Challenges and Experiences

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International Association of Deposit Insurers 4 th 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. - PowerPoint PPT Presentation

Transcript of Challenges and Experiences

  • Galo Cevallos Senior Internationl Advisor, International Affairs Federal Deposit Insurance CorporationInternational Association of Deposit Insurers 4th 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

  • Challenges and ExperiencesProgram OutlineFDIC 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 banksImproving the design of the deposit insurance system Insuring effective interagency coordination

  • FDIC: Challenges and ExperienceOverview of Banking and Regulatory System

    Overview of U.S.Banking SystemKey Functions of the FDICLarge, diverse and complexWell RegulatedFinancially Sound8,861 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 assetsFour Federal and 50 State supervisorsROA: 1.21%; ROE: 11.58%; NIM: 3.20%; Equity/TA: 10.52%Data as of December 31, 2006Deposit InsuranceBank SupervisionResolutions and ReceivershipsDeposit insurance reform; revised risk-related premium system; US $50.1 billion in deposit insurance fundPrimary federal supervisor for 5,220 banks; examined every 12 18 months; 7,400 risk management and specialty exams conducted in 2006February 2007 - First bank failure in almost three years; claims modernization project; large bank failure contingency planning

  • FDIC: Challenges and ExperienceReducing the Cost of Bank Failures

  • FDIC: Challenges and ExperienceReducing the Cost of Bank FailuresAddressing Moral Hazard and Regulatory ForbearancePrompt 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.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.

  • FDIC: Challenges and ExperienceReducing the Cost of Bank Failures

    Prompt Corrective Action (PCA)

    PCA requires supervisory intervention at an early stage as indicated by a banks capital position. Supervisory actions escalate in proportion to the banks 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 FailuresResolution 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.

  • FDIC: Challenges and ExperienceDesign ImprovementsA 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 Corporation Reform Act (February 2007)

    Principal Reform Features Included:

    Improved management of the fundImproved risk pricingPreserving the value of deposit insurance protection

  • FDIC: Challenges and Experience Design Improvements

    Problem OneLaw 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 Funds 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 TwoLaw 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 ImprovementsImproved Fund Managment

    Insured Deposit Growth Outpaced Fund Growth

    R.Ratio Graph

    0.0129

    0.0126

    0.0128

    0.0128

    0.0129

    0.013

    0.0131

    0.0134

    0.0133

    0.0133

    0.0132

    0.0132

    0.0131

    0.0129

    0.0128

    0.0126

    0.0125

    0.0123

    DIF Reserve Ratio

    Quarter

    Reserve Ratio

    DIF Reserve Ratio

    4qtr Growth - Fund Bal & Depins

    0.0010.0495383124

    0.0080.0513211149

    0.0590.0538636456

    0.0610.0280713162

    0.0560.0388541767

    0.0620.0203598781

    0.0510.0203399909

    0.0510.0294932801

    0.0360.0271780891

    0.0290.0425186062

    0.0320.0491107466

    0.0230.0540201956

    0.0320.0639491524

    0.0290.0762519564

    0.0230.0742265861

    0.0330.0845880628

    0.0320.0747826707

    0.0330.0688761173

    5.6%

    8.5%

    September 30, 2006

    Percent Change

    DIF Balance - 4 quarter growth

    DIF Insured Deposits - 4 quarter growth

    Quarter

    DIF Fund Balance

    DIF Insured Deposits

    Current Fund Charts (with DIF)

    From "Current Status of the Funds" from Rate Case (2006-02) - updated/double checked on 5/25/06 w/new QBP data from Matt

    DateDIF BalanceDIF Balance - 4 quarter growthDIF Balance - 4 quarter growthDIF Insured DepositsDIF Insured Deposits - 4 quarter growthDIF Insured Deposits - 4 quarter growthDIF Reserve Ratio

    12/0041.7----3,055.1----1.37%

    3/0142.4----3,139.8----1.35%

    6/0142.5----3,153.5----1.35%

    9/0142.6----3,182.8----1.34%

    12/0141.4-0.9%-0.9%3,210.75.1%5.1%1.29%

    3/0241.7-1.5%-1.5%3,306.45.3%5.3%1.26%

    6/0242.50.1%0.1%3,309.85.0%5.0%1.28%

    9/0243.00.8%0.8%3,346.25.1%5.1%1.28%

    12/0243.85.9%5.9%3,383.75.4%5.4%1.29%

    3/0344.36.1%6.1%3,399.22.8%2.8%1.30%

    6/0344.95.6%5.6%3,438.43.9%3.9%1.31%

    9/0345.66.2%6.2%3,414.32.0%2.0%1.34%

    12/0346.05.1%5.1%3,452.52.0%2.0%1.33%

    3/0446.65.1%5.1%3,499.52.9%2.9%1.33%

    6/0446.53.6%3.6%3,531.82.7%2.7%1.32%

    9/0447.02.9%2.9%3,559.54.3%4.3%1.32%

    12/0447.53.2%3.2%3,622.14.9%4.9%1.31%

    3/0547.62.3%2.3%3,688.55.4%5.4%1.29%

    6/0548.03.2%3.2%3,757.76.4%6.4%1.28%

    9/0548.42.9%2.9%3,830.97.6%7.6%1.26%

    12/0548.62.3%2.3%3,890.97.4%7.4%1.25%

    3/0649.23.3%3.3%4,000.58.5%8.5%1.23%

    6/0649.63.2%3.2%4,038.77.5%7.5%1.23%

    9/0650.03.3%3.3%4,094.86.9%6.9%1.22%

    DEPDOM & DEPINS - RIS

    From RIS: 5/24/06

    QuarterTotal Domestic DepositsTotal Estimated Insured Deposits

    199603313,309,259,6042,675,038,134

    199606303,329,972,4282,671,085,209

    199609303,378,183,0812,669,554,428

    199612313,454,556,1092,690,438,893

    199703313,447,705,5282,712,642,923

    199706303,497,133,4432,712,963,682

    199709303,507,362,9682,711,898,529

    199712313,602,188,7262,746,477,343

    199803313,649,586,9562,777,113,078

    199806303,663,037,0232,769,927,163

    199809303,651,418,6202,765,157,092

    199812313,817,150,0992,850,452,186

    199903313,764,453,5672,830,707,245

    199906303,788,928,0432,833,164,020

    199909303,805,583,3392,839,863,602

    199912313,885,825,6732,869,207,876

    200003313,954,413,6232,919,431,137

    200006304,008,172,3072,977,249,350

    200009304,058,635,1743,008,460,260

    200012314,211,894,7983,055,107,586

    200103314,281,072,9763,139,770,606

    200106304,342,033,2173,153,531,975

    200109304,407,684,9883,182,833,027

    200112314,564,063,6243,215,580,673

    200203314,573,239,9773,306,398,129

    200206304,618,597,0123,307,593,934

    200209304,784,756,6013,343,849,101

    200212314,916,080,8603,383,601,015

    200303315,031,216,8013,414,022,112

    200306305,177,105,6123,438,360,281

    200309305,169,464,9173,414,317,488

    200312315,223,926,9873,452,502,531

    200403315,358,307,2113,499,468,843

    200406305,467,494,9713,531,805,468

    200409305,568,960,8253,559,488,598

    200412315,724,620,2353,622,058,032

    200503315,833,047,4763,688,491,458

    200506305,931,698,5123,757,654,199

    200509306,073,946,8223,830,904,210

    200512316,229,727,5303,892,646,934

    200603316,340,821,1904,004,106,722

    &A

    Page &P

    Fund Bal & Depins

    41.3743210.737

    41.7463306.4

    42.513309.76

    42.9693346.189

    43.7973383.679

    44.2883399.215

    44.8833438.358

    45.6483414.317

    46.0223452.411

    46.5583499.465

    46.5213532.476

    46.993555.582

    47.5073622.054

    47.6173689.834

    48.0233757.685

    48.3733830.899

    48.5973892.545

    49.1934001.641

    do 4qtr growth

    DIF-insured deposit growth has outpaced fund growth in recent quarters($billions)

    DIF Balance

    DIF Insured Deposits

    Quarter

  • FDIC: Challenges and Experience Design Imp