of last year, and continued to increase in the third and fourth quarters. and the fdic is forecasting significantly fewer failing banks this year than last. so the overall picture is really fairly positive. however, and this is san important point, most of the improvement and earnings over the last two years has been the result of lower loan loss provisions, the set asides that the banks make reflecting improving credit quality. but future earnings gains will have to be based to a greater extent on increased lending, consistent with sound underwriting. 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's occurred so far has been led by lending to commercial borrowers. loans to medium and large commercial borrowers have increased in the last six quarters. the fdic just began collecting quarterly data on these small loans to businesses in its as a matter of fact 2011 call reports. so our history here is brief. but sense 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 aborderly liquidation authority to resolve the largest and most complex bank holding companies, and nonbank 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 would like to try to place these responsibilities within the broader frame work of the way the fdic's resolution activities regularly work together with bank supervision in responding to the financial difficulties of fdic insured institutions. i think this is 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 frame work of early intervention with these institutions to avoid failure, as well as the capacity to manage an orderly failure, if necessary. and i wanted to go through that with you, 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 to fdic to prepare to carry out an olderly resolution, if necessary. in such a process, motivated by the credible threat of failure, the managers and investors of problem institutions have an incentive 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 nelcessary to salvage some value of the institution. the credible threat of failure is nothing like the prospect of a hanging to focus the mind. what you want to do is avoid the resolution process, if possible. but if there's a belief there won't be a resolution, that in effect remove the incentive to address in a proactive way to avoid the cost of failure. our goal in regard to the fdic's new systemic resolution responsibilities is to adapt this frame work to important financial institutions, including their holding companies and affiliates, as well as doesignated nonbank

companies. this will pose new challenges to the fdic and i'll 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. the fdic outlined in the paper how this process might have worked in the lehman brothers case, and i refer you to our website where you can look at that paper if you're interested. 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 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 over seas regarding the significant challenges associated with cross border resolution. when you're dealing with our very largest, most complex institutions, you're generally dealing with companies with very significant international operations. and if you're going to deal with the orderly resolution of one of

these companies, cooperation with foreign supervisors really becomes essential. for the past year, this office has been developing its own resolution plans in order to be ready to resolve failing systemic financial company. these internal fdic resolution plans developed pursuant to the liquidation authority provided under title ii of dodd-frank apply in of the same powers the fdic has long used to manage failed bank receiverships applying them to important financial institutions. if the fdic is appointed as receiver of such an institution, lit be required under the law to carry out an orderly liquidation in a manner that maximizes the value of the company's assets

and insures 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 implementation of its responsibilities of dodd-frank. i'm 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 will prepare will largely be a complement 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 that are in quite an advanced state of development. now, in addition to the internal

work, the fdic has largely completed the basic rule making necessary to carry out its responsibilities under dodd-frank. in july, the fdic board aboved -- this is july of last year, the fdic board aboved a final rule implementing the orderly liquidation authority. this addressed the priority of claims and the treatment of similarly situated creditors in the resolution of a financial company. in sent of last year, the fdic board adopted two rules regarding the resolution plans that systemically important financial institutions themselves would be required to prepare. the first plan ruled -- this is a joint authority we share with the fed, implements the requirements of section 165-d of

the dodd-frank act. this requires bank holding companies with total consolidated assets of $50 billion or more, and certain nonbank financial companies that the new financial stability oversight council has the authority to designate as systemic. this is really a crucial new authority that dodd-frank provides. 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 replace the consolidated entity, the bank, holding company and affiliates into a publish receivership. and in addition, the new financial stability oversight

council can designate any nonbank financial company as systemic and by doing so, one that would subject to the fuel 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 sterns, lehman brothers, and aig. two investment banks and an energy company. so the importance of the new authority speaks for itself. so these companies will now be required to develop, maintain and periodically submit resolution plans to regulators. the plans will detail how the top tier legal entity in the

enterprise, as well as any subsidiary that conducts critical operations would be resolved under the u.s. bankruptcy code. complementing this joint rule making, the fdic also issued a final rule requiring any 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 get confused about this. the new authority under dodd-frank goes to the holding company and the affiliates. we've always had the authority to close the bank. we now are requiring complementary 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 complement each other by covering the full range of business lines, legal entities and capital structure combinations with a large financial firm. both of these requirements will improve efficiencies, risk management and contingency planning at the institution themselves. we expect, andi should say the companies themselves which are now in the process of developing these plans, that have been quite cooperative and two, i think are recognizing some benefits. it's a little bit like cleaning out your attic or your basement developing resolution plans. you find things going on.

we expect that the process of developing these plans or living wills will be a dialogue. the planning process will also be an interactive dialogue with the firms. these will insure planning for the holding company and affiliates in the event that --

>> so this is a relatively short time frame that we're working under for the largest institution. 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 disciplines. without this capability, these institutions, which by definition pose a risk to the financial system, create and expectation of public support to avoid failure.

that disports the financial marketplace that allows them to take on each 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 that there is a very strong public interest in the fdic of developing the capability to carry out its new systemic responsibilities in a credible and effective way. that is, indeed, our top priority going forward. thank you all very much. [ applause ]

>> i'm a law professor at boston university. when i think about living wills, i think they're sort of part of disclosure and part strategic. and i wondered whether anyone in the agency observes strategic -- maybe they would want to give you a document that makes it harder to resolve so that you can't sell them, you have to save them, for example. >> i don't think that's going to work. look, this is the beginning of the new process, and you 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 the federal reserve have a joint responsibility, for the rule making and for the supervision and enforcement of the rule.

i think are obviously approaching it with great seriousness and a high sense of priority. and i think the companies understand really that this is a new legal obligation that they have under the law. and at least in the initial engagements they seem to be taking it quite seriously and stuktively. we'll see how the process playing out and see what we receive from there. we're operating on the premise both sides approach this in good faith, and i'm hopeful it will be a productive exercise on both sides. >> other questions? yes. >> currently there's unlimited deposit insurance for deposits in noninterest bearing accounts, and i'm wondering if that is

supposed, i think, end in december 31 of this year. but i also understand there are proposals pending to extend that insurance, and can you give us some idea of what is the likelihood that that unlimited insurance could be extended. >> i should note that the insurance coverage that you're referring to, which is -- which was enacted as part of the dodd frank act, so it's a statutory requirement that was adopted by the congress. so it will be a decision for the congress on whether or not to extend it. that authority expires at the end of this year, and it will really be the congress's judgment on whether to extend it or not. i would certainly expect that the congress would have to consider both the condition of the industry, the condition of the economy in making that

judgment. and we'll certainly be prepared to provide input from the fdic's end, but that's going to be a judgment for congress to make. i think it's premature at this time to guess at to what the outcome is going to be. >> is it something that you would support, however? >> as i will provide input to the congress when asked. >> i have a question for you. you've expressed a good bit of interest and concern, i think, in recent months about the condition of the community banking industry and what the future of the community banking industry might be. they've certainly been very hurt by the commercial real estate downturn, and there have been questions raised about is there a pathway for them going forward? given the important role they played in the past, what do you see as the future of the community banking industry? >> that's really an important questi

question. to a certain extent, the role of the community banks in our financial system has been somewhat underappreciated, i think. you know, community banking are generally defined as banks with assets under a billion dollars. those institutions, although there are nearly 7,000 of them, of the 7500 or so insured institutions in the united states, nearly 7,000 are community banks with assets under a billion. 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 all the small business lending that all insured institutions do in the united states. as you well understand, credit for small business is absolutely

essential to job growth and the performance of the economy as a whole and the nature of small business lending. at least a lot of it is quite lab labor-intensive and highly customized. it's the kind of lending that the large institutions generally are not interested in doing anymore. they're interested in doing standardized lending products to generate volume. the customized lending that small businesses require in many instances are parla suited for the community bank and the way community banks do their business. and so if we did not have a significant and capable community banking sector in the u.s. financial system, there would be a real consequence for the financial system and the economy as a whole. i think that's somewhat

underappreciated. particularly during the course of this financial crisis, most of the attention has been on the big systemic companies. but -- and clearly from the fdic standpoint and the rest of the regulators, that's going to be an ongoing priority, as i've just talked about. but there really is a need, i think, to pay some attention in effect to the other end of the spectrum for the community banks. the role really is quite important, and i will tell you, we are in addition to the systemic resolution responsibilities, the fdic is making the future of community banks or other major priority over the course of this year in part because the fdic is the lead federal regulator for the majority of community banks in the united states. in fact, we just hosted a conference a couple of weeks ago on the future of community banking.

we're now going to be doing a number of things over the course of this year, including a series of round tables with community bankers in each of our six -- the fdic has six regional offices around the country. we're going to do a round table with community bankers in each region. i've asked our division of insurance and research to undertake an effort to review the development of community banks in the u.s. financial system over the past 25 years to gain a better understanding of sort of what's happened to community banks over that period, what have been the problems, and what business models have been successful. as far as i know, it's the first comprehensive review of this kind that's been done, which somewhat surprised me. i sort of asked where is the study on community banks, and there wasn't one. it actually seemed like a useful up gap for the fdic to try to

fill, and i think we'll learn some lessons that will be useful to point the way fwrard for community bajs. i asked our division of risk management supervision and our division of depositor and consumer protection to take a look at the way we do both rule-making and examinations and risk management and compliance for community banks to see if there aren't ways on the margin. we can do them simpler and more effectively. that will make our jobs easier and make the bank jobs easier while maintaining our supervisory standards. that's really going to be a major priority over the course of this year. we hope by the end of this year we'll be able to report back on the progress we've made. so thanks for asking the question. let me get on my soapbox, but it's an important issue. >> no more questions? 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 connected compensation with risks but there were no risk metrics. i think section 39 of the fdi act say they regulate compensation and now dodd-frank has section 956 which prohibits compensation that, quote, encouraging inappropriate risk. the statute mandated you adopt the final rule nine months after enactment and it's now two years. >> i'm aware of that. what i can say is we did put out a proposed regulation that would establish really for the first time as a regulatory standard, deferred compensation in regard to executive compensation, which i think is an important

principle to establish. and without getting carried away, i'm hopeful we can reach closure on that rule-making. i agree with you it's an important one. >> please join me in thanking chairman grueman. >> they would wear garments made of homespun cloth, and this homespun cloth would be much more rough textured, would be much less fine than the kinds of goods that they can import from great britain, but by wearing this homespun cloth, women were visibly and vividly and physically displaying their political sentiments. >> sunday night at 9:00, george mason university professor rose marie