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1998 Annual Report
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 supervision.
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 financial institutions.
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 communications.
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 insurance funds.
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.
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