In terms of earnings, 1998 was an extraordinary
year for banking. Despite declines in
net income in the third and fourth quarters, commercial banks earned a record $61.9
billion for the year as a whole. Return on assetsor ROA, a basic yardstick for
profitabilitywas 1.19 percent. Savings institutions earnings reached a record
$10.2 billion in 1998$1.4 billion above the previous record set in 1997. That $10.2
billion translated into a 1.01 percent ROAthe highest annual ROA for savings
institutions since 1946.
The Bank Insurance Fund grew 4.7 percent during the year to
$29.6 billion, and the Savings Association Insurance Fund grew 5 percent to $9.8 billion.
The funds are strongin fact, they are at record levels.
Having strong deposit insurance funds is important to everyone. In effect, deposit
insurance makes a bank failure a nonevent for
Chairman Donna Tanoue
an average household customer. Because the
government provides an absolute guarantee, people do not have to worry about the safety of
their savings, and because they do not have to worry, they do not feel compelled to rush
to the bank to get their money out in response to the newsor rumorthat their
institution is troubled financially. In the 1980s and early 1990s, nine percent of the
banks in the United Statesnearly one-out-of-10either failed altogether or
received FDIC financial assistance to stay open, and nearly 1,300 savings and loan
associations also failed. Because of federal deposit insurance, there was no widespread
panic or bank runs.
Deposit insurance protects depositors. But just as importantperhaps even more
importantis the fact that, in preventing banking panics, deposit insurance keeps the
payments system operating.
In recent years, weve seen financial crises in Asia and Latin Americacrises
that, in part, have led 21 countries to institute explicit deposit insurance programs
since May of 1995. Today, 68 countries have such systems. Clearly, the benefits of deposit
insurance are appreciated worldwide.
Deposit insurance, however, doesnt alone ensure stability in the financial
marketplace. It addresses only one potential problem, albeit a problem that can cripple,
or even bring down, a financial system: the evaporation of public confidence in banking.
Stability also requires both effective economic policy and effective prudential
When the three contributorseffective economic policy, effective prudential
supervision, and deposit insuranceare present, experience has shown that stability
in the financial marketplace can be achieved and maintained.
The conditions in the industryand the strength of our insurance fundsin
1998 gave the FDIC opportunity to focus on three corporate prioritiesYear 2000
readiness; emerging risks facing insured institutions, and, therefore, the insurance
funds; and diversity in our workforce. Each in its way contributed to our efforts to
ensure that the FDIC remains the worlds leading deposit insurance authority.
The Year 2000, or Y2K, computer challenge was the FDICs highest
safety-and-soundness priority during the year. Examiners visited all FDIC-supervised
institutions at least once by May 31 to assess progress toward Y2K readiness, and
thereafter began a second round of on-site assessments. To maintain communication with the
banking industry on the issue, the FDICalong with the Federal Financial Institutions
Examination Council and industry trade ssociationsconducted an extensive nationwide
outreach program for bankers. The FDIC participated in more than 130 seminars attended by
more than 11,000 bankers.
The FDIC also addressed consumer awareness and concerns on the Y2K issue with two
publications. The first was a brochure, The Year 2000 Date Change, which answers basic
consumer questions. All FDIC- insured institutions were provided with camera-ready
versions of the brochure, in both English and Spanish, so they could reproduce copies for
their customers. More than 10 million copies of the brochure were distributed in 1998. The
second was a special issue of the quarterly FDIC Consumer News, which was devoted
entirely to Y2K, and included features on the efforts of federal banking regulators to
protect bank customers and a list of steps that consumers can take to help protect
themselves. We arranged to distribute this issue of the FDIC Consumer News
through the federal Consumer Information Center in Pueblo, CO, as well as through insured
As the year drew to a close, it became more apparent that maintaining public confidence
in banking was an important element in the Y2K challenge. If the conventional wisdom
during 1999 were for people to take sensible precautions, most would likely take sensible
precautions. If the conventional wisdom were for people to take extreme measures, many
would take extreme measures. To promote sensible conventional wisdom, the FDIC followed a
simple communications strategy: The more people know about Y2K and bankingand about
the efforts of both the industry and the regulatorsthe more comfortable they would
be. Public confidence will be strengthened by regular, consistent and clear
During 1998, we told a three-part story on banking and Y2K. One, bankers have been
working aggressively to meet the Y2K challenge. Two, regulators are aggressively
supervising the banks preparations to become Y2K-ready. While no one could say there
wont be glitches, we have a great deal of confidence that the banking industry will
be ready. (In fact, by summer 1999, virtually all banks and savings institutions had
satisfactory Y2K ratings.) And three, money in an FDIC-insured account is safethe
Year 2000 will not affect our guarantee.
As the year ended, the Corporation began to refine and expand the information we would
communicate on Y2K and banking to meet ever-shifting public concerns.
Lastly, along with the Federal Reserve, the FDIC in December hosted a Year 2000 summit
on behalf of the Presidents Council on Year 2000 Conversion for financial
institutions and members of the utilities and telecommunications industries. The forum
focused on the participants progress in addressing the Y2K computer challenge.
As a risk to the banking industry, the Y2K challenge is unique, but FDIC-insured
institutions face other emerging risks as well.
By most measures of prosperity, this is the best economy in a generation. Inflation and
unemployment are at levels not seen since the 1960s. Consumer spending and business
investment are propelling growth even at this late stage of the expansion. The recent performance
of the U.S. economy is a triumph of technology, as well as of U.S. fiscal and monetary policy. It is also uncharted territory, so this is no time for complacency.
Moreover, our economy has become linked to the health ofand events
inforeign economies. This linkage has increased the potential for sudden adverse
economic and financial events.
During the third quarter of 1998, for example, a default in Russian debt and the
resultant difficulties with hedge funds, such as those experienced by Long Term Capital
Management, LP, showed how interconnected the world had become and how quickly and
dramatically events can affect world markets. That makes our job of watching the horizon
all the more important.
Strong competition in the financial marketplace has placed pressure on banks to look
for ways to maintain market share and increase profitabilityand these pressures may
also be forcing institutions to compromise their underwriting standards. The market
currently rewards high-performing banks to an unprecedented degree, giving some lenders
incentive to take increased risk.
For example, we are seeing a proliferation of non-traditional consumer lending that is
currently highly profitablesubprime and high loan-to-value home equity lending.
These "new frontiers" in consumer lending are pushing institutions into riskier
territory where some are having problems, even though times are good.
Responding to risks on the horizon is a challenge, but the FDIC also must respond to
the long-term changes in the banking industry that will ultimately shape the way we do our
jobs. Among these trends are the growing concentration of the FDICs exposure in the
largest banks we insure; expansion of business activities conducted by banks and their
affiliates; globalization of banking and increasing affiliations with non-bank financial
companies; electronic banking; and the growing segmentation of the industry into a few
large banks, and many small ones. The changes underway make it more challengingand
more importantfor the FDIC to understand the risks being underwritten by the deposit
In light of globalization, the Corporation in September hosted an international
conference on deposit insurancethe first of its kind. The conference brought
together senior government authorities from 62 countries. Discussions focused on the role
of deposit insurance in maintaining public confidence in the worlds banking systems.
The widespread response to our invitation reflected global interest in deposit
insurance issuesand their importance. Deposit insurance is becoming a frequent
condition of international funding agreements, and there is substantial international
demand for the FDICs assistanceand leadershipin this area.
During the conference it became clear that the FDIC has expertise and leadership to
offer by designing and publishing best practices for deposit insurance systems around the
world. It also became clear that the FDIC should take advantage of opportunities, such as
gatherings of international bankers, to describe our best practices concepts. The FDIC was
also asked to consider investigating the creation of an international consortium for
sharing information on deposit insurance.
As the year drew to a close, we created an executive-level Diversity Steering Committee
to ensure an inclusive workplace at the FDIC. Diversity is a business imperative for the
Corporation for three reasons. The first is that trends and events in the
financial-services industry and in society at large affect the FDICwe do not operate
in a vacuum. In that regard, the composition of the national employee pool is dramatically
changing as a result of the increasing diversity of our society. The second reason is that
one out of every six employees in the FDIC is eligible to retire in the next five years.
As a result, we will need to conserve and replenish our institutional knowledge and
expertise. For the Corporation to continue to be successful, we must retain and recruit
the most qualified and most motivated employees that we can. We must maintain and enhance
our reputation as a place where people want to work. We must continue to be an employer of
choice. The third reason is that the increasing diversity of our society directly effects
the depositors we insure and the customers and employees of financial institutions. We
need to understand their needs.
I would like to end on a personal note. Since becoming FDIC Chairman, I have been
reminded every day that the men and women of the FDIC are extraordinarily dedicated and
talented. It is a privilege to work with them. The Corporation has challenges ahead of
itchallenges from a changing financial industry and a changing America. But the FDIC
will rise to meet those challenges because of the men and women who stand behind it and
who, day in and day out, maintain the FDIC seal as a symbol of confidence. Because of the
work they have done, the FDIC has a proud history, but because of who they are, the
Corporations best years are yet to come.