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Thursday, March 4, 2004
U.S. House of Representatives,
Subcommittee on Oversight and Investigation,
Committee on Financial Services,
Washington, D.C.
    The subcommittee met, pursuant to call, at 10:07 a.m., in Room 2128, Rayburn House Office Building, Hon. Sue Kelly [chairman of the subcommittee] presiding.
    Present: Representatives Kelly, Paul, Oxley, Gutierrez, Inslee, Moore, Lynch Davis and Bell.
    Chairwoman KELLY. [Presiding.] This hearing of the Subcommittee on Oversight and Investigations will come to order.
    There are many important roles that Congress provides, but none is more important than protecting consumers through proactive and effective oversight, a commitment that the Financial Services Committee takes very seriously. The American people expect and deserve strong oversight of the regulators protecting their hard-earned money. The Oversight and Investigations Subcommittee will continue to ensure that all Americans have the protection and security that they need within their financial institutions to the best of our ability.
    This is the first in a series of oversight hearings on federal agencies within the jurisdiction of the Financial Services Committee. These hearings will enable the committee to assess the State of the agencies, examine their performance, and ensure that they are acting in the public interest. We begin this process by examining the FDIC, the Federal Deposit Insurance Corporation, which serves as the supervisor of the safety and soundness practices for thousands of U.S. financial institutions.
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    As an independent agency, the FDIC has been tasked by Congress with maintaining stability and confidence in the banking system. The agency supervises the health of roughly 5,300 state-chartered institutions and manages the receivership of the few failed depository institutions under its care. In addition to its safety and soundness mission, the FDIC is the deposit insurer for more than 9,000 of the nation's banks and savings associations, insuring over $3.4 trillion in deposits.
    The subcommittee welcomes the FDIC Chairman Donald Powell, and we look forward to his testimony. Last week, the FDIC issued its quarterly banking profile for the fourth quarter of 2003, which reported that the FDIC-insured institutions enjoyed record high earnings for the fourth consecutive quarter, including a 22 percent increase in profits during the fourth quarter of 2002. In addition, there were only three FDIC-insured institutions that failed in 2003, and the number of problem institutions was reduced from 136 at the end of 2002 to 116 at the year-end of 2003. We hope to hear about the steps that FDIC continues to take to improve efforts to identify and address systemic risks and other structural weaknesses in the financial sector.
    We are also especially interested in the progress that financial institutions are making regarding implementation of the Bank Secrecy Act and the Patriot Act's reporting provisions. The Patriot Act required the FDIC to expand its supervisory role with regard to money laundering. This is really vital to the nation's security and our financial stability. It is imperative that we dry up illicit money and we would like to hear about the progress that the agency has made working with the private sector to protect the American people in this way.
    The subcommittee also welcomes FDIC Inspector General Gaston Gianni. In 1996, Mr. Gianni became the first presidential-appointed Inspector General of the FDIC. The Inspector General's mission is to promote efficiency and effectiveness of the FDIC programs, as well as protect consumers from fraud, waste and abuse in the programs, an important endeavor that promotes stability and public confidence in our institutions. The subcommittee looks forward to hearing the Inspector General's findings on the programs and operations of the FDIC, including recommendations for improvements.
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    In addition, Ms. Jeannette Franzel, the Director of Financial Management and Assurance at the GAO, the General Accounting Office, is here today to discuss the GAO's audits in 2002 and 2003 of the FDIC. Ms. Franzel will discuss the GAO's findings that the agency maintains effective control over financial reporting and compliance. I would like to commend Chairman Powell for the clean report that the FDIC has received, and for taking as many steps as he has to improve targeted areas from the previous years, including the addition of a newly created chief information officer.
    I thank all of our witnesses for their participation in this important hearing on the FDIC oversight, and we look forward to your testimony. So without objection, all members's opening statements will be made part of the record.
    We turn now to Mr. Gutierrez.
    [The prepared statement of Hon. Sue W. Kelly can be found on page 26 in the appendix.]
    Mr. GUTIERREZ. Good morning and thank you, Chairwoman Kelly, for holding this hearing.
    The FDIC plays a very important role in the preservation of our banking system. I am concerned that the FDIC is the only federal financial regulatory agency that still permits banks under its supervision to engage in third party arrangements that allow private payday lending firms to make high cost consumer loans in violation of state usury and licensing laws.
    The OCC and the OTC and the Federal Reserve Board have all made clear this practice is unacceptable use of federal preemption authority, and effectively ended all indirect participation in payday lending by institutions under their supervision. I would hope and encourage the FDIC would follow the lead and prohibit these third party arrangements, many of which exist to avoid strong State and local disclosure laws for payday lending and remittances.
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    I am also troubled by the proposed CRA regulations which would change the definition of small institutions to mean an institution with total assets of less than $500 million, regardless of the size of the holding company. This would greatly increase the number of institutions that are eligible for small bank streamlined CRA examination, removing more than 1,100 banks from the more rigorously examined large bank category. Under current regulations, an institution is considered small if it has less than $250 million in assets and is independent or affiliated with a holding company with total bank and thrift assets of less than $1 billion.
    I have other concerns with the new proposed CRA regulations and I would like to see financial institutions receive CRA credit for their remittances activities when they are providing low-cost remittances service to low-and moderate-income customers.
    As you may be aware, the issue of costs associated with remittances has been a high priority for me. I am particularly pleased and want to thank the Chairman that the FDIC's Chicago office has been working with some of the institutions to encourage them to offer remittances services particularly in areas where there are a significant number of immigrant workers. I would like to know if there are plans, Mr. Chairman, to expand this work nationwide.
    However, many institutions are not providing adequate disclosure to its consumers, and I would like to see if the FDIC as well as other regulators provides greater oversight regarding the disclosure of fees and other charges for remittances by their regulated institutions. I have legislation that would require meaningful disclosure, but I do believe that regulators could currently impose the disclosure requirements on the institutions under their purview.
    I will also have some specific questions for Chairman Powell regarding the resolution of a failed thrift in my district, Universal Savings. I helped, along with the FDIC, I believe properly closed down and reopened the institution, and I understand that 100 percent of the FDIC-insured folks just kept working. Forty-eight hours later, they had access to their accounts again. But there are still some questions, so I would ask the chairman to please indulge us and give us some more information.
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    I look forward to the testimony of the Chairman, as well as the Inspector General and GAO Director, and I yield back the balance of my time.
    Chairwoman KELLY. Thank you.
    Ms. Maloney, have you an opening statement?
    Mrs. MALONEY. Yes I do, Madam Chairman, and thank you very much for holding this hearing.
    Welcome, Chairman Powell. I thank you for joining the subcommittee this morning. I want to begin by saying I join your call for deposit insurance reform this year. I am pleased that you are here to report healthy insurance funds. However, I do want to restate my opposition to efforts to increase above $100,000 the base amount of insurance available on individual accounts. I continue to be in agreement with Chairman Greenspan and others that raising the coverage limit is unnecessary and would only increase taxpayer liability.
    I would also like to join with the Ranking Member in his concern on payday lending. At the present time, no national banks, thrifts or members of the Federal Reserve partner with payday lenders. In contrast, 11 state-chartered banks supervised by the FDIC currently partner with payday lenders. For one stark example, after pressure from the Federal Reserve to discontinue its partnership with a payday lender, First Bank of Delaware withdrew from the supervision of the Federal Reserve System and became regulated by the FDIC.
    Additionally, responding to a number of safety and soundness risks and blatant violations of consumer protection laws, the OTS, the OCC and the Federal Reserve have taken strong action to prevent national banks from renting their charters to payday lenders. I would like to hear in your remarks whether you agree with the specific concerns that these and other agencies have raised about this practice.
    I would also like to put in the record some startling statistics. Payday lending fees cost U.S. families $3.4 billion annually, and 91 percent of all payday loans are made to borrowers with five or more payday loans per year. In other words, people are trapped in a payday lending cycle and cannot get out. As you are aware, these payday loans are often originated with little or no underwriting, as people simply turn over their checks to the lender for a cash advance at a high interest rate. Sadly, payday lenders are often found around military bases where they can depend on a steady supply of young financial novices with guaranteed government checks who are easy pickings.
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    So I would like to hear in your remarks today at some point if the FDIC is going to continue to allow payday lenders to rent bank charters, which is the clear signal given of the lack of action the agency has taken thus far. Shouldn't the agency at the very least give guidance, clarifying that these loans must include an analysis of the borrower's ability to repay the loan, including debt-income ratios and understanding of other borrower obligations?
    I really consider this a safety and soundness issue and certainly good management. So I look forward to your comments today and I am pleased to hear that we have healthy insurance funds. So, thanks.
    Chairwoman KELLY. Thank you, Ms. Maloney.
    For the benefit of anyone who has not testified here before who will be testifying, there are small black boxes on the table. They have lights on them. The green light means you are free to go. You have 5 minutes. The yellow means that you have 1 minute left, and the red light means that it is time to stop, just like a stoplight.
    We are very pleased to have our first panel, the FDIC Chairman, Mr. Donald Powell. He was sworn in on August 29, 2001. Mr. Powell, you have been with us before. We look forward to your testimony and we thank you very much for being here this morning. You will be recognized for a 5-minute summary of your testimony. Without objection, all written testimony will be made a part of the record. Please proceed.
    Mr. POWELL. Thank you, Madam Chair. I appreciate this opportunity to testify today.
    The FDIC was established 70 years ago to promote stability and confidence during one of our country's darkest periods. Since that time, we have stood as a pillar of trust, providing Americans the assurance that their nest eggs are safe and that the banking system is sound. We come before you today in an era of unprecedented prosperity for banks and savings institutions. The industry earned a record $31.1 billion in the fourth quarter of 2003, marking the fourth quarter in a row that earnings set a new high. The results for the fourth quarter also brought the industry's earnings for the full year to a record $120 billion, surpassing the previous annual record of $105 billion set in 2002.
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    The prosperity of the industry is mirrored by the strong financial footing of the FDIC. The FDIC brings decades of trust and confidence, through good times and bad, backed up by the strength of the guarantee we administer and the liquidity of the deposit insurance funds. A year-end 2003, the balance in the BIF was $33.8 billion and the balance in the SAIF was $12.2 billion. These balances represent 1.32 percent and 1.37 percent of estimated deposits in the BIF and SAIF respectively—well above the statutory target reserve ratio of 1.25 percent.
    In addition, it is important to remember that the FDIC brings more than a guarantee and a sizeable fund held in trust for the American people. We bring the ability to resolve banking problems, when they do occur, with a minimum impact on the lives of ordinary Americans and their communities. It is our efficiency in resolving economic calamities with a minimum cost in disruption and at least cost to the taxpayer which ensures the financial stability that is the bedrock of our economic system.
    Because the FDIC performs this unique function and because of its financial interest in safety and soundness of America's financial institutions, the corporation brings a unique perspective to the question of bank supervision and the administration of the federal financial safety net. The FDIC ensures and has an interest in the continued well being of every bank in America, not just those we directly supervise. Bank capital is important to the FDIC. It is a tangible symbol of the strength and essential buffer between risk in our financial system and the deposit insurance funds.
    We have a common interest with the financial services industry to make sure that the industry remains focused on customers, both by serving them well and treating them fairly. The FDIC brings an independent outlook and industry-wide expertise and works to strike a fair balance between the important innovations of the free market and the overall stability of the financial system.
    As the FDIC carries out these responsibilities, we try to be good stewards of the public trust. We are mindful of our budget, promote innovation and excellence in our workforce, and advocate policy positions we believe are fair and in the best interests of the industry and the American people. But there are additional flexibilities the FDIC needs if it is to continue its efforts to maintain a high-performance organization.
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    First, the FDIC needs greater flexibility to manage its deposit insurance responsibilities. We call for a comprehensive reform to provide this flexibility—the merging of the deposit insurance funds, the freedom to manage the funds's size relative to overall deposits, and the freedom to charge premiums based upon risk. These are responsible common-sense changes, and I thank this committee and the U.S. House of Representatives for overwhelmingly answering our call last year. We will continue our efforts to enact this important bill.
    Second, the FDIC needs additional flexibility in managing its employees. I have placed renewed emphasis on merit at the FDIC, rewarding performance and excellence at all levels of the workforce. There is much more to do and we will need Congress's help if we are to realize our full potential in this area. We will soon propose a package of legislative reforms to give the FDIC the tools needed to hire the right people, retain and promote employees who perform at high levels, and to strengthen the link between performance and compensation. I look forward to working with this committee and other appropriate committees in the Congress to make these reforms a reality.
    Finally, the FDIC wants to successfully conclude the important discussions currently underway regarding bank capital. The proposed Basel II capital accord is terribly important and will have profound implications on how we manage and regulate bank capital in America. We have sought from the beginning to ensure our system of capital regulation in America is not undermined by our legitimate desire for a more risk-sensitive and modern system of determining regulatory capital. The FDIC is working closely with its fellow regulators to ensure we all strike the appropriate balance.
    While it is true that the FDIC has a financial interest in the question of capital, we believe there are other worthy reasons for getting it right. Our success in retaining the industry's strong capital position will provide the regulators with the flexibility needed to allow ever-greater market innovations. Maintaining a solid foundation of capital that is beyond dispute will allow the marketplace, not the regulatory structure, to determine the future of banking and this, in my view, is exactly as it should be. I will continue working to strike this balance at the FDIC and will bring this perspective to our deliberations.
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    I appreciate the opportunity to testify here today and look forward to your questions. Thank you.
    [The prepared statement of Hon. Donald E. Powell can be found on page 118 in the appendix.]
    Chairwoman KELLY. Thank you very much, Mr. Powell.
    I want to begin by commending the FDIC for the agency's work in financial education with the Money Smart program. Financial education is extremely important to get those people who are not in the banking system into the banking system. I am very impressed with what you have done. Last year, I worked on Title V of the FCRA reauthorization legislation specifically for the strategy for assuring financial empowerment, the SAFE strategy. I wonder if you could tell us about the successes on the Money Smart program and if the FDIC will be bringing these experiences to the new commission that was created in the FACT Act.
    Mr. POWELL. Thank you. I am excited about this particular effort at the FDIC. I concur with you, Congresswoman Kelly, about the need for financial literacy for all Americans. We do participate in the new commission that just was formed. In fact, we had our first meeting about 15 days, maybe 2 weeks ago. I am proud to be part of the FDIC's Money Smart initiative. I can say that because it was started before I came and the work had been done. It is an award-winning program. We now have it in three or four different languages. We have something like 200 instructors that have trained 5,000 people to teach Money Smart in all communities around America. We have in excess of 200 partnerships with nonprofits, partnerships with government agencies, such as the Department of Defense. We are doing some work there. We are doing work in all 50 states in America.
    It is an exciting program. Its target is adults. I attended the first graduation ceremony in Chicago about 18 months or 2 years ago. I looked into the eyes of those people who participated in the Money Smart program. I can remember asking them about checking accounts, savings accounts, budgets, borrowing money, all those issues. While they did not get every answer, they got most of the answers correctly. So I am excited that we are in fact part of the financial literacy in America. We have a great, great program, incidentally, that is free. Anybody can ask for it and we are happy to share it with them.
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    Chairwoman KELLY. Thank you.
    I would like to know what the FDIC is doing in order to implement the Patriot Act provisions and what the criteria and the methods are that the agency uses to decide which BSA cases should be referred to the FinCEN for enforcement analysis.
    Mr. POWELL. That is part of the regular supervision that when we go into an institution and the compliance with the law. Our people, first of all, were trained on what the Patriot Act in fact is about. We equipped them with the tools, including the training that will enable them to go into institutions and look for violations of that particular act. I have complete confidence in our examiners to go into an institution and make sure that in fact that institution is complying with the Patriot Act and the Bank Secrecy Act.
    Obviously there will be times that we will miss some things and go back and correct some things. It is a continuing process. We have found that most bankers are more than willing. All banks understand the need. All banks will have put in place compliance officers. They have controls in place. They are taking this extremely seriously. We go in and, like we would on any other compliance examination, look for procedures, look at management's commitment to it, do they have a compliance officer, are they well trained, are they following the law. We will not be bashful in calling their hand when we believe that there are violations. We have the necessary enforcement tools that will get their attention.
    Chairwoman KELLY. I have one more follow-up on that, which is that the Patriot Act asked for increased cooperation and communications between regulators. You have talked about the bank side of that. What about the communications that are going on between the regulators, and how frequently does the FDIC discuss this sort of thing with other regulators? Is there something that we need to do to improve that kind of coordination?
    Mr. POWELL. I do not think so, Madam Chair. I think there is extraordinary communication, not only on this particular issue, but I have found that the communication between all of the bank regulators is extraordinary. We share data. We share information. We share concerns. We debate. We have training sessions together. I just attended a training session for supervisors Monday, sponsored by the FFIEC, attended by something in excess of 100 regulators from all four of the different agencies. So I think there is communication. I think we share concerns. We share issues. We share problems. I do not think that is an issue.
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    Chairwoman KELLY. I am glad to hear that. I hope that is true. We have had some indication that there is not an ease of coordination in terms of communication between some of the agencies, not specifically with your agency, but with some others. I was just interested in how you felt that was working.
    Mr. POWELL. I think there is always obviously some friction from time to time, but I can assure you at the principals level there is a commitment to that.
    Chairwoman KELLY. Good. Thank you. I am out of time.
    Mr. Gutierrez?
    Mr. GUTIERREZ. Mr. Chairman, I am going to ask you about two areas, so we will have a lot of time even within the 5-minute framework, I am sure, to be able to discuss them.
    Universal Savings, a mutual thrift in my district failed several years ago. I would like to know the status of that resolution. Have the depositors been paid and to what extent? I understand that an investigation may be pending into the circumstances surrounding the closure of the institution. Can you comment on that? And is there any other information you can give me about the institution of Universal Savings?
    Mr. POWELL. As you indicated, that institution was closed by the OTS in June of 2002. I am happy to report that all insured depositors have been paid. I am extremely happy to report that 94 percent of the uninsured depositors have been paid. I think that is important. I may have misspoken. What I meant to say, if I did not say it, if you were a depositor and you were uninsured, you got 94 percent of your money back. If you had $100 over the insurance limit, you got 94 percent of it paid. That is important. But just as important, I think, I am proud of the record of the FDIC in that we did this, as you and I talked about before the hearing, in a record time. Most of those people had their money within 24 hours. Some had it within 48 hours.
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    As you indicated, there is a criminal investigation going on now, and because of that, I would not comment on that.
    Mr. GUTIERREZ. So there is a criminal investigation and you cannot comment on that criminal investigation into Universal Savings?
    Mr. POWELL. That is true.
    Mr. GUTIERREZ. Okay. The second area is, currently 10 FDIC regulated State banks rent their charters to pawn shops, payday loan outlets, check cashers, so that the storefronts can make loans that would be illegal under our State usury and small loan laws. The OCC, the OTS and the Fed have taken regulatory action to stop their banks from payday loan charter renting. The FDIC is the regulator of choice for payday lenders, even letting a Fed member bank switch regulators to stay in business.
    I would like for you to comment on this situation and to help. In light of the progressive actions that you have taken as Chairman and the FDIC has taken in order to help remittances, for example, can you help so that FDIC-regulated banks basically do not lend out their charters. They say, well, we don't have to worry about the State laws; and we don't have to worry about them. Can you help us in that area and the particular area of payday lending?
    Mr. POWELL. Let me attempt to answer you. You raise several points. The first thing that struck me as you were making your comments is that we do not want insured banks to participate in any illegal activity. We will not condone anything that is illegal. At the same time, as you know, we are safety and soundness conscious. Through the guidance that we issue to the payday lenders, I think they understand that we are very serious about making sure that they do not do anything that would jeopardize the capital of their institution, to the extent that we all recognize and understand that these particular loans have unusual characteristics that would pose additional risk.
    Because of that, capital allocation sometimes is 1.5; sometimes it is three times as much, and it can be 100 percent allocated; 100 percent of the capital must be allocated to the outstanding balance on those loans. So we take the safety and soundness issue very seriously and we take the legality very seriously. We take also the seriousness of consumer laws that may be required from a broad range of consumer protection laws. We check for compliance with those consumer laws. At the same time, we look for discrimination. Is there any discrimination on the part of those payday lenders? And finally, we want to be sure that they are fair in dealing with consumers.
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    I have thought a lot about the issue of payday lending. I have thought a lot about how we deal with this in America. As I shared with you before the testimony, I have gone to convenience stores. I have visited with people that are in line to get their check cashed. I think there are lots of issues here. I will share with you an experience that I shared with the folks at a conference we sponsored about three or four months ago, a conference on the unbanked. We talked a lot about payday lending at that particular conference.
    What I shared with that group was when I visited with one individual gentleman, I said, ''You recognize and understand you can go down the street one block and cash your check free. You do not have to have an account there. If you have $100 check, they will give you back $100.'' He looked at me and said, ''I know that and I know what I am paying here at the payday lender, but that is the same institution that foreclosed on my brother's pickup.'' We talked a little bit about that.
    I think part of it is what Congresswoman Kelly mentioned a moment ago. Part of it is education. Part of it is culture. Part of it is trust. Somehow, banks have got to get down into the community and not have a banking lobby environment. Mix with the workers and say, ''You can trust us.'' We can understand that. I think that is a critical issue. I think it is a cultural issue. The folks that are customers of the payday lenders, I think some of them, they know exactly what they are paying. It is a matter of convenience. It is a matter of intimidation. It is a matter of trust.
    Mr. GUTIERREZ. I understand, Mr. Chairman.
    Mr. POWELL. I want to emphasize again. We do not want to participate in any illegal activity at all.
    Mr. GUTIERREZ. I understand. And maybe we can do this, because of the time, and I wanted to give you ample time. That is why I only asked two questions. Maybe you could answer specifically and you can put it in writing to the committee, and that is, if we do have FDIC charters, and they are using and basically lending out as fronts for payday lenders, I just want you to take a look at payday loans. If by doing that, they eliminate State laws that are very, very clear on usury kinds of interest rates and charges.
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    Mr. POWELL. Yes, usury.
    Mr. GUTIERREZ. Usury. Would you stop that? Because we already know that the OCC and the OTS and the Fed are doing that, and we would like you to look at it, write back to us, and join those other institutions so that people do not use the federal government, your institution, to give out loans that we might agree in private are probably bad, bad loans that should not be handed out.
    Mr. POWELL. I am happy to do that and respond to you in writing.
    Mr. GUTIERREZ. Thank you.
    Chairwoman KELLY. Thank you, Mr. Gutierrez.
    Mr. Paul?
    Mr. PAUL. Thank you, Madam Chairman.
    Good morning, Chairman Powell. I have a question dealing somewhat with philosophy, as well as a practical question about the obligations and responsibilities of the FDIC. I am very interested in the Austrian economic school. This, of course, is a school that was popularized by Nobel prizewinner Frederick Hayek. Their explanation of the business cycle, of course, is that the Federal Reserve is responsible for the business cycle and that artificially low credit causes investors to do dumb things like over-invest and mal-invest, and consumers to borrow more than they should. It creates bubbles that are destined to burst. I think history over the last 100 years bears this out to be a pretty plausible theory.
    The Austrians believe that the FDIC participates in the mal-investment, in that it is really not insurance. This is a government guarantee, flat-out, because if you had private insurance, you would have variable rates and depending on the solvency of the bank, the insurance would either be denied or the rates would be raised. So we really do not have insurance, but we as an official body and as you as representative of the FDIC have a responsibility to try to protect the taxpayer. Therefore, when we have troubles, which we have had multiple times over the last 70 years, we come in with just more regulations, which is of course an added burden on the banks and bank customers.
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    So philosophically, one question I have is, would you concede that this illusion of insurance contributes to over-investment and bad investment, although the so-called good at the FDIC, is to protect consumers and you can point out where the FDIC has done a lot of good, but overall it does a great deal of harm contributing to a mal-invested economy that eventually has to be corrected, and quite possibly we are in the midst of that correction now. We certainly saw that with the stock market crash of 2000.
    But right now, the banks hold over $1 trillion worth of GSEs. There are some who theorize that this is a huge bubble. What if we have a 20 percent decrease in housing prices, or what if interest rates go up, which they very possibly could. Haven't we really over-obligated the taxpayers to protect all these deposits and now with deregulation, banks get involved in other activities, and funds are always fungible. Therefore, the argument could be made that we have placed a tremendous potential burden on the taxpayer, although in the meantime it looks like we are doing good protecting the depositors, ultimately we could well face a major crisis of confidence where the bailing out necessary would put the dollar in jeopardy.
    Is there any thought to that on your part? Do you give any credence to this idea that the FDIC may contribute to the mistakes that will eventually have to be corrected?
    Mr. POWELL. I am not an economist, up front, but I am a former banker. I have given lots of thought about the FDIC insurance. I have thought about, and I have visited with lots of consumers about the importance and why are Americans concerned about stability in their banking system. I often kid that I did not know what ''moral hazard'' meant until I came to Washington.
    Having lived in the crisis and being a banker in the crisis, I can remember talking to consumers, calling me each and every day, ''Is my money safe?'' I think we would all, Congressman, agree that stability in the banking system is important for the economy of the United States. I think that is the reason the FDIC was created some 70 years ago because, in fact, there was instability in the banking system.
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    Where that level of coverage should be, we can debate. But I think there is and it has been proven over the years, the importance of the FDIC insurance for the consumers of America. It is the symbol of confidence, and I think Americans have to have confidence in their banking system. They have to have confidence when they deposit money in an insured institution, they will be able to get the money out.
    That safety net, how much does it contribute to this issue of moral hazard, is a different issue. We could say the coverage should be $50,000; we could debate it should be $200,000. That is a debate within itself. As you know, we at the FDIC have basically said it should be indexed, and put that issue to the side.
    I will tell you during the crisis that the FDIC insurance did contribute to the crisis, in my view, no question. But I will also quickly add to you it was not the only thing. It was not the only thing—commodity prices, the Tax Act of 1986, the imbalance in the thrifts in the balance sheet, and poor judgment were part of that. I am always curious when people do not understand that if I am the CEO of an institution, that I am not going to take unusual risks just because I have the FDIC insurance, because if I take unusual risk, the first person going down is going to be me. I am going to lose my job and I am going to lose my investment.
    So it is a balancing act. I think it has served America well for the past 70 years and I think Americans depend upon it. I think obviously we need to have these debates from time to time about where is it, is it important. We have had that at the FDIC. We have talked about how much of the private sector could, in fact, be part of the risk. We believe that an important part of deposit insurance reform is that premiums ought to be based upon risk. They are not today.
    Mr. PAUL. Thank you.
    Chairwoman KELLY. Thank you, Mr. Paul.
    Ms. Maloney?
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    Mrs. MALONEY. Thank you.
    Mr. Chairman, as you know, the outsourcing of jobs overseas is a particularly sensitive issue for our constituents, particularly with the high level of unemployment. As a highly competitive global industry, the banking sector is one of the industries at the forefront of efforts to move jobs to countries where they can save on labor costs. Already, U.S. banks have moved large numbers of call center jobs to India and other countries. I understand that many bank back office functions are now performed overseas and that this trend is increasing.
    I would like you to answer two questions with regard to outsourcing. First, is the FDIC studying the risk to consumer privacy and identity theft when sensitive personal financial data is transmitted halfway around the world? Are they adhering to our laws for privacy protection?
    Mr. POWELL. To my knowledge, we have not.
    Mrs. MALONEY. Then secondly, is the FDIC studying whether outsourcing of an increasing array of underwriting and record keeping jobs increases risk to the safety and soundness of the banking system? Is this potentially an increased operational risk?
    Mr. POWELL. To my knowledge, we have not, but we would be happy to do so. I think obviously we are concerned about identity theft and we are concerned about some of the issues that you have posed. If in fact we see any evidence of that, we will act accordingly.
    Mrs. MALONEY. I am encouraged to hear that. I truly appreciate any effort to conduct a study of the risks outsourcings may pose to the safety and soundness of the banking system.
    Mr. POWELL. We are happy to do that.
    Chairwoman KELLY. Chairman Powell, I would be very interested, the committee would be interested in having you report back specifically after having done a study on the issues that Ms. Maloney has raised.
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    Mr. POWELL. I will do that.
    Chairwoman KELLY. Thank you.
    Mrs. MALONEY. As you know, this committee is closely following Basel II, with the commitment that American businesses and financial institutions should not be put at a disadvantage. In your testimony, you reaffirmed the consensus that Basel II will lower capital standards for large U.S. institutions that come under this new regime. Yet in a separate section of your testimony, you note the 47 percent reduction in the number of community banks in the U.S. since 1990.
    So my question is, what is the FDIC's latest thinking on how many institutions in the U.S. will be under Basel II when all is said and done? And what will be the impact on consolidation and competitiveness if only a few large banks come under it? And also, I read one article where internationally, subsidiaries of banks or other community-type banks in foreign countries will not have the same strict capital requirements as we do, therefore possibly putting our institutions at a competitive risk; your comments on where it stands, and certainly we do not want to do anything that in any way undermines the competitiveness of American institutions, yet some papers I have read indicate that they believe it will. So your feelings on it?
    Mr. POWELL. I have not read all of those papers, but clearly one of our concerns is the competitive nature of what may happen as it relates to Basel. I do not think that question has been answered yet. It has been asked, and I think there are various views about that. We at the FDIC are looking at that also, but primarily we are focused today on capital, regulatory minimum capital standards.
    As you know, we are a safety and soundness organization, so we are focused primarily on capital and that is where we enter into the process and the debate. There has been lots of dialogue exchanged between all the principals as it relates to that one particular issue. We believe that it is time for reform of capital standards. Obviously, the marketplaces move ahead. We should base capital on risk. We do not debate that at the FDIC.
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    What we do debate and we have lots of debates about is how we measure and validate certain models that are talked about within Basel. But fundamentally, we believe that there should be minimum regulatory capital as a final buffer if in fact some of the assumptions go awry or there are some other things that may happen in the marketplace that would cause banks to have some type of charge against their capital. So we are focused on the capital issue. That is not to say we do not have concern about the competitive nature within large institutions.
    Mrs. MALONEY. On the capital issue, which is a very key issue in the whole discussion, some people have alleged that our banks are very heavily regulated, whereas foreign banks are not.
    Mr. POWELL. Right.
    Mrs. MALONEY. Therefore, possibly our banks or businesses would be put at a disadvantage. There are some allegations that the way that it is formulated, that the capital standards will be higher for our institutions than foreign institutions, therefore putting us at a disadvantage.
    Mr. POWELL. Yes. Today, domestic banks, as you know, in the U.S. we have to have a higher capital than our European counterparts, and also Japanese banks. We have clearly a lot more capital than those institutions. More important, we perform better. We perform better, and I think they meet the needs of the business community.
    So clearly, higher capital standards do not necessarily mean that the business needs are not going to be met, consumers's needs are not going to be met. The institutions make more money and return on equity than our counterparts in Europe and in Asia.
    Chairwoman KELLY. Thank you, Ms. Maloney.
    Ms. Inslee?
    Mr. INSLEE. Thank you.
    Following up Ms. Maloney's questions about outsourcing and our regulatory reach on some of these functions that are outsourced offshore, could you elaborate on what the regulatory climate is on those operations, particularly on what responsibility would be maintained by the parent bank for those operations? In other words, let's assume bank A outsources some bank function to the Philippines, not to pick on the Philippines, it is a great country, it just popped to mind, and that operation goes awry; there are violations of identity theft issues and the like. Do you believe you have the ability essentially that the bank maintains all obligations to the regulator in that context?
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    Mr. POWELL. Yes, sir. I think we have the ability and the will to examine that in the course of examination.
    Mr. INSLEE. I am sorry. Would you say that again?
    Mr. POWELL. I think we have the ability and the will to examine that in the normal examination process, like we would any outsourcing, technology outsourcing or whatever it may be.
    Mr. INSLEE. So right now under the current regulatory structure, statutory and based on rules, do you think the bank would retain the same liability to the regulator whether they did that in-house, on-shore, or whether they did it in an operation off-shore outsourced? Would the bank retain the same liability to the regulator?
    Mr. POWELL. I would want to be sure and check with the folks in the FDIC Legal Division, but it is my understanding absolutely we do. Counsel just said we do.
    Mr. INSLEE. Okay. What is your greatest concern, if you have any, about this issue of outsourcing some of these bank functions?
    Mr. POWELL. The integrity of the process. The peer integrity of the process.
    Mr. INSLEE. Do you think that there is an inherent loss of some regulatory integrity from an implicit standpoint when that happens, or not?
    Mr. POWELL. I am not sure. I do not have any experience in that. But I can assure you that clearly is one of the things that supervisors would look at, because it is integrity of the numbers. It is also dealing with customers's identity. It is very important. I know that institutions themselves ought to be sure that the integrity of the process is intact. They depend upon it. Their reputation depends upon it.
    Mr. INSLEE. I am sorry, you may have talked about this in response to Mr. Gutierrez's questions, if he asked you questions about the payday loans situation. Could you tell me your reaction to that issue? What your institution's thinking is in this regard, and how it compares to some of the other regulators?
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    Mr. POWELL. We have issued guidance as it relates to payday lenders. As someone indicated, I think we supervise directly in excess of 5,500 institutions. There are 11 that we have identified that are in payday lending and we have issued specific guidance as it relates to payday lenders: no violation of law; follow all the consumer protection laws in America; and in fact, is it fair? But more important, we have recognized that there is undue risk in payday lending. So we require capital allocations, one-to-one capital allocations against that undue risk. So it is very expensive from a capital process for an institution to be involved in payday lending. We looked at it from a safety and soundness issue, obviously.
    Mr. INSLEE. Thank you.
    Chairwoman KELLY. Thank you, Mr. Inslee.
    Mr. Chairman, Mr. Oxley?
    Mr. OXLEY. Thank you, Madam Chairman, and thank you for your efforts at oversight. I want to offer my opening statement as a matter of record.
    Chairwoman KELLY. So moved.
    [The prepared statement of Hon. Michael G. Oxley can be found on page 28 in the appendix.]
    Mr. OXLEY. I thank the chair.
    The fact is that we have had a busy 3 years on the legislative front, but one of the major goals of our committee is to conduct oversight, and that is why I think you are the first in the barrel, Mr. Chairman, and I want to welcome you back to the committee for what will be a series of oversight hearings with the regulators. I think it is always helpful for the committee to share views, and with your expertise and real-world experience, it is particularly helpful.
    All of us on this side of the Capitol are very desirous of closing the loop and getting deposit insurance reform passed. As you know, Mr. Chairman, this House on two occasions has passed with large margins an overall deposit insurance portfolio, and particularly the merging of the BIF-SAIF and other very, very helpful reforms for the industry. We are increasingly frustrated with the other body. I am not allowed to use the ''S'' word, but we are particularly frustrated with the other body in that we have not been able to finish the job.
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    I am just wondering if you could comment on that. We want to work with you towards what we think will be a very, very positive development in passing this legislation. We have made it very clear on our side. Mr. Frank and I both, and the chairman of the Financial Institutions Subcommittee, Spencer Bachus, his Ranking Member, have made it very clear that we are willing to sit down with the Senate and work out a compromise on what is the only real contentious issue left, and that is the insurance numbers and how that affects us going forward.
    So let me just throw that out to you. I know we are kindred spirits on this, but we just need to make our brethren in the other body aware of how important this area is to get completed.
    Mr. POWELL. Thank you, Mr. Chairman. You were not here when I applauded the leadership that you and others have provided on this legislation and we thank you for that.
    In my view, this is good for the American people. It is good for the banking industry. It is unfortunate that the debate is on that one particular part of the bill because the bill is about much more than just the coverage issue. It is critical that we merge the funds. It is critical that we have more flexibility at the FDIC. It is critical that premiums be based upon risk. No other insurance company bases their premium the way we base our premiums. It should be based upon risk.
    My concern is that we will react during a crisis. That is not the time to do that. I am confident and hopeful that the compromise on the coverage issue can come about. Our position has been very clear at the FDIC that we believe it should be indexed. We have listened to the voices that believe it should be increased, the voices that believe it should not be dealt with. We are hung up on that one issue, and other parts of the bill are going to go to the wayside, and that is not good for the American people and it is not good for the banking industry.
    So we are going to work diligently with your friends in the Senate and with Chairman Shelby, and hopefully we can overcome those obstacles this year.
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    Mr. OXLEY. I thank you for that observation. Indeed, you and I have both had conversations with Chairman Shelby and other members of the Banking Committee over on the other side. We always receive a very warm welcome and a positive response. It is just that we need to get down to the nitty-gritty of legislating. Somebody said politics is the art of the possible, and we are ready to exercise that possibility, hopefully probability, that we can get this bill over the goal line.
    Mr. POWELL. I will walk hand-in-hand with you.
    Mr. OXLEY. Yes, to use a football analogy, which I know you are not particularly familiar with.
    Let me ask you also your observations. We appear to be at least in the beginnings perhaps of a mega-merger that is going on out there with large banks, or large banks getting larger, that is with the Bank of America and Fleet, with the recent announcement with Bank One and J.P. Morgan. How will that, if at all, affect your responsibilities at the FDIC? Do you have the wherewithal to take care of the myriad responsibilities that you have as chairman of the FDIC? Is there something that we on the legislative side can help you with?
    Mr. POWELL. Yes, there are some things. As I mention in my testimony, we are going to be presenting a package to the Congress as it relates to specific issues that we can believe will enable us to do our job better. It is very important that we continue to maintain and retain and hire competent people, and that we reward them based upon their merit pay performance. That is an issue that we struggle with at the FDIC. So we will come with the legislative package so that you can help us as it relates to that.
    Mr. OXLEY. When can we expect that?
    Mr. POWELL. Within 30 days.
    Mr. OXLEY. Very good.
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    I see my time has expired. Mr. Chairman, again, it is good to have you with us and we appreciate your continued cooperation.
    I yield back.
    Chairwoman KELLY. Thank you very much, Mr. Chairman.
    The Chair notes that some members may have additional questions, and certainly I believe that I do for this panel, so they may wish to submit them in writing. So without objection the hearing record will remain open for 30 days for members to submit written questions to these witnesses and to place their responses in the record.
    We thank you, Chairman Powell. We are very pleased that you were willing to give us some time this morning. Thank you so much.
    Mr. POWELL. Thank you.
    Chairwoman KELLY. And now I would like to call the second panel. On our second panel, we have the FDIC Inspector General Gaston Gianni, who was sworn in in 1996. Also on our second panel is Jeanette Franzel, the Director of Financial Management and Assurance at the General Accounting Office. I thank you both for your appearance before the subcommittee. Without objection, your written statements will be made part of the record. You will be each recognized for a 5-minute summary of your testimony. We begin with you, Mr. Gianni.
    Mr. GIANNI. Madam Chairman, thank you. I am pleased to testify today as you conduct oversight hearings on the FDIC. I want to compliment the committee for this format of oversight. I think it works very well. I had many years at GAO and the experience now of being the Inspector General. Bringing in GAO and the Inspector General, along with the head of the agency, I believe is a model for conducting oversight by the Hill. So I hope others would take after and emulate your practice here.
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    FDIC has a long and successful tradition of maintaining public confidence and stability in the nation's financial system. There are many important indicators that the banking system is healthy and the corporation can take pride in its contributions to that stability and confidence. Likewise, I am proud of the accomplishments of my office, seeking to help ensure the successful accomplishment of the FDIC mission.
    At the outset, I would just like to acknowledge the congressional confirmation of Tom Curry, the corporation's fifth member of the board of directors in 2003. Our board is now operating at full strength, a very positive aspect to internal governance structure, for which I called in many of my past semiannual reports.
    The role of the IG is unique to an agency. To illustrate, at FDIC, although we are an integral part of the corporation, unlike any of the other divisions or offices, our legislative underpinning requires us to operate as an independent and objective unit and report both to the chairman and to the Congress. We have two essential roles. Through a comprehensive program of audits, evaluations, and investigations, we independently analyze and report on significant management challenges and foster integrity and accountability, and excellence in FDIC's programs.
    In this regard, an important aspect to the success of an IG office is the support of its agency top leadership. I am pleased to report to the subcommittee that both Chairman Powell and Vice Chairman Reich provide a supportive tone at the top that enables us to carry out our statutory responsibilities. As a result, we have an excellent working relationship with the corporation and we are committed to continuing that relationship in the future.
    I believe that the OIG adds significant value to FDIC. Net savings from our work have averaged over $290 million a year over the past 5 years. We also provide substantial non-monetary value to the corporation through advice and recommendations. Last year, we had $96 million in actual and potential monetary benefits. We offered 190 plus non-monetary recommendations for improving the internal operations and controls within the corporation. We had 35 referrals to the Department of Justice, 43 indictments, 22 convictions, and additional actions.
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    In addition, in the spirit of the Reports Consolidation Act, we annually identify the top management and performance challenges facing the corporation. The challenges capture the risks and opportunities we see before the corporation and serve as a guide for our work. The first four challenges address the more global issues confronting the corporation: adequacy of corporate governance in the insured depository institutions; protection of consumer interests; management and analysis of risks to the insurance fund; and effectiveness of the resolution and receivership activities.
    The other six focus internally on the corporation's operations: management of human capital; management and security of information technology resources; the security of critical infrastructure; management of major projects; cost containment and procurement integrity; and the assessment of corporate performance.
    I have given examples of our work under each one of these risks in my statement, but I would like to focus on a couple. Last year, we have through our investigations identified people who were taking advantage of the elderly by using the FDIC logo, the imprimatur, or suggesting that their deposits were insured by the FDIC. As a result of our investigation, we were able to help identify and return over $9 million to these unfortunate elderly people.
    As a result of several of these cases, we made recommendations to Chairman Oxley and to the committee to include in the Financial Services Regulatory Relief Act a provision that supports and gives the corporation added enforcement authority to protect our imprimatur and our insurance. I just want to thank the committee for its support in including it in its regulatory relief bill.
    Another area that we are focused on remains the corporation's oversight of information technology security. It is a daunting challenge. Information technology continues to play an increasingly greater role in every aspect of FDIC's mission. Our work required under the Federal Information Security Management Act shows that the corporation has worked hard to implement many sound information system controls to help ensure adequate security. However, daunting challenges remain due to ever-increasing threats posed by hackers and other illegal activities. We have urged the FDIC to stay the course in developing an enterprise-wide architecture and map the current versus the new state of where they want to be on business processes and supporting information systems and data architecture. Additionally, we have emphasized completing system certification and accreditation processes to test the security of developing IT assets.
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    Again, Chairman Powell acknowledged the fact that we have appointed a new CIO. We still have many positions that need to be filled within our IT arena. That is one of the challenges that will need to be taken care of as we go forward.
    Lastly, before I conclude, regarding the Government Performance and Results Act, while the corporation has made tremendous strides in improving and complying with the Act, we offer areas of suggestions for improving how they can comply and make that reporting more objective to accomplish the Chairman's priorities.
    In closing, I would like to again thank you for holding the hearing. Members of my office are committed to continuing to carrying out our mission at the FDIC. We are privileged to be public servants with the responsibilities of doing so. I hope my remarks shed some light and I would be happy to answer any questions that the subcommittee might have.
    [The prepared statement of Hon. Gaston L. Gianni, Jr. can be found on page 104 in the appendix.]
    Chairwoman KELLY. Thank you, Mr. Gianni.
    Ms. Franzel?
    Ms. FRANZEL. Thank you, Madam Chairwoman. I am pleased to be here today to discuss the results of our recent audits of the financial statements at FDIC. I do believe you have a copy of our recently issued reports.
    The FDIC actually administers three different funds, so we do three different audits: the Bank Insurance Fund, the BIF; the Savings Association Insurance Fund, the SAIF; and the FSLIC Resolution Fund, or the FRF. Regarding the financial statements for the BIF, SAIF and FRF, we issued unqualified or clean opinions for those audits. This means that the financial statements and the notes for each fund presented fairly in all material respects the financial position and the results of operations and cash flows in accordance with U.S. generally accepted accounting principles.
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    Regarding FDIC's internal control, we concluded that FDIC management maintained in all material respects effective control over financial reporting, safeguarding of assets, and compliance as of December 31, 2003. This is a very positive conclusion on internal controls. We did identify one reportable internal control weakness related to information systems security controls. This was not considered to be material, but is considered to be a deficiency in the design and operation of FDIC's controls. I will talk a little bit more about the significant improvements that FDIC has made in this area. During the course of our audit, we also did not note any instances of noncompliance with laws or regulations, so again, a very positive audit report.
    I would now like to discuss FDIC's information systems security. We have reported weaknesses in FDIC's information systems security for a number of years. Although we continued to consider this to be a weakness in 2003, we also found that FDIC has made significant progress in this area. For instance, FDIC has completed almost all of its actions on the weaknesses detected in our prior audits. Unfortunately, however, in 2003 we found additional information security weaknesses, some of which FDIC has already corrected. They were very specific instances where FDIC had not secured or limited access to its computer resources.
    A key reason for these continuing weaknesses was because FDIC had still not completely implemented a program of security monitoring. That is, an ongoing review, testing and evaluation of its information security, to ensure that systems are in compliance with policies and procedures. FDIC has begun implementing such a program, but it was not quite fully implemented at the end of 2003.
    We do believe that when FDIC fully implements this program, it should allow FDIC to identify and correct the types of problems that we found in 2003, so that when we come in hopefully FDIC's program can detect and correct any new weaknesses that have occurred and then in that case, hopefully we could clear the reportable condition going forward. FDIC management has shown a strong commitment to fully establishing this comprehensive security management program and we do believe that FDIC is on the right track in this area, and we will continue to work closely with FDIC to monitor this during 2004.
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    I will now briefly discuss the funds's financial condition. As you know, we have heard today that BIF and SAIF, the two insurance funds, have shown positive trends over the last couple of years. Both funds have reported positive net income, which increases the insurance reserves or net worth of the funds. Insured banks and savings institutions are also showing very positive trends in earnings and asset quality.
    In addition, FDIC is required to maintain fund balances for the insurance funds at a designated ratio of 1.25 percent of estimated insured deposits, and the reserve ratios were well above those levels at December 31, 2003. It is very important, however, to note that all of these results reflect a point in time. This holds true for both our audit results and the positive financial trends that we are seeing with FDIC and the industry.
    In summary, the results of our audits were very positive, clean opinions on the financial statements and overall effective internal control, with significant improvements in the area of computer security. In general, we have seen a strong commitment from FDIC management to promote excellence in financial reporting and internal control. FDIC continues to take important steps to monitor risk, modernize its systems, and adapt to change.
    With the banking environment, though, constantly changing, FDIC needs to continually monitor its business environment and the related risks, and adapt its internal operations and internal controls and its external insurance and supervision and monitoring functions in order to manage this risk and maximize the value of its overall mission.
    I would like to note that we have had a very productive and cooperative working relationship with FDIC management and staff at all levels. We also have very complementary roles and responsibilities with the IG and we do coordinate frequently on our work.
    Madam Chairwoman, I would be happy to answer any questions that you have.
    [The prepared statement of Jeanette M. Franzel can be found on page 32 in the appendix.]
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    Chairwoman KELLY. Thank you very much. I do have a couple of questions.
    I am interested in the fact that you have made an effort to allow the FDIC to reduce the regulatory burden on banks by testing, rather than duplicating a lot of work on audit and control functions. I want to know how this is going and how effective you have been in reducing the burden. Are you able to quantify it and document that there has actually been a reduction?
    Mr. Gianni?
    Mr. GIANNI. Yes, Madam Chairwoman. This is the corporation's new, what they call the merit exam program. We were involved as an observer at the outset, as the corporation was designing the concept to streamline its supervisory oversight of banks under $250 million that met certain criteria. Conceptually, it is a sound concept that you are risk-focused on how you are carrying out your exam process. At any time, if an institution should fall outside of the parameters set up or the criteria that were set up—for example the continuation of management is one of the criteria—if you have a change in management, in high-level management within an institution, that throws that institution out of the criteria and you have to go in and do a more extensive examination process.
    So conceptually, the process holds together. We have not examined the implementation of this new process. We plan to do so in our future work. However, the corporation does report that they have saved examiner time and freed up hours to direct to other important areas of activities within the corporation, but we have not analyzed it yet.
    Chairwoman KELLY. Mr. Gianni, when you do analyze it, do you plan to do that fairly soon? If so, will you report that to the committee for us please?
    Mr. GIANNI. The work is underway at the present time and we will report back to the committee, Madam Chairwoman.
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    Chairwoman KELLY. Thank you. I think that is something that is worth our having a report on from you.
    Some of the smaller and more rural institutions that the FDIC monitors have had concerns with the increased Patriot Act requirements. We have heard from some of them. I wonder if you think that Congress should consider making any changes with regard to those rural and small institutions.
    Mr. GIANNI. We have not looked at the reg burden of this. The corporation is currently in the process of developing proposals to the Congress that will address regulatory relief on reg burden. One of the concerns, and I have heard the concerns that you expressed or that have been expressed to you, one of the ideas that is being considered is whether there could be constructed a phased approach to providing the information to the Treasury Department. Perhaps if the Treasury Department would get a condensed set of information, which would reduce the burden on the part of the bank, and then when it went into the system and was analyzed and there was deemed a need for additional information, perhaps at that point in time they could go back out and ask for additional information. This is a concept that is being considered right now.
    One of the frustrations that I have also heard has been that information goes into the Treasury Department and nothing comes back to the bankers to indicate whether this information that cost them money to generate, whether that has been helpful to the federal government. I believe that the new director of FinCEN has been out listening to people and has a number of studies underway to try to improve the operations of his organization.
    Chairwoman KELLY. That is good to hear.
    I want to ask also, your office has repeatedly found that one of the problems that really is at the heart of a lot of bank failures is the fact that we do not have adequate corporate governance at the top. Are the requirements of Sarbanes-Oxley being met here? And is there something that we need to tweak to make that more solid? How can we help you on that?
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    Mr. GIANNI. I think regarding Sarbanes-Oxley, although Sarbanes-Oxley is certainly helpful, there were requirements already passed by the Congress that required strong governance principles within our financial institutions. What we do is go back. As you know, we are required by law when a major institution fails, to conduct what is called a material loss review. If it is a loss of $25 million or more to the insurance fund and it is an FDIC-insured institution, we are required to conduct a study as to why that institution failed.
    We have done so 10 times in the past 10 years. What we have recently done is we have gone back and we have analyzed those 10 studies that we had to see whether there were any trends that came out. Clearly, the top trend is that there were weak governance processes in place.
    Now, 10 in relation to 5,000 is relatively small, but we think our analysis will give additional emphasis to the examiners, to the corporation, to focus in on governance because governance is extremely important. It is the amount of control that is being maintained over the financial institution, whether you have a good working audit committee that helps oversee the operation of the institution. That was our finding and it continues to be. I do not think we need additional legislation. I think what we want to make sure, though, is that we are vigilant as we carry out our exams in these institutions.
    Chairwoman KELLY. Okay, thank you.
    Ms. Franzel, I want to ask you a question. The FDIC has regional field offices, so that they are fairly close to the people that they monitor. I am wondering what you have seen when you looked at the FDIC in terms of how that worked and whether or not we can learn from the cooperation between the FDIC and the State regulators in a way that can be applied to the regulation of other entities.
    Ms. FRANZEL. I think that taking a look at the current structure is probably a good idea, because with increases in technology, obviously, we have been able to do our work differently. It is important to have folks out there close to the people who are being regulated. We at GAO have the same type of structure. We have several field offices simply because we are covering federal expenditures all over the country, and we find that we need to have these types of offices out there.
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    So certainly I think that others can learn from this environment and this structure. We have not specifically studied whether the structure right now should be applied to other regulators, but I think that idea certainly has merit.
    Chairwoman KELLY. Thank you.
    Mr. GIANNI. If I might, Madam Chairwoman.
    Chairwoman KELLY. Yes?
    Mr. GIANNI. We have looked at the field. From an administrative standpoint, we have looked at the expenses incurred by the corporation among their regional offices. There was a wide disparity among the various regions as to the cost of the facilities. Since that time, the corporation has consolidated several of their regional offices and I believe are continuing to look at what is the right size and structure of their field organization. We do have individuals located in all 50 states, though, so that they can carry out their responsibilities.
    Chairwoman KELLY. Have you found that it facilitates cooperation between the State regulators and the federal regulators to have those field offices?
    Mr. GIANNI. Exactly. I think it is important because, as you know, we examine financial institutions in conjunction with the State examiners. So we have to really understand how the States are carrying out their responsibilities because every other exam cycle we are relying on the States to carry out an exam. We have to be knowledgeable about how they are carrying out their exams, what risks they are identifying. So there has to be a good communication and cooperation among the State examiners and the federal government. We have done some work in that area. We are continuing to monitor the activity and have some work underway at the present time.
    Chairwoman KELLY. Thank you. Thank you for adding that.
    I have other questions. I am going to submit them in writing. You have been very patient and I appreciate your being here. I think there are other members who may have additional questions for the panel. It is a very busy time on Capitol Hill, as you all know. So without objection, I am going to hold the hearing record open for 30 days for the members to submit written questions to these witnesses and place their responses in the record.
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    With that, this hearing is adjourned.
    [Whereupon, at 11:30 a.m., the subcommittee was adjourned.]