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Challenges and Recent Experiences of the Deposit Insurance Systems in the Latin American RegionSan Salvador, El Salvador - August 2007 1
Galo CevallosSenior Internationl Advisor, International Affairs
Federal Deposit Insurance Corporation
Galo CevallosSenior Internationl Advisor, International Affairs
Federal Deposit Insurance Corporation
International Association of Deposit Insurers4th Latin America Regional Committee Meeting
Challenges and Recent Experiences of the Deposit Insurance Systems
in the Latin American Region
Challenges Faced by the FDIC as Deposit Insurer
2 Challenges and Recent Experiences of the Deposit Insurance Systems in the Latin American Region
San Salvador, El Salvador - August 2007
Challenges and Experiences
ProgramOutline
FDIC – 75 Years of Challenges and Experience
• Overview of US Banking and Regulatory Systems
• Key Challenges to FDIC as Deposit Insurer
Reducing the cost of failed banks Improving the design of the deposit insurance system Insuring effective interagency coordination
3 Challenges and Recent Experiences of the Deposit Insurance Systems in the Latin American Region
San Salvador, El Salvador - August 2007
Overview of U.S.Banking System
Key Functions of the FDIC
Large, diverse and complex
Well Regulated
Financially Sound
• 8,861 insured institutions; US $11.8 Trillion in assets; US $4.2 Trillion in insured deposits; Median bank size US $140 million; largest bank – US $1.2 Trillion in assets
• Four Federal and 50 State supervisors
• ROA: 1.21%; ROE: 11.58%; NIM: 3.20%; Equity/TA: 10.52%Data as of December 31, 2006
Deposit Insurance
Bank Supervision
Resolutions and Receiverships
• Deposit insurance reform; revised risk-related premium system; US $50.1 billion in deposit insurance fund
• Primary federal supervisor for 5,220 banks; examined every 12 – 18 months; 7,400 risk management and specialty exams conducted in 2006
• February 2007 - First bank failure in almost three years; claims modernization project; large bank failure contingency planning
FDIC: Challenges and ExperienceOverview of Banking and Regulatory System
4 Challenges and Recent Experiences of the Deposit Insurance Systems in the Latin American Region
San Salvador, El Salvador - August 2007
FDIC: Challenges and ExperienceReducing the Cost of Bank Failures
In the aftermath of the US Savings and Loan Crisis – several weaknesses came to light
Moral HazardResulted in $153 billion cost to the deposit insurer and tax payers.
Regulatory Forbearance
5 Challenges and Recent Experiences of the Deposit Insurance Systems in the Latin American Region
San Salvador, El Salvador - August 2007
Addressing Moral Hazard and Regulatory Forbearance
Prompt Corrective Action (PCA) is intended to minimize the cost of resolving bank failures and limit regulatory forbearance by requiring more timely closure of failing institutions and earlier intervention in problem banks.
FDIC: Challenges and ExperienceReducing the Cost of Bank Failures
The Least-Cost approach compels the FDIC to use the least costly method to the deposit insurance fund when resolving a failing institution. Prior to 1991, the FDIC was not required to determine the least costly resolution and could pursue any resolution alternative, as long as it cost less than liquidating the institution.
6 Challenges and Recent Experiences of the Deposit Insurance Systems in the Latin American Region
San Salvador, El Salvador - August 2007
Prompt Corrective Action (PCA)
PCA requires supervisory intervention at an early stage as indicated by a bank’s capital position. Supervisory actions escalate in proportion to the bank’s capital level. Some of these actions are mandatory, while others are discretionary.
A key point is that supervisors are required to intervene while the bank has positive regulatory capital and is believed to have positive economic capital, which lessens the cost to the insurer.
Practices that Minimize Losses
FDIC: Challenges and ExperienceReducing the Cost of Bank Failures
7 Challenges and Recent Experiences of the Deposit Insurance Systems in the Latin American Region
San Salvador, El Salvador - August 2007
• Resolution method chosen must represent the least cost to the FDIC of all possible alternatives.
• FDIC must document its selection, which will be evaluated by the inspector general.
• An exception to the least-cost requirement may be made for systemically important banks.
Minimizing Cost of Bank Failures
The Least-Cost Requirement
The least cost test requires the FDIC to perform cost-benefit analyses on all possible resolution alternatives, based on the best available information at the time, when deciding how to resolve a failed financial institution.
Immediate Impact
of Least Cost Requirement
1991
Pre FDICIA
1993
Post FDICIA
Percent of closed banks where uninsured depositor lost money
17% 88%
FDIC: Challenges and ExperienceReducing the Cost of Bank Failures
8 Challenges and Recent Experiences of the Deposit Insurance Systems in the Latin American Region
San Salvador, El Salvador - August 2007
FDIC: Challenges and ExperienceDesign Improvements
A Commitment to Continuous
Redesign
A sign of an effective deposit insurance system is that it is continuously changing to account for its experiences and to keep up with a changing environment.
The Federal Deposit Insurance CorporationReform Act (February 2007)
Principal Reform Features Included:
• Improved management of the fund• Improved risk pricing• Preserving the value of deposit insurance
protection
9 Challenges and Recent Experiences of the Deposit Insurance Systems in the Latin American Region
San Salvador, El Salvador - August 2007
Problem One Law restricts the FDIC from charging premiums to most banks that are well capitalized and highly rated by bank supervisors as long as the Deposit Insurance Fund’s Designated Reserve Ratio is above 1.25 percent of insured deposits.
****• 95 percent of banks do not pay for
deposit insurance (9/30/2007);
• 1,100 newly established banks never made contributions to the deposit insurance fund (2005)
Improved Fund Managment
Twin Problems with
Funding Design
Problem Two Law requires the FDIC to assess premiums across-the-board at a rate of at least 23 basis points when the Designated Reserve Ratio falls below 1.25 percent; likely resulting in the industry paying high premiums when both banks and the economy can least afford it.
FDIC: Challenges and Experience Design Improvements
10 Challenges and Recent Experiences of the Deposit Insurance Systems in the Latin American Region
San Salvador, El Salvador - August 2007
Improved Fund Managment
Insured Deposit Growth Outpaced Fund Growth
FDIC: Challenges and Experience
Design Improvements
3.3%
DIF Fund Balance2.3%
3.3%
2.3%
3.2%
0.1%
5.9%6.1% 6.2%
5.1% 5.1%
3.6%
0.8%
3.2%2.9%3.2%2.9%
3.9%
2.0%2.0%
6.9%
7.5%7.4%7.6%
6.4%
5.4%4.9%
4.3%
2.7%2.9%2.8%
5.4%5.1%5.0%
DIF Insured Deposits
-2%
0%
2%
4%
6%
8%
10%
6/02 12/02 6/03 12/03 6/04 12/04 6/05 12/05 6/06
Quarter
5.6%
8.5%
September 30, 2006
Per
cen
t C
han
ge
11 Challenges and Recent Experiences of the Deposit Insurance Systems in the Latin American Region
San Salvador, El Salvador - August 2007
1.21%
1.23%
1.26%
1.25%
1.34%
1.29%
1.30%
1.32%
1.23%
1.22%
1.29%
1.33%1.33%
1.31%
1.31%
1.32%
1.28%
1.20%
1.23%
1.26%
1.29%
1.32%
1.35%
12/02 6/03 12/03 6/04 12/04 6/05 12/05 6/06 12/06
Quarter
Reserv
e R
ati
o
December 31, 2006
Improved Fund Managment
Fund Ratio Declined Steadily
FDIC: Challenges and Experience
Design Improvements
12 Challenges and Recent Experiences of the Deposit Insurance Systems in the Latin American Region
San Salvador, El Salvador - August 2007
Simple Yet Elegant Solution
Congress gave the FDIC’s Board of Directors the authority to set the Designated Reserve Ratio between 1.15 and 1.50 percent.
The FDIC is authorized to charge all institutions a risk-based premium regardless of the level of the designated reserve ratio.
Improved Fund Managment
Twin Problems with
Funding Design
FDIC: Challenges and Experience
Design Improvements
13 Challenges and Recent Experiences of the Deposit Insurance Systems in the Latin American Region
San Salvador, El Salvador - August 2007
Improved Risk Pricing
All Banks Should
Pay Something
FDIC: Challenges and Experience Design Improvements
Assessment Rates - 1993
Capital Group
Supervisory Subgroup
A B C
Well 23 26 29
Adequate 26 29 30
Under 29 30 31 Assessment Rates - 2001
Capital Group
Supervisory Subgroup
A B C
Well 0 3 17
Adequate 3 10 24
Under 10 24 27
Assessment Rates - Today
Capital Group
Supervisory Subgroup
A B C
Well 5 -7
28Adequate 10
Under 28 43
Rates paid by all banks while fund was being revitalized
Rates paid by banks once fund was restored
Rates paid today by all institutions
14 Challenges and Recent Experiences of the Deposit Insurance Systems in the Latin American Region
San Salvador, El Salvador - August 2007
Improved Risk Pricing
All Banks Should
Pay Something
FDIC: Challenges and Experience Design Improvements
Assessment Rates - Today
Capital GroupSupervisory Subgroup
A B C
Well 5 -7 (I)
28 (III)Adequate 10 (II)
Under 28 (III) 43 (IV)
The Final Rule
All banks pay premiums.
To further refine banks in Group I, performance metrics and CAMELS component ratings will be considered.
Consolidates nine risk categories into four categories to better align them with their respective historical failure and loss experience.
Capital ratios and supervisory ratings continue to drive the risk matrix.
FDIC Board of Directors may adjust rates +/-3 basis points with relative ease.
Market risk indicators considered when determining rate paid by large banks.
15 Challenges and Recent Experiences of the Deposit Insurance Systems in the Latin American Region
San Salvador, El Salvador - August 2007
Retirement accounts are now protected to $250,000.
Coverage for all other accounts may be indexed to inflation to preserve the value of protection.
Preserving the Value of Deposit Insurance Protection
Protecting Retirees and
Keeping Up with Inflation
FDIC: Challenges and Experience Design Improvements
16 Challenges and Recent Experiences of the Deposit Insurance Systems in the Latin American Region
San Salvador, El Salvador - August 2007
Risk Assessments An interagency effort
Division of labor without duplication
Examination Sharing Arrangements
Critical for deposit insurance pricing
Total Banks and Thrifts 8,662 11.9 Trillion
Total FDIC-Supervised 5,228 2.2 TrillionTotal OCC-Supervised 1,705 6.8 TrillionTotal FRB –Supervised 892 1.4 TrillionTotal OTS – Supervised 837 1.5 Trillion
As insurer, FDIC has access to examination records produced by other federal and state banking agencies
Examination ratings and capital positions determined by agencies are used to price deposit insurance premiums and gauge adequacy of deposit insurance fund.
Interagency Cooperation, Coordination, Communication
FDIC: Challenges and Experience Ensuring Effective Coordination
17 Challenges and Recent Experiences of the Deposit Insurance Systems in the Latin American Region
San Salvador, El Salvador - August 2007
Interagency Cooperation, Coordination, Communication
FDIC – Experience and Practical Considerations
Interagency Training and
Policy Development
Formal and
InformalInteragency Information
SharingArrangements
Interagency macro-risk
assessments to identify risks to the
deposit insurance
fund
Large Bank
Supervision and
Dedicated
Examiner Programs
Coordination with
functional
regulators
Coordinated
supervision of Foreign Banking
Organizations
Shared National Credit
Program
Interagency
Country Exposure Review
Committee
Coordination with State
Banking Authorities
via Conference
of State Bank
Supervisors
Central Data
Repository: reduces
burden and makes
regulatory reporting efficient
FDIC Exam Back-Up authority
encourages much
collaboration
Interagency approach to combating
money laundering
and terrorist financing
18 Challenges and Recent Experiences of the Deposit Insurance Systems in the Latin American Region
San Salvador, El Salvador - August 2007
Promoting Uniform Standards: The Important Role of
The Federal Financial Institutions Examination Council
The Federal Financial Institutions Examination Council (FFIEC) comprises Federal and State banking agencies, and credit union regulators. It promotes uniform principles, standards, and reporting:
The Financial Institution Rating System (CAMELS) Definitions for classifying assets Financial reports (Call Reports) Examiner training
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