MSIC 2023 Annual Report

INTERNATIONAL COLLABORATION

TABLE OF CONTENTS

LEADERSHIP LETTER

MSIC BENEFITS

VISION & VALUES

MSIC COOPERATIVE COMMUNITY

INTERNATIONAL COLLABORATION

MSIC INSURANCE FUND FINANCIAL REPORT

MSIC LIQUIDITY RESERVE FUND

MSIC PROPERTIES

MSIC HIGHLIGHTS & UPDATES

MSIC CHARITABLE GIVING

MSIC DIRECTORS & STAFF

MSIC MEMBERS

MSIC AUDITED FINANCIAL STATEMENTS

103

MSIC MISSION

MSIC 2023 Annual Report/Issued January 18, 2024/Copyright © 2024 by MSIC/All Rights Reserved. Massachusetts Credit Union Share Insurance Corporation/233 Needham Street/Suite 510/Newton, MA 02464/800.622.4015/617.758.0540/ https://msic.website

MSIC would like to sincerely thank and credit © An LeFevre of AnOriginal Photography (AnOriginal.com) for capturing many important moments which appear throughout this report.

LEADERSHIP LETTER

January 18, 2024

Fiscal Year 2023 saw financial effects MSIC has been anticipating for a number of years. After nearly 25 years of consistently declining interest rates, we experienced a dramatic rise in rates over a very short period of time. Credit unions that had resisted the temptation to extend the maturity of their investments to increase yield when rates were extremely low were not affected when the rates spiked. Financial Institutions that did not hold yield discipline, however, faced serious liquidity issues and a dramatic rise in their unrealized loss exposure from investments that were under water after the spike in rates. As a direct result of this rise in interest rates, upticks in inflation, and other post-pandemic financial effects, consumers sought other financial products as The Pandemic-related infusions of cash reversed, and the fear of recession increased. Financial institutions which had previously been awash in liquidity saw liquidity decline rapidly, and many were forced to compete for deposits for the first time in many years, thereby rapidly increasing their cost of funds. Moving forward in 2024, cost of funds management, and dealing with a much smaller loan pipeline will put pressure on credit union earnings. However, MSIC’s member credit unions are supported by high capital and good asset quality in the face of the earnings challenges ahead.The MSIC Cooperative is well-positioned for the next year.

Starting in the prior year, and in anticipation of a rise in rates, MSIC undertook a strategy to de-leverage its balance sheet by paying off borrowings at maturity and letting the balance in its Liquidity Reserve Fund decline. This strategic move helped MSIC’s earnings by significantly reducing its interest expense over the year. Also, MSIC recaptured half of its loss reserve during the year as the risk of loss from The Pandemic subsided and the financial condition of member credit unions improved. This also helped MSIC offset the impact of the overall decline in assessment revenue from the decline in the growth rate of excess shares and deposits as previously noted. At this writing, nearly all MSIC members are well-capitalized and well-run. With the recent stabilization in Federal Reserve interest rate policy, and the possibility that a soft landing of the economy will avoid a significant recession, we are confident that the few institutions which experienced a problem with interest rate risk are well on their way to resolving their issues. MSIC’s deposit insurance risk remains low as we enter the new year. As you will see in the pages of this report, MSIC enjoys a vibrant and effective business model, high capital, and sufficient resources. Our Active Risk Management program, now in its 15th year, has helped MSIC keep its deposit insurance risk low by helping avoid problems before they pose significant risk for MSIC and any affected member credit union. In addition to, and perhaps because of, the interest rate volatility noted previously, last March we all experienced a significant modern-day bank run with the collapse of Silicon Valley Bank and others, including Credit Suisse. MSIC’s members handled the crisis and allayed consumer fears very effectively. MSIC’s webinar series helped with immediate training on how to manage consumer contagion. MSIC members not only helped consumers evaluate their real risk, but also saw deposit increases as consumers sought out MSIC’s full deposit insurance system. As a direct result of the Silicon Valley Bank crisis, MSIC received numerous inquiries from institutions seeking to join our Cooperative. Those inquiries were from Massachusetts-based institutions and also from institutions in Maine,New Hampshire and Connecticut. As many of you know, MSIC has, for years, sought to expand membership beyond Massachusetts in

MSIC recaptured half of its loss reserve during the year as the risk of loss from The Pandemic subsided and the financial condition of member credit unions improved.

These factors also resulted in a significant decline in the growth rate of excess shares and deposits among MSIC members from the record setting growth rates of the past five years. MSIC members experienced a decrease in excess shares and deposits during Fiscal Year 2023, resulting in reduced revenue for MSIC.

4 INTERNATIONAL COLLABORATION

AS WE CELEBRATE MSIC’S 63RD YEAR WE CAN ALL BE PROUD OF THE HISTORY OF STABILITY AND PROTECTION OUR COOPERATIVE AFFORDS TO CONSUMERS AT OUR MEMBER CREDIT UNIONS.

order to manage its long-term concentration risk and ensure the long-term viability of the full deposit insurance system. We will continue in these efforts, and call upon the Division of Banks to become educated about this basic insurance need, and to support MSIC’s efforts.

Now, as we move beyond COVID-19, MSIC is resuming its mission to enhance and advocate for increasing levels of collaboration. In the coming years we will resume sponsorship of activities to bring our CEOs and their teams together to advance the collaboration agenda. But you have to meet us half way! Join us and help devise structures and business plans to advance the collective success of our Cooperative. We look forward to resuming this important work with each of you.

The March 2023 banking crisis also exposed the extent to which the business of banking, technological advances and changing consumer behaviors have created

We are also pleased to report that during the year LUSO Federal Credit Union successfully joined our Cooperative and we welcome them to our community of credit unions. As we celebrate MSIC’s 63rd year we can all be proud of the history of stability and protection our Cooperative affords to consumers at our member credit unions. This year we saw the dramatic positive effects on consumers when they were reminded that they are insured in full, and that no consumer had ever lost any money or been denied access to their funds at an MSIC member credit union. This system protects those consumers and brings great stability to the entire Massachusetts financial system.

significant additional risk for financial institutions, regulators and deposit insurers. MSIC uses its membership in the International Association of Deposit Insurers (IADI) as its research arm to keep pace with global best practices for deposit insurers. MSIC was the host for the 2023 IADI Conference and Annual General Meeting in Boston during the last week of September. We used that event to push the IADI to address the changing risk of financial institutions’ operations and the effects on deposit insurers. We are pleased that the IADI has now increased its activities to help all deposit insurers better prepare for this new world of bank runs. Our international collaboration as part of the IADI serves the MSIC Cooperative well by helping us be better prepared to manage complex risks in association with other deposit insurers around the world. A final note on MSIC’s collaboration agenda: for many years MSIC has advocated for increased collaboration among our credit union members. The facts are plain: the complexities of new technologies and changes in consumer expectations and behavior will make it very difficult for credit unions to operate successfully on their own. Collaboration is essential to reducing the costs of operations and thereby increasing profitability. Prior to The Pandemic, we were making good progress in the cultural change in our Cooperative necessary to expand collaboration in all our operations. The Pandemic brought these efforts to a halt because we were all forced to concentrate on our individual institutions and face the difficulties of protecting our staff, while also continuing to provide essential financial services to our consumer members during a stressful time.

The MSIC Insurance System is worth fighting for, especially in volatile times like this.

We wish you a successful and profitable 2024.

MICHAEL E. MURPHY Chairman

MICHAEL C. HANSON President & CEO

2023 ANNUAL REPORT 5

MS IC BENEF I TS

deposit insurance to 71 member institutions and serves 1.7 million consumers. The Cooperative holds approximately $32.01 billion in total assets. It is the fifth largest credit union cooperative in the world. MSIC’s coverage ratio of 2.40% remains the highest in the nation among all deposit insurers. Our member credit unions are healthy, well-capitalized, and well-managed. Even in this volatile market economy, after the COVID-19 Pandemic, MSIC’s deposit insurance risk remains low. The Filene Research Institute found that 80% of a credit union’s profits are derived from the top 20% of its depositors. In other words, relationships with excess deposit holders are the most profitable relationships for credit unions. The profits derived from these relationships help fund our important work on behalf of all consumer members. Providing your consumer members with full deposit insurance – the best coverage in the world – tells them that their interests come first. Full deposit insurance is also a vital tool as you seek new relationships, including in your member business lending efforts. When competing with large commercial banks that do not offer this deposit protection, the MSIC membership is a real competitive advantage. When competing primarily with Massachusetts Savings and Co-operative Banks, it is a competitive necessity, as many of these institutions also offer consumers full deposit protection. Also, the recent bank crisis involving Silicon Valley Bank in March 2023 highlighted the importance of MSIC’s full deposit insurance program for your consumers. Consumer fear is immediately mitigated when your members learn about MSIC’s full deposit insurance program. Today, the MSIC Cooperative provides approximately $2.5 billion in excess

In short, membership in the MSIC cooperative community is a real and substantial business asset. Many of the most successful credit unions in our membership use MSIC’s full deposit insurance system as part of their diversified liquidity strategy. Institutions benefit from MSIC membership through our strategic assistance, consulting services, educational trainings, and the cooperation of a diverse community which is actively interested in their success. It is important to note that MSIC is not a vendor; you cannot “buy” MSIC deposit insurance. To offer the best deposit insurance protection in the world to your members, you must become a member of the MSIC community. Also, MSIC membership is both a competitive advantage and a mark of distinction because only healthy, well-managed institutions qualify.

In MSIC’s 63-year history, no consumer doing business with a MSIC member credit union has lost any of their hard-earned savings, or been denied access to their funds. This is a record we can all be proud of. - Mike Hanson, MSIC President & Chief Executive Officer

6 INTERNATIONAL COLLABORATION

V I S ION & VALUES

VISION

MSIC is a recognized leader in providing excess deposit insurance, promoting sound public policies, addressing risks in the financial system, advocating for adequate consumer protection, and carrying out its notification and certification management responsibilities.

VALUES

Integrity We adhere to the highest ethical and professional standards. Competence We are a highly skilled, dedicated and diverse workforce that is empowered to achieve outstanding results.

MSIC, its Directors and its employees have a tradition of distinguished service to Massachusetts and the credit union movement. Six core values guide us in accomplishing our mission:

Teamwork We communicate and collaborate effectively with one another, our members, the industry and regulatory agencies. Accountability We are accountable to each other and to our stakeholders to operate in a financially responsible and operationally effective manner. Effectiveness We respond quickly and successfully to operational requirements and the needs of our members. Fairness We respect individual viewpoints and treat one another and our stakeholders with respect, impartiality, dignity and trust.

2023 ANNUAL REPORT 7

MS IC COOPERATIVE COMMUNI TY

0.55

Total assets were $32.0 billion at September 30, 2023, up 1.97% from the prior year. During Fiscal Year 2023 the MSIC Cooperative community continued to grow. The most notable change during the year was the decline in the rate of growth in excess shares and deposits. Those shares and deposits decreased over the year at a rate of 3.37% This change is primarily caused by the economic realities of the post-pandemic world, including a rapid spike in interest rates, and the ongoing concerns about potential U.S. and global recessions. Also, nearly all financial institutions are no longer awash in liquidity and many are reluctant to compete on interest rates at cutting edge levels. At many institutions, plans for deposit growth have been put on hold until rates stabilize. Looking ahead into next year, earnings will be the greatest challenge as loan volume remains low, portfolios still carry a low yield from the rate environment over the past five years, and the cost of funds has risen dramatically.

0.48

0.45

MSIC

All MA

Nationwide

MSIC COMPARATIVE ROAA For Fiscal 2023

At many institutions, plans for deposit growth have been put on hold until rates stabilize.

0.72

0.60

0.49

MSIC

All MA

Nationwide

MSIC COMPARATIVE DELINQUENCY RATIOS For Fiscal 2023

8 INTERNATIONAL COLLABORATION

11.91%

11.32

10.74

9.42

9.09%

7.18%

3.07%

1.97%

2019

2020 2021

2022

2023

MSIC

All MA

Nationwide

MSIC COMPARATIVE NET WORTH RATIOS As of September 30, 2023

MSIC AND MEMBER CREDIT UNIONS’ AGGREGATE ASSETS YEAR-OVER-YEAR GROWTH RATE Fiscal Years Ended September 30

0.55

$32.01

$31.50

$30.50

$28.03

$25.04

0.25

0.14

2019

2020 2021

2022

2023

MSIC

All MA

Nationwide

MSIC AND MEMBER CREDIT UNIONS’ AGGREGATE ASSETS As of September 30 ($ in Billions)

MSIC COMPARATIVE NET CHARGE-OFF RATIOS For Fiscal 2023

2023 ANNUAL REPORT 9

LEADERSHIP LETTER INTERNATIONAL COLLABORATION

International Collaboration MSIC’s membership in the International Association of Deposit Insurers (IADI) allows it to collaborate with other deposit insurers around the world as we all address the revolutionary change affecting financial services due to technology, new patterns in consumer behavior, and the continuing economic effects of the global pandemic. IADI, as the global standard for deposit insurance systems, conducts cutting edge research in conjunction with the Bank for International Settlements. This important work serves as a research arm of MSIC and allows easy access to best practices in the deposit insurance world. MSIC Hosts the 2023 IADI Annual General Meeting of Members & Annual Conference During 2022, MSIC was honored to be selected to host the 2023 IADI Annual General Meeting of Members and Annual Conference in Boston. From September 25-29, 2023, 210 delegates from deposit insurers from around the world gathered at Boston’s Westin Seaport Hotel for a week of meetings centered around the theme of “Successfully Managing Systemic Risk: Deposit Insurance in a Turbulent World.” Attendees engaged in discussions and attended presentations relating to the changing dynamics of financial institutions and the after-effects of the Silicon Valley Bank and Credit Suisse crisis in March 2023. Former FDIC Chair Sheila Bair was the keynote speaker at the Gala Dinner. The day-long conference on Wednesday, September 27, 2023 featured Professor Daniel Tarullo, a former Federal Reserve Governor, and the Keynote was Martin Gruenberg, the current FDIC Chairman. All three industry leaders addressed the changing issues relating to the delivery of financial services and the threat of additional bank failures and consumer contagion in the months and years ahead. MSIC’s President & CEO, Mike Hanson, served as Master of Ceremonies and was also the moderator of a panel centered around cooperatives.

MISSION OF IADI

IADI contributes to the enhancement of deposit insurance systems by promoting the development and acceptance of principles and supporting guidance, facilitating international cooperation among deposit insurers and other interested parties, and providing training for its members.

MISSION OF MSIC

To promote and strengthen the credit union movement, in partnership with member institutions, by providing excess share and deposit insurance and associated products and services for credit unions and their members, while preserving the integrity of the fund.

10 INTERNATIONAL COLLABORATION

IADI DINNER Wednesday, September 27, 2023

Introduction by Mike Hanson: Good evening and thanks for being here with us tonight. Our keynote speaker, Sheila Bair, has had a remarkable career as a dedicated and influential public servant. She is an attorney by training, she worked on Capitol Hill as the research director for a powerful United States senator, and she has served with distinction in a number of governmental agencies. But, of course, she is best known for being the Chair of the FDIC from 2006 to 2011, during the worst crisis since the Great Depression. She is also an educator, a former finance professor, and a college president. She is a robust and active consumer advocate, has always been an advocate for consumer protection in the financial services sector and for consumer financial education. Transcript of Sheila Bair Introduction and Speech

The best story I remember about Sheila during her tenure at the FDIC was an article in which the headline stated committed to “saving Main Street from Wall Street and saving Wall Street from itself.” And, of course, that’s exactly what she did. Working with her colleagues at the Treasury and the Fed, Sheila and her team delivered amazing and outstanding results for the entire global community. For all the pain and loss and suffering that crisis caused individuals and institutions throughout the world, we in this room, in this business, know that it could have been much, much worse. Sheila Bair is an outstanding example of true leadership and what a leader can accomplish in even the worst of situations. She’s an inspiration to all of us, and I am pleased to present our keynote speaker, the Honorable Sheila Bair.

2023 ANNUAL REPORT 1 1

Sheila Bair: Thank you, Mike, that was a very kind introduction; it’s nice to be back with deposit insurers. It’s been 12 years since I left the FDIC, and it seems like almost yesterday in terms of some of the vivid memories I still have from the great financial crisis. I was just so proud of the agency during the five years I was there. Some people said the FDIC had a good crisis; I don’t think anybody had a good crisis, but I do think the agency performed extremely well and bolstered public confidence in the system. We’re going to talk about the return of bank runs, but I want to note that during the great financial crisis, deposits were running to banks, not out of them, and that was because of the FDIC. I see a lot of the former colleagues here, and it’s wonderful seeing you again.

so I took it for what it was. I thought about the comment, and I thought, “You know, I kind of like that. Yeah, the FDIC is there for the little guy.” Because very early in my career, I worked for a senator named Bob Dole. He was a populist in the good sense of the word. And he was very fond of saying something that really stuck with me, and I’ve tried to live by that in my government service: that the role of government is not to protect the rich and powerful. That the role of the government is to protect people who can’t protect themselves. When it comes to banking, regular everyday mainstream households, don’t have the financial acumen to figure out which bank is safe and which bank isn’t. They just need a safe place to put their money: they need a place they know is going to have stable value; it’s going to be there when they need it; they’re not going to lose it. It’s going to be there to pay their bills, pay for the food, pay for the rent, pay for the doctor, whatever. And they need protection from the government, which is why we provide deposit insurance to them. We provide a lot of prudential regulation as well to make sure the banks take good care of their money, but we also provide that deposit insurance back stop, and that is so important to them on a personal level as well more on a systemic level. Obviously, with deposit insurance caps - almost all of us have deposit insurance caps - the idea is that we want to protect the people who we don’t really think should be expected to have the financial acumen to be evaluating whether banks are safe and sound or not to be going to their call reports. Big depositors, have a lot of money in the bank. They should be able to figure it out and that way we get some market discipline. So that’s the theory, right? That’s the theory. Well, in practice it doesn’t always work that way, and uninsured depositors, those big depositors, can certainly run in a crisis. We saw it during the great financial crisis, and we certainly saw it with the failure of Silicon Valley Bank last spring. I was fascinated by what happened at Silicon Valley Bank because of course they ended up getting bailed out. The vast majority of the deposits at Silicon Valley were not only uninsured but held by some of the richest people on the planet. So some of those accounts, yes, those were transaction accounts that some of the startups were

We’re going to talk about the return of bank runs, but I want to note that during the great financial crisis, deposits were running to banks, not out of them, and that was because of the FDIC.

One thing that Mike didn’t mention in my bio is that earlier in my misspent youth, I actually worked for the New York Stock Exchange. Yes, I was one of those Wall Street people. I worked there probably about a total of seven years, and I’m glad I did actually, because it was a good experience. I think everybody needs to work for the private sector and get some sense of what that’s about. When I learned that I was going to be nominated as Chair of the FDIC, one of the associates I knew on Wall Street, a guy with a big securities firm, he kind of sniffed, and he said, “Oh, you’re going to be Chair of the FDIC.” He said, “Well, they take care of the little people.” He was talking about depositors below $100,000, which was the deposit limit at the time. And he kind of meant it as a putdown, you know, typical guy. He was a big wheel, he would never be interested in anybody with less than $100,000 in the bank,

12 INTERNATIONAL COLLABORATION

they figured out maybe that bank could be in trouble, boy did they run, and they ran quickly; no loyalty whatsoever. They turned around over the weekend and were calling everybody; some called me: “We need a bailout. We need a bailout. We need a bailout.” They were getting no sympathy from me. I don’t know what they thought I was going to do about it; I haven’t been in office for quite some time. But they got the bailout. I don’t agree with it but I certainly understand why regulators made the decision to do that because there has been some growing instability, especially with our regional banks. They were worried about other uninsured deposits, and there was another bank that was ...and I’ve tried to live by that in my government service: that the role of government is not to protect the rich and powerful. That the role of the government is to protect people who can’t protect themselves.

using to make payroll, and it was a worthwhile thing to protect those. The vast majority of those billions that were protected, that was not the category that they fulfilled and those very sophisticated rich people still wanted their bailouts. And even as they ran that bank – and this is all based on public reports and people I’ve talked to – the bank was giving them a sweet deal as near as I could tell. They were getting high yields on the deposits. They were getting generous credit terms. Financing to a venture capital start-up is pretty risky, and a lot of banks won’t even do it; national banks aren’t allowed to do it, so the bank customers were getting a sweet deal. But once

2023 ANNUAL REPORT 13

failing on the same weekend. They were worried about catalyzing broader uninsured deposit runs.

big to fail” going into the great financial crisis; and we had it with our GSE’s - an implied government backstop for these very large entities without any capital behind it. I fear we’ve got the same thing now with uninsured deposits in the U.S. I’m hoping very much that our administration goes to Congress and asks to give the FDIC authority that it had during the crisis, which was taken away from it, to have temporary unlimited deposit insurance guarantees on transaction accounts. And I think this is really where you’re seeing the stress in the U.S: the regional banks, which we have a lot of in the U.S., more than most other countries. I kind of think that’s a good thing; not everybody agrees. We’ve got the mega banks, the “too big to fail” banks, multi-trillion-dollar banks; then we have the community banks; and then we have the regional banks in between. The mega banks, notwithstanding our best efforts to tell everybody “too big to fail” is over, nobody believes that. Everybody figures that you have your money with them because there’s no way that the government’s going to let them fail. Then you have the small banks, and almost all of their deposits are insured; they have the smaller customers that can deal with the current limits. The regional banks do a lot of business lending, a lot of business transaction accounts and by definition, those accounts almost always go above the insured deposit limits because they’re made for payments – a lot of money going in, a lot of money going out. This is one of the reasons why during the crises we saw stress in this sector, and it was hurting the smaller banks: that money was flowing into the “too big to fail” banks. We instituted a temporary guarantee; I really wish the FDIC had authority to do that again. I really wish the administration would ask Congress to restore that authority. Long-term, let’s just throw in the towel on uninsured, at least certain types of uninsured. It’s not a tenable situation to have one system for the little guy who we’re supposed to protect and then this free pass for the big guys whenever there’s turmoil. We bailed out bond holders, even shareholders during the great financial crisis. At least we didn’t bail out bond holders when these regional banks

And so, these billionaires got their bailouts, and everybody had to hold their nose and do that. But that’s not the way the system is supposed to work; it’s just not. It’s supposed to work that we have defined rules, – and people know it’s $250,000 – they have legal protections. Banks are assessed for that. They pay deposit insurance premiums that are paid into the deposit insurance fund and that flows into the cost of banking. The little guys, now, through their explicit paid-for deposit insurance guarantees, they’re the ones that are disadvantaged because the big guys are getting this free put on the government. I don’t think that’s right either because now there is this expectation that all the uninsured in the U.S. are going to be protected. Our Treasury Secretary has made statements to that effect, and while I have tremendous respect for her and have been a big supporter of hers, I just have to disagree because there’s no legal authority behind that, and there’s no capital behind that. If we have more bank failures - and I fear we’re going to have more bank failures - the yield curve has been inverted for over a year. We have big troubles with commercial real estate. It’s hard for me to imagine that we’re not going to have more bank failures. And when they do, there’s a very distinct chance that some uninsured depositors are going to have to take losses, and then what’s going to happen?

I think we have a very precarious situation now, and implied guarantees are never a good thing. We had it with “too

Long-term, let’s just throw in the towel on uninsured, at least certain types of uninsured.”

14 INTERNATIONAL COLLABORATION

I DO THINK THE FDIC DID A

failed. But it’s really not the system we should have now. I do think the FDIC did a wonderful study of potential changes to insured deposit limits. Transaction

concentrations of power with the very, very largest institutions.

WONDERFUL STUDY OF POTENTIAL CHANGES TO INSURED DEPOSIT LIMITS. TRANSACTION ACCOUNTS WAS ONE AREA WHERE THE STUDY REALLY FOCUSED.

But if I want Truist to be able to compete with, say, JP Morgan Chase for some of Amazon’s business or Microsoft’s business, having a $10 million cap, even that high, on a transaction account isn’t going to help them. I do think if you require that they be low-yielding and true transaction accounts, that of itself will be self-limiting. And I do think that it’s time that maybe that should be seriously considered as a way to stabilize our system and make it more competitive and preserve that really important regional bank sector of our banking system that has been so important, especially to small to medium-sized business lending. I hope they do it sooner than later. I hope Congress reads that FDIC report. I hope they start taking this issue up, because as I said earlier, we’re going to have more bank failures, and that’s going to spook the uninsured again. If we don’t deal with this now, we’re going to have a lot more money running to the “too big to fail” institutions. That’s going to increase concentrations, further stress the mid- size banks, and I think that’s going to be very, very bad for our system and our U.S. economy.

accounts was one area where the study really focused. I do think they have unlimited guarantees in Japan for transaction accounts and I think in the U.S. it’s time to consider that. I don’t believe in universal deposit insurance, because I think then you just have hot money seeking yield going into really weak banks, and then you have a lot of other problems. Transaction accounts, - bona fide transaction accounts - don’t pay a lot of yield, they’re used by businesses, governments, municipalities, and non-profits to make payments, and I think it makes a lot of sense to give them unlimited guarantees because if a bank fails, cutting those deposits can hurt the real economy. It might impact making payroll and paying vendors. It’s important to keep those accounts functional if a bank fails. I do think some unlimited, maybe permanent unlimited guarantees for transaction accounts might be the right solution. I know that’s politically not very popular, but I got to tell you, if we want to create competition for the “too big to fail” banks, if we want to avoid a barbell system where we have really big banks and really little banks and nobody in the middle coming up and trying to provide any competition to those big banks, we’ve got even worse

Thank you.

2023 ANNUAL REPORT 15

IADI 2023 ANNUAL CONFERENCE Wednesday, September 27, 2023

Mike Hanson Opening Statement Thank you for joining us at this important conference. Once again, we at MSIC hope you’re having a wonderful time, and I hope the meetings will be productive. For today, we really want to mix it up a little bit. We want to talk about some of the challenges that we’re facing as deposit insurers, and I hope we have a robust discussion. I hope we have a nice level of disagreement. I hope we reach some kind of consensus as to what the issues are that are facing us.

Can a free people govern themselves? Like all great human experiments, the results are far from certain. And all you need to do is look at our evening news to know that we air our problems publicly, and we have a long way to go, as many societies do. It’s a constant innovation and struggle. That revolution in thought, believe it or not, started about a mile from here in Boston. Boston at its heart is today still a revolutionary society; often, we forget that fact. I hope you will have some time to go see this revolutionary city while you are here this week. I hope you go to the old State House to see where the Declaration of Independence was first read to the citizens of Massachusetts; Bunker Hill with its obelisk representing of the first battle of the Revolution; and to Faneuil Hall to stand before the statue of Samuel Adams. Three or four years before 1776, it was Samuel Adams, John Hancock and their colleagues who created The American Revolution that started here in Boston. You can see the hall where those meetings of ordinary citizens started the process that led to the Revolution and America’s great experiment. And true to American style, Faneuil Hall now sits in a beautiful shopping area, so you can spend some time helping the economy and you can also get a Sam Adams lager while you’re there. It’s worth the trip. I think it’s appropriate that we’re here in this revolutionary city, and MSIC is delighted to be your host. And why is it appropriate? It’s appropriate because the industry we insure - banking, credit unions, cooperatives - is now going through a massive revolutionary transformational change. And it will dramatically affect how we do our business. Blockchain, cryptocurrencies, AI, new fintech methods of loan originations like the standardization of credit processes, not to mention the continuing effects of securitization, the ever-growing massive concentration of assets in individual large banks - these pose, and are already posing, significant risks for us and the economies we represent. Significant risk is also resulting from major demographic shifts with younger consumers doing banking in a completely different way with different new technologies, and using institutions that are outside of the traditional banking system. And don’t forget the use and abuse of social media: we all now need to become experts in consumer behavior as well as deposit insurance.

We want to talk about some of the challenges that we’re facing as deposit insurers, and I hope we have a robust discussion.

So let me begin. As I welcome you all to Boston, and I look around this audience and I see so many honorable and long- standing cultures before me, our friends from Japan, Korea, Malaysia, Thailand, India, Kenya, Ghana, Italy, France, Poland, among many others, and I say to myself “how do I introduce Boston?” How do I explain Boston to these long-standing and honorable cultures? I thought long and hard about this topic this week as to how I would welcome you to this city. As you can see from looking outside, Boston is a thriving and growing community. It is vastly innovative. It’s an intellectual center and a commercial hub. Great companies got their start here - Microsoft, Facebook, and Fidelity to name just a few. MIT alone has spun off 25,000 companies from its world class and cutting-edge research. When I was in law school decades ago, Kendall Square in Cambridge was a dirt parking lot. Today it is an innovation center with hundreds of billions of dollars in development and investment, including companies from pharmaceuticals to high tech start-ups. But Boston is also a very young society - and at only 250 years old compared with the cultures represented by my colleagues here today - Boston, and America remains an experiment:

16 INTERNATIONAL COLLABORATION

2023 ANNUAL REPORT 17

One thing we have already discovered about social media is that lies, innuendo, and gossip travel at five times the speed of truth and cooperation. So, we have to be very careful about consumer behavioral economics.

Recent consumer and cognitive behavioral research inform us that humans are really bad at predicting and assessing risk. We’re extraordinarily bad at it. Humans have ways of looking at reality that include short cuts leading to an individual’s perception of reality, usually based upon prior experience. This can, and does, lead us astray as we attempt to predict and evaluate levels of future risk. Now the last time I checked, deposit insurers are still staffed by humans. I don’t think we’ve been replaced by an AI algorithm quite yet. Are we any better at predicting and analyzing the risk in the system that’s right before our eyes? I’m not sure. Silicon Valley Bank, in hindsight, was clearly an apparent risk and ready for disaster. This bank, by the way, had a Boston office; they had a large book of business in the tech community in Boston, and we experienced part of the bank run. Luckily, it didn’t make a lot of TV coverage because the media was focused on California, and I’d like to keep it that way. Silicon Valley Bank were gurus in their industry; they were THE place you had to bank if you were in high tech. It was a cultural draw. The end result was that 94% of their deposits were uninsured. The management failed at basic asset-liability management in a rapidly rising interest rate environment. I don’t know, did the CEO and the staff there actually take an asset-liability class? And there is plenty of blame to go around – all of us missed the implications of the risk in that system – even though the risk factors were well known and apparent. We had capital rules that favored U.S. Treasuries. I’m now reminded of the view that long-dated US Treasuries are riskless. Right? Okay, except in a rapidly rising interest rate environment. It reminds me of what Sheila Bair was talking about at the Gala Dinner last night. Previously, conventional wisdom believed that American real estate mortgages were riskless. Right? Well, the 2008 crisis proved that we were again unable to perceive the risk right before our eyes. My concern is that Silicon Valley Bank and Credit Suisse are merely warnings of destabilizing factors that are already present in our system, and I’m concerned that we’re not perceiving the risk in a way that gives us a fighting chance to successfully resolve the next crisis. So, I think that the revolutionary question before us, and the question that we need IADI to help us with, is how do we address this, how do we consider it, how do we build our resilience and our agility and the quickness of our responses

We deposit insurers are in fact the global safety net in the consumer’s mind. So, when it all falls apart, we have to stand and deliver when it matters most.

And deposits? They’re no longer “sticky”. It was once hard for consumers and small businesses to move their deposits from one institution to another. Now deposits are quite “slippery”. Consumers can move their deposits with a click, creating enormous volatility for the institutions we insure. These factors, and others, will prove disruptive to the business models we insure, and they will prove disruptive to us. As we consider these new and significant challenges, remember that what we do is important. As some of you heard me say earlier this week, we spend a lot of time talking about resolution schemes, structures, supervision, and receiverships. Consumers don’t even know about any of that - and they don’t care about that. But when they get scared, they look to us. We, deposit insurers, are in fact the global safety net in the consumer’s mind. So, when it all falls apart, we have to stand and deliver when it matters most. Our level of resilience will make all the difference in a crisis. MSIC’s research indicates that we are all in for a very difficult decade in which institutions we insure may be at a destabilizing level of risk. We hosted this conference to start the discussion about how we need to manage systemic risk in this new revolutionary era. The last 40 years have reminded us a few things about systemic crises. They hit at the speed of a runaway freight train as it derails: and it feels about the same way when you go through one. Oftentimes, those crises have resulted from facts that were readily apparent to us in hindsight, but we all missed the level and implications of the risk.

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I want us to start to talk in meaningful ways about these risks and hope that we can weather them.”

Transcript of FDIC Chairman Gruenberg’s Keynote Address

Good afternoon. I would like to thank Mike Hanson for that kind introduction.

I am grateful for the opportunity to speak with you today at the 22nd Annual Conference of the International Association of Deposit Insurers (IADI). I am delighted to be back in person with my IADI friends and colleagues. I would like to thank IADI and IADI’s outstanding President, my friend Alejandro López, for inviting me to share some thoughts this afternoon, and the Massachusetts Credit Union Share Insurance Corporation (MSIC) for being such gracious hosts. I would also note that this is our first annual meeting with our new Secretary General, Eva Hüpkes, with whom I have had the pleasure of working closely through my involvement in the Financial Stability Board (FSB), and for whom I have the highest regard. From 25 founding members in 2002, IADI now has 124 affiliated organizations, including 95 member deposit insurers, 12 associates, and 17 partners. This growth speaks to the increasing recognition of the importance of effective systems of deposit insurance for financial stability and depositor protection, and the importance of IADI as the international standard setter for deposit insurance and the repository of global experience and expertise in this crucial area of banking regulation. In my remarks today, I will discuss the FDIC’s experience earlier this year with three large bank failures in the United States, considerations for changes to deposit insurance in light of that experience, and some thoughts on IADI’s role in global financial leadership. I am honored to join a number of distinguished speakers and panelists at today’s conference, and I commend IADI for organizing such an outstanding program. Recent Events As many of you probably know, on March 10, 2023, Silicon Valley Bank (SVB), with $209 billion in assets at year-end 2022, was closed by the state banking authority, which appointed the FDIC as receiver. The events that led to its failure began on March 8, when SVB announced a $1.8 billion loss on sale of securities, and a concurrent plan to

to deal with the next runaway train derailment? Because I’m certain of only one thing: that there will be another crisis at some point. How do we get better at our jobs? Do our institutions have sufficient liquidity? Do they have sufficient management talent? Do they understand the risks of the changing business model that they work under? Do we have the necessary liquidity? Do we have that capacity? Do we understand those risks in a way that can be meaningful? Because our job is not to clean up the derailment; our job is to avoid it and have consumers never know that it might have happened. We want to be so far under the radar that consumers don’t even know there was a crisis as we finish sweeping it up in private without public knowledge of that crisis. Consumer fear is our biggest volatile risk as we go forward. I’ll leave you with this thought: Benjamin Franklin - some historians have called him the first American - was born in Boston and is buried here, not far from where a group of Bostonians threw $10 million of tea into the harbor, pretty close to this spot. That’s why, by the way, we have coffee shops instead of tea rooms in America. While Franklin made his mark in Philadelphia, we still claim him in Boston and after the signing of the Declaration of Independence, he came out of the hall in Philadelphia and said, “We’d better hang together now or we shall surely hang separately later.”

So, I say to you, my friends, in the face of this revolutionary change in our business: We better hang together now. . . .

Today, I want us to start to talk in meaningful ways about these risks and hope that we can all weather them successfully.

Thank you.

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I can’t remember a time in which deposit insurance has been more central to global discussions of financial stability and financial risk.

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raise $2 billion in capital to shore up its balance sheet. Then on Thursday, March 9, shares of SVB fell 60 percent and it experienced a run by depositors. By that evening, $42 billion in deposits had left the bank with an additional $100 billion staged to be withdrawn the next day. To put this in perspective, nearly 30 percent of deposits left the bank in a matter of hours, with another 50 percent set to leave. Of great relevance, over 90 percent of SVB’s deposits were uninsured. When SVB failed on Friday, March 10, the FDIC initially established a Deposit Insurance National Bank (DINB), which is a self-liquidating vehicle under FDIC control. We announced that insured depositors would have full access to their funds on the Monday after failure and that uninsured depositors would have access to a substantial portion of their funds shortly thereafter through the payment of an advance dividend. A portion of the uninsured deposits would be held back in the receivership and would experience losses depending on the losses to the Deposit Insurance Fund. The prospect that uninsured depositors at SVB would experience losses alarmed uninsured depositors at several other regional banks, and depositors began to withdraw funds. Signature Bank of New York in particular experienced heavy withdrawals. A contagion effect became apparent and there was clear evidence that the failure of a regional bank in which uninsured depositors faced losses could cause systemic disruption. On Sunday, March 12, just two days after the failure of SVB, the New York State bank regulator closed Signature Bank and appointed the FDIC as receiver. Like SVB, Signature had experienced a run on deposits and was ultimately unable to meet its obligations, and also like SVB, over 90 percent of its deposits were uninsured. Faced with growing contagion in the system, the boards of the FDIC and Federal Reserve voted to recommend that the Secretary of the Treasury, in consultation with the President, make a systemic risk determination under the Federal Deposit Insurance Act with regard to the resolutions of SVB and Signature Bank. The systemic risk determination enabled the FDIC to extend deposit insurance protection to all of the depositors of SVB and Signature Bank, including uninsured depositors. The FDIC as receiver chartered two bridge

banks to carry this out and we then started the process of finding potential buyers for the bridge banks. This process allowed for the possible sale of the entire bank to an acquirer or major pieces of it to separate buyers. A regional bank with a similar business model, New York Community Bank’s subsidiary, Flagstar Bank, purchased Signature a week after it was placed in receivership. Another regional bank, First Citizens Bank of North Carolina, purchased SVB after two weeks. As this audience is well aware, the events of March were not solely contained within the U.S. SVB’s resolution was complicated by its international activity as part of a larger corporate group providing financial services to clients in a number of other jurisdictions. SVB, the U.S. insured depository institution, had a UK bank subsidiary, and loan production branches in Canada and Germany. The Bank of England used its resolution powers to transfer the ownership of that entity over the same weekend to HSBC UK. Canada’s Office of the Superintendent of Financial Institutions sought the appointment of a branch liquidator with whom we worked closely. In Germany’s case, we coordinated closely with BaFin, the Federal Financial Supervisory Authority, in a way that I think represents an excellent example of cross-border coordination. Allowing the branch to continue operations while under the FDIC’s control and granting recognition of actions taken by the FDIC as receiver to be effective under German law enabled a smoother resolution process. Although the FDIC was authorized to proceed under the systemic risk exception in these cases, it is important to recognize that both institutions were allowed to fail. Shareholders lost their investment. Unsecured creditors took losses. The boards and the most senior executives were removed. The FDIC is conducting investigations, as it is legally required to do, to hold directors, officers, and executives accountable for losses and misconduct. Less than two months later, on May 1, 2023, First Republic Bank of California, was closed by the state regulator, and again the FDIC was appointed receiver. At year-end 2022, First Republic Bank held $213 billion dollars in assets. First Republic had a nearly 70 percent reliance on uninsured deposits and was clearly impacted by the contagion effect of the previous two failures.

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First Republic was resolved via a purchase and assumption agreement with JPMorgan Chase Bank, which assumed

time since 1949. Large concentrations of uninsured deposits increase the potential for bank runs and can threaten financial stability. The report presents a fairly straightforward discussion of deposit insurance issues that will be familiar to all of you here today. Deposit insurance has two main objectives. One is to promote financial stability by making damaging bank runs less likely. Another objective is to protect small depositors. As of year-end 2022, more than 99 percent of deposit accounts in the U.S. were under the $250,000 deposit insurance limit.

REGULATION AND SUPERVISION PLAY AN IMPORTANT ROLE IN SUPPORTING THE FINANCIAL STABILITY OBJECTIVE OF DEPOSIT INSURANCE AND LIMITING RISK-TAKING THAT MAY RESULT FROM MORAL HAZARD.

all of the failed bank’s deposits and substantially all of the assets. This was done under the least- cost test and without a systemic risk exception. Implications for Deposit Insurance and Financial Stability

The three regional bank failures earlier this year illustrated a point I have made in previous speeches: while regional banks may not be as large, complex, and internationally active as the Global Systemically Important Banks — or G-SIBS as they are called — they pose distinct and significant challenges in resolution that could raise serious financial stability risks. In particular, the heavy reliance of regional banks on uninsured deposits for funding has the potential to create a destabilizing contagion effect on other banks if one regional bank were to fail and uninsured depositors took losses. Contagion can, and did, spread very quickly and well beyond its original source. The events of the spring raised questions about the role of deposit insurance in the U.S. banking system. As a step toward addressing these questions, on May 1, the FDIC released a report on “Options for Deposit Insurance Reform.” The report is a comprehensive overview of the deposit insurance system, its history and objectives, an assessment of the risks facing the system, and reform options for consideration to address those risks. The report deals with many of the issues IADI seeks to address in its Core Principles for Effective Deposit Insurance Systems (Core Principles) and the trade-offs all deposit insurers must face. First, the report analyzes relevant trends in deposits in the U.S. In particular, uninsured deposits have trended up over time and have increased the risk of bank runs. At their peak in 2021, the proportion of uninsured deposits in the banking system was almost 47 percent, higher than at any

While providing these benefits, deposit insurance can also lead to moral hazard and excessive risk-taking by making depositors less likely to care about the risks their banks are taking. Concerns about moral hazard can be addressed to some extent by certain design features of the system, such as limited coverage and risk-based premiums. However, the report highlights that the effectiveness of deposit insurance depends on how it interacts with other aspects of the banking regulatory system. Regulation and supervision play an important role in supporting the financial stability objective of deposit insurance and limiting risk-taking that may result from moral hazard. Capital and liquidity requirements, as well as supervision of interest rate risk management, rapid growth of assets and liabilities, and uninsured deposit concentrations are important examples. The report also discusses new tools that might be considered to complement deposit insurance system reforms such as a requirement that banks maintain an amount of long-term debt to absorb losses ahead of uninsured deposits. These are all matters under review in the U.S., and in some cases, action has already been taken. The report also looked at possible reforms to our deposit insurance arrangements, particularly with respect to coverage. The report considered three main options. The first is to raise the level of deposit insurance coverage.

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