[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF THE FEDERAL
DEPOSIT INSURANCE CORPORATION
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
MARCH 4, 2004
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-70
94-046 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
MARK GREEN, Wisconsin JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona MIKE ROSS, Arkansas
VITO FOSSELLA, New York CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MELISSA A. HART, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
TOM FEENEY, Florida DAVID SCOTT, Georgia
JEB HENSARLING, Texas ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey CHRIS BELL, Texas
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Oversight and Investigations
SUE W. KELLY, New York, Chair
RON PAUL, Texas, Vice Chairman LUIS V. GUTIERREZ, Illinois
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
MARK GREEN, Wisconsin DENNIS MOORE, Kansas
JOHN B. SHADEGG, Arizona JOSEPH CROWLEY, New York
VITO FOSSELLA, New York CAROLYN B. MALONEY, New York
JEB HENSARLING, Texas JIM MATHESON, Utah
SCOTT GARRETT, New Jersey STEPHEN F. LYNCH, Massachusetts
TIM MURPHY, Pennsylvania ARTUR DAVIS, Alabama
GINNY BROWN-WAITE, Florida CHRIS BELL, Texas
J. GRESHAM BARRETT, South Carolina
C O N T E N T S
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Page
Hearing held on:
March 4, 2004................................................ 1
Appendix:
March 4, 2004................................................ 25
WITNESSES
Thursday, March 4, 2004
Franzel, Jeanette M., Director, Financial Management and
Assurance, United States General Accounting Office............. 19
Gianni, Hon. Gaston L. Jr., Inspector General, Federal Deposit
Insurance Corporation.......................................... 17
Powell, Hon. Donald E., Chairman, Federal Deposit Insurance
Corporation.................................................... 5
APPENDIX
Prepared statements:
Kelly, Hon. Sue W............................................ 26
Oxley, Hon. Michael G........................................ 28
Hensarling, Hon. Jeb......................................... 30
Franzel, Jeanette M.......................................... 32
Gianni, Hon. Gaston L. Jr.................................... 104
Powell, Hon. Donald E........................................ 118
Additional Material Submitted for the Record
Franzel, Jeanette M.:
Written response to questions from Hon. Sue W. Kelly......... 145
Gianni, Hon. Gaston L. Jr.:
Written response to questions from Hon. Sue W. Kelly......... 148
Powell, Hon. Donald E.:
Written response to questions from Hon. Luis V. Gutierrez
(with attachments)......................................... 156
Written response to questions from Hon. Jeb Hensarling....... 206
Written response to questions from Hon. Sue W. Kelly......... 212
OVERSIGHT OF THE FEDERAL
DEPOSIT INSURANCE CORPORATION
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Thursday, March 4, 2004
U.S. House of Representatives,
Subcommittee on Oversight and Investigation,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:07 a.m., in
Room 2128, Rayburn House Office Building, Hon. Sue Kelly
[chairman of the subcommittee] presiding.
Present: Representatives Kelly, Paul, Oxley, Gutierrez,
Inslee, Moore, Lynch Davis and Bell.
Chairwoman Kelly. [Presiding.] This hearing of the
Subcommittee on Oversight and Investigations will come to
order.
There are many important roles that Congress provides, but
none is more important than protecting consumers through
proactive and effective oversight, a commitment that the
Financial Services Committee takes very seriously. The American
people expect and deserve strong oversight of the regulators
protecting their hard-earned money. The Oversight and
Investigations Subcommittee will continue to ensure that all
Americans have the protection and security that they need
within their financial institutions to the best of our ability.
This is the first in a series of oversight hearings on
federal agencies within the jurisdiction of the Financial
Services Committee. These hearings will enable the committee to
assess the State of the agencies, examine their performance,
and ensure that they are acting in the public interest. We
begin this process by examining the FDIC, the Federal Deposit
Insurance Corporation, which serves as the supervisor of the
safety and soundness practices for thousands of U.S. financial
institutions.
As an independent agency, the FDIC has been tasked by
Congress with maintaining stability and confidence in the
banking system. The agency supervises the health of roughly
5,300 state-chartered institutions and manages the receivership
of the few failed depository institutions under its care. In
addition to its safety and soundness mission, the FDIC is the
deposit insurer for more than 9,000 of the nation's banks and
savings associations, insuring over $3.4 trillion in deposits.
The subcommittee welcomes the FDIC Chairman Donald Powell,
and we look forward to his testimony. Last week, the FDIC
issued its quarterly banking profile for the fourth quarter of
2003, which reported that the FDIC-insured institutions enjoyed
record high earnings for the fourth consecutive quarter,
including a 22 percent increase in profits during the fourth
quarter of 2002. In addition, there were only three FDIC-
insured institutions that failed in 2003, and the number of
problem institutions was reduced from 136 at the end of 2002 to
116 at the year-end of 2003. We hope to hear about the steps
that FDIC continues to take to improve efforts to identify and
address systemic risks and other structural weaknesses in the
financial sector.
We are also especially interested in the progress that
financial institutions are making regarding implementation of
the Bank Secrecy Act and the Patriot Act's reporting
provisions. The Patriot Act required the FDIC to expand its
supervisory role with regard to money laundering. This is
really vital to the nation's security and our financial
stability. It is imperative that we dry up illicit money and we
would like to hear about the progress that the agency has made
working with the private sector to protect the American people
in this way.
The subcommittee also welcomes FDIC Inspector General
Gaston Gianni. In 1996, Mr. Gianni became the first
presidential-appointed Inspector General of the FDIC. The
Inspector General's mission is to promote efficiency and
effectiveness of the FDIC programs, as well as protect
consumers from fraud, waste and abuse in the programs, an
important endeavor that promotes stability and public
confidence in our institutions. The subcommittee looks forward
to hearing the Inspector General's findings on the programs and
operations of the FDIC, including recommendations for
improvements.
In addition, Ms. Jeannette Franzel, the Director of
Financial Management and Assurance at the GAO, the General
Accounting Office, is here today to discuss the GAO's audits in
2002 and 2003 of the FDIC. Ms. Franzel will discuss the GAO's
findings that the agency maintains effective control over
financial reporting and compliance. I would like to commend
Chairman Powell for the clean report that the FDIC has
received, and for taking as many steps as he has to improve
targeted areas from the previous years, including the addition
of a newly created chief information officer.
I thank all of our witnesses for their participation in
this important hearing on the FDIC oversight, and we look
forward to your testimony. So without objection, all members's
opening statements will be made part of the record.
We turn now to Mr. Gutierrez.
[The prepared statement of Hon. Sue W. Kelly can be found
on page 26 in the appendix.]
Mr. Gutierrez. Good morning and thank you, Chairwoman
Kelly, for holding this hearing.
The FDIC plays a very important role in the preservation of
our banking system. I am concerned that the FDIC is the only
federal financial regulatory agency that still permits banks
under its supervision to engage in third party arrangements
that allow private payday lending firms to make high cost
consumer loans in violation of state usury and licensing laws.
The OCC and the OTC and the Federal Reserve Board have all
made clear this practice is unacceptable use of federal
preemption authority, and effectively ended all indirect
participation in payday lending by institutions under their
supervision. I would hope and encourage the FDIC would follow
the lead and prohibit these third party arrangements, many of
which exist to avoid strong State and local disclosure laws for
payday lending and remittances.
I am also troubled by the proposed CRA regulations which
would change the definition of small institutions to mean an
institution with total assets of less than $500 million,
regardless of the size of the holding company. This would
greatly increase the number of institutions that are eligible
for small bank streamlined CRA examination, removing more than
1,100 banks from the more rigorously examined large bank
category. Under current regulations, an institution is
considered small if it has less than $250 million in assets and
is independent or affiliated with a holding company with total
bank and thrift assets of less than $1 billion.
I have other concerns with the new proposed CRA regulations
and I would like to see financial institutions receive CRA
credit for their remittances activities when they are providing
low-cost remittances service to low-and moderate-income
customers.
As you may be aware, the issue of costs associated with
remittances has been a high priority for me. I am particularly
pleased and want to thank the Chairman that the FDIC's Chicago
office has been working with some of the institutions to
encourage them to offer remittances services particularly in
areas where there are a significant number of immigrant
workers. I would like to know if there are plans, Mr. Chairman,
to expand this work nationwide.
However, many institutions are not providing adequate
disclosure to its consumers, and I would like to see if the
FDIC as well as other regulators provides greater oversight
regarding the disclosure of fees and other charges for
remittances by their regulated institutions. I have legislation
that would require meaningful disclosure, but I do believe that
regulators could currently impose the disclosure requirements
on the institutions under their purview.
I will also have some specific questions for Chairman
Powell regarding the resolution of a failed thrift in my
district, Universal Savings. I helped, along with the FDIC, I
believe properly closed down and reopened the institution, and
I understand that 100 percent of the FDIC-insured folks just
kept working. Forty-eight hours later, they had access to their
accounts again. But there are still some questions, so I would
ask the chairman to please indulge us and give us some more
information.
I look forward to the testimony of the Chairman, as well as
the Inspector General and GAO Director, and I yield back the
balance of my time.
Chairwoman Kelly. Thank you.
Ms. Maloney, have you an opening statement?
Mrs. Maloney. Yes I do, Madam Chairman, and thank you very
much for holding this hearing.
Welcome, Chairman Powell. I thank you for joining the
subcommittee this morning. I want to begin by saying I join
your call for deposit insurance reform this year. I am pleased
that you are here to report healthy insurance funds. However, I
do want to restate my opposition to efforts to increase above
$100,000 the base amount of insurance available on individual
accounts. I continue to be in agreement with Chairman Greenspan
and others that raising the coverage limit is unnecessary and
would only increase taxpayer liability.
I would also like to join with the Ranking Member in his
concern on payday lending. At the present time, no national
banks, thrifts or members of the Federal Reserve partner with
payday lenders. In contrast, 11 state-chartered banks
supervised by the FDIC currently partner with payday lenders.
For one stark example, after pressure from the Federal Reserve
to discontinue its partnership with a payday lender, First Bank
of Delaware withdrew from the supervision of the Federal
Reserve System and became regulated by the FDIC.
Additionally, responding to a number of safety and
soundness risks and blatant violations of consumer protection
laws, the OTS, the OCC and the Federal Reserve have taken
strong action to prevent national banks from renting their
charters to payday lenders. I would like to hear in your
remarks whether you agree with the specific concerns that these
and other agencies have raised about this practice.
I would also like to put in the record some startling
statistics. Payday lending fees cost U.S. families $3.4 billion
annually, and 91 percent of all payday loans are made to
borrowers with five or more payday loans per year. In other
words, people are trapped in a payday lending cycle and cannot
get out. As you are aware, these payday loans are often
originated with little or no underwriting, as people simply
turn over their checks to the lender for a cash advance at a
high interest rate. Sadly, payday lenders are often found
around military bases where they can depend on a steady supply
of young financial novices with guaranteed government checks
who are easy pickings.
So I would like to hear in your remarks today at some point
if the FDIC is going to continue to allow payday lenders to
rent bank charters, which is the clear signal given of the lack
of action the agency has taken thus far. Shouldn't the agency
at the very least give guidance, clarifying that these loans
must include an analysis of the borrower's ability to repay the
loan, including debt-income ratios and understanding of other
borrower obligations?
I really consider this a safety and soundness issue and
certainly good management. So I look forward to your comments
today and I am pleased to hear that we have healthy insurance
funds. So, thanks.
Chairwoman Kelly. Thank you, Ms. Maloney.
For the benefit of anyone who has not testified here before
who will be testifying, there are small black boxes on the
table. They have lights on them. The green light means you are
free to go. You have 5 minutes. The yellow means that you have
1 minute left, and the red light means that it is time to stop,
just like a stoplight.
We are very pleased to have our first panel, the FDIC
Chairman, Mr. Donald Powell. He was sworn in on August 29,
2001. Mr. Powell, you have been with us before. We look forward
to your testimony and we thank you very much for being here
this morning. You will be recognized for a 5-minute summary of
your testimony. Without objection, all written testimony will
be made a part of the record. Please proceed.
STATEMENT OF HON. DONALD E. POWELL, CHAIRMAN, FEDERAL DEPOSIT
INSURANCE CORPORATION
Mr. Powell. Thank you, Madam Chair. I appreciate this
opportunity to testify today.
The FDIC was established 70 years ago to promote stability
and confidence during one of our country's darkest periods.
Since that time, we have stood as a pillar of trust, providing
Americans the assurance that their nest eggs are safe and that
the banking system is sound. We come before you today in an era
of unprecedented prosperity for banks and savings institutions.
The industry earned a record $31.1 billion in the fourth
quarter of 2003, marking the fourth quarter in a row that
earnings set a new high. The results for the fourth quarter
also brought the industry's earnings for the full year to a
record $120 billion, surpassing the previous annual record of
$105 billion set in 2002.
The prosperity of the industry is mirrored by the strong
financial footing of the FDIC. The FDIC brings decades of trust
and confidence, through good times and bad, backed up by the
strength of the guarantee we administer and the liquidity of
the deposit insurance funds. A year-end 2003, the balance in
the BIF was $33.8 billion and the balance in the SAIF was $12.2
billion. These balances represent 1.32 percent and 1.37 percent
of estimated deposits in the BIF and SAIF respectively--well
above the statutory target reserve ratio of 1.25 percent.
In addition, it is important to remember that the FDIC
brings more than a guarantee and a sizeable fund held in trust
for the American people. We bring the ability to resolve
banking problems, when they do occur, with a minimum impact on
the lives of ordinary Americans and their communities. It is
our efficiency in resolving economic calamities with a minimum
cost in disruption and at least cost to the taxpayer which
ensures the financial stability that is the bedrock of our
economic system.
Because the FDIC performs this unique function and because
of its financial interest in safety and soundness of America's
financial institutions, the corporation brings a unique
perspective to the question of bank supervision and the
administration of the federal financial safety net. The FDIC
ensures and has an interest in the continued well being of
every bank in America, not just those we directly supervise.
Bank capital is important to the FDIC. It is a tangible symbol
of the strength and essential buffer between risk in our
financial system and the deposit insurance funds.
We have a common interest with the financial services
industry to make sure that the industry remains focused on
customers, both by serving them well and treating them fairly.
The FDIC brings an independent outlook and industry-wide
expertise and works to strike a fair balance between the
important innovations of the free market and the overall
stability of the financial system.
As the FDIC carries out these responsibilities, we try to
be good stewards of the public trust. We are mindful of our
budget, promote innovation and excellence in our workforce, and
advocate policy positions we believe are fair and in the best
interests of the industry and the American people. But there
are additional flexibilities the FDIC needs if it is to
continue its efforts to maintain a high-performance
organization.
First, the FDIC needs greater flexibility to manage its
deposit insurance responsibilities. We call for a comprehensive
reform to provide this flexibility--the merging of the deposit
insurance funds, the freedom to manage the funds's size
relative to overall deposits, and the freedom to charge
premiums based upon risk. These are responsible common-sense
changes, and I thank this committee and the U.S. House of
Representatives for overwhelmingly answering our call last
year. We will continue our efforts to enact this important
bill.
Second, the FDIC needs additional flexibility in managing
its employees. I have placed renewed emphasis on merit at the
FDIC, rewarding performance and excellence at all levels of the
workforce. There is much more to do and we will need Congress's
help if we are to realize our full potential in this area. We
will soon propose a package of legislative reforms to give the
FDIC the tools needed to hire the right people, retain and
promote employees who perform at high levels, and to strengthen
the link between performance and compensation. I look forward
to working with this committee and other appropriate committees
in the Congress to make these reforms a reality.
Finally, the FDIC wants to successfully conclude the
important discussions currently underway regarding bank
capital. The proposed Basel II capital accord is terribly
important and will have profound implications on how we manage
and regulate bank capital in America. We have sought from the
beginning to ensure our system of capital regulation in America
is not undermined by our legitimate desire for a more risk-
sensitive and modern system of determining regulatory capital.
The FDIC is working closely with its fellow regulators to
ensure we all strike the appropriate balance.
While it is true that the FDIC has a financial interest in
the question of capital, we believe there are other worthy
reasons for getting it right. Our success in retaining the
industry's strong capital position will provide the regulators
with the flexibility needed to allow ever-greater market
innovations. Maintaining a solid foundation of capital that is
beyond dispute will allow the marketplace, not the regulatory
structure, to determine the future of banking and this, in my
view, is exactly as it should be. I will continue working to
strike this balance at the FDIC and will bring this perspective
to our deliberations.
I appreciate the opportunity to testify here today and look
forward to your questions. Thank you.
[The prepared statement of Hon. Donald E. Powell can be
found on page 118 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Powell.
I want to begin by commending the FDIC for the agency's
work in financial education with the Money Smart program.
Financial education is extremely important to get those people
who are not in the banking system into the banking system. I am
very impressed with what you have done. Last year, I worked on
Title V of the FCRA reauthorization legislation specifically
for the strategy for assuring financial empowerment, the SAFE
strategy. I wonder if you could tell us about the successes on
the Money Smart program and if the FDIC will be bringing these
experiences to the new commission that was created in the FACT
Act.
Mr. Powell. Thank you. I am excited about this particular
effort at the FDIC. I concur with you, Congresswoman Kelly,
about the need for financial literacy for all Americans. We do
participate in the new commission that just was formed. In
fact, we had our first meeting about 15 days, maybe 2 weeks
ago. I am proud to be part of the FDIC's Money Smart
initiative. I can say that because it was started before I came
and the work had been done. It is an award-winning program. We
now have it in three or four different languages. We have
something like 200 instructors that have trained 5,000 people
to teach Money Smart in all communities around America. We have
in excess of 200 partnerships with nonprofits, partnerships
with government agencies, such as the Department of Defense. We
are doing some work there. We are doing work in all 50 states
in America.
It is an exciting program. Its target is adults. I attended
the first graduation ceremony in Chicago about 18 months or 2
years ago. I looked into the eyes of those people who
participated in the Money Smart program. I can remember asking
them about checking accounts, savings accounts, budgets,
borrowing money, all those issues. While they did not get every
answer, they got most of the answers correctly. So I am excited
that we are in fact part of the financial literacy in America.
We have a great, great program, incidentally, that is free.
Anybody can ask for it and we are happy to share it with them.
Chairwoman Kelly. Thank you.
I would like to know what the FDIC is doing in order to
implement the Patriot Act provisions and what the criteria and
the methods are that the agency uses to decide which BSA cases
should be referred to the FinCEN for enforcement analysis.
Mr. Powell. That is part of the regular supervision that
when we go into an institution and the compliance with the law.
Our people, first of all, were trained on what the Patriot Act
in fact is about. We equipped them with the tools, including
the training that will enable them to go into institutions and
look for violations of that particular act. I have complete
confidence in our examiners to go into an institution and make
sure that in fact that institution is complying with the
Patriot Act and the Bank Secrecy Act.
Obviously there will be times that we will miss some things
and go back and correct some things. It is a continuing
process. We have found that most bankers are more than willing.
All banks understand the need. All banks will have put in place
compliance officers. They have controls in place. They are
taking this extremely seriously. We go in and, like we would on
any other compliance examination, look for procedures, look at
management's commitment to it, do they have a compliance
officer, are they well trained, are they following the law. We
will not be bashful in calling their hand when we believe that
there are violations. We have the necessary enforcement tools
that will get their attention.
Chairwoman Kelly. I have one more follow-up on that, which
is that the Patriot Act asked for increased cooperation and
communications between regulators. You have talked about the
bank side of that. What about the communications that are going
on between the regulators, and how frequently does the FDIC
discuss this sort of thing with other regulators? Is there
something that we need to do to improve that kind of
coordination?
Mr. Powell. I do not think so, Madam Chair. I think there
is extraordinary communication, not only on this particular
issue, but I have found that the communication between all of
the bank regulators is extraordinary. We share data. We share
information. We share concerns. We debate. We have training
sessions together. I just attended a training session for
supervisors Monday, sponsored by the FFIEC, attended by
something in excess of 100 regulators from all four of the
different agencies. So I think there is communication. I think
we share concerns. We share issues. We share problems. I do not
think that is an issue.
Chairwoman Kelly. I am glad to hear that. I hope that is
true. We have had some indication that there is not an ease of
coordination in terms of communication between some of the
agencies, not specifically with your agency, but with some
others. I was just interested in how you felt that was working.
Mr. Powell. I think there is always obviously some friction
from time to time, but I can assure you at the principals level
there is a commitment to that.
Chairwoman Kelly. Good. Thank you. I am out of time.
Mr. Gutierrez?
Mr. Gutierrez. Mr. Chairman, I am going to ask you about
two areas, so we will have a lot of time even within the 5-
minute framework, I am sure, to be able to discuss them.
Universal Savings, a mutual thrift in my district failed
several years ago. I would like to know the status of that
resolution. Have the depositors been paid and to what extent? I
understand that an investigation may be pending into the
circumstances surrounding the closure of the institution. Can
you comment on that? And is there any other information you can
give me about the institution of Universal Savings?
Mr. Powell. As you indicated, that institution was closed
by the OTS in June of 2002. I am happy to report that all
insured depositors have been paid. I am extremely happy to
report that 94 percent of the uninsured depositors have been
paid. I think that is important. I may have misspoken. What I
meant to say, if I did not say it, if you were a depositor and
you were uninsured, you got 94 percent of your money back. If
you had $100 over the insurance limit, you got 94 percent of it
paid. That is important. But just as important, I think, I am
proud of the record of the FDIC in that we did this, as you and
I talked about before the hearing, in a record time. Most of
those people had their money within 24 hours. Some had it
within 48 hours.
As you indicated, there is a criminal investigation going
on now, and because of that, I would not comment on that.
Mr. Gutierrez. So there is a criminal investigation and you
cannot comment on that criminal investigation into Universal
Savings?
Mr. Powell. That is true.
Mr. Gutierrez. Okay. The second area is, currently 10 FDIC
regulated State banks rent their charters to pawn shops, payday
loan outlets, check cashers, so that the storefronts can make
loans that would be illegal under our State usury and small
loan laws. The OCC, the OTS and the Fed have taken regulatory
action to stop their banks from payday loan charter renting.
The FDIC is the regulator of choice for payday lenders, even
letting a Fed member bank switch regulators to stay in
business.
I would like for you to comment on this situation and to
help. In light of the progressive actions that you have taken
as Chairman and the FDIC has taken in order to help
remittances, for example, can you help so that FDIC-regulated
banks basically do not lend out their charters. They say, well,
we don't have to worry about the State laws; and we don't have
to worry about them. Can you help us in that area and the
particular area of payday lending?
Mr. Powell. Let me attempt to answer you. You raise several
points. The first thing that struck me as you were making your
comments is that we do not want insured banks to participate in
any illegal activity. We will not condone anything that is
illegal. At the same time, as you know, we are safety and
soundness conscious. Through the guidance that we issue to the
payday lenders, I think they understand that we are very
serious about making sure that they do not do anything that
would jeopardize the capital of their institution, to the
extent that we all recognize and understand that these
particular loans have unusual characteristics that would pose
additional risk.
Because of that, capital allocation sometimes is 1.5;
sometimes it is three times as much, and it can be 100 percent
allocated; 100 percent of the capital must be allocated to the
outstanding balance on those loans. So we take the safety and
soundness issue very seriously and we take the legality very
seriously. We take also the seriousness of consumer laws that
may be required from a broad range of consumer protection laws.
We check for compliance with those consumer laws. At the same
time, we look for discrimination. Is there any discrimination
on the part of those payday lenders? And finally, we want to be
sure that they are fair in dealing with consumers.
I have thought a lot about the issue of payday lending. I
have thought a lot about how we deal with this in America. As I
shared with you before the testimony, I have gone to
convenience stores. I have visited with people that are in line
to get their check cashed. I think there are lots of issues
here. I will share with you an experience that I shared with
the folks at a conference we sponsored about three or four
months ago, a conference on the unbanked. We talked a lot about
payday lending at that particular conference.
What I shared with that group was when I visited with one
individual gentleman, I said, ``You recognize and understand
you can go down the street one block and cash your check free.
You do not have to have an account there. If you have $100
check, they will give you back $100.'' He looked at me and
said, ``I know that and I know what I am paying here at the
payday lender, but that is the same institution that foreclosed
on my brother's pickup.'' We talked a little bit about that.
I think part of it is what Congresswoman Kelly mentioned a
moment ago. Part of it is education. Part of it is culture.
Part of it is trust. Somehow, banks have got to get down into
the community and not have a banking lobby environment. Mix
with the workers and say, ``You can trust us.'' We can
understand that. I think that is a critical issue. I think it
is a cultural issue. The folks that are customers of the payday
lenders, I think some of them, they know exactly what they are
paying. It is a matter of convenience. It is a matter of
intimidation. It is a matter of trust.
Mr. Gutierrez. I understand, Mr. Chairman.
Mr. Powell. I want to emphasize again. We do not want to
participate in any illegal activity at all.
Mr. Gutierrez. I understand. And maybe we can do this,
because of the time, and I wanted to give you ample time. That
is why I only asked two questions. Maybe you could answer
specifically and you can put it in writing to the committee,
and that is, if we do have FDIC charters, and they are using
and basically lending out as fronts for payday lenders, I just
want you to take a look at payday loans. If by doing that, they
eliminate State laws that are very, very clear on usury kinds
of interest rates and charges.
Mr. Powell. Yes, usury.
Mr. Gutierrez. Usury. Would you stop that? Because we
already know that the OCC and the OTS and the Fed are doing
that, and we would like you to look at it, write back to us,
and join those other institutions so that people do not use the
federal government, your institution, to give out loans that we
might agree in private are probably bad, bad loans that should
not be handed out.
Mr. Powell. I am happy to do that and respond to you in
writing.
Mr. Gutierrez. Thank you.
Chairwoman Kelly. Thank you, Mr. Gutierrez.
Mr. Paul?
Mr. Paul. Thank you, Madam Chairman.
Good morning, Chairman Powell. I have a question dealing
somewhat with philosophy, as well as a practical question about
the obligations and responsibilities of the FDIC. I am very
interested in the Austrian economic school. This, of course, is
a school that was popularized by Nobel prizewinner Frederick
Hayek. Their explanation of the business cycle, of course, is
that the Federal Reserve is responsible for the business cycle
and that artificially low credit causes investors to do dumb
things like over-invest and mal-invest, and consumers to borrow
more than they should. It creates bubbles that are destined to
burst. I think history over the last 100 years bears this out
to be a pretty plausible theory.
The Austrians believe that the FDIC participates in the
mal-investment, in that it is really not insurance. This is a
government guarantee, flat-out, because if you had private
insurance, you would have variable rates and depending on the
solvency of the bank, the insurance would either be denied or
the rates would be raised. So we really do not have insurance,
but we as an official body and as you as representative of the
FDIC have a responsibility to try to protect the taxpayer.
Therefore, when we have troubles, which we have had multiple
times over the last 70 years, we come in with just more
regulations, which is of course an added burden on the banks
and bank customers.
So philosophically, one question I have is, would you
concede that this illusion of insurance contributes to over-
investment and bad investment, although the so-called good at
the FDIC, is to protect consumers and you can point out where
the FDIC has done a lot of good, but overall it does a great
deal of harm contributing to a mal-invested economy that
eventually has to be corrected, and quite possibly we are in
the midst of that correction now. We certainly saw that with
the stock market crash of 2000.
But right now, the banks hold over $1 trillion worth of
GSEs. There are some who theorize that this is a huge bubble.
What if we have a 20 percent decrease in housing prices, or
what if interest rates go up, which they very possibly could.
Haven't we really over-obligated the taxpayers to protect all
these deposits and now with deregulation, banks get involved in
other activities, and funds are always fungible. Therefore, the
argument could be made that we have placed a tremendous
potential burden on the taxpayer, although in the meantime it
looks like we are doing good protecting the depositors,
ultimately we could well face a major crisis of confidence
where the bailing out necessary would put the dollar in
jeopardy.
Is there any thought to that on your part? Do you give any
credence to this idea that the FDIC may contribute to the
mistakes that will eventually have to be corrected?
Mr. Powell. I am not an economist, up front, but I am a
former banker. I have given lots of thought about the FDIC
insurance. I have thought about, and I have visited with lots
of consumers about the importance and why are Americans
concerned about stability in their banking system. I often kid
that I did not know what ``moral hazard'' meant until I came to
Washington.
Having lived in the crisis and being a banker in the
crisis, I can remember talking to consumers, calling me each
and every day, ``Is my money safe?'' I think we would all,
Congressman, agree that stability in the banking system is
important for the economy of the United States. I think that is
the reason the FDIC was created some 70 years ago because, in
fact, there was instability in the banking system.
Where that level of coverage should be, we can debate. But
I think there is and it has been proven over the years, the
importance of the FDIC insurance for the consumers of America.
It is the symbol of confidence, and I think Americans have to
have confidence in their banking system. They have to have
confidence when they deposit money in an insured institution,
they will be able to get the money out.
That safety net, how much does it contribute to this issue
of moral hazard, is a different issue. We could say the
coverage should be $50,000; we could debate it should be
$200,000. That is a debate within itself. As you know, we at
the FDIC have basically said it should be indexed, and put that
issue to the side.
I will tell you during the crisis that the FDIC insurance
did contribute to the crisis, in my view, no question. But I
will also quickly add to you it was not the only thing. It was
not the only thing--commodity prices, the Tax Act of 1986, the
imbalance in the thrifts in the balance sheet, and poor
judgment were part of that. I am always curious when people do
not understand that if I am the CEO of an institution, that I
am not going to take unusual risks just because I have the FDIC
insurance, because if I take unusual risk, the first person
going down is going to be me. I am going to lose my job and I
am going to lose my investment.
So it is a balancing act. I think it has served America
well for the past 70 years and I think Americans depend upon
it. I think obviously we need to have these debates from time
to time about where is it, is it important. We have had that at
the FDIC. We have talked about how much of the private sector
could, in fact, be part of the risk. We believe that an
important part of deposit insurance reform is that premiums
ought to be based upon risk. They are not today.
Mr. Paul. Thank you.
Chairwoman Kelly. Thank you, Mr. Paul.
Ms. Maloney?
Mrs. Maloney. Thank you.
Mr. Chairman, as you know, the outsourcing of jobs overseas
is a particularly sensitive issue for our constituents,
particularly with the high level of unemployment. As a highly
competitive global industry, the banking sector is one of the
industries at the forefront of efforts to move jobs to
countries where they can save on labor costs. Already, U.S.
banks have moved large numbers of call center jobs to India and
other countries. I understand that many bank back office
functions are now performed overseas and that this trend is
increasing.
I would like you to answer two questions with regard to
outsourcing. First, is the FDIC studying the risk to consumer
privacy and identity theft when sensitive personal financial
data is transmitted halfway around the world? Are they adhering
to our laws for privacy protection?
Mr. Powell. To my knowledge, we have not.
Mrs. Maloney. Then secondly, is the FDIC studying whether
outsourcing of an increasing array of underwriting and record
keeping jobs increases risk to the safety and soundness of the
banking system? Is this potentially an increased operational
risk?
Mr. Powell. To my knowledge, we have not, but we would be
happy to do so. I think obviously we are concerned about
identity theft and we are concerned about some of the issues
that you have posed. If in fact we see any evidence of that, we
will act accordingly.
Mrs. Maloney. I am encouraged to hear that. I truly
appreciate any effort to conduct a study of the risks
outsourcings may pose to the safety and soundness of the
banking system.
Mr. Powell. We are happy to do that.
Chairwoman Kelly. Chairman Powell, I would be very
interested, the committee would be interested in having you
report back specifically after having done a study on the
issues that Ms. Maloney has raised.
Mr. Powell. I will do that.
Chairwoman Kelly. Thank you.
Mrs. Maloney. As you know, this committee is closely
following Basel II, with the commitment that American
businesses and financial institutions should not be put at a
disadvantage. In your testimony, you reaffirmed the consensus
that Basel II will lower capital standards for large U.S.
institutions that come under this new regime. Yet in a separate
section of your testimony, you note the 47 percent reduction in
the number of community banks in the U.S. since 1990.
So my question is, what is the FDIC's latest thinking on
how many institutions in the U.S. will be under Basel II when
all is said and done? And what will be the impact on
consolidation and competitiveness if only a few large banks
come under it? And also, I read one article where
internationally, subsidiaries of banks or other community-type
banks in foreign countries will not have the same strict
capital requirements as we do, therefore possibly putting our
institutions at a competitive risk; your comments on where it
stands, and certainly we do not want to do anything that in any
way undermines the competitiveness of American institutions,
yet some papers I have read indicate that they believe it will.
So your feelings on it?
Mr. Powell. I have not read all of those papers, but
clearly one of our concerns is the competitive nature of what
may happen as it relates to Basel. I do not think that question
has been answered yet. It has been asked, and I think there are
various views about that. We at the FDIC are looking at that
also, but primarily we are focused today on capital, regulatory
minimum capital standards.
As you know, we are a safety and soundness organization, so
we are focused primarily on capital and that is where we enter
into the process and the debate. There has been lots of
dialogue exchanged between all the principals as it relates to
that one particular issue. We believe that it is time for
reform of capital standards. Obviously, the marketplaces move
ahead. We should base capital on risk. We do not debate that at
the FDIC.
What we do debate and we have lots of debates about is how
we measure and validate certain models that are talked about
within Basel. But fundamentally, we believe that there should
be minimum regulatory capital as a final buffer if in fact some
of the assumptions go awry or there are some other things that
may happen in the marketplace that would cause banks to have
some type of charge against their capital. So we are focused on
the capital issue. That is not to say we do not have concern
about the competitive nature within large institutions.
Mrs. Maloney. On the capital issue, which is a very key
issue in the whole discussion, some people have alleged that
our banks are very heavily regulated, whereas foreign banks are
not.
Mr. Powell. Right.
Mrs. Maloney. Therefore, possibly our banks or businesses
would be put at a disadvantage. There are some allegations that
the way that it is formulated, that the capital standards will
be higher for our institutions than foreign institutions,
therefore putting us at a disadvantage.
Mr. Powell. Yes. Today, domestic banks, as you know, in the
U.S. we have to have a higher capital than our European
counterparts, and also Japanese banks. We have clearly a lot
more capital than those institutions. More important, we
perform better. We perform better, and I think they meet the
needs of the business community.
So clearly, higher capital standards do not necessarily
mean that the business needs are not going to be met,
consumers's needs are not going to be met. The institutions
make more money and return on equity than our counterparts in
Europe and in Asia.
Chairwoman Kelly. Thank you, Ms. Maloney.
Ms. Inslee?
Mr. Inslee. Thank you.
Following up Ms. Maloney's questions about outsourcing and
our regulatory reach on some of these functions that are
outsourced offshore, could you elaborate on what the regulatory
climate is on those operations, particularly on what
responsibility would be maintained by the parent bank for those
operations? In other words, let's assume bank A outsources some
bank function to the Philippines, not to pick on the
Philippines, it is a great country, it just popped to mind, and
that operation goes awry; there are violations of identity
theft issues and the like. Do you believe you have the ability
essentially that the bank maintains all obligations to the
regulator in that context?
Mr. Powell. Yes, sir. I think we have the ability and the
will to examine that in the course of examination.
Mr. Inslee. I am sorry. Would you say that again?
Mr. Powell. I think we have the ability and the will to
examine that in the normal examination process, like we would
any outsourcing, technology outsourcing or whatever it may be.
Mr. Inslee. So right now under the current regulatory
structure, statutory and based on rules, do you think the bank
would retain the same liability to the regulator whether they
did that in-house, on-shore, or whether they did it in an
operation off-shore outsourced? Would the bank retain the same
liability to the regulator?
Mr. Powell. I would want to be sure and check with the
folks in the FDIC Legal Division, but it is my understanding
absolutely we do. Counsel just said we do.
Mr. Inslee. Okay. What is your greatest concern, if you
have any, about this issue of outsourcing some of these bank
functions?
Mr. Powell. The integrity of the process. The peer
integrity of the process.
Mr. Inslee. Do you think that there is an inherent loss of
some regulatory integrity from an implicit standpoint when that
happens, or not?
Mr. Powell. I am not sure. I do not have any experience in
that. But I can assure you that clearly is one of the things
that supervisors would look at, because it is integrity of the
numbers. It is also dealing with customers's identity. It is
very important. I know that institutions themselves ought to be
sure that the integrity of the process is intact. They depend
upon it. Their reputation depends upon it.
Mr. Inslee. I am sorry, you may have talked about this in
response to Mr. Gutierrez's questions, if he asked you
questions about the payday loans situation. Could you tell me
your reaction to that issue? What your institution's thinking
is in this regard, and how it compares to some of the other
regulators?
Mr. Powell. We have issued guidance as it relates to payday
lenders. As someone indicated, I think we supervise directly in
excess of 5,500 institutions. There are 11 that we have
identified that are in payday lending and we have issued
specific guidance as it relates to payday lenders: no violation
of law; follow all the consumer protection laws in America; and
in fact, is it fair? But more important, we have recognized
that there is undue risk in payday lending. So we require
capital allocations, one-to-one capital allocations against
that undue risk. So it is very expensive from a capital process
for an institution to be involved in payday lending. We looked
at it from a safety and soundness issue, obviously.
Mr. Inslee. Thank you.
Chairwoman Kelly. Thank you, Mr. Inslee.
Mr. Chairman, Mr. Oxley?
Mr. Oxley. Thank you, Madam Chairman, and thank you for
your efforts at oversight. I want to offer my opening statement
as a matter of record.
Chairwoman Kelly. So moved.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 28 in the appendix.]
Mr. Oxley. I thank the chair.
The fact is that we have had a busy 3 years on the
legislative front, but one of the major goals of our committee
is to conduct oversight, and that is why I think you are the
first in the barrel, Mr. Chairman, and I want to welcome you
back to the committee for what will be a series of oversight
hearings with the regulators. I think it is always helpful for
the committee to share views, and with your expertise and real-
world experience, it is particularly helpful.
All of us on this side of the Capitol are very desirous of
closing the loop and getting deposit insurance reform passed.
As you know, Mr. Chairman, this House on two occasions has
passed with large margins an overall deposit insurance
portfolio, and particularly the merging of the BIF-SAIF and
other very, very helpful reforms for the industry. We are
increasingly frustrated with the other body. I am not allowed
to use the ``S'' word, but we are particularly frustrated with
the other body in that we have not been able to finish the job.
I am just wondering if you could comment on that. We want
to work with you towards what we think will be a very, very
positive development in passing this legislation. We have made
it very clear on our side. Mr. Frank and I both, and the
chairman of the Financial Institutions Subcommittee, Spencer
Bachus, his Ranking Member, have made it very clear that we are
willing to sit down with the Senate and work out a compromise
on what is the only real contentious issue left, and that is
the insurance numbers and how that affects us going forward.
So let me just throw that out to you. I know we are kindred
spirits on this, but we just need to make our brethren in the
other body aware of how important this area is to get
completed.
Mr. Powell. Thank you, Mr. Chairman. You were not here when
I applauded the leadership that you and others have provided on
this legislation and we thank you for that.
In my view, this is good for the American people. It is
good for the banking industry. It is unfortunate that the
debate is on that one particular part of the bill because the
bill is about much more than just the coverage issue. It is
critical that we merge the funds. It is critical that we have
more flexibility at the FDIC. It is critical that premiums be
based upon risk. No other insurance company bases their premium
the way we base our premiums. It should be based upon risk.
My concern is that we will react during a crisis. That is
not the time to do that. I am confident and hopeful that the
compromise on the coverage issue can come about. Our position
has been very clear at the FDIC that we believe it should be
indexed. We have listened to the voices that believe it should
be increased, the voices that believe it should not be dealt
with. We are hung up on that one issue, and other parts of the
bill are going to go to the wayside, and that is not good for
the American people and it is not good for the banking
industry.
So we are going to work diligently with your friends in the
Senate and with Chairman Shelby, and hopefully we can overcome
those obstacles this year.
Mr. Oxley. I thank you for that observation. Indeed, you
and I have both had conversations with Chairman Shelby and
other members of the Banking Committee over on the other side.
We always receive a very warm welcome and a positive response.
It is just that we need to get down to the nitty-gritty of
legislating. Somebody said politics is the art of the possible,
and we are ready to exercise that possibility, hopefully
probability, that we can get this bill over the goal line.
Mr. Powell. I will walk hand-in-hand with you.
Mr. Oxley. Yes, to use a football analogy, which I know you
are not particularly familiar with.
[Laughter.]
Let me ask you also your observations. We appear to be at
least in the beginnings perhaps of a mega-merger that is going
on out there with large banks, or large banks getting larger,
that is with the Bank of America and Fleet, with the recent
announcement with Bank One and J.P. Morgan. How will that, if
at all, affect your responsibilities at the FDIC? Do you have
the wherewithal to take care of the myriad responsibilities
that you have as chairman of the FDIC? Is there something that
we on the legislative side can help you with?
Mr. Powell. Yes, there are some things. As I mention in my
testimony, we are going to be presenting a package to the
Congress as it relates to specific issues that we can believe
will enable us to do our job better. It is very important that
we continue to maintain and retain and hire competent people,
and that we reward them based upon their merit pay performance.
That is an issue that we struggle with at the FDIC. So we will
come with the legislative package so that you can help us as it
relates to that.
Mr. Oxley. When can we expect that?
Mr. Powell. Within 30 days.
Mr. Oxley. Very good.
I see my time has expired. Mr. Chairman, again, it is good
to have you with us and we appreciate your continued
cooperation.
I yield back.
Chairwoman Kelly. Thank you very much, Mr. Chairman.
The Chair notes that some members may have additional
questions, and certainly I believe that I do for this panel, so
they may wish to submit them in writing. So without objection
the hearing record will remain open for 30 days for members to
submit written questions to these witnesses and to place their
responses in the record.
We thank you, Chairman Powell. We are very pleased that you
were willing to give us some time this morning. Thank you so
much.
Mr. Powell. Thank you.
Chairwoman Kelly. And now I would like to call the second
panel. On our second panel, we have the FDIC Inspector General
Gaston Gianni, who was sworn in in 1996. Also on our second
panel is Jeanette Franzel, the Director of Financial Management
and Assurance at the General Accounting Office. I thank you
both for your appearance before the subcommittee. Without
objection, your written statements will be made part of the
record. You will be each recognized for a 5-minute summary of
your testimony. We begin with you, Mr. Gianni.
STATEMENT OF HON. GASTON L. GIANNI, JR., INSPECTOR GENERAL,
FEDERAL DEPOSIT INSURANCE CORPORATION
Mr. Gianni. Madam Chairman, thank you. I am pleased to
testify today as you conduct oversight hearings on the FDIC. I
want to compliment the committee for this format of oversight.
I think it works very well. I had many years at GAO and the
experience now of being the Inspector General. Bringing in GAO
and the Inspector General, along with the head of the agency, I
believe is a model for conducting oversight by the Hill. So I
hope others would take after and emulate your practice here.
FDIC has a long and successful tradition of maintaining
public confidence and stability in the nation's financial
system. There are many important indicators that the banking
system is healthy and the corporation can take pride in its
contributions to that stability and confidence. Likewise, I am
proud of the accomplishments of my office, seeking to help
ensure the successful accomplishment of the FDIC mission.
At the outset, I would just like to acknowledge the
congressional confirmation of Tom Curry, the corporation's
fifth member of the board of directors in 2003. Our board is
now operating at full strength, a very positive aspect to
internal governance structure, for which I called in many of my
past semiannual reports.
The role of the IG is unique to an agency. To illustrate,
at FDIC, although we are an integral part of the corporation,
unlike any of the other divisions or offices, our legislative
underpinning requires us to operate as an independent and
objective unit and report both to the chairman and to the
Congress. We have two essential roles. Through a comprehensive
program of audits, evaluations, and investigations, we
independently analyze and report on significant management
challenges and foster integrity and accountability, and
excellence in FDIC's programs.
In this regard, an important aspect to the success of an IG
office is the support of its agency top leadership. I am
pleased to report to the subcommittee that both Chairman Powell
and Vice Chairman Reich provide a supportive tone at the top
that enables us to carry out our statutory responsibilities. As
a result, we have an excellent working relationship with the
corporation and we are committed to continuing that
relationship in the future.
I believe that the OIG adds significant value to FDIC. Net
savings from our work have averaged over $290 million a year
over the past 5 years. We also provide substantial non-monetary
value to the corporation through advice and recommendations.
Last year, we had $96 million in actual and potential monetary
benefits. We offered 190 plus non-monetary recommendations for
improving the internal operations and controls within the
corporation. We had 35 referrals to the Department of Justice,
43 indictments, 22 convictions, and additional actions.
In addition, in the spirit of the Reports Consolidation
Act, we annually identify the top management and performance
challenges facing the corporation. The challenges capture the
risks and opportunities we see before the corporation and serve
as a guide for our work. The first four challenges address the
more global issues confronting the corporation: adequacy of
corporate governance in the insured depository institutions;
protection of consumer interests; management and analysis of
risks to the insurance fund; and effectiveness of the
resolution and receivership activities.
The other six focus internally on the corporation's
operations: management of human capital; management and
security of information technology resources; the security of
critical infrastructure; management of major projects; cost
containment and procurement integrity; and the assessment of
corporate performance.
I have given examples of our work under each one of these
risks in my statement, but I would like to focus on a couple.
Last year, we have through our investigations identified people
who were taking advantage of the elderly by using the FDIC
logo, the imprimatur, or suggesting that their deposits were
insured by the FDIC. As a result of our investigation, we were
able to help identify and return over $9 million to these
unfortunate elderly people.
As a result of several of these cases, we made
recommendations to Chairman Oxley and to the committee to
include in the Financial Services Regulatory Relief Act a
provision that supports and gives the corporation added
enforcement authority to protect our imprimatur and our
insurance. I just want to thank the committee for its support
in including it in its regulatory relief bill.
Another area that we are focused on remains the
corporation's oversight of information technology security. It
is a daunting challenge. Information technology continues to
play an increasingly greater role in every aspect of FDIC's
mission. Our work required under the Federal Information
Security Management Act shows that the corporation has worked
hard to implement many sound information system controls to
help ensure adequate security. However, daunting challenges
remain due to ever-increasing threats posed by hackers and
other illegal activities. We have urged the FDIC to stay the
course in developing an enterprise-wide architecture and map
the current versus the new state of where they want to be on
business processes and supporting information systems and data
architecture. Additionally, we have emphasized completing
system certification and accreditation processes to test the
security of developing IT assets.
Again, Chairman Powell acknowledged the fact that we have
appointed a new CIO. We still have many positions that need to
be filled within our IT arena. That is one of the challenges
that will need to be taken care of as we go forward.
Lastly, before I conclude, regarding the Government
Performance and Results Act, while the corporation has made
tremendous strides in improving and complying with the Act, we
offer areas of suggestions for improving how they can comply
and make that reporting more objective to accomplish the
Chairman's priorities.
In closing, I would like to again thank you for holding the
hearing. Members of my office are committed to continuing to
carrying out our mission at the FDIC. We are privileged to be
public servants with the responsibilities of doing so. I hope
my remarks shed some light and I would be happy to answer any
questions that the subcommittee might have.
[The prepared statement of Hon. Gaston L. Gianni, Jr. can
be found on page 104 in the appendix.]
Chairwoman Kelly. Thank you, Mr. Gianni.
Ms. Franzel?
STATEMENT OF JEANETTE M. FRANZEL, DIRECTOR, FINANCIAL
MANAGEMENT AND ASSURANCE, UNITED STATES GENERAL ACCOUNTING
OFFICE
Ms. Franzel. Thank you, Madam Chairwoman. I am pleased to
be here today to discuss the results of our recent audits of
the financial statements at FDIC. I do believe you have a copy
of our recently issued reports.
The FDIC actually administers three different funds, so we
do three different audits: the Bank Insurance Fund, the BIF;
the Savings Association Insurance Fund, the SAIF; and the FSLIC
Resolution Fund, or the FRF. Regarding the financial statements
for the BIF, SAIF and FRF, we issued unqualified or clean
opinions for those audits. This means that the financial
statements and the notes for each fund presented fairly in all
material respects the financial position and the results of
operations and cash flows in accordance with U.S. generally
accepted accounting principles.
Regarding FDIC's internal control, we concluded that FDIC
management maintained in all material respects effective
control over financial reporting, safeguarding of assets, and
compliance as of December 31, 2003. This is a very positive
conclusion on internal controls. We did identify one reportable
internal control weakness related to information systems
security controls. This was not considered to be material, but
is considered to be a deficiency in the design and operation of
FDIC's controls. I will talk a little bit more about the
significant improvements that FDIC has made in this area.
During the course of our audit, we also did not note any
instances of noncompliance with laws or regulations, so again,
a very positive audit report.
I would now like to discuss FDIC's information systems
security. We have reported weaknesses in FDIC's information
systems security for a number of years. Although we continued
to consider this to be a weakness in 2003, we also found that
FDIC has made significant progress in this area. For instance,
FDIC has completed almost all of its actions on the weaknesses
detected in our prior audits. Unfortunately, however, in 2003
we found additional information security weaknesses, some of
which FDIC has already corrected. They were very specific
instances where FDIC had not secured or limited access to its
computer resources.
A key reason for these continuing weaknesses was because
FDIC had still not completely implemented a program of security
monitoring. That is, an ongoing review, testing and evaluation
of its information security, to ensure that systems are in
compliance with policies and procedures. FDIC has begun
implementing such a program, but it was not quite fully
implemented at the end of 2003.
We do believe that when FDIC fully implements this program,
it should allow FDIC to identify and correct the types of
problems that we found in 2003, so that when we come in
hopefully FDIC's program can detect and correct any new
weaknesses that have occurred and then in that case, hopefully
we could clear the reportable condition going forward. FDIC
management has shown a strong commitment to fully establishing
this comprehensive security management program and we do
believe that FDIC is on the right track in this area, and we
will continue to work closely with FDIC to monitor this during
2004.
I will now briefly discuss the funds's financial condition.
As you know, we have heard today that BIF and SAIF, the two
insurance funds, have shown positive trends over the last
couple of years. Both funds have reported positive net income,
which increases the insurance reserves or net worth of the
funds. Insured banks and savings institutions are also showing
very positive trends in earnings and asset quality.
In addition, FDIC is required to maintain fund balances for
the insurance funds at a designated ratio of 1.25 percent of
estimated insured deposits, and the reserve ratios were well
above those levels at December 31, 2003. It is very important,
however, to note that all of these results reflect a point in
time. This holds true for both our audit results and the
positive financial trends that we are seeing with FDIC and the
industry.
In summary, the results of our audits were very positive,
clean opinions on the financial statements and overall
effective internal control, with significant improvements in
the area of computer security. In general, we have seen a
strong commitment from FDIC management to promote excellence in
financial reporting and internal control. FDIC continues to
take important steps to monitor risk, modernize its systems,
and adapt to change.
With the banking environment, though, constantly changing,
FDIC needs to continually monitor its business environment and
the related risks, and adapt its internal operations and
internal controls and its external insurance and supervision
and monitoring functions in order to manage this risk and
maximize the value of its overall mission.
I would like to note that we have had a very productive and
cooperative working relationship with FDIC management and staff
at all levels. We also have very complementary roles and
responsibilities with the IG and we do coordinate frequently on
our work.
Madam Chairwoman, I would be happy to answer any questions
that you have.
[The prepared statement of Jeanette M. Franzel can be found
on page 32 in the appendix.]
Chairwoman Kelly. Thank you very much. I do have a couple
of questions.
I am interested in the fact that you have made an effort to
allow the FDIC to reduce the regulatory burden on banks by
testing, rather than duplicating a lot of work on audit and
control functions. I want to know how this is going and how
effective you have been in reducing the burden. Are you able to
quantify it and document that there has actually been a
reduction?
Mr. Gianni?
Mr. Gianni. Yes, Madam Chairwoman. This is the
corporation's new, what they call the merit exam program. We
were involved as an observer at the outset, as the corporation
was designing the concept to streamline its supervisory
oversight of banks under $250 million that met certain
criteria. Conceptually, it is a sound concept that you are
risk-focused on how you are carrying out your exam process. At
any time, if an institution should fall outside of the
parameters set up or the criteria that were set up--for example
the continuation of management is one of the criteria--if you
have a change in management, in high-level management within an
institution, that throws that institution out of the criteria
and you have to go in and do a more extensive examination
process.
So conceptually, the process holds together. We have not
examined the implementation of this new process. We plan to do
so in our future work. However, the corporation does report
that they have saved examiner time and freed up hours to direct
to other important areas of activities within the corporation,
but we have not analyzed it yet.
Chairwoman Kelly. Mr. Gianni, when you do analyze it, do
you plan to do that fairly soon? If so, will you report that to
the committee for us please?
Mr. Gianni. The work is underway at the present time and we
will report back to the committee, Madam Chairwoman.
Chairwoman Kelly. Thank you. I think that is something that
is worth our having a report on from you.
Some of the smaller and more rural institutions that the
FDIC monitors have had concerns with the increased Patriot Act
requirements. We have heard from some of them. I wonder if you
think that Congress should consider making any changes with
regard to those rural and small institutions.
Mr. Gianni. We have not looked at the reg burden of this.
The corporation is currently in the process of developing
proposals to the Congress that will address regulatory relief
on reg burden. One of the concerns, and I have heard the
concerns that you expressed or that have been expressed to you,
one of the ideas that is being considered is whether there
could be constructed a phased approach to providing the
information to the Treasury Department. Perhaps if the Treasury
Department would get a condensed set of information, which
would reduce the burden on the part of the bank, and then when
it went into the system and was analyzed and there was deemed a
need for additional information, perhaps at that point in time
they could go back out and ask for additional information. This
is a concept that is being considered right now.
One of the frustrations that I have also heard has been
that information goes into the Treasury Department and nothing
comes back to the bankers to indicate whether this information
that cost them money to generate, whether that has been helpful
to the federal government. I believe that the new director of
FinCEN has been out listening to people and has a number of
studies underway to try to improve the operations of his
organization.
Chairwoman Kelly. That is good to hear.
I want to ask also, your office has repeatedly found that
one of the problems that really is at the heart of a lot of
bank failures is the fact that we do not have adequate
corporate governance at the top. Are the requirements of
Sarbanes-Oxley being met here? And is there something that we
need to tweak to make that more solid? How can we help you on
that?
Mr. Gianni. I think regarding Sarbanes-Oxley, although
Sarbanes-Oxley is certainly helpful, there were requirements
already passed by the Congress that required strong governance
principles within our financial institutions. What we do is go
back. As you know, we are required by law when a major
institution fails, to conduct what is called a material loss
review. If it is a loss of $25 million or more to the insurance
fund and it is an FDIC-insured institution, we are required to
conduct a study as to why that institution failed.
We have done so 10 times in the past 10 years. What we have
recently done is we have gone back and we have analyzed those
10 studies that we had to see whether there were any trends
that came out. Clearly, the top trend is that there were weak
governance processes in place.
Now, 10 in relation to 5,000 is relatively small, but we
think our analysis will give additional emphasis to the
examiners, to the corporation, to focus in on governance
because governance is extremely important. It is the amount of
control that is being maintained over the financial
institution, whether you have a good working audit committee
that helps oversee the operation of the institution. That was
our finding and it continues to be. I do not think we need
additional legislation. I think what we want to make sure,
though, is that we are vigilant as we carry out our exams in
these institutions.
Chairwoman Kelly. Okay, thank you.
Ms. Franzel, I want to ask you a question. The FDIC has
regional field offices, so that they are fairly close to the
people that they monitor. I am wondering what you have seen
when you looked at the FDIC in terms of how that worked and
whether or not we can learn from the cooperation between the
FDIC and the State regulators in a way that can be applied to
the regulation of other entities.
Ms. Franzel. I think that taking a look at the current
structure is probably a good idea, because with increases in
technology, obviously, we have been able to do our work
differently. It is important to have folks out there close to
the people who are being regulated. We at GAO have the same
type of structure. We have several field offices simply because
we are covering federal expenditures all over the country, and
we find that we need to have these types of offices out there.
So certainly I think that others can learn from this
environment and this structure. We have not specifically
studied whether the structure right now should be applied to
other regulators, but I think that idea certainly has merit.
Chairwoman Kelly. Thank you.
Mr. Gianni. If I might, Madam Chairwoman.
Chairwoman Kelly. Yes?
Mr. Gianni. We have looked at the field. From an
administrative standpoint, we have looked at the expenses
incurred by the corporation among their regional offices. There
was a wide disparity among the various regions as to the cost
of the facilities. Since that time, the corporation has
consolidated several of their regional offices and I believe
are continuing to look at what is the right size and structure
of their field organization. We do have individuals located in
all 50 states, though, so that they can carry out their
responsibilities.
Chairwoman Kelly. Have you found that it facilitates
cooperation between the State regulators and the federal
regulators to have those field offices?
Mr. Gianni. Exactly. I think it is important because, as
you know, we examine financial institutions in conjunction with
the State examiners. So we have to really understand how the
States are carrying out their responsibilities because every
other exam cycle we are relying on the States to carry out an
exam. We have to be knowledgeable about how they are carrying
out their exams, what risks they are identifying. So there has
to be a good communication and cooperation among the State
examiners and the federal government. We have done some work in
that area. We are continuing to monitor the activity and have
some work underway at the present time.
Chairwoman Kelly. Thank you. Thank you for adding that.
I have other questions. I am going to submit them in
writing. You have been very patient and I appreciate your being
here. I think there are other members who may have additional
questions for the panel. It is a very busy time on Capitol
Hill, as you all know. So without objection, I am going to hold
the hearing record open for 30 days for the members to submit
written questions to these witnesses and place their responses
in the record.
With that, this hearing is adjourned.
[Whereupon, at 11:30 a.m., the subcommittee was adjourned.]
A P P E N D I X
March 4, 2004
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