Jun 30 2011

Shelby on the FDIC: Learn From the Past

U.S. Senator Richard Shelby, ranking Republican on the Senate Committee on Banking, Housing and Urban Affairs, today made the following statement at a Committee hearing on the state of the FDIC.

Excerpts of Shelby’s statement are immediately below in bold, followed by the full text of his prepared remarks:

“This is an appropriate time for this hearing as it comes at the end of Chairman Sheila Bair’s five year term.  Chairman Bair’s time in office has been marked by the financial crisis and by profound changes in banking law, especially those enacted by Dodd-Frank.

“Given Chairman’s Bair active tenure at the FDIC, this is a unique opportunity to evaluate the successes and failures of the FDIC.  Only by learning from the past can we ensure that the FDIC remains a world-class regulator.

“The high cost of resolving failed banks raises serious questions about whether the FDIC needs to reconsider how it deals with troubled banks.  After the S&L crisis, Congress sought to improve the FDIC’s resolution of banks by enacting the prompt and corrective action regime (“PCA”).  The aim of PCA was to ensure that the FDIC closed troubled banks before they inflicted losses on the Deposit Insurance Fund.  A recent report by the GAO, however, showed that there are real problems with PCA. 

“The FDIC has long been the regulator of small banks.  Unfortunately, we have witnessed a significant decline in the number of small banks as the banking industry has consolidated…I fear that one of the consequences of the Dodd Frank Act is that it will accelerate the decline of small banks by imposing new regulatory burdens on them.

“Big banks will always be better positioned to deal with regulatory costs.  Unlike small banks, they have the size and resources needed to pay for and comply with new regulations. Hence, bureaucracies like the new Consumer Financial Protection Bureau generally skew the competitive landscape in favor of big banks. 

“I look forward to hearing from Chairman Bair what steps we can take to ensure that our regulatory landscape allows small banks to survive and, more importantly, to thrive.” 

STATEMENT OF SENATOR RICHARD C. SHELBY

Committee on Banking, Housing and Urban Affairs

June 30, 2011

“Thank you, Mr. Chairman.

“Today, we will examine the state of the Federal Deposit Insurance Corporation.

“This is an appropriate time for this hearing as it comes at the end of Chairman Sheila Bair’s five year term.  Chairman Bair’s time in office has been marked by the financial crisis and by profound changes in banking law, especially those enacted by Dodd-Frank.  

“As history will record, Chairman Bair was an active participant in both events. She played a key role in first devising and then later implementing the Federal government’s response to the financial crisis.  During the formulation of Dodd-Frank, she also exerted a strong influence over the final legislation, especially the resolution regime provisions.    

“Given Chairman’s Bair active tenure at the FDIC, this is a unique opportunity to evaluate the successes and failures of the FDIC.  Only by learning from the past can we ensure that the FDIC remains a world-class regulator.

“One area I would like to explore today is the FDIC’s record guarding the Deposit Insurance Fund.  Overseeing the Fund should always be the FDIC’s core mission.  Since 2007, 373 insured depository institutions have failed.  The estimated cost of these failures to the deposit insurance fund is almost $84 billion.  As a result, the balance of the Deposit Insurance Fund has declined dramatically.  At its lowest point, the Deposit Insurance Fund had a negative balance of $20.9 billion.

“The high cost of resolving failed banks raises serious questions about whether the FDIC needs to reconsider how it deals with troubled banks.  After the S&L crisis, Congress sought to improve the FDIC’s resolution of banks by enacting the prompt and corrective action regime (“PCA”).  The aim of PCA was to ensure that the FDIC closed troubled banks before they inflicted losses on the Deposit Insurance Fund.  A recent report by the GAO, however, showed that there are real problems with PCA. 

“The GAO found that every bank that underwent prompt and corrective action since 2007 because of capital deficiencies and failed inflicted a loss to the Deposit Insurance Fund.  The GAO also found that while the regulators identified problematic conditions among banks well before the failure, the FDIC did not always promptly close banks, allowing the bank losses to grow.  Most concerning, the GAO found that the average cost of resolving a bank was more than 30 percent of its assets. 

“It is clear that prompt and corrective action has not worked as was intended.  The cost of resolving banks is far too high and undermines the health of both the Deposit Insurance Fund and our banking system.  Accordingly, I would like to hear today how PCA can be improved.

“Another issue I would like to hear about today is capital.  I believe that strong capital requirements are essential.  Recently, the Basel Committee on Banking Supervision reached agreement on the new Basel III capital requirements.

“In 2006, Chairman Bair raised serious concerns about the Basel II capital accords, arguing that they would dangerously reduce capital at our largest banks.  Thanks to her efforts, the implementation of Basel II was delayed and subject to important safeguards.  Given her strong views on Basel II, I am very interested to hear her assessment of Basel III and how we can ensure that capital requirements are not watered down as memories of the crisis fade.

“Finally, I hope to hear how Chairman Bair believes we can ensure the viability of small banks.  The FDIC has long been the regulator of small banks.  Unfortunately, we have witnessed a significant decline in the number of small banks as the banking industry has consolidated.

“In 1984, there were 15,000 banking and thrift organizations.  Today, there is less than half that number.   I fear that one of the consequences of the Dodd Frank Act is that it will accelerate the decline of small banks by imposing new regulatory burdens on them.

“Big banks will always be better positioned to deal with regulatory costs.  Unlike small banks, they have the size and resources needed to pay for and comply with new regulations. Hence, bureaucracies like the new Consumer Financial Protection Bureau generally skew the competitive landscape in favor of big banks. 

“The ultimate impact of the Dodd Frank Act may well be to make the big banks bigger while wiping out the small banks in the coming tidal wave of regulatory compliance.

“I look forward to hearing from Chairman Bair what steps we can take to ensure that our regulatory landscape allows small banks to survive and, more importantly, to thrive.

“Thank you Mr. Chairman.”