Ms. Donna Tanoue
Chairman
Federal Deposit Insurance Corporation
It is an honor to represent the Federal Deposit Insurance Corporation here today as we discuss the Asian financial crisis and the lessons it holds for us.
The FDIC itself was born from crisis caused by a lack of public confidence in the banking system.
During the early 1930s, in the midst of the most serious financial turmoil in the U.S. history, turmoil in which almost 4,000 banks failed, our President, Franklin D. Roosevelt, addressed the American people.
He promised that the banking system of the U.S. would be repaired and that, in the future, the system would rest on a new foundation.
He noted that: "...[t]here is an element ... in our financial system more important than currency, more important than gold, and that is the confidence of the people."
To assure that confidence, to provide a foundation for the banking system, the Federal Deposit Insurance Corporation was created.
Today, the FDIC is the oldest and largest governmental deposit insurer in the world.
The FDIC performs three major functions in the US banking system.
First, we insure depositors up to $100,000.
Second, we supervise more than half of the 10,200 institutions we insure.
And third, we resolve bank and thrift failures. That is to say, when an institution is in danger of failing, we work to resolve the failure through the sale to another bank of the liabilities and as many of the assets as possible. If we cannot sell the institution, we pay the insured depositors - quickly - and liquidate the assets ourselves. Our goals are to make the failure of an insured institution as painless as possible for the depositors we insure, and to limit the effects of the failure on the local community and economy.
Since the FDIC's founding almost 70 years ago, the number of annual bank and thrift failures in the U.S. has varied tremendously with economic conditions. For example, in 1989, more than 200 institutions failed. Last year, only eight FDIC insured institutions failed.
One reason the FDIC has successfully helped to maintain confidence in the U.S. banking system in that the agency, with its personnel and systems, remains up and running, regardless of the state of the economy or the number of bank failures. This permanence recognizes a basic fact - that bank failures are inevitable.
The certainty of knowing there is a system in place to resolve any bank problems gives the market greater confidence in the banking system.
Along with America's Great Depression in the 1930s, the financial crisis in Asia that surfaced in 1997 obviously stands out as one of the most serious of the twentieth century. The Asian crisis was caused by a combination of factors, but clearly the loss of confidence in the banking sector contributed to it a great deal. Governments strove to address this crisis through various means, with several ultimately declaring blanket guarantees of depositors and other creditors.
The Asian crisis teachers us many lessons, including the importance of having in place - before a crisis occurs - both a deposit insurance system and, as important, a structure to deal with failing and failed financial institutions.
For example, Korea had in place a structure to deal with the rash of banking failures and bad assets accumulated from them. The resources available in the Korean Asset Management Corporation (KAMCO) played no small part in facilitating and expediting the restoration of confidence and minimizing the costs of the financial crisis.
In contrast, other countries, such as Thailand and Indonesia, had to establish organizations to deal with failing institutions in the midst of the crisis. Having to do so creates enormous political, legal, operational and logistical problems, and no doubt increased the costs of the resolution process.
So to any countries that are weighing the phase-out of their bank resolution programs and offices, I strongly urge careful reconsideration.
Of course, I do not mean to imply that deposit insurance, and an effective structure to resolving troubled institutions, can, by themselves, create and maintain public confidence. Confidence also resets on sound accounting, disclosure and auditing standards to ensure appropriate market discipline, as well as a strong regulatory and supervisory framework. Each element supports confidence in its own critical way.
Before closing, let me touch on a related point.
Today there is a consensus that - following a strengthening of the banking sector and improvements in economic conditions - the explicit, comprehensive guarantees understandably and rightfully introduced by these countries during the crisis to stem deposit outflows should be replaced by a system of limited deposit protection.
Yet, for a system of limited insurance to be effective in maintaining confidence, along with a structure of dealing with troubled institutions, economic recovery should be evident; regulatory, supervisory, and accounting reforms must be in place - or be phased-in; and the public should receive adequate notice of the pending change. In other words, movement to limited deposit insurance can only occur safely where other supporting factors exist.
If the turmoil from the Asian financial crisis of the last few years in the emergence of strong, permanent deposit insurance systems and permanent resolution and receivership for dealing with problems, both countries that suffered and those that witnessed suffering, will benefit.
Thank you.