FDIC CHAIRMAN GRUENBERG'S REMARKS ON JUMP$TART COALITION

FROM:   FEDERAL DEPOSIT INSURANCE CORPORATION
Remarks by Martin J. Gruenberg, Chairman Federal Deposit Insurance Corporation at Jump$tart Coalition National Partners Meeting; Washington, D.C.
April 23, 2015

Thank you very much for including me in your event today.

First, I'd like to recognize Laura and Ted for their leadership, not just of the Jump$tart Coalition, but for all they do to help teach American youth about money and how to responsibly handle their financial affairs.

All of you here today are terrific advocates and resources for advancing youth financial capability, both nationally and in communities across the nation. Thank you for your dedication and your many contributions to financial education.
I am delighted to be here today for the unveiling of an extraordinary new set of tools to help educators and families work together to teach children about financial literacy at every stage of their education, from Pre-K through age 20.
A little over two years ago, the FDIC began working more intensively with partner agencies on the Financial Literacy and Education Commission to promote youth financial capability.1 We did this because starting financial education early can have long-standing benefits for young people and their families.

We soon realized that our interests and objectives in this area matched those of the Consumer Financial Protection Bureau (CFPB). In particular, both of our agencies encourage practical and tested approaches that can positively affect young peoples' decisions in a lasting way.

So last April, the FDIC and CFPB signed an agreement to leverage our strengths by working together to improve financial education and the decision-making skills among American youth.

After a year of hard work, we are here today to announce the initial results of that partnership.

To start, I am very proud to announce a brand new Money Smart for Young People series. It is an extraordinary step forward for financial literacy. It is the first nationally available free curriculum that directly brings educators, parents, other family members and caregivers into the learning process for young people of all ages. This is a major innovation.

Family and other caregivers play an important role in shaping a young person's financial learning and development. Young people often learn about money by observing and listening to parents and other adults they spend time with. Yet, CFPB research showed that while parents want to talk about money with their kids, they often lack the knowledge and tools to do so effectively.

So to solve this problem, we added a parent/caregiver guide to all levels of the new Money Smart for Young People series. The guides are easy to use and include information about topics that are covered in class, as well as at-home activities and conversation starters.

And the program gives educators an extensive library of lesson plans so they can teach the concepts that make the most sense for their class.

In a minute, Rich will talk more about our efforts to get parents and caregivers more involved in educating their kids about money. As you will hear, this new Money Smart for Young People series truly supports the contributions of students, educators, and parents in learning.

For example, the new curriculums empower teachers with engaging activities to integrate financial education instruction into other subjects, such as math, English, and social studies. We hope this multi-disciplinary approach can be especially helpful for teaching toward state standards in a range of subjects.
Our new series will offer educators a powerful tool to customize lessons for students at different grade levels and abilities. Previous Money Smart lessons did not focus on grade level, but only provided general instruction.

As always, our Money Smart programs are available on line from the FDIC website.

We are eager to hear how teachers use the new Money Smart for Young People materials so that we can improve the curriculum and share successful approaches with other educators. We also want school administrators and principals to share their thoughts on how we can best equip teachers to use these materials.
I know there are a number of education leaders with us today. If you have any comments, please speak with an FDIC representative after this briefing, or send us an email through the FDIC website.

I also want to share with you another groundbreaking resource that has come about because of our work with the CFPB.

For the first time, we now provide videos for teachers that demonstrate how some fundamental financial lessons can be delivered in the classroom. They are short and meant to empower teachers not just by building their confidence, but inspiring their creativity to talk about money in the classroom.

Finally, the FDIC continues to work with the CFPB on our youth savings program. We know that hands-on approaches to learning really help students understand and retain lessons delivered by educators. To that end, earlier this week we announced Phase II of the FDIC's Youth Savings Account Pilot.

The first phase of the pilot program involved nine banks that set up youth savings programs, which gave young people the opportunity to apply their knowledge to real financial products at real depository institutions in a safe setting. Some of the programs sponsored school-based bank branches run by students.

For the second phase, we plan to build on successful approaches that were taken during the first phase of the pilot. For example, several banks in the first pilot have told us that younger children – even those in kindergarten – were excited to save, even pennies, and that doing so can start healthy habits at a formative age.
I am certain many of you can relate to how teenagers can be reluctant to take advice from their parents or other adults. But Some of the banks in the first phase of the pilot found that financial advice provided by peers can have greater credibility.

One of the student bankers whom FDIC staff spoke to recently said teachers frequently ask her and her peers to talk about the importance of saving with fellow students and to answer questions in classes.

Another student banker conveyed how she had helped her peers save for higher education.

We're encouraging banks that want to be a part of the second youth savings pilot program to let us know by June 18th. You can learn more about the pilot from the FDIC website. Also on the website, you can find interagency guidance for financial institutions aimed at promoting youth savings programs.

In closing, as many of you know, economic inclusion is a major priority for the FDIC. Our long experience with Money Smart has proved that carefully designed and implemented programs enhance the ability of mainstream institutions to offer safe, sound, and sustainable products and services to underserved consumers.

The newest efforts that we are announcing today advance this work in several important ways:

They make available a well-crafted and flexible set of tools for educators that incorporate best practices and educational standards;

They provide resources for parents and caregivers that reinforce key messages about using money to achieve a better future; and finally

They continue our work to link practical financial education and experience with a safe savings account at an insured institution, with the end goal a lasting banking relationship and greater financial stability for children and their families.
We strongly believe that our partnership with the CFPB will lead to more young people making better informed decisions about their money. I look forward to continuing the partnership in the years to come.
Thank you very much.

FDIC INSTITUTIONS REPORT NET INCOME OF $36.9 BILLION IN 4TH QUARTER 2014

FROM:  U.S. FEDERAL DEPOSIT INSURANCE CORPORATION

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported aggregate net income of $36.9 billion in the fourth quarter of 2014, down $2.9 billion (7.3 percent) from earnings of $39.8 billion that the industry reported a year earlier. The decline in earnings was mainly attributable to a $4.4 billion increase in litigation expenses at a few large banks. More than half of the 6,509 insured institutions reporting (61.2 percent) had year-over-year growth in quarterly earnings. The proportion of banks that were unprofitable during the fourth quarter fell to 9.4 percent from 12.7 percent a year earlier.

"The banking industry continued to improve at the end of the year," FDIC Chairman Martin J. Gruenberg said. "Although total industry earnings declined as a result of significant litigation expenses at a few large institutions and a continued decline in mortgage-related income, a majority of banks reported higher operating revenues and improved earnings from the previous year. In addition, banks made loans at a faster pace, asset quality improved, and the number of banks on the 'Problem List' declined to the lowest level in six years."

Chairman Gruenberg added: "Community banks performed especially well during the quarter. Their earnings were up 28 percent from the previous year, their net interest margin and rate of loan growth were appreciably higher than the industry, and they increased their small loans to businesses."

Community banks earned $4.8 billion during the quarter. Based on criteria developed for the FDIC Community Banking Study published in December 2012, there were 6,037 community banks (92.7 percent of all FDIC-insured institutions) in the fourth quarter of 2014 with assets of $2.1 trillion (13.3 percent of industry assets). Fourth quarter net income of $4.8 billion at community banks was up $1.0 billion (27.7 percent) from a year earlier, driven by higher net interest income, increased noninterest income, and lower loan-loss provisions. Community banks' net income, net interest income, noninterest income, and loan balances all grew at a faster pace than the industry as a whole. Asset quality indicators showed further improvement, and community banks continued to hold 45 percent of small loans to businesses.

For the industry as a whole, loan and lease balances rose $149.4 billion (1.8 percent) in the fourth quarter to $8.3 trillion. Commercial and industrial loans increased by $42.2 billion (2.5 percent), and credit card balances grew by $35.4 billion (5.2 percent). Over the past 12 months, loan and lease balances increased 5.3 percent. This is the highest 12-month growth rate for loans since mid-year 2008.

Net interest income was $1.1 billion (1 percent) higher than a year ago, as the industry's interest-bearing assets increased 6.2 percent in 2014. Almost three out of four institutions (70.5 percent) reported higher net interest income than in the fourth quarter of 2013. The average net interest margin (the difference between the average yield banks earn on loans and other investments and the average cost of funding those investments) was 3.12 percent, down from the 3.27 average in the fourth quarter of 2013. This is the lowest quarterly average margin since the 3.11 percent reported in the third quarter of 1989, as larger institutions continued to increase their holdings of low-yield, liquid investments.

Noninterest income was down $160 million (0.3 percent) from a year ago, as income from the sale, securitization, and servicing of residential mortgages declined $1.6 billion (30.8 percent). More than half of all banks (54.4 percent) reported year-over-year increases in quarterly noninterest income.

Noninterest expenses were $4.9 billion (4.8 percent) higher than a year ago, as itemized litigation expenses at a few of the largest banks were $4.4 billion higher. Banks set aside $8.2 billion in provisions for loan losses, up 12 percent from $7.3 billion a year earlier. This is the second consecutive quarter that the industry has reported a year-over-year increase in loss provisions.

Asset quality indicators continued to improve as insured banks and thrifts charged off $9.9 billion in uncollectible loans during the quarter, down $2.2 billion (18.3 percent) from a year earlier. The amount of noncurrent loans and leases (those 90 days or more past due or in nonaccrual status) fell $9.2 billion (5.4 percent) during the fourth quarter. The percentage of loans and leases that were noncurrent declined to 1.96 percent, the lowest level since the 1.73 percent posted at the end of the first quarter of 2008.

The average return on assets (ROA) fell to 0.96 percent in the fourth quarter from 1.09 percent a year earlier. The average return on equity (ROE) declined from 9.76 percent to 8.56 percent.

Chairman Gruenberg concluded: "The current operating environment remains challenging. Revenue growth continues to be held back by narrow interest margins and lower mortgage-related income. And, many institutions are reaching for yield given the low interest-rate environment, which is a matter of ongoing supervisory attention. Nevertheless, results from the fourth quarter generally were positive for the banking industry, and for community banks in particular."

Financial results for the fourth quarter of 2014 and the full year are contained in the FDIC's latest Quarterly Banking Profile, which was released today. Also among the findings:

Full-year earnings totaled $152.7 billion. Total net income for 2014 was $1.7 billion (1.1 percent) less than the industry reported in 2013. This is the first decline in annual net income in five years. Full-year ROA was 1.01 percent, marking the third year in a row that the annual ROA has exceeded 1 percent. Reduced revenues from the sale, securitization, and servicing of residential mortgages (down $9.1 billion or 35 percent) and increased litigation expenses at a few large banks (up $6.5 billion or 206 percent) were the main causes of the drop in full-year earnings. Almost two out of every three banks (64 percent) reported higher net income than in 2013.

The number of "problem banks" fell for the 15th consecutive quarter. The number of banks on the FDIC's "Problem List" declined from 329 to 291 during the quarter, the lowest since the end of 2008. The number of "problem banks" now is 67 percent below the post-crisis high of 888 at the end of the first quarter of 2011.

The Deposit Insurance Fund (DIF) balance continued to increase. The DIF balance (the net worth of the Fund) rose to a record $62.8 billion as of December 31 from $54.3 billion at the end of September. The Fund balance increased primarily due to decreases in estimated losses for past bank failures. Estimated insured deposits increased 1.0 percent, and the DIF reserve ratio (the Fund balance as a percentage of estimated insured deposits) rose to 1.01 percent as of December 31 from 0.88 percent as of September 30. A year ago, the DIF reserve ratio was 0.79 percent.

FDIC SAYS BRICK-AND-MORTAR BANKING MAIN MEANS ACCESS TO FDIC-INSURED INSTITUTIONS

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION

The Federal Deposit Insurance Corporation (FDIC) today released a study showing that despite the increased use of online and mobile banking, brick-and-mortar banking offices continue to be the primary means through which FDIC-insured institutions deliver financial services to their customers. FDIC-insured institutions operated 94,725 banking offices as of June 2014, a decline of just 4.8 percent from the all-time high of 99,550 offices in 2009.

The study identifies four main factors that have influenced the number and distribution of banking offices over time: population growth, banking crises, legislative changes to branching laws, and technological innovation. In terms of technological change, there is little evidence that the emergence of new electronic channels for delivering banking services has substantially diminished the need for traditional branch offices where banking relationships are built.

Historically, net declines in branch offices have typically followed periods of financial distress, such as the Great Depression, the S&L and banking crisis of the 1980s, and the most recent financial crisis. The relaxation of branching laws in the 1980s and 1990s appears to have increased the prevalence of banking offices by removing legislative constraints on the size and geographic scope of the branch networks that each bank could operate. Since 1970, banks have introduced a series of new electronic channels for delivering banking services. Yet between 1970 and 2014 the total number of banking offices grew nearly twice as fast as the U.S. population, and as of 2014 the density of banking offices per capita was higher than it had been at any point prior to 1977.

According to the 2013 FDIC National Survey of Unbanked and Underbanked Households, visiting a teller remains the most common way for households to access their accounts.

REGULATORS RELEASE GUIDANCE ON CERTAIN PRIVATE STUDENT LOANS

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION 
January 29, 2015 Regulators Release Guidance on Private Student Loans With Graduated Repayment Terms at Origination

Federal financial regulatory agencies, in partnership with the State Liaison Committee (SLC) of the Federal Financial Institutions Examination Council, today issued guidance for financial institutions on private student loans with graduated repayment terms at origination.

This guidance provides principles that financial institutions should consider in their policies and procedures for originating private student loans with graduated repayment terms.

The agencies—the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency—and the SLC recognize that the competitive job market, traditionally low entry-level salaries, and higher student debt loads can contribute to some borrowers preferring greater flexibility with their payments as they transition into the labor market. Graduated repayment terms are structured to provide for lower initial monthly payments that gradually increase.

Financial institutions that originate private student loans with graduated repayment terms should prudently underwrite the loans in a manner consistent with safe and sound lending practices. Additionally, financial institutions should provide disclosures that clearly communicate the timing and the amount of payments to facilitate a borrower's understanding of the loan's terms and features.

FDIC REPORTS COMMERCIAL BANK AND SAVINGS INSTITUTION NET INCOME FOR THIRD QUARTER

 FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION 

November 25, 2014

Media Contact: David Barr (202) 898-6992 dbarr@fdic.gov

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported aggregate net income of $38.7 billion in the third quarter of 2014, up $2.6 billion (7.3 percent) from earnings of $36.1 billion the industry reported a year earlier. The increase in earnings was mainly attributable to a $7.8 billion (4.8 percent) increase in net operating revenue (the sum of net interest income and total noninterest income), the biggest since the fourth quarter of 2009. Almost two-thirds of the 6,589 insured institutions reporting (62.9 percent) had year-over-year growth in quarterly earnings. The proportion of banks that were unprofitable during the third quarter fell to 6.4 percent from 8.7 percent a year earlier.

"The banking industry had another positive quarter," FDIC Chairman Martin J. Gruenberg said. "Community banks, in particular, performed better than a year ago. Most importantly, third quarter income growth was based on revenue growth instead of lower loan-loss provisions. This can be a more sustainable foundation for continued earnings growth going forward."

Total loan and lease balances rose by $50.9 billion (0.6 percent) in the third quarter to $8.2 trillion. Commercial and industrial loans increased by $10.1 billion (0.6 percent), and auto loans grew by $9 billion (2.4 percent), while balances of one- to four-family mortgage loans declined by $6.7 billion (0.4 percent). Over the last 12 months, loan and lease balances increased by 4.6 percent.

Noninterest income was $5.4 billion (9.2 percent) higher than a year ago. Gains from loan sales were $1.2 billion (45.6 percent) higher, while trading income was up by $1.1 billion (25.3 percent). This is the first time in the last five quarters that noninterest income has increased year-over-year.

Net interest income was up $2.4 billion (2.3 percent) from a year ago, as interest-bearing assets were 5.9 percent higher. The average net interest margin (the difference between the average yield banks earn on loans and other investments and the average cost of funding those investments) was 3.14 percent, down from the 3.26 percent average in the third quarter of 2013. This is the lowest quarterly average margin since 3.11 percent in the third quarter of 1989, as larger institutions increased their holdings of low-yield, liquid investments.

Noninterest expenses for goodwill impairment were $1.1 billion higher than a year ago, while itemized litigation expenses were $1.6 billion lower. Expenses for salaries and employee benefits were $2.0 billion (4.3 percent) higher than in the third quarter of 2013. Banks set aside $7.2 billion in provisions for loan losses, up 23.9 percent from $5.8 billion a year earlier. This is the first time in five years that the industry has reported a year-over-year increase in loss provisions.

Asset quality indicators continued to improve as insured banks and thrifts charged off $9.2 billion in uncollectible loans during the quarter, down $2.4 billion (21.0 percent) from a year earlier. The amount of noncurrent loans and leases (those 90 days or more past due or in nonaccrual status) fell by $9.7 billion (5.3 percent) during the quarter. The percentage of loans and leases that were noncurrent declined to 2.11 percent, the lowest level since the 2.09 percent posted at the end of the second quarter of 2008.

The average return on assets (ROA) rose slightly to 1.02 percent in the third quarter from 1.00 percent a year earlier. The average return on equity (ROE) rose from 8.94 percent to 9.04 percent.

Despite continued positive developments, Chairman Gruenberg noted: "Still, there are challenges ahead for the industry. Margins remain under pressure in this low interest rate environment. Institutions have responded by extending asset maturities, which raises concerns about interest-rate risk. And banks are increasing higher-risk loans to leveraged commercial borrowers. All of these issues continue to be matters of ongoing supervisory attention. Nevertheless, third quarter results were largely good news for community banks and for the entire banking industry."

Financial results for the third quarter of 2014 are contained in the FDIC's latest Quarterly Banking Profile, which was released today. Also among the findings:

Community banks earned $4.9 billion during the quarter. Starting with the Quarterly Banking Profile released for the first quarter of 2014, the FDIC added a new section that reports on the performance of community banks – those institutions that provide traditional, relationship-based banking services in their local communities. Based on criteria developed for the FDIC Community Banking Study published in December 2012, there were 6,107 community banks (93.0 percent of all FDIC-insured institutions) in the third quarter of 2014 with assets of $2.0 trillion (13.0 percent of industry assets). Third quarter net income at community banks of $4.9 billion was up $351 million (7.8 percent) from a year earlier, driven by higher net interest income and lower loan-loss provisions. The report also found that loan balances at community banks in the third quarter grew at a faster pace than in the industry as a whole, asset quality indicators continued to show improvement, and community banks continued to account for 45 percent of small loans to businesses.

The number of "problem banks" fell for the 14th consecutive quarter. The number of banks on the FDIC's "Problem List" declined from 354 to 329 during the quarter, the lowest since the 305 in the first quarter of 2009. The number of "problem" banks now is 63 percent below the post-crisis high of 888 at the end of the first quarter of 2011. Two FDIC-insured institutions failed in the third quarter, compared to six in the third quarter of 2013.

The Deposit Insurance Fund (DIF) balance continued to increase. The DIF balance (the net worth of the Fund) rose to a record $54.3 billion as of September 30 from $51.1 billion at the end of June. The Fund balance increased primarily due to assessment income, recoveries from litigation settlements, and receivership asset recoveries that exceeded estimates. Estimated insured deposits increased by 0.4 percent, and the DIF reserve ratio (the Fund balance as a percentage of estimated insured deposits) rose to 0.89 percent as of September 30 from 0.84 percent as of June 30. A year ago, the DIF reserve ratio was 0.68 percent. By law, the DIF must achieve a minimum reserve ratio of 1.35 percent by September 30, 2020.

FEDERAL BANKING AGENCIES NOTE "SERIOUS DEFICIENCIES IN UNDERWRITING STANDARDS AND RISK MANAGEMENT OF LEVERAGED LOANS"

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION 
For Immediate Release November 7, 2014 
Credit Risk in the Shared National Credit Portfolio is High; Leveraged Lending Remains a Concern

The credit quality of large loan commitments owned by U.S. banking organizations, foreign banking organizations (FBOs), and nonbanks is generally unchanged in 2014 from the prior year, federal banking agencies said Friday. In a supplemental report, the agencies highlighted findings specific to leveraged lending, including serious deficiencies in underwriting standards and risk management of leveraged loans.

The annual Shared National Credits (SNC) review found that the volume of criticized assets remained elevated at $340.8 billion, or 10.1 percent of total commitments, which approximately is double pre-crisis levels. The stagnation in credit quality follows three consecutive years of improvements. A criticized asset is rated special mention, substandard, doubtful, or loss as defined by the agencies' uniform loan classification standards. The SNC review was completed by the Federal Reserve Board, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency.

Leveraged loans as reported by agent banks totaled $767 billion, or 22.6 percent of the 2014 SNC portfolio and accounted for $254.7 billion, or 74.7 percent, of criticized SNC assets. Material weaknesses in the underwriting and risk management of leveraged loans were observed, and 33.2 percent of leveraged loans were criticized by the agencies.

The leveraged loan supplement also identifies several areas where institutions need to strengthen compliance with the March 2013 guidance, including provisions addressing borrower repayment capacity, leverage, underwriting, and enterprise valuation. In addition, examiners noted risk-management weaknesses at several institutions engaged in leveraged lending including lack of adequate support for enterprise valuations and reliance on dated valuations, weaknesses in credit analysis, and overreliance on sponsor's projections.

Federal banking regulations require institutions to employ safe and sound practices when engaging in commercial lending activities, including leveraged lending. As a result of the SNC exam, the agencies will increase the frequency of leveraged lending reviews to ensure the level of risk is identified and managed.

In response to questions, the agencies also are releasing answers to FAQs on the guidance. The questions cover expectations when defining leveraged loans, supervisory expectations on the origination of non-pass leveraged loans, and other topics. The FAQ document is intended to advance industry and examiner understanding of the guidance, and promote consistent application in policy formulation, implementation, and regulatory supervisory assessments.

Other highlights of the 2014 SNC review:

Total SNC commitments increased by $379 billion to $3.39 trillion, or 12.6 percent from the 2013 review. Total SNC outstanding increased $206 billion to $1.57trillion, an increase of 15.2 percent.

Criticized assets increased from $302 billion to $341 billion, representing 10.1 percent of the SNC portfolio, compared with 10.0 percent in 2013. Criticized dollar volume increased 12.9 percent from the 2013 level.

Leveraged loans comprised 72.9 percent of SNC loans rated special mention, 75.3 percent of all substandard loans, 81.6 percent of all doubtful loans, and 83.9 percent of all nonaccrual loans.

Classified assets increased from $187 billion to $191 billion, representing 5.6 percent of the portfolio, compared with 6.2 percent in 2013. Classified dollar volume increased 2.1 percent from 2013.

Credits rated special mention, which exhibit potential weakness and could result in further deterioration if uncorrected, increased from $115 billion to $149 billion, representing 4.4 percent of the portfolio, compared with 3.8 percent in 2013. Special mention dollar volume increased 29.6 percent from the 2013 level.
The overall severity of classifications declined, with credits rated as doubtful decreasing from $14.5 billion to $11.8 billion and assets rated as loss decreasing slightly from $8 billion to $7.8 billion. Loans that were rated either doubtful or loss account for 0.6 percent of the portfolio, compared with 0.7 percent in the prior review. Adjusted for losses, nonaccrual loans declined from $61 billion to $43billion, a 27.8percent reduction.

The distribution of credits across entity types—U.S. bank organizations, FBOs, and nonbanks—remained relatively unchanged. U.S. bank organizations owned 44.1 percent of total SNC loan commitments, FBOs owned 33.5 percent, and nonbanks owned 22.4 percent. Nonbanks continued to own a larger share of classified (73.6 percent) and nonaccrual (76.7 percent) assets than their total share of the SNC portfolio (22.4 percent). Institutions insured by the FDIC owned 10.1percent of classified assets and 6.7 percent of nonaccrual loans.
The SNC program was established in 1977 to provide an efficient and consistent review and analysis of SNCs. A SNC is any loan or formal loan commitment, and asset such as real estate, stocks, notes, bonds, and debentures taken as debts previously contracted, extended to borrowers by a federally supervised institution, its subsidiaries, and affiliates that aggregates $20 million or more and is shared by three or more unaffiliated supervised institutions. Many of these loan commitments also are participated with FBOs and nonbanks, including securitization pools, hedge funds, insurance companies, and pension funds.

In conducting the 2014 SNC Review, the agencies reviewed $975 billion of the $3.39 trillion credit commitments in the portfolio. The sample was weighted toward noninvestment grade and criticized credits. In preparing the leveraged loan supplement, the agencies reviewed $623 billion in commitments or 63.9 percent of leveraged borrowers, representing 81 percent of all leveraged loans by dollar commitments. The results of the review and supplement are based on analyses prepared in the second quarter of 2014 using credit-related data provided by federally supervised institutions as of December 31, 2013, and March 31, 2014.

FDIC REPORTS Q2 AGGREGATE COMMERCIAL BANK AND SAVINGS INSTITUTION NET INCOME OF $40.2 BILLION

FROM:  U.S. FEDERAL DEPOSIT INSURANCE CORPORATION 

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported aggregate net income of $40.2 billion in the second quarter of 2014, up $2.0 billion (5.3 percent) from earnings of $38.2 billion the industry reported a year earlier. The increase in earnings was mainly attributable to a $1.9 billion (22.4 percent) decline in loan-loss provisions and a $1.5 billion (1.4 percent) decline in noninterest expenses. Also, strong loan growth contributed to an increase in net interest income compared to a year ago. However, lower income from reduced mortgage activity and a drop in trading revenue contributed to a year-over-year decline in noninterest income. More than half of the 6,656 insured institutions reporting (57.5 percent) had year-over-year growth in quarterly earnings. The proportion of banks that were unprofitable during the second quarter fell to 6.8 percent from 8.4 percent a year earlier.

"We saw further improvement in the banking industry during the second quarter," FDIC Chairman Martin J. Gruenberg said. "Net income was up, asset quality improved, loan balances grew at their fastest pace since 2007, and loan growth was broad-based across institutions and loan types. We also saw a large decline in the number of problem banks. However, challenges remain. Industry revenue has been under pressure from narrow net interest margins and lower mortgage-related income. Institutions have been extending asset maturities, which is raising concerns about interest-rate risk. And banks have been increasing higher-risk loans to leveraged commercial borrowers. These issues are matters of ongoing supervisory attention. Nonetheless, on balance, results from the second quarter reflect a stronger banking industry and stronger community banks."

Total loan and lease balances rose by $178.5 billion (2.3 percent) in the second quarter to $8.1 trillion. This is the largest quarterly increase since the fourth quarter of 2007. Commercial and industrial loans increased by $49.9 billion (3.1 percent), residential mortgage loans rose by $22.7 billion (1.2 percent), credit card balances were up by $20.0 billion (3.0 percent), and auto loans grew by $10.9 billion (3.0 percent). Over the last 12 months, loan and lease balances increased by 4.9 percent, the highest 12-month growth rate since before the recent financial crisis.

Asset quality indicators continued to improve as insured banks and thrifts charged off $9.9 billion in uncollectible loans during the quarter, down $4.1 billion (29.5 percent) from a year earlier. The amount of noncurrent loans and leases (those 90 days or more past due or in nonaccrual status) fell by $13.4 billion (6.9 percent) during the quarter. The percentage of loans and leases that were noncurrent declined to 2.24 percent, the lowest level since the 2.09 percent posted at the end of the second quarter of 2008.

Despite the quarterly increase in mortgage balances, income from mortgage-related activity remained well below the level of a year earlier. Noninterest income from the sale, securitization and servicing of mortgages was $3.7 billion (42.5 percent) lower than a year ago. One- to four-family residential real estate loans originated and intended for sale during the quarter were $290.6 billion (63.9 percent) lower than in the second quarter of 2013, as higher interest rates reduced the demand for mortgage refinancing. Realized gains on securities sales also were lower than a year ago, as higher medium- and long-term interest rates reduced the market values of fixed-rate securities. Banks reported $770 million in pretax income from realized gains in the second quarter, a decline of $601 million (43.8 percent) from the second quarter of 2013.

Second quarter net operating revenue (the sum of net interest income and total noninterest income) of $169.0 billion was $1.5 billion (0.9 percent) lower than a year earlier, as a $2.0 billion (1.9 percent) increase in net interest income was outweighed by a $3.6 billion (5.3 percent) drop in noninterest income. The average net interest margin (the difference between the average yield banks earn on loans and other investments and the average cost of funding those investments) was 3.15 percent, the lowest since 3.11 percent in the third quarter of 1989, as declining asset yields at larger institutions outpaced the decline in the cost of funds.
Noninterest expenses for goodwill impairment declined by $4.4 billion, and expenses for salaries and employee benefits were $399 million (0.8 percent) lower than in the second quarter of 2013. Banks set aside $6.6 billion in provisions for loan losses, down 22.4 percent from $8.5 billion a year earlier. This is the 19th consecutive quarter that the industry has reported a year-over-year decline in loss provisions.

The average return on assets (ROA) rose slightly to 1.07 percent in the second quarter from 1.06 percent a year earlier. The average return on equity (ROE) rose from 9.46 percent to 9.54 percent.

Financial results for the second quarter of 2014 are contained in the FDIC's latest Quarterly Banking Profile, which was released today. Also among the findings:

Community banks earned $4.9 billion during the quarter. In the last Quarterly Banking Profile, the FDIC added a new section that reports on the performance of community banks – those institutions that provide traditional, relationship-based banking services in their local communities. Based on criteria developed for the FDIC Community Banking Study published in December 2012, there were 6,163 community banks (93 percent of all FDIC-insured institutions) in the second quarter of 2014 with assets of $2.0 trillion (13 percent of industry assets). Second quarter net income at community banks of $4.9 billion was up $166 million (3.5 percent) from a year earlier, driven by higher net interest income and lower loan loss provisions. The report also found that loan balances at community banks in the second quarter grew at a faster pace than in the industry as a whole, asset quality indicators continued to show improvement, and community banks again accounted for 45 percent of small loans to businesses.

The number of "problem banks" fell for the 13th consecutive quarter. The number of banks on the FDIC's "Problem List" declined from 411 to 354 during the quarter. The number of "problem" banks now is 60 percent below the post-crisis high of 888 at the end of the first quarter of 2011. Seven FDIC-insured institutions failed in the second quarter, compared to 12 in the second quarter of 2013.

The Deposit Insurance Fund (DIF) balance continued to increase. The DIF balance — the net worth of the Fund — rose to $51.1 billion as of June 30 from $48.9 billion at the end of March. Assessment income was the primary contributor to the growth in the Fund balance. Estimated insured deposits declined by 0.2 percent, and the DIF reserve ratio (the Fund balance as a percentage of estimated insured deposits) rose to 0.84 percent as of June 30 from 0.80 percent as of March 31. A year ago, the DIF reserve ratio was 0.64 percent. By law, the DIF must achieve a minimum reserve ratio of 1.35 percent by 2020.

FDIC CITES RURAL DEPOPULATION IMPLICATIONS ON RURAL COMMUNITY BANKS

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION 

The Federal Deposit Insurance Corporation (FDIC) today published an article in its FDIC Quarterly on the trends in rural depopulation and the implication of these trends on rural community banks. Overall, banks in areas affected by declining population are performing relatively well, but achieving growth and succession remain important challenges, according to the article titled "Long-Term Trends in Rural Depopulation and Their Implications for Community Banks."

Rural depopulation has been ongoing for over a century, and the paper examines the recent 30-year period from 1980 through 2010. Half of rural counties in the U.S. experienced a decrease in population between 1980 and 2010, compared with 12 percent of their counterparts in metro areas. The regions that experienced the most rapid depopulation during this period are located in the Great Plains, which reported declining population in 86 percent of its rural counties and the Corn Belt, which saw a drop in residents in 59 percent of its rural counties. Other regions with concentrations of rural counties that experienced depopulation during the study period were the southern Mississippi Delta and Appalachia.

More than 1,000 banks with $150 billion in assets are headquartered in rural counties where depopulation is occurring. These banks have recently experienced relatively strong financial performance, however, mainly due to their concentration on lending to the agricultural sector, which has outperformed other business segments during and after the recent recession.

The article concludes that the biggest obstacles bankers face in rural areas with depopulation are sustaining growth amidst a shrinking customer base and finding qualified management to fill vacancies. In 2004, the FDIC published a similar research paper on these trends.

"Community banks have demonstrated their continued resilience and value in the American financial system," said FDIC Chairman Martin J. Gruenberg. "I am particularly encouraged by our findings that banks operating in areas with a declining customer base are overcoming the additional hurdles rural depopulation poses and in many respects are outperforming their counterparts in other areas of the country. Comprehensive research covering the community banking sector is critical to formulating policies that are well-informed as to the particular challenges community banks have faced and the trends that will shape the sector in coming years."

As part of its Community Banking Initiative, the FDIC announced a number of actions in the fall of 2011 focused on understanding of the evolution of community banks over the past 25 years and the challenges and opportunities this segment of the banking industry faces.

The study, Long-Term Trends in Rural Depopulation and Their Implications for Community Banks, will be published in the next edition of FDIC Quarterly.

FDIC, SALLIE MAE SETTLE DECEPTIVE PRACTICES ALLEGATIONS RELATED TO STUDENT LOANS

FROM:  U.S. FEDERAL DEPOSIT INSURANCE CORPORATION 

The Federal Deposit Insurance Corporation (FDIC) today announced a settlement with Sallie Mae Bank, Salt Lake City, Utah, and Navient Solutions, Inc. (formerly known as Sallie Mae, Inc.), subsidiaries of SLM Corporation and Navient Corporation, respectively, and herein collectively referred to as Sallie Mae, for unfair and deceptive practices related to student loans in violation of Section 5 of the Federal Trade Commission Act (Section 5) and for violations of the Servicemembers Civil Relief Act (SCRA).

This action results from an examination of Sallie Mae by the FDIC regarding Sallie Mae's compliance with federal consumer protection statutes, including Section 5 and SCRA, and a companion investigation by the Department of Justice (DOJ) related to the treatment of servicemembers. As part of the settlement, Sallie Mae stipulated to the issuance of Consent Orders, Orders for Restitution, and Orders to Pay Civil Money Penalty (collectively, FDIC orders). The FDIC orders require these entities to pay civil money penalties totaling $6.6 million, to pay restitution of approximately $30 million to harmed borrowers and to fund a $60 million settlement fund with the DOJ to provide remediation to servicemembers. The DOJ has also taken separate action against the entities with regard to violations of the SCRA.

The FDIC determined that Sallie Mae violated federal law prohibiting unfair and deceptive practices in regards to student loan borrowers through the following actions:

Inadequately disclosing its payment allocation methodologies to borrowers while allocating borrowers' payments across multiple loans in a manner that maximizes late fees; and Misrepresenting and inadequately disclosing in its billing statements how borrowers could avoid late fees. The FDIC determined that Sallie Mae violated federal laws regarding the treatment of servicemembers (SCRA and Section 5) through the following actions:

Unfairly conditioning receipt of benefits under the SCRA upon requirements not found in the Act;
Improperly advising servicemembers that they must be deployed to receive benefits under the SCRA;
Failing to provide complete SCRA relief to servicemembers after having been put on notice of these borrowers' active duty status.

In addition to the payment of restitution to harmed borrowers and a civil money penalty, the FDIC orders require Sallie Mae to take affirmative steps to ensure that disclosures regarding payment allocation and late fee avoidance are clear and conspicuous, that servicemembers are properly treated under the SCRA, and that all residual violations be remedied to ensure compliance with applicable laws.

FDIC SAYS COMMERCIAL BANK NET INCOME INCREASED $5.8 BILLION IN 4TH QUARTER OF 2013

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION 

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported aggregate net income of $40.3 billion in the fourth quarter of 2013, a $5.8 billion (16.9 percent) increase from the $34.4 billion in earnings that the industry reported a year earlier. This is the 17th time in the last 18 quarters — since the third quarter of 2009 — that earnings have registered a year-over-year increase. The improvement in earnings was mainly attributable to an $8.1 billion decline in loan-loss provisions. Lower income stemming from reduced mortgage activity and a drop in trading revenue contributed to a year-over-year decline in net operating revenue (the sum of net interest income and total noninterest income). More than half of the 6,812 insured institutions reporting (53 percent) had year-over-year growth in quarterly earnings. The proportion of banks that were unprofitable fell to 12.2 percent, from 15 percent in the fourth quarter of 2012.

"The trend of slow but steady improvement that has been underway in the banking industry since 2009 continued to gain ground," said FDIC Chairman Martin J. Gruenberg. "Asset quality improved, loan balances were up, and there were fewer troubled institutions. However, challenges remain in the industry. Narrow margins, modest loan growth, and a decline in mortgage refinancing activity have made it difficult for banks to increase revenue and profitability. Nonetheless, these results show a continuation of the recovery in the banking industry."

The average return on assets (ROA), a basic yardstick of profitability, rose to 1.10 percent in the fourth quarter from 0.96 percent a year ago. The average return on equity (ROE) increased from 8.53 percent to 9.87 percent.

Fourth quarter net operating revenue totaled $166.1 billion, a decline of $2.8 billion (1.7 percent) from a year earlier, as noninterest income fell by $4.2 billion (6.6 percent) and net interest income increased by $1.4 billion (1.3 percent). The average net interest margin — the difference between the average yield banks earn on loans and other investments and the average cost of funding those investments — was 3.28 percent, the highest average of any quarter in 2013, but down from 3.34 percent in the fourth quarter of 2012.

Total noninterest expenses were $5.8 billion (5.3 percent) lower than in the fourth quarter of 2012, as litigation expenses fell by $3.1 billion at one large institution. Banks set aside $7 billion in provisions for loan losses, a reduction of $8.1 billion (53.7 percent) compared to a year earlier. This is the 17th consecutive quarter that the industry has reported a year-over-year decline in quarterly loss provisions.

Asset quality indicators continued to improve as insured banks and thrifts charged off $11.7 billion in uncollectible loans during the quarter, down $6.8 billion (37 percent) from a year earlier. The amount of noncurrent loans and leases — those 90 days or more past due or in nonaccrual status — fell by $14 billion (6.3 percent) during the quarter. The percentage of loans and leases that were noncurrent declined to 2.62 percent, the lowest level since the 2.35 percent posted at the end of the third quarter of 2008.

Net income over the full year of 2013 totaled $154.7 billion, an increase of $13.6 billion (9.6 percent) compared to 2012. The average full-year ROA rose to 1.07 percent from 1.00 percent in 2012. More than half of all institutions (54.2 percent) reported higher net income in 2013, while only 7.8 percent were unprofitable. This is the lowest annual proportion of unprofitable institutions since 2005.

Financial results for the fourth quarter of 2013 and the full year are contained in the FDIC's latest Quarterly Banking Profile, which was released today. Also among the findings:

Total loan balances increased. Loan balances increased by $90.9 billion (1.2 percent) in the three months ending December 31, as all major loan categories except one- to four-family residential real estate loans experienced growth during the quarter. Loans to commercial and industrial (C&I) borrowers increased by $27.3 billion (1.7 percent), loans secured by nonfarm nonresidential real estate properties rose by $17.1 billion (1.6 percent), and credit card balances posted a $14.3 billion (2.1 percent) increase. Home equity loan balances declined for a 19th consecutive quarter, falling by $6.9 billion (1.3 percent). Balances of other loans secured by one- to four-family residential real estate properties fell by $13 billion (0.7 percent), as the amount of mortgage loans sold during the quarter exceeded by $29 billion the amount of mortgage loans originated and intended for sale. For the 12 months through December 31, total loan and lease balances were up by $197.3 billion (2.6 percent).

Mortgage activity remained well below year-ago levels. One- to four-family residential real estate loans originated and intended for sale were $307.7 billion (62 percent) lower than in the fourth quarter of 2012, as rising interest rates in the first half of 2013 reduced the demand for mortgage refinancings. Noninterest income from the sale, securitization and servicing of mortgages was $2.8 billion (34 percent) lower than a year ago. Realized gains on available-for-sale securities also were lower than a year ago, as higher medium- and long-term interest rates reduced the market values of fixed-rate securities. Banks reported $506 million in pretax income from realized gains in the fourth quarter, a decline of $1 billion (66.6 percent) from a year ago.

The number of "problem banks" fell for the 11th consecutive quarter. The number of banks on the FDIC's "Problem List" declined from 515 to 467 during the quarter. The number of "problem" banks is down by almost half from the recent high of 888 at the end of the first quarter of 2011. Two FDIC-insured institutions failed in the fourth quarter of 2013, down from eight in the fourth quarter of 2012. For all of 2013, there were 24 failures, compared to 51 in 2012.

The Deposit Insurance Fund (DIF) balance continued to increase. The unaudited DIF balance — the net worth of the fund — rose to $47.2 billion as of December 31 from $40.8 billion as of September 30. Assessment income and a reduction in estimated losses from failed institution assets were the primary contributors to growth in the fund balance. Estimated insured deposits increased 0.7 percent, and the DIF reserve ratio — the fund's balance as a percentage of estimated insured deposits — rose to 0.79 percent as of December 31 from 0.68 percent as of September 30. A year ago, the DIF reserve ratio was 0.44 percent. By law, the DIF must achieve a minimum reserve ratio of 1.35 percent by 2020.

TruPS CDOs RULE APPROVED BY AGENCIES

 FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION 
January 14, 2014

Agencies Approve Interim Final Rule Authorizing Retention of Interests in and Sponsorship of Collateralized Debt Obligations Backed Primarily by Bank-Issued Trust Preferred Securities

Five federal agencies on Tuesday approved an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities (TruPS CDOs) from the investment prohibitions of section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the Volcker rule.

Under the interim final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking entities if the following qualifications are met:

the TruPS CDO was established, and the interest was issued, before May 19, 2010;
the banking entity reasonably believes that the offering proceeds received by the TruPS CDO were invested primarily in Qualifying TruPS Collateral; and
the banking entity’s interest in the TruPS CDO was acquired on or before December 10, 2013, the date the agencies issued final rules implementing section 619 of the Dodd-Frank Act.
The federal banking agencies on Tuesday also released a non-exclusive list of issuers that meet the requirements of the interim final rule.

The interim final rule defines Qualifying TruPS Collateral as any trust preferred security or subordinated debt instrument that was:

issued prior to May 19, 2010, by a depository institution holding company that as of the end of any reporting period within 12 months immediately preceding the issuance of such trust preferred security or subordinated debt instrument had total consolidated assets of less than $15 billion; or
issued prior to May 19, 2010, by a mutual holding company.
Section 171 of the Dodd-Frank Act provides for the grandfathering of trust preferred securities issued before May 19, 2010, by certain depository institution holding companies with total assets of less than $15 billion as of December 31, 2009, and by mutual holding companies established as of May 19, 2010. The TruPS CDO structure was the vehicle that gave effect to the use of trust preferred securities as a regulatory capital instrument prior to May 19, 2010, and was part of the status quo that Congress preserved with the grandfathering provision of section 171.

The interim final rule also provides clarification that the relief relating to these TruPS CDOs extends to activities of the banking entity as a sponsor or trustee for these securitizations and that banking entities may continue to act as market makers in TruPS CDOs.

The interim final rule was approved by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Commodity Futures Trading Commission, and the Securities and Exchange Commission, the same agencies that issued final rules to implement section 619. The agencies will accept comment on the interim final rule for 30 days following publication of the interim final rule in the Federal Register.

FDIC SETTLES WITH AMERICAN EXPRESS CENTURION BANK IN DECEPTIVE PRACTICES CASE

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION 
FDIC Announces Settlement With American Express Centurion Bank for Unfair and Deceptive Practices 

Today, the Federal Deposit Insurance Corporation (FDIC) announced a settlement with American Express Centurion Bank, Salt Lake City, Utah, (Bank) for unfair and deceptive marketing practices related to credit card "add-on products," in violation of Section 5 of the Federal Trade Commission (FTC) Act.

This action results from a review of the Bank's credit card products by the FDIC and the Consumer Financial Protection Bureau (CFPB). As part of the settlement, the Bank stipulated to the issuance of a Consent Order, Order for Restitution, and Order to Pay Civil Money Penalty (collectively, FDIC Order). The FDIC Order requires the Bank to pay a civil money penalty (CMP) of $3.6 million. The CFPB is also taking a parallel enforcement action against the Bank for the same practices and will assess a separate CMP of $3.6 million. Together, the FDIC and CFPB will require restitution of no less than $40.9 million to harmed consumers.

The Office of the Comptroller of the Currency (OCC) and the CFPB also announced actions against other American Express affiliated institutions for the same unfair and deceptive practices identified in those institutions. Collectively, these actions will result in restitution of approximately $59.5 million to more than 335,000 consumers.

The FDIC determined that the Bank violated federal law prohibiting unfair and deceptive practices by, among other things:

Misrepresenting to consumers the benefits and costs of its "Account Protector" add-on product. Consumers were led to believe that the benefits would continue for up to 24 months in the event of a qualifying life event, when in fact the majority of events had benefit periods of one, two, or three months. Consumers were also led to believe that if they purchased the product their monthly minimum payment would be cancelled in the event of a qualifying event. However, the benefit payment was limited to 2.5% of the consumer's outstanding balance, up to $500, which could be less than the minimum monthly payment.
Misrepresenting the terms and conditions of the "Lost Wallet" add-on product through telemarketing calls conducted in Spanish to consumers in Puerto Rico. American Express did not provide uniform Spanish language scripts to its customer service representatives for enrollment calls, and all written materials provided to consumers were in English.
Consumers were not informed during telemarketing calls or during the enrollment process for identity theft products that two steps were necessary to fully utilize credit monitoring and public records monitoring benefits. The second step was not completed by 85 % of consumers. These consumers were thus unfairly billed for benefits they did not receive.
In addition, the Order requires the Bank to take affirmative steps to correct its marketing and billing practices, and to ensure that all of the add-on products offered by the Bank are marketed and administered in compliance with applicable laws.

FDIC ALERTS CONSUMERS TO NEW PROTECTIONS FROM RISKY LOANS

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION 
December 12, 2013

For anyone thinking about buying a home or shopping for a mortgage, the Fall 2013 issue of FDIC Consumer News features an overview of important rules taking effect soon that are intended to protect consumers from risky loans. The coverage includes practical tips when shopping for a loan and for avoiding mortgage scams. Additional articles offer suggestions on options to consider if an institution turns you down for an account based on a report of a previously closed checking or savings account, as well as information on using a financial institution's social media site to communicate or conduct business with a bank. Here's an overview of this issue, which also marks the 20th anniversary of the FDIC newsletter:

New mortgage rules: Important new rules from the Consumer Financial Protection Bureau, which will implement provisions of the 2010 Dodd-Frank financial reform law, are primarily intended to ensure that consumers are not encouraged by a lender or loan broker to take a mortgage that they don't have the ability to repay. Other provisions will help consumers do a better job of protecting themselves during the loan origination process. Most of the new rules will take effect on January 10, 2014.

Mortgage scams: FDIC Consumer News is reminding mortgage borrowers to watch out for scammers who falsely claim to be lenders, loan servicers, financial counselors, representatives of government agencies or other professionals wanting to "help" fix loan payment problems. The newsletter presents common warning signs of fraudulent offers.

If you're turned down for a checking account: Certain "consumer reporting" companies can legally collect information from financial institutions on aspects relating to a consumer's checking account, such as the reasons an account was closed. And just as a negative credit report can hurt someone's ability to borrow from a financial institution, a checking history that shows a closed account because of unpaid overdrafts or other mismanagement can hurt that person's ability to open a new account. FDIC Consumer News offers suggestions for consumers who are unable to open a new account, including the importance of reviewing a copy of the report and disputing errors.

Using financial institutions' social networking sites: Many people interact with businesses on social media sites such as Facebook, Google+ and Twitter. Banks are also using social media to advertise their products and services, obtain consumer feedback and, in some cases, provide a gateway for customers to access their accounts. There can be consumer benefits, including finding out about new products or special offers more quickly, but users also need to be careful, such as by protecting personal, confidential or account information in their posts.

FDIC REPORTS INCOME DECLINE IN 3RD QUARTER FOR INSURED COMMERCIAL BANKS, SAVINGS INSTITUTIONS

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION 

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported aggregate net income of $36.0 billion in the third quarter of 2013, a $1.5 billion (3.9 percent) decline from the $37.5 billion in profits that the industry reported a year earlier. This is the first time in 17 quarters — since the second quarter of 2009 — that earnings registered a year-over-year decline. The earnings decline was mainly attributable to a $4 billion increase in litigation expenses at one institution. Lower revenue from reduced mortgage activity and lower gains on asset sales also contributed to the reduction in earnings. Half of the 6,891 insured institutions reporting had year-over-year growth in earnings, while half reported declines. The proportion of banks that were unprofitable fell to 8.6 percent, from 10.7 percent a year earlier. The FDIC also noted that industry earnings for the second quarter of 2013 had been revised downward, from $42.2 billion to $38.1 billion, as a result of expenses for goodwill impairment at two banks in the same organization.

"Most of the positive trends we have been seeing in industry performance continued in the third quarter," noted FDIC Chairman Martin J. Gruenberg. "Fewer institutions reported quarterly losses, lending grew at a modest pace, credit quality continued to improve, more banks came off the 'Problem List,' and fewer banks failed."

The average return on assets (ROA), a basic yardstick of profitability, fell to 0.99 percent from 1.06 percent a year ago. The average return on equity (ROE) fell from 9.35 percent to 8.92 percent.

Third quarter net operating revenue (net interest income plus total noninterest income) totaled $163.3 billion, a decline of $6.1 billion (3.6 percent) from a year earlier, as noninterest income fell by $4.7 billion (7.4 percent) and net interest income declined by $1.3 billion (1.3 percent). The average net interest margin — the difference between the average yield banks earn on loans and other investments and the average cost of funding those investments — was 3.26 percent, unchanged from second quarter, but down from 3.42 percent a year ago. The average margin is at its lowest level since the 3.20 percent reported in the fourth quarter of 2006.

Total noninterest expenses were $2.0 billion (1.9 percent) higher than in the third quarter of 2012, as litigation expenses rose by $4 billion at one large institution. Banks set aside $5.8 billion in provisions for loan losses, a reduction of $8.8 billion (60.4 percent) compared to a year earlier. This is the lowest quarterly loss provision reported by the industry since the third quarter of 1999.

Asset quality indicators continued to improve as insured banks and thrifts charged off $11.7 billion in uncollectible loans during the quarter, down $10.5 billion (47.4 percent) from a year earlier. The amount of noncurrent loans and leases (those 90 days or more past due or in nonaccrual status) fell by $18.3 billion (7.7 percent) during the quarter, and the percentage of loans and leases that were noncurrent declined to 2.83 percent, the lowest level in 5 years (since the 2.35 percent posted at the end of the third quarter of 2008).

Financial results for the third quarter of 2013 are contained in the FDIC's latest Quarterly Banking Profile, which was released today. Also among the findings:

Total loan balances rose. Loan balances increased by $69.7 billion (0.9 percent) in the three months ending September 30, as all major loan categories except 1-4 family residential real estate loans experienced growth during the quarter. Auto loan balances increased by $10.6 billion (3.2 percent), multifamily residential real estate loans rose by $8.1 billion (3.3 percent), loans to states and municipalities increased by $7.5 billion (7.3 percent), and credit card balances rose by $6.8 billion (1.0 percent). Home equity lines of credit fell by $10.9 billion (2.1 percent), while other 1-4 family residential real estate loans declined by $13.7 billion (0.7 percent). For the 12 months through September 30, total loan and lease balances were up by $224.0 billion (3.0 percent).

Higher interest rates caused a sharp drop in mortgage activity. Originations of 1-4 family residential real estate loans were $136.8 billion (30.1 percent) lower than in the second quarter, as interest rate increases in the second quarter reduced the demand for mortgage refinancings. Noninterest income from the sale, securitization and servicing of mortgages was $4.0 billion (45.2 percent) lower than a year ago. Realized gains on available-for-sale securities also were lower than a year ago, as higher medium- and long-term interest rates reduced the market values of fixed-rate securities. Banks reported $540 million in pretax income from realized gains, a decline of $2.2 billion (80.1 percent) from a year ago.

The number of "problem banks" continued to decline. The number of banks on the FDIC's "Problem List" declined from 553 to 515 during the quarter. The number of "problem" banks is down more than 40 percent from the recent high of 888 at the end of the first quarter of 2011. Six FDIC-insured institutions failed in the third quarter of 2013, down from 12 in the third quarter of 2012. Thus far in 2013, there have been 23 failures, compared to 50 during the same period in 2012.

The Deposit Insurance Fund (DIF) balance continued to increase. The DIF balance — the net worth of the fund — rose to $40.8 billion as of September 30 from $37.9 billion as of June 30. Assessment income and a reduction in estimated losses from anticipated failures were the primary contributors to growth in the fund balance. Estimated insured deposits were essentially unchanged from the previous quarter, increasing by only 0.1 percent, and the DIF reserve ratio — the fund's balance as a percentage of estimated insured deposits — rose from 0.64 percent as of June 30 to 0.68 percent as of September 30. By law, the DIF must achieve a minimum reserve ratio of 1.35 percent by 2020.

FDIC AND PEOPE'S BANK OF CHINA SIGN MEMORANDUM OF UNDERSTANDING

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION 

Beijing, China -- The Federal Deposit Insurance Corporation (FDIC) announced the signing of a Memorandum of Understanding (MOU) between the agency and the People's Bank of China (PBOC) designed to extend their effective international working relationship in the areas of deposit insurance and resolution. The purpose of the MOU is to develop and expand the interaction between the FDIC and the PBOC and to demonstrate a shared commitment to cooperation among banking agencies. The MOU also seeks to enhance cooperation in analyzing of cross-border financial institution recovery and resolution issues, and planning for potential recovery and resolution scenarios, including appropriate simulations, contingency planning and other work designed to improve preparations to manage troubled institutions with operations in the United States and the PBOC. The agreement was signed by FDIC Chairman Martin J. Gruenberg and Governor Zhou Xiaochuan of the PBOC and updates an existing MOU that was signed on August 2nd, 2007.

FDIC Chairman Gruenberg said, "There is a long history of close collaboration and cooperation between the PBOC and the FDIC, and I am honored to have the opportunity to build on this strong foundation through this MOU. China and the U.S. have a shared interest in maintaining and expanding our interaction on economic and financial issues, particularly in the areas of deposit insurance and cross-border resolution issues. Among U.S. financial regulators, the FDIC is uniquely positioned to engage and offer our experience with deposit insurance and resolution issues internationally. I welcome this expanded agreement with the PBOC and would like to thank our Chinese hosts, particularly Governor Zhou and the officials at the PBOC, for accommodating the delegation from the FDIC."

FDIC SAYS CREDIT RISK IN SHARED NATIONAL PORTFOLIO UNCHANGED IN 2013

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION 

Credit Risk in the Shared National Credit Portfolio Unchanged

The credit quality of large loan commitments owned by U.S. banking organizations, foreign banking organizations (FBOs), and nonbanks was relatively unchanged in 2013 from the prior year, federal banking agencies said Thursday.

The volume of criticized assets remained elevated at $302 billion, or 10 percent of total commitments, which was approximately twice the percentage of pre-crisis levels. The stagnation in credit quality follows three consecutive years of improvements. A criticized asset is rated special mention, substandard, doubtful, or loss as defined by the agencies' uniform loan classification standards. The Shared National Credits (SNC) annual review was completed by the Federal Reserve Board, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency.

Leveraged loans--transactions characterized by a borrower with a degree of financial leverage that significantly exceeds industry norms--totaled $545 billion of the 2013 SNC portfolio and accounted for $227 billion, or 75 percent, of criticized SNC assets. Material weaknesses in the underwriting of leveraged loans were observed, and 42 percent of leveraged loans were criticized by the agencies.

The federal banking agencies issued updated leveraged lending supervisory guidance on March 21, 2013. After declining during the financial crisis, the volume of leveraged lending has since increased and underwriting standards have deteriorated. The agencies expect supervised firms to properly evaluate and monitor credit risks in their leveraged loan commitments and ensure borrowers have sustainable capital structures.

Refinancing risk continued to ease in 2013 with only 15 percent of SNCs maturing over the next two years, compared with 23 percent for the same time frame in the previous review. Borrowers continued to refinance and extend loan maturities during the past year.

Other highlights:

• Total SNC commitments increased by $219 billion to $3.01 trillion, an 8 percent gain from the 2012 review. Total SNC loans outstanding increased $199 billion to $1.36 trillion, an increase of 10 percent.
• Criticized assets represented 10 percent of the SNC portfolio, compared with 11 percent in 2012.
• Classified assets, which are rated as substandard, doubtful, and loss, represented 6 percent of the SNC portfolio, compared with 7 percent in 2012.
• Credits rated special mention, which exhibit potential weakness and could result in further deterioration if uncorrected, increased from $99 billion to $115 billion, representing approximately 4 percent of the portfolio, a slight increase from 2012.
• Adjusted for losses, nonaccrual loans declined from $82 billion to $61 billion, a 26 percent reduction.
• The distribution of credits across entities, (U.S. banking organizations, FBOs, and nonbanks) remained relatively unchanged. U.S. banking organizations owned 44 percent of total SNC loan commitments, FBOs owned 36 percent, and nonbanks owned 20 percent.
• Nonbanks continued to own a larger share of classified (67 percent) and nonaccrual (72 percent) assets than their total share of the SNC portfolio. Institutions insured by the FDIC owned 12 percent of classified assets and 7 percent of nonaccrual loans.

The SNC program was established in 1977 to provide an efficient and consistent review and analysis of SNCs. A SNC is any loan or formal loan commitment, and asset such as real estate, stocks, notes, bonds, and debentures taken as debts previously contracted, extended to borrowers by a federally supervised institution, its subsidiaries, and affiliates that aggregates $20 million or more and is shared by three or more unaffiliated supervised institutions. Many of these loan commitments are also shared with FBOs and nonbanks, including securitization pools, hedge funds, insurance companies, and pension funds.

In conducting the 2013 SNC Review, the agencies reviewed $800 billion of the $3.01 trillion credit commitments in the portfolio. The sample was weighted toward noninvestment grade and criticized credits. The results of the review are based on analyses prepared in the second quarter of 2013 using credit-related data provided by federally supervised institutions as of December 31, 2012, and March 31, 2013.

PRESIDENT OBAMA'S REMARKS DURING NOMINATION OF DR. YELLEN AS FED CHAIR

FROM:  THE WHITE HOUSE
Remarks by the President in Nominating Dr. Janet Yellen as Chair of the Board of Governors of the Federal Reserve System

State Dining Room

3:16 P.M. EDT

     THE PRESIDENT:  Good afternoon.  Over the past five years, America has fought its way back from the worst recession since the Great Depression.  We passed historic reforms to prevent another crisis and to protect consumers.  Over the past three and half years, our businesses have created 7.5 million new jobs.  Our housing market is rebounding.  Manufacturing is growing.  The auto industry has come roaring back.  And since I took office, we’ve cut the deficit in half.

I think everybody understands we’ve still got a lot of work to do to rebuild the middle class, but we've made progress.  And we shouldn’t do anything to threaten that progress -- for these hard-won gains have made a difference to millions of Americans.  And, in part, we can thank the extraordinary grit and resilience of the American people; in part, we can thank the dynamism of our businesses.  But a lot of it also has to do with the choices we’ve made as a nation to create more jobs and more growth.  And one of the most important contributors to this whole process has been the Federal Reserve, under the strong leadership of Ben Bernanke.

For nearly eight years, Ben has led the Fed through some of the most daunting economic challenges of our lifetime.  For some time now he’s made it clear that he intends to finish his service as chairman at the end of his term, which is this January.  So, today I just want to take a minute to pay tribute to Ben for his extraordinary service.  But I also want to announce my choice for the next chair of the Federal Reserve, one of the nation’s foremost economists and policymakers -- current Vice Chairman Janet Yellen.

After I became President, I was proud to nominate Ben for a second term.  And while the Fed is, and must always be, independent, I want you to know, Ben, I'm personally very grateful to you for being such a strong partner in helping America recover from recession.

Perhaps it’s no surprise -- as the son of a pharmacist and a school teacher -- that Ben Bernanke is the epitome of calm.  And against the volatility of global markets, he’s been a voice of wisdom and a steady hand.  At the same time, when faced with a potential global economic meltdown, he has displayed tremendous courage and creativity.  He took bold action that was needed to avert another Depression -- helping us stop the free fall, stabilize financial markets, shore up our banks, get credit flowing again.

And all this has made a profound difference in the lives of millions of Americans.  A lot of people aren't necessarily sure what the chairman of the Federal Reserve does, but thanks to this man to the left of me, more families are able to afford their own home; more small businesses are able to get loans to expand and hire workers; more folks can pay their mortgages and their car loans.  It’s meant more growth and more jobs.

And I’d add that with his commitment to greater transparency and clarity, he’s also allowed us to better understand the work of the Fed.  Ben has led a new era of “Fedspeak” and been a little more clear about how the system works.  And that is good for our democracy.

And I have to tell you, as I travel around the world, the job of the Fed chair is not just our top monetary policymaker.  The world looks to the American Fed chair for leadership and guidance.  And the degree to which Ben is admired and respected, and the degree to which central bankers all across the world look to him for sound advice and smart policymaking is remarkable.  He has truly been a stabilizing force not just for our country, but for the entire world.  And I could not be more grateful for his extraordinary service.

And so, Ben, to you and your wife Anna, and your children Joel and Alyssa, I want to thank you for your outstanding service.  Thank you so much.  (Applause.)

Now, as I’ve said, the decision on who will succeed Ben is one of the most important economic decisions that I’ll make as President -- one of the most important appointments that any President can make -- because the chair of the Fed is one of the most important policymakers in the world, and the next chair will help guide our economy after I’ve left office.

I’ve considered a lot of factors.  Foremost among them is an understanding of the Fed’s dual mandate -- sound monetary policy to make sure that we keep inflation in check, but also increasing employment and creating jobs, which remains our most important economic challenge right now.

And I’ve found these qualities in Janet Yellen.  She’s a proven leader and she’s tough -- not just because she’s from Brooklyn.  (Laughter.)  Janet is exceptionally well-qualified for this role.  She’s served in leadership positions at the Fed for more than a decade.  As Vice Chair for the past three years, she’s been exemplary and a driving force of policies to help boost our economic recovery.

Janet is renowned for her good judgment.  She sounded the alarm early about the housing bubble, about excesses in the financial sector, and about the risks of a major recession.  She doesn’t have a crystal ball, but what she does have is a keen understanding about how markets and the economy work -- not just in theory but also in the real world.  And she calls it like she sees it.

Janet also knows how to build consensus.  She listens to competing views and brings people together around a common goal. And as one of her admirers says, “She’s the kind of person who makes everybody around her better.”  Not surprisingly, she is held in high esteem by colleagues across the country and around the world who look to the United States, as I said, and the Fed for leadership.

Janet is committed to both sides of the Fed’s dual mandate, and she understands the necessity of a stable financial system where we move ahead with the reforms that we've begun -- to protect consumers, to ensure that no institution is too big to fail, and to make sure that taxpayers are never again left holding the bag because of the mistakes of the reckless few.

And at the same time, she’s committed to increasing employment, and she understands the human costs when Americans can’t find a job.  She has said before, “These are not just statistics to me.  The toll is simply terrible on the mental and physical health of workers, on their marriages, on their children.”  So Janet understands this.  And America’s workers and their families will have a champion in Janet Yellen.
 
So, Janet, I thank you for taking on this new assignment.  And given the urgent economic challenges facing our nation, I urge the Senate to confirm Janet without delay.  I am absolutely confident that she will be an exceptional chair of the Federal Reserve.  I should add that she’ll be the first woman to lead the Fed in its 100-year history.  And I know a lot of Americans -- men and women -- thank you for not only your example and your excellence, but also being a role model for a lot of folks out there.

It’s been said that Janet found love at the Federal Reserve -- literally.  (Laughter.)  This is where she met her husband George, a celebrated economist in his own right.  And their son Robert is an economist as well.  So you can imagine the conversations around the dinner table might be a little different than ours.  (Laughter.)  In fact, I’ve been told their idea of a great family vacation is the beach -- with a suitcase full of economics books.  (Laughter.)  But this is a family affair.  We thank George and Robert for their support as Janet begins this journey.

Again, I want to thank Ben Bernanke for the outstanding work that he’s done, and obviously he will continue to help keep our economy moving forward during the remainder of his tenure here.  So we'll probably have occasion for additional good-byes.  And I know that Janet is very much counting on him to give some good advice as she moves into the chairman spot.

But with this, I’d like to give Janet a chance to say a few words.  (Applause.)

DR. YELLEN:  Thank you, Mr. President.  I'm honored and humbled by the faith that you’ve placed in me.  If confirmed by the Senate, I pledge to do my upmost to keep that trust and meet the great responsibilities that Congress has entrusted to the Federal Reserve -- to promote maximum employment, stable prices, and a strong and stable financial system.

I'd also like to thank my spouse, George, and my son, Robert.  I couldn't imagine taking on this new challenge without their love and support.

The past six years have been tumultuous for the economy and challenging for many Americans.  While I think we all agree, Mr. President, that more needs to be done to strengthen the recovery, particularly for those hardest hit by the Great Recession, we have made progress.  The economy is stronger and the financial system sounder.

As you said, Mr. President, considerable credit for that goes to Chairman Bernanke, for his wise, courageous and skillful leadership.  It has been my privilege to serve with him and learn from him.

While we have made progress, we have farther to go.  The mandate of the Federal Reserve is to serve all the American people, and too many Americans still can't find a job and worry how they’ll pay their bills and provide for their families.  The Federal Reserve can help if it does its job effectively.  We can help ensure that everyone has the opportunity to work hard and build a better life.  We can ensure that inflation remains in check and doesn’t undermine the benefits of a growing economy.
We can, and must, safeguard the financial system.

The Fed has powerful tools to influence the economy and the financial system.  But I believe its greatest strength rests in its capacity to approach important decisions with expertise and objectivity, to vigorously debate diverse views and then to unite behind its response.

The Fed’s effectiveness depends on the commitment, ingenuity and integrity of the Fed staff and my fellow policymakers.  They serve America with great dedication.

Mr. President, thank you for giving me this opportunity to continue serving the Federal Reserve and carrying out its important work on behalf of the American people.  (Applause.)

FDIC ENCOURAGES LENDERS TO WORK WITH STUDENT BORROWERS

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION 
Agencies Encourage Lenders to Work with Student Loan Borrowers 

WASHINGTON — The federal bank regulatory agencies today issued a statement encouraging financial institutions to work constructively with private student loan borrowers experiencing financial difficulties. Prudent workout arrangements are consistent with safe and sound lending practices and are generally in the long-term best interest of both the financial institution and the borrower.

Student loan borrowers who are unemployed or underemployed may face hardship in making payments on their private student loan debts after separation from school or during periods of economic difficulty. Current interagency guidance permits prudent workout and modification programs for retail loans, including student loans, and provides that extensions, deferrals, renewals, and rewrites may be used to help borrowers overcome temporary financial difficulties. Institutions that have private student loan workout programs should provide borrowers with information that clearly explains the programs, including eligibility criteria and the process for requesting a modification.

The statement is being issued by the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency.

FDIC INSTITUTIONS SHOW RECOVERY WITH INCOME INCREASES

FROM: FEDERAL DEPOSIT INSURANCE CORPORATION

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported aggregate net income of $40.3 billion in the first quarter of 2013, a $5.5 billion (15.8 percent) increase from the $34.8 billion in profits that the industry reported in the first quarter of 2012. This is the 15th consecutive quarter that earnings have registered a year-over-year increase. Increased noninterest income, lower noninterest expenses, and reduced provisions for loan losses accounted for the increase in earnings from a year ago. Half of the 7,019 insured institutions reporting financial results had year-over-year increases in their earnings. The proportion of banks that were unprofitable fell to 8.4 percent, from 10.6 percent a year earlier.

FDIC Chairman Martin J. Gruenberg said: "Today's report shows further progress in the recovery that has been underway in the banking industry for more than three years. We saw improvement in asset quality indicators over the quarter, a continued increase in the number of profitable institutions, and further declines in the number of problem banks and bank failures. However, tighter net interest margins and slow loan growth create an incentive for institutions to reach for yield, which is a matter of ongoing supervisory attention."

The average return on assets (ROA), a basic yardstick of profitability, rose to 1.12 percent from 1.00 percent a year ago. This is the highest quarterly ROA for the industry since the 1.22 percent posted in the second quarter of 2007.

First quarter net operating revenue (net interest income plus total noninterest income) totaled $170.6 billion, an increase of $2.7 billion (1.6 percent) from a year earlier, as noninterest income increased by $5.1 billion (8.3 percent) and net interest income declined by $2.4 billion (2.2 percent). The average net interest margin fell to its lowest level since 2006. Total noninterest expenses were $5.3 billion (3.9 percent) below the level of the first quarter of 2012. Banks set aside $11 billion in provisions for loan losses, a reduction of $3.3 billion (23.2 percent) compared to a year earlier.

Asset quality indicators continued to improve as insured banks and thrifts charged off $16.0 billion in uncollectible loans during the quarter, down $5.8 billion (26.7 percent) from a year earlier. The amount of noncurrent loans and leases (those 90 days or more past due or in nonaccrual status) fell by $15.7 billion (5.7 percent) during the quarter, and the percentage of loans and leases that were noncurrent declined to the lowest level since 2008.

Financial results for the first quarter of 2013 are contained in the FDIC's latest Quarterly Banking Profile, which was released today. Also among the findings:

Total loan balances posted a seasonal decline. Loan balances fell by $36.8 billion (0.5 percent) in the first quarter, as credit card balances declined by $35.9 billion (5.2 percent). Balances also fell in home equity lines (down $16.0 billion, or 2.9 percent), other 1-4 family residential real estate loans (down $18.3 billion, or 1 percent), and agricultural production loans (down $7.2 billion, or 10.7 percent). The declines in credit card balances and agricultural loans reflect seasonal factors. Loans to commercial and industrial borrowers increased by $24.8 billion (1.6 percent), while loans to depository institutions rose by $17.5 billion (17.2 percent). For the 12 months through March 31, total loan and lease balances were up by $247.7 billion (3.3 percent).

The end of temporary unlimited deposit insurance for noninterest-bearing transaction accounts at year-end 2012 did not lead to large deposit outflows. Total deposits increased by $1.8 billion (0.02 percent), as deposits in domestic offices fell by $20.5 billion (0.2 percent) and foreign office deposits rose by $22.3 billion (1.6 percent). Noninterest-bearing transaction deposits with balances greater than $250,000 fell by $74.9 billion (4.3 percent) during the quarter. Balances in these accounts that were over the $250,000 basic FDIC coverage limit declined by $70.3 billion (4.6 percent).

The number of problem banks continued to decline. The number of banks on the FDIC's "Problem List" declined from 651 to 612 during the quarter. The number of "problem" banks reached a recent high of 888 institutions at the end of the first quarter of 2011. Four FDIC-insured institutions failed in the first quarter, the smallest number since the second quarter of 2008 when two institutions were closed. Thus far in 2013, there have been 13 failures, compared to 24 during the same period in 2012.

The Deposit Insurance Fund (DIF) balance continued to increase. The DIF balance — the net worth of the fund — rose to $35.7 billion as of March 31 from $33.0 billion at the end of 2012. Assessment income was the primary contributor to growth in the fund balance. While the end of unlimited coverage for noninterest-bearing transaction accounts resulted in an 18.7 percent decline in estimated insured deposits in the first quarter, the estimated balances covered by the $250,000 insurance limit rose 2.6 percent during the quarter.

STATEMENT FROM FDIC OFFICIALS ON "TOO BIG TO FAIL" BANKS

FROM: FEDERAL DEPOSIT INSURANCE CORPORATION

Statement of Federal Deposit Insurance Corporation by James R. Wigand, Director, Office Of Complex Financial Institutions And Richard J. Osterman, Jr., Acting General Counsel on Who Is Too Big To Fail? Examining the Application of Title I of the Dodd-Frank Act before the Subcommittee on Oversight and Investigations; Committee on Financial Services; U.S. House of Representatives; 2128 Rayburn House Office Building
April 16, 2013


Chairman McHenry, Ranking Member Green, and members of the Subcommittee, thank you for the opportunity to testify on behalf of the Federal Deposit Insurance Corporation (FDIC) on Sections 165 and 121 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Our testimony will focus on the FDIC's role and progress in implementing Section 165, including the resolution plan requirements and the requirements for stress testing by certain financial institutions.

Section 165 of the Dodd-Frank Act

Resolution Plans
Under the Dodd-Frank Act, bankruptcy is the preferred resolution framework in the event of a systemic financial company's failure. To make this prospect achievable, Title I of the Dodd-Frank Act requires that all large, systemic financial companies prepare resolution plans, or "living wills", to demonstrate how the company would be resolved in a rapid and orderly manner under the Bankruptcy Code in the event of the company's material financial distress or failure. This requirement enables both the firm and the firm's regulators to understand and address the parts of the business that could create systemic consequences in a bankruptcy.

The FDIC intends to make the living will process under Title I of the Dodd-Frank Act both timely and meaningful. The living will process is a necessary and significant tool in ensuring that large financial institutions can be resolved through the bankruptcy system.

The FDIC and the Federal Reserve Board issued a joint rule to implement Section 165(d) requirements for resolution plans – (the 165(d) Rule) – in November 2011. The 165(d) Rule requires systemically important financial institutions (SIFIs) -- bank holding companies with total consolidated assets of $50 billion or more, and nonbank financial companies that the Financial Stability Oversight Council (FSOC) determines could pose a threat to the financial stability of the United States -- to develop, maintain, and periodically submit resolution plans to regulators.

In addition to the resolution plan requirements under the Dodd-Frank Act, the FDIC issued a separate rule which requires all insured depository institutions (IDIs) with greater than $50 billion in assets to submit resolution plans to the FDIC for their orderly resolution under the Federal Deposit Insurance Act. The 165(d) Rule and the IDI resolution plan rule are designed to work in tandem by covering the full range of business lines, legal entities and capital-structure combinations within a large financial firm.

The 165(d) Rule establishes a schedule for staggered annual filings. The first group of filers -- bank holding companies and foreign banking organizations with $250 billion or more in non-bank assets ("first wave" filers) -- submitted their initial resolution plans on July 1, 2012. Financial companies with less than $250 billion, but more than $100 billion in non-bank assets ("second wave" filers), will file their initial plans by July 1, 2013, and all other bank holding companies – those with assets over $50 billion – ("third wave" filers) are scheduled to file by December 31, 2013. While the general expectation is that firms will file annually, regulators may require that a plan be updated on a more frequent schedule, and a firm must provide notice to regulators of any event that may have a material effect on its resolution plan.

Eleven firms comprised the first wave of filers. The nine firms that submitted plans on July 1, 2012, were Bank of America Corporation, Citigroup, JPMorgan Chase, Goldman Sachs, Morgan Stanley, Deutsche Bank, UBS, Credit Suisse, and Barclays. The two other first wave filers, Bank of New York Mellon Corporation and State Street Corporation, submitted plans on October 1, 2012. The second wave filers include Wells Fargo, BNP Paribas, HSBC, and RBS. The third wave filers include approximately 115 firms, the large majority being foreign financial companies conducting business in the U.S.

The 165(d) Rule sets out the information to be included in a firm's resolution plan. The key objectives laid out in the Rule for the initial resolution plans submitted by first wave filers are identifying each firm's critical operations and core business lines, mapping those operations and core business lines to each firm's material legal entities, and identifying the key obstacles to a rapid and orderly resolution in bankruptcy. With regard to key obstacles, these might include such areas as a firm's internal organizational structure, interconnections of the firm to other systemic financial companies, management information system limitations, default and termination provisions of certain types of financial contracts, cross-jurisdictional operations, and funding mechanisms.

The 165(d) Rule provides that smaller, less complex financial institutions subject to the filing requirements may be eligible to file a less detailed, tailored resolution plan, for which the information requirements generally are limited to the firm's nonbanking operations, and the interconnections between the nonbanking operations and its IDI operations.

Section 165(d) of the Dodd-Frank Act requires the FDIC and the Federal Reserve Board to review each resolution plan. If, as a result of their review, the FDIC and the Federal Reserve Board jointly determine that the resolution plan is not credible or would not facilitate an orderly resolution of the firm under the Bankruptcy Code, then the company must resubmit the plan with revisions, including, if necessary, proposed changes in business operations or corporate structure. If the company fails to resubmit a credible plan that would result in orderly resolution under the Bankruptcy Code, the FDIC and the Federal Reserve may jointly impose more stringent capital, leverage, or liquidity requirements; growth, activities, or operations restrictions; or, after two years and in consultation with the FSOC, divestiture requirements.

Federal Reserve Board and FDIC staff reviewed the first wave filers' plans for informational completeness to ensure that all information requirements of the Rule were addressed in the plans. The initial plan submissions for the first wave filers were created using an assumption of the individual firm's failure under "baseline" economic conditions as a starting point. Subsequent submissions are required to take into account "adverse" and "severely adverse" economic conditions.

The eleven firms that submitted initial plans in 2012 will be expected to revise and update their submissions in their subsequent 2013 versions, pursuant to guidance that the FDIC and the Federal Reserve Board will provide to these companies. Resolution plans submitted in 2013 will be subject to informational completeness reviews and reviews for creditability or resolvability under the Bankruptcy Code. Going forward, the FDIC and the Federal Reserve Board expect the revised plans to focus on key issues and obstacles to an orderly resolution in bankruptcy, including global cooperation and the risk of ring-fencing or other precipitous actions. To assess this potential risk, the firms will need to provide a jurisdiction-by-jurisdiction analysis of the actions each would need to take in a resolution, as well as the actions to be taken by host authorities, including supervisory and resolution authorities. Other key issues expected to be addressed in the plans include: the risk of multiple, competing insolvency proceedings; the continuity of critical operations -- particularly maintaining access to shared services and payment and clearing systems; the potential systemic consequences of counterparty actions; and global liquidity and funding with an emphasis on providing a detailed understanding of the firm's funding operations and cash flows.

Stress Testing
Section 165 of the Dodd-Frank Act requires the FDIC to issue regulations for FDIC-supervised banks with total consolidated assets of more than $10 billion to conduct annual stress tests. The banks must report their respective stress test results to the FDIC and the Federal Reserve Board and these results also are summarized in a public document. The FDIC views the stress tests as an important source of forward-looking analysis that will enhance the supervisory process for these institutions. Furthermore, these stress tests will support ongoing improvement in a bank's internal assessments of capital adequacy and overall capital planning.

The Dodd-Frank Act requires the FDIC to coordinate with the other supervisory agencies to issue regulations that are consistent and comparable. While each banking agency issued separate final rules with respect to their supervised entities, the final rules were nearly identical across the agencies. The FDIC finalized its rule on annual stress tests on October 15, 2012. Complementing this rulemaking, the FDIC also issued proposed reporting templates that were developed jointly with the other agencies. Lastly, the agencies are working closely on proposed guidance to ensure consistent treatment for all covered financial institutions under the final rule.

Certain insured institutions and bank holding companies with assets of $50 billion or more comprised the first set of companies to conduct stress tests, which were completed in March 2013. Using September 30, 2012 financial data, institutions developed financial projections under defined stress scenarios provided by the agencies in November 2012. Each company publicly disclosed the results of their stress tests on or before March 31st of this year.

Institutions with assets greater than $10 billion, but less than $50 billion, and larger institutions that have not had previously conducted stress tests, will conduct their first round of stress tests later this fall.

Section 121 of the Dodd-Frank Act

Section 121 authorizes the Federal Reserve Board, with the concurrence of two-thirds of the voting members of the Financial Stability Oversight Council (FSOC), to take various actions with respect to a bank holding company with assets of $50 billion or more or a nonbank financial company supervised by the Federal Reserve Board, if it is determined that company poses a grave threat to the financial stability of the United States. Section 121 also grants the company, upon its request, the opportunity to request a written or oral hearing before the Federal Reserve Board to contest proposed actions.

As a voting member of the FSOC, the FDIC would participate in any discussions involving findings made by the Federal Reserve Board under this section and would carefully weigh the case and its merit in exercising our FSOC vote. To date, the FSOC has not heard any matters involving the use of this "grave threat" authority.

Conclusion
The FDIC has made significant progress in the implementation of Section 165 of the Dodd-Frank Act. Our goal is to ensure that firms that could pose a systemic risk to the financial system develop and maintain resolution plans that identify each firm's critical operations and core business lines, map those operations and core business lines to each firm's material legal entities, and identify and address the key obstacles to a rapid and orderly resolution in bankruptcy. Ensuring that any institution, regardless of size or complexity, can be effectively resolved through the bankruptcy process will contribute to the stability of our financial system and will avoid many of the difficult choices regulators faced in dealing with systemic institutions during the last crisis.