[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]





                        OVERSIGHT OF THE FEDERAL
                     DEPOSIT INSURANCE CORPORATION

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 4, 2004

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-70


94-046              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
____________________________________________________________________________
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California                 RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut       STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona             MIKE ROSS, Arkansas
VITO FOSSELLA, New York              CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE BACA, California
MELISSA A. HART, Pennsylvania        JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
TOM FEENEY, Florida                  DAVID SCOTT, Georgia
JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey            CHRIS BELL, Texas
TIM MURPHY, Pennsylvania              
GINNY BROWN-WAITE, Florida           BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director
              Subcommittee on Oversight and Investigations

                     SUE W. KELLY, New York, Chair

RON PAUL, Texas, Vice Chairman       LUIS V. GUTIERREZ, Illinois
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
MARK GREEN, Wisconsin                DENNIS MOORE, Kansas
JOHN B. SHADEGG, Arizona             JOSEPH CROWLEY, New York
VITO FOSSELLA, New York              CAROLYN B. MALONEY, New York
JEB HENSARLING, Texas                JIM MATHESON, Utah
SCOTT GARRETT, New Jersey            STEPHEN F. LYNCH, Massachusetts
TIM MURPHY, Pennsylvania             ARTUR DAVIS, Alabama
GINNY BROWN-WAITE, Florida           CHRIS BELL, Texas
J. GRESHAM BARRETT, South Carolina


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 4, 2004................................................     1
Appendix:
    March 4, 2004................................................    25

                               WITNESSES
                        Thursday, March 4, 2004

Franzel, Jeanette M., Director, Financial Management and 
  Assurance, United States General Accounting Office.............    19
Gianni, Hon. Gaston L. Jr., Inspector General, Federal Deposit 
  Insurance Corporation..........................................    17
Powell, Hon. Donald E., Chairman, Federal Deposit Insurance 
  Corporation....................................................     5

                                APPENDIX

Prepared statements:
    Kelly, Hon. Sue W............................................    26
    Oxley, Hon. Michael G........................................    28
    Hensarling, Hon. Jeb.........................................    30
    Franzel, Jeanette M..........................................    32
    Gianni, Hon. Gaston L. Jr....................................   104
    Powell, Hon. Donald E........................................   118

              Additional Material Submitted for the Record

Franzel, Jeanette M.:
    Written response to questions from Hon. Sue W. Kelly.........   145
Gianni, Hon. Gaston L. Jr.:
    Written response to questions from Hon. Sue W. Kelly.........   148
Powell, Hon. Donald E.:
    Written response to questions from Hon. Luis V. Gutierrez 
      (with attachments).........................................   156
    Written response to questions from Hon. Jeb Hensarling.......   206
    Written response to questions from Hon. Sue W. Kelly.........   212

 
                        OVERSIGHT OF THE FEDERAL
                     DEPOSIT INSURANCE CORPORATION

                              ----------                              


                        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.
    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.
    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.
    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.
    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.
    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.

 STATEMENT OF HON. DONALD E. POWELL, CHAIRMAN, FEDERAL DEPOSIT 
                     INSURANCE CORPORATION

    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.
    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.
    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.
    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.
    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.
    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.
    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.
    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.
    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.
    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.
    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?
    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.
    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.
    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?
    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?
    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.
    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.
    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.
    [Laughter.]
    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.
    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.

  STATEMENT OF HON. GASTON L. GIANNI, JR., INSPECTOR GENERAL, 
             FEDERAL DEPOSIT INSURANCE CORPORATION

    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.
    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.
    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.
    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?

     STATEMENT OF JEANETTE M. FRANZEL, DIRECTOR, FINANCIAL 
  MANAGEMENT AND ASSURANCE, UNITED STATES GENERAL ACCOUNTING 
                             OFFICE

    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.
    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.
    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.]
    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.
    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?
    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.
    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.
    With that, this hearing is adjourned.
    [Whereupon, at 11:30 a.m., the subcommittee was adjourned.]


                            A P P E N D I X



                             March 4, 2004

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