Federal Deposit Insurance Corporation
Subcommittee on Financial Institutions & Consumer Credit
Committee on Banking and Financial Services
United States House of Representatives
February 13, 1997
Madam Chairwoman and members of the Subcommittee, I appreciate
this opportunity to present the views of the Federal Deposit Insurance
Corporation on financial modernization; on H.R. 268, the Depository
Institutions Affiliation and Thrift Charter Conversion Act; and on related issues.
I commend you, Madam Chairwoman, and Congressman Vento for placing a
high priority on the need to modernize the nation's banking and financial
systems. H.R. 268 represents a thoughtful approach toward meaningful reform
that will serve us well in developing balanced, constructive legislation.
Before turning to those topics, I want to express our gratitude to you
and to other members of Congress for passing legislation providing immediate
financial stability to the Savings Association Insurance Fund (SAIF). The
legislation solved the immediate problems of the SAIF. The SAIF, however,
has longer-term structural problems because it insures the deposits of far fewer -- and more geographically concentrated -- institutions. A merger of the SAIF with the Bank Insurance Fund (BIF) would address these problems and create a
single, highly diversified, well-capitalized insurance fund. The FDIC strongly
supports a merger of the two funds as soon as possible. The legislation
capitalizing the SAIF made the merger of the BIF and the SAIF contingent upon
the creation of a common bank charter that would include federal savings
associations, and I hope these issues can also be addressed expeditiously.
Madam Chairwoman, I have written testimony that examines financial
modernization in detail. This morning, I will discuss four important points.
Point Number One -- experience has shown us that product and
geographic constraints on insured institutions have resulted in inadequate
diversification of sources of income and have prevented the institutions
from responding to changing market conditions. In the 1970s and 1980s,
such restrictions became increasingly harmful. Product restrictions on savings
and loan associations created the inherently unstable situation of these
institutions borrowing short-term deposits to fund long-term mortgages, which
helped lead to the collapse of the savings and loan industry. Commercial banks
faced new competition -- in the commercial paper market and elsewhere -- that
drove them into the riskier activities, such as commercial real estate lending,
that led to increased bank failures in the 1980s and early 1990s.
Point Number Two -- experience has also shown us that rapid
expansion of insured institutions into unfamiliar activities -- without
adequate supervision and monitoring by the regulators -- can have
undesirable consequences. When many banks and thrifts aggressively
expanded commercial real-estate lending in the 1980s, insufficient attention was
paid to safeguards against risky behavior.
Point Number Three -- because the record earnings and favorable
economic conditions that banks and thrifts now enjoy may not last forever -- no one has repealed the business cycle -- any financial modernization proposal must be examined and evaluated for its effects when financial
institutions are under stress. Our current experience is extraordinary. In
terms of profits, annual earnings for commercial banks last year probably
surpassed $50 billion for the first time. Moreover, the number and aggregate
assets of problem institutions are only a fraction of what they were only six
Point Number Four -- Any financial modernization proposal
should balance a number of public policy goals. Those goals include: the
safety and soundness of insured institutions, the integrity of the deposit
insurance funds, and the need for depository institutions to generate returns
sufficient to attract capital.
We believe that the following principles are critical components for a
financial modernization proposal that balances public policy goals and safety
and soundness concerns:
First, with limited exceptions discussed in my written testimony,
financial organizations should be permitted to engage in any type of financial
activity consistent with safety and soundness.
Second, a financial institution should have flexibility to choose the
corporate or organizational structure that best suits its needs, provided
safeguards protect the insurance funds and prevent expansion of the federal
Third, safeguards should prohibit inappropriate transactions between
insured institutions and their subsidiaries and affiliates.
Fourth, regulation should be commensurate with risk -- no less, no
more -- and should be along functional lines with no gaps between the
Fifth, easing the broad range of restrictions on activities of banking
organizations beyond those that are financial in nature should proceed
In conclusion, it is imperative that we learn from the past as we
contemplate a substantial expansion of powers available to banking
organizations. I applaud this subcommittee for its substantial attention to these
issues. The FDIC stands ready to assist the Subcommittee with this important
effort. I look forward to answering your questions.