FDIC Chair Martin J. Gruenberg asserted that despite the challenging economic environment for U.S. banks, relevant data suggests that post-crisis reforms have made the financial system more resilient and stable while strengthening the ability of banking organizations to serve the U.S. economy. Mr. Gruenberg discussed four broad areas that reflect the ability of banking organizations to serve the U.S. economy effectively:
Mr. Gruenberg argued that despite post-crises reform, U.S. banks remain willing to lend. He noted growth in the mortgage and commercial loan sectors, stronger capital and better and more resilient lending practices.
Mr. Gruenberg emphasized that "despite significant headwinds" – particularly reductions in net interest margin – bank earnings have demonstrated a favorable trajectory generally. He asserted that this improvement reflects a return to profitable banking, but with improved capital levels that are better equipped to absorb losses compared to the levels in pre-crisis years.
Mr. Gruenberg stated that post-crisis market liquidity for bonds has improved according to "recent research." He emphasized that:
effective prudential regulation should help promote sustainable liquidity conditions through time;
the reduction in the size of broker-dealer balance sheets in recent years might be the result of factors such as (i) the consolidated capital and liquidity of their parent banking organizations, (ii) the effective elimination of their access to intra-day credit from the clearing banks in the tri-party repo market, (iii) the risks of holding bonds, and (iv) lower bid-offer spreads, which make buying and selling bonds less profitable; and
"market-making" may not be retreating, but instead may be changing through "lower transaction costs, more frequent and smaller trades, and more trades conducted as agent or on order rather than as principal."
Migration of Financial Activities to Nonbanks
Mr. Gruenberg expressed "the idea that the post-crisis reforms may be changing the distribution of financial activity between banks and nonbanks, in some way making banks less important financial players than before."
Mr. Gruenberg delivered his remarks before the Exchequer Club.