declined for the third consecutive quarter. that was after five consecutive years of increases in the problem bank list. the deposit insurance fund which had been as much as $20 billion in the red moved into positive territory as of june 30th last year and continued to increase in the third and fourth quarters. and the fdic is forecasting significantly fewer failing banks this year than the last. so the overall picture is really fairly positive. however, and this is an important point, most of the improvement in earnings over the last two years has been the result of lower loan loss provisions, set asides the banks make reflecting improving credit quality. as the quality of loans have improved, they've been able to lower their reserves, but future earnings gains will have to be based to a greater extent on increased lending, consistent

with sound underwriting. prudent loan growth is a necessary condition for a stronger economy. you can only generate earnings by reducing reserves for so long. at some point you have to start making loans again. that's why we view the fourth quarter growth in the industry's loan portfolio, which is a third consecutive quarter of loan growth, as a hopeful sign. the loan growth that has occurred so far has been led by lending to commercial borrowers. loans to medium and large commercial and industrial borrowers have increased in each of the last six quarters. in the fourth quarter, we saw growth in small commercial and industrial loans as well. the fdic just began collecting quarterly data on these small loans to businesses in its march 2010 call report so our history here is brief, but since that time, this is the first

quarterly increase we've seen in small cni loans. so with the longer term trend and increased cni lending for larger companies, and with the uptick we saw in the fourth quarter in regard to small loans, we take that at least as a hopeful sign. we'll see how things develop over the course of the year, but this is something we're following of particular significance. now, if i may, let me turn to the fdic's new authorities under the dodd-frank act, relating to systemic resolution. as you know, the fdic has been given significant new responsibilities under the dodd-frank act to resolve systemically important financial institutions, specifically these include an orderly liquidation authority, to resolve the largest and most complex bank holding companies, and non-bank financial institutions, if

necessary, and a requirement for resolution plans that will give regulators additional tools with which to manage the failure of large, complex enterprises. before discussing our efforts to carry out these new responsibilities, i'd like to try to place these responsibilities within the broader framework of the way the fdic's resolution activities regularly work together with bank supervision in responding to the financial diftficulties f fdic insured institutions. i think this is really quite an important point to make. the issue is not just do we have authority to place systemic companies into a public receivership process. the issue is really developing a an integrated system of bank supervision, combined with bank

resolution that allows us in effect a framework of early intervention with these institutions to avoid failure as well as the capacity to manage an orderly failure if necessary and i want to go through that with you for a minute if i may. it's important to recognize up front that resolution is always the option of last resort. the purpose of the supervisory process is to make sure that institutions manage their risks so that the risk of failure is minimized. the goal is to have a supervisory process that can recognize problems early and encourage management to address problems in a proactive way. when an institution supervisory rating or capital adequacy is downgraded, the institution is subject to a variety of supervisory responses intended to encourage management to take prompt action. these supervisory actions may include specific criticisms of risk management practices,

formal or informal enforcement actions, and orders to raise capital or seek merger partners that can bring in new capital and management expertise. under the current arrangement, should the condition of the institution deteriorate, the fdic begins its resolution planning process in conjunction with the ongoing supervisory process and in close coordination with the primary supervisor of the institution. this would include undertaking a deposit insurance download for deposit insurance purposes, and developing a detailed resolution plan for the institution. the goal, as i indicated, is to have an integrated process of supervision and resolution, that will hopefully avoid closure of the institution, but that will enable the fdic to prepare to carry out an orderly resolution, if necessary.

in such a process, motivated by the credibility threat of failure, the managers and investors of problem institutions have an incentive, one, to work with regulators to address their problems sooner rather than later, two, to access new sources of capital, if available, or three, sell the institution in whole or part, if necessary, to salvage some value of the institution. the threat, the credible threat of failure is nothing like the prospect of a hanging to focus the mind, and what you really want to do is avoid the resolution process, if possible, but if there's a belief that there won't be a resolution, that, in effect, removes the incentive to address in a proactive way the problems with the institution to avoid the costs of failure. our goal in regard to the fdic's new systemic resolution

responsibilities is to adapt this framework to systemically important financial institutions, including their holding companies and affiliates, as well as designated non-bank financial companies. this will obviously pose significant, new challenges for the fdic and i'm going to get to that in a moment. but the basic goal is the same, resolution is the option of last resort. what is needed is an integrated process of supervision and resolution planning, for systemically important financial institutions that will provide for early supervisory intervention to avoid resolution, but that will be prepared to carry out an orderly resolution, if needed. the fdic outlined in the paper how this process might have worked in the lehman brothers' case, and i actually refer you to our website where you can take a look at that paper, if you're interested. now, let me say a few words

about the work we have done to prepare ourselves, to carry out our new responsibilities under title ii of the dodd-frank act. the fdic has taken a number of steps over the past year and a half to carry out its new systemic resolution responsibilities. first, the fdic established a new office of complex financial institutions to carry out three core functions. the first function is to monitor risk within and across these large complex firms, from the standpoint of resolution. second, to conduct resolution planning, and the development of strategies to respond to potential crisis situations, and third, and quite importantly, to coordinate with regulators overseas regarding the significant challenges associated with cross-border

resolution. when you're dealing with our very largest, most complex institutions, you are generally dealing with companies with very significant international operations. and if you're going to deal with an orderly resolution of one of these companies, a cooperation with the foreign supervisors in these highly integrated global financial markets really becomes essential. for the past year, this office has been developing its own resolution plans in order to be ready to resolve a failing systemic financial company. these internal fdic resolution plans developed pursuant to the orderly liquidation authority provided under title ii of dodd-frank apply many of the same powers that the fdic has long used to manage failed bank receiverships, applying them to a failing systemically important

financial institution. if the fdic is appointed as a receiver of such an institution, it will be required under the law to carry out an orderly liquidation in a manner that maximizes the value of the company's assets and ensures that creditors and shareholders appropriately bear any losses. the goal is to close the institution without putting the financial system itself at risk. this internal resolution planning work is the foundation of the fdic's implementation of its new responsibilities under dodd-frank. i'm about to get to in a moment, about to get to a description of what we're doing in regard to the living wills that the large companies themselves will be required to prepare, but people get confused on this point. the living wills that the companies themselves will prepare will largely be a

compliment to the internal resolution plans that, frankly, we have been working on for the past year and a half, and for many of our largest institutions, are in a quite advanced state of development. now, in addition to the internal work, the fdic is largely completed the basic rule making necessary to carry out its responsibilities under dodd-frank. in july the fdic board approved a final -- this is july of last year -- the fdic board approved a final rule implementing the orderly liquidation authority. this rule-making addressed among other things a priority of claims and the treatment of similarly situated creditors in a resolution of a systemic financial company. in september of last year, the fdic board adopted two rules regarding the resolution plans that systemically important financial institutions themselves will be required to

prepare. these are the so-called living wills. the first resolution plan ruled which was a joint rule-making under with the federal reserve, this is a joint authority we share with the fed, implements the requirements of section 165-d of the dodd-frank act. this section requires bank holding companies with total consolidated assets of $50 billion or more, and certain non-bank financial companies, that the new financial stability oversight council has the authority to designate a systemic. this is really a crucial, new authority that dodd-frank provides. you know, previously prior to dodd-frank, the fdic had authority to close insured banks. we did not have authority to close the holding company of the institution or the subsidiaries of the holding company. so one crucial new authority of dodd-frank is the ability to

place the consolidated entity, the bank, the holding company, and the affiliates, into a public receivership. that's authority that did not exist before, and in addition, the new financial stability oversight council can designate any non-bank financial company as systemic and by doing so, one, it was subject to the full prudential supervision authorities of the federal reserve, and would, could also subject it to the systemic resolution authorities of the fdic. if you think back to 2008, the first three companies that triggered the crisis were bear stearns, lehman brothers, and aig, two investment banks and an insurance company. so the importance of the new authority really speaks for

itself. so these companies will now be required to develop and maintain and periodically submit resolution plans to regulators. the plans will detail the top tier legal entity in the enterprise, as well as any subsidiary that conducts core business lines or critical operations, would be resolved under the u.s. bankruptcy code. complimenting this joint rule-making between the fed and the fdic, the fdic also issued a final rule requiring any fdic insured depository institution with assets under $50 billion to develop, maintain and periodically submit plans outlining how the fdic would resolve it through the fdic's traditional resolution powers under the federal deposit insurance act. people always get confused about this. the new authority under dodd-frank for resolution really goes to the holding company and the affiliates.

we've always had the authority to close the bank. we now are requiring complimentary resolution plans, one, addressing the holding company and the affiliates, the second addressing the insured institutions, so hopefully we have a comprehensive resolution plan for the consolidated entity. these two resolution plan rule makings are designed to work in tandem and compliment each other by covering the full range of business lines, legal entities and capital structure combinations within a large financial firm. both of these resolution plan requirements will improve efficiencies, risk management, and contingency planning at the institutions themselves. they will supplement the fdic's own work that will have a solution in the event of a failure. the companies which themselves

are now in the process of developing these plans, one, thus far have been quite cooperative and responsive and two, i think are actually recognizing some benefits. it's a little bit like cleaning out your attic or your basement, developing these resolution plans. you find things going on that you hadn't thought about in a while, particularly for these very large, complex institutions, so i think they're actually finding it thus far a fairly constructive process. we expect that the process of developing these plans or living wills will be a dialogue between the regulators and the firm. it is not a simple check the box exercise and will have to take into account each firm's unique characteristics. the planning process must also be an interactive dialogue with the firms, especially for the largest and most complicated firms. together, these efforts will ensure comprehensive and coordinated resolution planning for both the ensured depository and its holding company and

affiliates, in the event that an orderly liquidation is required. with the joint rule now final, the fdic and the federal reserve has started the process of engaging with the individual companies on the preparation of their resolution plans. this has been a very active engageme engagement, and under the new rule the first round of plans will be required from the largest companies, those with assets over $250 billion, and those first plans will be due in july. so this is a relatively short time frame that we're working under for the largest institutions. i should note, and i'll conclude on this point, that developing a credible capacity to place a systemically important financial institution into an orderly resolution process is essential to subjecting these companies to

meaningful market discipline. without this capability, these institutions, which by definition, pose a risk to the financial system, create an expectation of public support to avert failure. that distorts the financial marketplace, giving these institutions a competitive advantage that allows them to take on even greater risk, and creating an unlevel playing field for other financial institutions that are not perceived as benefiting from potential public support. i would suggest to you that there is a very strong public interest in the fdic developing the capability to carry out its new systemic resolution responsibilities in a credible and effective way. that is indeed our top priority going forward. thank you all very much.

[ applause ] >> do we have any questions for chairman gruenberg? yes? >> chairman, i'm a law professor at boston university. when i think about living wills, i think, well, they're sort of part disclosure and part strategic, and i wonder whether anyone in the agency observes any sort of strategic behavior on the part of the banks, when they're wrapped in these things. for example, maybe they would want to actually give you a document that makes it harder to resolve them, so that you can't sell them. you got to save them, for example. >> yeah, i don't think that's going to work. look, this is the beginning of a new process, and we haven't received the first plans yet. so in a sense it's going to be a learning experience for the firms and for us.

but i will say this much. i think, one, certainly we in themuch, i think one certainly we in the federal reserve that have the responsibility for the rule-making and the supervision and know enforcement of the rule i think are obviously approaching it with great seriousness and in a high sense of priority and i any the companies understand really that it's a new legal obligation that they have under the law. and at least in the initial engagements they seem to be taking seriously and constructively, so we will see how the process plays out and we will see what we is receive in the first round in july and take it from there. thus far, we are operating as though both sides are going to operate in good faith.

and i am hoping it will be a productive exercise on both sides. >> other question? yes. >> currently there's unlimited deposit insurance for deposits in noninterest bearing accounts. and that is supposed to end december 31 of this year, and i understand that there are proposals pending to extend that insurance and you give us some idea of what the likelihood is that that unlimited insurance would be extended? >> i should note that the insurance coverage that you are referring to which was enacted as part of dodd-frank act, so it's a statutory item that adopted by the congress, it's a

decision by the congress to adopt it. and it will be the -- i expect that they will have to consider both the condition of on the industry, the condition of the economy in making that judgment. and we will certainly be prepared to provide input from the fdic's end, and that is a judgment that the congress will have to make, and i think it's premature to guess atat the out. >> is it something that you would support, however? >> a as i will provide input to the congress when asked. >> i have a question for you, you have expressed a good bit of interest and concern in recent months about the condition of the community banking industry and what the future of it may be, they have been hurt by the

commercial real estate downturn and there's been questions of if there's a path way going forward, given the important role of them in the past, what do you see as the future of the community banking approxima inb? >> that is an important question. to the certain extent the role of the community banks in our final system is has been somewhat under appreciated i think. you know, community banks are generally defined as assets under a billion. although there are nearly 75,000 of them. those institutions account for a little over 10% of all the banking assets. so they make up a minority of the assets of the system.

but they account also for nearly 40% of of all the small business lending that all insured institutions do in the united states and as you well understands credit for small business business is important to job growth in the economy as a whole. and the nature of small business lending, at least a lot of it, is quite labor an highly customized. it's the kind of lending that the large institutions generally are not interested in doing anymore. they are interested in doing sort of standardized lendsing products to generate volume. the customized lending that small businesses require are particularly suited for the community bank and the way that community banks do their business. so, if we did not have a

significant and capable community banking sector in the u.s. financial system, there would be a consequence for the financial system and the economy as a whole. i think it's somewhat under appreciated. and you noerknow, particularly the financial crisis, most of the attention has been on the big systematic companies. but -- and clearly from the fdic's standpoint and the rest of the regulators, that will be an ongoing priority as i just talked about but there's a need to focus on the other end of the spe trum -- spectrum for the community banks. the fdic is making the future of community banks another major

priority over the course of the year, in part because the fdic is the led federal regulate later. we just in a conference -- we are going to do a series of rounds tables with the community bankers in each of our regionals ofs we will do a round table with our community banks in other of our regions. i've asked our division of insurance and research to undertake an effort to review the development of the community banks in the u.s. financial system over the past 25 years. to gain a better understanding of sort of what is happening to community banks over that period. what have been the problems and what business models have been

successful. as far as, as far as i know, it's the first comprehensive review of this kind has been done, which surprised me. i asked where is the study on community banks and there was not one. so it seemed like a useful gap to fill. and i think we will learn lessons on our way forward on community banks and i have asked our division of risk management and depositor and consumer protection to take a look at the way we do both rule making and examinations on risk management and compliance for community banks that we can do them simpler and that will make the bank jobs easier and our job

ea easier while maintaining supervisory nature. we hope to be able to report back on the progress we made. thank you for asking the question. it's an important issue. maybe one more? >> one more question, yes? >> banker compensation, one of the prime suspects of the financial crash, the federal reserve put out a report half a year ago that found that none of the top 25 banks kked compensation with risk. that there were no risk metrics. y -- the act provides that we -- dodd-frank has section 956 that prohibits compensation that gives inappropriate risk. it is now two years after ena enactment. >> i'm aware of that.

what i can say is that we did put out a proposed regulation that would establish really for the first time in -- as a regulatory standard deferred compensation, which is an important principal to establish, and without getting carried away, i hope we reach closure on that item, because it's an important one. >> please join me in thanking chairman gruenberg. [ applause ] >> our on ancestors came across in ships that you would not go across a lake with.