
|
 |
The
FDIC and the Banking Industry:
Perspective and Outlook
Introduction
Congress
created the FDIC in the Banking Act of 1933 to maintain stability and public
confidence in the nation’s banking system. The statute provided a Federal
government guarantee of deposits in U.S. depository institutions so that depositors’ funds,
within certain limits, would be safe and available to them in the event of a
financial institution failure. In addition to its role as insurer, the FDIC is
the primary federal regulator of Federally-insured state-chartered banks that
are not members of the Federal Reserve System.
The
FDIC carries out its mission through three major programs: insurance,
supervision, and receivership management.
- The
Insurance Program encompasses the activities undertaken by the
Corporation to administer the Deposit Insurance Fund (DIF), which
is funded through
assessments on insured institutions as well as investment income,
and to provide depositors with access to their insured funds when
an insured
institution fails.
- The
Supervision Program encompasses the activities undertaken by the
Corporation to promote safe and sound operations and compliance
with fair lending,
consumer protection, and other applicable statutes and regulations
by insured institutions for which the FDIC is the primary Federal
regulator (in cooperation with state banking agencies). The FDIC also
has
back-up
supervisory responsibility for other insured institutions for which
the Board of Governors of the Federal Reserve System (FRB), the
Office of
the Comptroller of the Currency (OCC), and the Office of Thrift
Supervision (OTS) are the primary Federal regulators.
Primary Federal Supervisor
|
Number of Institutions
|
Total Assets
(dollars in millions)*
|
FDIC
|
5,134
|
$2,217,547
|
OCC
|
1,556
|
8,334,895
|
FRB
|
0875
|
1,803,611
|
OTS
|
0819
|
1,217,637
|
Total
|
8,384
|
$13,573,6910
|
*Figures do not sum to
total due
to rounding.
Source: Third Quarter 2008 Quarterly Banking Profile. Data are as of 9/30/2008 |
- The Receivership
Management Program encompasses activities undertaken by the Corporation
in its capacity as receiver to resolve failed institutions in the least
costly manner to the DIF and to maximize net recoveries to the creditors
of receiverships.
Over
the next six years, the FDIC will confront numerous issues and
challenges in each of these major programs due to changing economic
conditions,
continuing changes in the nature of the financial services industry,
expected changes in financial services regulation, and emerging
consumer protection issues that impact the financial services
industry. Some of the major issues and challenges are addressed in
more detail
below.
The
Impact of the Economy
The performance
of the economy at national and regional levels directly affects
the business strategies of individual financial institutions and
may affect the industry's overall performance. Lending and funding
strategies of insured depository institutions are influenced by
interest rates, inflation, unemployment, and changes in the business
cycle for sectors such as agriculture, mortgage lending, commercial
real estate, and energy.
Since
mid-2007, a deep and prolonged housing market downturn in many
areas of the U.S. has coincided with significant disruptions to
credit markets to create a much more challenging operating environment
for FDIC-insured institutions. The industry has experienced sharply
higher credit losses in mortgage and construction lending and large
write downs in other mortgage related assets. Institutions that
were highly dependent on market-based sources of funding have had
to adjust their business models. The historic scale and scope of
these credit market disruptions implies that their effects will
continue to be felt for some time to come.
In
this more restrictive credit environment, U.S. economic activity
slowed markedly in late 2007 and early 2008. Residential construction
continued to weaken as nonprime mortgage credit became less available,
and growth in consumer and business spending also slowed. Economic
activity in the industrial Midwest continued to lag the nation,
while regional economies in and around Florida and California showed
significant adverse effects from the housing market distress. The
U.S. economy as a whole lost payroll jobs in each of the first
six months of 2008, and inflationary pressures rose as oil prices
spiked to record highs. This poor U.S. economic performance has
led policymakers to implement both monetary and fiscal stimulus
measures that have helped prevent real economic activity from shrinking
outright.
The
economic and credit market stresses of the past year have shown
that some depository institutions took on riskier activities during
this decade in response to competitive pressures within the industry
and with non-bank lenders. Many institutions that were actively
involved in subprime and nontraditional mortgage lending, or the
financing of residential construction projects, have already experienced
significant losses in recent quarters, and some have failed. Institutions
that have significant concentrations of certain other loan products,
such as credit card loans or commercial real estate loans, also
could find themselves more vulnerable to losses in the event of
a more serious economic downturn. Many institutions, especially
larger institutions, have also become more reliant on various forms
of non-interest income, such as trading income and gains on asset
sales, which can be more volatile than traditional revenue sources.
The
combination of a downturn in U.S. economic performance, ongoing
disruptions in credit markets and large increases in bank and thrift
credit losses make for a cautious outlook for the financial performance
of FDIC-insured institutions through 2009. These market disruptions
could, in the longer term, work to the advantage of banks’ ability
to access deposits since they are heavily regulated compared to
non-bank service providers. However, it appears unlikely that the
record industry earnings of recent years will soon be matched,
and higher levels of both problem institutions and failed institutions
can be expected. These uncertainties will ultimately be resolved
over time with the recognition of losses, an improvement in credit
practices, and the re-pricing of risk in the financial markets.
In the meantime, there remains a potential for additional financial
market disruptions which could result in further adverse consequences
for FDIC-insured institutions. This situation highlights the need
for both the Corporation and other regulators to identify and manage
the risks posed by new and existing financial products.
Challenges Facing the FDIC
In addition to the challenges posed by the economy, the FDIC also
expects to face challenges from other sources, including:
- Industry
consolidation and the increasing concentration of industry
assets in a small number of large, complex institutions for
which the Corporation is not, for the most part, the primary
Federal supervisor. Primary and back-up supervision of large
complex financial institutions will require increasingly specialized
examination staff capable of understanding complex financial
instruments and assessing their risk. The potential for the
failure of large complex financial institutions could require
highly specialized resolution strategies.
- Increasing
globalization and interdependence, which heighten the potential
for financial and economic instability to transcend geographic
boundaries.
- Implementation
of the Basel Committee on Bank Supervision’s new international
capital standards.
- The
FDIC’s expanded and strengthened international leadership
role as the result of its more active participation in the International
Association of Deposit Insurers.
- A
critical need for reform measures to provide more uniform and equal
consumer and prudential standards between depository institutions
and other financial institutions. However, as Congress considers
reforms in the existing Federal financial regulatory structure,
any changes must preserve key elements of the current regulatory
structure that have made the FDIC a model for other countries.
These include the FDIC’s status as an independent agency
with its own governance structure and source of funding; its authority
to address identified risks in the banking system through establishment
of a risk-based premium system and its special examination authority
for all insured institutions; and its role as a primary regulator
for state-chartered institutions under a dual banking system. The
FDIC will be prepared to take on new responsibilities, as necessary,
that build on its strong record of accomplishments over the past
75 years.
- Continued
progress on “culture change” initiatives, including
development of an enhanced performance-based compensation system,
will impact our ability to attract and retain a highly-skilled,
engaged workforce.
The
FDIC also expects to continue its tradition of strong consumer
protection over the next six years, by:
- Maintaining
a rigorous and responsive consumer protection supervisory program
that both complements and informs the Corporation’s risk
management supervision program regarding emerging risks.
- Advocating
broader economic inclusion within the nation’s banking system
through small-dollar loan programs, access to mortgage credit for
low- and moderate-income borrowers, and products that promote wealth
accumulation and other services responsive to the needs of underserved
populations.
- Promoting
consumer education on topics such as insurance coverage, identify
theft, and privacy, as well as expanding the FDIC’s award
winning Money Smart curriculum.
|