Federal Deposit Insurance Corporation
Conference of State Bank Supervisors
Annual Meeting and Conference
Ponte Vedra Beach, Florida
May 4, 1996
It is always a pleasure to come to Florida, but especially so
after the kind of winter many of us just had. Most of us cannot
hear the word "Florida" without thinking of the sun, the beach,
and the good time we can have here -- a warm-weather, tourist
paradise. That was not always the case, however. For most of
its history, Florida was sparsely populated and agricultural,
much like the other states that made up the Confederacy --
that's right, Florida, with its population of 150,000 in 1860,
joined the Confederacy, and some of the 15,000 soldiers it raised
fought at every major battle of the Civil War.
In fact, a group of Floridians was among the prisoners taken
at Gettysburg. They were sent to a prisoner of war camp in
northern Michigan. No prisoners had ever escaped from the camp,
which was isolated in the wilderness and kept under strict
discipline by the Union colonel who ran it.
When they arrived at the camp, the new prisoners were lined
up for inspection, where the colonel examined each one
individually, as was his practice.
Stopping in front of one of the Floridians, the colonel saw
a suspicious lump in the soldier's bed roll. "Open it," he
ordered, pointing at the roll.
The Floridian obeyed, and out dropped a snarling, snapping
"Ah, so small, but so ferocious," the colonel exclaimed.
"He's never lost a fight," the Floridian said.
"Is that so," the colonel said, stroking the head of his
mastiff sitting beside him, "I'll wager a U.S. ten-dollar gold
piece that my dog here will end his winning streak."
"Done," said the Floridian.
The Union colonel removed his dog's collar -- and in fifteen
seconds the colonel's mastiff was running to the other side of
the camp, yelping furiously, his tail tucked between his legs."
"Heavens," the Union colonel declared, "I've never seen
anything like that -- what kind of dog do you call that thing?"
"Well," said the Floridan, "before I cut off his tail and
painted him brown, I called him a 'gator."
Florida has played major, though sometimes surprising, roles
in the history of our country.
If anyone needs to be reminded why federal deposit insurance
is important, he need look no farther than the experience of
banking here in Florida in the 1920s and early 1930s. In 1926,
the state had 336 banks holding $640 million in assets. In 1933,
the state had 150 banks -- fewer than half the number seven years
earlier -- and those banks that did survive held only $226
million in assets -- about a third of the total in 1926. Even in
this earthly paradise, the outlook in early 1933 was bleak.
By the end of that year, however, banking in Florida was on the
upswing, reversing its seven-year-long slide. By mid-1934, total
bank assets had risen to $253 million. According to Charlton
Tebeau, Florida historian, the recovery had one cause. He wrote:
"Within a few months after the creation of the Federal Deposit
Insurance Corporation, all banks in the state but one had joined,
and an air of confidence prevailed."
One does not have to turn to history books for further proof
of the value of the world's oldest and most effective deposit
insurance system -- we can turn to our own memories. Almost all
of us, I am sure, remember the nearly 1,500 bank failures of the
1980s and early 1990s. Those failures did not cause panic and
runs on banks -- as did the dramatic number of bank failures in
the 1920s and 1930s -- because federal deposit insurance
maintained the public's confidence in the banking system -- it
was the bedrock on which public confidence was grounded.
Deposit insurance is one asset that everyone here today --
banker and supervisor alike -- holds in common.
From its very beginning the FDIC has recognized the
community of interest it shares with other bank supervisors and
with banks themselves in maintaining a strong banking system and,
thus, a strong bank insurance fund. We are all in this together.
For the FDIC, bank supervision is a means of assuring the
viability of deposit insurance and of maintaining the strength of
the bank insurance fund, so that bank depositors and bankers can
continue to enjoy its benefits.
From its very beginning, the FDIC has worked hand-in-hand
with state banking regulators. We recognized that the dual
banking system was a source of strength for the banking system.
We have a dual system of state and federal banking
authorities for the same reasons we have a dual system of state
and federal government: to provide checks and balances on the
arbitrary exercise of power, to keep the system responsible to
local needs, and to provide a range of choices to bankers and to
bank customers. In banking, the result is a more diverse and a
more innovative system -- and therefore a stronger system -- than
would otherwise be the case.
The effect of the dual banking system -- unintended, but
real -- is that it encourages banks to find better ways to serve
the public. An institutional difference strongly supports and
encourages competition -- it allows banks a greater degree of
freedom to decide what they are going to do and how they are
going to do it. In encouraging competition and innovation, the
dual banking system benefits the public.
Certainly, there is a price for these benefits -- fifty-plus
state banking authorities and four federal authorities are a more
complex system of regulation than, say, one federal regulator
obviously would be. The system, however, is not quite as complex
as it appears on the surface. In acting as a "clearing house"
for regulatory initiatives and policies, the Conference of State
Bank Supervisors provides a nexus for state and federal
regulators -- particularly the FDIC and the Federal Reserve as
primary federal regulators of state-chartered institutions --
making our jobs as supervisors easier than would otherwise be the
The FDIC has promoted a working relationship -- teamwork --
with state bank supervisors practically from the moment it opened
its doors. Working together made sense then -- and it makes
sense now. Over the years the FDIC and the states have taken many
steps to improve cooperation and coordination to meet three
common goals: improving supervision, reducing the regulatory
burden on insured institutions, and adapting to a banking
industry that was itself evolving to meet changing conditions and
the public's changing needs.
Since 1972, the FDIC has provided training to examiners of
state banking departments. In fact, during the last three years,
the FDIC has trained 1,302 state bank examiners from 44 states.
In 1980, the FDIC began a formal effort to expand
cooperation with the states. Since that time, working through
the CSBS, the Federal Financial Institutions Examination Council,
and other avenues, we have addressed "alternate" examination
programs, common examination and application forms, processing
examination reports and applications, joint enforcement actions,
information exchange, examination training and access to the
FDIC's computerized data base. In my first year as Chairman, I
was privileged to chair the FFIEC and work closely with its
statutorily established state liaison committee, headed by Cathy
Ghiglieri, Banking Commissioner of Texas.
In 1992, the FDIC and the CSBS entered into a joint
resolution to encourage the negotiation and formation of working
agreements on examinations between the FDIC and the state banking
departments. The agreements cover who would examine what banks,
as well as examination frequency, pre-examination procedures,
examination report processing, joint applications, and
At present, we have entered into formal written agreements
with 41 states and into informal working arrangements with six
others. We work to the maximum extent possible with every state.
In addition, virtually every state banking department has
access to the FDIC's data base of call reports, examination and
structure information; the automated report of examination; and
CD/ROM files containing the Uniform Bank Performance Reports, the
Uniform Trust Performance Reports and the FDIC manual for safety
and soundness examinations. Our data base can make examinations
both more effective and less burdensome.
In May 1995, the 50 state banking departments and the CSBS
approved guidelines outlining in general terms the roles and
responsibilities of the states in coordinating the supervision
and regulation of interstate banking organizations. In October
1995, the FDIC, the Federal Reserve, and the CSBS formed a
state-federal working group to streamline and improve the
coordination of the examination and supervision of
state-chartered banks operating in an interstate environment. As
you know, the working group's mission is to recommend actions
addressing supervisory policies, procedures, and practices that
are unnecessarily burdensome or duplicative, and to develop
a system of seamless supervision of state-chartered institutions.
Just days ago, the FDIC entered an agreement with the states
and the Federal Reserve that will provide a basic framework for
supervising and examining state-chartered banks with interstate
branches. The agreement outlines the responsibilities of the
federal agencies and home state supervisors.
The cooperative spirit of that agreement, I believe, has
already been reflected in what we do -- for example, we recently
worked with two state banking departments to coordinate our
concurrent examinations of a $10 billion multi-bank, multi-state
institution. Last year, each of us conducted examinations of the
banks separately. In conducting our examinations together this
year, we expect to cut our on-site examination time in the banks
State and federal regulators working together can provide
effective safety and soundness supervision with the greatest
possible degree of responsiveness to the needs of banks and to
the individual, local, and regional differences among them.
The FDIC is looking at a number of ways to enhance and
improve our process of bank supervision -- reducing the
regulatory burden on insured institutions, while focusing on the
risks to the banking system and to the insurance fund that each
individual institution presents. Some of our initiatives focus on
leveraging technology -- others concern procedural changes to
enhance the examination process. If the past is any guide --
and it is -- we will work closely with our state colleagues to
assure that we all benefit from our initiatives at the FDIC. If
training is needed, we will offer it. If more access to our data
is desired, we will deliver it. If greater coordination is
required, we will assure that it happens.
In leveraging technology, this year we will put into
operation an automated examination package that will allow us to
do a significant amount of analysis off-site. This package will
produce at least four benefits. One, bankers will have us
on-site for a shorter time. Two, examiners will spend less time
traveling away from home and more time comparing notes with
colleagues in field offices. Three and four, by leveraging
technology, this approach will improve the quality of supervision
and hold down the FDIC's costs of operations. Through this
leveraging of technology, we are aiming to reduce on-site
examiner presence by 25 percent.
We are also leveraging technology through our new ALERT
program for automating examinations. In cooperation with the
Federal Reserve's automation team and with state banking
departments through CSBS, we are committed to improving
examinations for all state-chartered institutions and are working
toward a final product that will be compatible for all state
examinations. Moreover, the FDIC will train state examiners
in automation with the same level of commitment we have shown in
ALERT is a cooperative effort of the FDIC's Division of
Supervision, headed by Nick Ketcha, who is here today, and our
Division of Information Resources Management, headed by Don
Demitros, who is also here. I want to publicly commend them and
their staffs for this outstanding effort, and particularly Tom
Saxen, of the Division of Supervision's Kansas City region, and
his team. Their zeal on this project has been an inspiration to
all of us.
Speaking of computers, I have to add here that we have a
major presence on the Internet -- a presence we significantly
expanded earlier this week. As you know, we publish the
Quarterly Banking Profile -- the best, in-depth, statistical
profile of the banking industry available today. Over the last
several quarters, we have put this Profile on our homepage when
it was released. Along with the Profile, we have published a
large book of graphs that clearly illustrate the most important
statistical trends in the Profile. As of earlier this week, that
graph book is on our Internet homepage, too. I recommend that
you look at it; it includes state specific data. I believe you
will find it informative and useful.
In addition to leveraging technology in our examination and
supervision process, we are leveraging economic, financial and
We are headed toward a diagnostic approach to bank
examinations -- a combination of observation at an individual
institution with the use of more general -- or macro -- data
provided by our new Division of Insurance that will result in a
more effective and accurate assessment of an institution's
ability to identify, measure, monitor and control the range of
risks it faces. It will also provide a structured framework for
our discussion of specific strengths, weaknesses, and possible
improvements with management and boards of directors.
To that end, we are developing "decision charts" for our
examiners to use that will provide more structure and consistency
to the risk assessment process. The decision charts -- for
credit risk, interest rate risk, operational risk, and other
relevant risks -- outline the diagnostic process. This involves
a graduated approach to examinations based upon the level of risk
at the institution -- on a risk by risk basis. If no symptom
is found in one risk area, the examiner will shift attention to
the next area. The charts are a tool that will lead to more
analytical and more fact-based thinking.
In short, using this approach, the scope and focus of our
bank examinations will become more a flow of forward-looking risk
evaluations -- some based on economic data and all based on the
individual facts of each financial institution -- and less a
checklist of procedures to be followed. I want to stress,
however, that we are enhancing what we already do in
examinations, not substituting something else for it.
Just as practitioners in medicine specialize, we are
creating "risk specialists" on emerging risk areas. We will
enhance our supervisory expertise by making these specialists
available where new risk areas emerge in the course of an
examination or in analyzing aggregate examination information.
We will start by creating risk specialists in the areas of
interest rate risk management and capital market accounting. We
already have capital markets instruments specialists and risk
modeling experts. Events in these areas are moving so quickly,
we want to make sure we are ready to deal with them and to help
you -- state banking departments and bankers alike.
We are also creating "case managers" in our supervisory
regions who will specialize in specific institutions. They will
review all off-site data and regulatory findings concerning these
institutions to assess the risks posed to the insurance fund.
Case managers will also provide one contact with the FDIC for a
In talking about examinations, I want to point out that --
for a number of years -- proposals that the FDIC explicitly
charge for its examinations have been made. The costs of our
examinations have always been included in the insurance
assessment. I have opposed -- and will continue to oppose -- the
idea that we explicitly charge banks for our examinations.
For three generations of Americans, federal deposit
insurance -- with the full faith and credit backing of the U.S.
government -- has provided a reason for unconditional faith in
the banking system. It is a certainty in an uncertain world.
Working together as bank supervisors, the FDIC, the Fed and
state authorities make sure that the public's faith continues to
be justified. We at the FDIC will assure that our colleagues
in the states and other interested federal agencies will also
benefit from any improvements we make in our supervisory process.
We also want to benefit from the new ideas of others -- inside
and outside government. Our community of interests gives us a
unity of purpose.