8 FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Barney Frank 

Chairman 

Committee on Financial Services 

House of Representatives 

Washington, D.C. 20515 

Dear Chairman Frank: 

October 2, 2009 

Thank you for your letter regarding specific consumer protection actions and 

initiatives undertaken by the Federal Deposit Insurance Corporation over the past ten 

years. I appreciate the opportunity to respond. 

As the nation's federal deposit insurer, maintaining consumer confidence and 

trust in the nation's banking system is a core function. Consumers have confidence in the 

banking system when banks treat them fairly, and when they can rely on mechanisms 

both within the industry and those established by government agencies to protect their 

interests. The FDIC does not consider a bank safe and sound if the bank does not treat its 

customers fairly. The Deposit Insurance Fund is there to make sure that consumers do 

not lose their insured deposits: but equally important to consumer confidence is ensuring 

that consumer protections are enforced on a routine basis, in good times and bad. 

It is clear that regulatory gaps in the financial system played a role in exacerbating 

the current financial crisis. However, the FDIC has continued to take a leadership role in 

protecting consumers. Whether taking enforcement actions, fostering a dedicated cadre 

of consumer protection ("compliance'') examiners, developing new consumer protection 

guidance, or serving as a v_ocal advocate on consumer protection issues, our track record 

demonstrates that consumer protection at the FDIC has not taken a back seat to any other 

concerns. 

Requesting Additional Consumer Protection Authority 

On a number of occasions - most recently in March of thi~ year- in testimony 

before the House Committee on Financial Services and in the Senate, we have asked for 

additional rulemaking authority to increase consumer protection (see Attachment A}. For 

example, in June 2007, I said the following before your Committee: 
2 

[R]egulators need to set rules for market participation. Moreover, price 

competition does not work if consume~ do not understand the true cost of 

financial products. Through appropriate rulemaking. regulators can establish 

consumer protection against abuses that are strong and consistent across industry 

and regulatory lines. In addition. there should be meaningful enforcement· 

authority and sufficient resources devoted to that authority. To achieve these 

goals, I would recommend that Congress consider the following reforms: 

• The creation of national standards for subprime mortgage lending by all 

lenders which could be done by statute or through HOEPA rulemaking; 

• Expand rulemaking authority to all federal banking regulators lo address 

unfair and deceptive practices; and 

• Permit state Attorneys General .and supervisory authorities to enforce 

TILA and the FfC Act against non-bank financial providers .... 

The FDIC raised some of the earliest alarms about consumer protection problems 

adversely affecting both consumers and the economy as a whole. In congressional 

testimony artd speeches, the FDIC raised concerns about the need for stronger consumer 

protections and highlighted the clear connection between consumer protection and safety 

and soundness. We urged stronger underwriting standards for nontraditional mortgage 

products, and argued that they were unsuitable for many borrowers. 

In addition, in comments submitted to other financial regulatory agencies, the 

FDIC bas strongly advocated for regulatory changes that would protect consumers and 

strengthen our financial system (see Attachment B). In comment letters we submitted on 

proposed rules regarding credit cards, mortgages, and other issues, we requested that the 

relevant agencies: · 

• Ban yield spread premiums and allow brokers to be fairly compensated by 

alternative means; . 

• Restrict marketing of high fee credit cards to consumers as credit repair products; 

• Require banks to only pay overdrafts if consumers have affirmatively selected to 

participate in overdraft coverage; 

• Prohibit underwriting based solely on initial teaser rates for all nontraditional 

mortgages and ban prepayment penalties outright for higher cost loans; and 

• Affinnatively require lenders to consider a borrower's debt-to-income ratio in 

determining repayment ability. 

Enforcing Consumer Protection Laws 

Bank examination for consumer compliance has been a long-standing part of our 

supervisory process. Based on our supervisory and enforcement authority. we mandate 

corrective action, assess substantial penalties, and require consumer reimbursement when 

we find violations of law, breaches of fiduciary duty, or mismanagement in banks• 

consumer protection responsibilities. 
3 

Over the past 10 years, the FDIC has conducted 34,364 consumer compliance and 

Community Reinvestment Act (CRA) exams and has taken over 1,500 fonnal and 

infonnaJ enforcement actions to address consumer protection violations or problems (see 

Attachment C). Enforcement actions generally are based on examination findings, but 

can also arise through complaints to our Consumer Response Center or third party 

referrals. For example, in 2008, the FDIC took 182 consumer protection enforcement 

actions against the banks we supervise. Illustrating the intersection between consumer 

protection and safety and soundness, some of these enforcement actions jointly addressed 

safety and soundness and consumer protection problems. 

While the FDIC does not have rulemaking authority for unfair or deceptive acts or 

practices (UDAP), we have been able to aggressively pursue case-by-case enforcement 

actions that resulted in substantial penalties and restitution to consumers. For example, in 

four recent significant cases where UDAP violations were found, our enforcement actions 

resulted in over $165 million in penalties and restitution (see Attachment C). We have 

taken action relating to credit cards, overdraft protection programs, automatic teller 

machines (ATM) usage of debit cards, rewards accounts, and other lending practices.1 

Since 2005, we have cited 75 institutions for violations ofUDAP regarding overdraft 

lines of credit and overdraft balances. 

In 2008, the FDIC and the Federal Trade Commission won a major settlement 

against CompuCredit, a credit card company, for misleading subprime credit card users. 

As a result. CompuCredit is correcting its practices and providing Sl 14 million in cash 

and credits to consumers who were improperly assessed fees as a result of inadequate and 

misleading disclosures. The FDIC also took groundbreaking enforcement actions against 

three banks that used this same finn's services. The banks have settled with the FDIC, 

are correcting their practices, and are substantially improving their compliance 

management systems and their oversight of third-party service providers. In addition, the 

FDIC assessed civil money penalties in excess of $5 million (see Attachment C for other 

examples of significant FDIC enforcement actions). 

The FDIC also has consistently ensured that consumers receive restitution when 

Truth-in•Lending discrepancies such as inaccurate finance charges are found and has 

achieved those results quickly. Over the last 10 years, we have required more than 900 

institutions to make restitution to consumers ranging from a few dollars each to several 

thousand dollars. 

Fair Lending Referrals 

We have been, and continue to be, committed to addressing discrimination. In 

2001, the FDIC established a Fair Lending Examination Specialist Program with 

examiners dedicated to providing expert fair lending consultation to compliance 

examiners. Over the past 10 years, the FDIC has made 213 referrals of pattern or practice 

1 In March 2007, the FDIC issued additional guidance to its compliance examiners specifically about Overdraft 

protection programs and accessing balance infonnarion through A TMs, !Uld over the phone or internet (see Attachment 

E). 
4 

fair lending violations to the Department of Justice (DOJ) (see Attachment C). Some of 

the less significant cases have been referred back to the FDIC for administrative 

resolution, and we have requested that significant cases involving discriminatory 

mortgage pricing be referred back to the FDIC in order to speed resolution. For example, 

at our request, the DOJ returned to the FDIC a case involving First Mariner Bank, and we 

were able to settle both UDAP and Equal Credit Opportunity Act violations in a S 1 

million consent order representing $950,000 in restitution to consumers and a $50,000 

civil money penalty. We also look for ways to make our consumer protection program 

more effective, such as by enhancing fair lending examinations through the use of 

residential pricing data and denial data. 

Taking Action Against Third Parties and Coordinating with Other Regulators 

In addition to taking action to protect consumers at FDIC-supervised institutions 

that we have traditionally examined, we use our available authority over institutionaffiliated parties to take enforcement action against third parties. For example, we used 

this authority against a non-bank credit card company, as described in the CompuCredit 

example. Where the FDIC does not have enforcement authority over third parties, we 

have worked with other regulators to ensure that proper enforcement actions are taken, 

One such example is a 2004 case with Commerce Bank & Trust Company and its 

affiliate 1-800-East-West Mortgage Company. When an examination of the bank 

identified significant problems in the entire mortgage process with its affiliate, the FDIC 

worked with the Division of Banks of the Commonwealth of Massachusetts to issue a 

joint Cease and Desist Order against the Bank and its affiliate. In this case, we also 

worked with the Department of Housing and Urban Development to settle RESP A 

violations involving kickbacks for business referrals. In 2008, the FDIC issued guidance 

that put banks on notice that they will be held accountable for managing activities 

conducted through third parties. It also made clear that, under appropriate circumstances, 

we wil1 use our authority to talce action against third parties. 

Dedicated Examiner Workforce Focused Exclusively on Consumer Protection 

The FDIC has established a robust compliance examination program dedicated to 

consumer protection. Since 2006, our compliance examination staff has increased by 

more than 40 percent through a combination of entry level and mid-career, experienced . 

staff positions. I want to emphasize that our compliance examiners focus solely on 

examining banks for consumer protection issues. They are consumer compliance experts 

by choice and are trained to examine, provide technical assistance on improvements, and 

cite consumer protection violations. Our 431 consumer compliance examiners have great 

pride about the work that they do. Their energy and expertise malce our consumer 

protection program effective and strong and they stand ready to enforce the cpnsumer 

protections laws that Congress puts in place for the future. 

Inextricable Relationship Between Consumer Protection and Safety and Soundness 
5 

While our consumer compliance examiners are dedicated to consumer protection 

supervision, we strengthen our compliance program by having compliance examiners and 

safety and soundness examiners share information and work together. when appropriate. 

For example. we have launched Joint Examination Teams (JET teams) where examiners 

from both consumer compliance and safety and soundness examine institutions offering 

certain products that are of concern to both disciplines. Through this approach, the FDIC 

was successful in eliminating payday lending partnerships at FDIC-supervised banks. In 

addition, iET teams have identified unfair or deceptive acts or practices by third-party 

vendors pertaining to subprime credit cards. 

Between 2005 and 2006, the FDIC investigated over a dozen banks that had 

partnered with payday lenders. Based on the FDIC's consumer protection and safety and 

soundness concerns, including a concern about inadequate consideration of the 

consumer's ability to repay the loans, the FDIC achieved the result that these banks are 

no longer engaged in these payday loan partnerships. In addition, to monitor future 

payday lending, the FDIC entered into a written agreement with one of the large payday 

lenders, which agreed to provide advance notice before entering into a payday lending 

agreement with an FDIC-supervised bank. We also worked closely with the Department 

of Defense on its rule to protect service members and their families from payday loans 

and other problematic credit products. 

At the FDIC, compliance examination findings are incorporated into both safety 

and soundness examinations and Community Reinvestment Act (CRA) performance 

evaluations. When significant issues are found. especially those relating to 

discrimination and UDAP, banks' overall composite ratings and their public CRA ratings 

are directly impacted and often downgraded. In addition, our compliance examination 

findings have a profound impact on whether or not the FDIC will approve an institution's 

applications to open additional branches or make other changes to its corporate structure. 

The failure of a bank to properly handle consumer compliance issues or effectively 

reinvest in the community is always taken into consideration in the application process 

along with safety and soundness issues. 

The FDIC has long belie~ed that consumer protection and safety and soundness 

are two sides of the same coin. We do not hesitate in taldng appropriate supervisory 

action to address consumer protection-related violations. Our examination process 

requires that significant consumer compliance violations are evaluated first at the 

Regional Office level and then referred to senior officials in Washington, D.C. who focus 

solely on enforcing consumer protection laws. The Washington consumer compliance 

office, in conjunction with the Legal Division, reviews the violations and determines the 

appropriate enforcement actions and corrective measures which may include restitution to 

consumers. 

Responding to Consumer Complaints 

In addition to supervising the banking system, the FDIC is an invaluable resource 

to consumers who are having difficulty dealing with their financial institutions (see 

-✓ 
6 

Attachment G). Since 2005, the FDIC's Consumer Response Center has received more 

than 100,000 complaints and questions from consumers about consumer protection 

matters. The FDIC has been instrumental in helping these individuals resolve their 

banking issues. 

Beyond assisting consumers, our Consumer Response Center is an integral part of 

the examination process. One of the first things that an examiner does to prepare for a 

consumer compliance exam is to review consumer complaints. The Center provides 

examiners a report outlining complaints received against particular banks. When a 

potential violation or other supervisory concern is identified, the Consumer Response 

Center works closely with the examination function to assure appropriate follow-up 

action is taken. 

As an example, earlier this year, the FDIC resolved significant issues arising out 

of complaints from consumers whose credit card convenience checks were not honored 

by the issuing bank. We required the bank to improve its process for determining 

customer eligibility for convenience checks and to ensure that the checks are honored 

consistently with the bank's consumer disclosures. The bank paid a $250,000 Civil 

Money Penalty for this unfair practice and refunded $160 per dishonored check to an 

estimated 10,000 affected customers. 

Vocal Advocate and Thought Leader for Consumer Protection 

I am proud of the leadership role that the FDIC has taken in the consumer 

protection arena. By encouraging banks to offer responsible products, conducting 

research on emerging consumer protection issues, and bringing together leaders to foster 

economic inclusion for all Americans, the FDIC seeks to protect consumers and to 

empower them t~ make best use of the American financial system. 

Foreclosure Prevention and Loan Modifications 

When the housing market was devastated by foreclosures, early on we advocated 

for long-term sustainable foreclosure prevention programs. Our experience managing 

foreclosures at IndyMac Ban1c led us to develop an effective loan modification protocol 

which served as the model for the Administration's loan modification program. We also 

designed the "Mod In a Box" which we placed on our website to give all lenders the 

ability to create streamlined and sustainable loan modifications in an effort to address the 

growing number of fo!eclosures throughout the United States. 

Small Dollar Loan Program 

Through our small-dollar loan pilot program, we have encouraged banks to offer 

affordable alternatives to high cost payday loans. The pilot is a two year case study 

designed to identify and amplify models for banks to offer affordable and profitable small 

dollar loans. After six quarters of results, the 31 banks in the pilot have made nearly 

24,000 loans with a balance of more than $28 million. Interestingly, loans made by 
7 

banks in the pilot are no more likely to default than loans to the general population, and 

participating bankers report that the loans represent an important cornerstone for 

profitability. 

Financial Literacy 

Since 2001, the FDIC's award-winning Money Smart financial education program 

has helped participants enhance their money management skills by learning the benefits 

of saving money, effectively managing credit, and avoiding predatory financial practices. 

Money Smart is available in seven languages and has reached more than 2.4 million 

individuals. Findings from a longitudinal survey of conswners show that Money Smart 

can positively influence how people manage their finances, as those who took the Money 

Smart course were more likely to open deposit accounts, save money, use and adhere to a 

budget, and have increased confidence in their .financial abilities when contacted 6 to 12 

months after completing the course. 

Overdraft Study 

Because little data was available regarding overdraft protection programs, we 

began a study in 2006 and, in November 2008, we issued our "FDIC Study of Bank 

Overdraft Programs." This was a two-part study that gathered empirical data on the 

types, characteristics, and use of overdraft programs operated by FDIC-supervised banks. 

Our objective was to provide data that would assist policymakers and inform the public 

of the features and costs rela~ed to overdraft programs. 

Economic Inclusion 

The FDIC's Advisory Committee on Economic Inclusion (ComE-IN) was fonned 

in 2006 to provide advice and recommendations to the FDIC in improving access to the 

financial mainstream for the 10 million unbanked households and the millions more 

underbanked households that use alternative financial service providers, often at a very 

high cost. The Committee is comprised of a diverse mix of academics, bankers, 

consumer advocates, and government officials to· ensure a wide range of views. To date, 

this Committee has tackled some of the most challenging issues facing underservcd 

consumers, including subprime mortgages and foreclosure prevention, asset building and 

prize-linked savings strategies, and access to affordable small dollar credit. Advice 

provided by this Committee has helped shape many aspects of the FDIC's response to 

issues facing consumers, including the use ofCRA ratings and other incentives for banks 

to provide better access to the financial mainstream, increasing consumer-focused 

research, and conducting our pilot program for banks offering small dollar loans. 

In addition, the Alliance of Economic Inclusion (AEI) was created in June 2006 to 

work with financial institutions and other partners to bring those currently unbanked and 

underserved into the financial mainstream. The AEI focuses on expanding banking 

services in underserved markets, including low- and moderate-income neighborhoods, 

minority communities and rural areas. 
8 

Access to Mortgage Credit 

In July 2008, the FDIC hosted a forum to discuss potential solutions to the serious 

disruption in mortgage credit access that occurred as a resultof the burgeoning economic 

crisis. We convened a distinguished set of experts, including the Secretary of the 

Treasury, the Chainnan of the Federal Reserve, bank CEOs, rating agency officials, 

investors, academics, and others to discuss how the market for low- and moderate-income .. 

(LMI) mortgages could be rejuvenated. As a result of this forum, we issued best 

practices for lending to LMI consumers for banks and others. Among other findings, 

these best practices addressed the importance of strong due diligence, mitigating moral 

hazard or having "skin" in the game, and aligning compensation related to mortgage 

transactions with loan performance. 

Leveraging CRA for Consumer Protection 

The FDIC has had a strong commitment to the statutory objectives of the CRA -

to expand credit to low- and moderate-income communities and address redlining. Our 

dedication to CRA is demonstrated through our examination program and the guidance 

we have issued to banks and examiners. The FDIC's compliance examiners conduct 

CRA examinations in conjunction with our consumer compliance examinations, which 

include a strong fair lending component. 

As a matter of policy, we emphasize to our examination force that bank CRA 

ratings must reflect full consideration of consumer protection violations and any 

discriminatory practices in CRA ratings. As a result, we have consistently linked our 

rigorous fair lending oversight and ;tJDAP enforcement initiatives to CRA ratings of 

institutions. Recent examples of CRA downgrades resulting from our consideration of 

these violations include Columbus Bank and Trust, Republic Banlc, and Advanta (see 

Attachment C). 

The FDIC has shown leadership by leveraging CRA to encourage solutions .to 

emerging consumer and community credit needs. For example, in June 2007, we issued 

guidance (Financial Institution Letter 50-2007) to encourage financial institutions to offer 

small-dollar credit products and to promote these products to their customers. The 

guidance infornied banks that such loans would be considered favorably under the CRA 

if they were affordable, safe and sound, consistent with all applicable federal and state 

laws, an~ served low- and moderate-income customers. 

As you know, we were early advocates for considering loan modification and 

foreclosure prevention initiatives more fully in CRA evaluations: The focus on effective 

loan modifications continues to require strong industry encouragement and practical tools 

for implementation, such as our FDIC foreclosure prevention tool kit, updated on 

September 16, 2009. 
9 

In addition, we have taken a leadership role in working with the other Federal 

regulators to promote additional interagency guidance to ensure that financial institution 

responses to these two emerging issues are fully considered during CRA examinations. 

Guidance on favorable consideration of small loans and loan modifications, for example, 

has been incorporated into lnteragency Questions and Answers. 

The FDIC also continues to explore using po~itive CRA consideration as an 

incentive for banks to offer products that build wealth and provide for financial security. 

The FDIC has pursued new initiatives to promote broader access to banking services by 

traditionally underserved populations and to ensure adequate consumer protection in the 

provision of these services, including conducting significant surveys and forums on 

serving the unbanked. 

Conclusion 

We believe that our record demonstrates our deep commitment to consumer 

protection. With the advent of the Consumer Financial Protection Agency (CFP A) and 

the prospect of strong rules applicable to all consumer financial providers, services and 

products, the FDIC is eager to leverage our dedicated, experienced compliance 

examination and enforcement staff and other resources to support the CFP A's consumer 

protection mission. 

The enclosed attachments provide more detailed infonnation that we hope is 

helpful to you. Please let me know if you have questions or need additional information. 

Sincerely, 

Sheila C. Bair 

Enclosures: 

Attachment A - FDIC requests for new or enhanced authorities 

Attachment B - FDIC comment letters on proposed regulations 

Attachment C - Formal and informal enforce111ent actions 

Attachment D - Final rules 

Attachment E - New/revised examination procedures (CD also provided) 

Attachment F -Formal guidance and policies {financial institution letters) 

Attachment G - _Consumer complaint program 

Attachment H - Consumer outreach and financial education 

Attachment 1-Reviews, audits, and assessments 
Attachment A 

Requests for Additional Authority to Protect Consumers: 

Testimony Before Congress and Related Correspondence 

March 20, 2009 

Testimony by Martin C. Gruenberg, Vice Chairman, Federal Deposit Insurance Corporation 

"Federal and State Enforcement of Consumer and Investor Protection Laws" before the House 

Committee on Financial Services 

Pages 16 through 18 

Excerpt: 

In order to further strengthen the use of the FTC Act's rulemaking provisions, the 

· FDIC has recommended that Congress consider granting Section 5 rulemaking 

authority to all federal banking regulators. By limiting FTC rulemaking authority 

to the FRB, OTS and NCUA, current law excludes participation by the primary 

federal supervisors of about 7,000 banks. The FDIC's perspective - as deposit 

insurer and as supervisor for the largest number of banks, many of whom are small 

community banks - would provide valuable input and expertise to the rulemaking 

process. [page 17] 

March 19, 2009 

Testimony by Sheila C. Bair, Chainnan, Federal Deposit Insurance Corporation "Modernizing 

Bank Supervision and Regulation" before the Senate Committee on Banking, Housing and 

Urban Affairs 

Excerpts: 

Under the Federal Trade Commission (FTC) Act, only the Federal Reserve Board 

has authority to issue regulations applicable to banks regarding unfair or deceptive 

acts or practices ... the FTC Act does not give the FDIC authority to write rules that 

apply to the approximately 5,000 entities it supervises - the bulk of state banks-nor 

to the OCC for their 1700 natio~al banks ... [I]n order to strengthen the use of the 

FTC Act's rulemaking provisions, the FDIC has recommended that Congress 

consider granting Section 5 rulemaking authority to all federal banking 

regulators ... the FDIC's perspective- as deposit insurer and as supervisor for the 

largest number of banks, many of whom are small community banks - would 

provide valuable input and expertise to the rulemaking process. 

April 17, 2008 

Testimony by Martin C. Gruenberg, Vice Chairman, Federal Deposit Insurance Corporation 

"The Credit Cardholders• Bill of Rights: Providing New Protections for Consumers" before the 

House Committee on Financial Services 

Pages 8 through 10. 

Excerpts: 

While improved disclosures are important, it is doubtful whether even improved 

disclosures can mitigate the harmful effect of some of the most questionable 

1 
practices. Action by Congress may expedite solutions to some of the most troubling 

practices. (page 8] 

******** 

Last year, the Bouse of Representatives passed legislation, H.R. 3526, to amend the 

FI'C Act to grant banking agency the authority to prescribe regulations governing 

unfair or deceptive acts or practices with respect to the institutions each such 

agency supervises. The authority in H.R. 3526 would be a helpful addition to our 

present enforcement authority, and would enable us to improve our ability to 

address egregious and pervasive practices on an industry-wide basis. Including the 

perspectives of the supervisor of some of the nation's largest banks and the 

perspectives of the supervisor of the largest number of banks as well as the deposit 

insurer would provide valuable input and expertise to the rulemaking process. (page 

9] 

Response to follow-up questions from Rep. Barrett (May 5, 2008 letter to Chairman Frank) 

[attached] 

April 15, 2008 

Robert W. Mooney, Deputy Director, Division of Supervision and Consumer Protection, Federal 

Deposit Insurance Corporation 

"Financial Literacy and Education: The Effectiveness of Governmental and Private Sector 

Initiatives" 

Pages 2 through 3 

Excerpt: 

The FDIC has called for national standards to address many of the problems and 

abuses that are now coming to light in the subprime mortgage market. These 

standards should impose underwriting based on the borrower's ability to repay the 

true cost of the loan, especially ~mong the non-bank lenders currently operating 

with little or no regulatory oversight Such standards also should address 

misleading or confusing marketing that prevents borrowers from properly 

evaluating loan products. [page 2] 

April 9, 2008 

Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation 

"Using FHA for Housing Stabilization and Homeownership Retention" 

Page6 

Excerpt: 

I would emphasize that there is a particular urgency for Congress to act on 

legislation to establish national licensing standards for non-bank mortgage 

participants. [page 6] 

2 
February 13, 2008 

Sandra L. Thompson, Director, Division of Supervision and Consumer Protection, Federal 

Deposit Insurance Corporation ''The Community Reinvestment Act: Thirty Years of 

Accomplishments, But Challenges Remain" before the House Financial Services Committee. 

Excerpt: 

These patterns raise questions about what should constitute a bank's assessment 

area and whether only lending within the assessment area should be considered. 

They also raise questions about whether continuing to cover only banks and thrifts 

under CRA is achieving the goals established by CRA thirty years ago - that is, to 

work towards meeting the credit needs of entire communities. [page 23] 

December 6, 2007 

Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation "Accelerating Loan 

Modifications, Improving foreclosure Prevention and Enhancing Enforcement" before the House 

Financial Services Committee . 

Excerpts: 

"Between now and the end of 2008, subprime hybrid ARMs representing hundreds 

of billions of dollars in outstanding mortgage debt will undergo payment 

resets ••. these foreclosures will inflict financial harm on individual borrowers and 

their communities ... the FDIC advocates a systematic approach to loan 

restructuring.". 

October 24, 2007 

Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation 

"Legislative Proposals on Reforming Mortgage Practices" before House Financial Services 

Committee 

Pages 3 through 4 

Excerpt: 

Legislative action by this Committee and rulemaking by the Federal Reserve Board 

under the Home Ownership and Equity Protection Act (HOEPA) bold out promise 

that mortgage originations will return to the standards and fundamentals that have 

served us well for many years. 

,., 

In my June testimony before this Committee, I listed several elements that should be 

included in national standards for mortgage lending. [page 3] 

3 
September 5, 2007 

Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation, "Recent Events in the Credit 

and Mortgage Markets and Possible Implications for U.S. Consumers" before the House 

Financial Services Committee 

Excerpt: 

The FDIC "supports the exercise of authority by the Federal Reserve under HOEP A to 

establish a national standard." 

June 13, 2007 

Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation 

"hnproving Federal Consumer Protection in Financial Services" 

Pages 9 through 10, 17 through 28 

Excerpts: 

Through appropriate rulemaldng, regulators can establish consumer protections 

against abuses that are strong and consistent across industry and regulatory lines. 

In addition, there should be meaningful enforcement authority and sufficient 

resources devoted to that authority. To achieve these goals, I would recommend that 

Congress consider the following reforms: 

• The creation of national ·standards for subprime mortgage lending by 

all lenden which could be done by statute or through HOEPA 

rulemaking; 

• Expand rulemaking authority to all federal banking regulators to 

address unfair and deceptive practices; ..• [page 17] 

Response to follow-up questions from Rep. Waters (July 20, 2007 letter to Ms. Waters): 

[attached] 

June 7, 2007 

Sheila C. Bair, Chairman, Federal Deposi~ Insurance Corporation 

"Improving Credit Card Consumer Protection: Recent Industry and Regulatory Initiatives" 

Pages 7, 9 through 10, 21 · 

Excerpt: 

The Federal Reserve Board bas the authority to promulgate regulations defming 

unfair and deceptive acts or practices of banks, while the Office of Thrift 

Supervision and the National Credit Union Administrati_on enjoy similar 

rulemaking authority for thrift institutions and credit unions, respectively. Other 

Federal banking agencies, including the FDIC, may use their enforcement authority 

pursuant to the FDI Act to address unfair and deceptive acts and practices engaged 

in by their supervised institutions, but they have no rulemaking authority. (page 9-

10] 

4 
. . ·J·::1~~;· •.!·l ~.!f. ~_;l.!-t;}. '.df. '::· '! U::: 

Thi: J-lonoral,le Sheila C. Rair 

Clrnirnian 

Federal Di.:posit Insurance Coll')orntion 

550 Ii;; Street, NW 

Washington. DC 2U429 

l)i.:ar ( 'hairm:111 Bair: 

Septcmher 23. 2009 

RE: Consumer Protection Initiatives 

During the course of the <.k:h:.111: rcg,m.ling the Consumer Financial Protcctil)n Ag~nc.:y 

(( 'FPA) two main urgumcnls have been made by federal rcgulalors and many in industry l!gainsl 

the ccntrnlizalinn of consumer protection funclions. We are told that 1.h~ foJcral agcnch.s do Ill.II 

want to lose their consumer proteclion authority because that aulhorily is i11tegrully linked wirh 

i:valu:11ing an inslitutio11·s overnll.s:ifi:ty and soundness.· We arc also told that 1he federal 

.1gcucics arc not only capahlt: 01: but willing lo, lake ac1io11 to proteel consumers. 

The firsl argumcul ignores the fact that in troubled times., a regulutor tnskcd wirh s,1fe1y 

an<l sow11l11c~ n.-sponsihilities wul consumer protection responsibili1ies wiH a.I most c:t:rtainly 

focus its clfo1ts on the former at !he expense of thi= laucr. and consumers will suffer. lm.ked, had 

more focus been placed on consumer protection llmctions earlier in this decade, much of the 

current crisis may well have been avoided. 

The second argument is of particular intcresl to many of my colleagues and me. It would 

grcally in Ii.inn the dcbute over the CFPA if my coll~agues and I had a belier understanding of the 

spcci lit: t:onsumer protection actions your ngency has undertaki.:n during the l~tsl IO years. 111 

particular. please identify any final rules or regulations adopted, fomrnl enforcement actious 

tnken (including wrillen agreemcnls and cea.sc ant.I desist orders). informal enforct:ment aclions 

taken (including hoard resolutions adopted aml MOUs entered inlo), nc\v inspection pro1ocols or 

procedures adopted, formal policies udoμted or regulatory guitlance issued, or any other actions 

1aken by your agency !hut related directly to consumer protection fimctions. Additionully, to the 

extent you havl! undertaken any reviews, audits, or assessments of any of these initiatives, please 

prnvi<lc a sumnuiry of the results. To lhe extent your agency sought lo Luke :idditional actions 

hut fouml it did not have Lhe authority to clo so, pleas!.! identify whc1I specific new aulhoritit;;S you 

req11e.c;ted of Congress. 

As you know, wc an.: on u very slio11 timd'rame, but 1his inrormation is·ofgrca1 

imponancc 10 the Commillcc. Your responses arc appreciared by r-,iday. October 2, 2009. 

ChaimrnV 
- FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA c. BAIR October 9, 2009 

CHAIRMAN 

Honorable Spencer Bachus 

Ranking Member 

Committee on Financial Services 

House of Representatives 

Washington, D.C. 20515 

Dear Congressman Bachus: 

Thank you for your letter about the role of the Federal Deposit Insurance Corporation in 

the Capital Purchase Program (CPP) oftbe D~artmcnt of the Treasury's Troubled Asset Relief 

Program's (TARP) and the consideration o: I! I' application for a CPP 

subscription. I share your concern about the TARP CPP decision-making process and the 

program's participation rate among community banks. A! !3; an open and operating 

institution, I cannot comment on any specifics relative to institution. 

As you noted, community banks continue to perceive the TARP program as a financial 

stability initiative targeted for large institutions, and program participation rates confirm this 

perception. Although all qualifying, domestically owned banks among the 25 largest institutions 

have received TARP subscriptions, few smaller institutions have participated. ·As of September 

15, 2009, only 680 institutions of the 7,257 holding companies and small independent banks in 

the United SWes have received TARP subscriptions. Thus, more than 93 percent of U.S. 

banking institutions, which are predominantly comprised of community institutions, did not 

participate in the TARP program. 

We have heard many other concerns voiced about the program, such as the high cost of 

TARP capital for Subchapter S corporations. th~ tier 1 capital ineligibility of TARP subscriptions 

for mutual institutions, and the high closing ~sts on TARP subscriptions for smaller institutions. 

In addition, the approval process for TARP has been viewed by the industry as protracted and 

opaque. The FDIC believes the TARP program could be revi$ed to enhance greater participation 

by viable community banks. We look forward to working with the Treasury Department, other 

banking agencies, and Congress to make this program accessible to community banks. 

Thank you again for contacting me about this important matter. If you have further 

questions or comments. please contact me at 202-898-6974 or Paul Nash, Deputy for External 

Affairs. at 202-898-6962. 

Sincerely, 

Sheila C. Bair 
09/17/2009 15:10 FAX 2022253692 

IAIIIEY Plu,,o:. MA,, QfAIIUUJt 

VIAFACSIMJLE 

Tha Honorable Slieila Bidr 

Chmman 

11. &. ~ouu at Bqmmtatth.tst 

Cnmmitttt onjf"mandal &ttbitm 

2129 ltlphtlr .,wi cntla .tdlllhll 

lllolfnltmr,-20515 

September i7, 2009 

Federal De.polit Insurance Cotpora.tion 

660 1 ~ Stnet, NW 

· Washington, DC 20429 

Deu Clwrm.an Bair: 

. . I am ,n;itiDg to yo11 today' to expre11 my con.cam with the Iaclc of transpa,:ency in tha 

considaration of Capital Purcliasa Program (CPP) applications by am.Iller i.nsti.tutiona. 

While the Treuur:, Dap.utmmt ia pnerall)' .raaponaible for aatablishing the parameter• of 

the OPP, it ia clear that the daciaion of the functional f:aderal regulator ii generally, tha 

controllins factm- in dttanaini:na' whether BD inatitution will receive federal auiatallce. 

What ia not clear ii how the F~ Depoait Insurance Carpora.tion (FDIC) and other 

functional reru]atara uzive at thmr daciaona. 

While I have heard. from a nmnber of muill inatitutions that have been frustrated by 

the delaya and lack of eom.munication recudinc th.air CPP applicatiom", on.a bank in 

partiaalu typme,.. .ca af em.all.er :imtitutions in tba opaque proceu. a ]first applied for CPP.aaaiatanca on NO"fember 1ai:" 2008 but 

dua ta Treum,'1 m uiJl&' guid•linea mr privately-held bum. tbei? first 

application wu mareJ:y a placaholder, A final app'.lication waa aubuuttad to tha FDIC on 

December 4111, 2008. Mare than 88V8Jl~mo th1 ~a:ter);fn July~. 2009, the ba.nk recaivad a 

phona call from the FDIC indicating tbJ......._'-411.•

1 •~ii would not ba receivinr a poaitiva 

rec:omma:odation from the regulator, Ta}y- ~JJ,)'l.Dg the healthy bRDl: its requeat fur 

uaiatance, The FDIC staffer recommended that tha bank with4raw it.a application and on 

July 7c [!; 1!J i:m:nally- requested that their application be withdrawn. 

f:. No reaaon wu p?eD. :fox tha FDIC'• decimon ta --itbboJd .,. positive recommen!!a,tion .,,;__ § p!iea-. Given that there"""" aoma 98 CPP appmnJs from May.July 

20 ,fb dbad a reuona.ble expect.ation du.ring that puiod that the FDIC-a·de1a.y 

could~ a.fa:varabla reBW.t. 

A Waahin,ion Poli et.my from Sept.ember 11, 2009 ,ugeesta that tha 1r0vammant is 

cm:rantly COD.t.emplatiDJ a new capital injection plan f'or commwnty banh1, Should. that 

be tha cue, I would hope that the FDIC and ita fellow reruJators will atriva tor a grea.tar 

MIJ'&II of t:ranapllt'eDcy than hu been tha cue with the Capital Pw:chaae Prop-am, The 

1 Wa.shlngron l'ast • .,.AIIIP: Traasury Loob to Shirt Resaie'.s Focus to sman Buslnetw 11'1d Community Banks"' 

~ 002/003 
~9/17/2009 15:10 FAX 2022253692 

The Honorable Sbaila Bm 

Paee2 

September, 17,2009 

FDIC, in conault.a.tion with the TraBSUI')' Dep~t md the otb.ar .func&nal :ngulat.or-. 

ahowd e,d:ahliab 10m1 buic tramparency cuida1ine1 fer the CPP program ao that the more 

than 200 institutions awllifmc' a daciann from their ?'Bgulator ha'ri aome idea ohrba.t · 

mettics will lead to a favorahls reoommP!udati.on. 

Should you hava farther q~ationa reprdjng thia matt.er, plaaae contact ma or rq 

etaft 

Ranking Member 

ce: · The Honorable Timothy Geitlmer, Secreta:ry of tbs Trea.aury 

@003/003 
- FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA C. BAIR 

CHAIRMAN 

Ho"Q.orable Carl Levin 

United States Senate 

Washington, D.C. 20515 

Dear Senator Levin: 

October 9, 2009 

Thank you for your letter expressing concern that the Federal Deposit Insurance 

Corporation might impose an additional special assessment this year on insured 

depository institutions. 

As we discussed last week, the FDIC imposed a special assessment earlier this 

year only after serious consideration of our responsibility to maintain the Deposit 

Insurance Fund (DIF) without imposing undue burden on the banking industry. We 

recognize that assessments are a significant expense, particularly during a recession when 

bank earnings are tmder pressure. We also recognize that assessments reduce the capital 

and funding that allow banks to lend in their communities. FDIC staff recently updated 

projections affecting the DIF and determined that additional resources would be 

necessary to meet the FDIC•s liquidity needs. We are currently seeking comment on a 

proposed alternative to imposing further special assessments on the industry this year. 

On September 29, 2009, the FDIC issued a notice of proposed rulemak:ing that 

would require all insured depository institutions to prepay their estimated regular 

· quarterly risk-based assessments for the fourth quarter of 2009, and for all of2010, 2011, 

and 2012. Unlike a special assessment, which would immediately affect bank earnings, 

requiring prepaid assessments allows each institution to record the entire amount of its 

prepaid assessment as a prepaid expense (an asset) as of December 30, 2009. An 

institution's income and earnings would not be affected until its regular risk-based 

assessment becomes due each quarter. Additionally, FDIC staff believes that most of the 

prepaid assessment paid under this proposal would be drawn from available cash and 

excess reserves, which should not significantly affect depository institutions• current 

lending activities. 

Nevertheless, the FDIC recognizes that prepaying assessments could prove 

difficult for some institutions. kl a result, the proposal would allow the FDIC to exercise 

its discretion as supervisor and insurer to exempt an institution from the prepayment 

requirement if the FDIC determines that the prepayment would adversely affect the safety 

and soundness of the institution. In addition, an insured depository institution could 

apply to the FDIC for an exemption from the prepaid requirement if the prepayment 
CARL LEVIN MIOGGAN 

Toe Honorable Sheila C. Bair 

Chairman 

ti.nittd ~tatts ~matt 

WASHINGTON, DC 2051~2202 

September 15, 2009 

Federal Deposit Insurance CoIJ)Oration 

550 17th St, NW 

Washingto~ DC 20429 

Dear Chairman Bair: 

FC!C 

... F LEGISCATTVE AFFAIRS 

I would like to express my concerns with the FDIC imposing another massive special 

assessment, which, if implemented, could weaken many of our comnnmity banks. 

I was encouraged by your New York Times Op-Ed of September 1, 2009, in which you 

highlighted the importance of maintaining strong and effective community banks. As I am sure 

you would agree, community banks have long been an important and vital resource for the 

residents and local businesses th~y serye. · 

While most cominunity lenders· were not caught up in the exotic excesses of their larger 

pe~, ~e ongoing economic crisis bas still had a tremendous impact on them. The impact bas 

been particularly acute in states like Michigan, which are experiencing high unemployment and 

substantial declines in property values. Adding yet another major financial obligation during this 

crisis could further deplete the capital of these small financial institutions, making it difficult for 

them to extend the credit needed to tum our economy around. · 

Congress has already given the FDIC the tools it needs to ensure the integrity of the 

insurance fi.md in these challenging times. Congress included a provision in the Helping 

Families Save Their Homes Act (P.L.111-22) that authorizes the FDIC to borrow up to $100 

billion from the Treasw-y. If additional funds are needed for the insurance fund, the FDIC should 

consider utilizing this acce~ to the Treasury fun~. 

In the wake of the worst financial crisis our cowitry has experienced in decades, I 

commend your leadership and commitment to maintaining a stable, solvent insurance fund for 

the protection of our hard-earned deposi~. Y om task has been particularly difficult, given the 

challenges posed by the 92 bank failures that have already occurred this year and ~e losses that 

are expected in the near future. 

However, imposing a second major special assessment could impPse significant financial 

hardship on community banks and tbeir communities. I encourage you and the Board of 
Directors to consider alternate methods of ensuring .the security of the deposit insurance fund, 

including accessing the Treasury facility that Congress has already provided. 

Further, if the FDIC is to impose another special assessment, it should consider ways to 

alleviate some of that burden, including by allowing smaller banks and banks in economically 

distressed areas additional time to pay. 

Thank you for your consideration. I look forward to hearing from you on this matter. 

Carl Levin 

cc: The Honorable Timothy Geithner 

Secretary of the Department of the Treasury 
FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Carolyn McCarthy 

House of Representatives 

Washington, D.C. 20515 

Dear Congresswoman McCarthy: 

October 26, 2009 

Thank you for your letter concerning the sale of Guaranty Bank to the BBVA 

Group. I appreciate the opportunity to respond to the issues you raised regarding this 

transaction. 

A Loss Sharing agreement was entered into by the Federal Deposit Insurance 

Corporation and Compass Bank, Birmingham, Alabama, as part of the whole bank 

Purchase and Assumption dated August 21, 2009. 

Both Compass Banlc, a state chartered bank, and Compass Bancshares, its 

immediate bank holding company, are U.S. domestic entities wholly owned by BBV A 

USA Bancshares, Inc., Houston, Texas, whose ultimate parent is Banco Bilbao Vizcaya 

Argentaria SA, headquartered in Spain. Compass Bank is chartered in Alabama and is 

assessed insurance premiums by the FDIC. There are 50 foreign owned banks 

throughout the U.S. that also pay insurance assessments and are community lenders. 

The Loss Sharing agreement specific to this transaction is between the FDIC and 

the domestically chartered subsidiary bank, Compass Bank, rather than with either the 

domestic bank holding companies or the foreign parent. There is no agreement that 

uniformly provides U.S. banks with European government assistance to purchase 

European banks. However, the Loss Sharing agreement on selected assets in the 

Guaranty Bank Purchase and Assumption by Compass Bank was individually negotiated 

between the FDIC and the assuming bank's management. Such an agreement also might 

be negotiated, under similar circumstances, between any U.S. banks making European 

bank acquisitions and respective European governments or agencies. 

Finally, the Loss Sharing agreement entered into between the FDIC and Compass 

Bank -involves approximately $11 billion of Guaranty Bank's assets. Although Loss 

Sharing agreements are not intended to directly create U.S. jobs or maximize bank 

profits, these agreements are designed to mitigate losses to the FDIC and to the banking 

system in general from bank failures, and as a result should strengthen industry capital, 

aid in stabilizing the U.S. financial system, and preserve as many affected jobs as 

possible. As with all of our closed bank transactions, this sale was based on a 

competitive bidding process; and it was the best offer available for these assets. As 

customary, we accepted it pursuant to our least cost statutory mandate. Moreover, by 
entering into this federal assistance agreement at the subsidiary bank level, capital will be 

preserved or created first at the state chartered bank before any profits can be upstreanied to either the domestic or foreign bank holding companies. 

I hope this information is helpful. If you have further questions or comments, 

please do not hesitate to contact me at (202) 898-6974 or Paul Nash, Deputy for External 

Affairs, at (202) 898-6962. 

Sincerely, 

Sheila C. Bair 
S~p. 11. 20t}9 4:54PM 

CAROLYN McCARTHY fl O ,..,,,No. 4574 P. 1 L 01 -13,,GI 

41'11 Dl$'UIC't, NJlw l'OH 

WAtlllNIITO)l oma, 

23.fli li4Yil/AN Kou,, Onlc:s lhnLDIHO 

w .UHINiSTDit, DC l0.51:s 

(202) ll.S-5'.n' 

fu: (202j llH751 

DIS1lltf Ol'PICI. 

lDO a .... -c,n J>v.z..... SlJn1I 200 

c:....-on, NY IISlO 

(S1~)7lt-)OOI 

!!'Alt' (SI Ii) 7311-10 ,1 

Ms. Sheila C. Bair 

Chairwonu.n 

CONGRESS OF THE UNITED STATES 

HOUSB OP RBPRBSENTATIVBS 

WASHINGTON, DC 2051.S-3204 

September 11, 2009 

Federal Deposit. Insurance Corporation 

550 Seventeenth Street, NW 

Washington D.C. 20429 

Dear Chairwoman Bair, 

cou,.rmm. 

:£I,'OCA.nOH A.N.D tAlaO'll 

rrw:ourmn1,.. 

CilAIJtWOMW, 

Hl!ALTKY PAHIUH AHII CouuDttlTIE> 

)t~ ... Lt~ htrt.on,un. LdOI,. •NO PEJISI01" 

s1mN11«uancs· CAl'l'J'IJ. M/\llkl1', lmut.AHt/, Alff> 

C,owu,u,,,u.lU,l'l' l#QNSb•O l!t...l"Un.a.. 

Pilt/\llL1A~ lmTITII~ """ c:o-..... c:.,,.,...,. 

Ul.ut, 

hny../jvtww l.tN.tt.tw/wrJlh~ 

\l'USEtl& 

t.crr 11,a,~lyomturtby.t.o-.c•~ 

The FDIC announced on August 21, 2009 the sale of Guaranty Bank to BBVA Group, a l&rge Spanish bank 

holding company. The failure ·of Guaranty Bank- which in published reports was the 10th largest bank fo.i lure 

in U.S. History- is expected to cost the FDIC Insurance Fund approximately $3 bilJion. 

The FDIC Board's dedsion to award Guaranty to BBVA over other U.S. bidders is surprising because it 

effectively means that U.S. taxpayer funds are being used to help a European bank eicpand its opet-ations in 

the United States. The FDIC Insurance Fund's assets come from fees assessed on U.S. banks, m11ny of 

which are cu1Tcntly being assisted with taxpayer dollars in I.he form of TARP funds. 

There have been various news articles regarding the details surrounding this sale, and· 1 believe it is important 

for Congress and U.S. taxpayers to understand \Vhat it means for the future of the U.S. financial system. The 

sale of Guaranty Bank to BBVA means that the FDIC has essentially decided to underwrite the expansion of 

a foreign bank's operations in the U.S. using taxpayer funds. 

Specifically, I would nppreciatc response to the followiog questions: 

• Will the FDIC be entering into a loss share agreement with BBV A. given th3.t BBVA is a foreign 

entity? 

• Has the Spanish government and the European Union committed to the PDIC that U.S. banks will be 

able to acquire troubled European banks with assistance, as the FDIC has assisted BBVA? 

• How will the BBVA purchase of Guaranty Bank help in creating jobs and stabilize the U.S. financial 

system, whe:n their profits will not be staying here in the US? 

Being a time sensitive matter, I look forward to yout' li;ind and prompt response to my inquires. 

Sincerely, 

Member of Congress 
The Honorable Christopher J. Dodd · 

Chairmm 

Office of the Comptroller of the Currency 

Board of Governors of the Federal Reserve System 

Federal Deposit Insurance Corporation 

Office of Thrift Supervision 

National Credit Union Administration 

August 14, 2009 

Committee on Banking, Housing, and Urban Affairs 

United States Senate 

Washington, D.C. 20510 

Dear Mr. Chairman.: 

Thank you for your letter of June 3, 2009, regarding potential safety and soundness 

concerns arising :fro~ the increased use of appraisal management companies (AMCs) by 

mortgage lenders, including federally regulated :financial institutions. The Office of the 

Comptrolle.r of the Currency, Boa.i:d of Govern.ors of the Federal Reserve System, Federal 

Deposit lnsurance Corporation, Office of Thrift Supervision, and National Credit Union 

Administration (collectively, the Agencies) view ap~als as an integral part of a regulated 

institution's residential mortgage loan underwriting process and, therefore, have extensive 

regulations, guidelines, policies, and procedures in place to ensure the quality and reliability of 

appraisals. · · · · 

_ ... ·----.. _ . y C?UI 1e~ ~qu~!--~_es~~~?~ ?.~ S!CJ!~-fl:~_?ur ex~ers take to address safety and 

soundness concerns arising from the increased use or AM Cs aiia to ensure tlie accuracy and 

reliability of appraisals. The requirements for appraiser independence and competency have 

· · · - -- -.. "been· t:otilcrsto:tres-of the-Agencles~ regulatory framework since·the-adoption of the appraisal··· - · 

regulations in 1990. Over the years, the Agencies have issued additional guidance to emphasize 

the importance of reliable appraisals in an institution's real estate lending activities, including the 

separation and protection of appraisers _from coercion and other undue influence from tlie 

institution's loan production, investment, and collection functions, as well as from the borrower. 

The lnteragency Appraisal wuJ Evaluation Guidelines (Guidelines) state th.at an institution's 

board of directors is respons10le for reviewing and adopting policies and procedures that 

establish and maintain en effectiv~, independent real estate appraisal pro gram. 
-2- . 

If a regulated :financial institution chooses-to use the app:raisal management-services of an 

AMC. the insti~on is not relieved of its respoD.SI"bility to maintain a safe and sound appraisal 

program and to ensure appraiser independence. In such a case. the Agencies expect the · 

institution~s appraisal program to include risk management practices that monitor the AMC's. 

performance, ensure that an appraiser is selected and engaged based on his or her competency to . 

pcrfonn the particular apprajsal assignment, and ensure that the AMC is protected from coercion 

and other undue influence .from the institution's loan production, investment, and collection 

functions. The regnl~ institution remams responsible for compliance with applicable laws and 

regulations, which requires the exercise of appropriate oversight of its appraisal program. If an 

institution engages another party to perform such services, the Agencies expect the institution to 

consider the legal, reputational and operational risks posed by the mangement and have 

appropriate policies and procedures to manage such risks. 

As part of an examination of a regulated institution's real estate lending activity, the 

Agencies' examiners review an institution's real estate appraisal and evaluation policies and 

procedures. Examiners also review the steps taken by an institution to ensure that·the mdividuals 

who perform appraisals are quali:fied and not ~ject to conflicts of interest. Further, when 

analyzing individual transactions, examiners review an mstitution's individual appraisals, . 

including those obtained under third party arrangements, for compliance with regulations and 

supervisory guidance. AJJ. institution's failure to comply with fhe Agencies' appraisal 

regulations, policies, or guidelines is cited in the examination report, and deficiencies require 

corrective action. 

These examiner· directives are reflected m the existing Guidelines. The Agencies recently 

requested public comment on proposed. updates to the Gnide~.1 ~e updates reflect 

revisions to the Unifann Standards of Profes.g_onal .Appraisal Practice, the evolution of collateral 

valuation practices. and the_ addition of the National Credit Union .Administration, which was not 

a party to the existing Guidelines. Some commenters have requested that the Agencies provide 

·more explicit guidance on the use·of AMCs. The Agencies are considering whether to 

mcorparate a discussion on AMCs in the firutl guidelines and will ~ider your letter as part of 

that review . 

. - . -- . -- -·-----·--------······--- -----------·--·-·-------- ------ -- ----·----.. - -· 

1 Proposed Interagency Appraisal and Evaluation Guidelines, 73 Fed. Reg. 69,647 (Nov. 19, 

2008). 
-3-

We hope this information responds to your concerns, -and tha:μk yon again for .your letter. 

John C. Dugan 

Comptroller of the Currency 

Sheila C. Bair> CbaiIJDan 

Federal J?eposit Insurance Co:rporatjon 

Michael E. Fryzcl, Chairman 

National Credit Union A.drmnistraiian 

Sincerely, 

B'an S. Bernanke,. ChsiDDsn 

BoardofGovemorsofthe 

Federal Reserve System 

J E. Bowman, Acting Director 

ffice of Thrift Supervision 

_____________ --- ---·--··· _ .. __ ·----,-- ✓-------- :- ... _.__:. __ --"··~· .,,-.,.' . .... ··········----------' 
The Hnrnn.blc Ben :Rernmka 

CJwinnlD 

Board of Govamn af11u: 

Fedml~S)'stom 

2tf'A and Canmtntknt AYCDDe. NW 

W•shlnp,q, J1C 20551 

Tbe~1obsiDu.gaa 

~ ofdm CmJm£y Ofttca aftho tc:rmpnlJct dftbe Cum:llr:y 

A.dmmistmar of'Nldioul.Bllllcs 

Wisbmstnn,, DC 20219 

The ~le M"v:haeJ :£. F~ 

Chairman 

NBtlQnaI Credit Unum 4drnrnistndon 

~ 

1775Dllb:Street° ·-

VA 22314-3421 

Dear SinMidim: 

tJ:tnittd ~tatts ~matt 

COMMITTEE ON IIANICING, HOUSING. AND 

URBAN AFFAIRS 

WA$fJNGTQN, DC2D5'1~5 

JuneJ,2009 

J..Ao9-W 

C/10 

J,. •la,tiN;tuSt ~~faoiar ID ihc.~iP.ac ctisiswa ~ GUm:atJy mcpcrimx;~,-was fanlty 

apprajlala_tmt:helpkti\al imlatedllame ~ ~ mmtpp balances. May~ who went provfdecl 

infllld-lPP"'•• m mnr bbldhqJ-mortpac, that~~.• raultmg ia J,istmcall)' hip nls of 

tlelinquenctennd" filRcbures. In Hafit af thts.~ I ,vould. lDce to b,:ing ID~ •tbmtiQD mw@1daa ~ 

1bs use ofAppmsal Mmlap,cnt C~"('"~ by tho imtitmillnsy011 rep]atc.9Dd ~ pollJnti•l 

•efti:ca OD tb"dr llfttymd snoncJnes• In pmlcumr, IDIIIY~ incbldi:ng~ of:p:r, C\.iiJ51:i1ueul .n 

coDCCtDed that use of AMCsmay cmnpmmise 1hD quality aod.relfabili1¥ of"tppawJi.uted to 1appar1:t-0~1l 

mortpge 

~ 

lendin~ Theit l;OiJCedJI m llt!fgbtmcd by the imp1t41cAl:afj..fD.:af 1m HDlbo Valma:iofi Code en 

entel'Jd hi1D by Fmmje Mae and Prcddit Mac II part Of a settlement-with 1h11 New Yott Sbfte Attt>mey 

Galc:nl :: 

lt lsmy 1JDdermadmg Chat,vith ~ HQJnC ValQ:tiCIJl Codc,ofCanduct qi cffcct, tho ~Df 

raidettti•J aq,pnJsall i:Daducte4 tJntxrp AMCil hat b:n:ascdn1Jt1119ugh}y_2b percent \D uoat,61:l pen;:ent fn 

Jess thin ona,;m. Com=tm boa b.k cxp1QSSOII to mo about pqt=ti•J ., and-~ .imp~ of 

this im:mn1d ..._Specifically.we blYe l'l!Ceivcdiq,cx'll af out-of-l:Dlrbt appo1sm being used by A.Mes in 

111 c:fmn ID m11i•11ize prafits;rznn6nued inappJQPdafc.infJuencc Dfappraism &y Joenafficcn IDd 1dan 

production stiff' in~ where the but bal outsouteea:ihe appraisal flmctkin to a.AMC; mid wutcspaa ~ abaqt AMG.J oaptqring •. padica ~the: IPF.tC'a fee 1ridmutaD)'·diSGlosuri11to'- c:onsumct1 • 

~Dy Jeoprdi:z:mgtb.equalityandzellebilhy ~ •ppraisals fbrwldch the appniiserhas .aof n:ceived 

~,map:bt-~f& . 

Pleese describe 1he stap.1S your examincR IIO tiling to iddress.-~ ~ and ID ensure the accmacy md reliability of'b apprajsals. . 

CHRJSTOPHER. l. OODD 

Cbabman 
'· LI/-(!) 1-/ 3 '/6 

e FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Christopher J. Dodd 

Chairman 

Committee on Banking, Finance and Urban Affairs 

United States Senate 

Washington, D.C. 20510 

Dear Mr. Chairman: 

November 13, 2009 

Thank you for the opportunity to testify before the Senate Banking Committee at the 

July 23 hearing "Establishing a Framework for Systemic Risk Regulation." 

Enclosed are my responses to the follow up questions you provided from 

Senator Bunning, Senator Crapo, Senator Menendez, Senator Reed, Senator Shelby, and 

Senator Vitter. If you have further questions or comments, please do not hesitate to contact me 

at (202) 898-6974 or Paul Nash, Deputy for External Affairs, at (202) 898-6962. 

Sincerely, 

Sheila C. Bair 

Enclosure 
Response to questions from the Honorable Jim Bunning 

by Sheila C. Bair, Chairman, 

Federal Deposit Insurance Corporation 

Ql. Many proposals call for a risk regulator that is separate from the normal safety and 

soundness regulator of banks and other firms. The idea is that the risk regulator will set 

rules that the other regulators will enforce. That sounds a lot like the current system we 

have today, where different regulators read and enforce the same rules different ways. 

Under such a risk regulator, bow would you make sure the rules were being enforced the 

same across the board? 

Al. The significant size and growth of unsupervised financial activities outside the traditional 

banking system -- in what is termed the shadow financial system -- has made it all the more 

difficult for regulators or market participants to understand the real dynamics of either bank 

credit markets or public capital markets. The existence of one regulatory framework for insured 

institutions and a much less effective regulatory scheme for non-bank entities created the 

conditions for arbitrage that permitted the development of risky and hannful products and 

services outside regulated entities. 

We have proposed a Systemic Risk Council composed of the principal prudential regulators for 

banking, financial markets, consumer protection, and Treasury to look broadly across all of the 

financial sectors to adopt a "macro-prudential" approach to regulation. The point oflooking 

more broadly at the financial system is that reasonable business decisions by individual financial 

firms may, in aggregate, pose a systemic risk. This failure of composition problem cannot be 

solved by simply making each financial instrument or practice safe. 

Rules and restrictions promulgated by the proposed Systemic Risk Council would be uniform 

with respect to institutions, products, practices, services and markets that create potential 

systemic risks. Ag~in, a distinction should be drawn between the direct supervision of 

systemically-significant financial firms and the macro-prudential oversight and regulation of 

developing risks that may pose systemic risks to the U.S. financial system. The former 

appropriately calls for the identification of a prudential supervisor for any potential systemically 

significant holding companies or similar conglomerates. Entities that are already subject to a 

prudential supervisor, such as insured depository institutions and financial holding companies, 

should retain those supervisory relationships. In addition, for systemic entities not already 

subject to a federal prudential supervisor, this Council should be empowered to require that they 

submit to such oversight, presumably as a financial holding company under the Federal Reserve 

-- without subjecting them to the activities restrictions applicable to these companies. 

We need to combine the current micro-prudential approach with a macro-prudential approach 

through the Council. The current system focuses only on individual financial instruments or 

practices. Each agency is responsible for enforcing these regulations only for their institutions. 

In addition, there are separate regulatory schemes used by the SEC and the CFTC as well as the 

state level regulation of insurance companies. The macro-prudential oversight of system-wide 
risks requires the integration of insights from a number of different regulatory perspectives --

banks, securities firms, holding companies, and perhaps others. Thus, the FDIC supports the 

creation of a Council to oversee systemic risk issues, develop needed prudential policies, and 

mitigate developing systemic risks. 

Q2. Before we can regulate systemic risk, we have to know what it is. But no one seems to 

have a definition. How do you define systemic risk? 

A2. We would anticipate that the Systemic Risk Council, in conjunction with the Federal 

Reserve would develop definitions for systemic risk. Also, mergers, failures, and changing 

business models could change what firms would be considered systemically important from 

year-to-year. 

Q3. Assuming a regulator could spot systemic risk, what exactly is the regulator supposed 

6to do about it? What powers would they need to have? 

A3. The failure of some large banks and non-banks revealed that the U.S. banking agencies 

should have been more aggressive in their efforts to mitigate excessive risk concentrations in 

banks and their affiliates, and that the agencies' powers to oversee systemically important nonbanks require strengthening. 

As discussed in my testimony, the FDIC endorses the creation of a Council to oversee systemic 

risk issues, develop needed prudential policies, and mitigate developing systemic risks. For 

example, the Council could ensure capital standards are strong and consistent across significant 

classes of financial services firms including non-banks and GSEs. Prior to the current crisis, 

systemic risk was not routinely part of the ongoing supervisory process. The FDIC believes that 

the creation of a Council would provide a continuous mechanism for measuring and reacting to 

systemic risk across the financial system. The powers of such a Council would ultimately have 

to be developed through a dialogue between the banking agencies and Congress, and empower 

the Council to ensure appropriate oversight of unsupervised non-banks that present systemic risk. 

Such non-banks should be required to submit to such oversight, presumably as a financial 

holding company under the Federal Reserve. 

Q4. How do you propose we identify firms that pose systemic risks? 

A4. The proposed Systemic Risk Council could establish what practices, instruments, or 

characteristics (concentrations of risk or size) that might be considered risky, but should not 

identify any set of firms as systemic. We have concerns about fonnally designating certain 

institutions as a special class. We recognize that there may be very large interconnected 

financial entities that are not yet subject to federal consolidated supervision, although most of 

them are already subject to such supervision as a result of converting to banks or financial 

holding companies in response to the crisis. Any recognition of an institution as systemically 

important, however, risks invoking the moral hazard that accompanies institutions that are 
considered too big to fail. That is one reason why, most importantly, a robust resolution 

mechanism, in addition to enhanced supervision, is important for very large financial 

organizations. 

QS. Any risk regulator would have access to valuable information about the business of 

many firms. There would be a lot of people who would pay good money to get that 

information. How do we protect that information from being used improperly, such as 

theft or an employee leaving the regulator and using his knowledge to make money? 

AS. The FDIC, as deposit insurer and supervisor of over 5,000 ban.ks, prides itself on 

maintaining confidentiality with our stakeholders. We have a corporate culture that demands 

strict confidentiality with regard to bank and personal information. Our staff is trained 

extensively on the use, protection, and disclosure of non-public information as well as 

expectations for the ethical conduct. Disclosure of non-public information is not tolerated and 

any potential gaps are dealt with swiftly and disclosed to affected parties. The FDIC's Office of 

Inspector General has a robust process for dealing with improper disclosures of information both 

during and post-employment with FDIC. 

These ethical principles are supported by criminal statutes which provide that federal officers 

and employees are prohibited from the disclosure of confidential information generally (18 

U.S.C. 1905) and from the disclosure of information from a bank examination report (I 8 U.S.C. 

1906). 

All former federal officers and employees are subject to the post-employment restrictions (18 

U.S.C. 207), which prohibit former government officers and employees from knowingly making 

a communication or appearance on behalf of any other person, with the intent to influence, 

before any officer or employee of any federal agency or court in connection with a particular 

matter in which the employee personally and substantially participated, which involved a 

specific party at the time of the participation and representation, and in which the U.S. is a party 

or has a direct and substantial interest. 

In addition, an officer or employee of the FDIC who serves as a senior examiner of an insured 

depository institution for at least 2 months during the last 12 months of that individual's 

employment with the FDIC may not, within 1 year after the termination date of his or her 

employment with the FDIC, knowingly accept compensation as an employee, officer, director, or 

consultant from the insured depository institution; or any company (including a bank holding 

company or savings and loan holding company) that controls such institution. (12 U.S.C. 

1820(k). . 
Response to questions from the Honorable Mike Crapo 

by Sheila C. Bair, Chairman, 

Federal Deposit Insurance Corporation 

Ql. I appreciate the FDIC's desire to provide clarity around the process of private 

investors investing in failed banks that have been taken over by the FDIC. We need to 

make sure that the final rule doesn't deter private capital from entering the banking 

system, leaving the FDIC's insurance fund and, ultimately, the taxpayers with the final 

bill. Are you open to modifying some of the proposed requirements, such as the 15% 

capital ref_Juirement? 

Al. The Federal Deposit Insurance Corporation is aware of the need for additiona] capital in the 

banking system and the potential contribution that private equity capital could make to meet this 

need. At the same time, the FDIC is sensitive to the need for all investments in insured 

depository institutions, regardless of the source, to be consistent with protecting the Deposit 

Insurance Fund and the safety and soundness of insured institutions. 

In light of the increased number of bank and thrift failures and the consequent increase in interest 

by potential private capital investors, the FDIC published for comment on July 9, 2009, a 

Proposed Statement of Policy on Qualifications for Failed Bank Acquisitions (Proposed Policy· 

Statement). The Proposed Policy Statement provided guidance to private capital investors 

interested in acquiring the deposit liabilities, or the liabilities and assets, of failed insured 

depository institutions. It included specific questions on the important issues surrounding nontraditional investors in insured financial institutions including the level of capital required for the 

institution that would be owned by these new entrants into the banking system and whether these 

owners can be a source of strength. We sought public and industry comment to assist us in 

evaluating the policies to apply in deciding whether a non-traditional investor may bid on a 

failed institution. 

On August 26, 2009, the FDIC's Board of Directors voted to adopt the Final Statement of Policy 

on Qualifications for Failed Bank Acquisitions (Final Policy Statement), which was published in 

the Federal Register on September 2, 2009. The Final Policy Statement takes into account the 

comments presented by the many interested parties who submitted comments. Although the 

final minimum capital commitment has been adjusted from 15 percent Tier 1 leverage to 1 O 

percent Tier 1 common equity, key elements of the earlier proposed staternent remain in place: 

cross support, prohibitions on insider lending, limitations on sales of acquired shares in the first 

three years, a prohibition on bidding by excessively opaque and complex business structures, and 

minimum disclosure requirements. 

Importantly, the Final Policy Statement specifies that it does not apply to investors who do not 

hold more than 5 percent of the total voting powers and who are not engaged in concerted 

actions with other investors. It also includes relief for investors if the insured jnstitution 

maintains a Uniform Financial Institution composite rating of 1 or 2 for 7 consecutive years. 

The FDIC Board is given the authority to make exceptions to its application in special 

circumstances. The Final Policy Statement also clearly excludes partnerships between private 
capital investors and bank or thrift holding companies that have a strong majority interest in the 

acquired banks or thrifts. 

In adopting the Final Policy Statement, the FDIC sought to strike a balance between the interests 

of private investors and the need to provide adequate safeguards for the insured depository 

institutions involved. We believe the Final Policy Statement will encourage safe and sound 

investments and make the bidding more competitive and robust. In turn, this will limit the 

FDIC's losses, protect taxpayers, and speed the resolution process. Al; a result, the Final Policy 

Statement will aid the FDIC in carrying out its mission. 
Response to questions from the Honorable Robert Menendez 

by Sheila C. Bair, Chairman, 

Federal Deposit Insurance Corporation 

Ql. A recent media article (New York Times, June 14th) states there have been strong 

disagreements between the FDIC and the OCC over-whether the proposal to impose new 

insurance fees on banks is unfair to the largest banks, with the FDIC arguing that the 

largest banks contributed to the current crisis and should have to pay more. Can you 

elaborate on your rationale for requiring big banks to pay more than community banks? 

Al. The New York Times article referred to the emergency special assessment, adopted on May 

22, 2009, which imposes a 5-basis point special assessment rate on each insured depository 

institution's assets minus Tier l capital as of June 30, 2009. 

The Federal Deposit Insurance Reform Act of 2005 requires the FDIC to establish and 

implement a restoration plan if the reserve ratio falls below 1.15 percent of insured deposits. On 

October 7, 2008, the FDIC established a Restoration Plan for the Deposit Insurance Fund. The 

Restoration Plan was amended on February 27, 2009, and quarterly base assessment rates were 

set at a range of 12 to 45 basis points beginning in the second quarter of 2009. However, given 

the FD I C's estimated losses from projected institution failures, these assessment rates were 

determined not to be sufficient to return the fund reserve ratio to 1.15 percent. On May 22, 2009, 

therefore, the FDIC Board of Directors adopted a final rule establishing a 5 basis point special 

assessment on each insured depository institution's assets minus Tier 1 capital as of June 30, 

2009. The special assessment is necessary to strengthen the Deposit Insurance Fund and 

promote confidence in the deposit insurance system. 

The adoption of the final rule on the special assessment followed a request for comment that 

generated av.er 14,000 responses. The final rule implemented several changes to the FDIC's 

special assessment interim rule, including a reduction in the rate used to calculate the special 

assessment and a change in the base used to calculate the special assessment. 

The assessment formula is the same for all insured institutions -- big and small. However, it 

produces higher assessments for institutions that rely more on non-deposit liabilities. These 

institutions do tend to be the larger institutions. The FDIC considers this appropriate as in the 

event of the failure of institutions with significant amounts of secured debt, the FDIC's loss is 

often increased without any compensation in the form of increased assessment revenue. · 

The amount of the special assessment for any institution, however, will not exceed 10 basis 

points times the institution's assessment base for the second quarter 2009 risk-based assessment. 

We believe that the special assessment formula provides incentives for institutions to hold longterm unsecured debt, and for-smaller institutions to hold high levels of Tier 1 capital-both good 

things in the FDIC's view. 
Response to questions from the Honorable Jack Reed 

by Sheila C. Bair, Chairman, 

Federal Deposit Insurance Corporation 

Ql. You discussed regulatory arbitrage in your written statements and emphasized 

the benefits of a Council to minimize such opportunities. Can you elaborate on this? 

Should standards be set by individual regulators, the Council, or both? Can a 

Council operate effectively in emergency situations? 

Al. One type ofregulatory arbitrage is regulatory capital arbitrage. It is made possible 

when there are different capital requirements for organizations that have similar risks. 

For instance, banks must hold 10 percent total risk-based capital and a 5 percent leverage 

ratio to be considered well capitalized, while large broker-dealers (investment banks) 

were allowed to operate with as little as 3 percent risk based capital. Thus for similar 

assets, a bank would have to hold $5 for every $100 of assets, a broker dealer would only 

be required to hold $3 of capital for every $100 of the same assets. Obviously, it would 

be more advantageous for broker dealers to accumulate these assets, as their capital 

requirement was 40 percent smaller than for a comparable bank. 

The creation of a Systemic Risk Council with authority to harmonize capital requirements 

across all financial firms would mitigate this type ofregulatory capital arbitrage. 

Although the capital rules would vary somewhat according to industry, the authority 

vested in the Council would prevent the types of disparities in capital requirements we 

have recently witnessed. 

Some have suggested that ·a council approach would be less effective than having this 

authority vested in a single agency because of the perception that a deliberative council 

such as this would need additional time to address emergency situations that might arise 

from time to time. Certainly, some additional thought and effort will be needed to 

address any dissenting views in council deliberations, but a vote by Council members 

would achieve a final decision. A Council will provide for an appropriate system of 

checks and balances to ensure that appropriate decisions are made that reflect the various 

interests of public and private stakeholders. In this regard, it should be noted that the 

board structure at the FDIC, with the participation of outside directors, is not very 

different than the way the council would operate. In the case of the FDIC, quick 

decisions have been made with respect to systemic issues and emergency bank 

resolutions on many occasions. Based on our experience with a board structure, we 

believe that decisions could be made quickly by a deliberative council while still 

providing the benefit of arriving at consensus decisions. 

Q2. \Vhat do you see as the key differences in viewpoints with respect to the role 

and authority of a Systemic Risk Council? For example, it seems like one key 

question is whether the Council or the Federal Reserve will set capital, liquidity, and 
risk management standards. Another key question seems to be who should be the 

Chair of the Council, the Secretary of the Treasury or a different Senate-appointed 

Chair. Please share your views on these issues. 

A2. The Systemic Risk Council should have the authority to impose higher capital and 

other standards on financial firms notwithstanding existing federal or state law and it 

should be· able to ovenule or force actions on behalf of other regulatory entities to raise 

capital or other requirements. Primary regulators would be charged with enforcing the 

requirements set by the Council. However, if the primary regulators fail to act, the 

Council should have the authority to do so. The standards set by the Council would be 

designed to provide incentives to reduce or eliminate potential systemic risks created by 

the size or complexity of individual entities, concentrations of risk or market practices, 

and other interconnections between entities and markets. 

The Council would be uniquely positioned to provide the critical linkage between the 

primary federal regulators and the need to talce a macro-prudential view and focus on 

emerging systemic risk across the financial system. The Co~ncil would assimilate 

information on economic conditions and the condition of supervised financial companies 

to assess potential risk to the entire financial system. The Council could then direct 

specific regulatory agencies to undertake systemic risk monitoring activities or impose 

recommended regulatory measures to mitigate systemic risk. 

The Administration proposal includes eight members on the Council: the Secretary of the 

Treasury (as Chairman); the Chairman of the Federal Reserve Board; the Director of the 

National Bank Supervisor; the Director of the Consumer Financial Protection Agency; 

the Chairman of the Securities and Exchange Commission; the Chairman of the 

Commodities Futures Trading Commission; the Chairman of the FDIC; and the Director 

of the Federal Housing Finance Agency. 

In designing the role of the Council, it will be important to preserve the longstanding 

principle that bank regulation and supervision are best conducted by independent 

agencies. For example, while the OCC is an organization within the Treasury 

Department, there are statutory safeguards to prevent undue involvement of the Treasury 

in regulation and supervision of National Banks. Given the role of the Treasury in the 

Council contemplated in the Administration's plan, careful attention should be given to 

the establishment of appropriate safeguards to preserve the political independence of 

financial regulation. 

Moreover, while the FDIC does not have a specific recommendation regarding what 

agencies should compose the Council, we would suggest that the Council include an odd 

number of members in order to avoid deadlocks. One way to address this issue that 

would be consistent with the importance of preserving the political independence of the 

regulatory process would be for the Treasury Chair to be a non-voting member, or the 

Council could be headed by someone appointed by the President and confirmed by the 

Senate. 
Q3. What are the other unresolved aspects of establishing a framework for systemic 

risk regulation'! 

A3. With an enhanced Council with decision-making powers to raise capital and other 

key standards for systemically related ·firms or activities, we are in general agreement 

with the Treasury plan for systemic risk regulation, or the Council could be headed by a 

Presidential appointee. 

Q4. How should Tier 1 firms be identified? Which regulator(s) should have this 

responsibility? 

A4. As discussed in my testimony, the FDIC endorses the creation of a Council to 

oversee systemic risk issues, develop needed prudential policies and mitigate developing 

systemic risks. Prior to the current crisis, systemic risk was not routinely part of the 

ongoing supervisory process. The FDIC believes that the creation of a Council would 

provide a continuous mechanism for measuring and reacting to systemic risk across the 

financial system. The powers of such a Council would ultimately have to be developed 

through a dialogue between the banking agencies and Congress, and empower the 

Council to oversee unsupervised non-banks that present systemic risk. Such non-banks 

should be required to submit to such oversight, presumably as a financial holding 

company under the Federal Reserve. The Council could establish what practices, 

instruments, or characteristics (concentrations of risk or size) that might be considered 

risky, but would not identify any set of firms as systemic. 

We have concerns about fonnally designating certain institutions as a special class. Any 

recognition of an institution as systemically important, however, risks invoking the moral 

hazard that accompanies institutions that are considered too big to fail. That is why, most 

importantly, a robust resolution mechanism, in addition to enhanced supervision, is 

important for very large financial organizations. 

QS. One key part of the discussion at the hearing is whether the Federal Reserve, or 

any agency, can effectively operate with two or more goals or missions. Can the 

Federal Reserve effectively conduct monetary policy, macro-prudential regulation, 

and consumer protection? 

AS. The Federal Reserve has been the primary federal regulator for state chartered 

member institutions since its inception and has been the bank holding company 

supervisor since 1956. With the creation of the Consumer Financial Protection Agency 

and the Systemic Risk Council, the Federal Reserve should be able to continue its 

monetary policy role as well as remain the prudential primary federal regulator for state 

chartered member institutions and bank holding companies. 
Q6. Under the Administration's plan, there would be heightened supervision and 

consalidation of all large, interconnected financial firms, including likely requiring 

more firms to become financial holding companies. Can you comment on whether 

this plan adequately addresses the too-big-to-fail problem? Is it problematic, as 

some say, to identify specific firms that are systemically significant, even if you 

provide disincentives to becoming so large, as the Administration's plan does? 

A6. The creation of a systemic risk regulatory framework for bank holding companies 

and systemically important firms will address some of the problems posed by too-big-tofail firms. In addition, we should develop incentives to reduce the size of very large 

financial firms. 

However, even if risk-management practices improve dramatically and we introduce 

effective macro-prudential supervision, the odds are that a large systemically significant 

firm will become troubled or fail at some time in the future. The current crisis has clearly 

demonstrated the need for a single resolution mechanism for financial firms that will 

preserve stability while imposing the losses on shareholders and creditors and replacing 

senior management to encourage market discipline. A timely, orderly resolution process 

that could be applied to both banks and non-bank financial institutions, and their holding 

companies, would prevent instability and contagion and promote fairness. It would 

enable the financial markets to continue to function smoothly, while providing for an 

orderly transfer or unwinding of the firm's operations. The resolution process would 

ensure that there is the necessary liquidity to complete transactions that are in process at 

the time of failure,- thus addressing the potential for systemic risk without creating the 

expectation of a bailout. 

Under a new resolution regime, Congress should raise the bar higher than existing law 

and eliminate the possibility of open assistance for individual failing entities. The new 

resolution powers should result in the shareholders and unsecured creditors talcing losses 

prior to the government, and consideration also should be given to imposing some haircut 

on secured creditors to promote market discipline and limit costs potentially borne by the 

government. 
Too Big To Fail 

Response to questions from the Honorable Richard Shelby 

by Sheila C. Bair, Chairman, 

Federal Deposit Insurance Corporation 

Chairman Bair, the Obama Administration's proposal would have regulators designate 

certain firms as systemically important. These firms would be classified as Tier 1 Financial 

Holding Companies and would be subject to.a separate regulatory regime. 

QI. If some firms are designated as systemically important, would this signal to market 

participants that the government will not aUow these firms to fail? If so, how would this 

worsen our too big to fail problem? 

Al. We have concerns about formally designating certain institutions as a special class. Any 

recognition of an institution as systemically important risks invoking the moral hazard that 

accompanies institutions that are considered too-big-to-fail. That is why, most importantly, a 

robust resolution mechanism, in addition to enhanced supervision, is important for very large 

financial organizations. A vigorous systemic risk regulatory regime, along with resolution 

authority for bank holding companies and systemically risky financial firms would go far toward 

eliminating too-big-to-fail. 

Government Replacing Management? 

In your testimony, while discussing the need for a systemic risk regulator to provide a 

resolution regime, you state that "losses would be borne by the stockholders and 

bondholders of the holding company, and senior management would be replaced." 

Q2. Could you expand upon how the senior management would be replaced? Would the 

systemic risk regulator decide who needed to be replaced and who would replace them? 

A2. When the FDIC talces over a large insured bank and establishes a bridge bank, the normal 

business practice is to replace certain top officials in the bank, usually the CEO, plus any other 

senior officials whose activities were tied to the cause of the bank failure. The resolution 

authority would decide who to replace based on why the firm failed. 

"Highly credible mechanism" for orderly resolution 

Chairman Bair, in your testimony you suggest that we must re-design our system to allow 

the market to determine winners and losers, "and when firms- through their own 

mismanagement and excessive risk taking- are no longer viable, they should fail." You also 

suggest that the solution must involve a "highly credible mechanism" for orderly resolution 

of failed institutions similar to that which exists for FDIC-insured banks. 
Q3. Do you believe that our current bankruptcy system is inadequate, or do you believe 

that we must create a new resolution regime simply to fight the perception that we will not 

allow a systemically important institution to fail? 

A3. In the United States, liquidation and rehabilitation of most failing corporations are governed 

by the federal bankruptcy code and administered primarily in the federal bankruptcy courts. 

Separate treatment, however, is afforded to banks, which are resolved under the Federal Deposit 

Insurance Act and administered by the FDIC. 1 The justifications for this separate treatment are 

banks' importance to the aggregate economy, and the serious adverse affect of their insolvency 

on others. 

Bankruptcy focuses on returning value to creditors and is not geared to protecting the stability of 

the financial system. When a fum is placed into bankruptcy, an automatic stay is placed on most 

creditor claims to allow management time to develop a reorganization plan. This can create 

liquidity problems for creditors -- especially when a financial institution is involved -- who must 

wait to receive their funds. Bankruptcy cannot prevent a meltdown of the financial system when 

a systemically important financial firm is troubled or failing. 

Financial firms -- especially large and complex financial firms - are highly interconnected and 

operate through financial commitments. Most obtain a significant share of their funding from 

wholesale markets using short-term instruments. They provide key credit and liquidity 

intennediation functions. Like banks, financial firms (holding companies and their affiliates) can 

be vulnerable to ''runs" if their short-term liabilities come due and cannot be rolled over. For 

these firms, bankruptcy can trigger a rush to the door, since counterparties to derivatives 

contracts -- which are exempt from the automatic stay placed on other contracts - will exercise 

their rights to immediately terminate contracts, net out their ·exposures, and sell any supporting 

collateral. 

The statutory right to invoke close-out netting and settlement was intended to reduce the risks of 

market disruption. Because financial firms play a central role in the intermediation of credit and 

liquidity, tying up these functions in the bankruptcy process would be particularly destabilizing. 

However, during periods of economic instability this rush-to-the-door can overwhelm the market 

and even depress market prices for the underlying assets. This can further destabilize the 

markets and affect other financial firms as they are forced to adjust their balance sheets. 

By contrast, the powers that are available to the FDIC under its special resolution authority 

prevent the immediate close-out netting and settlement of financial contracts of an insured 

depository institution if the FDIC, within 24 hours after its appointment as receiver, decides to 

transfer the contracts to another bank or to an FDIC-operated bridge bank. As a result, the 

potential for instability or contagion caused by the immediate close-out netting and settlement of 

qualified financial contracts can be tempered by transferring them to a more stable counterparty 

or by having the bridge bank guarantee to continue to perform on the contracts. The FDIC's 

resolution powers clearly add stability in contrast to a bankruptcy proceeding. 

1 Another exception would be the liquidation or rehabilitation of insurance companies, which arc handled under state 

law. 
For any new resolution regime to be truly "credible," it must provide for the orderly wind-down 

of large, systemically important financial :firms in a manner that is clear, comprehensive, and 

capable of conclusion. Thus, it is not simply a matter of "perception," although the new 

resolution regime must be recognized by firms, investors, creditors, and the public as a 

mechanism in which systemically important institutions will in fact fail. 

Firms subject to new resolution reeime 

Chairman Bair, in your testimony, you continuously refer to "systemically significant 

entities," and you also advocate for much broader resolution authority. 

Q4. Could you indicate how a "systemicaJiy significant entity" would be defined? Will the 

list of systemically significant institutions change year-to-year? Do you envision it 

including non-financial companies such as GM? 

Would all financial and "systemically significant entities" be subject to this new resolution 

regime? If not, how would the market determine whether the company would be subject to 

a traditional bankruptcy or the new resolution regime? 

Why do we need a systemic risk regulator if we are going to allow institutions to become 

"systemically important"? 

A4. We would anticipate that the Systemic Risk Council, in conjunction with the Federal 

Reserve would develop definitions for systemic risk. Also, mergers, failures, and changing 

business models could change what firms would be considered systemically important from 

year-to-year. 

While not commenting on any specific company, non-financial finns that become major 

financial system participants should have their financial activities come under the same 

regulatory scrutiny as any other major financial system participant. 

Better deal for the Taxpayer 

Ql. Chairman Bair, you advocate in your testimony for a new resolution mechanism 

designed to handle systemically significant institutions. Could you please cite specific 

examples of how this new resolution regime would have worked to achieve a better 

outcome for the taxpayer during this past crisis? 

Al. A proposed new resolution regime modeled after the FDIC's existing authorities has a 

number of characteristics that would reduce the costs associated with the failure of a systemically 

significant institution. 

First and foremost, the existence of a transparent resolution scheme and processes will make 

clear to market participants that there will be an imposition of losses according to an established 

claims priority where stockholders and creditors, not the government, are in the first loss 
position. This will provide a significant measure of cost savings by imposing market discipline 

on institutions so that they are less likely to get to the point where they would have otherwise 

been considered too-big-to-fail. 

Also, the proposed resolution regime would allow the continuation of any systemically 

.significant operations, but only as a means to achieve a final resolution of the entity. A bridge 

mechanism, applicable to the parent company and all affiliated entities, would allow the 

government to preserve systemically significant functions. Also, for institutions involved in 

derivatives contracts, the new resolution regime would provide an orderly unwinding of 

counterparty positions as compared to the rush to the door that can occur during a bankruptcy. In 

contrast, since counterparties to derivatives contracts are exempt from the automatic stay placed 

on other contracts under the Bankruptcy Code, they will exercise their rights to immediately 

terminate contracts, net out their exposures, and sell any supporting collateral, which serves to 

increase the loss to the failed institution. 

In addition, the proposed resolution regime enables losses to be imposed on market players who 

. should appropriately bear the risk, including shareholders and unsecured debt investors. This 

creates a buffer that can reduce potential losses that could be borne by taxpayers. 

Further, when the institution and its assets are sold, this approach creates the possibility of 

multiple bidders for the financial organization and its assets, which can improve pricing and 

reduce losses to the receivership. 

The current financial crisis led to illiquidity and the potential insolvency of a number of 

systemically significant financial institutions during 2008. Where government assistance was 

provided on an open-institution basis, the government exposed itself to significant loss that 

would otherwise have been mitigated by these authorities proposed for the resolution of 

systemically significant institutions. A new resolution regime for firms such as Lehman or AIG 

would ensure that shareholders, management, and creditors talce losses and would bar an open 

institution bail-out, as with AIG. The powers of a receiver for a financial firm would include the 

ability to req:iire counterparties to perform under their contracts and the ability to repudiate or 

terminate contracts that impose continuing losses. It also would have the power to terminate 

employment contracts and eliminate many bonuses. 
Response to questions from the Honorable David Vitter 

by Sheila C. Bair, Chairman, 

Federal Deposit Insurance Corporation 

Chairwoman Bair, you recently released a proposal which, I believe, asks private equity to 

maintain a 15% Tier-1 capital ratio while well capitalized banks only maintain a 5% ratio 

and newly established banks an 8% ratio. In May, the FDIC announced the successful 

purchase of Bank United which allowed almost $1 billion of private investment come in and 

successfully take over the bank's management. By all reports this has been a successful 

arrangement for both the FDIC and private investment company. Although I understand 

your policy concerns, I think that the current proposal goes too far in several respects. I 

am concerned that the FDIC's proposed policy deters private capital from entering the 

banking system, leaving the FDIC's insurance fund and, ultimately, the taxpayers with the 

final bill~ With bank failures mounting this year, I would have liked see more private 

investment able to participate in cleaning up these troubled banks. 

Ql. What can the FDIC do to ensure that more private equity comes in to stem the tide of 

bank failures? 

Al. On August 26, 2009, the FDIC's Board of Directors voted to adopt the Final Statement of 

Policy on Qualifications for Failed Bank Acquisitions (Final Policy Statement), which was 

published in the Federal Register on September 2, 2009. The Final Policy Statement talces into 

account the comments presented by the many interested parties who submitted comments. 

Although the final minimum capital commitment has been adjusted from 15 percent Tier 1 

leverage to 10 percent Tier 1 common equity, key elements of the earlier proposed statement 

remain in place: cross support, prohibitions on insider lending, limitations on sales of acquired 

shares in.the first three years, a prohibition on bidding by excessively opaque and complex 

business structures, and minimum disclosure requirements. 

Importantly, the Final Policy Statement specifies that it does not apply to investors who do not 

hold more than 5 percent of the total voting powers and who are not engaged in concerted 

actions with other investors. It also includes relief for investors if the insured institution 

maintains a Uniform Financial Institution composite rating of 1 or 2 for 7 consecutive years. 

The FDIC Board is given the authority to make exceptions to its application in special 

circumstances. The Final Policy Statement also clearly excludes partnerships between private 

capital investors and bank or thrift holding companies that have a strong majority interest in the 

acquired banks or thrifts. 

In adopting the Final Policy Statement, the FDIC sought to strik_e a balance between the interests 

of private investors and the need to provide adequate safeguards for the insured depository 

institutions involved. We believe the Final Policy Statement will encourage safe and sound 

investments and make the bidding more competitive and robust. In turn, this will limit the 

FDIC's losses, protect taxpayers, and speed the resolution process. As a result, the Final Policy 

Statement will aid the FDIC in carrying out its mission. 
Q2. Are you concerned that without attracting private capital, the FDIC's deposit 

insurance fund and, ultimately, taxpayers will foot the entire bill for the looming bank 

failures? 

A2. We do not see a taxpayer exposure as a result of upcoming bank failures. Our latest 

publicly released information shows that the FDIC ended the second quarter of 2009 with a DIF 

balance of $10.4 billion and an additional $32 billion reserve for expected future failure losses. 

Updates to these numbers show the FDIC estimates that it ended the third quarter of 2009 with a 

negative fund balance. The contingent loss reserve for expected future losses from failures has 

grown, however. 

To date, the FDIC has required a special assessment to rebuild the DIF and we recently issued a 

notice of proposed rulemaking to require the prepayment of assessments for three years. Current 

projections are that assessment income will exceed expected losses from bank failures over the 

next several years. However, there is a timing problem as the bulk of bank failures are expected 

to occur in 2009 and 20 l 0, while most assessment income will be booked in later years. 

Therefore, although the prepayment of assessments will not immediately rebuild the fund 

balance, it will provide the FDIC with the liquidity needed to fund projected-bank failures. 

Further, even ifit became necessary for the FDIC to borrow from the U.S. Treasury, any 

potential borrowing would be repaid by insured depository institutions. 

Q3. If private equity does come in, what could the savings be to the deposit insurance 

fund? 

A3. If, as expected, the FDIC increases the overall number of potential bidders for failed 

financial institutions by including more private equity firms, it would increase competition and 

potentially improve the quality of the bids. 

Q4. Do you agree with the Secretary's assessment that the FDIC was created to address 

resolving srnalJ banks and thrifts and does not have the appropriate resources to deal with 

the failure of a major bank? 

A4. The FDIC has substantial experience resolving large, complex, internationally active 

insured depository institutions. Continental Illinois National Bank and Trust, which required 

FDIC assistance in 1984 was the seventh largest commercial bank in the country at the time. 

More recently, in September 2008, the FDIC dealt with the failure of Washington Mutual Bank 

which had total assets of $307 billion. This was the fifth largest bank in the country at that time. 

This experience with conservatorships and receiverships bas significant parallels for systemically 

important holding companies and for other types of financial companies, enabling the FDIC to 

take advantage of its experience in acting as receiver for thousands of insured depository 

institutions. Also, much of the Administration's special resolution authority proposal is based on 

the FDIC's current statutory authority. Therefore, expanding the FDIC's activities to 
systemically significant institutions will be consistent in many respects to its current scope of 

activities. 

QS. If there are limits on the FDIC's expertise and resources would keep the FDIC from 

resolving the biggest banks in the country, what are they? 

AS. We believe the FDIC is prepared to handle the resolution of an insured depository 

institution of any size and complexity. Our testimony outlines limitations of our current 

resolution authority and recommends, on page 7, principles to guide Congress in adopting a 

process that ensures an orderly and comprehensive resolution mechanism for systemically 

important financial firms. 

Q6. What are the impediments, if any, that the FDIC would face in resolving the 

depository institutions associated with Bank of America or Citi? 

A6. Although I cannot comment on supervisory matters involving open institutions, any large 

depository institution can pose special challenges. They typically have extensive foreign 

operations, higher-than-nonnal levels of uninsured deposits, expansive branch networks that can 

span multiple time zones and usually are heavily involved in derivative financial instruments. 

Further, the largest insured depository institutions are owned by holding companies that own 

other related entities. These holding companies manage operations by business line with little 

regard to the legal entities involved. The intertwined nature of the operations of a large bank 

holding company will present its own set of challenges. This is one reason it is important for the 

FDIC to have receivership authority over the entire financial services holding company, not just 

the insured depository institution. 
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The Honorable Sheila Bair 

Chairman 

i.lnittd rStatts i,maa: 

COMMITit:E ON BANKING. HOUSING, AND 

URBAN AFFAIRS 

WASHINGTON. DC 2D510--6075 

August 26. 2009 

FDIC 

SEP - J 2009 

1 

Federal Deposit Insurance Corporation 

550 1-fh Street, NW 

Washington. DC 20429 OFFICE OF LEGISLATIVE AFFAIRS 

Dear Chairman Bair: 

Thank you for testifying before the Commi~ 011 Banking, Housing. and Urban Affairs 

on July 23. 2009. In order to complete the hearing record. we would appreciate your answers to 

the enclosed questions as soon as possible. · 

. Please repeat the question. then your answer. single spacing both question and answer. 

Please do not use all capitals. 

Send yom reply to Ms. Dawn L. Ratliff. the Committee's Chief Clerk. She will transmit 

copies to the appropriate offices, including the committee's publications office. Due to cmrent 

procedures regarding Senate mall, it is recommended that you send 1q>lics via e-mail in a MS 

Word, WordPerfect or .pdf attachment to Dawn Ratliff@banking.senate.gov. 

CJD/dr 

If you have any questions about this letter, please contact Ms. Ratliff at (202)224-3043. 

Sincerely, 

CHRISTOPHER J. DODD 

Chairman 
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November 16, 2009 

The Honorable Sheila C. Bair, Chairman 

Federal Deposit Insurance Corporation 

550 17111 Street, NW 

Washington, DC 20429 

Dear Chairman Bair: 

Thank you for your efforts to maintain stability and public confidence in the nation's financial 

system during these extraordinary times. Your contn'butions to the public policy debate about 

how our nation must refonn its financial regulatory house is appreciated, particularly your 

thoughtful and consistent support for preserving a viable dual-charter banking system. Like you, 

I am concerned that concentration of regulatory power in a single federal regulator would 

severely prejudice the community banks that arc the lending lifeblood for our nation's "main 

streets." 

At this time of economic uncertainty, when our economy is struggling to recover and we seek 

ways to improve access to critically needed credit for businesses and consumers, we must do all 

we can to support -- and fairly implement - prudent financial regulatory policies and processes 

that support economic growth. As I travel my home state of Washington, I hear directly from 

community bankers, small businesses and consumers who are concerned about what arc seen to 

be mixed policy and regulatory messages and disparate treatment coming from the "other 

Washington." At a minimum, they suggest a belief that our regulatory systems are unfairly 

weighted against "Main Street" and in favor of "Wall Street." 

As Chairman Frank and Congressman Minnick of the House Financial Services Committee 

highlight in their October 29, 2009, letter to you and to other federal financial regulators (copy 

enclosed), our nation's community bankers were not significant contributors to the sub-prime 

lending debacle that triggered the series of financial events that contributed to the credit and 

economic crisis we fmd owselves facing today. I share many of the concerns expressed in the 

Congressmen's letter and wonder ifwe might all benefit from field staff being allowed to 

exercise their training and judgment without undue pressure by any one Regional Office to 

produce results significantly more negative than those otherwise recommended by field 

examiners. Furthermore, I agree with their message that "[a] self-fulfilling prophecy of 

community bank failures, shrinking credit availability and a slower economic recovery can all 

result from a regulatory over-reaction to the current crisis." 

,·) 
The Honorable Sheila C. Bair 

November 16, 2009 

Page 2 

I look forward to your response to Chairman Frank and Congressman Minnick; and to 

supplement their observations, you should know that it is regularly expressed to me that federal 

policies have rewarded irresponsible behaviors by the "too big to fail" institutions and continue 

to provide these same institutions with a competitive advantage over traditional "main street" 

community banks. The perception is that the government will always be there to bail out the 

large institutions, affording them the ability to borrow on more favorable terms than their "main 

street' competitors. 

Similarly, it has been suggested to me that the various FDIC regions do not all adhere to, nor do 

they consistently apply, the same standards, with the San Francisco and Atlanta regions being 

singled out as taking more aggressive approaches to the community banks in their regions than 

do their counterparts around the nation. On this point, l would ask for your assurances that FDIC 

bas systems in place to minimiz.c the likelihood that different standards or disparate treatment is 

applied to institutions by region, and that, rather, banks across the nation are to receive equal 

treatment irrespective of where they are located. 

On a positive note, we arc seeing some signs of investor willingness to infuse much needed 

capital into our banks. The FDIC recognized the need for some regulatory flexibility as to 

private-equity investors seeking to buy failing banks in the final guidelines adopted on August 

26, 2009. The guidelines were an effort to strike a balance between the clear need for banks to 

attract capital and the fundamental principles supporting prudent banking practices. 

With respect to these August 26 guidelines, what can you share as to the experience since their 

adoption? Has private equity stepped forward? If noty arc there reasons you discern as to why 

that is the case and is any consideration being given to what additional, responsible steps need to 

be taken by regulators to facilitate safe and sound appropriate capital investment? Recent 

experience suggests to me that there is more we can do to overcome potential equity investors• 

concern that their applications will receive fair and timely consideration by the appropriate 

regulators and any insights you can provide are welcome. 

We must continue to support the viability of a safe and sound dual-charter banking system and 

the community banks that serve communities across our nation. I commend your continuing 

support for the community banking system in the regulatory reform discussions and I look 

forward to hearing from you as to how we can smooth out the regulatory bumps along the road to 

an improved. responsive and responsible fmancial regulatory system and economic recovery. 

Sincerely, 

Enclosure 
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October 29 2009 

The Honorable Ben S. Bemanke 

Chairman 

Board of Governors 

Oflhe Federal Reserve Svstem 

201h and Constitution Avet~ue, t-lW 

Washington, DC 20551 

The Honorable John Dugan 

Comptroller of the Cunency 

Office of the Comptroller of the Currency 

250 E Street, SW 

Washington, DC 20219 

The Honorable John E. Bowman 

Acting Director 

Office of Thrift Supervision 

1700 G Street. NW 

Washington, DC' 20552 

The Honorable Sheila C. Bair 

Chuinnan 

Federal Deposit lnsumnce 

Corporation 

550 1th Street, NW 

Washington, DC 20429 

Tl1e Honorable Debbie Ma1z 

Chairman 

National Credil L'nion Administration 

1775 Duke Street 

Alexandria, VA 22314-3428 

Dear Chairman Bcmanke, Chairman Bair, Comptroller Dugan, Chaimian Matz and Acting 

Director Bowman: 

·. · ... ··.: .... ,,·, ',_; .. ~ 

It is now reco!:,'llized that the vast majority of problem sub-prime loans were originated by nonbank lenders. Yet, it is the already highly regula1ed traditional depository banks that a.re feeling 

the greatest reg1.1latory piessure as a result of the crni-ent economic crisis. In particular. one of 

the biggest challenges faced by community banks (but shared by all banks) is how 10 respond to 

the calls from Congress to increase lending to stimulate the economy and to work with troubled 

borrowers 011 foreclosure mitigation, while dealing with increasingly stringent directives from 

regulators that can preclude banks from doingjust that. 

Community banks became strong and viable play¢rs in the financial services industry b~cause 

they fill an important need. and it would be short-sighted to weaken tJ1at role through overzealous regulatory actions - actions based not on \l/"rong-doing or poor management practices at 

th~e banks. but on changes in the economic environment and toughening regulatory standards. 

lt is critical now more than ever that regulatory persoru,el ou1 in 1he field apply a measured 

approach to examinations that is directed by agency iea<lership rathel' than subject to arbitrary 

decisions in the field. Examiners that are now being inappropriately lought:r in their analysis of 

asset quality and are consistently requiring <l.owngrades of loans whenever there is any doubt 
ahout the loa.'ls con<litio11 are acting counter to the kind ofba1ancecl approach required in U1e 

current economy. 

Worsening c.onditions in many markets have strainc:d th~ ability of some borrowers to pay on 

their loans, which often leads regulators to insist that a bank make a capital call on the borrower, 

impose hannful amortization schedules or obtain aJdiLional collateral These steps can set in 

motion n ''death spiml" ba51.,."Cf on fire-sale prices for assets to raise cash. a drop in the comparable 

sales figures the appraisers use. which resu:ts in market devaJuations of other assets. TI1ese 

actions a.e directly counter to the message from Congress calling for banks to work with 

borrowers to help them through these difficult rimes and to make credit available. 

Vv11ile there is no q11estion that regulatory gaps and other regula10ry sho11-comings were a 

signi Ii cant contributor to the economic crisis. those gaps were largely within the non-bank 

lending market and Wall Su·ee1 bank~. 

We call on regulators lo show some temperance in their regulation of traditional banks. Not ro 

jeopardize core safety and soundness principles, but to show some rest.r.iint in the immediate 

enforceme::11t of new rules that ruay prove ro be excessive at a time when community banks arc 

least able to respond. A self-fulfilling prophecy of community bank failures, shrinking credit 

ovnilnbilily and ii slower economic ret:ovcry can all result from a regulatory over-reaction to the 

current crisis. 

Herc: are some cxumples of problem arens :hat. have been brought to our alic:ntion by 

constituents: 

I. "'Cnofticial" Capilal Requirements--the official regulatory standard for being ··Well 

capitalized" i::; basically 5% for Tier One Capitul and 10% for Total Risk Base Capital. 

Some bankers indicate that i11tlividual examiners have in some c.ases unofficially moved 

these numbers to as high as 8~9% end 12% respectively. The impact is !.hat many 

community banks have to restrict their growth (lending activity) in order Lo shrink their 

balance sheets and meet these standards. Rcs1ricting lending activity, especially lo small 

businesses-is counter prodllctive to helping the economy recover. 

2. In many cases the tradiliom1l '·CAtvfELS" rating exercise for banks appears to have 

become an "A" -asset quality-exam. We have always understood that weakness u1 asset 

quality in an institution could be mitigated by strength in other arens such as Capital, core 

earnings and liquidity. Examiners now seem to say if c1sse1 quality is bad all the other 

components arc also llllsatisfactory. 

3. Valuation of assets-Banks arc being forced to \\>lite assets._ loans and Other Real Estate 

Own<!d_ uown to cun-ent --market" value. The problem is that there is virtually no maii,et 

for sor.1e of these assets (developed lots for example) ut pi·eselll, leading to artificially 

low prices for those assets rhat have to be sold under duress. However, many of these 

markets are expected to recover i11 the future, and the fon.:ed writc:downs to ··fire-sale'' 

values now are making the banl,s' capital crunch artificially and unnecessarily worse. 

1 
4. Discouragement o[ the use of short lenn bo1rnwings from Fe<leral Resi;rve, Federal 

Home Lonn Bank, or CDARS rectprocal ClYs, etc. Regulators Sl!em to be re-establishing 

their old aversion to a bank funding its operations with anything but deposits. The 

pressure in this area is often applied by lowering liquidity grades on exams for those 

banks that do make use of what the examiners deern '"exce,-;sive" bo1ro-.:ving. Titls 

··message'' is in tum cam;ing sonie institutions artificially to corn,-tricl Jc11ding in order to 

reduce lheir amouni ofbon·owings to please the regulator 

These are just a few examples, but lhe overall message is clear. While our regulators need to 

uphuld proper safety and soundness standards in rhis difficult economy. unnecessarily aggressive 

decisions made in the field by individual examiners or teams inte1,ded to require banks to hold or 

acquire capital in CXCl!SS of the official regulatory standard for being "well capitalized'' must be 

avoided, to prevent more banks from foiling unnecessarily. We are calling upon you to take the 

long view, use their wisdom and experience to nuide their field staff toward a more appropriate 

application of the core principles of safety and soundnc-.ss regulation in order ro enable our banks 

to assist Cully iJ, our economic recovery. 

BARNEY FAAN K WALT MTNNTCK 

'J 

.. 

.) 
SHEILA C. BAIR 

CHAIRMAN 

FEDERAL DEPOSIT INSURANCE CORPORATION, . Washington, DC 20429 

November 26, 2008 

Honorable Dianne Feinstein 

United States-Senate 

Washington, D.C. 20510 

Dear Senator Feinstein: 

Thank you for your Jetter expressing support for the Federal Deposit Insurance 

Corporation's efforts to promote a more systematic approach to modifying problem mortgage 

loans. 

As you point out in your letter, foreclosure represents an increasingly self-defeating 

response to the problem of delinquent mortgage Joans. In the present environment, thls approach 

only adds to an overhang of excess vacant homes that has been estimated to exceed one million 

units nationally. To help us get ahead of this proble~ we need a program that encourages 

mortgage lenders and servicers to modify loans on a sustainable basis, and that does so 

efficiently on a large scale. 

As you arc aware. the FDIC has initiated a systematic loan modification program at 

IndyMac Federal Bank, where it is conservator. This program identifies loans with high monthly 

payments relative to income-and makes offers to borrowers to reduce the monthly payment to as 

low as 31 percent of monthly income. Modifications arc undertaken according to a standard 

protocol based on interest rate reductions, extensions of term, and principal forbearance. Like 

any mortgage servicer. the FDIC must undertake a net present value. or NPV, test for every 

modified loan to ensure that this strategy will maximize the returns for the Deposit Insurance 

Fund or the investors that own the troubled mortgages. The FDIC also takes steps to verify the 

occupancy status and current income of the borrower. 

Based on this experience, the FDIC discussed with the Treasury Department 

implementation of a partial Joss guaranty program, as authorized under the Emergency Economic 

Stabilization A.ct (EESA). that would provide financial incentives for a wide range of mortgage 

servicers to modify high-cost mortgage loans according to the IndyMac standard. One of the 

advantages of this approach is the ability to modify loans that have been securitiz~ leaving 

them in place under private management While those discussions have not led to adoption of 

the program by Tre~ under the authority provided by the EES~ we believe that the rapid 

implementation of such a guaranty pro.gram would be the best way to achieve a significant 

impact on the distressed housing market 

I believe that this approach offers a way forward to improve the affordability of mortgage 

loans for distressed households, reducing the number of unnecessary foreclosures, and helping to 

stabilize U.S. housing markets. But given the· immense scale of the challenge before us, our 
approach can make a dent in the problem only if it is implemented. in a comprehensive manner. 

lt will not be without costs. But we feel that to the extent that declining home prices and 

mortgage credit distress are at the heart of the present crisis, this program will more directly 

address it Under this proposal, there is hope that we will finally stop falling behind this problem 

and begin to stabilize our housing markets and our financial system. 

I appreciate your interest in thls issue and support of our efforts to address it. If you have 

further questions or comments. please do not hesitate to contact me at (202) 898-6974 or Eric 

Spitler, Director of Legislative: Affairs, at (202) 898-3837. 

Sincerely, 

Sheila C. Bair 


- FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Michael N. Castle 

House of Representatives 

Washington, D.C. 20515 

Dear Congressman Castle: 

October 9, 2009 

Thank you for soliciting the Federal Deposit Insurance Corporation's comments 

on subtitle D of the Discussion Draft of the Consumer Financial Protection Agency Act 

of 2009. 

Subtitle D seeks to eliminate the potential for regulatory arbitrage that exists 

because of federal preemption of certain state laws. We support that goal. We also 

support creating a strong floor _for consumer protection, rather than a _ceiling, by allowing 

more protective state consumer laws to apply to all providers of financial products and 

services operating within a state. While we are still studying the- language of subtitle D 

and other options that have been suggested, we believe that the fundamental approach 

should significantly improve consumer protection. 

We appreciate the opportunity to comment. Please do not hesitate to contact me 

at (202) 898-6974 or Paul Nash, Deputy for External Affairs, at (202) 898-6962. 

Sincerely, 

Sheila C. Bair 
SHEILA C. BAIR 

CHAIRMAN 

FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

October 15, 2009 

Honorable Christopher J. Dodd 

Chaimun 

Committee on Banking, Housing, and Urban Affairs 

United States Senate · 

Washington, D.C. 20510 

Dear Mr. Chairman: 

Jn our roles as Chairman, Vice Chairman, and appointed Director of the Federal 

Deposit Insurance Corporation, we are responsible for ensuring public confidence in the 

U.S. banking system by protecting depositors and taking action as appropriate to mitigate 

the risks and potential costs associated with the federal government's guarantee of 

insured deposits. We are deeply concerned that recent proposals to consolidate the 

supervisory powers of the four federal banking agencies into a single agency would not 

only fail to address the underlying causes of the financial crisis, but would weaken our 

dual banking system, lead to further consolidation in the banking industry, and undem1ine 

the FDIC's ability to perform critical functions necessary to protect depositors and 

mitigate risks to taxpayers. 

The financial crisis had its roots in an unsustainable credit bubble driven by a 

confluence of factors. These factors included a prolonged period of low short-term 

interest rates that encouraged the financial system to fund long-term assets with shorttem1 credit, inadequate regulatory standards for mortgage loan originations, regulatory 

gaps between banks and the non-bank financial sector, an explosion of derivatives 

activity that concentrated risks while it obscured them from view, arbitrage of different 

capital requirements among bank and non-bank institutions, and the lack of effective 

resolution option,s for large complex institutions. 

There is little controversy about the important role these factors played in creating 

the conditions for the financial crisis. In contrast, we are not aware of any serious 

suggestion that the ability of state banks to convert to a federal charter, or vice versa, 

played such a role. Moreover, we believe the costs and potential for harmful 

consequences of a four agency supervisory consolidation are substantial and real. 

There is little doubt that consolidation of supervisory authority in a single agency 

would endanger the dual banking system in the U.S. Supervisory consolidation in a 

single federal chartering authority would over time result in continued diminution and deemphasis of the role of state banks and state regulation. This would be unfortunate, 

because the dual banking system has fostered a vibrant community banking industry that 
has supported economic growth and job creation, especially in rural areas, while state 

regulation has played an important role in identifying and addressing issues affecting 

consumers. 

Moreover, and of great concern to us, the loss of the FDIC's supervisory function 

would compromise our ability to work as Congress intended to ensure that the statutory 

intent of Prompt Corrective Action is carried out. In addition to supervising state 

nonmember banks, our examinations are the eyes and ears by which the FDIC, in its role 

as deposit insurer, understands, assesses, and addresses risks at banks of all sizes and 

charter types. 

A vibrant examination and supervision program plays a critical role in supporting 

the FDIC's ability to execute its insurance mission, and carry out its responsibilities as 

backup supervisor for all insured institutions. As a backup supervisor, the FDIC has 

played an active role during this crisis in numerous troubled bank situations where we 

were not the primary federal regulator. Our examiners' involvement has promoted earlier 

and more cost-effective resolutions. Supervisory input is an important element to the 

FDIC's risk-based deposit insurance premium, our overall assessment of industry-wide 

risks for deposit insurance purposes, and the development of policies to address those 

risks. 

It is of great concern to us that the consolidation of supervisory authority in a 

single agency would weaken the system of checks and balances within the U.S. 

regulatory system. With our perspective as deposit insurer, the FDIC adds a needed 

conservative voice to safety and soundness regulation. For example, in single-regulator 

systems such as exist in many parts of the world, untested "advanced approaches" to 

allow large banks to set their own capital requirements using internal models were put 

into place without meaningful input from deposit insurers who had financial 

accountability for the results. In the U.S., in contrast, the FDIC's voice moved the 

outcome to a more gradual and prudential implementation of Basel ll. Without the 

FDIC's strong role in the process, the U.S. would have implemented the advanced 

approaches earlier and with fewer safeguards, our large banks would have entered the 

crisis with less capital, and the problems would have been even more costly to address. 

It is noteworthy that the strongest advocates of single regulator models have 

tended to be large financial institutions. We are concerned that a single regulator would 

inevitably come to view the largest institutions as its most important constituents since of 

necessity they would dominate the attention of the regulator. While the views of these 

institutions are important and worthy of consideration, we believe there is a substantial 

risk that over time a single regulator could be unduly swayed by the particular interests of 

these institutions. This in tenn could lead to further industry consolidation, even though 

there is a clear consensus that we need less concentration in the financial sector, not 

more. 

What is needed are better approaches to fill regulatory gaps such as a strong 

Systemic Risk Council would provide: a strong rule-writing agency for consumer 
protection to address regulatory gaps and risk in the non-bank sector, better resolution 

tools to end the too-big-to-fail problem, and other specific capital and regulatory reforms. 

As always, it remains the FD I C's privilege to work with you and your staff on the 

many important issues surrounding regulatory reform. We look forward to continuing 

these discussions going forward. 

Sheila C. Bair 

Chairman 

Sincerely, 

Martin J. Gruenberg 

Vice Chairman 
SHEILA C. BAIR 

CHAIRMAN 

- FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

November 18, 2009 

Honorable Barney Frank 

Chairman 

Committee on Financial Services 

House of Representatives 

Washington, D.C. 20515 

Dear Mr. Chairman: 

I am pleased that Representatives Brad Miller and Dennis Moore have offered an 

amendment to address the imbalance under existing law in which the new resolution fund 

could suffer a loss in the resolution of a systemically significant financial firm while 

secured creditors receive full payment. 

This amendment is a worthy addition to your proposed legislation because it 

supports your goals of preventing future taxpayer bail-outs and restoring market 

discipline to our largest financial companies. Fundamental to your legislation are the 

bans on government assistance to specific financial firms and the creation of a credible 

resolution process to close them and impose the losses on shareholders and creditors. 

The Miller/Moore amendment supports these goals by requiring secured creditors 

to take losses of up to 20 percent of their secured claim before any losses could be 

imposed on the new resolution fund. This would apply only in the rare circumstance 

where losses were so severe that all other creditors have been wiped out. However, this 

amendment will help achieve your goal of enhancing market discipline because it will 

mean that secured creditors, alike with every other creditor, will need to evaluate the 

solvency of our largest financial firms. This amendment will ensure that the largest firms 

are not immunized from their bad decisions by relying on short-term financing so long as 

they have collateral to pledge. 

For these reasons, I urge you to support the amendment of Representatives Miller 

and Moore in furtherance of our shared goal of returning market discipline to our 

financial system. 

Sincerely, 

Sheila C. Bair 
e FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Louise M. Slaughter 

Chairwoman 

Committee on Rules 

House of Representatives 

Washington, D.C. 20515 

Dear Madam Chairwoman: 

December 7, 2009 

I write in support of Congressman Hank Johnson's proposed amendment to 

Section 1105 of H.R. 4173, the Wall Street Reform and Consumer Protection Act of 

2009. 

The Federal Deposit Insurance Corporation supports allowing for judicial review 

of the Financial Services Oversight Council's extraordinary orders to mitigate systemic 

risk under Section 1105. However, the FDIC is concerned the judicial review provisions 

could be read more broadly than intended and inadvertently interfere with the ability of 

the FDIC and other bank regulatory agencies to take normal supervisory actions under 

existing law unrelated to the Section 1105 authority. 

Congressman Johnson's amendment is technical in nature, but the FDIC feels 

strongly that it is a necessary clarification to Section 1105. Thus, I urge the Committee to 

make Representative Johnson's amendment to Section 1105 in order. 

Thank you in advance for your consideration. Please let me know if you have any 

questions. If you have further questions or comments, please contact me at (202) 898-

6974 or Paul Nash, Deputy for External Affairs, at (202) 898-6962. 

Sincerely, 

Sheila C. Bair