FDIC Chief: Banking Challenges Remain

The chairman of the Federal Deposit Insurance Corp. says challenges remain in the banking sector, but the number of banks affected is a small portion of institutions overall. Sheila Bair also says that smaller banks are doing a better job of lending than larger ones.

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MELISSA BLOCK, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

ROBERT SIEGEL, host:

And I'm Robert Siegel.

For all the disastrous losses of the financial crisis, there's one positive record that remains unbroken. No depositor has lost a dime from an account insured by the Federal Deposit Insurance Corportion. The FDIC regulates almost 5,000 banks. And while the deposits are safe, not all of those banks are. The FDIC now has just over 700 institutions on its problem bank list. FDIC chair Sheila Bair joins us from her office. Welcome to the program.

Ms. SHEILA BAIR (Chair, FDIC): Thank you. I'm happy to be here.

SIEGEL: And, first, for the sector of the banking industry that you insure, how bad is it?

Ms. BAIR: Well, I think it's going to be difficult this year. We had 140 bank failures last year and we think there will be more bank failures this year. However, we have almost 8,000 insured depository institutions out there. Most of them are profitable, well-capitalized and doing fine. So, there are some challenges in the banking sector right now, but it's still a small percentage of banks overall and certainly, as compared to the previous crisis that hit banks, the S&L crisis, it's nowhere close to where we were there.

SIEGEL: There seem to be, nowadays, mixed messages going out to the banks out of Washington: make more loans, get the economy going. Also, reduce your leverage, maintain your capital. How can the banks satisfy those two policy objectives?

Ms. BAIR: Well, a well-capitalized bank will be in a very good position to lend. So I don't think those are mutually exclusive. And I will say, I think all the research shows that the smaller banks, I think, are doing a better job in continuing to make loans than the larger institutions. There are some small banks that have a lot of commercial real estate loans that are troubled right now. And as they need to reserve against possible future losses on those loans, that does constrict their ability to lend. But we try to have a balanced supervisory approach and continue the ability of banks to make healthy loans. And certainly the stronger institutions, again, the smaller, stronger institutions are doing a very good job of lending, and we encourage that.

SIEGEL: But you're saying that the big banks - are you saying they could lend more and should lend more but are not doing so?

Ms. BAIR: Well, I'm saying that their loan balances are down significantly in comparison to where the smaller banks loan balances are. There's a 7.5 percent decline last year on loan balances and about 90 percent of that was driven by banking organizations of $100 billion in assets or greater. So we do think, yes, that there could be - and we do encourage those large institutions to lend, make prudent loans, especially to small businesses, where there has been a significant issue with credit availability.

And we've also asked them not to rely on these models and say, well, certain areas of the country we're not going to lend or certain, you know, business types were not going to lend, or certain size of loans we're not going to lend. Those types of model-driven formulas we think are harmful. And so we encourage all banks, large and small, to make individual credit determinations. So if you have a credit worthy borrower, know your borrower and make the loan.

SIEGEL: All across the country we read there have been in recent months a tremendous number of mortgage foreclosures. And all over the country, presumably, banks now have - hold title to a great many buildings. What are the banks - by and large, what are they doing? Are they selling all the properties they have? Are they holding onto them, lest they acknowledge how little those properties are worth? What's the story and to what extent is that a problem that gets you on the problem list?

Ms. BAIR: Right. Well, certainly, if you have a lot of loans that went bad, you might have a lot of repossessed property. So I think it's, you know, the original - the loan problem was what probably might have you having more intense supervisory attention. But all institutions, even healthy ones, have some real estate owned right now. So that's - just because a bank may own a piece of foreclosed property doesn't really say anything in and of itself about the health of the bank.

Banks are required to realize their losses in a timely way and while they own foreclosed property, they're expected to keep it in good condition, keep the lawns mowed, et cetera.

SIEGEL: But I would imagine, if I'm a banker, I would read a timely way as to at least keep some of it until the market recovers a little bit and gradually try to do better than all - flooding the market with all of these...

Ms. BAIR: Well, that's true. Well, and I think it is not necessary to force immediate liquidation of properties. I think there are certain properties that probably there may be a problem of liquidity in some areas. There may be a problem with some properties that they will just, you know, never recover.

SIEGEL: But is there a tidal wave of foreclosed properties that's in bank vaults around the country that's about to hit and keep the real estate market very, very low for a couple more years?

Ms. BAIR: Well, I think there certainly will be a continuing foreclosure problem. And this is why we continue to stress loan modifications to try to rehabilitate the loan, at least for owner-occupied property to - if you have a credit ready borrower who can make a payment at a reduced rate, to try to rework that loan and keep the person in their home, keep the property off of the market and rehabilitate the loan.

And we think we've had good success with our program. We pioneered this with IndieMac Bank and our redefault rates are low - they're about 30 percent.

SIEGEL: Senator Christopher Dodd's plan for financial regulation, do you support it?

Ms. BAIR: Well, we're still analyzing it. There's certain pieces of it that we are very supportive of. Where we were consulted, there's a piece of what we call resolution authority which would basically create a mechanism to take over a large financial institution that has gotten itself into trouble and break it up and sell it.

This is a type of process we use for smaller institutions. This is a mechanism that used to be used for all the large banks, as well, and then a lot of what had been traditional banking activity moved into non-banks. And so we really have no resolution process for activity that's moved outside of a (unintelligible) depository institution, and that was really where the lion's share of the problems were created during this crisis. So, on the resolution piece in particular, we're very supportive.

SIEGEL: Well, Chair Sheila Bair of the FDIC, thank you very much for talking with us.

Ms. BAIR: Thank you.

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