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FDIC chairman cites future challenges.

At the American Institute of CPAs National Conference on Savings Institutions, Andrew C. Hove, Jr., acting chairman of the Federal Deposit Insurance Corp., told CPAs that although recent data reflected positive growth at the more than 2,200 savings institutions the FDIC insures, new strategies must be developed to respond to new challenges.

According to first-quarter results, 94% of all savings institutions were profitable, capital ratios were on the rise and, for the first time since the advent of regulatory reporting on thrifts in 1990, problem assets fell below 2% of total assets. "We expect even higher earnings in capital ratios and lower amounts of troubled assets than in this first quarter," said Hove. "The institutions you represent today," said the chairman, "clearly are the survivors. They have worked through some difficult times and have done a remarkable job."

But recent growth has created a disparity of premiums between the Savings Association Insurance Fund (SAIF) and the Banking Insurance Fund (BIF), reported Hove. During the first six months of 1994, the SAIF increased by $500 million while the BIF grew by $4.4 billion. Premium levels for SAIF will remain higher than for BIF because $800 million is drawn from the SAIF each year to pay for interest on Financing Corp. bonds used to fund the savings and loan bailout. High BIF earnings will speed its recapitalization and prompt the FDIC to reduce the assessment ratio on BIF members dramatically. The disparity would create a higher cost of doing business for SAIF members and, according to Hove, "is one of the biggest challenges facing SAIF members for the next couple of years."

Managing derivative risk. "Commanding the most attention during the past year," said Hove, "was the derivative activity of depository institutions. The complexity and dramatic growth of the global market for derivatives is a challenge to both those holding these instruments and those who regulate them." The FDIC chairman told the conference that derivatives, when used appropriately, can provide substantial funding, liquidity and risk management benefits to insured depository institutions and other business enterprises. But he warned that derivatives often are not well understood, and their complexities and risks clearly can produce losses that can take management and regulators by surprise.

"I believe the FDIC is meeting the challenge of developing regulatory policies, standards and guidance that promote safety and soundness without stifling the legitimate business of derivatives," said Hove. The chairman said that because the use of derivatives varies substantially by institution, regulation is most effective at the institution level. "A practice that is inappropriate at one institution may well be in the range of acceptable behavior for another institution."

Hove said FDIC examiners found risk management systems were essential for institutions that traded in derivatives. The chairman cited six questions, developed by the American Institute of CPAs, that boards of directors should ask about their organizations' activities in derivative financial instruments. "The FDIC fully concurs with the AICPA statement, and I commend the AICPA for developing these questions," said Hove.

The chairman looked to the Financial Accounting Standards Board to issue statements that address hedging transactions using derivatives. "Some institutions devise their own accounting policies based on two authoritative standards," said Hove. "This leads to a lack of comparability of financial information depository institutions report to their stockholders, depositors, creditors and regulatory agencies. The solution is for FASB to develop more standards that comprehensively address hedging transactions and other uses of derivative instruments."

New accounting rules on capital. Hove expressed concern over the number of new accounting rules that change the way income and assets are recognized and measured for financial reporting purposes and their effect when they automatically float into regulatory capital calculations without modification. "Over the past two and a half years federal banking agencies have questioned whether equity capital and other components of regulatory capital assess capital adequacy appropriately," said Hove. "Resolution of capital proposals may have been relatively straightforward, but because decisions on regulatory capital present a greater challenge to the agencies, a host of statutory regulatory requirements has been linked to institutions' regulatory capital ratios," the acting FDIC chairman said. These requirements include prompt corrective action rules, risk-related insurance premiums and brokered deposits. Therefore, agency decisions on capital issues affect institutions' operating costs and activities more than ever before. "In spite of these complications," said Hove, "agencies cannot shrink from the responsibility to make hard choices on regulatory capital proposals."
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Title Annotation:Federal Deposit Insurance Corporation acting chairman Andrew C. Hove, Jr.
Publication:Journal of Accountancy
Date:Nov 1, 1994
Words:738
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