TOPICS > Economy

FDIC Chief: Most Banks Will Survive Credit Crunch

July 28, 2008 at 6:30 PM EDT
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Poor lending and underwriting caused two more banks in the U.S. to close over the weekend, yet regulators and the Federal Deposit Insurance Corporation, or FDIC, are helping banks remain stable as the economy struggles. Sheila Bair,the chair of FDIC, explains the process.

JUDY WOODRUFF: Two more banks in the United States closed this weekend, as the effects of the housing and credit crunch continue rippling through the financial system.

The First National Bank of Nevada and the First Heritage Bank of California became the sixth and seventh banks to go under this year.

The Federal Deposit Insurance Corporation, or FDIC, which regulates commercial banks and guarantees deposits, sold the banks’ deposits to Mutual of Omaha Bank.

Now, those failures come after the demise of IndyMac Bank in California, which earlier this month became the largest American lender to fail in more than two decades.

Sheila Bair is the chair of the FDIC, and she joins me now.

Sheila Bair, thank you very much for being here.

SHEILA BAIR, Chairman, Federal Deposit Insurance Corporation: A pleasure. Thank you.

JUDY WOODRUFF: What was behind the failure of these two banks?

SHEILA BAIR: Well, primarily some very unwise lending. They had some very poorly underwritten loans in both residential mortgages, as well as residential construction development. It was primarily poor lending, poor underwriting.

JUDY WOODRUFF: Now, their deposits were acquired by this other bank, the Mutual of Omaha Bank.

SHEILA BAIR: That’s right.

JUDY WOODRUFF: What role did your agency, the FDIC, play in this coming about?

SHEILA BAIR: It is a confusing process. We actually don’t charter banks. In this case, the chartering authority was the Office of the Comptroller of the Currency. And when it became apparent to the OCC that these banks were no longer viable, they decided to pull the charter, close the bank, and turn it over to us as receiver.

We have advanced notice when a primary regulator decides to do that. We will typically work with them days, sometimes weeks, if we have the time, in advance, trying to get at least the deposits on a marketing system that we have to see if other banks would like to acquire the deposits.

That’s our preferred course of action. It is a smoother process for depositors if the bank has to be closed to just have their deposits switched over to another healthier institution.

Most banks nursed back to health

JUDY WOODRUFF: How many other banks are in trouble?

JUDY WOODRUFF: We know there are 90 banks that are on the so-called watch list...

SHEILA BAIR: That's a good question, right.

JUDY WOODRUFF: ... that you have, something like 26 billion in assets.

SHEILA BAIR: That's right, yes.

JUDY WOODRUFF: How many banks are you worried about right now?

SHEILA BAIR: Right. Well, the troubled bank list are those with very low supervisory ratings, so the primary regulator, whether it's the OCC or any of the other regulators that we have, have determined that they're higher risk institutions.

Actually only 13 percent of the institutions that go on the troubled bank list eventually fail. Most are nursed back to health. That's why we put them on the troubled bank list.

We work with the primary regulator to give them extra care and attention to nurse them back to health or to sell them off to another institution before it gets to a situation where we have to close them. That number is going to go up, but it's still very low by historical standards.

JUDY WOODRUFF: The 13 percent of the 90 or the 90 banks that are in trouble?

SHEILA BAIR: The 90. The 90. That's still very low. If you look at the S&L days, I think, in 1990, 1991, we had something like 1,500 banks on the troubled bank list. So it's a very small number.

You're looking at an industry with $13 trillion in assets; $26 billion on the troubled bank lists is not a lot. Again, that number is going to go up, but I think we'll still be operating at historically low levels.

JUDY WOODRUFF: Again, you said 13 percent, give or take. Do you think that -- does that feel like the right number?

SHEILA BAIR: Well, that's our historical number. That's our historical number. And it can vary from year to year, but historically about 13 percent fail.

We're still finding acquires so we had a very nice acquisition by Mutual of Omaha of deposits of this bank. And they actually paid enough of a premium that we could cover both the insured and the uninsured depositors, so there were no depositor losses in this transaction.

JUDY WOODRUFF: So there were no depositor losses?

SHEILA BAIR: Not in this transaction, no.

The role of the FDIC

JUDY WOODRUFF: For people who are watching who are worried about their bank, help us understand again what the FDIC does.

SHEILA BAIR: Well, we ensure deposits up to $100,000 per institution, $250,000 for IRA accounts. You can actually get more insurance coverage than that at a particular institution by structuring your accounts.

It goes by ownership categories. So, for instance, you could get $100,000 in a single account, another $100,000 in a joint account with your spouse. Trust accounts can also qualify for greater coverage.

We recommend that folks, if they're above $100,000 basic, $250,000 for the IRA, to go to our Web site at, go to our Electronic Deposit Insurance Estimator, EDIE. It's prominently displayed on our Web page. And you can input your deposit information to make sure you're below our insured deposit limits.

If you are below the limits, you're absolutely safe. The FDIC has been around for 75 years. We've never lost a penny of insured deposits. And we generally guarantee access the next business day, so there's virtually uninterrupted access.

JUDY WOODRUFF: But if a bank goes under, it's going to make a difference in how much is covered, as to whether that bank is -- whether those deposits are purchased by somebody?

SHEILA BAIR: You are always completely guaranteed for your insured amount, so, again, $100,000, $250,000. If you're above those limits, go to our Web site to make sure your accounts are structured. You have nothing to worry about if you're below our insured limits.

Occasionally, even if you're above the insured limits, occasionally we can find another institution to acquire all the deposits and pay that premium. That doesn't happen a lot of the times, so people should really make sure they stay below their insured limits.

JUDY WOODRUFF: People, it's their responsibility, you're saying, to look...

SHEILA BAIR: Well, it is. We encourage banks -- but we also encourage banks. We provide training modules for the tellers and the account representatives who open accounts. We very strongly encourage banks to work with the customers.

But we have a call center. A lot of people who will take phone calls or people who do not want to do the electronic version of the deposit insurance estimator to make sure to walk through the process with customers and make sure they're insured.

Confidence to shore up banks

JUDY WOODRUFF: Now, I understand the FDIC has something like $53 billion you set aside to cover these kinds of losses. IndyMac, the big bank in California that went under last month, took up -- ate up some of that money.


JUDY WOODRUFF: Are you confident you've got enough to cover the coming big losses?

SHEILA BAIR: Well, I am. I think -- I would be very surprised if institutions approaching the size of IndyMac or bigger than IndyMac would fail. I think we're looking more at the smaller institutions. Again, the number is going to go up, but it's historically going to be very low.

We do -- we are collecting premiums all the time, so we replenish the fund through insurance assessments. We'll also be doing a new plan in September, early October, to what we call a restoration plan. We'll probably be increasing premiums to make sure that the funds stay strong.

JUDY WOODRUFF: What do you mean, premiums to...

SHEILA BAIR: The premiums that we charge banks for deposit insurance. And so they do pay for the deposit insurance.

JUDY WOODRUFF: So they will have to pay more?

SHEILA BAIR: It's provided free to the depositor, but the bank pays for the insurance premium. So, yes, it will probably be going up.

U.S. banking system remains sound

JUDY WOODRUFF: If someone -- when people ask you, is the banking system in this country sound, what do you say?

SHEILA BAIR: I say yes. Overwhelmingly, banks are safe and sound.

JUDY WOODRUFF: If that's the case, then why have the shareholders in banks seen bank stocks go down? I mean, they've been going down. There's a little bit of a bump-up recently, but today, even after the housing legislation passed the Congress, they went down again.

SHEILA BAIR: They went down. Well, market value and the bank's capitalization are two different things. Just because the bank's stock may be going down really does not correlate with whether the bank is solvent or not.

We look at capital cushions, the adequacy of loan loss provisions. It's really when losses on a bank's asset side of their balance sheet start blowing through the loan loss reserves and the capital that we have to make a decision about closing it. But that does not correlate with the market...

JUDY WOODRUFF: But my question is, do shareholders know something that the rest of us don't know?

SHEILA BAIR: Well, I don't know. You know, it's a good question. There's a lot of things that drive markets. Markets go up; markets go down. But the share prices are very volatile.

I guess my message for current shareholders is to make sure that your bank is -- you know, that you have a good investment, that your board of directors are doing what they should do, in terms of running the bank, that you have good risk management, and that they need additional capital, put in some additional capital to make sure you have an adequate cushion to keep your bank safe. But I think that's where shareholders should be focusing their efforts.

JUDY WOODRUFF: Is it your sense that all of this is due to the housing crisis?

SHEILA BAIR: I do think most of it comes back to housing, absolutely. We've been advocates for a long time for systematic loan modifications to try to get these foreclosure rates down, because, as this housing stock is going on the market through foreclosures, we're in this self-reinforcing downward spiral with home prices.

And until home prices stabilize, I think we're still having some challenging times ahead, both in the financial sector, as well as the more broad economy.

JUDY WOODRUFF: Well, in fact, the International Monetary Fund gave a very bleak assessment today.

SHEILA BAIR: Yes, it did.

JUDY WOODRUFF: They said not only credit risks remain; they said banks have got to raise more capital.

SHEILA BAIR: Yes, well, we've been encouraging all banks, these are uncertain economic times, so we'd like to see nice, fat cushions of capital, as well as get their loan loss reserves up.

But the good news is banks went into this cycle with very strong capital, coming off of many quarters of record earnings, so they went into this in a strong position. And they are raising the capital.

And we have beefed up our supervisory resources, as have regulators, so I think overall, again, they're very safe and very sound.

JUDY WOODRUFF: Sheila Bair, the head of the FDIC, thank you very much.

SHEILA BAIR: Thank you.