Statement of Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation on FDIC Oversight: Examining and Evaluating the Role of the Regulator during the Financial Crisis and Today before the House Subcommittee on Financial Institutions and Consumer Credit; 2128 Rayburn House Office Building
May 26, 2011
Chairman Capito, thank you for the opportunity to testify today on the state of the
banking industry and the Federal Deposit Insurance Corporation, and on future
challenges to economic and financial stability.
Shortly after taking the oath as FDIC Chairman almost five years ago, I came to
realize that we would face significant challenges in a number of areas. Although the
FDIC was still in the midst of a two-and-a-half year period without a failed institution,
the longest such period in our history, there were signs that not all was well with the
banking industry. Predatory lending practices and unsuitable mortgage products, which
were already an area of focus for me at the Treasury Department when I served as
Assistant Secretary for Financial Institutions in 2001 and 2002, became even more
prevalent as the decade progressed. Rising concentration in the banking industry was
leading to the emergence of large, complex organizations that encompassed bank
subsidiaries, special-purpose vehicles, and nonbank affiliates, while a greater share of
financial activity was migrating to nonbank financial companies. Not only did these non-
bank affiliates and financial companies exist largely outside of the prudential supervision
and capital requirements that apply to federally insured depository institutions in the
U.S., but they were also not subject to the FDIC's process for resolving failed insured
financial institutions through receivership. Meanwhile, many small and mid-sized
banking institutions had, over time, accumulated large concentrations of loans backed by
commercial real estate and construction projects that were vulnerable to a weakening of
U.S. real estate markets following a record boom in home prices.
Despite the warning signs, few at the time foresaw the extent of the emerging
threat to our financial stability-a threat that was realized in the fall of 2008 when we
experienced the worst financial crisis since the 1930s. While the emergency policy
measures that were put in place in late 2008 and early 2009 helped to prevent an even
larger catastrophe, the macroeconomic consequences of the financial crisis have been
enormous. Even as the danger to the banking industry begins to recede, we are faced
with the twin tasks of rebuilding our financial infrastructure on more solid ground and
implementing safeguards that will help to prevent a costly recurrence of this disaster.
Today, as I prepare to wrap up my term as FDIC Chairman, I am pleased to have
the opportunity to discuss with you what I see as some of the most important causes of
the crisis, the steps that the FDIC took to deal with the problem, the reforms we are
putting in place to make our system less vulnerable to costly instability in the future, and
some of the broader policy challenges we must address to secure our economic future.
The Roots of the Financial Crisis
Much has been said and written about the causes of the financial crisis. In
previous testimony, I have described in some detail the combination of factors that led to
the crisis of 2008 and motivated the legislative reforms that are now being put in place.
Today, I would like to summarize these causes under four broad themes.
Excessive Reliance on Debt and Financial Leverage
A healthy system of credit intermediation, where the surplus of savings is
channeled toward its highest and best use by household and business borrowers, is
critically important to the modern economy. A starting point for understanding the
causes of the crisis and the changes that need to be made in our economic policies is
recognition that the U.S. economy has long depended too much on debt and financial
leverage to finance all types of economic activity.
In principle, debt and equity are substitute forms of financing for any type of
economic activity. However, owing to the inherently riskier distribution of investment
returns facing equity holders, equity is generally seen as a higher-cost form of financing.
This perceived cost advantage for debt financing is further enhanced by the standard tax
treatment of payments to debt holders, which are generally tax deductible, and equity
holders, which are not. In light of these considerations, there is a tendency in good times
for practically every economic constituency - from mortgage borrowers, to large
corporations, to startup companies and the financial institutions that lend to all of them -
to seek higher leverage in pursuit of lower funding costs and higher rates of return on
capital. What is frequently lost when calculating the cost of debt financing are the
external costs that are incurred when problems arise and borrowers cannot service the
debt. Credit defaults, which tend to occur with high frequency in economic downturns,
frequently lead to severe adjustments-including foreclosure, repossession, and
distressed asset sales-that impose very high costs on economic growth and our financial
Thus, as demonstrated in the recent financial crisis, the social costs of debt
financing are significantly higher than the private costs. In good economic times, when
few borrowers are forced to default on their obligations, more economic activity can take
place at a lower cost of capital when debt is substituted for equity. However, the built-in
private incentives for debt finance have long been observed to result in periods of excess
leverage that contribute to a financial crisis. As Carmen Reinhart and Kenneth Rogoff
describe in their 2009 book This Time It's Different:
"If there is one common theme to the vast range of crises we consider in this book,
it is that excessive debt accumulation, whether it be by the government, banks,
corporations, or consumers, often poses greater systemic risks than it seems
during a boom."1
This is precisely what was observed in the run up to the recent crisis. Mortgage
lenders effectively loaned 100 percent or more against the value of many homes without
underwriting practices that ensured borrowers could service the debt over the long term.
Securitization structures were created that left the issuers with little or no residual
interest, meaning that these deals were 100 percent debt financed. In addition, financial
institutions not only frequently maximized the degree of on-balance-sheet leverage they
could engineer; many further leveraged their operations by use of off-balance-sheet
structures. For all intents and purposes, these off-balance-sheet structures were not
subject to prudential supervision or regulatory capital requirements, but nonetheless
enjoyed the implicit backing of an affiliated insured bank. These and many other
financial practices employed in the years leading up to the crisis made our core financial
institutions and our entire financial system more vulnerable to financial shocks.
Misaligned Incentives in Financial Markets
Financial markets are ideally deep, liquid, efficient markets where observable
prices convey useful information to market participants. However, informational
asymmetries, conflicts of interest, or other misaligned incentives can significantly impair
the liquidity and efficiency of financial markets. One of the enduring legacies of the
financial crisis will be how misaligned incentives led to devastating instability in our
I explored some of the implications of misaligned incentives in our financial
system in my January 2010 testimony before the Financial Crisis Inquiry Commission
(FCIC). 2 Overall, financial institutions were only too eager to originate mortgage loans
and securitize the loans using complex structured debt securities. Investors purchased
these securities without a proper risk evaluation, as they outsourced their due diligence
obligation to the credit rating agencies. Consumers refinanced their mortgages, drawing
ever more equity out of their homes as residential real estate prices grew beyond
sustainable levels. Formula-driven compensation at financial institutions allowed high
short-term profits to be translated into generous bonus payments, without regard to any
longer-term risks. These developments were made possible by a set of misaligned
incentives among and between all of the parties to the securitization process-including
borrowers, loan originators, credit rating agencies, loan securitizers, and investors.
Misaligned economic incentives within mortgage securitization transactions and
the widespread use of such securitizations to fund residential lending combined to play a
key role in driving the precipitous decline in the housing market and the financial crisis.
Almost 90 percent of subprime and Alt-A originations in the peak years of 2005 and
2006 were privately securitized. During this period, the originators and securitizers
seldom retained meaningful "skin in the game." These market participants received
immediate profits with each deal while assuming that they faced little or no risk of loss if
the loans defaulted. As a result, securitizers had very little incentive to maintain adequate
lending and servicing standards.
The substantial and immediate profits available through securitization skewed the
incentives toward increased volume, rather than well underwritten, sustainable lending.
In the late 1990s and early 2000s, when private mortgage-backed securitization was still a
relatively small part of the market, the typical deal structure included non-rated or sub-
investment grade tranches reflecting the equity interest that was retained by the issuer.
These equity slices typically ranged in size from 3 to 5 percent or more of the total value
of the deal. As long as the market required issuers to retain the equity risk, there was at
least some incentive for issuers to more carefully choose the mortgages they would
include in the pool. But by the middle of the decade, the size of these equity tranches had
fallen in many cases to one percent or less of the value of the deal.
Moreover, an active market arose in selling and repackaging these equity tranches
in collateralized debt obligations, thereby removing all risk of loss from the original
security issuer. Without the need to carry and fund equity claims arising from mortgage
securitization, the pure "originate-to-distribute" model of mortgage lending came into
being, conferring virtually infinite leverage to the issuers of private mortgage-backed
securities. Predictably, with higher leverage came riskier lending, and increased numbers
of borrowers-encouraged by lenders and brokers-received loans that they simply could
not repay. When housing prices reached unsustainable levels and began to decline, the
house of cards collapsed and revealed the inherent flaws in the incentives of the prior
securitization model. More than half of the privately-securitized subprime loans made in
2006 have now defaulted, along with over 40 percent of the privately-securitized Alt-A
loans made that year.
The mortgage servicing documentation problems that were uncovered last year
are yet another example of the implications of lax underwriting standards and misaligned
incentives in the mortgage industry. Since the servicers of securitized mortgages do not
own the mortgages, they lack economic incentives to mitigate losses through effective
loan restructuring. In addition, the traditional, fixed level of compensation for loan
servicing paid under typical securitizations has proven to be wholly inadequate to
implement appropriate policies and procedures to effectively deal with the volume of
problem mortgage loans. As a consequence, inadequate resources and lack of economic
self-interest led mortgage servicers to cut corners in all aspects of mortgage servicing and
documentation. Thus, the incentive problems that helped to spawn the crisis are now
among the most important impediments to resolving it. Clearly, financial risk managers
and financial regulators must pay much closer attention in the future to incentive and
information problems that inhibit the efficiency of financial markets and raise the risk of
Failures and Gaps in Financial Regulation
The regulatory reforms put in place for federally-insured depository institutions
following the banking crisis of the 1980s and early 1990s helped to constrain risk-taking
on bank balance sheets. But in a process known as regulatory arbitrage, risk began to
migrate into the so-called shadow banking system-a network of large-bank affiliates,
special-purpose vehicles, and nonbank financial companies that existed largely outside of
the prudential supervision, capital requirements, and receivership powers that apply to
federally insured depository institutions in the U.S. The migration of essential banking
activities outside of regulated financial institutions to the shadow banking system
ultimately lessened the effectiveness of regulation and made the financial markets more
vulnerable to a breakdown.
Many of the structured finance activities that generated the largest losses were
complex and opaque transactions undertaken at the intersection of the lightly regulated
shadow banking system and the more heavily regulated traditional banking system. For
instance, private-label MBSs were originated through mortgage companies and brokers
as well as portions of the banking industry. The MBSs were subject to minimum
securities disclosure rules that are not designed to evaluate loan underwriting quality.
Moreover, those rules did not allow sufficient time or require sufficient information for
investors and creditors to perform their own due diligence either initially or during the
term of the securitization. For banks, once these loans were securitized, they were off the
balance sheet and no longer on the radar of many banks and bank regulators.
Outside of the largest and most complex institutions, traditional banks and thrifts
continued to rely largely on insured deposits for their funding and most focused on
providing core banking products and services to their customers. Eventually, these
traditional institutions also suffered extensive losses as many of their loans defaulted as a
consequence of collateral damage from the deleveraging effects and economic undertow
created by the collapse of the housing bubble.
The Erosion of Market Discipline Due to "Too Big to Fail"
One of the most powerful inducements toward excess leverage and institutional
risk-taking in the period leading up to the crisis was the lack of effective market
discipline on the largest financial institutions that were considered by the market to be
Too Big to Fail. Several large, complex U.S. financial companies at the center of the
2008 crisis could not be wound down in an orderly manner when they became nonviable.
Major segments of their operations were subject to the commercial bankruptcy code, as
opposed to bank receivership laws, or they were located abroad and therefore outside of
U.S. jurisdiction. In the heat of the crisis, policymakers in several instances resorted to
bailouts instead of letting these firms collapse into bankruptcy because they feared that
the losses generated in a failure would cascade through the financial system, freezing
financial markets and stopping the economy in its tracks.
As it happened, these fears were realized when Lehman Brothers-a large,
complex nonbank financial company-filed for bankruptcy on September 15, 2008.
Anticipating the complications of a long, costly bankruptcy process, counterparties across
the financial system reacted to the Lehman failure by running for the safety of cash and
other government obligations. Subsequent days and weeks saw the collapse of interbank
lending and commercial paper issuance, and a near complete disintermediation of the
shadow banking system. The only remedy was massive intervention on the part of
governments around the world, which pumped equity capital into banks and other
financial companies, guaranteed certain non-deposit liabilities, and extended credit
backed by a wide range of illiquid assets to banks and nonbank firms alike. Even with
these emergency measures, the economic consequences of the crisis have been enormous.
Under a regime of Too Big to Fail, the largest U.S. banks and other financial
companies have every incentive to render themselves so large, so complex, and so
opaque that no policymaker would dare risk letting them fail in a crisis. With the benefit
of this implicit safety net, these institutions have been insulated from the normal
discipline of the marketplace that applies to smaller banks and practically every other
private company. This situation represents a new and dangerous form of state capitalism,
where the market expects these companies to receive generous government subsidies in
times of financial distress. Unless reversed, we could expect to see more concentration of
market power in the hands of the largest institutions, more complexity in financial
structures and relationships, more risk-taking at the expense of the public, and, in due
time, another financial crisis. However, as described later, the Dodd-Frank Act
introduces several measures in Title I and Title II that, together, provide the basis for a
new resolution framework designed to render any financial institution "resolvable,"
thereby ending the subsidization of risk-taking that took place prior to these reforms.
In summary, the roots of the financial crisis lay under four main areas: excessive
debt, misaligned incentives in financial markets, failures and gaps in financial regulation,
and the undermining of market discipline by To Big to Fail. Any one of these problems
in isolation would have weakened the long-term performance of our financial system and
made it more vulnerable to shocks. In combination, they led to the worst U.S. financial
crisis and economic downturn since the 1930s. The following section discusses how the
FDIC responded to the immediate challenges posed by these developments.
FDIC Responses to the Challenges of the Financial Crisis
The FDIC was created in 1933 in response to the most serious financial crisis in
American history to that time. Our mission then-as now-is to promote financial
stability and public confidence in banking through bank supervision, deposit insurance
and the orderly resolution of failed banking institutions. Working with our regulatory
counterparts, the FDIC has played an instrumental role in addressing the recent crisis.
Our actions have helped to restore financial stability and pave the way for economic
recovery. We have done so by effectively carrying out our core missions as described
above, and by undertaking some unprecedented emergency actions necessary to restore
stability to our financial system. The appropriateness and effectiveness of these actions is
evidenced both by the gradual recovery we are seeing in financial markets and
institutions, as well as the 19 consecutive unqualified audit opinions the FDIC has
received from the Government Accountability Office (GAO). This section summarizes
the FDIC's actions during the crisis and highlights some important organizational
changes and new initiatives we have undertaken to enhance our effectiveness.
The FDIC is the primary federal supervisor for most community banks in the U.S.
These institutions provide credit, depository, and other financial services to consumers
and businesses on Main Street, and are playing a vital economic role as cities and towns
recover from the recession. As primary federal supervisor for these institutions, the
FDIC seeks to maintain a vigilant but balanced posture with regard to both safety and
soundness and consumer compliance supervision. Such an approach is in keeping with
our longstanding belief that consumer protection and safe and sound banking are two
sides of the same coin.
During the financial crisis, the FDIC initiated a number of enhancements to its
supervisory program and issued a broad spectrum of guidance to the banking industry to
establish, and clearly reaffirm, safety and soundness expectations. The FDIC's Division
of Risk Management Supervision (RMS) responded quickly to the rapid deterioration of
insured depository institutions by expanding off-site monitoring activities, accelerating
on-site examinations, performing on-site visitations between examinations, and
strengthening the workforce through permanent and temporary hiring. At the same time,
we provided examiners with greater latitude to expand the scope of examinations when
necessary and training updates on fundamental aspects of bank supervision and real estate
lending. From a policy perspective, the FDIC independently issued and joined
interagency issuances of much-needed regulatory guidance. This guidance dealt with
significant risk management issues that became central themes of the crisis such as
subprime and nontraditional mortgage lending, commercial real estate lending, incentive
compensation practices, liquidity and funds management, and regulatory/charter
conversions. Importantly, we also actively encouraged banks to continue prudently
originating and, when appropriate, modifying loans to creditworthy borrowers.
As the Committee is well aware, the most important element of prudential bank
supervision is on-site examination activity. Given the significant weaknesses in real
estate lending and increasing volume of problem banks over the past several years, the
frequency and scope of FDIC supervisory activities expanded. In 2010 alone, the FDIC
conducted over 2,700 regular examinations and 2,210 on-site visitations. We have also
exercised our special examination authority to evaluate risks posed to the Deposit
Insurance Fund (DIF) by insured institutions that are not directly supervised by the FDIC.
While our core examination procedures have not changed, the FDIC is working smarter
through a significantly enhanced off-site monitoring and surveillance program that has
helped us to more quickly address emerging signs of financial deterioration. When signs
of deterioration are identified, we typically perform an on-site visitation to assess the
emergent weaknesses, whether a regular examination should be accelerated, the
appropriateness of currently-assigned CAMELS ratings, and potential risk to the Fund.
As a result of the increased volume of problem institutions nationally, we
accelerated the process for initiating corrective programs that address financial or
managerial concerns. We implemented a process that ensures the initiation of most
corrective programs within 60 days of the completion of an examination. This has helped
banks act on supervisory recommendations expeditiously. The FDIC also strengthened
its internal standard for performing supervisory activities at institutions rated '3', '4', or
'5' so that we conduct not only a regular examination every twelve-months, but also on-
site visitations every six months, at a minimum. Moreover, we actively communicate
with banks that are subject to a corrective program and ensure that their related progress
reports are reviewed and followed-up on in a timely manner.
To achieve the goals of our supervisory mission, the FDIC hired additional
examiners and technical specialists. As of April 30th, our risk management examination
force stands at approximately 1,900 examiners, up from 1,200 at the end of 2007. This
staffing increase improved our ability to conduct supervision and special examination
activities as well as responding to complex and emerging risks. RMS has also provided
training to the examination staff to update and reinforce credit, real estate appraisal, and
other bank supervision fundamentals. Through this training, we have emphasized a
forward-looking, balanced approach to supervision that promotes fairness and
effectiveness in our role as regulators.
The FDIC issued a variety of timely supervisory guidance both before and during
the crisis on important risk management issues affecting the banking industry. As the
Committee will recall, subprime and non-traditional residential mortgage loans were one
of the first lending fields negatively impacted by the real estate bubble. In response, the
FDIC joined the other regulatory agencies in issuing Interagency Guidance on
Nontraditional Mortgage Product Risks in 2006, and led the development of the joint
Interagency Statement on Subprime Lending in 2007 to establish regulatory expectations
about the risks and oversight of these credit products. 3 We believe that these and
subsequent related issuances helped banks improve their credit risk management and
consumer protection process for higher-risk mortgage lending.
With respect to commercial real estate (CRE) lending, we issued a number of
Financial Institution Letters addressing the need for strong risk management practices
and appropriate capital and reserve levels for institutions with CRE loan concentrations.
For example, in 2008, the FDIC issued a Financial Institution Letter titled Managing
Commercial Real Estate Concentrations in a Challenging Environment that emphasized
the importance of these tenets. 4 This Letter followed up on the 2006 joint Guidance on
Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices,
which outlined how strong risk management practices and appropriate levels of capital
were essential elements of a sound commercial real estate lending program. 5 Institutions
that adhered to the risk management tenets in these issuances have tended to weather the
crisis and remain well positioned to originate new loans as demand returns to the market.
In response to significant concerns about the regulatory position relative to CRE
loan workouts and restructures, we joined the other banking agencies in issuing the 2009
Policy Statement on Prudent Commercial Real Estate Loan Workouts which encouraged
prudent and pragmatic CRE workouts within the framework of financial accuracy,
transparency, and timely loss recognition. 6 This issuance has led to a better
understanding of regulatory expectations and an encouragement to banks to engage in
prudent restructures when appropriate. The FDIC has also been a strong proponent of
reforms to address front-loaded compensation structures that provide incentives for short-
term excessive risk taking. We joined the other agencies to issue the Interagency Notice
of Proposed Rulemaking Incentive-Based Compensation Arrangements earlier this year. 7
This proposed rulemaking seeks to strengthen the incentive compensation practices at
covered institutions by better aligning employee rewards with longer-term institutional
Managing the Deposit Insurance Fund
Shortly after my tenure at the FDIC began in 2006, we moved to implement a new
law that eased statutory restrictions on the FDIC's ability to build up the DIF balance
when economic conditions were favorable. The earlier restrictions had prevented the
FDIC from charging most banks a premium based on risk when the fund balance
exceeded $1.25 per $100 of insured deposits. The 2006 reforms permitted the FDIC to
charge all banks a risk-based premium and provided additional, but limited, flexibility to
manage the size of the DIF. The FDIC changed its risk-based pricing rules in response to
the new law, but the onset of the recent crisis prevented the FDIC from increasing the
DIF balance. In all, the failure of 365 FDIC-insured institutions since year-end 2007 has
imposed total estimated losses of $83 billion on the DIF.
As in the earlier banking crisis, the sharp increase in bank failures caused the fund
balance, or its net worth, to become negative. In the recent crisis, the DIF balance turned
negative in the third quarter of 2009 and hit a low of negative $20.9 billion in the
following quarter. By that time, however, the FDIC had already moved to shore up its
resources to handle the high volume of failures and begin replenishing the fund. The
FDIC increased assessment rates at the beginning of 2009, which raised regular
assessment revenue from $3 billion in 2008 to over $12 billion in 2009 and almost $14
billion in 2010. In June 2009, the FDIC imposed a special assessment that brought in an
additional $5.5 billion from the banking industry. Furthermore, in December 2009, to
increase the FDIC's liquidity, the FDIC required that the industry prepay almost $46
billion in assessments, representing over three years of estimated assessments.
While the FDIC had to impose these measures at a very challenging time for
banks, they enabled the agency to avoid borrowing from the Treasury. The measures also
reaffirmed the longstanding commitment of the banking industry to fund the deposit
Since the FDIC imposed these measures, the DIF balance has steadily improved.
It increased throughout 2010 and stood at negative $1.0 billion as of March 31 of this
year. Barring unforeseen circumstances, the DIF balance at June 30 should again be
positive, after seven quarters in the red. The FDIC has put in place assessment rates
necessary to achieve a reserve ratio (the ratio of the fund balance to estimated insured
deposits) of 1.35 percent by September 30, 2020, as the Dodd-Frank Act requires.
The FDIC has also implemented the Dodd-Frank Act requirement to redefine the
base used for deposit insurance assessments as average consolidated total assets minus
average tangible equity. As Congress intended, the change in the assessment base, in
general, will result in shifting some of the overall assessment burden from community
banks to the largest institutions, which rely less on domestic deposits for their funding
than do smaller institutions. The result will be a sharing of the assessment burden that
better reflects the relative loss exposure to the DIF.
The Dodd-Frank Act also provided the FDIC with substantial new flexibility in
setting reserve ratio targets and paying dividends. The FDIC now has the ability to
achieve goals for deposit insurance fund management that we sought to achieve for many
years but lacked the tools to accomplish. The FDIC has used its new authority to enable
the agency to adopt policies that should maintain a positive DIF balance even during a
banking crisis while preserving steady and predictable assessment rates throughout
economic and credit cycles. The FDIC also revised its risk-based premium rules for large
banks. The new premium system for large banks goes a long way toward assessing for
risks when they are assumed, rather than when problems materialize, by calculating
assessment payments using more forward-looking measures. The system also removes
reliance on long-term debt issuer ratings consistent with the Dodd-Frank Act.
Resolution of Failed Institutions
Between 2003 and 2007, only 10 FDIC-insured institutions failed - the lowest
five-year failure total in the history of the FDIC. As it happened, this was the calm
before the storm. Since the end of 2007, the FDIC has been called upon to resolve 365
failed banks and thrifts, marking a wave of failed institutions second only to the banking
crisis of the 1980s and early 1990s. 8 The institutions that have failed since 2007 held
$659 billion in total assets and managed 30.6 million deposit accounts with $427 billion
in total deposits. These failures included some of the largest and most challenging
resolutions the FDIC has ever undertaken. While just 25 institutions failed in 2008, they
included IndyMac Bank, with $32 billion in assets, and Washington Mutual Bank, with
$299 billion in assets and some 2,239 branches located in 15 states. The total of 140
failure resolutions in 2009 included the sudden failure of Colonial Bank, a $25 billion
bank with 346 branches located in five states. Also in 2009, the FDIC successfully
resolved United Commercial Bank, an institution with 63 bank branches in the U.S., an
office located in Hong Kong, and a subsidiary bank headquartered in Shanghai, China.
Following the string of large failures in 2008 and 2009, the recent trend has been
toward the failure of smaller institutions. From 2009 to 2010, the average size of failed
institutions fell by about half, to around $600 million in assets. However, the number of
failed institutions increased in 2010 to 157. While the number of failures remains
elevated, we expect that 2010 will ultimately prove to have been the peak year for bank
failures in this cycle. Through May 20, a total of 43 institutions had been resolved so far
To meet the challenge posed by large numbers of failed institutions and the failure
of several large institutions within a relatively short timeframe, the FDIC has applied
innovative resolution strategies, effectively leveraged its existing resources, and relied on
the expertise and commitment of FDIC staff and management to ensure that failed bank
resolutions were a non-event for insured depositors and to minimize further disruptions to
other bank stakeholders and the wider financial markets.
Throughout the crisis, the FDIC has offered innovative resolution and asset sales
transactions, such as loss sharing and structured transactions, to help preserve value, to
maximize returns for the failed bank receiverships, and to return banking assets to the
private sector. In all, 253 of the 365 recent bank failures were resolved via loss sharing
resolution transactions, where the acquirer assumes most or all of the problem assets of
the failed institution and shares the losses with the FDIC. These structures provide
downside protection to investors in a risk-averse environment while preserving incentives
for the acquirer to maximize returns on those assets over time, and to modify problem
mortgages where this strategy can be shown to enhance value.
The FDIC is now also offering failed bank assets through securitizations. In July
2010, the FDIC issued a securitization of $470 million of performing single-family
mortgages. This transaction was the first single-family securitization in the history of the
FDIC and the first time the FDIC sold assets in a securitization in the current financial
crisis. The transaction broke new ground in several areas including the alignment of the
servicer's compensation with performance, independent third party oversight and the
ability to adapt servicing standards to changes in the performance of the underlying
collateral and market conditions.
The increased rate of failures has forced the FDIC to quickly scale up its
resources in bank resolution. Our Division of Resolutions and Receiverships (DRR)
began 2008 with 223 permanent employees. By December 2010, DRR's total authorized
permanent staff had increased to 442. While additional FDIC staff resources were being
hired and trained, we made use of temporary contractors to help meet the additional
staffing needs. Also, in 2008 and 2009, the FDIC Board authorized the establishment of
three Temporary Satellite Offices (TSOs), staffed with approximately 1,000 term
employees, to address the temporary increase in resolution workload in the West, the
Southeast, and the upper Midwest regions of the country. Based on projections for
declining resolution activity in the Western states, the FDIC has already announced plans
to sunset our West Coast TSO in January 2012, and we will announce plans to close the
two remaining TSOs as soon as conditions warrant.
The Role of Public Outreach
In mid-2008, in connection with the observation of our 75th anniversary, the
FDIC announced an education campaign designed to raise public awareness of federal
deposit insurance and its limits. This effort included national advertising, a multi-city
outreach effort and an award program for outstanding work in financial education. A
series of advertisements ran in selected national newspapers and magazines, encouraging
consumers to learn more about their FDIC insurance coverage, with the goal of raising
awareness of deposit insurance and instilling confidence in the stability of the insured
banking system. As part of the anniversary commemoration, advertisements were placed
in major media and online publications and I participated in public roundtables and media
interviews around the country to discuss deposit insurance, the costs and benefits of
banking services, and the importance of consumer protection in financial services.
Later in 2008, the FDIC launched a second major initiative to raise public
awareness of the benefits and limitations of federal deposit insurance through public
service announcements (PSAs) and the enhancement of our online tools that enable bank
customers to determine whether their deposits qualify for FDIC insurance. The success
of this campaign led us to extend it to Spanish language PSAs and brochures, and to
conduct further outreach to the Asian American and African American communities.
These award-winning efforts to bolster awareness of deposit insurance would prove
valuable in preserving public confidence as the number of failed institutions mounted. 9
Emergency Systemic Assistance
Following the passage of the FDIC Improvement Act (FDICIA) of 1991, the
statute governing the FDIC's resolution authority required us to undertake the least-cost
method to resolve failed institutions. Under such a scenario, insured depositors are made
whole, equity holders are wiped out, and the returns to general creditors and uninsured
depositors are determined by the level of recoveries on receivership assets. However,
FDICIA also provided emergency powers to suspend the least-cost requirement when
imposing this requirement would pose a systemic risk to the financial stability of the U.S.
Invoking this systemic risk exception required the recommendation of the FDIC Board
and the Board of Governors of the Federal Reserve System, and the approval of the
Secretary of the Treasury, in consultation with the President.
At the height of the financial crisis, in late 2008 and early 2009, uncertainty
among financial institution counterparties had created a situation of generalized
illiquidity in short-term funding markets. Perhaps the best barometer of risk aversion and
illiquidity in overnight funding markets is the so-called TED spread, or the difference
between three-month Eurodollar rates and the yield on three-month Treasury instruments.
Normally fluctuating around a level of 25 basis points, the TED spread had spiked to
levels exceeding 100 basis points with the onset of financial market turmoil in late 2007,
and then peaked at over 450 basis points in early October 2008, following the bankruptcy
of Lehman Brothers. This and other clear signs of critical illiquidity in short-term money
markets prompted the FDIC and the other federal regulatory bodies to undertake a range
of emergency measures to restore confidence and liquidity to financial markets.
On October 13, 2008, the FDIC Board voted to recommend invoking the systemic
risk exception in order to implement a Temporary Liquidity Guarantee Program (TLGP).
The TLGP improved access to liquidity through two programs: the Transaction Account
Guarantee Program (TAGP), which fully guaranteed noninterest-bearing transaction
deposit accounts above $250,000, regardless of dollar amount; and the Debt Guarantee
Program (DGP), which guaranteed eligible senior unsecured debt issued by eligible
All insured depository institutions were eligible to participate in the TAGP.
Institutions eligible to participate in the DGP included insured depository institutions,
U.S. bank holding companies, certain U.S. savings and loan holding companies, and
other affiliates of insured depository institutions that the FDIC designated as eligible
entities. Although financial markets improved significantly in the first half of 2009, the
Board subsequently extended both the DGP and TAGP since portions of the industry
were still affected by the recent economic turmoil. The deadline for issuance of
guaranteed debt was ultimately extended to October 31, 2009, with the expiration date of
the guarantee extended to as late as December 31, 2012. While the FDIC Board also
voted to extend the TAGP through the end of 2010, the Dodd-Frank Act subsequently
provided similar deposit insurance coverage for noninterest bearing transactions accounts
above the normal deposit insurance limit through the end of 2012.
The TLGP did not rely on taxpayer funding or the DIF; both the TAGP and the
DGP were paid for by direct user fees. Through year-end 2010, some $10.4 billion in
fees for debt guarantees and surcharges had been collected under the DGP, and another
$1.1 billion in fees had been collected through the TAGP. At year-end 2010, more than
5,100 participating FDIC-insured institutions reported an average of 198,361 noninterest-
bearing transaction accounts over $250,000. The deposit balances in these accounts
totaled $164 billion, of which $114 billion was guaranteed under the TAGP. Also at
year-end, some 64 participating issuers reported senior unsecured debt guaranteed under
the DGP in the amount of $247 billion.
By providing the ability to issue debt guaranteed by the FDIC, institutions were
able to extend maturities and obtain more stable unsecured funding. This calmed what
was becoming a "perfect storm" whereby creditors refused to roll their debt beyond
weeks, days or even overnight and demanded more collateral at the exact time that banks
needed these funds to continue to finance their operations. Along with the other
extraordinary measures taken by the Treasury Department and the Federal Reserve Board
in the fall of 2008, the FDIC's TLGP helped to calm market fears and encourage lending
during these unprecedented disruptions in financial markets in the U.S. and abroad. Most
important, these programs were pre-designed to have a limited life, so that the FDIC
guarantee can return to its proper, limited scope as financial market conditions normalize.
Loan Modification Programs
Since the early stages of the mortgage crisis, the FDIC has made a concerted
effort to promote the timely modification of problem mortgages as a first alternative that
can spare investors the high losses associated with foreclosure, assist families
experiencing acute financial distress, and help to stabilize housing markets where
distressed sales have resulted in a lowering of home prices in a self-reinforcing cycle.
In 2007, when the dimensions of the subprime mortgage problem were just
becoming widely known, I advocated in speeches, testimony and opinion articles that
servicers not only had the right, but the contractual obligation, to carry out modifications
that would maximize value and protect subprime borrowers from unaffordable interest-
rate resets. It was clear in most cases that doing so would benefit investors by enabling
them to avoid foreclosure costs that could run as high as 40 percent or more of the value
of the collateral. In addition, the FDIC and other federal regulators jointly hosted a series
of roundtables on the issues surrounding subprime mortgage securitizations to facilitate a
better understanding of problems and identify workable solutions for rising delinquencies
and defaults, including alternatives to foreclosure.
The FDIC had an opportunity to pioneer the implementation of such an approach
as conservator at IndyMac Federal Bank in 2008. At IndyMac, the FDIC inherited
responsibility for servicing a large pool of past due first-lien mortgages, both owned by
the bank and serviced for others. Consistent with our fiduciary duty to maximize
collections on the receivership-owned loans and to maximize recoveries for loans
serviced for others, we implemented an interest-rate and term loan modification program
to convert as many of these distressed loans as possible into performing loans that were
more affordable and sustainable over the long term, where doing so would maximize the
expected net present value (NPV) of the mortgages. In total, over 23,000 mortgages were
modified using the FDIC protocol at IndyMac, almost all of which reduced the
borrower's monthly payment by 10 percent or more.
At IndyMac, we developed some useful methods and learned some important
lessons about how to pursue modification on a large scale. We learned that modifying
loans early in their delinquency gives the best chance of success. We saw that larger
payment reductions result in more successful modifications. Among the loans modified
at IndyMac, we saw that increasing the size of the payment reduction from 10 percent to
40 percent or more can cut redefault rates by half. We also demonstrated that
communication and follow-through with borrowers is critical. If the borrower can be
contacted and the modification completed before there is an extended period of
delinquency, the chances for a successful modification are greatly enhanced. Above all,
we learned once again how important it is to keep the program simple. Modification
programs must be relatively straightforward if servicers are to be able to apply a
streamlined approach and if borrowers are to understand their options and act
The FDIC has also continued to support prudent workout arrangements through
its examination review process. In addition, we require acquirers of failed institutions
who manage mortgage loans under loss sharing agreements with the FDIC to implement
loan modification programs similar to the one developed at IndyMac.
Over the past year, with the emergence of the mortgage servicing crisis as a key
operational risk for banks and an impediment to the recovery of U.S. housing markets,
the need for effective servicing and appropriate modifications has become even more
apparent. The FDIC has consistently advocated for broad agreements among the major
stakeholders, including large mortgage servicers, their regulators, and the state attorneys
general, that would include the systematic modification of problem mortgages in order to
prevent needless foreclosures. The large backlog of seriously past-due mortgages has
created an overhang of uncertainty for our housing markets that is inhibiting the inflow of
new buyers that will be needed to help these markets move back toward a more stable
equilibrium. It is our hope that all parties to the mortgage servicing crisis will respond in
a way that both helps families stay in their homes and hastens the recovery of our housing
The FDIC Advisory Committee on Economic Inclusion
Early in my term, the FDIC Board created the Advisory Committee on Economic
Inclusion to provide advice and recommendations on expanding access to mainstream
banking services for underserved consumers. Census data show that some 17 million
adults do not have a checking or savings account, and another 43 million adults do have
an account but also rely on non-bank financial products to make ends meet. This
problem disproportionately affects specific minority groups and lower-income
consumers, and has a real impact on their household finances. The Committee's
objective is to explore ways to lower the number of underserved households and to
increase the supply of financial products targeted to these households, with an emphasis
on safety and affordability for consumers and feasibility for banks. Consisting of 20
individuals from banks, academia, government, and consumer and philanthropic groups,
the Committee has advised us on some of the initiatives at the FDIC of which I am most
proud. One of these was the FDIC Model Safe Accounts Pilot, which is currently
evaluating the feasibility of banks offering safe, low-cost, overdraft-free transactional and
savings accounts. In 2008, the Committee recommended that the FDIC publish a list of
best practices for mortgage lending to low- and moderate-income (LMI) households. 10 In
March of this year, we met again to discuss LMI mortgage lending in the wake of the
crisis and the Dodd-Frank Act.
Perhaps most notably, the Committee recommended the establishment of the
FDIC Small-Dollar Loan Pilot, a case study designed to illustrate how banks can
profitably offer affordable small-dollar loans as an alternative to high-cost credit
products, such as payday loans and fee-based overdraft protection. 11 Under the pilot,
some 28 volunteer institutions made more than 34,400 small-dollar loans with a total
principal balance of $40.2 million. Most pilot bankers indicated that small dollar loans
were a useful business strategy for developing or retaining long-term relationships with
consumers. Following the conclusion of the Pilot, we developed a Small-Dollar Loan
Template for others to use, that is relatively simple to implement and requires no
particular technology or other major infrastructure investment. Moreover, the template
could help banks better adhere to existing regulatory guidance in offering alternatives to
fee-based overdraft protection programs.
These initiatives are integral to the FDIC's mission to promote public confidence
in the banking system. Economic inclusion is about ensuring that all Americans have
access to safe, secure, and affordable banking services so that everyone has the
opportunity to save, build assets, and achieve financial security.
The FDIC Advisory Committee on Community Banking
In May 2009, the FDIC Board of Directors established the FDIC Advisory
Committee on Community Banking to provide the FDIC with advice and guidance on a
broad range of important policy issues impacting small community banks throughout the
country, as well as the local communities they serve, with a focus on rural areas. The
Advisory Committee has been able to provide valuable input on examination policies and
procedures, credit and lending practices, deposit insurance assessments, insurance
coverage issues, regulatory compliance matters, and obstacles to the continued growth
and ability of community banks to extend financial services in their local markets in the
current environment. As discussed later in my testimony, the Advisory Committee has
played an integral role in addressing issues related to regulatory burden that can
disproportionately affect community banks.
In the six meetings we have held with the Advisory Committee since late 2009,
we have considered the impact of the financial crisis on community banks, how the
financial reform legislation affects community banks, options for funding the deposit
insurance system, a variety of examination issues, bank resolutions, and the future role of
the community banks as an engine of growth for small businesses and the U.S. economy.
FDIC Organizational Changes
As part of the process of preparing the FDIC to effectively confront future
challenges, the FDIC Board of Directors has undertaken a number of organizational
To focus on our expanded responsibilities to monitor and, potentially, resolve
Systemically Important Financial Institutions (SIFIs), we established the Office of
Complex Financial Institutions (OCFI). The OCFI will be responsible for the FDIC's
role in the oversight of bank holding companies with more than $100 billion in assets and
their corresponding insured depository institutions as well as for non-bank financial
companies designated as systemically important by the Financial Stability Oversight
Council (FSOC). The OCFI, in concert with the Federal Reserve Board, also will be
responsible for reviewing resolution plans and credit exposure reports developed by the
SIFIs. Also, the OCFI will be responsible for implementing and administering the
FDIC's SIFI resolution authority and for conducting special examinations on SIFIs under
the FDIC's backup examination and enforcement authority.
In addition, we reorganized our existing supervisory operations to create separate
divisions for safety and soundness supervision and consumer protection. The Division of
Risk Management Supervision is responsible for the FDIC's supervision and enforcement
of safety and soundness standards at FDIC supervised institutions. The Division of
Depositor and Consumer Protection (DCP) manages the FDIC's many responsibilities for
depositor and consumer protection, including effective coordination with CFPB. This
reorganization reflects the importance of dedicated focus on both risk management and
consumer protection supervision and will enable the FDIC to best carry out its mission in
the regulatory and market environment following the passage of the Dodd-Frank Act.
DCP has responsibility for compliance examination and enforcement programs as
well as the depositor protection and consumer and community affairs activities that
support that program. Relative to the CFPB, DCP will have a clear delineation of
authority to enforce consumer protection laws for institutions with $10 million or less in
assets. DCP will work closely with the CFPB on the development of consumer
Finally, consistent with the requirements of Section 342 of the Dodd-Frank Act,
the FDIC established a new Office of Minority and Women Inclusion (OMWI) in
January. This new office assumed the responsibilities and employees of the FDIC's
former Office of Diversity and Economic Opportunity, allowing for a smooth transition
and no disruption in the FDIC's ongoing diversity and outreach efforts. The new
organizational structure will also enable us to undertake some important new initiatives in
this area. We are in the process of hiring an OMWI Deputy Director whose primary
responsibility is overseeing enhanced contractor outreach and minority and women
inclusion efforts, developing standards for assessing diversity policies and practices of
regulated entities and establishing criteria for dealing with contractors who fail to meet
standards for inclusion and diversity in their workforces. In addition, an OMWI Steering
Committee has been created to promote coordination and awareness of OMWI
responsibilities across the FDIC and ensure that they are managed in the most effective
Current Condition of the Financial Services Industry
FDIC-insured institutions recorded six consecutive years of record earnings
starting in 2001, culminating in net income of $145.2 billion in 2006. However, this
short-term profitability was masking an underlying weakness in credit quality that would
emerge starting in 2007 as real estate markets weakened and the U.S. economy moved
toward recession. By 2008, annual industry earnings had fallen to just $4.5 billion, and
in 2009, the industry recorded a net loss of $9.8 billion - the largest in its history.
Quarterly provisions for loan losses taken by FDIC-insured institutions since the end of
2007 now total just under $645 billion, equal to over 8 percent of the book value of loans
outstanding at the beginning of the period.
During 2010, the industry began reporting progressively lower levels of loss
provisions, which led to a stabilization of industry earnings. FDIC-insured institutions
recorded annual net income of $86.2 billion in 2010, still well below all-time highs but
the highest level since before the recession started. New data show that industry financial
performance strengthened further in the first quarter of 2011. Earnings rose and asset
quality indicators improved compared to the last quarter and year-ago levels. However,
problem assets remain at high levels, and revenue has been relatively flat for several
Banks and thrifts reported aggregate net income of $29 billion in the first quarter,
which was 67 percent more than in first quarter 2010 and was the highest quarterly
income in nearly three years. Industry earnings have registered year-over-year gains for
seven consecutive quarters. More than half of institutions reported improved earnings in
the quarter from a year ago, and fewer institutions were unprofitable.
The main driver of earnings improvement continued to be reduced provisions for
loan losses. First quarter 2011 provisions for losses totaled $20.6 billion, which were
about 60 percent below a year ago. This was the sixth consecutive quarter that provisions
declined from year-ago levels. Reduced provisions for losses reflect general
improvement in asset quality indicators. The volume of noncurrent loans declined for the
fourth consecutive quarter, and net charge-offs declined for the fifth consecutive quarter.
All major loan types had declines in volumes of noncurrent loans and net charge-offs.
However, the ratio of noncurrent loans to total loans of 4.71 percent remains above levels
seen in the crisis of the late 1980s and early 1990s.
The positive contribution from reduced provisions outweighed the negative effect
of lower revenue at many institutions. Net operating revenue - net interest income plus
total noninterest income - was $5.6 billion lower than a year ago. This was only the
second time in the 27 years for which data are available that the industry has reported a
year-over-year decline in quarterly net operating revenue. Both net interest income and
total noninterest income reflected aggregate declines. More than half of all institutions
reported year-over-year increases in net operating revenue, but eight of the ten largest
institutions reported declines.
The relatively flat revenues of recent quarters, in part, reflect reduced loan
balances. Loan balances have declined in ten of the past eleven quarters, and the 1.9
percent decline in the first quarter was the second largest percentage decline in the history
of the data. Balances fell in most major loan categories. Recent surveys suggest that
banks have been starting to ease lending standards, but standards remain significantly
tighter than before the crisis. Surveys also indicate that borrower demand remains
sluggish. Growth of well-underwritten loans will be essential not only for banks to build
revenues but also to provide a stronger foundation for economic recovery.
The number of "problem banks" leveled off in the quarter at 888, with total assets
of $397 billion. The rate of growth in the number of problem banks has slowed
considerably since the end of 2009. As we have repeatedly stated, we believe that the
number of failures peaked in 2010, and we expect both the number and total assets of this
year's failures in 2011 to be lower than last year's.
Near-Term Regulatory Priorities
As I have testified several times over the past year, the Dodd-Frank Act, if
properly implemented, will not only reduce the likelihood of future crises, but will
provide effective tools to address large company failures when they do occur without
resorting to taxpayer-supported bailouts or damaging the financial system.
Our highest near-term regulatory priorities are two-fold: 1) implementing the
various regulatory mandates that make up the new resolution framework for SIFIs, and 2)
strengthening and harmonizing capital and liquidity requirements for banks and bank
holding companies under the Basel III protocol and Section 171 of the Dodd Frank Act,
the Collins Amendment.
SIFI Resolutions Framework
The new SIFI resolution framework has three basic elements. First, the new
FSOC, chaired by the Treasury Secretary and made up of the other financial regulatory
agencies, is responsible for designating SIFIs based on criteria that are now being
established by regulation. Once designated, the SIFIs will be subject to heightened
supervision by the Federal Reserve Board and required to maintain detailed resolution
plans that demonstrate they are resolvable under bankruptcy-not bailout-if they should
run into severe financial distress. Finally, the law provides for a third alternative to
bankruptcy or bailout-an Orderly Liquidation Authority, or OLA, that gives the FDIC
many of the same powers over SIFIs that we have long used to manage failed-bank
I would like to clarify some misconceptions about these authorities and highlight
some priorities I see for their effective implementation.
It is important at the outset to clarify that being designated as a SIFI will in no
way confer a competitive advantage by anointing an institution as Too Big to Fail. SIFIs
will be subject to heightened supervision and higher capital requirements. They will also
be required to maintain resolution plans and could be required to restructure their
operations if they cannot demonstrate that they are resolvable. In light of these
significant regulatory requirements, the FDIC has detected absolutely no interest on the
part of any financial institution in being named a SIFI. Indeed, many institutions are
vigorously lobbying against such a designation.
We believe that the ability of an institution to be resolved in a bankruptcy process
without systemic impact should be a key consideration in designating a firm as a SIFI.
Further, we believe that the concept of resolvability is consistent with several of the
statutory factors that the FSOC is required to consider in designating a firm as systemic,
those being size, interconnectedness, lack of substitutes and leverage. If an institution
can reliably be deemed resolvable in bankruptcy by the regulators, and operates within
the confines of the leverage requirements established by bank regulators, then it should
not be designated as a SIFI.
What concerns us, however, is the lack of information we might have about
potential SIFIs that may impede our ability to make an accurate determination of
resolvability before the fact. This potential blind spot in the designation process raises
the specter of a "deathbed designation" of a SIFI, whereby the FDIC would be required to
resolve the firm under a Title II resolution without the benefit of a resolution plan or the
ability to conduct advance planning, both of which are critical to an orderly resolution.
This situation, which would put the resolution authority in the worst possible position,
should be avoided at all costs. Thus, we need to be able to collect detailed information
on a limited number of potential SIFIs as part of the designation process. We should
provide the industry with some clarity about which firms will be expected to provide the
FSOC with this additional information, using simple and transparent metrics such as firm
size, similar to the approach used for bank holding companies under the Dodd-Frank Act.
This should reduce some of the mystery surrounding the process and should eliminate
any market concern about which firms the FSOC has under its review. In addition, no
one should jump to the conclusion that by asking for additional information, the FSOC
has preordained a firm to be "systemic." It is likely that, after we gather additional
information and learn more about these firms, relatively few of them will be viewed as
systemic, especially if the firms can demonstrate their resolvability in bankruptcy at this
stage of the process.
The FSOC issued an Advanced Notice of Proposed Rulemaking (ANPR) last
October and a Notice of Proposed Rulemaking (NPR) on January 26, 2011 describing the
processes and procedures that will inform the FSOC's designation of nonbank financial
companies under the Dodd-Frank Act. We recognize the concerns raised by several
commenters to the FSOC's ANPR and NPR about the lack of detail and clarity
surrounding the designation process. This lack of specificity and certainty in the
designation process is itself a burden on the industry and an impediment to prompt and
effective implementation of the designation process. That is why it is important that the
FSOC move forward and develop some hard metrics to guide the SIFI designation
process. The sooner we develop and publish these metrics, the sooner this needless
uncertainty can be resolved. The FSOC is in the process of developing further
clarification of the metrics for comment that will provide more specificity as to the
measures and approaches we are considering using for designating non-bank firms.
SIFI Resolution Plans
A major - and somewhat underestimated - improvement in the SIFI resolution
process is the requirement in the Dodd-Frank Act for firms designated as SIFIs to
maintain satisfactory resolution plans that demonstrate their resolvability in a crisis.
When a large, complex financial institution gets into trouble, time is the enemy.
The larger, more complex, and more interconnected a financial company is, the longer it
takes to assemble a full and accurate picture of its operations and develop a resolution
strategy. By requiring detailed resolution plans in advance, and authorizing an on-site
FDIC team to conduct pre-resolution planning, the SIFI resolution framework regains the
informational advantage that was lacking in the crisis of 2008.
The FDIC recently released a paper detailing how the filing of resolution plans,
the ability to conduct advance planning, and other elements of the framework could have
dramatically changed the outcome if they had been available in the case of Lehman. 12
Under the new SIFI resolution framework, the FDIC should have a continuous presence
at all designated SIFIs, working with the firms and reviewing their resolution plans as
part of their normal course of business. Thus, our presence should in no way be seen as a
signal of distress. Instead, it is much more likely to provide a stabilizing influence that
encourages management to more fully consider the downside consequences of its actions,
to the benefit of the institution and the stability of the system as a whole.
The law also authorizes the FDIC and the Federal Reserve Board to require, if
necessary, changes in the structure or activities of these institutions to ensure that they
meet the standard of being resolvable in a crisis. In my opinion, the ultimate
effectiveness of the SIFI resolution framework will depend in large part on the
willingness of the FDIC and the Federal Reserve Board to actively use this authority to
require organizational changes necessary to the ability to resolve SIFIs.
As currently structured, many large banks and nonbank SIFIs maintain thousands
of subsidiaries and manage their activities within business lines that cross many different
organizational structures and regulatory jurisdictions. This can make it very difficult to
implement an orderly resolution of one part of the company without triggering a costly
collapse of the entire company. To solve this problem, the FDIC and the Federal Reserve
Board must be willing to insist on organizational changes that better align business lines
and legal entities well before a crisis occurs. Unless these structures are rationalized and
simplified in advance, there is a real danger that their complexity could make a SIFI
resolution far more costly and more difficult than it needs to be.
Such changes are also likely to have collateral benefits for the firm's management
in the short run. A simplified organizational structure will put management in a better
position to understand and monitor risks and the inter-relationships among business lines,
addressing what many see as a major challenge that contributed to the crisis. That is
why-well before the test of another major crisis-we must define high informational
standards for resolution plans and be willing to insist on organizational changes where
necessary in order to ensure that SIFIs meet the standard of resolvability.
The Orderly Liquidation Authority (OLA)
There also appear to be a number of popular misconceptions as to the nature of
the Orderly Liquidation Authority. Some have called it a bailout mechanism, while
others see it as a fire sale that will destroy the value of receivership assets. Neither is
true. The OLA strictly prohibits bailouts. While it is positioned as a backup plan in
cases where bankruptcy would threaten to result in wider financial disorder, the OLA is
actually a better-suited framework for resolving claims against failed financial
institutions. It is a transparent process that operates under fixed rules that prohibit any
bailout of shareholders and creditors or any other type of political considerations, which
can be a legitimate concern in the case of an ad-hoc emergency rescue program. Not
only would the OLA work faster and preserve value better than bankruptcy, but the
regulatory authorities who will administer the OLA are in a far better position to
coordinate with foreign regulators in the failure of an institution with significant
The FDIC has made considerable progress in forging bilateral agreements with
other countries that will facilitate orderly cross-border resolutions. In addition, we
currently co-chair the Cross Border Resolutions Group of the Basel Committee. It is
worth noting that not a single other advanced country plans to rely on bankruptcy to
resolve large, international financial companies. Most are implementing special
resolution regimes similar to the OLA. Under the OLA, we can buy time, if necessary,
and preserve franchise value by running an institution as a bridge bank, and then
eventually sell it in parts or as a whole. It is a powerful tool that greatly enhances our
ability to provide continuity and minimize losses in financial institution failures while
imposing any losses on shareholders and unsecured creditors.
Under the OLA, the FDIC can conduct advance planning, temporarily operate and
fund an institution under government control to preserve its value as a going concern, and
quickly pay partial recoveries to creditors through advance dividends, as we have long
done in failed-bank receiverships. The result will be a faster resolution of claims against
a failed institution, smaller losses for creditors, reduced impact on the wider financial
system, and an end to the cycle of bailouts.
The history of the recent crisis is replete with examples of missed opportunities to
sell or recapitalize troubled institutions before they failed. But with bailout now off the
table, management will have a greater incentive to bring in an acquirer or new investors
before failure, and shareholders and creditors will have more incentive to go along with
such a plan in order to salvage the value of their claims. These new incentives to be more
proactive in dealing with problem SIFIs will reduce their incidence of outright failure and
also lessen the risk of systemic effects arising from such failures.
In summary, the measures authorized under the Dodd-Frank Act to create a new,
more effective SIFI resolution authority will go far toward reducing leverage and risk-
taking in our financial system by subjecting every financial institution, no matter its size
or degree of interconnectedness, to the discipline of the marketplace. Prompt and
effective implementation of these measures will be essential to constraining the tendency
toward excess leverage in our financial system and our economy, and in creating
incentives for safe and sound practices that will promote financial stability in the future.
In light of the ongoing concern about the burden arising from regulatory reform, I
think it is worth mentioning that none of these measures to promote the resolvability of
SIFIs will have any impact at all on small and midsized financial institutions except to
reduce the competitive disadvantage they have long encountered with regard to large,
complex institutions. There are clear limits to what can be accomplished by prescriptive
regulation. That is why promoting the ability of market forces to constrain risk taking
will be essential if we are to achieve a more stable financial system in the years ahead.
Strengthening Capital Standards
At the height of the crisis, the large intermediaries that make up the core of our
financial system had too little capital to maintain market confidence in their solvency.
The crisis also showed how leverage can be masked through off-balance-sheet positions,
implicit guarantees, securitization structures, and derivatives positions. While bank
capital requirements are critically important to financial stability, the problem of
excessive leverage in the financial system extends well beyond bank balance sheets to a
wide range of nonbank financial companies and special-purpose vehicles.
Last year witnessed two landmarks in the history of bank capital regulation: the
international Basel III agreement and Section 171-the Collins Amendment-of the
Dodd Frank Act. Basel III strengthens the definition and increases the amount of bank
capital so that banks will be able to withstand downturns and continue to lend. Basel III
also requires capital for risks that the old rules did not adequately address and establishes
an international leverage ratio. The Collins Amendment ensures large banks will be
required to hold at least as much capital in proportionate terms as would a smaller bank
with similar exposures.
Implementing these significant improvements in capital regulation is, in my view,
one of the most important near term regulatory priorities. I hope that a Final Rule
implementing aspects of the Collins Amendment will be agreed upon before my term as
Chairman comes to an end. Agency staffs are also drafting an NPR that will seek
comment on the implementation of Basel III in the U.S., with publication targeted for
later this year.
Why are these proposed changes in capital regulation so important? A first and
obvious point is that banking and financial crises have devastating effects on economic
growth and job creation. Maintaining strong capital levels consistent with a safe-and-
sound banking system both promotes long-term economic growth and makes bank
lending less procyclical.
Skeptics argue that requiring banks to hold greater amounts of higher-cost equity
capital will raise the cost of credit and impair economic performance. 13 But recent
studies that also account for the social cost of debt financing relative to equity show that
higher capital requirements will have a relatively modest effect on the cost of credit and
economic activity, while making the financial system more resilient to shocks. 14
Our financial system was so vulnerable heading into the crisis because of
shortcomings in capital regulation. Regulatory definitions of what counted as capital
were too permissive, the level of high-quality capital was too low, our rules missed
important risks, and a dangerous precedent-growing reliance by the regulators on
banks' own risk estimates-was gaining momentum.
For over twenty years, there was international agreement that Tier 1 capital
should be at least four percent of risk-weighted assets. Since four percent Tier 1 capital
needed to consist "predominantly" of common equity and if "predominantly" means "at
least half" (and it was in some countries), a bank could theoretically have as little as two
percent common equity. The rest of the Tier 1 requirement could be met with hybrid
debt or other non-loss absorbing capital. For example, common equity could include
substantial amounts of deferred tax assets that are not available to absorb loss when a
bank is unprofitable, mortgage servicing rights and other intangible assets whose values
may be highly sensitive to assumptions, minority interests in consolidated subsidiaries
that are not available to absorb loss outside the subsidiary, and equity investments in
financial firms-interlinked exposures that increase contagion risk in the system. All of
these deficiencies of the capital definition were exposed during the crisis.
While the definition of Tier 1 capital itself represents something of a mixed bag,
the minimum Tier 1 capital ratio - four percent of risk weighted assets - is also subject to
miscalculation that could leave the institution holding too little capital. Here again, the
crisis demonstrated significant shortcomings with our rules. Complex and illiquid
securitization exposures and OTC derivatives exposures in trading books required little
capital. Some off-balance sheet vehicles (such as some Structured Investment Vehicles
or SIVs) avoided capital requirements altogether. In addition, 2004 Basel II's advanced
approaches abandoned fixed capital requirements by loan category and allowed banks to
calculate their risk-based capital requirements based on their own estimates of risk.
The FDIC's analysis showed the advanced approaches would significantly reduce
capital requirements. The U.S. Quantitative Impact Study conducted in 2004-2005
validated our concerns: the 26 large organizations participating estimated that their Tier
1 capital requirements would drop by a median 31 percent compared to the agencies'
general risk-based capital rules. For residential mortgages, widely agreed at the time to
pose little risk, banks' own models produced median capital drops of almost 73 percent.
The agencies' analysis also showed that different banks were estimating widely different
capital requirements for loans with similar risk characteristics, an illustration of the
underlying subjectivity of the advanced approaches.
Other countries acted with dispatch to implement the advanced approaches,
without benefit of any objective constraint on bank leverage. Throughout the crisis and
its aftermath, capital requirements in most European countries are lower under the
advanced approaches than they were under Basel I, and often much lower.
I am proud of the FDIC's insistence that in the U.S. banks remain subject to the
leverage requirements established by our statutory Prompt Corrective Action regulations,
and that the transition to the advanced approaches would be gradual and subject to
significant safeguards. Many large banks criticized us for taking that stand. But imagine
if we had implemented the advanced approaches promptly in 2004, with all capital floors
phased out in two years as originally scheduled by the Basel Committee. Large U.S.
banking organizations almost certainly would have entered the crisis with far less capital
to absorb losses, which would have caused even more failures and more retrenchment in
In a speech before the International Conference of Bank Supervisors in Merida,
Mexico in 2006, when I called for an international leverage ratio, the idea was summarily
dismissed. By December, 2010, however, the Basel Committee finalized an international
leverage ratio standard that is in some ways more stringent than our U.S. standard.
This policy shift reflects, of course, the lessons of the crisis about the dangers of
excessive leverage. The development of the international leverage ratio, and the rest of
the stronger capital standards of Basel III, also reflects the efforts of the men and women
of the FDIC and our fellow banking regulators who worked tirelessly to negotiate these
The second landmark in capital regulation is Section 171 of the Dodd Frank
Act-the Collins Amendment. In my view, this is the single most important provision of
the Act for strengthening the capital of the U.S. banking system and leveling the
competitive playing field between large and small U.S. banks. Section 171 essentially
says that risk-based and leverage capital requirements for large banks, bank holding
companies and nonbanks supervised by the Federal Reserve Board may not be lower than
the capital requirements that apply to thousands of community banks nationwide.
More is on the agenda. The Basel Committee is developing capital standards for
the most systemically important institutions that would augment the standards announced
in December, 2010. These standards must be met with the same tangible common equity
that Basel III requires for the new minimum standard for common equity capital.
Allowing convertible debt to meet these standards suffers from a number of potential
problems. Conversion in a stressed situation could trigger a run on the institution,
downstream losses to holders of the debt, and potentially feed a crisis. Reliance on
innovative regulatory capital is something that has been tried with Trust Preferred
Securities. During the crisis, those securities did not absorb losses on a going concern
basis and served as an impediment to recapitalizations. Regulators should avoid such
devices in the future, and instead rely on tangible common equity.
Minimizing Regulatory Burden
The FDIC recognizes that while the changes required by the Dodd-Frank Act are
necessary to establish clear rules that will ensure a stable financial system, these changes
must be implemented in a targeted manner to avoid unnecessary regulatory burden. We
are working on a number of fronts to achieve that necessary balance.
The FDIC is particularly interested in finding ways to eliminate unnecessary
regulatory burden on community banks, whose balance sheets are much less complicated
than those of the larger banks. At the January 20 meeting of the FDIC's Advisory
Committee on Community Banking, we engaged the members - nearly all bankers - in a
full and frank discussion of other ways to ease the regulatory burden on small
institutions. We discussed ways of analyzing the impact of new regulations on
community banks, how questionnaires and reports can be streamlined through
automation, how to keep bank reporting requirements focused on the items most essential
to risk management, and ways that bankers can communicate their concerns in this area
to FDIC officials.
Above all, it is important to emphasize to small and mid-sized financial
institutions that the Dodd-Frank Act reforms are not intended to impede their ability to
compete in the marketplace. On the contrary, we expect that these reforms will do much
to restore competitive balance to the marketplace by restoring market discipline and
appropriate regulatory oversight to systemically important financial companies, many of
which received direct government assistance in the recent crisis.
Addressing Future Economic Challenges
The task of restoring the normal functioning of our financial markets and
institutions remains incomplete. The implementation of reforms under the Dodd-Frank
Act will go a long way toward restoring long-term confidence and stability to our
financial system. We also face a number of broader economic policy challenges, both in
the near term and over the longer term. This section outlines two areas where
policymakers urgently need to focus their attention if we are to secure the recovery and
reduce the likelihood of future economic instability.
Securing the Recovery in U.S. Housing Markets
High risk mortgage lending and shortcomings in consumer protections for
mortgage borrowers were among the most important underlying causes of the housing
bubble and the financial crisis that resulted. Not only did the proliferation of high-risk
subprime and nontraditional mortgage products help to push home prices up during the
boom, but excessive reliance on foreclosure as a remedy to default has helped to push
home prices down since the peak of the market over four years ago. While the U.S.
economy is in its eighth quarter of expansion, mortgage markets remain deeply mired in
credit distress and private securitization markets remain largely frozen. Serious
weaknesses identified with mortgage servicing and foreclosure documentation have
introduced further uncertainty into this already fragile market. The FDIC has
emphasized the need for specific changes to address the most glaring deficiencies in
servicing practices, including a single point of contact for distressed borrowers,
appropriate write-downs of second liens, and servicer compensation structures that are
aligned with effective loss mitigation.
The FDIC is especially concerned about a number of related problems with
servicing and foreclosure documentation. "Robo-signing" is the use of highly-automated
processes by some large servicers to generate affidavits in the foreclosure process without
the affiant having thoroughly reviewed facts contained in the affidavit or having the
affiant's signature witnessed in accordance with state laws. The other problem involves
some servicers' inability to establish their legal standing to foreclose, since under current
industry practices, they may not be in possession of the necessary documentation
required under State law. These are not really separate issues; they are simply the most
visible of a host of related, unresolved problems in the mortgage servicing industry.
As you know, even though the FDIC is not the primary federal regulator for the
largest loan servicers, our examiners participated with other regulators in horizontal
reviews of these servicers, as well as two companies that facilitate the loan securitization
process. In these reviews, federal regulators cited "pervasive" misconduct in foreclosures
and significant weaknesses in mortgage servicing processes.
Unfortunately, the horizontal review only looked at processing issues. Since the
focus was so narrow, we do not yet really know the full extent of the problem. The
Consent Order, discussed further below, requires these servicers to retain independent,
third parties to review residential mortgage foreclosure actions and report the results of
those reviews back to the regulators. However, we have heard concerns regarding the
thoroughness and transparency of these reviews, and we continue to press for a
comprehensive approach to this "look back."
These servicing problems continue to present significant operational risks to
mortgage servicers. Servicers have already encountered challenges to their legal standing
to foreclose on individual mortgages. More broadly, investors in securitizations have
raised concerns about whether loan documentation for transferred mortgages fully
conforms to applicable laws and the pooling and servicing agreements governing the
securitizations. If investor challenges to documentation prove meritorious, they could
result in "putbacks" of large volumes of defaulted mortgages to originating institutions.
There have been some settlements regarding loan buyback claims with the GSEs
and some institutions have reserved for some of this exposure; however, a significant
amount of this exposure has yet to be quantified. The extent of the loss cannot be
determined until there is a comprehensive review of the loan files and documentation of
the process dealing with problem loans. We also believe that the FSOC needs to consider
the full range of potential exposure and the related impact on the industry and the real
In April 2011, the Federal banking agencies ordered fourteen large mortgage
servicers to overhaul their mortgage-servicing processes and controls, and to compensate
borrowers harmed financially by wrongdoing or negligence. The enforcement orders
were only a first step in setting out a framework for these large institutions to remedy
deficiencies and to identify homeowners harmed as a result of servicer errors. The
enforcement orders do not preclude additional supervisory actions or the imposition of
civil money penalties. Also, a collaborative settlement effort continues between the State
Attorneys General and federal regulators led by the U.S. Department of Justice. It is
critically important that lenders fix these problems soon to contain litigation risk and
remedy the foreclosure backlog, which has become the single largest impediment to the
recovery of U.S. housing markets.
Controlling the Growth in U.S. Federal Debt
The banking industry today is very focused on credit risk. Over the last three
years, FDIC-insured institutions have set aside over $640 billion in loan loss provisions
and, in the process, written off more than half a trillion dollars in bad loans. This is by
far the most severe credit event in our modern history. But even as institutions are
focused on cleaning up balance sheets and building capital, the FDIC is encouraging
them to remain focused on what could be the next major threat to financial stability -
interest rate risk at depository institutions. Since the liability side of the bank balance
sheet is typically shorter in duration than the asset side, banks tend to be adversely
affected by rising interest rates. During a prolonged period of very low short-term
interest rates and a steep yield curve, institutions may be tempted to make money by
essentially borrowing short and lending long. However, structuring the bank portfolio in
this way risks increasing the institution's vulnerability to losses in the event of rising
The FDIC is actively addressing the need for heightened measures to manage
interest rate risk at this critical stage of the interest rate cycle. In January 2010 we issued
a Financial Institution Letter (FIL) clarifying our expectations that FDIC-supervised
institutions will manage interest rate risk using policies and procedures commensurate
with their complexity, business model, risk profile, and scope of operations. 15 That same
month, the FDIC hosted a Symposium on Interest Rate Risk Management that brought
together leading practitioners in the field to discuss the challenges facing the industry in
this area. 16
Effective management of interest rate risk assumes a heightened importance in
light of the recent high rates of growth in U.S. government debt -- the yield on which
represents the benchmark for determining private interest rates all along the yield curve.
Total U.S. federal debt has doubled in the past seven years to over $14 trillion, or more
than $100,000 for every American household. This growth in federal borrowing is the
result of both the temporary effects of the recession on federal revenues and outlays and a
long-term structural deficit related to federal entitlement programs.
The U.S. has long enjoyed a unique status among sovereign issuers by virtue of its
economic strength, its political stability, and the size and liquidity of its capital markets.
Accordingly, international investors have long viewed U.S. Treasury securities as a
haven, particularly during times of financial market uncertainty. However, as the amount
of publicly-held U.S. debt continues to rise, and as a rising portion of that debt comes to
be held by the foreign sector (about half as of September 2010), there is a risk that
investor sentiment could at some point turn away from dollar assets in general and U.S.
Treasury obligations in particular.
With more than 70 percent of U.S. Treasury obligations held by private investors
scheduled to mature in the next five years, an erosion of investor confidence would likely
lead to sharp increases in government and private borrowing costs. As recent events in
Greece and Ireland have shown, such a reversal in investor sentiment could occur
suddenly and with little warning. If investors were to similarly lose confidence in U.S.
public debt, the result could be higher and more volatile long-term interest rates, capital
losses for holders of Treasury instruments, and higher funding costs for depository
institutions. Household and business borrowers of all types would pay more for credit,
resulting in a slowdown in the rate of economic growth if not outright recession.
Over the past year, the U.S. fiscal outlook has assumed a much larger importance
in policy discussions and the political process. Members of Congress, the
Administration, and the Presidential Commission on Fiscal Responsibility and Reform
have all offered proposals for addressing the long-term fiscal situation, but political
consensus on a solution appears elusive at this time. It is likely that the capital markets
themselves will continue to apply increasing pressure until a credible solution is reached.
Already, the cost for bond investors and others to purchase insurance against a default by
the U.S. government has risen from just 2 basis points in January 2007 to a current level
of 42 basis points.
Financial stability critically depends on public and investor confidence.
Developing policies that will clearly demonstrate the sustainability of the U.S. fiscal
situation will be of utmost importance in ensuring a smooth transition from today's
historically low interest rates to the higher levels of interest rates that are inevitable in
coming years. Government policies to slow the growth in U.S. government debt will be
essential to lessening the impact of this shock and reducing the likelihood that it will
result in a costly new round of financial instability. In short, there is no greater threat to
our future economic security and financial stability than an inability to control the size of
U.S. government debt.
But as strongly as I feel about this issue, I feel just as strongly that a technical
default on U.S. government obligations would prove to be calamitous. Investor
confidence in U.S. Treasury obligations is absolutely vital to domestic and global
financial stability and cannot be taken for granted. In the end, that confidence is based
solely on the belief that policymakers will do whatever is necessary to make good on the
nation's financial obligations. Any signal to the contrary risks permanently destroying
the inviolable trust that investors the world over have placed in this nation for more than
two centuries. I urge Congress to reaffirm this trust by committing to a responsible
increase in the debt ceiling.
Chairman Capito and members of the Committee, I have provided today a fairly
comprehensive account of the causes of the crisis, the FDIC's response to the crisis, the
implementation of regulatory reform, and some important economic challenges that still
lie ahead. As I conclude, I would like to share with you one of the most important
lessons I have drawn from my experience as FDIC Chairman. It is that the most
important attribute of effective regulation is the political courage to stand firm against
weak practices and excessive risk taking in the good times. It is during a period of
prosperity that the seeds of crisis are sown. It is then that overwhelming pressure is
placed on regulators to relax capital standards, to permit riskier loan products, to allow
higher concentrations of risk on the balance sheet and permit the movement of risky
assets off the balance sheet, where they continue to pose a risk to stability.
The history of the crisis shows many examples when regulators acted too late, or
with too little conviction, when they failed to use authorities they already had or failed to
ask for the authorities they needed to fulfill their mission. As the crisis developed, too
many in the regulatory community were too slow to acknowledge the danger, and were
too slow to act in addressing it. The fact is, regulators are never going to be popular or
glamorous figures, whether they act in a timely manner to forestall a crisis or if they fail
to act and allow it to take place. The best they can hope to achieve is the knowledge that
they exercised the statutory authority entrusted to them in good faith and to its fullest
effect in the interest of financial stability, without regard to the political consequences.
While I share the sense that the worst is past for this economic cycle, the outcome
of the next financial crisis is already being determined by decisions regulators are making
today in the Dodd-Frank Act implementation process. The Dodd-Frank Act provides the
tools to restore market discipline and put an end to the cycle of government bailouts
under Too Big to Fail. These tools will be effective-and the large, systemically-
important institutions will be resolvable-in the next crisis only if regulators show the
courage today to fully exercise their authorities under the law.
For example, no financial firm wants to be designated as a SIFI, and there is even
a great deal of resistance to the collection of information during the SIFI designation
process. But we must have this information so that we can be assured that we will not be
faced with the need to invoke the orderly resolution authority in a crisis without the
benefit of advance planning and a well-considered resolution plan. Similarly, the success
of the SIFI resolution framework will critically depend on the willingness of the FDIC
and the Federal Reserve Board to actively use their authority to require organizational
changes at SIFIs that better align business lines and legal entities well before a crisis
occurs. Unless structures are rationalized and simplified in advance, there is a real
danger that their complexity could make a SIFI resolution far more costly and more
difficult than it needs to be.
These authorities are being shaped now in the interagency rule-making process.
If properly implemented, these measures can make our financial system significantly
more stable by restoring market discipline to systemically-important institutions. If we
lack the political courage to insist on these measures now, when market conditions are
relatively calm, we will have no hope of preventing bailouts in the next crisis.
I have also emphasized in this testimony that strong capital standards are of
fundamental importance in maintaining a safe-and-sound banking system that supports
economic growth. Capital standards play a central role in preserving financial stability.
Well-defined and objective capital requirements do not depend for their operation on the
ability of supervisors to foresee risks that are not yet evident. Supervisory processes will
always lag innovation and risk-taking to some extent, and restrictions on activities can be
difficult to define and enforce. Hard and fast objective capital standards, on the other
hand, are easier for supervisors to enforce, and provide an additional cushion of loss
absorbency when mistakes are made, as will inevitably be the case.
We have already experienced a great deal of political resistance to higher capital
requirements from industry representatives claiming that they will stifle growth and
derail the expansion. These claims ignore the enormous economic costs of having too
little capital coming into this crisis, as well as new research showing that the high social
cost of debt financing argues for a more conservative approach to financing financial and
economic activity in the years ahead.
Thank you, and I would be glad to take your questions.
1 Reinhart, Carmen and Ken Rogoff. This Time Is Different: Eight Centuries of Financial Folly. Princeton: Princeton University Press. 2009. p. xxv.
9 "FDIC: Celebrating 75 Years, Not a Penny Lost" won PRWeek's Public Sector Campaign of the Year in 2009. "The More You Know, the Safer Your Money" won PRWeek's Public Sector Campaign of the Year in 2010.
13 See: "Interim Report on the Cumulative Impact on the Global Economy of Proposed Changes in the Banking Regulatory Framework," Institute of International Finance, June 2010. http://www.iif.com/press/press+151.php
14 See: Admati, Anat, Peter M. DeMarzo, Martin R. Hellwig and Paul Pfleiderer. "Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive." Stanford Graduate School of Business Research Paper No. 2065, March 2011. http://www.gsb.stanford.edu/news/research/Admati.etal.html