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FDIC . . . For Doing It Correctly

Posted by Larry Doyle on March 19, 2009 2:41 PM |

Sense on Cents is very judicious in selecting our Economic All-Stars (highlighted in the left sidebar). These individuals continually display a level of professionalism, maturity, consistency, and integrity which are not commonly found in our financial or political spectrum. I deeply appreciate their insights and perspectives and enjoy sharing them with our audience at Sense on Cents and No Quarter USA.

I thank Susan and Andy for tipping me off to remarks made earlier today in which Sheila Bair Says “Too Big to Fail” Strategy for Financial Institutions Must End. The administration and other political pundits  are trying to make the case that the Federal Reserve should serve as the systemic risk regulator. In my opinion, Sheila Bair should occupy that role. There is a major political battle developing over this turf.  Make no mistake that how this battle plays out will have deep and longstanding implications for our financial system as a whole and for individual consumers.

My vote goes to Ms. Bair and the FDIC, “for doing it correctly” to this point. The U.S. Systemic Risk Watchdog Not Panacea highlights the developing battle between the FDIC and the Fed. Both of these entities have a lot on their plate already, but I believe the FDIC is better positioned to handle this role. Bair and team are laser focused on banking institutions, while the Fed is more broadly focused on the economy, money supply, and the markets.

In recent discussions with a number of colleagues, the topic of the dramatically changing landscape in the world of banking keeps coming up. For many individuals, banks and banking operations can generate a fair amount of anxiety. In the process of praising Ms. Bair, I would like to use that as an opportunity to personalize the world of banking highlighted at the FDIC website.    

This site addresses Deposit Insurance, Consumer Protection, Industry Analysis, Asset Sales, Regulations and Examinations, and News and Events. The world of banking does not need to be overwhelming. The opportunities to properly manage your finances, find solid investment opportunities, and navigate the economic landscape are a mere point and click away. Anything you do not understand, bring it right back to Sense on Cents!! 


  • fiscalliberal

    I guess I would trust Sheila Bair as the systemic regulator. The problem I have with the Fed is that the government has no control with the Fed in terms of implimentation. Case in point, the Fed had the ability to regulate the loan brokers writing the Sub Prime loans and Greenspan said the market will regulate them. It was those no documentation, non substantiation of income loans that started the house of cards collapse. We can lay that directly on Greenspan and the Republican President and Congress.

    So – my question would be, who controls the FDIC or is it independent like the Fed.

  • Fiscal…FDIC is an independent agency. I got the following from their site:

    The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress that maintains the stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions, and managing receiverships.

    The FDIC is a leader in developing and implementing sound public policies, identifying and addressing risks in the nation’s financial system, and effectively and efficiently carrying out its insurance, supervisory, and receivership management responsibilities.

    The FDIC and its employees have a long and continuing tradition of distinguished public service. Six core values guide FDIC employees as they strive to fulfill the Corporation’s mission and vision:

    FDIC employees adhere to the highest ethical standards in the performance of their duties and responsibilities.
    The FDIC maintains a highly skilled, dedicated, and diverse workforce.
    FDIC employees work cooperatively with one another and with employees in other regulatory agencies to accomplish the Corporation’s mission.
    The FDIC responds quickly and successfully to identified risks in insured financial institutions and in the broader financial system.
    Financial Stewardship
    The FDIC acts as a responsible fiduciary, consistently operating in an efficient and cost-effective manner on behalf of insured financial institutions and other stakeholders.
    The FDIC treats all employees, insured financial institutions, and other stakeholders with impartiality and mutual respect.

  • Chris Dodd said “no institution should ever be ‘too big to fail’.”

    How true Senator. Would this include the government institution?

  • Larry Doyle

    Chris Dodd with a “tremendous grasp of the obvious!”

  • Mountainaires

    How do you explain the fact that that FDIC just punished a bank for NOT doing precisely what got us into the trouble in the first place–lending to risky entities.

    Considering his bank is doing well in a tanking industry and even the FDIC’s deposit insurance fund is in trouble after paying for an upswing in bank failures, Petrucelli told the Boston Business Journal that the negative rating caught him by surprise.

    This was a major discussion in numerous news stories, but here is the basic story [link below]. My view is that the FDIC shouldn’t be punishing banks like East Bridgewater:,2933,509584,00.html

  • Larry Doyle

    Mountainaires….my initial thoughts when I viewed this headline was that this bank should be applauded for prudent lending. However, upon reading the story, I actually think the FDIC may very well have a point. Easy Bridgewater has a ratio of only 28% loan to deposits. Where are they putting their money to work? Into securities. It strikes me that they are operating more like a hedge fund than a bank.

    While it is great that East Bridgewater has no loan chargeoffs, by the same token it can be said that they are not taking enough risk.

    I appreciate your point but I think there is probably more of a middle ground for a bank like this. While 90% loan to deposit ratio may generate too much risky and imprudent lending, 28% may not be enough prudent lending.

    This is not to say that the FDIC is perfect by any means. A large organization like that is likely filled with plenty of problems. I just think that Ms. Bair seems to get it and overall doees a good job leading her business.

  • Mountainaires

    Okay, not to belabor the point, but….

    I agree that Sheila Bair is doing a good job; watched her on Washington Journal recently, and she is a very credible person. That said, there is more to this story. Frankly, if I were looking for a bank, I’d be considering East Bridgewater as a very strong candidate. It’s disturbing that the CRA [Community Reinvestment Act] is now being expanded under new legislation, when it is a prime source, in my view, for the problems we are all now experiencing. East Bridgewater was downgraded by the FDIC under the CRA [Community Reinvestment Act]. It’s a small thing, perhaps, just one bank, just a slap on the wrist; but big pictures are drawn from small details. They are sanctioning this strong bank for not making enough loans under a program which forces banks to make risky loans, which weakens banks. If business or consumers wanted more debt in that particular community, they can go to another bank; but more debt is not what we need these days anyway. It’s bad policy.

    Here’s more on East Bridgewater:^1793570&page=1

    The FDIC’s negative review of East Bridgewater Savings Bank’s loan volume is an anomaly in today’s current banking scene as lenders reel from their role in offering too many cruddy mortgage products to borrowers with weak credit.

    Still, the FDIC slapped East Bridgewater Savings with a rare “needs to improve” rating after evaluating the bank under the Community Reinvestment Act.

    From late 2003 through mid-2008, East Bridgewater Savings averaged 28 cents in loans for every dollar in deposit. The average loan-to-deposit ratio among similar size savings banks is more than 90 percent, FDIC data show.

    “There are no apparent financial or legal impediments that would limit the bank’s ability to help meet the credit needs of its assessment area,” the FDIC said in its CRA evaluation.

    FDIC examiners also faulted East Bridgewater for not advertising and marketing its loan products enough. The bank, which does not have a Web site, offers fixed-rate mortgages.

    East Bridgewater Savings:

    Bad or delinquent loans?




    Money set aside in 2008 for anticipated loan losses?


    “We’re paranoid about credit quality,” Petrucelli said. The 62-year-old chief executive has run the bank since 1992.

    The negative CRA rating, he said, caught him by surprise. The bank received “satisfactory” CRA ratings from the FDIC in 2003 and from the Massachusetts Division of Banks in early 2006.

    East Bridgewater Savings ended 2008 with $135 million in assets and deposits of $84 million.

    The bank even squeaked out a profit of $87,000. And its Tier 1 risk-based capital ratio was 31.6 percent, or more than three times higher than many community banks in Massachusetts.

    But in the eyes of regulators, East Bridgewater Savings looks stingy. Its net loans and leases equaled 21 percent of assets. That compared with 72 percent among 385 savings banks across the country with assets between $100 million and $300 million.

    • Larry Doyle

      All good color. I certainly would feel very comfortable owning East Bridgewater’s stock and having my money on deposit there.

      I wonder if I could get a loan there, though. Tier 1 ratios of 10% are considered outstanding. A Tier 1 ratio of 30% is unheard of.

      No doubt we would want more banks with the disciplined lending of EB than the reckless lending employed by so many others. However, if ALL banks were like EB, I think we would not have enough credit in our local economies.

      Thanks again for all the color.

      The CRA topic is a very interesting issue. CRA in and of itself is not a bad thing but the abuse of the CRA-concept by unsavory sub-prime originators and supported by Freddie and Fannie, who were supported by unsavory legislators, is clearly at the core of our problems.

      I view CRA as a prescription medicine. When used properly it can do great things. When abused, it can be deadly. Who abused it, the pushers!!

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