consumer protection laws at state-Bank Supervision chartered nonmember banks. • Primary federal supervisor for 4,641 banks and thrifts; examined every 12 – 18 months. • Act as Receiver for failed banks and thrifts, reimburseResolutions and depositors, and liquidate assets.Receiverships • February 2007 - First bank failure in almost three years; 426 failures from 2007 until today. No depositor has ever lost a dollar of insured deposits.Deposit Insurance • Provide Federal deposit insurance for banks and Savings associations in the United States. • September 2011 - $6.8 trillion in deposits insured at 7,445 FDIC-insured institutions.
The Nexus:Bank Supervision, Bank Receivership, and the Deposit Insurance Functions Information gathered through onsite examinations and off-site surveillance are shared by all bank supervisors with the FDIC’s Deposit Insurance and Resolution Departments. The Deposit result is effective coordination, communication, and collaboration. nk Ba rmati on Insurer o Inf Deposit Insurer: • Accurate and timely risk assessments result accurate risk-based deposit insurance pricing; Bank effective fund management, and capital and liquidity planning; prompt identification of riskSupervisor build-up in banking system aiding in macro- prudential supervision and risk monitoring Receivership Manager: Inf Ban orm k ati • More accurate estimates of probability of bank on default and potential losses. • Advanced notice results in better planning for and responses to bank failures. • Receivership Results in improved marketing which yields betters least-cost resolution option Manager
Primary Business Functions: Bank Supervision Responsibilities • Identify and proactively mitigate risks identified in banks and savings associations. • Prompt corrective action; enforcement; sanctions Coordinated Risk-Focused Supervision Throughout an Institution’s Life Cycle On-Site ActivitiesApplication Supervisory Supervisory Follow-up Follow-up Exit Off-Site Surveillance
Primary Business Functions:Bank Supervision Regular On-site Examinations and Off-site Reviews• Maintain public confidence in the integrity of the banking system and in individual institutions.• Provide the best means of determining the institutions adherence to laws and regulations.• Help prevent problem situations from remaining uncorrected anddeteriorating to the point that resolution is required.• Provide an understanding of the nature, relative seriousness and ultimate cause of an institutions problems, and thus provides a factual foundation to soundly base corrective measures, recommendations and instructions.
Primary Business Functions:Bank Supervision Regular On-site Examinations and Off-site Reviews• All banks are examined regularly: every 12-18 months.• Off-site reviews are conducted quarterly or more frequently as a bank’s risk profile warrants.• FDIC conducts on-site examinations and off-site analysis of state non-member banks.• National banks and thrifts are assessed by the OCC.• FDIC conducts off-site reviews of all banks and may under an established interagency protocol, join other bank supervisory agencies during examinations, particularly when institutions become “problem institutions.”
Primary Business Functions:Bank Supervision Regular On-site Examinations and Off-site ReviewsSafety and soundness examinations assess a bank’s strength on a rating scale. • Institutions rated 1 or 2 are subject to “normal” or routine supervision. • Institutions rated 3, 4 & 5 are closely monitored and generally subject to corrective programs. • The scope and frequency of “Supervisory Follow-Up” based on the bank’s risk profile and bank management’s ability to favorably resolve any issues. • Follow-up may include: quarterly progress reports; unscheduled visits; and acceleration of exam interval. • Ratings are confidential and not publicly disclosed.
Primary Business Functions:Bank Supervision As rating becomes more severe 1 2345 Supervisory response intensifies • Exam frequency increased and scope • deepened Exam frequency may be increased and scope broadened • Targeted visits and reviews very likely • Regular exam frequency and scope • Increased off-site monitoring • Close and frequent off-site monitoring • Routine off-site monitoring • Quarterly, or more frequent, progress • Quarterly, or more frequent, progress • Routine regulatory reporting reports may be required reports required • Enforcement action unlikely • Informal enforcement action likely • Formal enforcement action certain
Primary Business Functions:Resolutions of Failing Institutions Responsibilities • Handle bank failures • Establish broad receivership alternatives • Exercise special receivership powers • Minimize costs to the deposit insurance fund. • Reimburse depositors • Reimburse promptly • Communicate clear reimbursement procedures and priority of claims.
Primary Business Functions:Resolutions of Failing Institutions45004000 • Prior to closing a bank, the FDIC works together3500 with other regulators to resolve weak banks.3000 • Once an institution is closed, the FDIC performs resolutions functions and also acts as receiver and2500 liquidates the assets of the failed banks.2000 • Problem Institutions: Up to 844 (2011) from 501500 (2006)1000 • Bank failures: 92 in 2011; 9 in 2012; 426 since 2007 500 0
Primary Business Functions: Resolutions of Failing Institutions Typical Resolution Process Least-Cost Test or Systemic Risk Sell the Whole Bank Determination Required Sell Deposits Failed Receivership & Branches Bank Liquidate Assets Sell Asset PoolsReimburses insured FDICdepositors Deposit Insurer
Primary Business Functions:Deposit InsuranceResponsibilities• Protect small depositors, ensure prompt reimbursement of insured deposits, promote understanding of protections offered by US deposit insurance.• Promote market discipline and guard against arbitrage, in part, by making FDIC membership compulsory to all deposit-taking financial institutions.• Fund the deposit insurance system: • Ensure adequacy of the deposit insurance fund and contingency funding • Create and maintain ex-ante risk-sensitive insurance premium system• Guard entry into deposit insurance system: • Develop and enforce admission criteria; coordinate with bank supervisors to limit risk- taking; coordinate with licensing authority. • All banks must apply to the FDIC for deposit insurance coverage. • Banks must also apply for to the Office of the Comptroller of the Currency or the State Banking Authority for a banking license.
Primary Business Functions:Deposit InsuranceDIF ratio (percent of insured deposits), quarter end1.40 1.2 1.21 1.22 1.22 1.191.20 1.01 Deposit Insurance Fund Reserve Ratio1.00 March 31, 2008 – September 30, 2011 0.760.800.60 0.360.40 0.27 0.220.20 0.06 0.120.00 -0.02-0.20 -0.16 -0.15 -0.12-0.40 -0.28 -0.39 -0.38-0.60 2007 2008 2009 2010 2011
FDIC Response to the Banking Crisis Managing a Rise in Bank Failures whileStrengthening the US Deposit Insurance System for the Future
Preserving Financial Stability:FDIC Response to the US Banking CrisisResponding to the Crisis• Immediate FDIC Actions & Managing a Rise in Bank Failures.• Strengthening the US Deposit Insurance System for the Future.• Regulatory Reform & the Dodd-Frank Wall Street Reform and Consumer Protection Act.• FDIC: Impact and Implementation Challenges of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Preserving Financial Stability:FDIC Response to the US Banking CrisisCauses of the Crisis• Gaps in Financial Regulation-allowed financial system risks to grow in a network outside of prudential supervision.• Excessive reliance on debt and financial leverage-complex and opaque transactions embedded with substantial credit risk.• Misaligned incentives in financial markets-focus on short-term profits versus long-term viability.• Lack of market discipline-allowed large complex financial institutions to grow and diversify operations without adequate control. • Created “Too Big to Fail.”
Preserving Financial Stability:FDIC Response to the US Banking Crisis$400 180 $372 This crisis has been characterized by a failure of 157 160$350 many institutions, some very large and complex 140 140$300 120$250 100$200 Failed Banks 74 80 $170$150 50 Failed Assets (In Billions) 60$100 40 $92 25 $50 15 11 20 8 6 8 7 3 4 3 4 3 $30 1 0 0 $0 0 3 94 98 03 07 93 95 96 97 99 00 01 02 04 05 06 08 09 10 Q 19 19 19 19 20 20 20 20 20 20 20 20 19 19 19 20 20 20 11 20
Preserving Financial Stability:FDIC Response to the US Banking Crisis To Manage this Crisis – we have devoted more resources to more intensive bank supervision and failed $4,500 9,252 10,000 bank management $4,000 9,000 $3,500 $3,880 8,000 $3,422 7,000 $3,000 6,000 In Millions $2,500 4,476 5,000 $2,000 $2,249 4,000 $1,500 $973 $1,107 $1,230 3,000 $1,000 2,000 $500 1,000 $0 0 2006 2007 2008 2009 2010 2011 Staffing has more than doubled since the onset of the crisis; most will supervise banks and resolve failures. The total operating budget for 2011 is $3.88 billion.
Preserving Financial Stability:FDIC Response to the US Banking Crisis A key tool used to resolve bank failures has been the Purchase and Assumption Agreement with Loss Sharing Option Resolutions strategy first used in the early 1990s FDIC agrees to assume future losses, usually up to 80% Reduces FDIC’s immediate outlays Disposes of assets quickly, while preserving asset value Gives investors support who otherwise would not invest due to shortened due diligence period Aligns interests of FDIC and acquiring bank 25
Preserving Financial Stability:FDIC Response to the US Banking Crisis As the Number of Problem Banks and Failed Bank have Grown, the Deposit Insurance Fund has dropped below the 1.35* Percent Lower Bound Established by US Congress *DIF Minimum Increased from 1.15 with passage of Reform legislation 900 844 1.6 800 1.4 1.2 Depoisit Insurance Fund % 700 Problem and Failed Banks 1 600 0.8 500 0.6 400 Failed Banks 0.4 Problem Banks 0.2 300 0.12 DIF 0 200 -0.2 100 -0.4 48 0 -0.6 September 2011 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2007 2008 2009 2010 2006
Preserving Financial Stability:FDIC Response to the US Banking Crisis The banking industry – not taxpayers – are rebuilding the deposit insurance fund Rate Adjustment Recalibrated how assessment are calculated; adjusts for unsecured debt, secured liabilities and brokered deposits Special Assessment Imposed a one time fee of 5 basis points assessed against total assets minus Tier 1 Capital (May 2009) Pre-paid assessments Prepayment of estimated risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, & 2012 (September 2009) Restoration Plan Implemented a Restoration Plan to return the Designated Reserve Ratio to the statutorily mandated level of 1.35 by September 30, 2020.
Preserving Financial Stability: FDIC Response to the US Banking Crisis The FDIC Deposit Insurance Fund Ratio: 1934 - Present 2.5 Bank Insurance Fund: 1934 - 1988 BIF + SAIF:1989 - 2005 2 DIF: 2005 -… 1.5Deposit Insurance Fund Ratio ---1.35% Goal by 2020--- 1 0.5 0 1946 1974 2002 1934 1938 1942 1950 1954 1958 1962 1966 1970 1978 1982 1986 1990 1994 1998 2006 2010 -0.5 -1
FDIC Response to the Banking CrisisOverview: Dodd-Frank Wall Street Reform and Consumer Protection Act
U.S. Financial Regulatory Reform Overview: Dodd-Frank Wall Street Reform and Consumer Protection Act Manage systemic risk through Manage Systemic Risk – With the goal of stronger oversight and monitoring and managing the build up of regulation systemic risks, the Act establishes the Financial Stability Oversight Council (FSOC), Eliminate Too-Big-To-Fail which in concert with the Federal Reserve and FDIC will have enhanced powers to regulate Protect Consumers systemically important firms’ safety, size, and range of activities. The Act will also strengthen Fortify the U.S. deposit oversight and regulation of all other financial insurance regime institutions and their holding companies by requiring holding companies to hold minimum levels of capital, restricting proprietary trading in the bank’s books, requiring capital buffers to mitigate pro-cyclicality, and creating tougher rules that limit transactions between affiliates.
U.S. Financial Regulatory Reform Overview: Dodd-Frank Wall Street Reform and Consumer Protection Act Manage systemic risk through Financial Stability Oversight Council – The stronger oversight and Council will serve as an early warning system regulation to identify and manage systemic risks, including companies, market activities, and Eliminate Too-Big-To-Fail practices in the financial system. The Council will have the authority to identify banking and Protect Consumers non-banking companies, which because of their potential systemic importance, should be Fortify the U.S. deposit subject to more rigorous regulation and insurance regime supervision, increased risk disclosure, higher capital, liquidity, and risk management requirements.
U.S. Financial Regulatory Reform Overview: Dodd-Frank Wall Street Reform and Consumer Protection Act Manage systemic risk through Eliminate Too-Big-To-Fail – Ends the stronger oversight and possibility that taxpayers will be asked to write regulation a check to bail out financial firms that threaten the economy by creating a safe way to liquidate Eliminate Too-Big-To-Fail failed financial firms, imposing tough new capital and leverage requirements that make it Protect Consumers undesirable to get too big, updating the Fed’s authority to allow system-wide support but no Fortify the U.S. deposit longer prop up individual firms, and insurance regime establishing rigorous standards and supervision to protect the economy and American consumers, investors, and businesses.
U.S. Financial Regulatory Reform Overview: Dodd-Frank Wall Street Reform and Consumer Protection Act Manage systemic risk through Consumer Financial Protection Bureau – A stronger oversight and new independent agency, housed at the regulation Federal Reserve, with broad authority and a substantial budget to create and enforce rules Eliminate Too-Big-To-Fail designed to protect consumers of a wide range of financial products and services. Bureau will Protect Consumers have exclusive rulemaking responsibilities and will share supervision and enforcement with Fortify the U.S. deposit FDIC and other federal regulators. insurance regime
U.S. Financial Regulatory Reform Overview: Dodd-Frank Wall Street Reform and Consumer Protection Act Manage systemic risk through A stronger deposit insurance system - The stronger oversight and new law makes changes in the FDIC’s regulation authorities to manage the Deposit Insurance Fund (DIF). The increase from $100,000 to Eliminate Too-Big-To-Fail $250,000 in deposit insurance protection is made permanent and retroactive to January 1, Protect Consumers 2008. The Transaction Account Guarantee program, which provides full deposit insurance Fortify the U.S. deposit protection for noninterest bearing accounts, is insurance regime extended until December 31, 2012. The FDIC is required to increase the DIF reserve ratio to 1.35% by September 30, 2020.
U.S. Financial Regulatory Reform Dodd-Frank Wall Street Reform and Consumer Protection ActWhat are the FDIC’s primary newresponsibilities under the new law?• Strengthened Back-Up Authority• Expanded Receivership Authorities• Resolution Plans or Living Wills• A Stronger Deposit Insurance Fund
U.S. Financial Regulatory ReformDodd-Frank Wall Street Reform and Consumer Protection Act Strengthened Back-Up Authority The new law gives the FDIC back-up examination authority for systemic nonbank financial companies and bank holding companies with at least $50 billion in assets if the FDIC Board determines examination is necessary to implement the FDIC’s authority to provide for orderly liquidation of the company. Special Examinations Coordination Orderly Resolutions Back-up Enforcement Actions
U.S. Financial Regulatory ReformDodd-Frank Wall Street Reform and Consumer Protection Act Orderly Liquidation AuthorityFor the first time, the federal government will have the power to winddown troubled systemically important bank and non-bank financialcompanies (SIFI) outside of normal bankruptcy proceedings. The newlaw gives the FDIC broad authority to resolve failed non-bankinstitutions in a manner substantially similar to the FDIC’s resolutionsprocess for insured banks. Importantly, the Act also expressly prohibitsthe use of taxpayer funds. • Orderly Liquidation of SIFI’s • Designed to ensure that no institution is too big or too interconnected to fail, thereby subjecting every financial institution to the discipline of the marketplace.
U.S. Financial Regulatory ReformDodd-Frank Wall Street Reform and Consumer Protection Act Living Wills The law requires systemic nonbank financial companies and large bank holding companies (assets >$50 billion) to demonstrate the ability to rapidly and orderly resolve during a crisis –known as a “Living Will.” • Living Wills submitted to a number of regulators, including the FDIC. • Failure to submit acceptable plans may result in changes to the structure or activities of the institutions to ensure that they meet the standard of being resolvable in a crisis.
U.S. Financial Regulatory ReformDodd-Frank Wall Street Reform and Consumer Protection ActThe Deposit Insurance Fund and InsuranceThe new law makes positive changes in the FDIC’s authoritiesto manage the Deposit Insurance Fund in order to haveincreased resources on hand in the future. • Minimum Reserve Ratio • Eliminates the maximum limitation of the reserve ratio • Permanent (Retroactive) Increase in Deposit Insurance Coverage • Assessment Base • Insurance of Transaction Accounts