Speeches and Testimony
Federal Deposit Insurance Corporation
On the Release of the
Quarterly Banking Profile
September 12, 1995
The numbers you have before you show that, in the second quarter of
1995, the commercial banking industry broke its quarterly earnings
record. For the last three-and-a-half years, earnings have been rising at
historic levels. Looking at the latest quarterly earnings figures -- which
are $12 billion, with the tenth consecutive quarter of earnings above $10
billion -- one of the people here has said the banking industry is like
Cal Ripken: It just keeps going.
In large part, of course, these record earnings were the result of
continuing extraordinarily favorable conditions -- a strong economy,
high loan demand, and relatively few problems in asset quality.
Profitability, as measured by return on average assets (ROA), was
unchanged from a year ago, at 1.16 percent, but was up from the 1.1
percent ROA registered in the first quarter of 1995. By contrast,
savings institutions earned $1.9 billion in the second quarter of 1995,
for an annualized ROA of 0.76 percent. In banking, an ROA of 1
percent or more is considered to be a good return. Two out of every
three banks registered an ROA above 1 percent in the latest quarter.
I want to stress that industry net interest margins have been relatively
stable over the last ten quarters of fluctuating interest rates, remaining
within a 21-basis-point range. At 4.3 percent the banking industry's net
interest margin in the second quarter remained practically unchanged
from that of the previous quarter. By contrast, the savings industry's
net interest margin in the same quarter was down to 3.05 percent from
the first quarter. That is 125 basis points lower than the net interest
margin for banks.
In the second quarter, the banking industry's asset mix continued to
shift toward loans, away from securities. Lending remained strong in
all categories of loans. Loans to consumers, including home mortgage
loans and credit card loans, were up by $37.5 billion, and commercial
and industrial loans were up $18.2 billion.
The lending mix has continued to shift toward loans that traditionally
reflect relatively more diversified credit risk -- primarily residential
mortgage loans, credit cards and other loans to individuals -- and away
from types of loans that reflect more concentrated credit risk, such as
commercial real estate loans.
In the twelve months ending June 30, total loans and leases at
commercial banks grew 12.5 percent. The last calendar year that
commercial bank loan growth exceeded 10 percent was in 1984, when
total loans grew by 14.3 percent. There are, however, several
significant differences between loan growth then and the growth we are
witnessing in 1995. Loan portfolio risks are more diversified today than
in 1984. In 1984, retail loans accounted for 29 percent of all loans held
by commercial banks, while loans to commercial borrowers accounted
for the remaining 71 percent. In contrast, at the end of June, retail
loans accounted for more than 44 percent of the banks loan portfolios,
while loans to commercial borrowers represented 56 percent. Further,
in 1984, lending growth was more concentrated in terms of both
geography and type of loan. For example, loans for real estate
construction and land development increased by more than 25 percent in
1984 and banks in the southwest alone accounted for almost one-third of
that growth. In contrast, over the most recent four quarters, these loans
have increased by only 6.2 percent. In 1984, commercial real estate
loans grew by 18 percent and banks in the southwest accounted for
almost one-quarter of that growth. For the four quarters ending this
June 30, these loans also increased about 6 percent.
All that having been said, the FDIC still has concerns as a bank
supervisor and insurer. As I have often said before, it is our job to
worry even in good times. We will continue to analyze credit
underwriting standards, and we will monitor credit diversification and
Even so, the banking industry's recent performance has been
In addition to record earnings, the industry has recapitalized the Bank
Insurance Fund (BIF) far faster than anyone could have anticipated just
a few years ago and a number of years ahead of the projected
recapitalization of the Savings Association Insurance Fund (SAIF). At
the end of the second quarter the BIF reserve ratio was 1.288. Why did
it exceed the designated reserve ratio of $1.25 for every $100 in insured
deposits? Because we do not assess banks on a pay-as-you-go basis.
Our analysis shows that, if we had adhered to a straight pay-as-you-go
policy for pricing risk while holding the BIF ratio at 1.25 percent over
the past 45 years, during the difficult time with the most bank failures
the assessment rate would have bounced from 32 basis points in 1988 to
just under 18 basis points in 1989 to 49 basis points in 1990 to nearly
63 basis points in 1991.
In other words, such a course would have exposed the banking industry
to unduly high and volatile insurance assessments that would have
required banks to pay more, just when they needed their income the
most: when they were experiencing problems and suffering high losses.
For these reasons, the FDIC must consider the range of risks to the BIF
so as to enable us to maintain the target 1.25 ratio on average over time.
There are medium- and long-term risks in the banking system that are
not reflected in the numbers on current performance. As insurer, we
need to take those risks into account, not unlike insurance companies
that take smoking into consideration when setting rates and reserves
even though the effects of the habit may not be evident immediately.
Favorable conditions will not last forever. If the future is anything like
the past, the revenue needs of the fund will vary considerably from what
they are today.
With consistently high earnings, commercial banking has never been
stronger financially -- and that gives us a rare opportunity to address
problems that have been given insufficient attention. In particular, there
are three serious problems that may not be clearly illustrated in the
numbers you have before you. One, the weakness in the SAIF is
structural -- it will not go away -- it must be fixed. Two, unnecessary
regulation continues to burden banking, and particularly to burden
disproportionately the smaller institutions that can least afford to pay for
it. Three, the banking industry needs to have its product lines expanded
so that when current favorable circumstances change, as they inevitably
will, it will be more diversified, and therefore stronger.
I will now entertain questions. With me are Don Inscoe, Ross Waldrop,
and Tim Critchfield, FDIC analysts who put together the Quarterly