8 FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Christopher J. Dodd 

Chaim1an 

Committee on Banking, Housing, and Urban Affairs 

United States Senate 

Washington, D.C. 20510 

Honorable Blanche L. Lincoln 

Chaim1an 

Committee on Agriculture, Nutrition and Forestry 

United States Senate 

Washington, D.C. 20510 

Dear Chairman Dodd and Chairman Lincoln: 

April 30,2010 

Thank you for reaching out to the Federal Deposit Insurance Corporation for our views on 

Title VII of the "Wall Street Transparency and Accountability Act" contained in S. 3217, the 

"Restoring American Financial Stability Act of 2010." At the outset, I would like to express my 

strong support for enhanced regulation of "over-the-counter" (OTC) derivatives and the 

provisions of the bill which would require centralized clearing and exchange trading of 

standardized products. If this requirement is applied rigorously it will mean that most OTC 

contracts will be centrally cleared, a desirable improvement from the bilateral clearing processes 

used now. I would also like to express my wholehearted endorsement of the ultimate intent of 

the bill, to protect the deposit insurance fund from high risk behavior. 

1 would like to share some concerns with respect to section 716 of S. 3217, which would require 

most derivatives activities to be conducted outside of banks and bank holding companies. If 

enacted, this provision would require that some $294 trillion in notional amount of derivatives be 

moved outside of banks or from bank holding companies that own insured depository 

institutions, presumably to nonbank financial finns such as hedge funds and futures commission 

merchants, or to foreign banking organizations beyond the reach of federal regulation. I would 

note that credit derivatives - the riskiest - held by banks and bank holding companies (when 

measured by notional amount) total $25.5 trillion, or slightly less than nine percent of the total 

derivatives held by these entities. 

At the same time, it needs to be pointed out that the vast majority of banks that use OTC 

derivatives confine their activity to hedging interest rate risk with straightforward interest rate 
derivatives. Given the continuing uncertainty surrounding future movements in interest rates and 

the detrimental effects that these could have on unhedged banks, I encourage you to adopt an 

approach that would allow banks to easily hedge with OTC derivatives. Moreover, I believe that 

directing standardized OTC products toward exchanges or other central clearing facilities would 

accomplish the stabilization of the OTC market that we seek to enhance, and would still allow 

banks to continue the important market-making functions that they currently perform. 

In addition, I urge you to carefully consider the underlying premise of this provision - that the 

best way to protect the deposit insurance fund is to push higher risk activities into the so-called 

shadow sector. To be sure, there are certain activities, such as speculative derivatives trading, 

that should have no place in banks or bank holding companies. We believe the Volcker rule 

addresses that issue and indeed would be happy to work with you on a total ban on speculative 

trading, at least in the CDS market. At the same time, other types of derivatives such as 

customized interest rate swaps and even some CDS do have legitimate and important functions 

as risk management tools, and insured banks play an essential role in providing market-making 

functions for these products 

Banks arc not perfect, but we do believe that insured banks as a whole pcrfonned better during 

this crisis because they arc subject to higher capital requirements in both the amount and quality 

of capital. Insured banks also are subject to ongoing prudential supervision by their primary 

banking regulators, as well as a second pair of eyes through the FDIC's back up supervisory role, 

which we are strengthening as a lesson of the crisis. If all derivatives market-making activities 

were moved outside of bank holding companies, most of the activity would no doubt continue, 

but in less regulated and more highly leveraged venues. Even pushing the activity into a bank 

holding company affiliate would reduce the amount and quality of capital required to be held 

againsl lhis activity. It would also be beyond the scrutiny of the FDIC because we do not have 

the same comprehensive backup authority over the affiliates of banks as we do with the banks 

themselves. Such affiliates would have to rely on less stable sources of liquidity, which - as we 

saw during the past crisis - would be destabilizing to the banking organization in times of 

financial distress, which in tum would put additional pressure on the insured bank to provide 

stability. By concentrating the activity in an affiliate of the insured bank, we could end up with 

less and lower quality capital, less infonnation and oversight for the FDIC, and potentially less 

support for the insured bank in a time of crisis. Thus, one unintended outcome of this provision 

would be weakened, not strengthened, protection of the insured bank and the Deposit Insurance 

Fund, which I know is not the result any of us want 

A central lesson of this crisis is that it is difficult to insulate insured banks from risk taking 

conducted by their nonbanking affiliated entities. When the crisis hit, the shadow sector 

collapsed, leaving insured banks as the only source of stability. Far from serving as a source of 

strength, bank holding companies and their affiliates had to draw stability from their insured 

deposit franchises. We must be careful not to reduce even further the availability of support to 

insured banks from their holding companies. As a result, we believe policies going forward 

should recognize the damage regulatory arbitrage caused our economy and craft policies that 

focus on the quality and strength ofregulation as opposed to the business model used to support 

it. 
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The FDJC is pleased to continue working with you on this important issue to assure that the final 

outcome serves all of our goals for a safer and more stable financial sector. We hope that a 

compromise can be achieved by perhaps moving some derivatives activity into affiliates, so long 

as capital standards remain as strict as they are for insured depositories and banks continue to be 

able to fully utilize derivatives for appropriate hedging activities. 

Please do not hesitate to contact me al2::,= 2: · ~r have your staff contact Paul Nash, 

Deputy Director for External Affairs, .... ;ti ..... :,...,:.~ ... ~:,. ,...,...,...,..._,_,j 

Sincerely, 

Sheila C. Bair 
FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Susan M. Collins 

Ranking Minority Member 

May 7, 2010 

Committee on Homeland Security and Governmental Affairs 

United States Senate 

Washington, D.C. 20510 

Dear Senator Collins: 

I am writing to express my strong support for your amendment number 3879 to 

ensure strong capital requirements for our nation's financial institutions. This 

amendment is a critical clement to ensure that U.S. financial institutions hold sufficient 

capital to absorb losses during future periods of financial stress. With new resolution 

authority, taxpayers will no longer bail out large financial institutions. This makes it 

imperative that they have sufficient capital to stand on their own in times of adversity. 

During the crisis, FDIC-insured subsidiary banks became the source of strength 

both to the holding companies and holding company affiliates. Far from being a source 

of strength to banks as Congress intended, holding companies became a source of 

weakness requiring federal support. If, in the future, bank holding companies are to 

become sources of financial stability for insured banks, then they cannot operate under 

consolidated capital requirements that are numerically lower and qualitatively less 

stringent than those applying to insured banks. This amendment would address this issue 

by requiring bank holding companies to operate under capital standards at least as 

stringent as those applying to banks. 

The crisis also demonstrated the dangers of excessive leverage undertaken by 

large nonbanks outside of the scope of federal bank regulation. Notable examples 

included the excessive leverage of the largest investment banks during the run-up to the 

crisis, and the extremely high leverage of Fannie Mae and Freddie Mac. To remedy this 

and prevent regulatory gaps and arbitrage, large nonbank financial institutions deemed to 

be systemic must be held to the same, or higher, capital standards as those applying to 

banks and bank holding companies. Again, the amendment accomplishes this goal 

simply and directly. 

Finally, and more broadly, the crisis identified the dangers of a regulatory mindset 

focused exclusively on the soundness of individual banks without reference to the "big 

picture." For example, an individual overnight repo may be safe, but widespread 

financing of i I liquid securities with overnight repos left the system vulnerable to a 
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liquidity crisis. A financial system-wide view requires regulators, working in 

conjunction with the new Financial Services Oversight Panel, to develop capital 

regulations to address the risks of activities that affect the broader financial system, 

beyond the bank that is engaging in the activity. 

We at the FDIC remain committed to working with you towards a stronger 

financial system. This amendment will be an important step in accomplishing this goal. 

I .. : .· .·I( vaub,ve further questions or comments, plea~e do not hesitate to contact me at 

_ ·'"·~•~- -T~. jor Paul Nash, Deputy for External Affairs, atj ·.. . ..... . ..... -I 

Sincerely, 

Sheila C. Bair 

(b )(2) 
- FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

OFFICE OF THE CHAIRMAN 

Honorable Christopher J. Dodd 

Chairman 

Committee on Banking, Housing, and llrban Affairs 

United States Senate 

Washington, D.C. 20S I 0 

Dear Mr. Chainnan: 

May 11, 2010 

l write in strong support of a provision within the Dodd-Lincoln derivatives 

substitute amendment that prohibits derivatives and securities clearinghouses from 

accessing the Federal Reserve discount window. This provision is in conflict with 

Section 806(b) of the Wall Street Transparency and Accountability Act that could 

provide discount window access to clearinghouses and other designated financial market 

utilities. While I support eliminating discount window access for clearinghouses, l 

support preserving their access to broadly-based assistance provided under Section 13(3). 

Clearinghouse access to this potentially routine government liquidity would 

constitute an unprecedented expansion of the discount window to entities other than 

insured depository institutions. Such an expansion, over time. could increase risk by 

enabling clearinghouses to rely on government liquidity instead of more prudent and 

market-based risk management practices. Giving a clearinghouse the ability to access 

"one-off' support through discount window lending could significantly increase moral 

hazard and the likelihood that a clearinghouse might require a bailout in the future. 

While some insured depository institutions may come within the definition of 

"financial market utilities" as used in the bill, they already have access to the discount 

window. Further expanding access is in direct conflict with a central goal of the 

legislation: to protect the American public by lowering the risk of future taxpayer 

bailouts. 

Accordingly, I would propose deleting section 806(b), which authorizes the 

Federal Reserve Board to enable Federal Reserve Banks to provided discount window 

borrowing privileges to "designated financial market utilities" (i.e., clearing facilities), 

but retaining robust clearinghouse oversight. In an extreme and extraordinary 

circumstance. the Federal Reserve should have adequate authority under Section 13(3) to 

make assistance generally available to clearinghouses. 
(b)(2) ~· .. -'" ..·~... T.f·· .. •···ou have questions or comments, please do not hes, itate •. to. c ... ontact me ail ··I 

[.__ _· --'-'-------'---'• pr Paul Nash, Deputy for External Affairs, at! , •, · ·::• ···I 

Sincerely, 

Sheila C. Bair 

(6)(2) 

(6)(2) 
8 FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA C. BAIR 

CHAIRMAN May 17, 2010 

Honorable Carl Levin 

Chainnan 

Permanent Subcommittee on Investigations 

Committee on Homeland Security and Governmental Affairs 

United States Senate 

Washington, D.C. 205 I 0 

Dear Mr. Chaitman: 

I am writing to express my strong support for the amendment to S. 3217 that you 

arc co-sponsoring with Senator Kaufman and Senator Reed on back-up examination and 

enforcement authority for the Federal Deposit Insurance Corporation. I also would like 

to express my appreciation for the diligent efforts of the Penn anent Subcommittee on 

Investigations to examine the causes of the financial crisis and remedies lo help prevent a 

recurrence of the mistakes that led to the current crisis. 

The amendment would provide vital improvements to the FDIC's back-up 

examination and enforcement authority to protect the Deposit Insurance Fund and help 

facilitate the orderly liquidation of large systemically important financial companies. 

This enhanced examination and enforcement authority is a key clement in ending the toobig-to-fail doctrine. 

S. 3217, the Restoring American Financial Stability Act of 2010 would give the 

FDIC the important responsibility of providing for the orderly liquidation of large 

systemically important financial organizations (defined as covered financial companies 

under the Act). The ability to close these large, complex companies and place them into 

receivership in a manner similar to banks is essential to ending too-big-to-fail. 

In order lo plan for the potential failure of such a company, the FDIC needs backup examination authority. The FDIC's access to timely information on the condition of 

these large companies is especially important in light of the recently adopted ShelbyDodd amendment to Title rr of S. 3217. Under that amendment, the FDIC will he 

required initially to fund its liquidation operations and activities through a line of credit 

with Treasury, the amount of which is dependent on the value of the assets of the 

company to be resolved. As a result, the FDIC will need timely access to infom1ation 

ahout the condition of a troubled company, through an examination if need be, to 

detennine the value of the company's assets and lo otherwise prepare for its resolution. 

We note that the Treasury's 2009 White Paper on financial regulatory reform, "A New 

Foundation: Rebuilding Financial Supervision and Regulation," recommended that the FDIC 

have holding company backup authority; and H.R. 4173, the Wall Street Refonn and 
Consumer Protection Act of 2009, which passed the House on December 11, 2009, also 

expands the FDIC's authority in this area. The Levin-Kaufman amendment provides the 

FDIC back-up examination authority of the large financial companies supervised by the 

Federal Reserve as well as deposltory institution holding companies generally. 

As you know, the FDIC is the primary federal regulator for nearly 5,000 statechartered depository institutions that are not members of the Federal Reserve System. In 

addition to its role as primary federal regulator for most state-chartered depository 

institutions, the FDIC has back-up authority to examine the other 3,000 FDIC-insured 

institutions and take enforcement actions in a case where the primary regulator does not 

act to correct a violation or deficiency in a timely manner. 

The Levin-Kaufman amendment addresses regulatory gaps examined by the 

Subcommittee during its hearing on the failure of Washington Mutual (WaMu). Current 

law and an implementing agreement with the other three primary federal banking 

regulators have prevented FDIC supervision staff from obtaining timely access to 

information on the condition of FDIC-insured institutions at critical times. In the case of 

WaMu, the FDIC was not able to fully participate in examinations, and the FDIC's access 

to critical information on the mortgage operations that eventually led to WaMu's failure 

was restricted. 

The Levin-Kaufman amendment would go a long way toward preventing a 

recurrence of such events. The amendment would streamline the FDIC's exercise of its 

back-up examination authority by giving the FDIC Chairperson, in addition to the Board 

of the FDIC, the ability to authorize a back-up examination of a depository institution. 

Because the operations and conditions of a depository institution and its holding company 

arc inexorably intertwined, the amendment would give the FDIC back-up authority to 

examine a depository institution's holding company as well. 

The Levin-Kaufman amendment would further enhance the FDIC's ability to 

obtain needed information on the condition of a depository institution, holding company, 

or nonbank financial company. The amendment would allow the FDIC to obtain the 

information directly from these entities, whenever readily available information from 

other regulators is inadequate. 

Importantly, the Levin-Kaufman amendment would streamline the process for 

exercising the FDIC's back-up enforcement authority. The amendment would give the 

FDIC Chairperson, in addition to the Board of the FDIC, the ability to autho1ize an 

enforcement action against a depository institution or depository institution holding 

company whenever the primary regulator fai Is to take an enforcement action 

recommended by the FDIC within 60 days. By allowing the Chairperson to act, the 

Levin-Kaufman amendment ensures that the FDIC can act quickly to prevent losses to 

the Deposit Insurance Fund and ensure the orderly liquidation ofa covered financial 

company. 

The Levin-Kaufman amendment provides the FDIC important tools to protect the 

Deposit [nsurance Fund and, in the event of a failure, promote financial stability through 
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orderly liquidation of systemically important financial company, while ending too-bigto-fail. I applaud your leadership on this important amendment and your work to ensure 

the soundness of the financial system. 

r----;-,;~P"-""'-'Aft. ve further questions or comments, please do 

Ior Paul Nash, Deputy for External Affairs, at 

cc: Senator Dodd 

Senator Shelby 

Sincerely, 

Sheila C. Bair 

ntact me at 

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FEDERAL DEPOSIT INSURANCE CORPORATION, Washington. oc 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Luis V. Gutierrez 

Chainnan 

June 17, 2010 

Subcommittee on Financial Institutions and Consumer Credit 

Committee on Financial Services 

House of Representatives 

Washington, D.C. 20515 

Dear Mr. Chainnan: 

I am writing in response to your request for my views on your proposal for a prefunded working capital reserve (ex ante fund) for the orderly liquidation of systemically 

important financial institutions. My public support for an ex ante fund is long held and 

well documented. 

Foremost among the needed financial refonns is a new legal and regulatory 

framework to resolve the failure of a large interconnected financial finn similar to the 

regime long in place for insured banks and thrifts. Such a liquidation regime would 

provide the government with the tools to ensure the orderly winding down of these 

institutions, without disrupting the broader economy, while imposing the losses on 

shareholders, bondholders, and other creditors. It also would bring sorely lacking market 

discipline to our largest institutions. A key element for such a regime - as it is for 

banks - is adequate working capital to be used by the receiver to provide temporary 

financing to maintain operations as the institution is broken up and sold off. 

The House passed bill, as well as the bill approved by the Senate Banking 

Committee, would impose assessments on large, interconnected non-bank financial 

institutions to build a working capital fund "up front." The Senate passed bill would 

instead require the FDIC to borrow from a line of credit established by the Treasury 

Department and assess the industry "ex post" to repay the Treasury Department for any 

shortfall. Ex post assessments could, I believe, result in either pro-cyclical assessments 

during an economic crisis, or multi-year delays in repayment. In contrast, an ex ante fund 

would provide the FDIC with the ability to charge regular assessments in "good times," 

providing more predictability to covered financial companies and better capacity to 

manage their expenses. The ex ante fund also would give the FDIC the authority to 

impose risk-based assessments on all large, interconnected firms, requiring the riskiest 

firms to pay the most. To avoid double charging banks that already pay deposit insurance 

premiums, your proposal appropriately bases the assessments on assets held outside of 

insured depositories. 
As I have previously stated, I believe an ex ante fund provides better protection 

for taxpayers than a system borrowing all funds from the Treasury Department when 

needed and then repaying the borrowings through after-the-fact industry assessments. 

Even though it is contemplated that the funds will be fully repaid by the industry, the 

immediate temporary use of government funds would undoubtedly be viewed by the 

public as a government bailout. With the ex ante fund, any temporary use of government 

assistance would occur only if and when the industry funding is depleted. Finally, your 

proposal provides further protection for taxpayers by requiring the FDIC to recoup any 

costs associated with the resolution through additional post-failure industry assessments. 

I appreciate that some believe an ex ante assessment could be viewed as a "bailout 

fund" and thus it is preferable to establish a Treasury line of credit. To address those 

concerns, I would only ask that one analyze the strong record of the FDIC in protecting 

the Deposit Insurance Fund (DlF). For over 75 years, the FDIC has maintained the DIF 

scrupulously in confom1ance with its statutory mandate - to protect insured depositors. 

The FDIC would be equally as scrupulous in protecting the integrity of an ex ante 

resolution fund, consistent with the express tenns of this legislation. 

Your proposal also places the budgetary burden of the new systemic risk 

regulatory regime where it belongs - on the entire non-bank financial sector. Resolution 

of insured banks wi II continue to be funded through the DIF. Over the decades, insured 

banks have paid heavily into the DIF to maintain the integrity of industry funding of 

deposit insurance, and this has been particularly true during the recent crisis. At the same 

time, as the financial crisis hit, the shadow sector collapsed into the regulated banking 

sector, reaping substantial benefits from the stabilization measures that were instituted. 

The burden of nonbank resolution authority should fall on non banks, and the FDIC is 

vigorously opposed to any proposal that meets pay-go requirements on the back of the 

Deposit Insurance Fund. The new resolution authority-- like many other parts of this 

bill - is necessitated by instability created by the explosive growth of the shadow sector, 

and the shadow sector should pay for its costs. Since the current financial crisis began in 

2008 the commercial banking sector has already paid in more than $65 billion to stabilize 

the financial sector through assessments to recapitalize the DIF. Commercial banks are 

projected to pay almost another $80 billion under the current DIF recapitalization plan by 

2016. 

Thank you for considering my views. 

Sincerely, 

Sheila C. Bair 
SHEILA C. BAIR 

CHAIRMAN 

FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

June 22, 20 I 0 

I lonorable Susan Collins 

United States Senate 

Washington, D.C. 20510 

Dear Senator Collins: 

I am writing to express my continued support for your amendment to strengthen the 

capital regulation of the U.S. banking system and systemically important nonbank financial 

institutions. 

The amendment ensures that our largest financial institutions, including those that 

benefited the most from federal support during the crisis, will adhere to capital requirements at 

least as stringent as those applying to thousands of community banks nationwide. The 

amendment requires bank holding companies' capital requirements to be at least as stringent as 

those of banks, ensuring they can serve as a source of strength to their subsidiary banks rather 

than a source of weakness as we saw too often during the crisis. Requiring large non bank firms 

regulated by the Federal Reserve to adhere to capital requirements as strict as those faced by 

banks addresses the problem of regulatory capital arbitrage that fueled risk-taking in the years 

before the crisis. 

One of the implications of the amendment has attracted a great deal of attention. 

Specifically, trust preferred securities, which are not permitted as tier I capital for insured banks, 

would not be permitted as tier I capital for bank holding companies. I view this as an important 

and necessary change. 

Over the past several years, the capital bases at the largest financial institutions have 

become diluted with trust preferred securities and other debt instruments that "look" like capital 

in good times, but that fail to absorb losses when called upon. Institutions became very savvy at 

exploiting legal, accounting, and regulatory rules to create and issue well over a hundred billion 

dollars in trust preferred securities in the boom years of the 1990s and 2000s. Trust preferred 

securities proved highly attractive to investors insofar as they legally commit bank holding 

companies to pay dividends or risk going into default. (In fact, the tax code treats them as debt, 

making the inlt!rest deductible to the bank holding company.) The ease of issuing these debt-like 

instruments as "capital" fueled growth at many weaker institutions, allowing them to increase 

leverage and risk taking. 

However, as the crisis hit, these securities became a significant burden on troubled bank 

holding companies, making them a drain -· not a source of strength - for their subsidiary banks. 

The market had no confidence in trust preferred securities as loss-absorbing capital and notably, 

the regulators did not give credit for trust preferred securities in conducting the stress tests of 

capital adequacy m 2009. 
Another significant problem is that investors interested in recapitalizing bank holding 

companies have been discouraged by their inability to persuade holders of trust preferred 

securities to convert their shares into common equity. Because holders of trust preferred 

securities have legal rights to cumulative dividends, they have little incentive to subordinate their 

position to facilitate the infusion of fresh equity capital. This leaves potential acquirers frustrated 

and unable to complete an open bank transaction, making it more likely the banking organization 

will fail, exposing the Deposit Insurance Fund to losses that could have otherwise been avoided. 

The increased leverage facilitated by trust preferred securities, combined with the impediments 

they pose to recapitalization, will cost the Deposit Insurance fond billions in resolution costs 

which must, of course, be borne by the all insured banks through increased deposit insurance 

assessments. 

Your amendment takes aim at the financial engineering that went on in the boom years, 

and serves as the most concrete and meaningful legislative proposal that I have seen to improve 

the quality of capital at U.S. banking organizations. Contrary to the argument that your 

amendment would reduce credit availability, 11 will actually encourage renewed lending by 

placing the banking system on a sounder footing with real, tangible common equity. Ask any 

securities analyst or market participant whether or not they put much value in trust preferred 

securities during the crisis - the answer is a resounding no. The market believes trust preferred 

securities arc debt - the regulators and Congress should follow suit. The end result of your 

amendment would be to replace weak, risky debt-like instruments with growth sustaining, true 

capital. 

We appreciate that concerns have been raised by some in the financial services industry 

that banking organizations should not be required to raise capital as they seek to repair their 

balance sheets and provide credit support for the recovering economy. The amendments you 

have agreed to provide ample relief and transition time for financial institutions to adjust to these 

new requirements. There will always be some industry resistance to increasing capital 

requirements. In bad times, there will be those who argue that increased capital will constrain 

lending; in good times, they will argue that increased capital is unnecessary given low 

delinquency default rates on their loans and other assets. The process of deleveraging will be 

difficult whenever it occurs, but occur it must. With greater capital cushions, much of the 

financial crisis could have been averted. Large financial entities would have been constrained in 

their risk taking and better able to withstand losses, ameliorating the need for costly bailouts. 

We have a great opportunity to return to the basic business of banking and away from the 

financial games that caused significant hardship, the loss of millions of jobs, and significant 

losses to the Deposit Insurance Fund. The FDIC remains committed to working with you towards 

accomplishing this goal and we applaud your strong leadership. 

Sincercly, 

Sheila C. Bair 
(b )(2) 

FEDERAL DEPOSIT INSURANCE CORPORATION, Washington. oc 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Hank Johnson 

House of Representatives 

Washington, D.C. 20515 

Dear Congressman Johnson: 

June 25, 2010 

Thank you for your letter concerning options available to underserved consumers in need 

of small-dollar emergency credit. We share your concerns. Expanding the availability of 

mainstream financial services in general and of affordable small-doJlar loans in particular is a 

significant priority at the Federal Deposit Insurance Corporation. 

The FDIC has issued guidelines to encourage banks to offer affordable small-dollar credit 

products, conducted a pilot program to demonstrate the feasibility of banks offering these 

products, and continues to explore strategies to scale small-dollar lending across the financial 

mainstream. As the enclosed report prepared by my staff indicates, we also have pursued 

initiatives to increase underserved consumers' access to savings and financial literacy as an 

option to potentially avoid costly forms of emergency credit. 

As the enclosed material describes in more detail, the FDIC's small-dollar loan pilot 

program had 28 banks located in 27 states that provided loans up to $2,500 at annual percentage 

rates of less than 36 percent. These loans had low or no fees and loan tenns of at least 90 days to 

give consumers time to repay. The FDIC's Advisory Committee on Economic Inclusion (ComEIN) is meeting on Thursday, June 24 to review how lessons learned from the pilot and other 

strategies can be used to encourage more banks to offer safe, affordable and feasible small-doJlar 

loans. We contacted your staff to invite them to the meeting or to view it live via Webcast at 

http://www.vodium.com/goto/fdic/advisorycommittce.asp. 

Through these steps and by working with other interested groups, the FDIC looks 

forward to the day when affordable small-dollar loans become a staple product at all banks. If 

you have further questions or comments, please do not hesitate to contact me at I 

or Paul Nash, Deputy for External Affairs, at I I ~----~ 

Sincerely, 

Sheila C. Bair 

Enclosures 

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Response to an Inquiry by 

The Honorable Hank Johnson 

The following information Is provided by the Federal Deposit Insurance 

Corporation 

Like all of us, underserved consumers need to cash their paychecks, pay bills, and save 

for the future with products that are safe, affordable, and easy to understand. 1 They also 

need access to reasonably-priced credit to buy a car or a home, pay for their children's 

education, and, of particular relevance to your inquiry, to meet unexpected financial 

emergencies. As you point out, there is a great demand for small-dollar credit to cover 

emergencies; but all too often, consumers tum to high-cost products to meet their needs. 

For example, outside sources estimate payday loan volume to be in excess of $40 billion 

annually and overdraft fees at more than S38 billion per year.2 Annual percentage rates 

(APRs) for these products can top several hundred, or even thousand, percent. 

The FDIC believes that banks already have the tools and infrastructure to create smalldollar emergency credit products that are affordable for consumers and beneficial for 

banks. To that end, we have taken a number of steps to help stimulate an increase in 

bank offerings of reasonably-priced, safe and sound alternatives to high-cost emergency 

credit. We also believe that enhancing opportunities to save and bolstering financial 

literacy can help underscrved consumers better manage economic disruptions, and 

perhaps avoid using short-term credit altogether. We have taken a multi-pronged 

approach to addressing the issues raised in your letter. Our efforts relate to savings and 

financial literacy, and our overall economic inclusion initiatives are described in detail 

below. The efforts are concentrated in the six following key areas: 

• Use of our Advisory Committee on Economic Inclusion to stimulate discussion 

and obtain information about the issues you raise; 

• Our small-dollar loan guidelines and pilot program; 

• Development of safe, low-cost transactional and savings account templates; 

• Ongoing financial literacy education and outreach through the FDIC's Money 

Smart initiative; 

• Coalition building through the Alliance for Economic Inclusion; and 

• FDIC surveys on underbanked and unbanked, and other economic inclusion 

research. 

1 "Underserved" refers to "unbanked'" and "underbanked'" populations. "Unbanked'" generally means 

consumers do not have a checking or savings accounl wilh a mainstream financial institu1ion. 

"Underbanked" generally refers lo consumers that have a bank account, but also use non-bank, alternative 

financial services and products and providers, such as monc)' orders, check cashing services, payday loans, 

rent-to-own agreements, pawn shops, or refund anticipation loans. 

! The payday loan estimate is from "Economic Impact of the Payday I.ending lndus1ry," HIS Global Insight 

(USA) Consulting Services Group, May 2009, which in tum cites an April 17, 2008 report from Stephens, 

Inc., "Industry Repon: Payday Loan Industry" as the source for 1hc estima1c. The overdraft estima1e is 

from "Bank Overdraft Fees to Total 538.5 billion," CJ\'NMoney.com, August 10, 2009, which in turn cites 

an August 2009 repon from Mochs Services as the source for the cstimale. 
Advisory Committee on Economic Inclusion 

Upon the approval of the FDIC's Board of Directors, Chainnan Bair established the 

FDIC Advisory Committee on Economic Inclusion (the Committee) in 2006 and 

extended its two-year charter in 2008. The Committee is comprised of representatives 

from banks, academics, consumer and community groups, and government agencies. 

The purpose of the Committee is to provide advice and recommendations to the FDIC 

regarding expanding access to banking services by underserved populations. 

In April 2010, the Committee adopted a strategic plan. As reflected in that plan, the 

Committee's objectives are to (l) lower the level ofunderserved households and (2) 

increase the supply of financial products and services targeted to undcrserved households. 

The Committee has outlined project initiatives to help meet its objectives. Initiatives arc 

concentrated in, but are not limited to, the following program areas: Transactional 

Accounts, Savings, Affordable Credit, Financial Literacy, Incentives, and Safe 

Mortgages. A copy of the Committee's strategic plan is enclosed. 

Small-Dollar Loan Guidelines 

In June 2007, the FDIC issued the Affordable Small-Dollar Loan Guidelines (the 

guidelines), to encourage financial institutions to offer small-dollar credit products that 

are affordable, yet safe and sound and consistent with all applicable federal and state 

laws. The guidelines explore several aspects of loan product development, including 

affordable prices, reasonable loan terms, streamlined underwriting, and the benefits of 

linking saving and financial education to short-term loan products. 

In response to your question about the supervisory treatment of small-dollar loans, the 

guidelines state "Safe and sound small-dollar lending programs that comply with 

consumer protection laws will not be criticized by FDIC examiners. Importantly, the 

FDIC recognizes that the Community Reinvestment Act (CRA) provides a valuable 

incentive to offer affordable small-dollar loans. Institutions that provide such products 

consistent with these guidelines will receive favorable CRA consideration as outlined in 

the CRA section below." A copy of the guidelines is enclosed. 

Small-Dollar Loan Pilot Program 

In February 2008, the FDIC launched a two-year case study known as the FDIC SmallDollar Loan Pilot (the pilot) to determine the feasibility of banks offering small-dollar 

loans as an alternative to high-cost emergency credit sources, such as payday loans or 

fee-based overdraft programs. Twenty-eight banks participated with total assets ranging 

from $27 million to $10 billion, with almost 450 branches in 27 states. 

The pilot concluded as of the fourth quarter 2009. During the pilot, banks made 34,400 

loans with a principal balance of $40.2 million. Defaults on loans originated under the 

pilot are in line with the default rates for consumer loans generally. Perhaps most 
importantly, the pilot shows that banks can offer affordable small-dollar loans in a 

manner that suits their business plans and is fair to consumers. 

The pilot has resulted in a model, or template, of product elements that can produce a 

safe, affordable, and feasible small-dollar loan. Product elements include loan amounts 

of $2,500 or less, loan terms of at least 90 days or more, AP Rs of 36 percent or less, low 

or no fees, streamlined but solid underwriting and optional savings and financial 

education components. 

The template is replicable in that it is simple and requires no particular technology or 

other major infrastructure investment. Moreover, adoption of the template could help 

banks better adhere to existing regulatory guidance regarding offering alternatives to feebased overdraft protection programs. 3 Specifically, this guidance suggests that banks 

should "monitor excessive consumer usage (ofoverdrafts), which may indicate a need for 

alternative credit arrangements or other services, and inform consumers of these available 

options .. that could include small-dollar credit products. 

Best practices and elements of success emerged from the pilot and underpin the template. 

In particular, a dominant business model emerged: most pilot bankers indicated that 

small-dollar loans were a useful business strategy for developing or retaining long-term 

relationships with consumers. In terms of overall programmatic success, bankers 

reported that long-term support from a bank's board of directors and senior management 

was most important. The most prominent product element bankers linked to the success 

of their program was a loan term longer than just a few pay cycles to give consumers 

time to repay. 

Going forward, the FDIC is working with the banking industry, consumer, community, 

and philanthropic groups, other government agencies, innovators in small-dollar lending, 

and others to research and pursue strategies that could prove useful in expanding the 

supply of small-dollar loans. Among other things. these strategies include: 

• Highlighting the facts about the pilot and other successful small-dollar loan 

models. 

• Studying the creation of pools of nonprofit or government funds to serve as 

"guarantees., for small-dollar loans. 

• Encouraging broad-based partnerships among banks, nonprofit organizations, and 

community groups to work together in designing and delivering small-dollar 

loans. 

• Studying the feasibility of safe and innovative emerging small-dollar loan 

technologies and business models. 

• Considering ways that regulators can encourage banks to offer safe and affordable 

small-dollar loan products and that these products can receive favorable CRA 

consideration. 

3 "Overdraft Protection Programs, Joint Agency Guidance" Financial Institution Letter, 

February 18. 2005, http://ww,•.r.fdic.gov/news/news/financial/2005/fi 11105.html. 
The FDIC released the results from the first year of the pilot in July 2009. A copy of the 

report is enclosed. Final results of the pilot program will be discussed at the next 

Committee meeting on June 24, 2010 and released shortly thereafter. 

Safe, Low-Cost Account Templates 

On May 7, 20IO, the FDIC published, for a 30-day comment period, proposed templates 

describing potential features for safe, low-cost transactional and basic savings account 

products for low- and moderate-income (LMI) consumers. The templates provide a 

roadmap for basic account elements to encourage insured financial institutions to make 

safe, low-cost transactional and basic savings account products more widely available to 

LMI consumers. Expanded access to safe and affordable bank accounts could provide 

more underserved consumers with the option of tapping savings for emergencies, rather 

than relying on high-cost fonns of credit. 

The guiding principles in developing these templates are that these financial products 

have low and transparent fees; are simple to use; include easily understandable terms and 

conditions; are FDIC-insured and subject to consumer protection laws, regulations and 

guidelines; and represent sustainable product offerings for financial institutions. 

Financial Literacy: the Money Smart Initiative 

The FDIC initiated a national financial education campaign in 2001 by launching Money 

Smart, a comprehensive financial education curriculum designed to help individuals 

outside the financial mainstream develop financial skills and positive banking 

relationships. Over 2.4 million consumers have been reached with Money Smart and 

over 1,600 organizations are part of the FDIC's Money Smart Alliance. Money Smart is 

available in seven languages, comes in adult and young adult versions, and is available 

for consumers to complete independently on line or through a MP3 player. 

A 2007 study of the effectiveness of Money Smart showed that financial education can 

improve an individual's overall financial well-being and reduce reliance on costly credit. 

For example, two-thirds of Money Smart graduates reported an increase in savings after 

completing the course, while more than one-half reported a decrease in debt. A copy of a 

report describing the study is enclosed. 

The FDIC continues to form alliances with public, private, and non-profit entities to 

promote financial education and encourage linkages between financial education and 

access to mainstream banking services. 

Alliance for Economic Inclusion 

The Alliance for Economic Inclusion (AEI) is the FDIC's national initiative to establish 

coalitions of financial institutions, local policymakers, community-based and consumer 

organizations, and other partners in 14 markets across the country lo bring unbanked and 
underserved populations into the financial mainstream. The focus of AEI is on 

expanding basic retail financial services to underserved populations, including savings 

accounts, affordable remittance products, small-dollar loan programs, targeted financial 

education programs, and asset-building programs. The number of AEI members 

nationwide is 967, and 35 banks offer or arc developing small-dollar loan programs.4 

FDIC Unbanked and Underbanked Surveys and Other Economic Inclusion 

Research 

Section 7 of the Federal Deposit Insurance Reform Confonning Amendments Act of 

2005 (Pub. L. 109-1 73) requires the FDIC to conduct ongoing surveys "on efforts by 

insured institutions to bring those individuals and families who have rarely, if ever, held a 

checking account, a savings account, or other type of transaction or check cashing 

account at an insured depository institution into the conventional finance system." The 

Act further requires the FDIC to provide a "fair estimate of the size and worth of the 

'unbanked' market in the United States." 

To satisfy the congressional mandate, the FDIC designed two complementary national 

surveys: a survey of FDIC-insured depository institutions (bank survey) and a survey of 

households (household survey). The bank survey focused on collecting data related to 

banks' efforts to serve unbanked and underbanked populations. The bank survey results 

were released to the public in February 2009, and among its key findings was that while 

73 percent of banks are aware of significant underserved populations in their market area, 

less than 18 percent identify expanding services to these consumers as a priority in their 

business strategy. 

The household survey was conducted in January 2009 as a supplement to the U.S. Census 

Bureau's Current Population Survey, and the results were released to the public in 

December 2009. The household survey sought to estimate the size of the unbanked and 

underbanked markets and to identify the factors that inhibit their participation in the 

mainstream banking system. The household survey estimated that 7.7 percent of U.S. 

households arc unbanked, while 17.9 percent of U.S. households arc underbanked. 

Certain racial and ethnic groups are more likely to be underserved than the population as 

a whole. Almost 54 percent of black households, 44.5 percent of American 

Indian/Alaskan households, and 43.3 percent of Hispanic households are underserved. 

The results of these surveys provide new and valuable information to policymakers, the 

banking industry, and other organizations interested in expanding safe and affordable 

financial access to underserved populations. The surveys will be repeated in 2011. 

Copies of the executive summaries for both surveys are enclosed. Additional data for the 

household survey is available in an interactive fonnat on www.cconomicinclusion.gov, a 

website established by the FDIC to highlight our efforts to expand access to the financial 

mainstream. 

'Some of the AEI member banks offering small-dollar loans also participated in the small-dollar loan pilot 

discussed above. 
In addition to the surveys, the FDIC provides research, data, and other resources for 

consumers, banks, policymakers and others regarding issues related to consumer 

protection, underserved populations, and the use of alternative financial services. These 

research materials also are avaiJable on www.cconomicinclusion.gov. 

Enclosures 
SHEILA C. BAIR 

CHAIRMAN 

FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

June 29, 2010 

Honorable Chris Dodd 

Chairman 

Committee on Banking 

United States Senate 

Washington, D.C. 205!0 

Honorable Richard Shelby 

Ranking Minority Member 

Committee on Banking 

United States Senate 

Washington, D.C. 20510 

Honorable Barney Frank 

Chainnan 

Committee on Financial Services 

House of Representatives 

Washington, D.C. 20515 

Honorable Spencer Bachus 

Ranking Minority Member 

Committee on Financial Services 

House of Representatives 

Washington, D.C. 20515 

Dear Chairmen Dodd and Frank and Ranking Members Shelby and Bachus: 

Thank you for your interest in our views regarding increasing the Deposit 

Insurance Fund (DIF) ratio to 1.35. 

Federal deposit insurance promotes public confidence in our nation's banking 

system by providing a safe place for consumers' funds. Deposit insurance has provided 

much needed stability throughout this crisis. Moreover, insured deposits provide banks 

with a stable and cost-effective source of funds for lending in their communities. 

Importantly, the DIF is funded by the insured banking industry. 

A key measure of the strength of the insurance fund is the reserve ratio, which is 

the amount in the DIF as a percentage of the industry's estimated insured deposits. 

Current law requires us to maintain a reserve ratio of at least 1.15 percent. One of the 

lessons learned from the current crisis is that a minimum reserve ratio of I .15 is 

insufficient to avoid the need for pro-cyclical assessments in times of stress. One of my 

first priorities when I assumed the Chairmanship of the FDIC in June of 2006 was to 

begin building our reserves. Regrettably, there was insufficient time before the crisis hit. 

Indeed, we started this crisis with a DIF reserve ratio of 1.22 percent (as of December 31, 

2007). Beginning in mid-2008, as bank failures increased and the insurance fund 

incurred losses, the Fund balance and reserve ratio dropped precipitously. The reserve 

ratio became negative in the third quarter of 2009 and hit a low of negative 0.39 percent 

as of December 31, 2009. To date, we have collected more than $65 billion in 

assessments, and are projected to collect another $80 billion by 2016 to restore the fund. 
Given this experience, we believe it is clear that as the economy strengthens and 

the banking system heals, the reserve ratio needs to be increased. In fact, our Board has 

acted through regulation to target the reserve ratio at 1.25 percent, and a further increase 

to 1.35 percent is consistent with our view that the Fund should build up in good 

economic times and be allowed to fall in poor economic times, while maintaining 

relatively steady premiums throughout the economic cycle, thereby reducing the 

procyclicality of the assessment system. 

Please let me know if you have any questions or would like to discuss further. 

Sincerely, 

Sheila C. Bair