Galo Cevallos.

Maintaining Confidence and Stability in the United States:

The FDIC’s Role in Deposit Insurance and Bank Supervision

Galo Cevallos, Senior International AdvisorOffice of International Affairs

Federal Deposit Insurance Corporation

Regulación E Impacto Del Sector Financiero Público En El Desarrollo Socio-económico

Quito, EcuadorMarzo 2012

An independent agency of the United States government created to maintain stability and

public confidence in the nation's financial system by providing insurance protection for depositors, supervising financial institutions,

and managing receiverships

1933

• 4,000 Banks Fail, $1.3 billion depositor losses

• FDIC created in Banking Act of 1933

• FDIC Authorized to Regulate and Supervise Banks

1934

• 9 Banks Fail

• Insurance:

Initially - $2,500Raised to $5,000

• FDIC opens for business

• FDIC pays first insured depositor

1935

• 27 banks fail

• FDIC made permanent

Today

• Post Frank-Dodd Act FDIC

• Enhanced Supervision and Responsibilities

2007- 2012

• 426 bank failures YTD

• Sweeping changes

• Deposit Insurance raised to $250,000

U.S. Banking SystemU.S. Banking System

Risk Assessments An interagency effort

Division of labor without duplication

Examination Sharing Arrangements

Critical for deposit insurance pricing

Total FDIC – Supervised 4,641 2.31 TrillionTotal OCC – Supervised 1,969 9.65 Trillion Total FRB – Supervised 826 1.85 Trillion

Insured Foreign Branches 9 35.5 BillionTotal Insured Institutions 7,445 13.84 Trillion*As of September 2011

As insurer, FDIC has access to examination records produced by other federal and state banking agencies

Examination ratings and capital positions determined by agencies are used to price deposit insurance premiums and gauge adequacy of deposit insurance fund.

Interagency Cooperation, Coordination, Communication

Key Functions of the FDICKey Functions of the FDIC

Deposit Insurance

Bank Supervision

Resolutions and Receiverships

• 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.

• Supervise and enforce consumer protection laws at state-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, reimburse depositors, and liquidate assets.

•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.

ReceivershipManager

Bank

Informatio

n

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 result is effective coordination, communication, and collaboration.

Deposit Insurer:

• Accurate and timely risk assessments result accurate risk-based deposit insurance pricing; effective fund management, and capital and liquidity planning; prompt identification of risk build-up in banking system aiding in macro-prudential supervision and risk monitoring

Receivership Manager:

• More accurate estimates of probability of bank default and potential losses.

• Advanced notice results in better planning for and responses to bank failures.

• Results in improved marketing which yields betters least-cost resolution option

DepositInsurer

Bank Supervisor

Bank

Information

The Nexus: The Nexus: Bank Supervision, Bank Receivership, and the Deposit Insurance Bank Supervision, Bank Receivership, and the Deposit Insurance FunctionsFunctions

Responsibilities• Identify and proactively mitigate risks identified in

banks and savings associations.

• Prompt corrective action; enforcement; sanctions

Primary Business Functions:Primary Business Functions:Bank SupervisionBank Supervision

Coordinated Risk-Focused Supervision Throughout an Institution’s Life Cycle

On-Site Activities

Supervisory

Follow-up

Off-Site Surveillance

Supervisory

Follow-up

Exit

Application


• Maintain public confidence in the integrity of the banking system and in individual institutions.

• Provide the best means of determining the institution's adherence to laws and regulations.

• Help prevent problem situations from remaining uncorrected and deteriorating to the point that resolution is required.

• Provide an understanding of the nature, relative seriousness and ultimate cause of an institution's problems, and thus provides a factual foundation to soundly base corrective measures, recommendations and instructions.

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.”



Safety and soundness examinations assess a bank’s Safety and soundness examinations assess a bank’s strength on a rating scale.strength on a rating scale.

• Institutions rated 1 or 2 are subject to “normal” or routine Institutions rated 1 or 2 are subject to “normal” or routine supervision.supervision.

• Institutions rated 3, 4 & 5 are closely monitored and Institutions rated 3, 4 & 5 are closely monitored and generally subject to generally subject to corrective programs.corrective programs.

• The scope and frequency of “Supervisory Follow-Up” based The scope and frequency of “Supervisory Follow-Up” based on the bank’s risk on the bank’s risk

profile and bank management’s ability to favorably resolve profile and bank management’s ability to favorably resolve any issues.any issues.

• Follow-up may include: quarterly progress reports; Follow-up may include: quarterly progress reports; unscheduled visits; and acceleration of exam interval.unscheduled visits; and acceleration of exam interval.

• Ratings are confidential and not publicly disclosed.Ratings are confidential and not publicly disclosed.


As rating becomes more severe

Supervisory response intensifies

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• Regular exam frequency and scope

• Routine off-site monitoring

• Routine regulatory reporting

• Enforcement action unlikely

• Exam frequency may be increased and scope broadened

• Increased off-site monitoring

• Quarterly, or more frequent, progress reports may be required

• Informal enforcement action likely

• Exam frequency increased and scope deepened

• Targeted visits and reviews very likely

• Close and frequent off-site monitoring

• Quarterly, or more frequent, progress reports required

• Formal enforcement action certain


Primary Business Functions:Primary Business Functions:Resolutions of Failing InstitutionsResolutions 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.

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• Prior to closing a bank, the FDIC works together with other regulators to resolve weak banks.

• Once an institution is closed, the FDIC performs resolutions functions and also acts as receiver and liquidates the assets of the failed banks.

• Problem Institutions: Up to 844 (2011) from 50 (2006)

• Bank failures: 92 in 2011; 9 in 2012; 426 since 2007


FailedBank

Receivership

Sell theWhole Bank

SellDeposits

& Branches

Liquidate Assets

SellAssetPools

Least-Cost Test or Systemic Risk Determination Required

FDICDeposit Insurer

Reimburses insured depositors

Typical Resolution ProcessTypical Resolution Process


Responsibilities• 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:Primary Business Functions:Deposit InsuranceDeposit Insurance

1.2 1.21 1.22 1.22 1.19

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Deposit Insurance Fund Deposit Insurance Fund Reserve Ratio Reserve Ratio

March 31, 2008 – September March 31, 2008 – September 30, 201130, 2011

FDIC Response to the Banking CrisisFDIC Response to the Banking Crisis

Managing a Rise in Bank Failures whileStrengthening the US Deposit Insurance System for the

Future

Preserving Financial Stability:Preserving Financial Stability:FDIC Response to the US Banking CrisisFDIC Response to the US Banking Crisis

Responding 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.


Causes 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.”


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775829

860 884 888 865 844

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Number of institutions on the FDIC's "Problem List," 2006 - 2011, quarter end

50

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Failed Banks

Failed Assets (In Billions)


This crisis has been characterized by a failure of This crisis has been characterized by a failure of many institutions, some very large and complexmany institutions, some very large and complex

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$1,107 $1,230

$2,249

$3,422

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To Manage this Crisis – we have devoted more resources to more intensive bank supervision and failed bank management

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.


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Resolutions strategy first used in the early 1990sResolutions strategy first used in the early 1990s

FDIC agrees to assume future losses, usually up FDIC agrees to assume future losses, usually up to 80%to 80%

Reduces FDIC’s immediate outlaysReduces FDIC’s immediate outlays Disposes of assets quickly, while preserving asset valueDisposes of assets quickly, while preserving asset value Gives investors support who otherwise would not invest Gives investors support who otherwise would not invest

due to shortened due diligence perioddue to shortened due diligence period Aligns interests of FDIC and acquiring bankAligns interests of FDIC and acquiring bank

A key tool used to resolve bank failures has been the Purchase and Assumption Agreement with Loss Sharing Option


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

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The banking industry – not taxpayers – are rebuilding The banking industry – not taxpayers – are rebuilding the deposit insurance fundthe deposit insurance fund

Rate AdjustmentRate Adjustment Recalibrated how assessment are calculated; Recalibrated how assessment are calculated; adjusts for unsecured debt, secured liabilities and brokered depositsadjusts for unsecured debt, secured liabilities and brokered deposits

Special AssessmentSpecial Assessment Imposed a one time fee of 5 basis points Imposed a one time fee of 5 basis points assessed against total assets minus Tier 1 Capital (May 2009)assessed against total assets minus Tier 1 Capital (May 2009)

Pre-paid assessmentsPre-paid assessments Prepayment of estimated risk-based Prepayment of estimated risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, & assessments for the fourth quarter of 2009 and for all of 2010, 2011, & 2012 (September 2009) 2012 (September 2009)

Restoration PlanRestoration Plan Implemented a Restoration Plan to return the Implemented a Restoration Plan to return the Designated Reserve Ratio to the statutorily mandated level of 1.35 by Designated Reserve Ratio to the statutorily mandated level of 1.35 by September 30, 2020.September 30, 2020.



---1.35% G

oal b

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The FDIC Deposit Insurance Fund Ratio: 1934 - Present

Bank Insurance Fund: 1934 - 1988

BIF + SAIF:1989 - 2005

DIF: 2005 -…

FDIC Response to the Banking Crisis

Overview: Dodd-Frank Wall Street Reform and Consumer Protection Act

Manage systemic risk through stronger oversight and regulation

Eliminate Too-Big-To-Fail

Protect Consumers

Fortify the U.S. deposit insurance regime

Manage Systemic Risk – With the goal of monitoring and managing the build up of systemic risks, the Act establishes the Financial Stability Oversight Council (FSOC), which in concert with the Federal Reserve and FDIC will have enhanced powers to regulate systemically important firms’ safety, size, and range of activities. The Act will also strengthen oversight and regulation of all other financial 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 ReformU.S. Financial Regulatory ReformOverview: Dodd-Frank Wall Street Reform and Consumer Overview: Dodd-Frank Wall Street Reform and Consumer

Protection ActProtection Act

Financial Stability Oversight Council – The Council will serve as an early warning system to identify and manage systemic risks, including companies, market activities, and practices in the financial system. The Council will have the authority to identify banking and non-banking companies, which because of their potential systemic importance, should be subject to more rigorous regulation and supervision, increased risk disclosure, higher capital, liquidity, and risk management requirements.



Protect Consumers




Eliminate Too-Big-To-Fail – Ends the possibility that taxpayers will be asked to write a check to bail out financial firms that threaten the economy by creating a safe way to liquidate failed financial firms, imposing tough new capital and leverage requirements that make it undesirable to get too big, updating the Fed’s authority to allow system-wide support but no longer prop up individual firms, and establishing rigorous standards and supervision to protect the economy and American consumers, investors, and businesses.



Protect Consumers




Consumer Financial Protection Bureau – A new independent agency, housed at the Federal Reserve, with broad authority and a substantial budget to create and enforce rules designed to protect consumers of a wide range of financial products and services. Bureau will have exclusive rulemaking responsibilities and will share supervision and enforcement with FDIC and other federal regulators.



Protect Consumers




A stronger deposit insurance system - The new law makes changes in the FDIC’s authorities to manage the Deposit Insurance Fund (DIF). The increase from $100,000 to $250,000 in deposit insurance protection is made permanent and retroactive to January 1, 2008. The Transaction Account Guarantee program, which provides full deposit insurance protection for noninterest bearing accounts, is extended until December 31, 2012. The FDIC is required to increase the DIF reserve ratio to 1.35% by September 30, 2020.



Protect Consumers




What are the FDIC’s primary new responsibilities 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 ReformU.S. Financial Regulatory ReformDodd-Frank Wall Street Reform and Consumer Dodd-Frank Wall Street Reform and Consumer



Protection ActProtection ActStrengthened 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 Special

ExaminationsExaminations Orderly ResolutionsOrderly Resolutions

Coordination Back-up Enforcement

Actions

Orderly Liquidation AuthorityFor the first time, the federal government will have the power to wind down troubled systemically important bank and non-bank financial companies (SIFI) outside of normal bankruptcy proceedings. The new law gives the FDIC broad authority to resolve failed non-bank institutions in a manner substantially similar to the FDIC’s resolutions process for insured banks. Importantly, the Act also expressly prohibits the use of taxpayer funds.• Orderly Liquidation of SIFI’sOrderly Liquidation of SIFI’s

• Designed to ensure that no institution is too big or Designed to ensure that no institution is too big or too interconnected to fail, thereby subjecting every too interconnected to fail, thereby subjecting every financial institution to the discipline of the financial institution to the discipline of the marketplace. marketplace.



Living WillsThe 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.



The Deposit Insurance Fund and InsuranceThe new law makes positive changes in the

FDIC’s authorities to manage the Deposit Insurance Fund in order to have increased resources on hand in the future.

• Minimum Reserve RatioMinimum Reserve Ratio

• Eliminates the maximum limitation of the reserve ratioEliminates the maximum limitation of the reserve ratio

• Permanent (Retroactive) Increase in Deposit Insurance CoveragePermanent (Retroactive) Increase in Deposit Insurance Coverage

• Assessment BaseAssessment Base

• Insurance of Transaction AccountsInsurance of Transaction Accounts



Thank YouThank You

Galo Cevallos.

Economy & Finance

Transcript of Galo Cevallos.