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A n n u a l
Mission
In its unique role as deposit insurer of banks
and savings associations, and in cooperation
with the other state and federal regulatory
agencies, the Federal Deposit Insurance
Corporation (FDIC) promotes the safety
and soundness of the U.S. financial system
and the insured depository institutions by
identifying, monitoring and addressing risks
to the deposit insurance fund.
The FDIC promotes public understanding
and the development of sound public policy
by providing timely and accurate financial
and economic information and analyses.
It minimizes disruptive effects from the
failure of banks and savings associations.
It assures fairness in the sale of financial
products and the provision of financial
services.
The FDIC’s long and continuing tradition
of excellence in public service is supported
and sustained by a highly skilled and diverse
workforce that continuously monitors and
responds rapidly and successfully to changes
in the financial environment.
The Federal Deposit Insurance Corporation
(FDIC) is an independent agency created by
the Congress that maintains the stability and
public confidence in the nation’s financial
system by insuring deposits, examining and
supervising financial institutions, and managing
receiverships.
R e p o r t
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Vision
Values
The FDIC is a leader in developing and
implementing sound public policies, identifying
and addressing risks in the nation’s financial
system, and effectively and efficiently
carrying out its insurance, supervisory, and
receivership management responsibilities.
The FDIC and its employees have a long and continuing tradition of distinguished public service.
Six core values guide FDIC employees as they strive to fulfill the Corporation’s mission and vision:
Integrity
Effectiveness
FDIC employees adhere to the highest ethical
standards in the performance of their duties
and responsibilities.
The FDIC responds quickly and successfully to
identified risks in insured financial institutions
and in the broader financial system.
Competence
Financial Stewardship
The FDIC maintains a highly skilled, dedicated,
and diverse workforce.
The FDIC acts as a responsible fiduciary,
consistently operating in an efficient and
cost-effective manner on behalf of insured
financial institutions and other stakeholders.
Teamwork
FDIC employees work cooperatively with
one another and with employees in other
regulatory agencies to accomplish the
Corporation’s mission.
Fairness
The FDIC treats all employees, insured
financial institutions, and other stakeholders
with impartiality and mutual respect.
Federal Deposit Insurance Corporation
550 17th Street, NW Washington, DC 20429
Office of the Chairman
February 15, 2008
Dear Sir/Madam,
In accordance with:
•
•
•
•
•
the provisions of section 17(a) of the Federal Deposit Insurance Act,
the Chief Financial Officers Act of 1990, Public Law 101-576,
the Government Performance and Results Act of 1993,
the provisions of Section 5 (as amended) of the Inspector General Act of 1978, and
the Reports Consolidation Act of 2000,
the Federal Deposit Insurance Corporation (FDIC) is pleased to submit its 2007 Annual Report
(also referred to as the Performance and Accountability Report), which includes the audited
financial statements of the Deposit Insurance Fund and the Federal Savings and Loan Insurance
Corporation Resolution Fund.
In accordance with the Reports Consolidation Act of 2000, the FDIC completed an assessment
of the reliability of the performance data contained in this report. No material inadequacies were
found and the data are considered to be complete and reliable.
Based on internal management evaluations, and in conjunction with the results of independent
financial statement audits, the FDIC can provide reasonable assurance that the objectives
of Section 2 (internal controls) and Section 4 (financial management systems) of the Federal
Managers’ Financial Integrity Act of 1982 have been achieved, and that the FDIC has no
material weaknesses. Additionally, the U.S. Government Accountability Office did not
identify any significant deficiencies in the FDIC’s internal controls for 2007. We are
committed to maintaining our effective internal controls corporate-wide in 2008.
Sincerely,
Sheila C. Bair
Chairman
The President of the United States
The President of the United States Senate
The Speaker of the United States House of Representatives
Message from the Chairman
Message from the Chief Financial Officer
I.
Management’s Discussion and Analysis
The Year in Review
Insurance
Supervision and Consumer Protection
Receivership Management
Effective Management of Strategic Resources
II.
Financial Highlights
Deposit Insurance Fund Performance
Corporate Operating Budget Spending
Investment Spending
III. Performance Results Summary
Summary of 2007 Performance Results by Program
2007 Budget and Expenditures by Program
Performance Results by Program and Strategic Goal
Prior Years' Performance Results
Program Evaluation
IV. Financial Statements and Notes
Deposit Insurance Fund (DIF)
FSLIC Resolution Fund (FRF)
Government Accountability Office’s Audit Opinion
Management’s Response
Overview of the Industry
V. Management Control
Enterprise Risk Management
Material Weaknesses
Management Report on Final Actions
VI. Appendices
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15
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31
34
34
36
39
40
40
42
43
51
57
59
60
80
94
99
100
102
102
102
103
106
A. Key Statistics
B. More About the FDIC
C. Office of Inspector General’s Assessment of
the Management and Performance Challenges Facing the FDIC
106
116
124
Message from the Chairman • Sheila C. Bair
I am pleased to present the Federal Deposit Insurance Corporation’s (FDIC) 2007
Annual Report (also referred to as the Performance and Accountability Report).
The year posed major challenges to financial institutions and to the economy as
a whole. Slumping housing markets and escalating problems, particularly related
to subprime mortgage lending, were among the chief contributors to increased
uncertainty in the financial markets and widespread reductions in asset values.
In spite of these challenges, the FDIC continued to ensure public confidence and
stability in the nation’s financial system. FDIC-insured institutions entered 2007
with strong earnings and capital, and consequently, were in a good position to
absorb the initial stresses associated with last summer’s market events.
The problems that have emerged in the subprime mortgage market underscore
my longstanding view that consumer protection and safe and sound lending
go hand in hand. Most insured institutions have a good performance record in
both areas. However, failure by some lenders to uphold adequate standards in
the increasingly complex mortgage industry has caused serious problems for
consumers, lenders, investors, and the economy. Many of the more troubling
lending practices were found in institutions that are not subject to federal supervision, rather than in insured banks and thrifts. Nationally, the home foreclosure
rate has nearly doubled in the past two years. An estimated 1.7 million owneroccupied, subprime hybrid adjustable rate mortgages (ARMs) will reset in 2008
and 2009, and the combination of declining home prices and scarce refinancing
options could result in hundreds of thousands of additional foreclosures. The
FDIC is committed to working with market participants to develop solutions that
would help prevent unnecessary foreclosures and keep homeowners in their
homes.
Throughout 2007, I urged servicers and lenders to voluntarily restructure some
of their performing loans. Specifically, I endorsed a streamlined process to
keep homeowners with resetting subprime mortgages at their starter rate for
five or more years if they were current on their payments, but could not make
the higher payments after the loan reset. Using a streamlined process to keep
subprime borrowers paying affordable mortgages frees up resources for lenders
and servicers to respond to problems in other categories of loans. On December
6, 2007, Treasury Secretary Paulson called for accelerated and systematic loan
modifications – a plan endorsed by President Bush along with the other federal
banking regulators, and agreed to by many representatives of the mortgage
lending industry. I view this as a very positive initial step towards avoiding
hundreds of thousands of foreclosures and the ensuing economic consequences.
Three FDIC-insured banks failed in 2007. All three failures posed unique
challenges for the FDIC – one, in particular, because it was an Internet bank
with no physical branches. It was also the FDIC’s largest bank closing in
14 years. While the industry had experienced no failures for two-and-a-half-years,
the FDIC remained ready and able to respond and incorporated innovations to
address new and challenging issues. In all three bank failures, the FDIC effectively
responded to the needs of the failed banks’ depositors – as it has since 1934 –
ensuring timely payments of insured deposits.
In spite of its record of success, the FDIC has remained focused on improving
its ability to resolve financial institution failures. As financial institutions have
grown in both size and complexity, the challenges facing the FDIC, if one or more
should fail, have likewise grown. In response, the FDIC has strived to balance
the need for readiness with the goal of maximizing operational efficiencies.
These objectives are being met through a combination of contingency planning,
cross-training of staff, development of enhanced systems for managing both the
assets and liabilities of future failures, and proposed improvements in financial
institution recordkeeping. Through this combination of strategies, the FDIC
will continue its strong record of service, reliability, efficiency, and providing
outstanding value to its stakeholders.
The U.S. financial system benefits from a balance between large and complex
banks, regionally focused banks, and community banks. Community banks are
integral to their local economies and to the customers they serve – individuals
and businesses alike. Overall it is impressive that community banks, while facing
intensified competition, have been able to achieve both respectable earnings and
growth in recent years. Community banks possess certain advantages as lenders
to local households, small businesses, and farmers. The willingness of private
investors to risk their own money to create new banks is a powerful market
indicator of the viability of small banks, especially in areas of high population
density. Community banks will continue to occupy an important position in the
banking industry for the foreseeable future.
We were busy in other areas as well, among them: implementing significant
policies to implement deposit insurance reform, working towards an agreement
on Basel II capital standards, modernizing the claims business process, maintaining a strong supervisory program, and promoting economic inclusion. Below are
a few highlights of our activities in 2007, as well as some challenges we will face
in 2008.
Policy
On January 1, 2007, new risk-based deposit insurance assessment rates became
effective as part of implementation of the Federal Deposit Insurance Reform
Act of 2005. We distributed credits totaling $4.7 billion to those institutions that
contributed to the buildup of the insurance funds through 1996, and issued an
Advance Notice of Proposed Rulemaking (ANPR) seeking comments on alternative
methods for allocating future dividends.
Our efforts on capital reform continued in 2007, with our active participation –
along with our fellow U.S. banking regulators – in shared implementation of the
Basel II Capital Accord. On November 5th, the FDIC Board of Directors jointly
approved, along with the other federal banking regulators, the final rule to implement the advanced approaches of the Basel II Capital Accord in the U.S. (Basel II
AIRB final rule). The final rule is consistent in most respects with the rules that
are being implemented in other jurisdictions. At the request of the FDIC, the
agencies also included safeguards in the event that the new rules do not work as
intended. For instance, the final regulation implements the agencies’ agreement
not to allow any bank to exit its transitional risk-based capital floors unless and
until the agencies publish a study finding that there are no material deficiencies in
the framework after two years experience in implementation or unless identified
defects are remedied. If any agency allows its banks to exit the floors in a way
that departs from this consensus approach, the rule requires that agency to
publish a report explaining its reasoning. The final rule will become effective
on April 1, 2008.
The agencies have agreed to issue a proposed rule that would provide all noncore banks with the option to adopt a standardized approach under the Basel II
Capital Accord. This would replace the earlier proposed rule to adopt the “Basel
IA” option. Basel IA was a new capital framework to be used by banks that
chose not to use the Basel II framework. As we enter the new year, the FDIC
will continue to provide leadership for this effort and work toward the goal of
publishing a Notice of Proposed Rulemaking (NPR) to implement the standardized
approaches of Basel II in the U.S. (Basel II Standardized NPR). Both the Basel
II AIRB final rule and the Basel II Standardized NPR are part of our effort to
enhance the risk sensitivity of the existing risk-based capital framework, while
maintaining safety and soundness within the banking and thrift industries.
We also moved forward with our deposit insurance claims and modernization
initiative that has been ongoing for the past several years. We published an NPR
broken into two parts. The first part applies to all FDIC-insured institutions and
governs the specific time and circumstances under which account balances
will be determined, for deposit insurance purposes, in the event of a failure.
The second part applies only to the largest FDIC-insured institutions –
approximately 160 institutions with at least $2 billion in domestic deposits and
more than 250,000 deposit accounts, or total assets of more than $20 billion,
regardless of the dollar amount of deposits or number of accounts. Under the
proposal, these institutions would be required to adopt mechanisms that would,
in the event of the institution’s failure: place provisional holds on large deposit
accounts in a percentage specified by the FDIC; provide the FDIC with deposit
account data in a standard format; and allow automatic removal of provisional
holds once the FDIC makes an insurance determination. The FDIC places a high
priority on providing access to insured deposits promptly and, in the past, has
usually been able to allow most depositors access to their deposits on the next
business day. If adopted, the proposed rule would better enable the FDIC to
continue this practice, especially for the larger, more complex institutions it
insures.
Supervisory Program
Along with successfully managing an unusually large policy agenda in 2007,
we continued to administer strong and effective supervisory programs in both
the risk-management and compliance areas. We performed 2,258 safety and
soundness examinations; 1,773 compliance and Community Reinvestment Act
exams; and 2,941 specialty exams. The FDIC is the primary federal regulator
for state nonmember banks, the vast majority of which are community banks.
The core work of our examination staff continues to be the on-site evaluations
and assessment of these banks’ risk management, compliance and consumer
programs. Our field examiners are on the frontline and their work in identifying
emerging risks and promoting stability in our nation’s economic system has been
the hallmark of the FDIC for 75 years.
During the year, as the FDIC and fellow banking regulators became increasingly
concerned with the expansion of subprime hybrid ARMs and the potential risk
posed by these products, we took a leading role with the other regulators in
issuing the Statement on Subprime Mortgage Lending. The statement describes
the prudent safety and soundness and consumer protection standards that institutions should follow to ensure borrowers obtain loans they can afford to repay.
We also took a leading role in developing the interagency Statement on Working
with Mortgage Borrowers, encouraging financial institutions to pursue strategies
to mitigate losses while preserving homeownership for borrowers that are
delinquent or in default, or are at imminent risk of default. To provide guidance
to entities that service residential mortgage loans for others, the FDIC, along
with the other federal financial regulatory agencies, issued the Statement on
Loss Mitigation Strategies for Servicers of Residential Mortgages.
To improve the quality of our examination programs, we launched our successful
Joint Examination Teams (JETs) initiative, in which examiners from both the
compliance and the risk-management sides examine FDIC-supervised institutions
identified as offering certain consumer credit products, such as subprime loans,
nontraditional mortgage loans, and third-party loan origination arrangements.
Through this team effort, we can more fully assess institutions’ various risks
as well as their ability to control those risks. Our compliance examiners have
expertise in such areas as unfair and deceptive acts or practices, the Truth-inLending Act, the Real Estate Settlement Procedures Act, and the Equal Credit
Opportunity Act, while our risk-management examiners’ expertise covers such
areas as credit card and mortgage banking activities, securitization and assetliability modeling.
As part of our continued effort to develop and maintain a highly skilled and
flexible workforce, we have expanded our internal certificate program to include
the Bank Secrecy Act, Receivership Claims, Franchise and Asset Marketing, and
Basic Compliance Examination functions. This program allows employees to earn
industry-recognized professional certifications.
Also in 2007, we implemented a number of regulatory relief provisions included
in the Financial Services Regulatory Relief Act of 2006. These included revising
Regulation R, which sets forth circumstances and conditions under which banks
can continue to effect securities transactions for customers without being
subject to registration as a broker under the Securities Exchange Act of 1934;
expanding the examination cycle for “1” and “2”-rated banks to 18 months
by raising the program’s asset threshold from $250 million to $500 million; and
developing model privacy notices – along with other federal financial institution
regulatory agencies, the Securities and Exchange Commission and the Federal
Trade Commission – which financial institutions have the option to use. We are
mindful of unnecessary regulatory burden and will continue to eliminate it where
possible.
Finally, during a year in which we witnessed a range of natural disasters around
the country, we issued 12 financial institution letters announcing steps to provide
regulatory relief to institutions and to facilitate recovery in areas damaged by
fire, flood and other natural disasters. Recognizing the lasting damage caused by
Hurricane Katrina, we also issued guidance to remind examination personnel and
the industry that communities and families impacted by Hurricane Katrina may
need additional time to recover.
Economic Inclusion
The FDIC is strongly committed to advancing economic inclusion for all segments
of society. In 2007, we launched our Alliance for Economic Inclusion initiative in
nine markets across the country, promoting the expanded use of insured financial
institutions by segments of the U.S. population that are currently underserved by
the banking industry. Broad-based coalitions of financial institutions, communitybased organizations and other partners were formed to focus on expanding basic
retail financial services for underserved populations. Services include savings
accounts, affordable remittance products, small-dollar loan programs, targeted
financial education programs, alternative delivery channels and other assetbuilding programs. Also, foreclosure-prevention efforts have been integrated.
As part of our economic inclusion effort this year, we focused on assisting
financially stressed residential borrowers. Working through our Alliance for
Economic Inclusion and with NeighborWorks® America, we are promoting
a broad foreclosure-prevention initiative for consumers at risk of foreclosure
from subprime and nontraditional mortgage lending.
In addition, we hosted three meetings of the FDIC Advisory Committee on
Economic Inclusion (ComE-IN), which was approved by the FDIC Board of
Directors pursuant to the Federal Advisory Committee Act in November 2006.
The Committee provides the FDIC with advice and recommendations on important
initiatives focused on expanding access to banking services by underserved
populations. The topics addressed during the 2007 meetings were access
to small dollar loans, the subprime mortgage situation and money services
businesses and their access to the banking system.
Based on a recommendation from the Advisory Committee on Economic
Inclusion, the FDIC Board approved a two-year pilot project to review affordable
and responsible small-dollar loan programs in thirty diverse financial institutions
across the country. This program will assist bankers by identifying and
disseminating information on replicable business models for small-dollar
loans by evaluating data submitted to the FDIC about the bank’s small dollar
loans, the overall value and profitability of their program, and the benefit
to consumers.
During 2007, the FDIC also commenced work on two surveys intended to provide
extensive new data regarding economic inclusion. Both of these survey efforts
are related to a mandate in section 7 of the Federal Deposit Insurance Reform
Conforming Amendments Act of 2005 requiring the FDIC to conduct a survey
of FDIC-insured institutions every two years regarding their efforts to serve the
unbanked. The first of these surveys, the Survey of Banks’ Efforts to Serve the
Unbanked and Underbanked, will be conducted during 2008 and is expected to
yield significant insight about bank efforts to serve unbanked and underbanked
populations. The FDIC is also exploring the feasibility of conducting a survey
of U.S. households to estimate the percentage of the U.S. population that is
unbanked and underbanked. The survey is scheduled to be conducted in January
2009 as a supplement to the Bureau of the Census’s Current Population Survey.
It is expected to yield significant new data on the extent of the population that
is unbanked and/or underbanked and the reasons why some households do not
make greater use of traditional banking services.
We also continued promoting financial education to the unbanked and underbanked populations around the country, expanding our efforts to integrate
our Money Smart financial education program into public schools. To reach an
even wider audience with Money Smart, we distributed a revised version of
our instructor-led curriculum and an online computer-based instruction. In 2007,
the FDIC surpassed its goal established at the inception of the Money Smart
program to provide financial education to 1 million consumers. To date, over
1.4 million consumers have taken the Money Smart curriculum.
Conclusion
As we begin 2008, the FDIC aspires to be recognized by its employees and
stakeholders as an outstanding employer with a highly motivated and engaged
workforce that understands and is committed to the Corporation’s mission, goals
and objectives. To that end, during 2007 we conducted a comprehensive employee
survey and have plans underway to further improve the Corporation in the areas
of communication, empowerment, employee performance, and compensation
systems. Our employees have been and always will be the FDIC’s most important
resource in completing its mission. I look forward to continued work with our
dedicated staff and exceptional Board of Directors in 2008.
The FDIC remains committed to working with bankers, consumers, fellow
regulators, Congress and others to keep the banking industry healthy and the
economy strong – a commitment that we will continue to keep into 2008 and
well beyond.
Sincerely,
Sheila C. Bair
Message from the Chief Financial Officer • Steven O. App
I am pleased to join Chairman Bair in presenting our 2007 Annual Report.
The report provides our stakeholders with meaningful financial and program
performance information and summarizes our accomplishments. Our priority
is to provide timely, reliable and useful information.
The U.S. Government Accountability Office (GAO) issued unqualified audit opinions
for the two funds administered by the Corporation: the Deposit Insurance Fund
(DIF) and the Federal Savings and Loan Insurance Corporation (FSLIC) Resolution
Fund (FRF). This marks the sixteenth consecutive year that we have received
unqualified audit opinions, and demonstrates our continued dedication to sound
financial management. It is also indicative of the financial statements being fairly
presented. Achieving this major milestone attests to the hard work of the FDIC’s
employees, and I applaud their efforts.
The FDIC’s financial highlights during 2007 include:
For the twelve months ending December, 31, 2007, DIF’s comprehensive
income totaled $2.2 billion compared to $1.6 billion for the previous year,
an increase of 38 percent. Excluding the recognition of exit fees earned of
$345 million (a one-time adjustment) from the 2006 results, comprehensive
income rose by $1.02 billion, or 84 percent, from a year ago. This year-over-year
increase was primarily due to a $611million increase in assessment revenue,
a $299 million increase in interest revenue, a $298 million decrease in the
unrealized loss on available-for-sale (AFS) securities, offset by a $42 million
increase in operating expenses and a $147 million increase in the provision
for insurance losses.
The $611 million increase in assessment revenue resulted from significant changes
to the risk-based assessment system beginning in 2007 (see footnote 7 to
DIF’s financial statements for a detailed explanation). For 2007, DIF recognized
$643 million in assessment revenue, representing $3.7 billion in gross premiums
due from insured depository institutions, net of $3.1 billion in assessment credits
used. Assessment revenue increased from $94 million in the first quarter to
$245 million in the fourth quarter. The increased revenue each quarter primarily
resulted from a reduction in the assessment credits used by financial institutions
to offset gross assessments. This trend towards higher assessment income
is expected to continue as institutions deplete their available credits. Of the
$4.7 billion in one-time assessment credits granted, $1.6 billion (34 percent)
remained as of December 31, 2007.
In 2007, we continued our efforts to reduce operating costs and prudently manage
the funds that the FDIC administers. Annual budgeted operating expenditures
for 2007 totaled approximately $1.00 billion, which represents an increase
of $29 million (3 percent) from 2006. On December 19, 2007, the FDIC Board
of Directors approved a 2008 Corporate Operating Budget totaling $1.14 billion,
a slight increase over the 2007 budget, largely due to the cost of employee
pay increases negotiated for 2008.
10
Capital investment spending decreased significantly in 2007 to approximately
$12 million, roughly 48 percent of 2006 levels. This decrease is largely attributable
to the completion of two major investment projects in 2006. The FDIC now has
four active investment projects remaining. Investment spending is projected to
be $17 million in 2008.
In accordance with the requirements of the Federal Managers’ Financial Integrity
Act of 1982, the FDIC’s management conducted its annual assessment and
concluded that the system of internal controls, taken as a whole, complies with
internal control standards prescribed by the Government Accountability Office
(GAO) and provides reasonable assurance that the related objectives are being
met.
Our performance in 2007 gives us confidence that we can meet the challenges
of an ever-changing banking industry. In 2008, we will continue to focus on cost
effective management of both the DIF and the FRF, while maintaining a strong
enterprise-wide risk management and internal control program.
Sincerely,
Steven O. App
11
I. Management’s Discussion and Analysis
The Year in Review
Insurance
In 2007, the FDIC continued its work
on high-profile policy issues, ranging
from implementation of deposit
insurance reform to finalizing capital
reform. In addressing these and other
issues, the Corporation published
numerous Notices of Proposed
Rulemaking (NPRs) throughout the
year, seeking comment from the
public. The Corporation also continued
to focus on a strong supervisory
program and reorganized examination
teams that inspected financial
institutions that originate significant
volumes of subprime loans and nontraditional loan products. The FDIC
continued expansion of financial
education programs, providing Money
Smart training to hundreds of public
school teachers. It also sponsored
and co-sponsored major conferences
and participated in local and global
outreach initiatives.
The FDIC insures bank and savings
association deposits. As insurer, the
FDIC must continually evaluate and
effectively manage how changes in
the economy, the financial markets
and the banking system affect the
adequacy and the viability of the
Deposit Insurance Fund.
Highlighted in this section are the
Corporation’s 2007 accomplishments
in each of its three major business
lines – Insurance, Supervision
and Consumer Protection, and
Receivership Management – as
well as its program support areas.
Implementation of
Deposit Insurance Reform
On November 2, 2006, the FDIC
Board of Directors adopted a final
rule on assessments as part of
the implementation of the Federal
Deposit Insurance Reform Act of
2005 (Reform Act). The new rule
enables the FDIC to more closely
tie each bank’s assessments to
the risk that it poses to the Deposit
Insurance Fund.
Effective January 1, 2007, assessment
rates ranged from 5 to 7 basis points
for Risk Category I institutions,
10 basis points for Risk Category II
institutions, 28 basis points for Risk
Category III institutions and 43 basis
points for Risk Category IV institutions.
Some members of the Deposit Insurance Reform Implementation Team, with Chairman Sheila Bair,
Vice Chairman Martin Gruenberg and Director Thomas Curry.
12
These rates are uniformly 3 basis
points greater than the base assessment rates also adopted by the
Board in November 2006. The Board
retains the flexibility to adjust rates
without further notice-and-comment
rulemaking, provided that no such
adjustment can be greater than
3 basis points in any quarter; that
these adjustments cannot result in
rates more than 3 basis points above
or below the base rates; and that
rates cannot be negative. The table
on the following page shows the
distribution of institutions among the
risk categories as well as within Risk
Category I.
Within Risk Category I, the FDIC
determines an assessment rate from
three primary sources of information –
the supervisory component ratings
for all insured institutions, the financial
ratios for most institutions, and the
long-term debt issuer ratings for
large institutions that have them.
Generally, for those institutions
in Risk Category I with less than
$10 billion in assets and those with
$10 billion or more in assets that
do not have long-term debt issuer
Distribution of Institutions and Assessment Base Among Risk Categories Quarter Ending September 30, 2007
Dollars in billions
Risk
Category
Annual
Rate in
Percent
Basis
Number of
of Total
Assessment
Points
Institutions
Institutions
Base
I - Minimum
5
I - Middle
5.01– 6 .00
I - Middle
6.01– 6 .99
I - Maximum
7
II
10
III
28
IV
43
Total
2,709
3,088
1,422
859
422
64
7
8,571
32%
36%
17%
10%
5%
1%
0%
100%
$
$
3,872
2,078
456
296
163
14
1
6,880
Percent
of Total
Assessment
Base
56%
30%
7%
4%
2%
0%
0%
100%
Note: Institutions are categorized based on supervisory ratings, debt ratings and financial data as of September 30, 2007.
Rates do not reflect the application of assessment credits. Percentages may not add to 100 percent due to rounding.
ratings, assessment rates are based
on a combination of financial ratios
1
and CAMELS component ratings.
Generally, for those institutions in
Risk Category I with $10 billion or
more in assets that have long-term
debt issuer ratings, assessment
rates are determined from weighted
average CAMELS component ratings
and long-term debt issuer ratings.
For all large Risk Category I institutions,
additional risk factors are considered
to determine whether the assessment
rates should be adjusted. This additional information includes market
data, financial performance measures,
considerations of the ability of an
institution to withstand financial
stress, and loss severity indicators.
Any adjustment is limited to no more
than 1/2 basis point up or down. In
February 2007, the FDIC released for
public comment proposed guidelines
on how it would determine such
adjustments. The FDIC Board approved
final guidelines in May 2007.
Institutions that contributed to the
build-up of the insurance funds
through 1996 received an aggregate
$4.7 billion in one-time credits under
the Reform Act to offset future
deposit insurance assessments.
These credits were allocated to
institutions based on their 1996
assessment base shares.
The average annualized assessment
rate (weighted by each institution’s
assessment base), before accounting
for the use of credits, was approximately 5.4 basis points for the first
three quarters of 2007. Approximately
68 percent of all institutions (71 percent of institutions in Risk Category I)
were able to offset their first,
second, and third quarter 2007
assessments entirely using credits.
During the first half of 2007,
the FDIC completed substantial
modifications to its information
systems in order to implement the
changes to risk-based assessment
rates, track credit use and availability
for each institution, incorporate
changes to the calculation and
reporting of the assessment base,
and deliver the invoices for the
first quarter assessments by the
June 2007 deadline.
In September 2007, the FDIC issued
an Advance Notice of Proposed
Rulemaking (ANPR), seeking comments on alternative methods for
allocating dividends as part of a
permanent final rule to implement
the dividend requirements of the
Reform Act. In October 2006, the
Board adopted a temporary rule
governing dividends, which expires
at the end of 2008. The comment
period for the Dividend ANPR closed
on November 19, 2007.
International Capital Standards
The FDIC, as insurer, has a substantial
interest in ensuring that bank capital
regulation effectively safeguards
the federal bank safety net against
excessive loss. During 2007, the
FDIC participated in the Basel
Committee on Banking Supervision
(BCBS) and many of its subgroups.
The FDIC also participated in various
U.S. regulatory efforts aimed at
interpreting international capital
standards and establishing sound
policy and procedures for
implementing these standards.
1 The CAMELS composite rating represents the adequacy of Capital, the quality of Assets, the capability of Management, the quality and level of Earnings, the adequacy of Liquidity, and the Sensitivity
to market risk, and ranges from “1” (strongest) to “5” (weakest).
13
Ensuring the adequacy of insured
institutions’ capital under Basel II
remained a key objective for the FDIC.
In 2007, the FDIC devoted substantial
resources to domestic and international efforts to ensure these new
rules are designed and implemented
appropriately. These efforts, in conjunction with other federal financial
regulators, included publishing a final
rule for the implementation of the
advanced approaches of Basel II
as well as proposed examination
guidance. This guidance is intended
to provide the industry with regulatory
perspectives for implementation. In
concert with regulators from other
U.S. banking agencies and other
Basel Committee member countries,
the FDIC also participated in a
review of supervisory and regulatory
supplemental capital measures
currently being used to ensure
bank capital adequacy.
The Basel II Final Rule was published in the Federal Register on
December 7, 2007, with an effective
date of April 1, 2008. The findings of
the fourth quantitative impact study
(QIS-4), which were completed
in 2005, suggested that, without
modification, the Basel II framework
could result in an unacceptable
decline in minimum risk-based
capital requirements. As a result,
the agencies have included
safeguards against the possibility
that the new rules do not work as
intended. For instance, the agencies
have agreed, by regulation, not to
allow any bank to exit its transitional
14
risk-based capital floors unless and
until the agencies publish a study
giving the new rules a clean bill of
health or unless identified defects
are remedied. If any agency allows
its banks to exit the floors in a way
that departs from this consensus
approach, the rule requires that
agency to publish a report explaining
its reasoning. In addition, the agencies
have retained the U.S. leverage
ratio and Prompt Corrective Action
requirements.
Through its supervisory program, the
FDIC continues to work with certain
insured state non-member bank
subsidiaries of banking organizations
that plan to operate under the new
capital accord, to review and assess
implementation plans and progress
towards meeting qualification
requirements.
Domestic Capital Standards
The FDIC is involved in efforts to
revise the existing risk-based capital
standards for banks that will not be
subject to the advanced approaches
of Basel II. As such, the FDIC has
taken a lead role in developing a
proposed rule that would implement
the standardized approach of Basel II
(Basel II Standardized NPR). The proposed rule is intended to modernize
the risk-based capital rules for banks
that do not use the advanced
approaches of Basel II, and minimize
potential competitive inequities that
may arise between banks that adopt
Basel II and banks that remain under
the existing rules. The agencies have
indicated that they expect to issue
the Basel II Standardized NPR during
the first quarter of 2008.
Identifying and Addressing Risks
to the Deposit Insurance Fund
During 2007, the FDIC continued to
research and analyze trends in the
banking sector, financial markets
and the overall economy to identify
emerging risks to the banking
industry and the Deposit Insurance
Fund. The identified risks were
highlighted throughout the year in
presentations and written reports.
The FDIC redesigned its Large
Insured Depository Institution (LIDI)
program to ensure uniform reporting
of critical risks posed by institutions
with assets over $10 billion. The
information captured through this
program is used to support business
line activities related to supervision,
insurance and resolutions. Institutionspecific concerns were directed to
FDIC regional offices for appropriate
action. The FDIC continued to
analyze the regional economies
affected by hurricanes Katrina
and Rita throughout the year.
Center for Financial Research
During 2007, the FDIC’s Center
for Financial Research (CFR)
co-sponsored two major research
conferences: the 17th Annual
Derivatives Securities and Risk
Management Conference and the
seventh Annual Bank Research
Conference.
The 17th Annual Derivatives
Securities and Risk Management
Conference, which the FDIC cosponsored with Cornell University’s
Johnson Graduate School of
Management and the University of
Houston’s Bauer College of Business,
was held in April 2007 at FDIC‘s
Virginia Square facility and attracted
over 100 researchers from around
the world. Conference presentations
focused on technical and mathematical
aspects of risk measurement and
securities pricing, and included several
presentations on Basel II-related
topics.
of Chicago, the University of Kansas
School of Business, and The Journal
of Financial Services Research,
co-sponsored the Mergers and
Acquisitions of Financial Institutions
Conference in November.
The CFR and The Journal of
Financial Services Research (JFSR)
hosted the seventh Annual Bank
Research Conference in September
with over 100 attendees. The conference included the presentation of
12 papers, a nationally recognized
guest speaker, Francis A. Longstaff –
Allstate Professor of Insurance
and Finance, Anderson School of
Management, UCLA, an expert panel,
and discussions on timely issues
affecting the financial system.
The conference theme focused
on liquidity in the financial system.
Experts discussed analyses on such
topics as asset prices and liquidity,
liquidity in the equity and options
markets, and issues involving
commercial bank liquidity and
bank lending.
Ten CFR working papers were
published in 2007 on topics including
risk measurement, exchange rate
exposure, and financial institution
credit and retail banking relationships.
The CFR also hosted the Basel
Research Task Force Annual
Workshop in May. The workshop
included a two-day session with
research paper presentations and
discussions by staff members
of Basel Committee institutions.
Approximately 85 researchers and
policy makers attended the workshop.
Many represented foreign central
banks and financial supervisory
agencies. Additionally, the FDIC
along with the Federal Reserve Bank
Other Risk Identification Activities
The FDIC researched and analyzed
emerging risks and trends in the
banking sector, financial markets
and the overall economy to identify
issues affecting the banking industry
and the DIF. During 2007, the FDIC
focused significant attention on the
condition of housing markets and
the problems facing subprime mortgage borrowers and their lenders.
The FDIC also continued to analyze
the regional economies adversely
affected by hurricanes Katrina and
Rita throughout the year. A consumer
finance research section was formed
in late 2007 to examine a variety of
consumer-related issues, including
fair lending, consumer credit access,
small business credit access, new
consumer financial services, and
home mortgage finance.
In 2007, the FDIC began publishing
FDIC Quarterly, which incorporates
information previously available in the
Quarterly Banking Profile and other
FDIC publications. FDIC Quarterly
discusses current conditions, trends
and changes in the performance
of insured institutions, and issues
affecting the economy and the
banking system. In 2007, FDIC
Quarterly analyzed such topics as the
case for subprime loan modifications,
the privatization of deposit insurance,
the effectiveness of financial education programs, and the popularity
of individual development accounts
(matched savings accounts that
enable low-income families to save
money for a particular financial goal,
such as buying a home, paying for
post-secondary education, or starting
or expanding a small business). In
addition, quarterly FDIC State Profiles
were released for each state during
2007.
Throughout the year, the FDIC
conducted numerous outreach
activities addressing economic and
banking risk analyses. Presentations
were made to financial institutions
and related trade groups, bank
directors’ colleges, community
groups, foreign visitors and other
regulators.
Supervision and Consumer
Protection
Supervision and consumer protection
are cornerstones of the FDIC’s efforts
to ensure the stability of and public
confidence in the nation’s financial
system. The FDIC’s supervision
program promotes the safety and
soundness of FDIC-supervised
insured depository institutions,
protects consumers’ rights, and
promotes community investment
initiatives.
15
FDIC Examinations 2005-2007
Examination Program
The FDIC’s strong bank examination
program is the core of its supervisory
program. At year-end 2007, the
Corporation was the primary federal
regulator for 5,257 FDIC-insured
state-chartered institutions that are
not members of the Federal Reserve
System (generally referred to as
“state nonmember” institutions).
Through safety and soundness,
consumer compliance and Community
Reinvestment Act (CRA), and other
specialty examinations, the FDIC
assesses their operating condition,
management practices and policies,
and their compliance with applicable
laws and regulations. The FDIC also
educates bankers and consumers on
matters of interest and addresses
consumers' questions and concerns.
In 2007, the Corporation conducted
2,258 statutorily-required safety and
soundness examinations, including
a review of Bank Secrecy Act compliance, and all required follow-up
examinations for FDIC-supervised
problem institutions within prescribed
time frames. The FDIC also conducted
1,773 CRA/Compliance examinations
(1,241 joint CRA/compliance
examinations, 528 compliance-only
examinations,2 and four CRA-only
examinations) and 2,941 specialty
examinations. All CRA/compliance
examinations were also conducted
within the time frames established
by FDIC policy, including required
follow-up examinations of problem
institutions. The accompanying table
compares the number of examinations,
by type, conducted in 2005, 2006
and 2007.
2
3
2007
2006
Safety and Soundness:
State Nonmember Banks
2,039
2,184
Savings Banks
213
201
Savings Associations
3
2
National Banks
0
0
State Member Banks
3
1
Subtotal - Safety and Soundness Examinations
2,258
2,388
CRA/Compliance Examinations:
Community Reinvestment Act - Compliance
1,241
777
Compliance - only
528
1,177
CRA - only
4
5
Subtotal CRA/Compliance Examinations
1,773
1,959
Specialty Examinations:
Trust Departments
418
468
Data Processing Facilities
2,523
2,584
Subtotal-Specialty Examinations
2,941
3,052
Total
6,972
7,399
As of December 31, 2007, there
were 77 insured institutions with
total assets of $22.2 billion designated
as problem institutions for safety and
soundness purposes (defined as those
institutions having a composite
3
CAMELS rating of “4” or “5”),
compared to the 51 problem
institutions with total assets of
$8.5 billion on December 31, 2006.
This constituted a 51 percent yearover-year increase in the number of
problem institutions and a 161 percent increase in problem institution
assets. During 2007, 38 institutions
with aggregate assets of $6.4 billion
were removed from the list of
problem financial institutions, while
64 institutions with aggregate assets
of $26.5 billion were added to the list
of problem financial institutions. The
FDIC is the primary federal regulator
for 47 of the 77 problem institutions.
2005
2,198
199
1
0
1
2,399
815
1,198
7
2,020
450
2,708
3,158
7,577
During 2007, the Corporation issued
the following formal and informal
corrective actions to address safety
and soundness concerns: 48 Cease
and Desist Orders, three Temporary
Cease and Desist Orders, one
modified Cease and Desist Order,
and 158 Memoranda of Understanding.
Of these actions issued, 25 Cease
and Desist Orders and 31 Memoranda
of Understanding were issued based,
in part, on apparent violations of the
Bank Secrecy Act.
As of December 31, 2007, 43 FDICsupervised institutions were assigned
a “4” rating for safety and soundness
and four institutions were assigned a
“5” rating. Forty-two of the “4”- rated
institutions were examined in 2007,
and formal or informal enforcement
actions have been finalized to address
the FDIC’s examination findings. All
“5”-rated institutions were examined
in 2007.
Compliance-only examinations are conducted for most institutions at or near the mid-point between joint compliance-CRA examinations under the Community Reinvestment Act of 1977, as amended
by the Gramm-Leach-Bliley Act of 1999. CRA examinations of financial institutions with aggregate assets of $250 million or less are subject to a CRA examination no more than once every five years
if they receive a CRA rating of “Outstanding” and no more than once every four years if they receive a CRA rating of “Satisfactory” on their most recent examination.
The CAMELS composite rating represents the adequacy of Capital, the quality of Assets, the capability of Management, the quality and level of Earnings, the adequacy of Liquidity, and the
Sensitivity to market risk, and ranges from “1” (strongest) to “5” (weakest).
16
As of December 31, 2007, eight
FDIC-supervised institutions were
assigned a “4” rating for compliance;
no institutions were assigned a “5”
rating. In total, three of the “4”-rated
institutions were examined in 2007;
three were examined prior to 2007
but are currently in various stages
of appealing the ratings, and the
remaining two were examined
in 2006. With regard to the two
for which examinations were last
conducted in 2006, an informal
enforcement action for one was
issued in September 2007; therefore,
an examination is not due until 2008.
The other institution is operating
under a Cease and Desist Order
and the examination remains open.
The Corporation has issued
enforcement actions to address
the examination findings for all five
of the institutions that were not
in the process of an appeal. These
actions include one Cease and
Desist Order as noted above and
four Memoranda of Understanding.
Revisions to Compliance
Examination Guidance
The FDIC conducted an internal
analysis of compliance examination
reports to determine if appropriate
follow-up action is initiated on
significant violations cited during
compliance examinations. The review
revealed that a change was needed
to clarify guidance to ensure that
the most problematic weaknesses
and significant violations cited in
examination reports are promptly
addressed by bank management.
In response, a Regional Director
Memorandum entitled, Compliance
Examination Process: Clarification
of “Significant” Violations and
Amendments to Enforcement Action
and Post-Examination Processes was
issued in 2007. The post-examination
follow-up process was formalized,
through which state nonmember
banks will be required to respond to
examination staff in writing, outlining
actions planned and taken to address
identified deficiencies including
significant violations. This process
will enable the FDIC to more
consistently assess an institution’s
success or failure in addressing the
issues during the interim period
between examinations.
Joint Examination Teams
The FDIC used joint compliance/risk
management examination teams
(JETs) to assess risks associated
with new, nontraditional and/or
high-risk products being offered by
FDIC-supervised institutions. The
JET approach recognizes that to fully
understand the potential risks inherent
in certain products and services, the
expertise of both compliance and risk
management examiners is required.
The JET approach has three primary
objectives:
• To enhance the effectiveness
of the FDIC’s supervisory
examinations in unique
situations;
• To leverage the skills of examiners
who have experience with
emerging and alternative loan
and deposit products; and
• To ensure that similar supervisory
issues identified in different areas
of the country are addressed
consistently.
The JET concept evolved from the
FDIC’s examination of state nonmember banks that were conducting
payday lending activities through
third-party vendors. Payday lending
involved unique and complex products
with significant safety and soundness
and consumer protection risks for
the institutions involved in this activity.
Joint examination teams were
subsequently used in the examination
of credit card lenders that were
targeting subprime customers.
As with the payday lenders, such
products present a myriad of safety
and soundness and consumer
protection risks for these lenders.
In 2007, the FDIC has used JETs
in institutions involved in significant
subprime or nontraditional mortgage
activities; institutions affiliated with
or utilizing third parties to conduct
significant lending activities, especially
in the credit card area; and institutions
for which the FDIC has received a
high volume of consumer complaints
or complaints with serious allegations
of improper conduct by banks.
Subprime Hybrid Adjustable Rate
Mortgages
In 2007, the FDIC continued to closely
monitor the expansion of subprime
hybrid adjustable rate mortgages
(ARMs), typically offered to subprime
borrowers. Hybrid ARMs start with
a low fixed interest rate for an initial
period, which often lasts for two
to three years, and then resets to
a variable rate. Mortgage lenders
typically qualified borrowers based
on the low introductory payment
17
amount rather than at the fully
indexed interest rate, assuming a
fully amortizing repayment schedule.
Such underwriting standards and
loan terms can cause payment
shock, the consequences of which
may not have been fully explained
to borrowers. In addition, many
lenders combined these loans with
other potentially risky features, such
as requiring little or no documentation
of income, high loan-to-value ratios,
and simultaneous second-lien
mortgages, which could compound
the risk to both borrowers and
lenders.
To address these concerns, the
FDIC joined the other federal financial
institution regulatory agencies in
issuing the Statement on Subprime
Mortgage Lending (Subprime
Guidance) on July 10, 2007. The
guidance covers three primary areas:
risk management practices, consumer
protection principles, and control
systems. The risk management
section focuses on avoiding predatory
lending, following prudent underwriting standards for qualifying borrowers,
and encouraging institutions to
work constructively with residential
borrowers who are in default or whose
default is reasonably foreseeable.
The consumer protection principles
section recommends that communications with consumers, including
advertisements, oral statements
and promotional materials, provide
borrowers with full and balanced
information about the costs, terms,
features and risks of subprime hybrid
ARMs in a timely manner. The FDIC
joined the other regulatory agencies in
providing illustrations for disclosures
18
for public comment. The control
systems section specifies that institutions should develop and implement
strong control systems to monitor
whether their subprime lending
activities are performing as expected,
and whether actual practices are
consistent with their policies and
procedures. These systems should
monitor both the institution’s personnel
and third party originators, such as
mortgage brokers or correspondents.
Working through Mortgage Resets
The FDIC became increasingly
concerned about borrowers’ ability to
service the higher debt load resulting
from payment shock when their
hybrid ARMs payments reset. Many
borrowers, especially those who
were qualified at a low introductory
payment amount rather than the fully
indexed interest rate and on a fully
amortizing repayment schedule, may
not have sufficient financial capacity
to make the higher contractual
payments owed on their home loans.
To address this concern, the
FDIC led the agencies in issuing
the Statement on Working with
Mortgage Borrowers in April 2007.
This guidance primarily addresses
those instances when a financial
institution has retained a residential
mortgage loan on its books. The
agencies issued the Statement
on Loss Mitigation Strategies for
Servicers of Residential Mortgages
in September 2007 to provide
guidance to entities that service
residential mortgage loans for
others. In addition, the FDIC
joined the Conference of State
Bank Supervisors and the American
Association of Residential Mortgage
Regulators in issuing the Supplemental
Information for Loss Mitigation
Strategies. This guidance encourages
servicers to consider the borrower’s
ability to repay modified obligations,
taking into account the borrower’s
total monthly housing-related
payments as a percentage of the
borrower’s gross monthly income.
The FDIC is encouraging servicers
to adopt a streamlined approach to
making the decision to grant loan
modifications where necessary.
Where the homeowner generally has
been current at the starter rate, but
cannot refinance in today’s market
or make the higher payments after
the interest rate resets, then the
loan should be modified to keep it
at the starter rate for a long-term
sustainable period. Such modification
arrangements would also benefit
lenders and investors who would not
only have a higher level of performing
loans, but would also avoid administrative expenses associated with servicing delinquent debts or foreclosing
on the property. In addition, financial
institutions may receive favorable
CRA consideration for programs that
transition low-to moderate-income
borrowers from higher cost credit to
lower cost credit, provided that the
loan modifications are made in a
prudent manner.
Regulatory Relief
On October 13, 2006, the President
signed Public Law No.109-351, the
Financial Services Regulatory Relief
Act of 2006 (FSRRA). The law required
the FDIC and other federal regulatory
agencies to revise certain rules and
regulations and supervisory processes.
All required regulatory changes,
except revisions to part 359 and FDIC
policy on applications for deposit
insurance, were completed during
2007. In 2007, the GAO began a
review of Currency Transaction
Reports as required under FSRRA.
The FDIC has provided the GAO with
requisite information to support this
review.
Regulation R
The FDIC joined the Office of the
Comptroller of the Currency (OCC),
the Federal Reserve Board (FRB),
the Office of Thrift Supervision (OTS),
and the Securities and Exchange
Commission (SEC) in drafting
and finalizing the joint FRB/SEC
Regulation R - Definitions of Terms
and Exemptions Relating to the
“Broker” Exceptions for Banks. The
FSRRA required the Federal Reserve,
in consultation with the other federal
banking regulatory agencies, and
the SEC to develop a regulation
implementing the exceptions for
banks from the definition of broker
contained in the Gramm-Leach-Bliley
Act of 1999. The final Regulation R
was published in the Federal Register
on October 3, 2007, and became
effective on December 3, 2007.
Regulation R sets forth the circumstances and conditions under which
banks can continue to effect securities
transactions for customers without
being subject to registration as a
broker under the Securities Exchange
Act of 1934.
Model Privacy Notices
The FDIC also worked with the
other federal banking agencies, the
National Credit Union Administration,
the SEC and the Federal Trade
Commission to develop model privacy
notices that financial institutions have
the option of using.
Review of the Reports of Condition
Section 604 of the Financial Services
Regulatory Relief Act of 2006 requires
the federal banking agencies to review
the content of bank Call Reports and
Thrift Financial Reports (TFR). The
objective of Section 604 is for the
agencies to use the results of the
review as a basis for eliminating or
reducing any information collected
in Call Reports and TFRs found to
be unnecessary or inappropriate.
The Federal Financial Institution
Examination Council's (FFIEC) Task
Force on Reports surveyed various
Call Report user groups to identify
the purposes for which each group
uses each Call Report item, the
extent of usage for each item, and
the frequency with which each data
item is needed. There were 165
survey participants from the four
banking agencies and the Conference
of State Bank Supervisors (CSBS).
The survey was completed in August
and the results were evaluated and
reported to the FFIEC principals in
October 2007.
• Statement of Policy on Bank
Mergers Transactions and
Applicable Sections of Part 303
To eliminate the competitive
factors report from other banking
agencies, and the post-approval
waiting period for mergers with
affiliates.
FDIC Rules and Regulations
The FDIC also revised the following
rules and regulations:
• Part 348
To raise the threshold allowing
depository organizations with
total assets of $50 million
(previously $20 million) to be
exempt from the prohibition
against having interlocking
management officials, if the
depositories are located, or
have an affiliate located, in
the same metropolitan statistical
area, primary metropolitan
statistical area, or consolidated
metropolitan statistical area.
• Part 309
To reflect broad authority for
the FDIC to provide confidential
supervisory information to any
other federal or state agency
or authority with supervisory
or regulatory authority over the
depository institution that is
determined to be appropriate.
• Applicable Sections of Part 308
and the Application Process
To extend the time for review
of a change-in-control notice
to address issues arising from
so-called “stripped charters.”
In addition, Part 308 was
amended to clarify that the
appropriate federal banking
agency may suspend or
prohibit individuals charged
with certain crimes from
participating in the affairs
of any relevant depository
institution.
• Statement of Policy on
Section 19 of the FDI Act
To reflect amendments made
by the Financial Services
Regulatory Reform Act of 2006.
• Part 337.12
To expand the examination cycle
for “1” and “2”-rated community
banks to 18 months by raising
the asset threshold eligibility
from $250 million to $500 million.
19
Disaster Relief
Recognizing that many communities
and families may need an extended
period of time to recover from the
devastation caused by Hurricane
Katrina, the FDIC and the other
federal banking agencies issued a
reminder to examiners and financial
institutions to consider the principles
outlined in the Hurricane Katrina
Examiner Guidance. In addition,
during the year the FDIC issued
12 financial institution letters that
provided regulatory relief to financial
institutions and facilitated recovery
in areas damaged by fire, flood and
other natural disasters.
Protection of Federal Benefit
Payments
The FDIC, along with the other
federal financial institution regulators,
proposed guidance that encourages
federally regulated financial institutions to follow best practices to
protect federal benefit payments
from garnishment orders. Federal law
protects federal benefit payments –
such as Social Security benefits
and Veterans’ benefits – from
garnishment orders and the claims
of judgment creditors, subject to
certain exceptions. Creditors and
debt collectors are often able to
obtain orders from state courts
garnishing funds in a consumer’s
account that do not meet the
requirements of exempt funds.
To comply with state court garnishment orders, financial institutions
often place a temporary freeze or
hold on an account upon receipt of a
garnishment order, which can cause
significant hardship for the account
holder. The agencies developed
20
proposed guidance, which includes
best practices, to encourage financial
institutions to minimize the hardships
encountered by federal benefit
funds recipients and to do so while
remaining in compliance with applicable laws. The comment period closed
in November 2007 and the agencies
have reviewed the comments and
will determine the best course of
action during 2008.
Large Complex Financial
Institution Program
The FDIC’s Large Complex Financial
Institution Program addresses the
unique challenges associated with the
supervision, insurance and potential
resolution of large and complex
financial institutions. A significant
share of the banking industry’s assets
and insured deposits are held in a
small number of large institutions.
This program ensures a consistent
approach to large-bank supervision
and risk analysis on a national basis.
This is achieved by compiling key
data and performing analyses of
large-bank operations for use by
various FDIC divisions and offices,
and by providing specialists with
information to support supervisory
activities for large banks.
In 2007, the FDIC led a comprehensive initiative to standardize data
capture and reporting through the
Large Insured Depository Institution
(LIDI) Program. Under this Program,
supervisory staff throughout the
nation performs comprehensive quantitative and qualitative risk analysis on
institutions with assets over $10 billion,
or under this threshold at regional
discretion. This information is used
by various business lines to perform
critical functions related to insurance,
resolutions and supervision.
In 2007, the LIDI Program supported
the insurance function in analyzing
and setting appropriate insurance
premiums for large insured financial
institutions. The Corporation also
led and supported various initiatives
designed to better understand potential
resolution challenges posed by
complex insured financial institutions.
The FDIC continued to assess internal
and industry preparedness relative
to Basel II capital rules and was
actively involved in domestic and
international discussions intended
to ensure effective implementation
of the New Capital Accord. This
included participation in numerous
supervisory working group meetings
with foreign regulatory authorities to
address Basel II home-host issues.
Bank Secrecy Act/Anti-Money
Laundering
The FDIC pursued a number of Bank
Secrecy Act (BSA), Counter-Financing
of Terrorism (CFT) and Anti-Money
Laundering (AML) initiatives in 2007.
International AML/CFT Initiatives
The FDIC conducted three training
sessions in 2007 for 57 central
bank representatives from Algeria,
Bosnia, Egypt, Indonesia, Jordan,
Kuwait, Morocco, Pakistan, Paraguay,
Philippines, Tanzania, and Turkey.
The training focused on AML/CFT
controls, the AML examination
process, customer due diligence,
suspicious activity monitoring,
and foreign correspondent
banking. The sessions also
included presentations from the
Federal Bureau of Investigation
on combating terrorist financing,
and the Financial Crimes Enforcement
Network (FinCEN) on the role of
financial intelligence units in detecting
and investigating illegal activities.
In addition to hosting onsite
AML/CFT instruction, the FDIC
provided guidance and resources
for international AML/CFT financial
system assessments and training.
In 2007, the FDIC provided technical
assistance in Yemen and Senegal
to evaluate AML controls and
each country’s AML statutory and
legislative framework. Also, the FDIC
delivered an AML presentation at
the U.S.-Middle East/North Africa
Private Sector Dialogue conference
in Dubai, United Arab Emirates. Finally,
the FDIC met with representatives
from the Deposit Insurance
Corporation of Japan, the Korean
Financial Intelligence Unit, the Banco
Central del Uruguay and the Bank
of Al-Maghrib, Morocco, to discuss
the AML examination process,
enforcement authority and the FDIC’s
supervisory role in combating money
laundering and other illicit financial
activities.
Certification of Specialists
The FDIC continued to increase
regulatory knowledge to keep abreast
of current issues related to money
laundering and terrorist financing as
an additional 10 percent of BSA/AML
subject matter experts nationwide
earned the designation of Certified
Anti-Money Laundering Specialists.
As of December 31, 2007, 38 BSA
subject matter experts had completed
the AML certification process by
passing the certification examination
given by the Association of Certified
Anti-Money Laundering Specialists.
Money Services Businesses Project
The FDIC developed an action plan
to gain a better understanding of
state regulators’ AML supervision
and enforcement of money services
businesses (MSBs). As part of the
project, the FDIC partnered with
the Money Transmitter Regulators
Association (MTRA), the Conference
of State Bank Supervisors and FinCEN.
MTRA surveyed state MSB agencies
to gather BSA/AML compliance,
licensing, supervision and enforcement information. The FDIC then
conducted several interviews with
state MSB regulators to better
understand the MSB supervision
process. The FDIC also conducted a
pilot review to assess the feasibility
of incorporating state MSB AML
examination findings into FDIC risk
management examinations.
2007 FFIEC BSA/AML Examination
Manual
The FDIC coordinated the revision
and issuance of the 2007 FFIEC
BSA/AML Examination Manual. The
manual was released by the FFIEC
for publication and distribution on
August 24, 2007. It reflects the
ongoing commitment of the federal
banking agencies to provide current
and consistent guidance on riskbased policies, procedures and
processes for banking organizations
to comply with the BSA and safeguard operations from money
laundering and terrorist financing.
The manual has been updated to
further clarify supervisory expectations
and incorporate regulatory changes
since its 2006 release. The revisions
also reflect feedback from the banking
industry and examination staff.
Additionally, the FDIC had the manual
translated into Spanish and responses
to the Spanish language version of
the manual have been positive.
Enforcement Actions
The FDIC, along with the other
federal banking agencies, released
the Interagency Statement on
Enforcement of BSA/AML
Requirements on July 19, 2007.
The statement provides for greater
consistency in BSA enforcement
decisions and offers insight into
how those decisions were made.
The statement describes the circumstances and provides examples under
which the federal banking agencies
will issue a cease and desist order.
Applicable statutes mandate that
the appropriate agency shall issue a
cease and desist order if a regulated
institution fails to establish and
maintain a BSA compliance program
or correct a previously identified
problem with its BSA compliance
program.
Promoting Economic Inclusion
The FDIC pursued a number of
initiatives in 2007 to promote inclusion
of traditionally underserved populations
in banking services and to ensure
protection of consumers in the
provision of these services.
21
The Advisory Committee
for Economic Inclusion
The FDIC Advisory Committee
on Economic Inclusion (ComE-IN)
was established by Chairman
Sheila C. Bair and the FDIC Board
of Directors pursuant to the Federal
Advisory Committee Act. The ComEIN was chartered in November 2006,
and provides the FDIC with advice
and recommendations on important
initiatives focused on expanding
access to banking services by
underserved populations.
Three ComE-IN meetings were held
during 2007. The inaugural meeting
addressed access to affordable small
dollar loans. One recommendation
that resulted was to launch a small
dollar loan pilot program. The Board
of Directors of the FDIC subsequently
approved a two-year pilot project to
review affordable and responsible
small-dollar loan programs in financial
institutions. The purpose of the study
is to identify effective and replicable
business practices to help banks
incorporate affordable small-dollar
loans into their other mainstream
banking service offerings. Best
practices resulting from the pilot
will be identified and become a
resource for other institutions.
The second meeting addressed the
subprime mortgage situation, how it
developed and possible solutions. The
third meeting covered ways to ensure
safe, available services for the money
services businesses and examined
their access to the banking system.
Alliance for Economic Inclusion
In 2007, the FDIC formally launched
the Alliance for Economic Inclusion
(AEI), a broad-based coalition of
banks, community organizations,
foundations, educators, and local,
state and federal agencies in nine
underserved markets across the
nation – the Greater Boston area;
Wilmington, DE; Baltimore, MD;
South Texas (Houston/Austin);
Members of the FDIC Advisory Committee on Economic Inclusion and speakers discuss money services
businesses and the problem of access to banks.
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Chicago; the Louisiana and Mississippi
Gulf Coast; Alabama's Black Belt;
Kansas City; and Los Angeles. These
diverse markets include low- and
moderate-income neighborhoods,
urban neighborhoods, minority
communities and rural areas. The
goal of the AEI initiative is to work
with financial institutions and other
partners in select markets to bring
those who are unbanked and underserved into the financial mainstream.
More than 700 banks and other
organizations have joined the AEI.
Under the auspices of the AEI,
approximately 28,000 bank accounts
have been opened; 29,000 consumers
have received financial education;
41 banks are developing small dollar
loan programs; and 21 banks now
offer remittance products allowing
customers to send money to friends
or family members outside the U.S.
The FDIC has also included a component of its foreclosure prevention
efforts within the AEI. An AEI
partnership with NeighborWorks®
America to promote foreclosure
prevention and education was
announced on July 13, 2007. Since
July, both NeighborWorks® America
and FDIC have conducted more than
28 local outreach and training events.
These events were designed to
provide assistance to NeighborWorks®
Centers for Foreclosure Solutions and
other local organizations in developing
and implementing strategies to
educate at-risk homeowners about
the availability of foreclosure prevention counseling services and other
resources. Each of the nine AEI
coalitions is also coordinating foreclosure prevention efforts to provide
support and expand local foreclosure
prevention programs already underway
within their communities.
Additionally, FDIC reviewed its supervisory guidance and determined that the
Case Managers Manual and the Risk
Management Manual of Examination
Policies should be revised to ensure
that they encourage economic inclusion consistent with safe and sound
banking practices.
Affordable Small-Dollar Loan
Guidelines and Pilot Program
Many consumers with bank accounts
turn to high-cost payday or other
non-bank lenders because they are
accessible and can quickly provide
small loans to cover unforeseen
circumstances. To help enable
insured institutions to better serve
an underserved and potentially
profitable market while helping
consumers avoid, or transition away
from, reliance on high-cost debt,
the FDIC issued its Affordable
Small-Dollar Loan Guidelines on
June 19, 2007. The guidelines
explore several aspects of product
development, including affordability
and streamlined underwriting.
They also discuss tools, such as
financial education and linked savings
accounts that may address longterm financial issues that concern
borrowers. The guidelines also note
that FDIC-supervised institutions
Michael Krimminger, FDIC Special Advisor for Policy, offers
details of a proposed pilot project to expand availability of
reasonably priced small-dollar loans as CFO Steve App looks on.
offering products that comply with
consumer protection laws, and are
structured in a responsible, safe and
sound manner, may receive favorable
consideration under the Community
Reinvestment Act (CRA).
Additionally, on June 19, 2007, the
FDIC Board approved a two-year
pilot project to review affordable
and responsible small-dollar loan
programs in financial institutions and
assist bankers by identifying and disseminating information on replicable
business models for small-dollar
loans. The pilot project with banks
near military installations that was
planned for 2007 will be included in
this effort. A web site was developed
to provide information on the pilot
and participant banks were recruited
for the study. Participants applied and
twenty-nine were selected in 2007.
During 2008, participating institutions
will be asked to provide summary
data to the FDIC about the loans in
the program, the overall value and
profitability of the program, and the
benefit to consumers. Information
collected will be highlighted in FDIC
publications and speeches. A final
report is planned for 2010.
Home Mortgage Disclosure Act
The winter 2007 edition of Supervisory
Insights contained the article “Using
the HMDA Pricing Data to Identify
and Analyze Outliers.” The article
describes the process used by the
FDIC for loan review and analysis
at institutions that, based on an
initial screening of Home Mortgage
Disclosure Act (HMDA) data, have
pricing practices that are potentially
discriminatory. The article offers
suggestions to bankers and examiners
gleaned from analyses of two years
of HMDA pricing data.
Economic Inclusion Surveys
During 2007, the FDIC also
commenced work on two surveys
intended to provide extensive new
data regarding economic inclusion.
Both of these survey efforts are
related to a mandate in section 7
of the Federal Deposit Insurance
Reform Conforming Amendments
Act of 2005 requiring the FDIC to
conduct a survey of FDIC-insured
institutions every two years regarding
their efforts to serve the unbanked.
The first of these surveys, the
23
Survey of Banks’ Efforts to Serve
the Unbanked and Underbanked,
will be conducted during 2008 and is
expected to yield significant insight
about bank efforts to serve unbanked
and underbanked populations. The
FDIC is also exploring the feasibility
of conducting a survey of U.S.
households to estimate the percentage of the U.S. population that is
unbanked and underbanked. The
survey is scheduled to be conducted
in January 2009 as a supplement to
the Bureau of the Census’s Current
Population Survey. It is expected
to yield significant new data on
the extent of the population that is
unbanked and/or underbanked and
the reasons why some households
do not make greater use of traditional
banking services.
Overdraft Protection Programs
Study
Over the last few years, the use
of automated overdraft protection
programs has significantly risen. The
banking regulators published guidance
on these programs in 2005. The
Federal Reserve amended Regulation
DD in 2006 to encompass additional
disclosure and advertising requirements for certain types of automated
overdraft protection programs.
With little empirical data on these
programs, the FDIC has initiated
a two-part Study of Overdraft
Protection Programs to systematically
gather information about the types,
characteristics and usage of overdraft
programs offered by FDIC-supervised
banks. This effort will help the FDIC
more fully understand this rapidly
growing and changing product. The
study results should help the industry
develop more effective overdraft
programs that better serve customers.
24
Information is being gathered through
a survey instrument and a download
of account and transaction level data
requested from banks. Using the
survey instrument, field staff is gathering information at 500 randomly
selected institutions. The survey will
gather information on how overdraft
protection is offered to the public
as well as how banks manage nonsufficient funds (NSF) items and
programs. A data download is being
requested from up to 100 institutions
to gather 12 months of customerlevel micro data on NSF and overdraft
activity.
This study will continue through 2008
and once it has been completed, the
FDIC plans to make the findings and
aggregate information public. (No
personally identifiable information
will be gathered and no individual
bank information will be published.)
The FDIC will use this information
to better formulate future policy
decisions.
Minority Depository Institutions
The FDIC has long recognized the
importance of minority depository
institutions (MDIs), particularly in
promoting the economic viability
of minority and under-served communities. As a reflection of the
FDIC’s commitment to MDIs, on
April 9, 2002, the FDIC issued the
Policy Statement Regarding Minority
Depository Institutions. The policy
statement implements an outreach
program designed to preserve and
encourage minority ownership of
financial institutions.
Since the adoption of the policy
by the Board, the FDIC’s National
Coordinator for MDIs has maintained
contact with various MDI trade
associations and has met periodically
with the other federal banking regulators to discuss the initiatives underway
at the FDIC. The coordinator has
worked to identify opportunities
where the federal banking agencies
might work together to assist minority
institutions. Since the adoption of
the policy statement, all of the FDIC
regional offices have held annual MDI
outreach programs, have annually
contacted each FDIC-supervised MDI
to offer to meet with bank boards to
discuss issues of interest, and have
offered to make return visits to these
institutions following the examination
process.
The FDIC’s Minority Bankers’
Roundtable series is a forum
designed to, among other things,
explore possible partnerships
between the MDI community and
the FDIC, as well as to seek input
on how the FDIC can better promote
the availability of technical assistance
to the MDI segment of the industry.
From the 2006 Roundtable sessions
evolved ideas for two partnerships
that were piloted during 2007.
The first initiative, a “University
Partnerships” pilot, is designed
to do the following:
• Promote financial literacy at
Historically Black Colleges and
Universities (HBCUs) or other
schools with a significant minority
population;
• Provide the partnering MDI and
the FDIC an opportunity to keep
the business school deans aware
of current industry issues and to
build goodwill on campus; and
• Offer both the MDI and the FDIC
an opportunity to showcase their
respective career opportunities.
The second 2007 Roundtable initiative
involved partnering with the Puerto
Rico Bankers Association to deliver
a high-level specialized Compliance
School. This event took place from
November 6-9, 2007, in San Juan,
Puerto Rico, and was attended by
150 bankers. This type of partnership
was the first for the FDIC and was
consistent with the goal of increasing
usage of FDIC technical assistance.
In July 2007, the FDIC hosted the
second annual National Minority
Depository Institution Conference
in Miami, Florida. This event was
coordinated on an interagency
basis and drew approximately
170 attendees. In addition to
presentations by senior officials
from all of the federal banking
regulatory authorities, the program
covered these topics: Broadening
Access to the Financial Mainstream,
Opportunities for NeighborWorks®
America and Minority Community
Bankers, and Capital Enhancement
and Investment Opportunities,
including a presentation on the
Community Development Financial
Institution Fund. The program also
included workshops on Information
Technology, BSA Emerging Issues,
Compliance and CRA Hot Topics,
and the Revised Interagency Policy
Statement on the Allowance for Loan
and Lease Losses. Feedback from
the attendees was overwhelmingly
positive. A third annual interagency
conference is planned for 2008.
Other FDIC MDI accomplishments
for 2007 include the following:
• Updating the examiner guidance
memorandum “Minority
Depository Institution Program”;
• Inviting minority bankers to speak
at regional examiner training
conferences to foster a better
understanding by the examiners
of the unique challenges MDIs
face;
• Making improvements to the
FDIC’s external website to better
organize and provide easier
access to MDI information; and
• Developing a survey that was sent
to all MDIs on December 21, 2007,
to provide all MDIs, including
those not supervised by the
FDIC, an opportunity to rate
the effectiveness of the FDIC’s
MDI program, FDIC-sponsored
conferences and roundtables,
outreach efforts, and technical
and general assistance. The survey
results and comments will be
used to improve our current
efforts and to develop MDI
initiatives going forward.
Homeland Security
The FDIC has taken a leadership role
in ensuring that the financial sector –
a critical part of the infrastructure of
the United States – is prepared for a
financial emergency. As a member of
the Financial and Banking Information
Infrastructure Committee (FBIIC),
the FDIC has sponsored a series of
outreach meetings titled “Protecting
the Financial Sector: A Public and
Private Partnership.”
Information Technology, Cyber
Fraud and Financial Crimes
The FDIC and other FFIEC regulatory
agencies jointly issued guidance
requiring financial institutions to
strengthen account access credentials
in an effort to curb online fraud
and protect both consumer and
commercial Internet banking
customers. The guidance required
the implementation of stronger
authentication for most institutions
on or before January 1, 2007. FDIC
examiners tracked and reported on
compliance with the guidance during
various examination activities in 2007.
Details collected suggest that an
overwhelming majority (94 percent)
of the institutions have complied with
the provisions of the guidance. Most
of the remaining institutions have
plans to comply. Industry feedback
suggests that stronger authentication
has reduced online Internet bankingrelated fraud through more secure
access credential management
practices.
Other major accomplishments during
2007 in combating identity theft
included the following:
• Assisted financial institutions
in identifying and shutting down
approximately 1,400 “phishing”
Web sites. The term “phishing” –
as in fishing for confidential
information – refers to a scam
that encompasses fraudulently
obtaining and using an individual’s
personal or financial information.
• Issued 323 Special Alerts to FDICsupervised institutions of reported
cases of counterfeit or fraudulent
bank checks.
25
• Participated on the President’s
Identity Theft Task Force and
five of its primary subgroups.
The FDIC was one of seventeen
federal agencies that participated.
The Task Force submitted its
report to the President on
April 11, 2007. The report contains
a comprehensive description of
the problem as well as numerous
recommendations concerning
what the federal government
and private industry can do to
mitigate this serious problem.
Since the report was submitted
to the President, the FDIC
continues to participate in
several Task Force subgroups
that are performing additional
research on specific aspects of
identity theft and plan to submit
additional recommendations to
the President in the spring of
2008.
• The FDIC, in addition to the other
federal banking agencies and
the Federal Trade Commission,
published a final identity theft
red flag regulation and guidelines
on November 9, 2007. The
regulation and guidelines
implement sections 114 and
315 of the Fair and Accurate
Credit Transactions Act of
2003. Compliance is expected
by November 1, 2008.
26
Consumer Complaints
and Inquiries
The FDIC investigates consumer
complaints about FDIC-supervised
institutions and answers inquiries
from the public about consumer
protection laws and banking practices.
In 2007, the FDIC received 11,624
written complaints, of which 4,457
were against state nonmember
institutions. The Corporation responded
to over 93 percent of these complaints
within timeliness standards established by corporate policy. The FDIC
also responded to 3,656 written and
3,321 telephone inquiries from consumers regarding state nonmember
institutions. Overall in 2007, the FDIC
handled 5,856 consumer telephone
calls from the public and members
of the banking community about
consumer protection issues not
including deposit insurance inquiries
which are discussed on the following
page.
Deposit Insurance Education
An important part of the FDIC's role
in insuring deposits and protecting
the rights of depositors is ensuring
that bankers and consumers have
access to accurate information about
the FDIC's deposit insurance rules.
The FDIC has an extensive deposit
insurance education program
consisting of seminars for bankers,
electronic tools for estimating deposit
insurance coverage, and written and
electronic information targeted for
both bankers and consumers. The
FDIC also responds to thousands of
telephone and written inquiries each
year from consumers and bankers
regarding FDIC deposit insurance
coverage.
Effective October 12, 2006, the FDIC
Board of Directors adopted final rules
that implemented provisions of the
Federal Deposit Insurance Reform
Act of 2005 pertaining to deposit
insurance coverage. Following the
adoption of the final rule changes,
the FDIC completed a multi-pronged
effort in 2007 to update numerous
publications and educational tools
for consumers and bankers on
FDIC insurance coverage, including
consumer brochures, banker resource
guides, videos and the Electronic
Deposit Insurance Estimator.
To address current questions and
issues relating to changes in the
FDIC insurance coverage of deposit
accounts, the FDIC hosted two
identical series of telephone seminars
for bankers on the FDIC’s rules
for deposit insurance coverage –
one series in October and one in
November. Each series consisted of
topics on Basic Concepts of Deposit
Insurance Coverage, Coverage for
Retirement and Employee Benefit
Plan Accounts, Trust Account
Coverage, and Coverage for Business
and Government Accounts. The
seminars were designed to provide
bankers with a comprehensive
review of the FDIC’s rules for deposit
insurance coverage. These free
seminars were open to employees
of all FDIC-insured banks and savings
associations. The telephone conferences were attended by bankers
in approximately 11,000 locations.
Many of these locations represent
bank branch offices where multiple
employees took part in the training.
The FDIC coordinated with bank
trade associations to conduct seven
comprehensive seminars for financial
institution employees on the rules
for deposit insurance coverage. These
seminars, which were conducted in
classroom settings throughout the
United States, provided a comprehensive review of how FDIC insurance
works, including the 2006 changes
to the FDIC’s final rules for insurance
coverage.
The FDIC also completed a comprehensive and authoritative resource
guide for bankers, attorneys, financial
advisors and similar professionals on
the FDIC’s rules and requirements
for deposit insurance coverage
of revocable and irrevocable trust
accounts. The new trust guidebook
will be published on the FDIC’s Web
site in the first quarter of 2008.
In 2007, the FDIC received over
119,000 telephone and written
inquiries from consumers and bankers
regarding federal insurance coverage
of bank deposits. Of these inquiries,
4,125 required formal written
responses, 98 percent of which
were completed within timeliness
standards established by corporate
policy.
Financial Education and
Community Development
In 2001, the FDIC – recognizing the
need for enhanced financial education
across the country – inaugurated
its award-winning Money Smart
curriculum, which is now available
in six languages, large print and
Braille versions for individuals with
visual impairments and a computerbased instruction version. Since its
inception, over 1.4 million individuals
(including approximately 200,000
in 2007) have participated in Money
Smart classes and self-paced
computer-based instruction.
Approximately 163,000 of these
participants have subsequently
established new banking relationships.
During 2007, the FDIC updated
and enhanced the Money Smart
curriculum and training tools. These
changes included guidance on
consumer-related concerns such as
identity theft, remittances and how
to assess mortgage product options.
In recognition that public schools are
one of the best venues for reaching
the next generation of consumers of
all income levels, the FDIC embarked
on a pilot project to expand its outreach and enhance the availability of
the Money Smart financial curriculum
in high schools. Over 339 schools,
school systems and related entities
have been contacted regarding the
availability of Money Smart. Several
hundred secondary school teachers
and volunteers have been trained to
deliver Money Smart. The FDIC also
began work on developing a Money
Smart curriculum for young adults.
The FDIC completed a major multiyear study in 2007 to evaluate the
effectiveness of the Money Smart
curriculum. The study, A Longitudinal
Evaluation of the Intermediateterm Impact of the Money Smart
Financial Education Curriculum
upon Consumers' Behavior and
Confidence, shows that the training
can positively influence how people
manage their finances. The survey
examines the impact of financial
education on the behavior of a broad
audience up to one year after completing the training. The goal was to
measure, over time, not only whether
trainees’ knowledge of financial
matters improved, and whether they
intended to change their financial
behaviors, but also whether, months
after the training, they had actually
acted on their intentions. Survey
results indicate that those who took
the Money Smart course were more
likely to open deposit accounts, save
money, use and adhere to a budget,
and have increased confidence in
their financial abilities when contacted
6 to 12 months after completing the
course. A majority of those surveyed
reported an increase in personal
savings, a decrease in debt, a better
understanding of financial principles,
and an increased willingness to
comparison shop for financial
services.
During 2007, the FDIC also undertook
over 195 community development,
technical assistance and outreach
activities. These activities were
designed to promote awareness of
investment opportunities to financial
institutions, access to capital within
communities, knowledge-sharing
among the public and private sector,
and wealth-building opportunities for
families. Representatives throughout
the financial industry and their stakeholders collaborated with the FDIC on
a broad range of initiatives structured
to meet local and regional needs for
financial products and services, credit,
asset-building, affordable housing,
small business and micro-enterprise
development and financial education.
27
Deposit insurers from an array of countries gathered at Virginia Square for the Strategic Planning and 18th Meeting of the
Executive Council of the International Association of Deposit Insurers. Chairman Sheila C. Bair and Jean Pierre Sabourin,
past Chairman of IADI, are in the front row, near the center.
International Outreach
During 2007, the FDIC focused its
international programs and activities
toward the goal of helping to build
strong and effective systems for
protecting depositors, supervising
financial institutions and resolving
failures. Efforts included arranging
and conducting training sessions,
technical assistance missions and
foreign visits, leadership roles in
international organizations, bilateral
consultations with foreign regulators,
and many other activities and
consulting services.
Association of Supervisors of Banks
in the Americas (ASBA) and to
represent the North American Region.
The FDIC’s leadership within ASBA
included providing technical training
to ASBA members on operational risk
management and leading two working
groups in developing ASBA guidance
on key supervisory issues. The FDIC
also established strong working
relationships and presented at several
European Forum of Deposit Insurers
(EFDI) meetings, including the EFDI/
IADI Joint Symposium on Cross
Border Issues.
The FDIC’s strengthened international
leadership role paved the way for the
election of the FDIC’s Vice Chairman
to the position of President of the
International Association of Deposit
Insurers (IADI) and Chair of the IADI
Executive Council. In addition, the
Vice Chairman, as Chair of the IADI
Training and Conference Standing
Committee, developed and led the
first-ever Executive Training Program,
providing training to 35 IADI members
from 27 countries. The FDIC was
elected for the first time to serve
on the Board of Directors for the
The FDIC continued to enhance
the effectiveness and broaden the
scope and impact of its three primary
international programs – technical
assistance, foreign visitors and
training. The FDIC provided technical
assistance to 12 central banks, bank
supervisors and deposit insurers from
11 countries. A highlight of this assistance was an expanded partnership
with the Financial Services Volunteer
Corp (FSVC) in supporting the Central
Bank of Egypt in developing an
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examiner commissioning program.
The FDIC also provided critical
technical assistance to Albania on
resolution practices and the legal
framework for establishing the backup
financial support from the government
to strengthen the deposit insurance
safety net. In addition, the FDIC
hosted 66 foreign country visits,
including 417 foreign visitors from
28 countries. Noteworthy among
these visits was the second U.S.China Seminar on Bank Supervision,
delegations representing parliament
officials from South Africa, United
Kingdom, Sweden and Italy, and an
extended visit by board members
and staff of the Nigerian Deposit
Insurance Corporation. Lastly, 168
foreign students from 17 countries
received training in examinations,
financial institution analysis, loan
analysis, examination management,
information technology examination,
and anti-money laundering and
counter-terrorism financing.
The FDIC expanded relationships
with key international banking and
deposit insurance organizations by
expanding the secondment program
At an August 2, 2007 press conference in Beijing, FDIC Chairman Sheila C. Bair and Governor Zhou
of the People's Bank of China (PBC) formalized the international working relationship between the
FDIC and the PBC by signing a Memorandum of Understanding.
(detailing staff from one country
to another), technical assistance
agreements and initiating new
supervisory information sharing
agreements. Secondment Memoranda
of Understanding (MOU) were
entered into with Japan, Albania,
Poland, Nicaragua, and Korea to allow
for selected employees from these
countries to come to the FDIC to
receive training and gain expertise
in areas of supervision, resolution
management and deposit insurance.
Technical assistance agreements
were executed with the People‘s
Bank of China and the U.K. Financial
Services Authority, providing FDIC
subject matter expertise in promoting
deposit insurance best practices.
Notable examples of forging strong
relationships with key countries
included the FDIC Chairman’s visits
to China, Japan and South Korea, the
Vice Chairman’s visits to Malaysia,
Turkey and other IADI- and EFDImember countries and the Chief
Operating Officer’s visits to Russia,
China and the United Kingdom. The
FDIC also entered into supervisory
information sharing MOUs with
Brazil, Argentina, the Netherlands,
and Australia.
Receivership Management
The FDIC has the unique mission
of protecting depositors of insured
banks and savings associations. No
depositor has ever experienced a
loss on the insured amount of his
or her deposit in an FDIC-insured
institution due to a failure. Once an
institution is closed by its chartering
authority – the state for state-chartered
institutions, the Office of the
Comptroller of the Currency (OCC)
for national banks and the Office of
Thrift Supervision (OTS) for federal
savings associations – and the FDIC
is appointed receiver, it is responsible
for resolving the failed bank or savings
association. The FDIC gathers data
about the troubled institution,
estimates the potential loss to
the insurance fund from various
resolution alternatives, solicits
and evaluates bids from potential
acquirers (if any), and recommends
the least-costly resolution method
to the FDIC’s Board of Directors for
approval.
Resolving Financial Institutions
Failures
During 2007, three FDIC-insured
institutions failed. The accompanying
chart provides liquidation highlights
and trends for the past three years.
No federally-insured financial
institution failures occurred in
either 2005 or 2006.
Metropolitan Savings Bank in
Pittsburgh, Pennsylvania, was the
first FDIC-insured institution closed
since June 2004. This institution
was closed by the Pennsylvania
Department of Banking on February
2, 2007. At the time of closure,
Metropolitan had total assets of
$15.3 million and total deposits of
$17.5 million with $925 thousand
in deposits that exceeded the
federal deposit insurance limit.
Allegheny Valley Bank of Pittsburgh,
Pennsylvania, paid the FDIC a premium
of six percent on assumed deposits
of approximately $12.3 million and
purchased certain assets in the form
of cash equivalents, securities, and
loans secured by deposits for
$1.9 million. The estimated cost
to the DIF is $2.5 million.
29
Liquidation Highlights 2005-2007
Dollars in billions
Total Institutions Resolved
Assets of Resolved Institutions
Net Collections from Assets in Liquidation
Total Assets in Liquidation
Total Dividends Paid
Savings Over Cost of Liquidation
●
●
●
■
$
$
$
$
$
2007
3
2.34
1.25
0.91
1.65
.36
$
$
$
$
$
2006
0
0.00
0.17
0.35
0.17
0
2005
0
$ 0.00
$ 0.37
$ 0.44
$ 0.44
$
0
Includes activity from thrifts resolved by the former Federal Savings and Loan Insurance Corporation and the
Resolution Trust Corporation.
■
Least Cost Test Savings. The least cost test is performed prior to resolution to rank order the various resolution
alternatives by estimated cost to the Deposit Insurance Fund.
●
NetBank of Alpharetta, Georgia,
was closed by the Office of Thrift
Supervision on September 28, 2007.
NetBank was an Internet bank and
had no physical branches. At the time
of closure, NetBank had total assets
of $2.2 billion and total deposits of
$1.94 billion with $94.5 million in
deposits that exceeded the federal
deposit insurance limit. Uninsured
depositors received an immediate
dividend of 50 percent of their
uninsured balance. ING Bank, FSB,
Wilmington, Delaware, assumed
$1.38 billion of the failed bank’s
insured non-brokered deposits for a
one percent premium and purchased
$464 million of NetBank’s assets.
The estimated cost to the DIF is
$107.7 million.
Miami Valley Bank of Lakeview,
Ohio, was closed by the Ohio
Superintendent of Financial
Institutions on October 4, 2007. At
the time of closure, Miami Valley had
total assets of $92.6 million and total
deposits of $65 million with $3.9 million in deposits that exceeded the
federal deposit insurance limit. The
Citizens Banking Company, Sandusky,
Ohio, assumed $56.4 million of the
failed bank’s insured deposits for a
two percent premium and purchased
$9 million of Miami Valley’s assets.
The estimated cost to the DIF is
$3 million.
30
Receivership Management
Activities
The FDIC, as receiver, manages the
failed banks and their subsidiaries
with the goal of expeditiously winding
up their affairs. The oversight and
prompt termination of receiverships
help to preserve value for the uninsured depositors and other creditors
by reducing overhead and other
holding costs. Once the assets of a
failed institution have been sold and
the final distribution of any proceeds
is made, the FDIC terminates the
receivership estate. In 2007, the
number of receiverships under management was reduced by 22 percent
(from 55 to 43), while the book
value of assets under management
increased by 158 percent (from
$352 million to $907 million).
For the institutions that failed in
2007, the FDIC successfully contacted
all known qualified and interested
bidders to market these institutions.
Additionally, the FDIC marketed
90 percent of the marketable assets
of these institutions at the time
of failure and made insured funds
available to all depositors within
one business day of the failure.
Receivership-Related Securities
Disposition and Cash Collections
A total of 56 securities, including
mortgage-backed securities, swap
agreements, corporate bonds and
common stock, were managed
throughout the year or were sold,
with cash collections from sales and
management totaling approximately
$29 million.
Claims Administration System
and Related Notice of Proposed
Rulemaking
During 2007, the FDIC identified
requirements and completed the
high-level design of a new insurance
determination system called
the Claims Administration System,
targeted to be implemented in 2009.
The FDIC also issued a Notice of
Proposed Rulemaking that, in the
event of a financial institution failure,
would require all insured institutions,
regardless of size to assist in the
insurance determination process and
to provide the FDIC with depositor
data in a standard format. In both
2005 and 2006, the FDIC had issued
Advance Notices of Proposed
Rulemaking on this topic.
Asset Servicing Technology
Enhancement Project
In 2007, the Asset Servicing
Technology Enhancement Project
(ASTEP) implemented a new asset
management system called 4C.
This effort takes advantage of new
technology and replaces several
outdated systems. The 4C system
currently supports the management
of receivership loans, real estate,
securities, and other assets. It
also provides a data warehouse.
On May 8, 2007, the FDIC Board of
Directors approved funding for the
inclusion of the institution franchise
and the asset marketing functions in
the 4C system. 4C will be completed
in late 2008 allowing the FDIC to
more efficiently market financial
institution franchises, manage and
sell the assets of failed banks, and to
easily report on these activities.
Protecting Insured Depositors
Although the FDIC’s focus in recent
years has shifted from resolving
large numbers of failed institutions
to addressing existing and emerging
risks in insured depository institutions, the FDIC continues to protect
deposits in institutions that fail.
The FDIC’s ability to attract healthy
institutions to assume deposits and
purchase assets of failed banks and
savings associations at the time of
failure minimizes the disruption to
customers and allows some assets
to be returned to the private sector
immediately. Assets remaining
after resolution are liquidated by the
FDIC in an orderly manner and the
proceeds are used to pay creditors,
including depositors whose accounts
exceeded the $100,000 (or $250,000)
insurance limit. During 2007, the
FDIC paid dividends of $64.3 million to
depositors whose accounts exceeded
the insured limit(s).
Professional Liability Recoveries
The FDIC staff works to identify
potential claims against directors
and officers, accountants, appraisers,
attorneys and other professionals who
may have contributed to the failure
of an insured financial institution.
Once a claim is deemed meritorious
and cost effective to pursue, the
FDIC initiates legal action against the
appropriate parties. During the year,
the FDIC recovered approximately
$47.1 million from these professional
liability claims. In addition, as part
of the sentencing process for those
convicted of criminal wrongdoing
against institutions that later failed,
a court may order a defendant to
pay restitution or to forfeit funds or
property to the receivership. The
FDIC, working in conjunction with
the U.S. Department of Justice,
collected more than $5.3 million in
criminal restitution during the year.
At the end of 2007, the FDIC’s
caseload was comprised of nine
professional liability lawsuits (up
from 8 at year-end 2006), 34 open
investigations (up from 2), and
93 active settlement collections
(down from 97). At year end, there
were 687 active restitution and
forfeiture orders (down from 814).
This includes 357 Resolution Trust
Corporation orders that the FDIC
inherited on January 1, 1996.
Effective Management
of Strategic Resources
The FDIC recognizes that it must
effectively manage its human, financial,
and technological resources in order
to successfully carry out its mission
and meet the performance goals
and targets set forth in its annual
performance plan. The Corporation
must align these strategic resources
with its mission and goals and deploy
them where they are most needed
in order to enhance its operational
effectiveness and minimize potential
financial risks to the Deposit Insurance
Fund. Major accomplishments
in improving the Corporation’s
operational efficiency and effectiveness during 2007 follow.
31
Senator Bob Dole was guest speaker at the FDIC's Veteran's Day Program.
Human Capital Management
The FDIC’s human capital management program is designed to attract,
develop, reward and retain a highly
skilled, cross-trained, diverse and
results-oriented workforce. In 2007,
the FDIC continued to implement
workforce planning and development initiatives, as well as strategies
to more fully engage employees in
advancing the Corporation’s mission.
Succession Management
Strategies
Over the next decade, the FDIC
expects to reshape its workforce
in light of the projected retirements
of a large proportion of its current
employee base. In 2006, Corporation
leadership developed several programs
to plan for and address those
retirements. These programs were
designed to assess executive
leadership bench strength, identify
potential skill-set shortages or gaps,
and institute strategies for closing
these gaps.
32
During 2007, the FDIC began implementing a number of initiatives
aimed at strengthening our human
capital capabilities. First, senior
leadership distributed a summary
report of the findings of the 2006
Executive Manager (EM) talent review
to all EMs. As a result of the review,
several recommended succession
planning initiatives are being pursued,
and the talent review process will be
cascaded down to capture Corporate
Manager (CM) II leaders in the first
quarter of 2008. Second, the Office
of Personnel Management’s management competency assessment tool
was administered to all EMs and
CMs to establish a baseline for
identifying and closing leadership
competency gaps. Finally, the
Corporate Executive Development
Program was launched with the
selected high potential employees
beginning an 18-month program of
rotational assignments, mentoring
and training that will prepare them
to assume leadership roles in the
Corporation as part of the succession
plan. The FDIC will continue to pursue
these and other succession management initiatives in 2008 and the years
to come.
Employee Engagement
The FDIC continually evaluates its
human capital programs and strategies to ensure that the Corporation
remains an employer of choice and
all employees are engaged and
aligned with its mission. The 2006
Federal Human Capital Survey provided the FDIC with a baseline for
employee satisfaction and engagement in a number of areas associated
with working for the federal government and the FDIC, in particular. In
reviewing the results released in
early 2007, the Chairman established
broad objectives for addressing areas
of concern. She also launched an
employee engagement initiative to
include an employee survey that was
more narrowly targeted to issues
of importance to the FDIC and its
employees. The 2007 employee
engagement survey had an exceptional overall response rate of 77
percent, and focus groups were
conducted to glean insights on causal
factors underlying the 2007 survey
results that highlighted areas needing
improvement. Dialogues regarding
the 2007 survey results will continue
into 2008 and an action plan to implement recommendations will be developed. A principal benefit derived from
this initiative and others is enhanced
communication among employees
and leadership in the Corporation.
Corporate Employee Program
During 2007, the FDIC continued
its focus on new employee development through the Corporate
Employee Program, which is the
pipeline for new employees into
the Corporation's business line
divisions. The program provides a
foundation across the full spectrum
of the Corporation’s business lines,
allowing for greater flexibility to
respond to changes in the financial
services industry and in meeting the
Corporation’s staffing needs. At the
end of 2007, 364 employees had
entered the multi-year, multi-disciplined program.
Employee Learning and Growth
The FDIC implemented its
Professional Learning Account
Program, which emphasizes continuous employee learning and growth.
It provides employees a greater role
in planning their career development.
Also, to further enhance the FDIC’s
readiness and flexibility, the internal
certificate program was expanded
during 2007 to include the areas
of Bank Secrecy Act, Receivership
Claims, Franchise and Asset
Marketing, and Basic Compliance
Examination functions. In addition,
the FDIC continued its sponsorship of industry-recognized professional certifications such as
Certified Anti-Money Laundering
Specialist (CAMS); Certified Fraud
Examiner (CFE); Certified Information
Systems Auditor® (CISA®); Certified
Regulatory Compliance Manager
(CRCM); Chartered Financial Analyst®
(CFA®); and Financial Risk Manager®
(FRM®).
With the Corporation’s increased
focus on consumer protection, the
Advanced Compliance Examination
School (ACES) for commissioned
compliance examiners was launched
to address current and complex
consumer compliance issues.
The content of the online Examiner
Continuing Education Program,
which provides examiners access
to a variety of risk management
and compliance technical training
offerings, was also expanded.
Information Technology
Management
Information technology (IT) resources
are one of the most valuable assets
available to the FDIC in fulfilling its
corporate mission. The FDIC continued to improve its IT administration
and management practices in 2007.
Enterprise Architecture
The Corporation is committed to
using IT to improve the operational
efficiency of its business processes.
In 2007, the IT program focused on
establishing an economical enterprise
architecture that supports effective
IT systems portfolio management
as well as security and privacy
programs. This architecture, which
is being implemented over a threeto five-year time frame, will provide
for better accountability and transparency while offering service delivery
efficiencies.
Internet Program
The FDIC’s public Web site, www.
fdic.gov, is a key communication
delivery method for the FDIC.
Each of the three major business
lines – Insurance, Supervision, and
Receivership Management – utilizes
the Web site extensively. A Brown
University research study released
in July 2007 ranked the FDIC’s Web
site eighth in federal government
Web sites, up from 27th last year.
The FDIC’s Web site was the highest
ranked among all federal bank regulators. During a typical weekday, www.
fdic.gov hosts approximately 30,000
user sessions. On October 5, 2007,
a day after the Miami Valley Bank
closing, the FDIC logged 157,986
user sessions. This was the largest
single day usage for the Web site,
representing a 500 percent increase
in traffic and resulting in over 2.6 million hits to www.fdic.gov in a 24-hour
period. To ensure the continued availability of this facility, the robustness
and security of the Web site were
improved during 2007.
Securing the FDIC
During 2007, many IT initiatives were
undertaken to provide a more secure
environment within the FDIC, including implementation of tools to combat the increasing levels of Internet
and e-mail scams, conducting disaster recovery tests and updating the
Corporation’s disaster recovery plan,
and conducting privacy and sensitive
data walk-about inspections.
33
II. Financial Highlights
Deposit Insurance Fund
Performance
FDIC-DIF Insured Deposits (estimated 1960 -2007)
D o l l a r s
The FDIC administers the Deposit
Insurance Fund (DIF) and the FSLIC
Resolution Fund (FRF), which fulfills
the obligations of the former
Federal Savings and Loan Insurance
Corporation (FSLIC) and the former
Resolution Trust Corporation (RTC).
The following summarizes the
condition of the DIF. (See the
accompanying tables on FDIC-Insured
Deposits and Insurance Fund
Reserve Ratios on the following
page.)
For the twelve months ending
December, 31, 2007, DIF’s comprehensive income totaled $2.2 billion
compared to $1.6 billion for the
previous year, an increase of 38 percent. Excluding the recognition of
exit fees earned of $345 million
(a one-time adjustment) from the
2006 results, comprehensive income
rose by $1.02 billion, or 84 percent,
from a year ago. This year-over-year
increase was primarily due to a
$611 million increase in assessment
revenue, a $299 million increase
in interest revenue, a $298 million
decrease in the unrealized loss on
AFS securities, offset by a $42 million
increase in operating expenses and a
$147 million increase in the provision
for insurance losses.
34
i n
●
b i l l i o n s
1960
1970
1980
1990
2000
2007
$ 4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
• All amounts are year-end except 2007 is at 9/30/07.
From 1989 through 2005, amounts represent the sum of separate Bank Insurance Fund and Savings Association Insurance Fund
amounts.
Source: Commercial Bank Call Reports and Thrift Financial Reports.
The $611 million increase in
assessment revenue resulted
from significant changes to the riskbased assessment system beginning in 2007 (see footnote 7 to DIF’s
financial statements for a detailed
explanation). For 2007, DIF recognized $643 million in assessment
revenue representing $3.7 billion in
gross premiums due from insured
depository institutions net of
$3.1 billion in assessment credits
used. Assessment revenue increased
from $94 million in the first quarter
to $245 million in the fourth quarter.
The increased revenue each quarter
primarily resulted from a reduction
in the assessment credits used by
financial institutions to offset gross
assessments. This trend toward higher
assessment income is expected to
continue as institutions deplete their
available credits. Of the $4.7 billion in
one-time assessment credits granted,
$1.6 billion (34 percent) remained as
of December 31, 2007.
Deposit Insurance Fund Reserve Ratios (Fund Balances as a Percent of Estimated Insured Deposits)
1.45
1.40
1.35
1.30
1.25
1.20
1.15
1.00
0
3/04 6/04
9/04 12/04 3/05
6/05
9/05 12/05 3/06
6/06
9/06 12/06 3/07 6/07 9/07
Prior to 2007, amounts represent the sum of separate Bank Insurance Fund and Savings Association Insurance Fund amounts.
35
Selected Statistics Deposit Insurance Fund
D o l l a r s
i n
m i l l i o n s
For the years ended December 31
2007
2006
2005
Financial Results
Revenue
$ 3,196
$ 2,644
Operating Expenses
993
951
Insurance and Other Expenses
(includes provision for loss)
98
(46)
Net Income
2,105
1,739
Comprehensive Income
2,248
1,569
Insurance Fund Balance
$ 52,413
$ 50,165
Fund as a Percentage of Insured Deposits
▼
(Reserve Ratio)
1.22%
1.21%
Selected Statistics
●
Total DIF - Member Institutions
8,560
Problem Institutions
65
Total Assets of Problem Institutions
$ 18,515
Institution Failures
3
Total Assets of Current Year Failed Institutions
$ 2,345
Number of Active Failed Institution Receiverships
22
▼
●
▼
▼
▼
$
$
8,680
50
8,265
0
0
25
$
2,421
966
(156)
1,611
1,090
$ 48,597
1.25%
$
$
8,833
52
6,607
0
0
27
As of September 30, 2007.
Commercial banks and savings institutions. Does not include U.S. branches of foreign banks.
For 2005, amounts represent sum of separate BIF and SAIF amounts.
Corporate Operating Budget
Spending
The FDIC has had an exceptional
record of controlling operating
costs over the past five years, and
2007 was no exception. Corporate
Operating Budget spending totaled
$1,002 million in 2007, including
$981.8 million for ongoing operations
and $19.7 million for receivership
funding. During the five-year period
from 2003 through 2007, the FDIC’s
annual Corporate Operating Budget
spending declined from $1,008 million
to $1,002 million, a reduction of
$6 million, or 0.6 percent, despite
36
the effects of inflation on the FDIC’s
costs. That reduction was primarily
attributable to significant reductions
in staffing as well as a steady
reduction in resolutions and receivership activities resulting from the
historically low number of bank
failures.
Cost Reductions Realized
through Staff Reductions
Salary and benefits costs represent
more than 60 percent of the FDIC’s
annual Corporate Operating Budget.
Because compensation costs are so
significant, the FDIC has engaged in
a continuing effort to realign staffing
to reflect reduced workload requirements as it has moved past the
banking and thrift crisis. Total FDIC
staffing fell from 5,430 at the
beginning of 2003 to 4,532 at yearend 2007, a 17 percent reduction
over five years. As a result, aggregate
spending for salaries and benefits
decreased by 4 percent, from
$666 million in 2003 to $639 million
in 2007, despite an increase of
16.9 percent in the salaries of
individual employees during this
period.
FDIC Staffing and Operating Budget Spending 2003-2007
Staff
7,000
$ Millions
1,500
6,000
•
•
1,000
•
•
•
•
5,000
4,000
3,000
500
2,000
1,000
0
0
Operating Expenses
Staff
2003
$1,008
5,311
2004
1,004
5,078
2005
990
4,514
2006
973
4,476
2007
1,002
4,532
Total Interest Revenue vs. Operating and Investment Budget Spending
$ Millions
3,000
2,000
1,000
0
Total Interest Revenue (DIF+FRF)
Total Budget Spending
A Continuing Record
of Prudent Stewardship
Two comparisons illustrate the FDIC’s
prudent stewardship of the funds
under management (DIF and FRF)
over the past five years.
The FDIC relies primarily upon
interest earned on the investment
of the Deposit Insurance Fund
for its operations. It is notable that
the Corporation has reduced its
operational spending even as the
interest earned on the DIF (and its
predecessor funds) has increased
2003
$ 2,095
$ 1,035
2004
2,148
1,112
significantly. As a result, the FDIC’s
annual spending has dramatically
declined as a percentage of interest
revenue on the DIF. The combined
interest earned by the DIF and FRF
grew to $2,696 million in 2007
($2,540 million for DIF and $156 million
for FRF), while combined operating
and investment budget spending fell
to 37.6 percent of interest revenue,
down from 49.4 percent in 2003.
The Corporation’s prudent stewardship of the DIF can also be seen
when operating budget spending
is compared to the growth of the
industry over the past five years.
The banking industry’s deposit
2005
2,440
1,052
2006
2,392
998
2007
2,696
1,013
insurance assessment base rose by
approximately 33 percent during this
period, from $5.1 trillion in 2003 to
approximately $6.8 trillion in 2007.
During that same period, the FDIC’s
operating budget spending decreased
by 0.6 percent. As a result, the
FDIC’s operating budget spending
represented only 0.0147 percent
(approximately 1.5 basis points)
of the average deposit insurance
assessment base in 2007, compared
to 0.0198 percent (approximately
2 basis points) of the average deposit
insurance assessment base in 2003.
37
As the Assessment Base Increased . . .
$ Trillions
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0
Assessment
Base (Average)
2003
$5.1
2004
5.4
2005
5.9
2006
6.4
2007
6.8
Operating Budget Spending Declined, and as a Result . . .
$ Biillions
1.400
1.200
1.000
0.800
0.600
0.400
0.200
0.000
Operating Budget
Spending
2003
$1.008
2004
1.004
2005
0.990
2006
0.973
2007
1.002
Spending has Declined Significantly as a Percentage
of the Assessment Base.
Percentage
0.03
0.02
0.01
0.00
Spending per
Assessment Base
38
2003
0.0198%
2004
0.0186
2005
0.0168
2006
0.0152
2007
0.0147
These comparisons demonstrate the
good value provided to the banking
industry through the FDIC’s continuing
commitment to prudent stewardship
of the DIF.
2008 Corporate Operating Budget
Although its staffing realignment was
essentially completed in 2006, the
FDIC will continue to emphasize
control of spending in 2008 and
future years. In December 2007,
the Board of Directors approved a
2008 Corporate Operating Budget
of approximately $1.142 billion,
including $1.067 billion for ongoing
operations. The approved 2008
budget is 3.1 percent higher than
the 2007 Corporate Operating Budget.
This limited budget increase was
required for negotiated employee
pay increases and included funding
for a number of major new initiatives,
including additional staff for risk
management and compliance
examinations, as well as increased
funding for resolution preparedness.
The Corporation realigned its spending
priorities and reduced costs in other
areas to address these priority
initiatives while limiting the size
of the overall 2008 budget increase.
In 2008 and future years, the FDIC
will continue to rigorously review
its workload and staffing and seek
operational efficiencies through
continuous improvement of its
business processes.
Investment Spending
The FDIC instituted a separate
Investment Budget in 2003. It has
a disciplined process for reviewing
proposed new investment projects
and managing the construction and
implementation of approved projects.
All of the projects in the current
investment portfolio are major IT
system initiatives. Proposed IT projects
are carefully reviewed to ensure
that they are consistent with the
Corporation’s enterprise architecture.
The project approval and monitoring
processes also enable the FDIC to
be aware of risks to the major capital
investment projects and facilitate
appropriate, timely intervention to
address these risks throughout the
development process. An investment
portfolio performance review is
provided to the FDIC’s Board of
Directors quarterly.
The Corporation undertook significant
capital investments during the 20032007 period, including construction
of a major expansion of its Virginia
Square facility and the implementation of 11 major new IT systems.
Investment spending totaled
$234 million during this period,
peaking at $108 million in 2004.
Spending for investment projects
in 2007 totaled approximately
$12 million. In 2008, investment
spending is estimated to total
$17 million.
Investment Spending 2003-2007
$ Millions
120
80
40
0
Investment Spending
2003
$ 27
2004
108
2005
62
2006
25
2007
12
39
III. Performance Results Summary
Summary of 2007 Performance Results by Program
The FDIC successfully achieved 44 of the 46 annual performance targets
established in its 2007 Annual Performance Plan. Two performance targets
were not applicable. One related to rulemaking for Basel IA and the other related
to making a decision on pursuit of potential professional liability claims within
18 months of failure of a financial institution. There were no instances in which
2007 performance had a material adverse effect on successful achievement
of the FDIC’s mission or its strategic goals and objectives regarding its major
program responsibilities.
Key accomplishments by program are highlighted in the table below.
Program Area
Performance Results
Insurance
• Completed substantial modifications to the agency’s information systems in order to implement
statutory and regulatory changes to risk-based premiums and to track insurance assessment
credit use and availability for each insured institution.
• Issued proposed and final guidance on how the FDIC will determine the need for limited
adjustments to risk-based assessment rates for large institutions.
• Completed three studies required by the Federal Deposit Insurance Reform Conforming
Amendments Act of 2005:
• An evaluation of further possible changes to the deposit insurance system;
• An evaluation of the feasibility of using alternatives to estimated insured deposits
for designating and calculating the insurance fund reserve ratio; and
• A review of the Corporation’s policies and practices in establishing contingent loss
reserves.
• Completed reviews of the recent accuracy of the contingent loss reserves.
• Established a Designated Reserve Ratio of 1.25 percent for 2008, in accordance with the
provisions of the deposit insurance reform legislation.
• Issued an Advance Notice of Proposed Rulemaking (ANPR) seeking comments on alternative
methods for allocating dividends in order to develop a permanent final rule to implement the
dividend requirements of the Reform Act.
• Provided seminars for bankers, developed a guide on deposit insurance of revocable and
irrevocable trust accounts and disseminated educational information and tools to consumers
and bankers on FDIC deposit insurance coverage limits.
• Completed risk assessments for all large insured depository institutions and followed up on all
identified concerns through off-site review and analysis.
• Conducted and published analysis on the effects of Hurricanes Katrina and Rita.
• Published economic and banking information and analyses, through the FDIC Quarterly and the
Center for Financial Research Working Papers.
• Successfully managed the three financial institution failures that occurred during 2007.
40
Program Area
Performance Results (continued)
Supervision and
• Conducted 2,258 safety and soundness examinations, including required follow-up examinations
Consumer Protection of problem institutions, within prescribed time frames.
• Conducted 1,773 compliance and Community Reinvestment Act examinations, including
required follow-up examinations of problem institutions, within prescribed time frames.
• Performed off-site reviews of 1,350 institutions.
• Published Notices of Proposed Rulemaking for Basel II and IA, and continued other analytical
and preparatory activities related to the implementation of these new capital regulations.
• Completed advanced certification requirements for more than 10 percent of BSA/AML
subject-matter experts.
• Conducted over 179 outreach and technical assistance events for bankers and community
groups to promote awareness of community investment opportunities, access to capital,
knowledge-sharing between the public and private sectors, and wealth building opportunities
for families.
• Continued to disseminate the award-winning Money Smart financial education curriculum
in multiple languages, adding 90 Money Smart Alliance members; contacting over 330 schools,
school systems and government entities regarding the availability of curriculum; reaching
approximately 72,765 individuals through train-the-trainer sessions and the self-paced computer
based instruction.
Receivership
• Terminated 12 of the 55 (22 percent) failed financial institution receiverships existing at the
Management beginning of the year.
• Began work on a new Claims Administration System (to be fully implemented in 2009).
• No institution reached the 18-month milestone for professional liability claims investigation
in 2007.
41
2007 Budget and Expenditures by Program
(Excluding Investments)
The FDIC budget for 2007 totaled $1.107 billion. Excluding $155 million for
Corporate General and Administrative expenditures, budget amounts were
allocated to corporate programs and related goals as follows: $166 million,
or 15 percent, to the Insurance program; $587 million, or 53 percent, to the
Supervision and Consumer Protection program; and $199 million, or 18 percent,
to the Receivership Management program.
Actual expenditures for the year totaled $1.002 billion. Excluding $128 million
for Corporate General and Administrative expenditures, actual expenditures
were allocated to programs as follows: $158 million, or 16 percent, to the
Insurance program; $589 million, or 59 percent, to the Supervision and
Consumer Protection program; and $127 million, or 13 percent, to
the Receivership Management program.
2007 Budget and Expenditures (Support Allocated)
Dollars in Millions
Budget
Expenditures
$
600
500
400
300
200
100
0
Insurance
Program
42
Supervision and
Consumer Protection
Program
Receivership
Management
Program
General
and
Administrative
Performance Results by Program and Strategic Goal
2007 Insurance Program Results
Strategic Goal: Insured depositors are protected from loss without recourse to taxpayer funding.
Annual Performance Goal
Indicator
Target
Results
1.
Respond promptly to all financial
Number of business days after
Provide access to insured
Achieved.
institution closings and emerging
institution failure that depositors funds in one business day if
See pg. 29.
issues.
have access to insured funds
the failure occurs on a Friday.
either through transfer of
deposits to successor insured
Provide access to insured
Achieved.
depository institution or
funds in two business days if See pg. 29.
depositor payout.
the failure occurs on any other
day of the week.
Enhancement of FDIC capabilities
to make a deposit insurance
determination for a large-bank
failure.
Review comments received in Achieved.
response to the 2006 Advance See pg. 30.
Notice of Proposed Rulemaking
(ANPR) and publish a Notice
of Proposed Rulemaking
on Large-Bank Deposit
Insurance Determination
Modernization in 2007.
2.
Assess the insurance risks
in 100 percent of insured
depository institutions and
adopt appropriate strategies.
Identify and address risks to the
Insurance risks posed by large
Deposit Insurance Fund (DIF).
insured depository institutions.
Concerns referred for
examination or other action.
Achieved.
See pg. 40.
Identify and follow up on
Achieved.
100 percent of material issues See pg. 40.
raised through off-site review
and analysis.
Emerging risks to the DIF.
Identify and review the
Achieved.
emerging areas of risk,
See pgs.
including mortgage lending,
14, 15, 20-21.
hedge funds, commercial real
estate lending, derivatives,
money laundering, illicit
financial transactions and
the international operations of
insured depository institutions.
Address potential risks from
Achieved.
cross-border banking instability See pgs.
through coordinated review
20, 21, 28.
of critical issues and, where
appropriate, agreements with
key authorities.
43
2007 Insurance Program Results (continued)
Strategic Goal: Insured depositors are protected from loss without recourse to taxpayer funding.
Annual Performance Goal
3.
Indicator
Disseminate data and analyses
Scope and timeliness of
on issues and risks affecting the
information dissemination on
financial services industry to bankers, identified or potential issues
supervisors, the public and other
and risks.
stakeholders.
Target
Results
Results of research and
analyses are disseminated
in a timely manner through
regular publications, ad hoc
reports and other means.
Achieved.
See pgs.
14, 15, 40.
Industry outreach activities
Achieved.
are undertaken to inform
See pgs.
bankers and other stakeholders 21, 26.
about current trends, concerns
and other available FDIC
resources.
4.
Maintain and improve the deposit
Implementation of deposit
insurance system.
insurance reform.
Implement the new deposit
insurance pricing system.
Achieved.
See pgs.
12-13.
Complete and issue guidance
on the pricing of deposit
insurance for large banks.
Achieved.
See pgs.
12-13.
Publish an ANPR seeking
comment on a permanent
dividend system.
Achieved.
See pgs.
13, 40.
Loss reserves.
Enhance the effectiveness of Achieved.
the reserving methodology by See pgs.
applying sophisticated analytical 13, 40.
techniques to review variances
between projected losses and
actual losses, and by adjusting
the methodology accordingly.
Fund adequacy.
Set assessment rates to
maintain the insurance fund
reserve ratio between 1.15
and 1.50 percent of estimated
insured deposits.
44
Achieved.
See pg. 40.
2007 Insurance Program Results (continued)
Strategic Goal: Insured depositors are protected from loss without recourse to taxpayer funding.
Annual Performance Goal
Indicator
Target
Results
Provide educational information
Timeliness of responses to
to insured depository institutions
insurance coverage inquiries.
and their customers to help them
understand the rules for determining
the amount of insurance coverage
on deposit accounts.
Utility of educational tools
available to bankers and
consumers.
Respond to 90 percent of
inquiries from consumers and
bankers about FDIC deposit
insurance coverage within
time frames established by
policy.
Achieved.
See pg. 27.
Conduct a series of national
Achieved.
teleconferences for insured
See pg. 26.
financial institutions to address
current questions and issues
relating to FDIC insurance
coverage of deposit accounts.
6.
Undertake global outreach
activities to inform and train
foreign bank regulators and
deposit insurers.
5.
Expand and strengthen the FDIC’s
Scope of information sharing
leadership role in providing technical
and assistance available to
guidance, training, consulting services international banking and
and information to international
deposit insurance entities.
governmental banking and deposit
insurance organizations.
Publish a comprehensive and Achieved.
authoritative resource guide
See pgs.
for bankers, attorneys, financial 26-27.
advisors and similar professionals on the FDIC’s rules
and requirements for deposit
insurance coverage of revocable
and irrevocable trust accounts.
Achieved.
See pgs.
28-29.
Foster strong relationships with Achieved.
international banking regulators See pgs.
and associations that promote 28-29.
sound banking policies in order
to provide leadership and
guidance in global banking
supervision and regulations,
failure resolution and deposit
insurance.
45
2007 Supervision and Consumer Protection Program Results
Strategic Goal: FDIC-supervised institutions are safe and sound.
Annual Performance Goal
Indicator
Target
Results
1.
Conduct on-site risk management
Percentage of required
examinations to assess the overall
examinations conducted in
financial condition, management
accordance with statutory
practices and policies, and compliance requirements and FDIC policy.
with applicable laws and regulations
of FDIC-supervised depository
institutions.
One hundred percent of
Achieved.
required risk management
See pg. 16.
examinations (including reviews
of information technology (IT)
and Bank Secrecy Act (BSA)
compliance) are conducted
on schedule.
2.
Take prompt and effective supervisory Percentage of follow-up
action to address issues identified
examinations of problem
during the FDIC examination of FDIC- institutions conducted within
supervised institutions that receive
required time frames.
a composite Uniform Financial
Institutions Rating of "4" or "5" (problem
institutions). Monitor FDIC-supervised
insured depository institutions’
compliance with formal and informal
enforcement actions.
One hundred percent of
follow-up examinations are
conducted within 12 months
of completion of the prior
examination.
Achieved.
See pg. 16.
3.
Increase regulatory knowledge to
Certification of BSA/AML
keep abreast of current issues related subject-matter experts.
to money laundering and terrorist
financing.
An additional 10 percent of
BSA/AML subject-matter
experts nationwide are
certified under the Association
of Certified Anti-Money
Laundering Specialists
certification program.
Achieved.
See pg. 21.
4.
More closely align regulatory capital
Continuation of preparatory
with risk in large or multinational
activities related to the
banks while maintaining capital
implementation of the new
at prudential levels.
Basel Capital Accord (Basel II).
Further develop the Basel II
Achieved.
framework to ensure that it
See pgs.
does not result in a substantial 13-14.
reduction in risk-based capital
requirements or significant
competitive inequities among
different classes of banks.
Consider alternative approaches
for implementing the Basel
Capital Accord.
Participate in the continuing
Achieved.
analysis of the projected results See pg. 14.
of the new capital regime.
Promote international
Achieved.
cooperation on the adoption
See pg. 13.
of supplemental capital
measures in countries that
will be operating under Basel II.
46
2007 Supervision and Consumer Protection Program Results (continued)
Strategic Goal: FDIC-supervised institutions are safe and sound.
5.
Annual Performance Goal
Indicator
Target
More closely align regulatory capital
with risk in banks not subject to
Basel II capital rules while maintaining
capital at prudential levels.
Development of a revised
Complete rulemaking on
capital framework proposal
Basel IA.
for institutions not subject
to Basel II.
Results
Not
Applicable.
See pg. 14.
6.
Ensure that FDIC-supervised
Percentage of on-site
institutions that plan to operate under examinations or off-site
the new Basel II Capital Accord are
analyses performed.
well positioned to respond to new
capital requirements.
On-site examinations or offsite analyses are performed
for all FDIC-supervised banks
that intend to operate under
Basel II to ensure that they
are effectively working toward
meeting required qualification
standards.
7.
Applicable provisions of the
Partially
Financial Services Regulatory Achieved.
Relief Act of 2006 (FSRRA)
See pg. 18.
are implemented in accordance
with statutory requirements.
Reduce regulatory burden on the
Implementation of regulatory
banking industry while maintaining
burden reduction legislation.
appropriate consumer protection
and safety and soundness
safeguards.
Utilization of state anti-money
laundering (AML) regulatory
assessments of Money Service
Businesses (MSBs) in FDIC
risk management examinations.
Support is provided to the
Government Accountability
Office (GAO), as requested,
for studies required under
FSRRA.
Achieved.
See pg. 14.
Achieved.
See pg. 18.
State AML assessments of
Partially
MSBs are incorporated into
Achieved.
FDIC risk management
See pg. 21.
examinations in states where
MSB AML regulatory programs
are consistent with FDIC risk
management standards.
Strategic Goal: Consumers' rights are protected and FDIC-supervised institutions invest in their communities.
Annual Performance Goal
8.
Indicator
Conduct CRA and compliance
Percentage of examinations
examinations in accordance with
conducted in accordance with
the FDIC’s examination frequency
required time frames.
policy.
Target
Results
One hundred percent of
Achieved.
required examinations are
See pg. 16.
conducted within time frames
established by FDIC policy.
47
2007 Supervision and Consumer Protection Program Results (continued)
Strategic Goal: Consumers' rights are protected and FDIC-supervised institutions invest in their communities.
Annual Performance Goal
Indicator
Target
Results
9.
Take prompt and effective supervisory
Percentage of follow-up
action to monitor and address
examinations or related
problems identified during compliance activities conducted within
examinations of FDIC-supervised
required time frames.
institutions that receive a “4” or “5”
rating for compliance with consumer
protection and fair lending laws.
One hundred percent of
follow-up examinations
or related activities are
conducted within 12 months
from the date of a formal
enforcement action to
confirm that the institution
is in compliance with the
enforcement action.
Achieved.
See pg. 16.
10. Determine the need for changes in
Completion of analysis and
current FDIC practices for following
evaluation of current practices.
up on actions on significant violations
of consumer compliance laws
and regulations identified during
examinations of banks for compliance
with consumer protection and fair
lending laws.
An analysis is completed
Achieved.
for all institutions on the
See pg. 17.
prevalence and scope of
repeat instances of significant
violations from the previous
compliance examination.
11. Effectively meet the statutory
Timely responses to written
mandate to investigate and respond
complaints.
to consumer complaints about FDIC-
supervised financial institutions.
48
A determination is made
Achieved.
regarding the need for changes See pg. 17.
to current FDIC and FFIEC
guidance on follow-up
supervisory action on significant
violations identified during
compliance examinations,
based on the substance and
level of risk posed to consumers
by these repeat violations.
Responses are provided
Achieved.
to 90 percent of written
See pg. 26.
complaints within time frames
established by policy.
2007 Supervision and Consumer Protection Program Results (continued)
Strategic Goal: Consumers' rights are protected and FDIC-supervised institutions invest in their communities.
Annual Performance Goal
Indicator
Target
Results
12. Provide effective outreach and
Number of individuals taking
200,000 additional individuals
technical assistance on topics
a Money Smart class or using
are taught using the Money
related to the CRA, fair lending,
the self-paced curriculum.
Smart curriculum.
and community development.
120 school systems and
government entities are
contacted to make them
aware of the availability
of Money Smart as a tool
to teach financial education
to high school students.
Dissemination of information
A review of existing risk
that promotes expanded use
management and compliance/
of insured financial institutions
CRA examination guidelines
by segments of the U.S.
and practices is completed to
population that are currently
ensure that they encourage
underserved by those institutions. and support the efforts of
insured financial institutions
to foster economic inclusion,
consistent with safe and sound
banking practices.
Achieved.
See pg. 27.
A pilot project is conducted
with banks near military
installations to provide
small-dollar loan alternatives
to high-cost payday lending.
Not
Achieved.
See pg. 23.
Strategies are developed and
implemented to encourage
FDIC-supervised institutions
to offer small-denomination
loan programs.
Achieved.
See pg. 23.
Research is conducted and
Achieved.
findings disseminated on
See pgs.
programs and strategies to
23-24.
encourage and promote broader
economic inclusion within the
nation’s banking system.
Number of outreach activities
conducted, including technical
assistance activities.
125 technical assistance
(examination support) efforts
or banker/community outreach
activities are conducted related
to CRA, fair lending, or
community development.
Achieved.
See pg. 27.
Achieved.
See pgs.
22-23.
Achieved.
See pg. 27.
49
2007 Receivership Management Program Results
Strategic Goal: Recovery to creditors of receivership is achieved.
Annual Performance Goal
1.
Indicator
Target
Market failing institutions to all known List of qualified and interested
Contact all known qualified
qualified and interested potential
bidders.
and interested bidders.
bidders.
2.
Results
Achieved.
See pg. 30.
Value, manage, and market assets of Percentage of failed institution’s Ninety percent of the book
failed institutions and their subsidiaries assets marketed.
value of a failed institution’s
in a timely manner to maximize net
marketable assets are
return.
marketed within 90 days
of failure.
Achieved.
See pg. 30.
3.
Achieved.
See pgs.
30, 40.
Manage the receivership estate and
Timely termination of new
its subsidiaries toward an orderly
receiverships.
termination.
4.
50
Terminate all receiverships
within 90 days of the
resolution of all impediments.
Conduct investigations into all
Percentage of investigated
For 80 percent of all claim
potential professional liability claim
claim areas for which a decision areas, a decision is made
areas in all failed insured depository
has been made to close or
to close or pursue claims
institutions and decide as promptly
pursue the claim.
within 18 months of the
as possible to close or pursue each
failure date.
claim, considering the size and
complexity of the institution.
Not
Applicable.
No claims
within the
18-month
period.
See pg. 41.
Prior Years' Performance Results
Refer to the respective full Annual Report of prior years for more information on performance results for those years.
(Shaded area indicates no such target existed for that respective year.)
Insurance Program Results
Strategic Goal: Insured depositors are protected from loss without recourse to taxpayer funding.
Annual Performance Goals and Targets
2006
2005
Respond promptly to all financial institution closings
and emerging issues.
If the failure occurs on a Friday, the target is one business day.
Not Applicable. Not Applicable.
No Failures.
No Failures.
If a failure occurs on any other day of the week, the target
Not Applicable. Not Applicable.
is two business days.
No Failures.
No Failures.
Review comments received from the advance notice
Achieved.
of proposed rulemaking on Large-Bank Deposit Insurance
Determination Modernization, consult with stakeholders,
and make a determination on how to proceed.
2004
1.
2.
3.
4.
Identify and address risks to the insurance funds.
Assess the insurance risks in 100 percent of large insured
Achieved.
Achieved.
depository institutions and adopt appropriate strategies.
Identify and follow up on 100 percent of issues raised through
Achieved.
off-site review and analysis.
Identify and follow up on 100 percent of referrals.
Achieved.
Analyses are included in regular publications or as ad hoc reports
on a timely basis.
Conduct industry outreach activities aimed at the banking
community and industry trade groups to discuss current trends
and concerns and to inform bankers about available FDIC
resources.
Maintain sufficient and reliable information on insured
depository institutions.
Implement a modernized Call Reporting process during
Not Achieved.
the second Call Reporting period in 2005.
Implement a modernized Call Reporting process
by December 31, 2004.
Achieved.
Not Applicable.
All failures occurred
on a Friday.
Achieved.
Achieved.
Achieved.
Achieved.
Not Achieved.
Disseminate data and analyses on issues and risks affecting
the financial services industry to bankers, supervisors,
the public and other stakeholders.
Results of research and analyses are disseminated in
Achieved.
Achieved.
a timely manner through regular publications, ad hoc reports
and other means.
Industry outreach activities are undertaken to inform bankers
Achieved.
Achieved.
and other stakeholders about current trends, concerns and
other available FDIC resources.
51
Insurance Program Results (continued)
Strategic Goal: Insured depositors are protected from loss without recourse to taxpayer funding.
Annual Performance Goals and Targets
2006
2005
Maintain and improve the deposit insurance system.
Develop and implement an assessment credit and dividends
Achieved.
system and a new deposit insurance pricing system.
Implement deposit insurance reform legislation in accordance
Achieved.
Not Applicable.
with statutorily prescribed time frames.
Legislation
enacted
Feb. 8, 2006.
Provide information and analysis to Congressional committees
Achieved.
in support of deposit insurance reform legislation.
Obtain legislative support for a proposed assessment credit
Achieved.
and rebate system and a new deposit insurance pricing system.
Enhance the effectiveness of the reserving methodology by
Achieved.
Achieved.
applying sophisticated analytical techniques to review variances
between projected losses and actual losses, and by adjusting
the methodology accordingly.
Set assessment rates to maintain the insurance fund reserve
Achieved.
ratio between 1.15 and 1.50 percent of estimated insured deposits.
Set assessment rates to maintain the insurance funds at the
Achieved.
designated reserve ratio (DRR), or return them to the DRR
if they fall below it, as required by statute.
When deposit insurance reform legislation is enacted,
Not Applicable.
promulgate rules and regulations establishing criteria for
Legislation
replenishing the Deposit Insurance Fund when it falls below
enacted
the low end of the range.
Feb. 8, 2006.
Enhance the working prototype of the integrated fund model
Achieved.
for financial risk management.
Develop a working prototype of a new, integrated fund model
for financial risk management.
Host conference, present findings from the study and obtain
feedback from scholars and industry representatives and other
interested parties.
Implement an FDIC Center for Financial Research with enhanced
ties to the academic community.
Implement enhancements to the reserving process and
methodology in accordance with recommendations from
a comprehensive 2003 review.
2004
5.
52
Not Applicable.
Legislation
not enacted
in 2004.
Achieved.
Achieved.
Achieved.
Achieved.
Not Applicable.
Legislation
not enacted
in 2004.
Achieved.
Not Achieved.
Achieved.
Achieved.
Insurance Program Results (continued)
Strategic Goal: Insured depositors are protected from loss without recourse to taxpayer funding.
Annual Performance Goals and Targets
6.
2006
2005
Provide educational information to insured depository
institutions and their customers to help them understand
the rules for determining the amount of insurance coverage
on deposit accounts.
Update Insuring Your Deposits (basic deposit insurance brochure Achieved.
for consumers), Your Insured Deposit (comprehensive deposit
insurance brochure), and EDIE (Electronic Deposit Insurance
Estimator) on the FDIC Web site to reflect changes resulting
from enactment of deposit insurance legislation.
Update the consumer version of the EDIE (Electronic Deposit
Achieved.
Insurance Estimator) located on the FDIC’s Web site.
Develop and make available to the public an updated Spanish
Achieved.
language version of EDIE reflecting deposit insurance reform.
Develop and make available to the public a Spanish language
Achieved.
version of the FDIC’s 30-minute video on deposit insurance
coverage.
Respond to 90 percent of inquiries from consumers and bankers Achieved.
about FDIC deposit insurance coverage within time frames
established by policy.
Respond to 90 percent of written inquiries within time frames
Achieved.
established by policy.
Develop a CD-ROM and Internet-based resource for bankers
on the deposit insurance rules.
2004
Achieved.
Supervision and Consumer Protection Program Results
Strategic Goal: FDIC-supervised institutions are safe and sound.
Annual Performance Goals and Targets
1.
2006
2005
2004
Conduct on-site risk management examinations to assess
the overall financial condition, management practices
and policies, and compliance with applicable laws and
regulations of FDIC-supervised depository institutions.
One hundred percent of required risk management examinations Achieved.
Achieved.
Achieved.
(including a review for Bank Secrecy Act (BSA) compliance) are
(Excludes BSA.)
conducted on schedule.
53
Supervision and Consumer Protection Program Results (continued)
Strategic Goal: FDIC-supervised institutions are safe and sound.
Annual Performance Goals and Targets
2.
2006
2005
Take prompt and effective supervisory action to address
issues identified during the FDIC examination of FDICsupervised institutions that receive a composite Uniform
Financial Institutions Rating of “4” or “5” (problem
institutions.) Monitor FDIC-supervised insured depository
institutions’ compliance with formal and informal
enforcement actions.
One hundred percent of follow-up examinations are conducted
Achieved.
Achieved.
within 12 months of completion of the prior examination.
3.
Increase regulatory knowledge to keep abreast of current
issues related to money laundering and terrorist financing.
At least 10 percent of BSA/AML subject-matter experts
Achieved.
nationwide are certified under the Association of Certified
Anti-Money Laundering Specialists certification program.
4.
Increase industry and regulatory awareness of emerging/
high-risk areas.
The number of trained BSA/AML subject-matter experts
Achieved.
increased to 300.
Advanced training is completed for all BSA/AML subject-matter
Achieved.
experts.
At least one outreach session per region.
Achieved.
5.
More closely align regulatory capital with risk in large
or multinational banks.
Publish a Notice of Proposed Rulemaking (NPR).
Achieved.
Participate in the continuing analysis of the projected results
Achieved.
of the new capital regime.
Notice of Proposed Rulemaking (NPR) and associated
Achieved.
examination guidance for implementing the new Basel Capital
Accord are published for comment.
Quantitative Impact Study 4 is completed.
Achieved.
6.
More closely align regulatory capital with risk in banks
not subject to Basel II capital rules.
Develop a Notice of Proposed Rulemaking (NPR) for public issuance. Achieved.
7.
Ensure that FDIC-supervised institutions that plan to operate
under the new Basel Capital Accord are making satisfactory
progress toward meeting required qualification standards.
On-site examinations or off-site analyses are performed for all
Achieved.
Achieved.
FDIC-supervised banks that intend to operate under Basel II
to ensure that they are effectively working toward meeting
required qualification standards.
54
2004
Achieved.
Supervision and Consumer Protection Program Results (continued)
Strategic Goal: Consumers’ rights are protected and FDIC-supervised institutions invest in their communities.
Annual Performance Goals and Targets
1.
2.
3.
4.
50
2006
2005
Conduct CRA and compliance examinations in accordance
with the FDIC’s examination frequency policy.
One hundred percent of required examinations are conducted
Achieved.
Achieved.
within time frames established by FDIC policy.
Take prompt and effective supervisory action to monitor
and address problems identified during compliance
examinations of FDIC-supervised institutions that received
a “4” or “5” rating for compliance with consumer protection
and fair lending laws.
One hundred percent of follow-up examinations or related
Achieved.
Achieved.
activities are conducted within 12 months from the date of
a formal enforcement action to confirm that the institution
is in compliance with the enforcement action.
Provide effective outreach and technical assistance on topics
related to the CRA, fair lending, and community development.
200,000 additional individuals are taught using the Money Smart Achieved.
Achieved.
curriculum.
125 technical assistance (examination support) efforts or banker/ Achieved.
Achieved.
community outreach activities are conducted related to CRA,
fair lending, or community development.
200 additional members are added to the Money Smart Alliance.
Achieved.
20,000 additional copies of the Money Smart curricula are
Achieved.
distributed.
Effectively meet the statutory mandate to investigate and
respond to consumer complaints about FDIC-supervised
financial institutions.
Responses are provided to 90 percent of written complaints
Achieved.
Achieved.
within time frames established by policy.
2004
Achieved.
Achieved.
Achieved.
Achieved.
Achieved.
Achieved.
Achieved.
55
Receivership Management Program Results
Strategic Goal: Recovery to creditors of receivership is achieved.
Annual Performance Goals and Targets
2006
2005
Market failing institutions to all known qualified and
interested potential bidders.
Contact all known qualified and interested bidders.
Not Applicable. Not Applicable.
No Failures.
No Failures.
2004
1.
Achieved.
2.
Value, manage, and market assets of failed institutions
and their subsidiaries in a timely manner to maximize
net return.
Ninety percent of the book value of a failed institution’s
Not Applicable. Not Applicable.
marketable assets are marketed within 90 days of failure.
No Failures.
No Failures.
Eighty-five percent of book value of a failed institution’s
Achieved.
marketable assets are marketed within 90 days of failure.
3.
Manage the receivership estate and its subsidiaries toward
an orderly termination.
Terminate all receiverships within 90 days of the resolution
Achieved.
of all impediments.
Inactivate 75 percent of receiverships managed through the
Not Achieved.
Receivership Oversight Program within three years of the
failure date.
4.
56
Conduct investigations into all potential professional
liability claim areas in all failed insured depository
institutions and decide as promptly as possible to
close or pursue each claim, considering the size and
complexity of the institution.
For 80 percent of all claim areas, a decision is made to close
Not Applicable. Achieved.
or pursue claims within 18 months of the failure date.
No Failures.
Achieved.
Achieved.
Program Evaluation
Program evaluations are designed to improve the operational effectiveness
of FDIC’s programs and ensure that objectives are met. These evaluations
are often led by the Office of Enterprise Risk Management and are generally
interdivisional, collaborative efforts involving management and staff from the
affected program(s).
The Corporation's 2007 Annual Performance Plan contained several objectives
aimed at ensuring that the FDIC would continue to address issues associated
with implementation of Deposit Insurance Reform and continue its commitment
to enhance systems security, privacy, and project management efforts. The
following are the results of the Corporation’s program evaluation activities for
2007.
The FDIC issued clarifying guidance on its authority to enforce conditions imposed
in connection with deposit insurance applications, notices and requests. This
guidance ensured consistency in reviewing proposals involving a change in bank
control and the appropriateness of recommending conditions that are similar in
nature and language to conditions imposed in deposit insurance applications.
The FDIC addressed several remaining Deposit Insurance Reform issues in 2007.
Deposit Insurance Reform directly impacted the business process of assessments
invoicing and collection, and forced major changes to the Assessment Invoice
Management System (AIMS) and the FDICconnect interface. Significant
upgrades were implemented in AIMS including a new pricing scheme, payment
in arrears process, interim dividend process, one-time credit process, and
a mechanism for tracking and reporting on the average deposit base.
In the third quarter of 2007, two Post Project Reviews (PPRs) were conducted.
Their purpose is to improve the Corporation’s future systems development efforts
by reviewing recently implemented projects. Among the several significant reviews
completed in 2007 were Phase Four of the Virtual Supervisory Information on
the Net (ViSION) and the FDIC’s New Financial Environment. PPRs currently
underway include the Central Data Repository (CDR) and the Corporate Human
Resources Information System Time and Attendance (CHRIS T&A). Both the CDR
and CHRIS T&A PPRs are scheduled for completion in the first quarter of 2008.
In the area of systems security, the FDIC focused on mission-critical information
systems and applications. The Corporation strengthened its procedures for
securing and disposing of electronic data collected during examinations and
using encryption to protect confidential/sensitive data. Further, the Corporation
enacted measures to protect the privacy of personally-identifiable information
(PII), including requiring mandatory Web-based privacy awareness training for
employees and contractors, conducting Privacy Impact Assessments (PIAs) on
systems identified as containing PII, and purging Social Security numbers from
paper documents and automated systems files in certain program areas. The
Corporation initiated a major security project during 2007 to review access to
and to determine the continuing need for existing shared network folders. Those
folders deemed necessary for ongoing operations will be reviewed for sensitive
information and flagged with appropriate access rights. The remainder will be
archived with restricted access. The first step of this project was completed
in 2007 and resulted in access restrictions to domain users. The project will
continue and be tracked as a Corporate Performance Objective in 2008.
57
The Corporation developed policies and procedures to ensure consistent
implementation of and oversight for using Memoranda of Understanding and
Interagency Agreements. This included expanding their use to promote the
exchange of technical information with foreign banking authorities, foreign
central banks and banking regulators.
Program evaluation activities in 2008 will focus on key corporate issues,
including addressing privacy issues, shared folder access and security, and
asset management. Of particular importance in 2008 is upgrading the FDIC’s
New Financial Environment, an integrated state-of-the-art financial management
system.
58
IV. Financial Statements and Notes
59
Deposit Insurance Fund
60
Deposit Insurance Fund
Federal Deposit Insurance Corporation
Deposit Insurance Fund Balance Sheet at December 31
Dollars in Thousands
2007
Assets
Cash and cash equivalents
Investment in U.S. Treasury obligations, net: (Note 3)
Held-to-maturity securities
Available-for-sale securities
Assessments receivable, net (Note 7)
Interest receivable on investments and other assets, net
Receivables from resolutions, net (Note 4)
Property and equipment, net (Note 5)
Total Assets
Liabilities
Accounts payable and other liabilities
Postretirement benefit liability (Note 11)
Contingent liabilities for: (Note 6)
Anticipated failure of insured institutions
Litigation losses
Total Liabilities
$
4,244,547
2006
$
2,953,995
38,015,174
8,572,800
244,581
768,292
808,072
351,861
$ 53,005,327
37,184,214
8,958,566
0
747,715
538,991
376,790
$ 50,760,271
$
$
151,857
116,158
154,283
129,906
124,276
200,000
592,291
110,775
200,000
594,964
52,034,503
358,908
49,929,226
233,822
19,625
2,259
52,413,036
50,165,307
$ 53,005,327
$ 50,760,271
Commitments and off-balance-sheet exposure (Note 12)
Fund Balance
Accumulated net income
Unrealized gain on available-for-sale securities, net (Note 3)
Unrealized postretirement benefit gain (Note 11)
Total Fund Balance
Total Liabilities and Fund Balance
The accompanying notes are an integral part of these financial statements.
61
Deposit Insurance Fund
Federal Deposit Insurance Corporation
Deposit Insurance Fund Statement of Income and Fund Balance for the Years Ended December 31
Dollars in Thousands
2007
Revenue
Interest on U.S. Treasury obligations
Assessments (Note 7)
Exit fees earned (Note 8)
Other revenue
$
2,540,061
642,928
0
13,244
2006
$
2,240,723
31,945
345,295
25,565
3,196,233
2,643,528
992,570
95,016
3,370
950,618
(52,097)
5,843
Total Expenses and Losses
1,090,956
904,364
Net Income
2,105,277
1,739,164
125,086
17,366
(172,718)
2,259
2,247,729
1,568,705
50,165,307
48,596,602
$ 52,413,036
$ 50,165,307
Total Revenue
Expenses and Losses
Operating expenses (Note 9)
Provision for insurance losses (Note 10)
Insurance and other expenses
Unrealized gain/(loss) on available-for-sale securities, net (Note 3)
Unrealized postretirement benefit gain (Note 11)
Comprehensive Income
Fund Balance - Beginning
Fund Balance - Ending
The accompanying notes are an integral part of these financial statements.
62
Deposit Insurance Fund
Federal Deposit Insurance Corporation
Deposit Insurance Fund Statement of Cash Flows for the Years Ended December 31
Dollars in Thousands
2007
Operating Activities
Net Income:
$ 2,105,277
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of U.S. Treasury obligations
571,267
Treasury inflation - protected securities (TIPS) inflation adjustment
(313,836)
Depreciation on property and equipment
63,115
Loss on retirement of property and equipment
153
Provision for insurance losses
95,016
Terminations /adjustments of work-in-process accounts
0
Exit fees earned
0
Unrealized gain on postretirement benefits
17,366
2006
$ 1,739,164
599,274
(109,394)
52,919
0
(52,097)
433
(345,295)
0
Change in Operating Assets and Liabilities:
Decrease in unamortized premium and discount of U.S. Treasury obligations (restricted)
(Increase) in assessments receivable, net
(Increase) in interest receivable and other assets
(Increase) /Decrease in receivables from resolutions
(Decrease) in accounts payable and other liabilities
(Decrease)/Increase in postretirement benefit liability
Increase in exit fees and investment proceeds held in escrow
0
(244,581)
(20,442)
(350,309)
(39,580)
(13,748)
0
1,359
0
(14,635)
147,258
(166,822)
129,906
3,639
Net Cash Provided by Operating Activities
1,869,698
1,985,709
6,401,000
1,225,000
5,955,000
845,000
(1,607)
(7,706,117)
(11,721)
(9,050,372)
(497,422)
0
Net Cash Used by Investing Activities
(579,146)
(2,262,093)
Net Increase/(Decrease) in Cash and Cash Equivalents
1,290,552
(276,384)
Cash and Cash Equivalents - Beginning
2,953,995
3,230,379
$ 4,244,547
$ 2,953,995
Investing Activities
Provided by:
Maturity of U.S. Treasury obligations, held-to-maturity
Maturity of U.S. Treasury obligations, available-for-sale
Used by:
Purchase of property and equipment
Purchase of U.S. Treasury obligations, held-to-maturity
Purchase of U.S. Treasury obligations, available-for-sale
Cash and Cash Equivalents - Ending
The accompanying notes are an integral part of these financial statements.
63
Deposit Insurance Fund
Notes to the
Financial Statements
December 31, 2007
and 2006
1
Legislation and Operations of the Deposit Insurance Fund
Overview
The Federal Deposit Insurance Corporation (FDIC) is the independent deposit
insurance agency created by Congress in 1933 to maintain stability and public
confidence in the nation’s banking system. Provisions that govern the operations
of the FDIC are generally found in the Federal Deposit Insurance (FDI) Act, as
amended, (12 U.S.C. 1811, et seq). In carrying out the purposes of the FDI Act,
as amended, the FDIC insures the deposits of banks and savings associations
(insured depository institutions), and in cooperation with other federal and state
agencies promotes the safety and soundness of insured depository institutions
by identifying, monitoring and addressing risks to the deposit insurance fund.
An active institution’s primary federal supervisor is generally determined by the
institution’s charter type. Commercial and savings banks are supervised by the
FDIC, the Office of the Comptroller of the Currency, or the Federal Reserve
Board, while thrifts are supervised by the Office of Thrift Supervision.
The Deposit Insurance Fund (DIF) was established on March 31, 2006, as a result
of the merger of the Bank Insurance Fund (BIF) and the Savings Association
Insurance Fund (SAIF). The FDIC is the administrator of the DIF and the FSLIC
Resolution Fund (FRF). These funds are maintained separately to carry out their
respective mandates.
The DIF is an insurance fund responsible for protecting insured bank and thrift
depositors from loss due to institution failures. The FRF is a resolution fund
responsible for the sale of remaining assets and satisfaction of liabilities
associated with the former Federal Savings and Loan Insurance Corporation
(FSLIC) and the Resolution Trust Corporation.
Recent Legislation
The Federal Deposit Insurance Reform Act of 2005 (Title II, Subtitle B of Public
Law 109-171, 120 Stat. 9) and the Federal Deposit Insurance Reform Conforming
Amendments Act of 2005 (Public Law 109-173, 119 Stat. 3601) were enacted
in February 2006. Pursuant to this legislation (collectively, the Reform Act), the
BIF and the SAIF were merged as discussed above. Additionally, as a result of
the Reform Act, the FDIC immediately increased coverage for certain retirement
accounts to $250,000 and required the deposit of funds into the DIF for SAIFmember exit fees that had been restricted and held in escrow. Furthermore, the
Reform Act: 1) provides the FDIC with greater discretion to charge insurance
assessments and to impose more sensitive risk-based pricing; 2) annually permits
the designated reserve ratio to vary between 1.15 and 1.50 percent of estimated
insured deposits, thereby eliminating the statutorily fixed designated reserve ratio
of 1.25 percent; 3) generally requires the declaration and payment of dividends
from the DIF if the reserve ratio of the DIF equals or exceeds 1.35 percent of
estimated insured deposits at the end of a calendar year; 4) grants a one-time
assessment credit for each eligible insured depository institution or its successor
based on an institution’s proportionate share of the aggregate assessment base
64
of all eligible institutions at December 31, 1996; and 5) allows the FDIC to increase
all deposit insurance coverage, under certain circumstances, to reflect inflation
every five years beginning January 1, 2011. See Note 7 for additional discussion
on the reforms related to Assessments.
Operations of the DIF
The primary purpose of the DIF is to: 1) insure the deposits and protect the
depositors of DIF-insured institutions and 2) resolve DIF-insured failed institutions
upon appointment of FDIC as receiver in a manner that will result in the least
possible cost to the DIF.
The DIF is primarily funded from: 1) interest earned on investments in U.S. Treasury
obligations and 2) deposit insurance assessments. Additional funding sources,
if necessary, are borrowings from the U.S. Treasury, Federal Financing Bank,
Federal Home Loan Banks, and insured depository institutions. The FDIC
has borrowing authority from the U.S. Treasury up to $30 billion and a Note
Purchase Agreement with the Federal Financing Bank not to exceed $40 billion
to enhance DIF’s ability to fund deposit insurance obligations.
A statutory formula, known as the Maximum Obligation Limitation (MOL), limits
the amount of obligations the DIF can incur to the sum of its cash, 90 percent of
the fair market value of other assets, and the amount authorized to be borrowed
from the U.S. Treasury. The MOL for the DIF was $83.6 billion and $79.7 billion
as of December 31, 2007 and 2006, respectively.
Receivership Operations
The FDIC is responsible for managing and disposing of the assets of failed
institutions in an orderly and efficient manner. The assets held by receivership
entities, and the claims against them, are accounted for separately from DIF
assets and liabilities to ensure that receivership proceeds are distributed in
accordance with applicable laws and regulations. Accordingly, income and
expenses attributable to receiverships are accounted for as transactions
of those receiverships. Receiverships are billed by the FDIC for services
provided on their behalf.
65
Deposit Insurance Fund
2
Summary of Significant Accounting Policies
General
These financial statements pertain to the financial position, results of operations,
and cash flows of the DIF and are presented in conformity with U.S. generally
accepted accounting principles (GAAP). These statements do not include reporting
for assets and liabilities of closed banks and thrifts for which the FDIC acts as
receiver. Periodic and final accountability reports of the FDIC’s activities as receiver
are furnished to courts, supervisory authorities, and others as required.
Use of Estimates
Management makes estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
from these estimates. Where it is reasonably possible that changes in estimates
will cause a material change in the financial statements in the near term, the
nature and extent of such changes in estimates have been disclosed. The more
significant estimates include the assessments receivable and associated revenue,
the allowance for loss on receivables from resolutions, the estimated losses for
anticipated failures and litigation, and the postretirement benefit obligation.
Cash Equivalents
Cash equivalents are short-term, highly liquid investments with original
maturities of three months or less. Cash equivalents consist primarily
of Special U.S. Treasury Certificates.
Investment in U.S. Treasury Obligations
DIF funds are required to be invested in obligations of the United States or
in obligations guaranteed as to principal and interest by the United States;
the Secretary of the U.S. Treasury must approve all such investments in
excess of $100,000. The Secretary has granted approval to invest DIF funds
only in U.S. Treasury obligations that are purchased or sold exclusively through
the Bureau of the Public Debt’s Government Account Series (GAS) program.
DIF’s investments in U.S. Treasury obligations are either classified as heldto-maturity or available-for-sale based on the FDIC’s assessment of funding
needs. Securities designated as held-to-maturity are shown at amortized cost.
Amortized cost is the face value of securities plus the unamortized premium or
less the unamortized discount. Amortizations are computed on a daily basis from
the date of acquisition to the date of maturity, except for callable U.S. Treasury
securities, which are amortized to the first call date. Securities designated as
available-for-sale are shown at market value, which approximates fair value.
Unrealized gains and losses are included in Comprehensive Income. Realized
gains and losses are included in the Statement of Income and Fund Balance
as components of Net Income. Income on both types of securities is calculated
and recorded on a daily basis using the effective interest method.
66
Revenue Recognition for Assessments
Prior to 2007, insurance assessments were fully paid in advance on the last
day of each quarter for the next quarter and recorded as unearned assessment
revenue. One-third of the amount was recognized monthly as assessment
income during the quarter in accordance with GAAP.
The Reform Act granted the FDIC discretion in the manner assessments are
determined and collected from insured depository institutions. As a result,
the FDIC now collects deposit insurance premiums at the end of the quarter
following the period of insurance coverage. Consequently, assessment revenue
for the insured period is recognized based on an estimate. The estimate is
derived from an institution’s risk-based assessment rate and assessment base
for the prior quarter; adjusted for the current quarter’s available assessment
credits, any changes in supervisory examination and debt issuer ratings for
larger institutions, and a modest deposit insurance growth factor.
The estimated revenue amounts are adjusted when actual premiums are collected
at quarter end. Total assessment income recognized for the year includes
estimated revenue for the October-December assessment period. See Note 7
for additional information on assessments.
Capital Assets and Depreciation
The FDIC buildings are depreciated on a straight-line basis over a 35 to 50 year
estimated life. Leasehold improvements are capitalized and depreciated over
the lesser of the remaining life of the lease or the estimated useful life of the
improvements, if determined to be material. Capital assets depreciated on a
straight-line basis over a five-year estimated life include mainframe equipment;
furniture, fixtures, and general equipment; and internal-use software. Personal
computer equipment is depreciated on a straight-line basis over a three-year
estimated life.
Disclosure about Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 157, Fair Value Measurements, in September
2006. SFAS No. 157 defines fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures about fair value measurements. The
Statement does not require any new fair value measurements. FDIC will adopt
SFAS No. 157 effective January 1, 2008, on a prospective basis. Management does
not expect the Statement to have a material impact on the financial statements.
Related Parties
The nature of related parties and a description of related party transactions
are discussed in Note 1 and disclosed throughout the financial statements
and footnotes.
67
Deposit Insurance Fund
3
Investment in U.S. Treasury Obligations, Net
As of December 31, 2007 and 2006, investments in U.S. Treasury obligations,
net, were $46.6 billion and $46.1 billion, respectively. As of December 31, 2007,
the DIF held $9.6 billion of Treasury inflation-protected securities (TIPS). These
securities are indexed to increases or decreases in the Consumer Price Index
for All Urban Consumers (CPI-U). Additionally, the DIF held $4.3 billion of callable
U.S. Treasury bonds at December 31, 2007. Callable U.S. Treasury bonds may
be called five years prior to the respective bonds’ stated maturity on their
semi-annual coupon payment dates upon 120 days notice.
U.S. Treasury Obligations at December 31, 2007
Dollars in Thousands
Maturity
Held-to-Maturity
●
Yield at
▼
Purchase
Net
Carrying
Amount
Face
Value
U. S. Treasury notes and bonds
Within 1 year
4.49%
$ 5,600,000
After 1 year thru 5 years
4.50%
12,920,000
After 5 years thru 10 years
4.81%
11,550,000
After 10 years
5.02%
3,500,000
U. S. Treasury inflation-protected securities
Within 1 year
3.86%
258,638
After 1 year thru 5 years
3.16%
$ 1,288,950
Total
$ 35,117,588
$
5,651,699
13,310,856
12,856,888
4,626,945
258,620
$ 1,310,166
$ 38,015,174
Unrealized
Holding
Gains
Unrealized
Holding
Losses■
$
$
30,313
416,031
764,723
286,889
(469)
0
0
0
Market
Value
$
5,681,543
13,726,887
13,621,611
4,913,834
349
$ 52,927
$ 1,551,232
0
$
0
$ (469)
258,969
$ 1,363,093
$ 39,565,937
$
$
$
Available-for-Sale
U. S. Treasury notes and bonds
After 1 year thru 5 years
4.79%
$
500,000
U. S. Treasury inflation-protected securities
Within 1 year
3.92%
1,700,545
After 1 year thru 5 years
3.75%
6,004,277
Total
$ 8,204,822
$
498,260
10,100
0
508,360
1,700,397
6,015,235
$ 8,213,892
2,325
346,483
$ 358,908
0
0
$ 0
1,702,722
6,361,718
$ 8,572,800
$ 46,229,066
$ 1,910,140
$ (469)
$ 48,138,737
Total Investment in U.S. Treasury Obligations, Net
Total
$ 43,322,410
For purposes of this table, all callable securities are assumed to mature on their first call dates. Their yields at purchase are reported as their yield to first call date.
For TIPS, the yields in the above table are stated at their real yields at purchase, not their effective yields. Effective yields on TIPS include a long-term annual inflation
assumption as measured by the CPI-U. The long-term CPI-U consensus forecast is 2.2 percent, based on figures issued by the Congressional Budget Office and
Blue Chip Economic Indicators in early 2007.
■
All unrealized losses occurred as a result of changes in market interest rates. FDIC has the ability and intent to hold the related securities until maturity. As a result,
all unrealized losses are considered temporary. However, all of the $469 thousand reported as total unrealized losses is recognized as unrealized losses occurring over
a period of 12 months or longer with a market value of $1.1 billion applied to the affected securities.
●
▼
68
U.S. Treasury Obligations at December 31, 2006
Dollars in Thousands
Maturity
Held-to-Maturity
●
Yield at
▼
Purchase
Face
Value
U. S. Treasury notes and bonds
Within 1 year
4.58%
$ 6,401,000
After 1 year thru 5 years
4.47%
15,500,000
After 5 years thru 10 years
4.68%
9,025,000
After 10 years
5.01%
2,445,000
U. S. Treasury inflation-protected securities
After 1 year thru 5 years
3.83%
926,751
After 5 years thru 10 years
2.41%
568,345
Total
$ 34,866,096
Net
Carrying
Amount
Unrealized
Holding
Gains
3,389
91,703
36,025
57,589
Unrealized
Holding
Losses■
$
(20,704)
(196,635)
(42,270)
(3,227)
Market
Value
$ 6,448,905
16,276,424
9,690,085
3,247,814
$
$
6,431,590
16,171,492
9,683,840
3,302,176
926,844
594,142
$ 37,184,214
21,185
0
$ 209,891
0
(778)
$ (263,614)
948,029
593,364
$ 37,130,491
$ 1,269,835
$
$
$
Available-for-Sale
U. S. Treasury notes and bonds
Within 1 year
3.85%
$ 1,225,000
U. S. Treasury inflation-protected securities
After 1 year thru 5 years
3.80%
7,443,478
Total
$ 8,668,478
0
(9,208)
1,260,627
7,454,909
243,030
0
7,697,939
$ 8,724,744
$ 243,030
$ (9,208)
$ 8,958,566
$ 45,908,958
$ 452,921
$ (272,822)
$ 46,089,057
Total Investment in U.S. Treasury Obligations, Net
Total
$ 43,534,574
●
For purposes of this table, all callable securities are assumed to mature on their first call dates. Their yields at purchase are reported as their yield to first call date.
For TIPS, the yields in the above table are stated at their real yields at purchase, not their effective yields. Effective yields on TIPS include a long-term annual inflation
assumption as measured by the CPI-U. The long-term CPI-U consensus forecast is 2.2 percent, based on figures issued by the Congressional Budget Office and
Blue Chip Economic Indicators in early 2006.
■
All unrealized losses occurred as a result of changes in market interest rates. FDIC has the ability and intent to hold the related securities until maturity. As a result,
all unrealized losses are considered temporary. However, of the $273 million reported as total unrealized losses, $237 million is recognized as unrealized losses occurring
over a period of 12 months or longer with a market value of $13.3 billion applied to the affected securities.
▼
As of December 31, 2007 and 2006, the unamortized premium, net of the unamortized discount, was $2.9 billion and
$2.4 billion, respectively.
69
Deposit Insurance Fund
4
Receivables From Resolutions, Net
The receivables from resolutions include payments made by the DIF to cover
obligations to insured depositors, advances to receiverships for working capital,
and administrative expenses paid on behalf of receiverships. Any related allowance
for loss represents the difference between the funds advanced and/or obligations
incurred and the expected repayment. Assets held by DIF receiverships are the
main source of repayment of the DIF’s receivables from closed banks and thrifts.
As of December 31, 2007, there were 22 active receiverships, including three
failures in the current year.
As of December 31, 2007 and 2006, DIF receiverships held assets with
a book value of $1.2 billion and $655 million, respectively (including cash,
investments, and miscellaneous receivables of $363 million and $348 million
at December 31, 2007 and 2006, respectively). The estimated cash recoveries
from the management and disposition of assets that are used to derive the
allowance for losses are based on a sampling of receivership assets in liquidation.
Sampled assets were generally valued by estimating future cash recoveries,
net of applicable liquidation cost estimates, and then discounted using current
market-based risk factors applicable to a given asset’s type and quality. Resultant
recovery estimates were extrapolated to the non-sampled assets in order to
derive the allowance for loss on the receivable. Estimated asset recoveries are
regularly evaluated, but remain subject to uncertainties because of potential
changes in economic and market conditions. Such uncertainties could cause
the DIF’s actual recoveries to vary from current estimates.
Receivables From Resolutions, Net at December 31
Dollars in Thousands
Receivables from closed banks
Allowance for losses
2007
$ 4,991,003
(4,182,931)
2006
$ 4,650,025
(4,111,034)
Total
$ 808,072
$ 538,991
As of December 31, 2007, the DIF allowance for loss was $4.18 billion, representing
84 percent of the gross receivable. Of the remaining 16 percent of the gross
receivable, the amount of credit risk is limited since 60 percent of the $808 million
net receivable will be repaid from receivership cash, investments, and a promissory
note fully secured by a letter of credit. The majority of the remaining 40 percent
will be repaid from assets classified as or supported by real estate mortgages.
Although estimated asset recoveries are regularly evaluated, the impact of any
additional credit risk exposure, due to ongoing conditions in the housing market,
is uncertain at this time.
70
5
Property and Equipment, Net
Property and Equipment, Net at December 31
Dollars in Thousands
2007
$ 37,352
276,626
145,693
71,138
(178,948)
$ 351,861
Land
Buildings (including leasehold improvements)
Application software (includes work-in-process)
Furniture, fixtures, and equipment
Accumulated depreciation
Total
2006
$ 37,352
284,871
232,206
145,635
(323,274)
$ 376,790
The depreciation expense was $63 million and $53 million for December 31, 2007
and 2006, respectively.
6
Contingent Liabilities for:
Anticipated Failure of Insured Institutions
The DIF records a contingent liability and a loss provision for DIF-insured
institutions that are likely to fail within one year of the reporting date, absent
some favorable event such as obtaining additional capital or merging, when
the liability becomes probable and reasonably estimable.
The contingent liability is derived by applying expected failure rates and loss
rates to institutions based on supervisory ratings, balance sheet characteristics,
and projected capital levels. In addition, institution-specific analysis is performed
on those institutions where failure is imminent absent institution management
resolution of existing problems, or where additional information is available
that may affect the estimate of losses. As of December 31, 2007 and 2006,
the contingent liabilities for anticipated failure of insured institutions were
$124.3 million and $110.8 million, respectively, including an estimated liability
for one small institution that failed on January 25, 2008.
In addition to these recorded contingent liabilities, the FDIC has identified
additional risk in the financial services industry that could result in an additional
loss to the DIF should potentially vulnerable insured institutions ultimately fail.
As a result of these risks, the FDIC believes that it is reasonably possible that
the DIF could incur additional estimated losses up to approximately $1.7 billion.
The actual losses if any will largely depend on future economic and market
conditions and could differ materially from this estimate.
71
Deposit Insurance Fund
During 2007, an increasingly difficult economic and credit environment challenged
the soundness and profitability of some FDIC-insured institutions. The downturn
in housing markets led to asset-quality problems and volatility in financial markets,
which hurt banking industry performance and threatened the viability of some
institutions that had significant exposure to higher risk residential mortgages.
It is uncertain how long the effects of this downturn will last. While supervisory
and market data suggest that the banking industry will continue to experience
elevated levels of stress over the coming year, as of September 30, 2007,
99% of insured institutions met the highest regulatory capital (“well capitalized”)
standard. The FDIC continues to evaluate the risks to affected institutions in
light of evolving economic conditions; however, the impact of such risks on
the insurance fund cannot be reasonably estimated at this time.
Litigation Losses
The DIF records an estimated loss for unresolved legal cases to the extent that
those losses are considered probable and reasonably estimable. In addition to
the $200 million recorded as probable, the FDIC has determined that losses
from unresolved legal cases totaling $0.6 million are reasonably possible.
Other Contingencies
Representations and Warranties
As part of the FDIC’s efforts to maximize the return from the sale of assets
from bank and thrift resolutions, representations and warranties, and guarantees
were offered on certain loan sales. In general, the guarantees, representations,
and warranties on loans sold relate to the completeness and accuracy of loan
documentation, the quality of the underwriting standards used, the accuracy
of the delinquency status when sold, and the conformity of the loans with
characteristics of the pool in which they were sold. The total amount of loans
sold subject to unexpired representations and warranties, and guarantees was
$8.1 billion as of December 31, 2007. There were no contingent liabilities from
any of the outstanding claims asserted in connection with representations and
warranties at December 31, 2007 and 2006, respectively.
In addition, future losses could be incurred until the contracts offering the
representations and warranties, and guarantees have expired, some as late
as 2032. Consequently, the FDIC believes it is possible that additional losses
may be incurred by the DIF from the universe of outstanding contracts with
unasserted representation and warranty claims. However, because of the
uncertainties surrounding the timing of when claims may be asserted, the
FDIC is unable to reasonably estimate a range of loss to the DIF from
outstanding contracts with unasserted representation and warranty claims.
72
7
Assessments
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
required the FDIC to establish a risk-based assessment system, charging higher
rates to those insured depository institutions that posed greater risks to the
DIF. To arrive at a risk-based assessment for a particular institution, the FDIC
placed each institution in one of nine risk categories based on capital ratios and
supervisory examination data. Based on FDIC’s evaluation of the institutions
under the risk-based premium system and due to the limitations imposed by
the Deposit Insurance Funds Act of 1996 (DIFA) and the health of the banking
and thrift industries, most institutions were not charged an assessment for
a number of years. In addition, the FDIC was required by statute to maintain
the insurance funds at a designated reserve ratio (DRR) of not less than
1.25 percent of estimated insured deposits (or a higher percentage as
circumstances warranted).
Effective January 1, 2007, the Reform Act continues to require a risk-based
assessment system and allows the FDIC discretion in defining risk. By regulation,
the FDIC has consolidated the number of assessment risk categories from nine
to four. The four new categories continue to be defined based upon supervisory
and capital evaluations. Other significant changes mandated by the Reform Act
and the implementing regulations:
• require payment of assessments by all insured depository institutions,
eliminating the restriction on assessments for the best-rated institutions;
• grant a one-time assessment credit of approximately $4.7 billion to certain
eligible insured depository institutions (or their successors) based on the
assessment base of the institution as of December 31, 1996, as compared
to the combined aggregate assessment base of all eligible institutions;
• establish a range for the DRR from 1.15 to 1.50 percent of estimated insured
deposits and eliminate the fixed DRR of 1.25 percent. The FDIC is required
to annually publish the DRR and has, by regulation, set the DRR at 1.25 percent for 2008. As of September 30, 2007, the DIF reserve ratio was 1.22%
of estimated insured deposits;
• require the FDIC to adopt a DIF restoration plan to return the reserve ratio
to 1.15 percent generally within five years, if the reserve ratio falls below
1.15 percent or is expected to fall below 1.15 percent within six months;
• require the FDIC to annually determine if a dividend should be paid, based
on the statutory requirement generally to declare dividends if the reserve
ratio exceeds 1.35 percent at the end of a calendar year. The Reform Act
permits dividends for one-half of the amount required to maintain the reserve
ratio at 1.35 percent when the reserve ratio is between 1.35 and 1.50 percent
and all amounts required to maintain the reserve ratio at 1.50 percent when
the reserve ratio exceeds 1.50 percent.
73
Deposit Insurance Fund
The assessment rate averaged approximately 5.4 cents and .05 cents per $100
of assessable deposits for 2007 and 2006, respectively. At December 31, 2007,
the “Assessments Receivable, net” line item of $245 million represents the
estimated gross premiums due from insured depository institutions for the
fourth quarter of the year, net of $708 million in estimated one-time assessment
credits. The actual deposit insurance assessments for the fourth quarter will
be billed and collected at the end of the first quarter of 2008. During 2007 and
2006, $643 million and $32 million were recognized as assessment income from
institutions, respectively.
Assessments Revenue for the Year Ended December 31
Dollars in Thousands
Gross assessments
Less: One-time assessment credits applied
Assessments Revenue
2007
$ 3,730,886
(3,087,958)
$ 642,928
Of the $4.7 billion in one-time assessment credits granted, $1.6 billion (34 percent)
remained as of December 31, 2007. The use of assessment credits is limited to
no more than 90 percent of the gross assessments for assessment periods that
provide deposit insurance coverage in years 2008 through 2010. Credits are also
restricted when the reserve ratio is less than 1.15 percent and for institutions
that are not adequately capitalized or exhibit financial, operational or compliance
weaknesses. The credits can only be used to offset future deposit insurance
assessments and, therefore, do not represent a liability to the DIF. They are
transferable among institutions, do not expire, and cannot be used to offset
Financing Corporation (FICO) payments.
Assessments continue to be levied on institutions for payments of the interest
on obligations issued by the FICO. The FICO was established as a mixed-ownership
government corporation to function solely as a financing vehicle for the FSLIC.
The annual FICO interest obligation of approximately $790 million is paid on a
pro rata basis using the same rate for banks and thrifts. The FICO assessment
has no financial impact on the DIF and is separate from deposit insurance
assessments. The FDIC, as administrator of the DIF, acts solely as a collection
agent for the FICO. During 2007 and 2006, $785 million and $788 million,
respectively, were collected and remitted to the FICO.
74
8
Exit Fees Earned
From the early to mid-1990s, the SAIF collected entrance and exit fees for
conversion transactions when an insured depository institution converted from
the BIF to the SAIF (resulting in an entrance fee) or from the SAIF to the BIF
(resulting in an exit fee). The exit fees and interest earned were held in escrow
pending determination of ownership. As a result, the SAIF did not recognize exit
fees or any interest earned as revenue. The Reform Act removed the restriction
on SAIF-member exit fees held in escrow and the funds were deposited into the
general (unrestricted) fund of the DIF. The exit fees plus earned interest, a total
of $345 million, were recognized as revenue at their carrying value for 2006.
9
Operating Expenses
Operating expenses were $993 million for 2007, compared to $951 million for
2006. The chart below lists the major components of operating expenses.
Operating Expenses for the Years Ended December 31
Dollars in Thousands
2007
2006
Salaries and benefits
Outside services
Travel
Buildings and leased space
Software/Hardware maintenance
Depreciation of property and equipment
Other
Services billed to receiverships
$ 640,294
137,812
55,281
61,377
28,542
63,115
23,640
(17,491)
$ 619,452
124,045
49,408
65,929
27,139
52,919
22,124
(10,398)
Total
$ 992,570
$ 950,618
75
Deposit Insurance Fund
10
Provision for Insurance Losses
Provision for insurance losses was a positive $95 million for 2007 and a negative
$52 million for 2006. The following chart lists the major components of the
provision for insurance losses.
Provision for Insurance Losses for the Years Ended December 31
Dollars in Thousands
2007
2006
$ 81,229
286
$ (152,776)
(4,230)
Total Valuation Adjustments
81,515
(157,006)
Contingent Liabilities Adjustments:
Anticipated failure of insured institutions
Litigation losses
Total Contingent Liabilities Adjustments
13,501
0
13,501
105,409
(500)
104,909
$ 95,016
$ (52,097)
Valuation Adjustments
Closed banks and thrifts
Other assets
Total
11
Employee Benefits
Pension Benefits and Savings Plans
Eligible FDIC employees (permanent and term employees with appointments
exceeding one year) are covered by the federal government retirement plans,
either the Civil Service Retirement System (CSRS) or the Federal Employees
Retirement System (FERS). Although the DIF contributes a portion of pension
benefits for eligible employees, it does not account for the assets of either
retirement system. The DIF also does not have actuarial data for accumulated
plan benefits or the unfunded liability relative to eligible employees. These
amounts are reported on and accounted for by the U.S. Office of Personnel
Management (OPM).
Eligible FDIC employees also may participate in a FDIC-sponsored tax-deferred
401(k) savings plan with matching contributions up to five percent. Under the
Federal Thrift Savings Plan (TSP), FDIC provides FERS employees with an automatic
contribution of 1 percent of pay and an additional matching contribution up to
4 percent of pay. CSRS employees also can contribute to the TSP. However,
CSRS employees do not receive agency matching contributions.
76
Pension Benefits and Savings Plans Expenses for the Years Ended December 31
Dollars in Thousands
Civil Service Retirement System
Federal Employees Retirement System (Basic Benefit)
FDIC Savings Plan
Federal Thrift Savings Plan
Severance Pay
2007
$ 6,698
40,850
21,008
15,938
59
Total
$ 84,553
$
2006
6,808
38,915
20,681
15,328
39
$ 81,771
Postretirement Benefits Other Than Pensions
The DIF has no postretirement health insurance liability, since all eligible retirees
are covered by the Federal Employees Health Benefit (FEHB) program. FEHB
is administered and accounted for by the OPM. In addition, OPM pays the
employer share of the retiree’s health insurance premiums.
The FDIC provides certain life and dental insurance coverage for its eligible
retirees, the retirees’ beneficiaries, and covered dependents. Retirees eligible
for life and dental insurance coverage are those who have qualified due to:
1) immediate enrollment upon appointment or five years of participation in
the plan and 2) eligibility for an immediate annuity. The life insurance program
provides basic coverage at no cost to retirees and allows converting optional
coverages to direct-pay plans. For the dental coverage, retirees are responsible
for a portion of the dental premium.
The DIF has elected not to fund the postretirement life and dental benefit
liabilities. As a result, the DIF recognized the underfunded status (difference
between the accumulated postretirement benefit obligation and the plan assets
at fair value) as a liability. Since there are no plan assets, the plan’s benefit
liability is equal to the accumulated postretirement benefit obligation. At
December 31, 2007 and 2006, the liability was $116.2 million and $129.9 million,
respectively, which is recognized in the “Postretirement benefit liability” line
item on the Balance Sheet. The cumulative actuarial gains/losses (changes
in assumptions and plan experience) and prior service costs/credits (changes
to plan provisions that increase or decrease benefits) were $19.6 million and
$2.3 million at December 31, 2007 and 2006, respectively. These amounts
are reported as accumulated other comprehensive income in the “Unrealized
postretirement benefit gain” line item on the Balance Sheet.
77
Deposit Insurance Fund
The DIF’s expenses for postretirement benefits for 2007 and 2006 were
$7.2 million and $9.0 million, respectively, which are included in the current and
prior year’s operating expenses on the Statement of Income and Fund Balance.
The changes in the actuarial gains/losses and prior service costs/credits for
2007 and 2006 of $17.4 million and $2.3 million, respectively, are reported as
other comprehensive income in the “Unrealized postretirement benefit gain”
line item. Key actuarial assumptions used in the accounting for the plan include
the discount rate of 6 percent, the rate of compensation increase of 3.45 percent,
and the dental coverage trend rate of 6.10 percent. The discount rate of 6 percent
is based upon rates of return on high-quality fixed income investments whose
cash flows match the timing and amount of expected benefit payments. For
the year ended December 31, 2007, the discount rate was increased by
1.25 percent from the rate used in 2006, resulting in a decrease in the benefit
liability of $24.3 million.
12
Commitments and Off-Balance-Sheet Exposure
Commitments:
Leased Space
The FDIC’s lease commitments total $63.7 million for future years. The lease
agreements contain escalation clauses resulting in adjustments, usually on
an annual basis. The DIF recognized leased space expense of $22 million and
$30 million for the periods ended December 31, 2007 and 2006, respectively.
Leased Space Commitments
Dollars in Thousands
2008
2009
2010
2011
2012
2013/Thereafter
$ 18,855
$ 15,529
$ 11,165
$ 8,488
$ 5,999
$ 3,637
Off-Balance-Sheet Exposure:
Deposit Insurance
As of September 30, 2007, the estimated insured deposits for DIF were
$4.2 trillion. This estimate is derived primarily from quarterly financial data
submitted by insured depository institutions to the FDIC. This estimate
represents the accounting loss that would be realized if all insured depository
institutions were to fail and the acquired assets provided no recoveries.
78
13
Disclosures About the Fair Value of Financial Instruments
Cash equivalents are short-term, highly liquid investments and are shown at fair
value. The fair market value of the investment in U.S. Treasury obligations is
disclosed in Note 3 and is based on current market prices. The carrying amount
of interest receivable on investments, short-term receivables, and accounts
payable and other liabilities approximates their fair market value, due to their
short maturities and/or comparability with current interest rates.
The net receivables from resolutions primarily include the DIF’s subrogated claim
arising from payments to insured depositors. The receivership assets that will
ultimately be used to pay the corporate subrogated claim are valued using discount
rates that include consideration of market risk. These discounts ultimately affect
the DIF’s allowance for loss against the net receivables from resolutions. Therefore,
the corporate subrogated claim indirectly includes the effect of discounting and
should not be viewed as being stated in terms of nominal cash flows.
Although the value of the corporate subrogated claim is influenced by valuation
of receivership assets (see Note 4), such receivership valuation is not equivalent
to the valuation of the corporate claim. Since the corporate claim is unique, not
intended for sale to the private sector, and has no established market, it is not
practicable to estimate a fair market value.
The FDIC believes that a sale to the private sector of the corporate claim would
require indeterminate, but substantial, discounts for an interested party to profit
from these assets because of credit and other risks. In addition, the timing of
receivership payments to the DIF on the subrogated claim does not necessarily
correspond with the timing of collections on receivership assets. Therefore, the
effect of discounting used by receiverships should not necessarily be viewed as
producing an estimate of market value for the net receivables from resolutions.
79
FSLIC Resolution Fund
80
Federal Deposit Insurance Corporation
FSLIC Resolution Fund Balance Sheet at December 31
Dollars in Thousands
2007
Assets
Cash and cash equivalents
Receivables from thrift resolutions and other assets, net (Note 3)
Receivables from U.S. Treasury for goodwill judgments (Note 4)
Total Assets
Liabilities
Accounts payable and other liabilities
Contingent liabilities for litigation losses and other (Note 4)
Total Liabilities
Resolution Equity (Note 5)
Contributed capital
Accumulated deficit
Total Resolution Equity
Total Liabilities and Resolution Equity
$
2006
3,617,133
34,812
35,350
$ 3,687,295
$
$
$
4,276
35,350
39,626
3,616,466
36,730
251,827
$ 3,905,023
5,497
279,327
284,824
127,417,582
(123,769,913)
127,453,996
(123,833,797)
3,647,669
3,620,199
$ 3,687,295
$ 3,905,023
The accompanying notes are an integral part of these financial statements.
81
FSLIC Resolution Fund
Federal Deposit Insurance Corporation
FSLIC Resolution Fund Statement of Income and Accumulated Deficit for the Years Ended December 31
Dollars in Thousands
2007
Revenue
Interest on U.S. Treasury obligations
Other revenue
$
156,034
31,558
2006
$
151,648
17,650
Total Revenue
187,592
169,298
Expenses and Losses
Operating expenses
Provision for losses
Goodwill/Guarini litigation expenses (Note 4)
3,364
(10,135)
195,939
12,002
(19,257)
411,056
Recovery of tax benefits
Other expenses
(68,217)
2,757
(34,783)
2,783
Total Expenses and Losses
123,708
371,801
63,884
(202,503)
(123,833,797)
(123,631,294)
$ (123,769,913)
$ (123,833,797)
Net Income / ( Loss)
Accumulated Deficit - Beginning
Accumulated Deficit - Ending
The accompanying notes are an integral part of these financial statements.
82
Federal Deposit Insurance Corporation
FSLIC Resolution Fund Statement of Cash Flows for the Years Ended December 31
Dollars in Thousands
2007
Operating Activities
Net Income/(Loss)
$ 63,884
Adjustments to reconcile net income/(loss) to net cash (used by) operating activities:
Provision for losses
(10,135)
Change in Operating Assets and Liabilities:
Decrease in receivables from thrift resolutions and other assets
(Decrease ) in accounts payable and other liabilities
(Decrease )/Increase in contingent liabilities for litigation losses and other
Net Cash Used by Operating Activities
12,053
(1,221)
2006
$ (202,503)
(19,257)
21,273
(2,302)
(243,977)
21,824
(179,396)
(180,965)
405,063
194,728
(225,000)
0
180,063
194,728
667
13,763
Financing Activities
Provided by:
U.S.Treasury payments for goodwill litigation (Note 4)
Used by:
Payments to Resolution Funding Corporation (Note 5)
Net Cash Provided by Financing Activities
Net Increase in Cash and Cash Equivalents
Cash and Cash Equivalents - Beginning
Cash and Cash Equivalents - Ending
3,616,466
3,602,703
$ 3,617,133
$ 3,616,466
The accompanying notes are an integral part of these financial statements.
83
FSLIC Resolution Fund
Notes to the
Financial Statements
December 31, 2007
and 2006
1
Legislative History and Operations/Dissolution
of the FSLIC Resolution Fund
Legislative History
The Federal Deposit Insurance Corporation (FDIC) is the independent deposit
insurance agency created by Congress in 1933 to maintain stability and public
confidence in the nation’s banking system. Provisions that govern the operations
of the FDIC are generally found in the Federal Deposit Insurance (FDI) Act,
as amended, (12 U.S.C. 1811, et seq). In carrying out the purposes of the
FDI Act, as amended, the FDIC insures the deposits of banks and savings
associations, and in cooperation with other federal and state agencies promotes
the safety and soundness of insured depository institutions by identifying,
monitoring and addressing risks to the deposit insurance funds established in
the FDI Act, as amended. In addition, FDIC is charged with responsibility for the
sale of remaining assets and satisfaction of liabilities associated with the former
Federal Savings and Loan Insurance Corporation (FSLIC) and the Resolution
Trust Corporation (RTC).
The U.S. Congress created the FSLIC through the enactment of the National
Housing Act of 1934. The Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) abolished the insolvent FSLIC, created the
FSLIC Resolution Fund (FRF), and transferred the assets and liabilities of the
FSLIC to the FRF–except those assets and liabilities transferred to the RTC–
effective on August 9, 1989. Further, the FIRREA established the Resolution
Funding Corporation (REFCORP) to provide part of the initial funds used by
the RTC for thrift resolutions.
The RTC Completion Act of 1993 (RTC Completion Act) terminated the RTC
as of December 31, 1995. All remaining assets and liabilities of the RTC
were transferred to the FRF on January 1, 1996. Today, the FRF consists
of two distinct pools of assets and liabilities: one composed of the assets
and liabilities of the FSLIC transferred to the FRF upon the dissolution of the
FSLIC (FRF-FSLIC), and the other composed of the RTC assets and liabilities
(FRF-RTC). The assets of one pool are not available to satisfy obligations
of the other.
Pursuant to the Federal Deposit Insurance Reform Act of 2005, the Bank
Insurance Fund and the Savings Association Insurance Fund were merged
into a new fund, the Deposit Insurance Fund (DIF). The FDIC is the administrator
of the FRF and the DIF. These funds are maintained separately to carry out
their respective mandates.
84
Operations/Dissolution of the FRF
The FRF will continue operations until all of its assets are sold or otherwise
liquidated and all of its liabilities are satisfied. Any funds remaining in the
FRF-FSLIC will be paid to the U.S. Treasury. Any remaining funds of the
FRF-RTC will be distributed to the REFCORP to pay the interest on the
REFCORP bonds. In addition, the FRF-FSLIC has available until expended
$602.2 million in appropriations to facilitate, if required, efforts to wind up
the resolution activity of the FRF-FSLIC.
The FDIC has conducted an extensive review and cataloging of FRF’s remaining
assets and liabilities and is continuing to explore approaches for concluding
FRF’s activities. Some of the issues and items that remain open in FRF are:
1) criminal restitution orders (generally have from 5 to 10 years remaining to
enforce); 2) collections of settlements and judgments obtained against officers
and directors and other professionals responsible for causing or contributing
to thrift losses (generally have from 6 months to 12 years remaining to
enforce); 3) numerous assistance agreements entered into by the former
FSLIC (FRF could continue to receive tax-sharing benefits through year 2013);
and 4) goodwill litigation (no final date for resolution has been established;
see Note 4). The FDIC is considering whether enabling legislation or other
measures may be needed to accelerate liquidation of the remaining FRF assets
and liabilities. The FRF could potentially realize substantial recoveries from the
tax-sharing benefits, criminal restitution orders and professional liability claims
of up to $400 million; however, any associated recoveries are not reflected in
FRF’s financial statements given the significant uncertainties surrounding the
ultimate outcome.
Receivership Operations
The FDIC is responsible for managing and disposing of the assets of failed
institutions in an orderly and efficient manner. The assets held by receivership
entities, and the claims against them, are accounted for separately from FRF
assets and liabilities to ensure that receivership proceeds are distributed
in accordance with applicable laws and regulations. Also, the income and
expenses attributable to receiverships are accounted for as transactions
of those receiverships. Receiverships are billed by the FDIC for services
provided on their behalf.
85
FSLIC Resolution Fund
2
Summary of Significant Accounting Policies
General
These financial statements pertain to the financial position, results of operations,
and cash flows of the FRF and are presented in conformity with U.S. generally
accepted accounting principles (GAAP). These statements do not include
reporting for assets and liabilities of closed thrift institutions for which the
FDIC acts as receiver. Periodic and final accountability reports of the FDIC’s
activities as receiver are furnished to courts, supervisory authorities, and
others as required.
Use of Estimates
Management makes estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from these estimates. Where it is reasonably possible that changes
in estimates will cause a material change in the financial statements in the near
term, the nature and extent of such changes in estimates have been disclosed.
The more significant estimates include allowance for losses on receivables
from thrift resolutions and the estimated losses for litigation.
Provision for Losses
The provision for losses represents the change in the valuation of the receivables
from thrift resolutions and other assets.
Fair Value of Financial Instruments
Cash equivalents, which consist of Special U.S. Treasury Certificates, are shortterm, highly liquid investments with original maturities of three months or less
and are shown at fair value. The carrying amount of short-term receivables and
accounts payable and other liabilities approximates their fair market value, due
to their short maturities.
The net receivable from thrift resolutions is influenced by the underlying valuation
of receivership assets. This corporate receivable is unique and the estimate
presented is not necessarily indicative of the amount that could be realized
in a sale to the private sector. Such a sale would require indeterminate, but
substantial, discounts for an interested party to profit from these assets because
of credit and other risks. Consequently, it is not practicable to estimate its fair
market value.
Other assets primarily consist of credit enhancement reserves, which are valued
by performing projected cash flow analyses using market-based assumptions
(see Note 3).
86
Disclosure About Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 157, Fair Value Measurements, in September
2006. SFAS No. 157 defines fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures about fair value measurements. The
Statement does not require any new fair value measurements. FDIC will adopt
SFAS No. 157 effective January 1, 2008, on a prospective basis. Management
does not expect the Statement to have a material impact on the financial
statements.
Related Parties
The nature of related parties and a description of related party transactions are
discussed in Note 1 and disclosed throughout the financial statements and
footnotes.
3
Receivables From Thrift Resolutions and Other Assets, Net
Receivables From Thrift Resolutions
The receivables from thrift resolutions include payments made by the FRF to
cover obligations to insured depositors, advances to receiverships for working
capital, and administrative expenses paid on behalf of receiverships. Any related
allowance for loss represents the difference between the funds advanced and/or
obligations incurred and the expected repayment. Assets held by the FDIC in its
receivership capacity for the former RTC are a significant source of repayment of
the FRF’s receivables from thrift resolutions. As of December 31, 2007, 13 of
the 850 FRF receiverships remain active primarily due to unresolved litigation,
including goodwill matters.
As of December 31, 2007 and 2006, FRF receiverships held assets with a book
value of $22 million and $33 million, respectively (including cash, investments, and
miscellaneous receivables of $18 million and $26 million at December 31, 2007
and 2006, respectively). The estimated cash recoveries from the management
and disposition of these assets are used to derive the allowance for losses.
The FRF receivership assets are valued by discounting projected cash flows,
net of liquidation costs using current market-based risk factors applicable to a
given asset’s type and quality. These estimated asset recoveries are regularly
evaluated, but remain subject to uncertainties because of potential changes
in economic and market conditions. Such uncertainties could cause the FRF’s
actual recoveries to vary from current estimates.
87
FSLIC Resolution Fund
Other Assets
Other assets primarily include credit enhancement reserves valued at $20.2 million
as of December 31, 2007 and 2006. The credit enhancement reserves resulted
from swap transactions where the former RTC received mortgage-backed securities
in exchange for single-family mortgage loans. The RTC supplied credit enhancement
reserves for the mortgage loans in the form of cash collateral to cover future credit
losses over the remaining life of the loans. These reserves may cover future credit
losses through 2020.
Receivables From Thrift Resolutions and Other Assets, Net at December 31
Dollars in Thousands
2007
$ 8,367,078
(8,359,347)
Receivables from closed thrifts
Allowance for losses
Receivables from Thrift Resolutions, Net
7,731
9,012
27,081
27,718
$ 34,812
$ 36,730
Other assets
Total
4
2006
$ 11,308,460
(11,299,448)
Contingent Liabilities for:
Litigation Losses
The FRF records an estimated loss for unresolved legal cases to the
extent those losses are considered probable and reasonably estimable. As
of December 31, 2007 and 2006, respectively, $35.4 million and $279.3 million
were recorded as probable losses. Additionally, at December 31, 2007, the
FDIC has determined that losses from unresolved legal cases totaling $3 million
are reasonably possible.
88
Additional Contingency
Goodwill Litigation
In United States v. Winstar Corp., 518 U.S. 839 (1996), the Supreme Court
held that when it became impossible following the enactment of FIRREA
in 1989 for the federal government to perform certain agreements to count
goodwill toward regulatory capital, the plaintiffs were entitled to recover
damages from the United States. Approximately 19 remaining cases are
pending against the United States based on alleged breaches of these
agreements.
On July 22, 1998, the Department of Justice’s (DOJ’s) Office of Legal Counsel
(OLC) concluded that the FRF is legally available to satisfy all judgments and
settlements in the goodwill litigation involving supervisory action or assistance
agreements. OLC determined that nonperformance of these agreements was
a contingent liability that was transferred to the FRF on August 9, 1989, upon
the dissolution of the FSLIC. On July 23, 1998, the U.S. Treasury determined,
based on OLC’s opinion, that the FRF is the appropriate source of funds for
payments of any such judgments and settlements. The FDIC General Counsel
concluded that, as liabilities transferred on August 9, 1989, these contingent
liabilities for future nonperformance of prior agreements with respect to
supervisory goodwill were transferred to the FRF-FSLIC, which is that portion
of the FRF encompassing the obligations of the former FSLIC. The FRF-RTC,
which encompasses the obligations of the former RTC and was created upon
the termination of the RTC on December 31, 1995, is not available to pay any
settlements or judgments arising out of the goodwill litigation.
The goodwill lawsuits are against the United States and as such are defended
by the DOJ. On January 3, 2008, the DOJ again informed the FDIC that it
is “unable at this time to provide a reasonable estimate of the likely aggregate
contingent liability resulting from the Winstar-related cases.” This uncertainty
arises, in part, from the existence of significant unresolved issues pending
at the appellate or trial court level, as well as the unique circumstances of
each case.
The FDIC believes that it is probable that additional amounts, possibly substantial,
may be paid from the FRF-FSLIC as a result of judgments and settlements in
the goodwill litigation. Based on representations from the DOJ, the FDIC is
unable to estimate a range of loss to the FRF-FSLIC from the goodwill litigation.
However, the FRF can draw from an appropriation provided by Section 110
of the Department of Justice Appropriations Act, 2000 (Public Law 106-113,
Appendix A, Title I, 113 Stat. 1501A-3, 1501A-20) such sums as may be
necessary for the payment of judgments and compromise settlements in the
goodwill litigation. This appropriation is to remain available until expended.
Because an appropriation is available to pay such judgments and settlements,
any liability for goodwill litigation should have a corresponding receivable from
the U.S. Treasury and therefore have no net impact on the financial condition
of the FRF-FSLIC.
89
FSLIC Resolution Fund
The FRF paid $405.1 million as a result of judgments and settlements in six
goodwill cases for the year ended December 31, 2007, compared to $194.7 million
for four goodwill cases for the year ended December 31, 2006. As described
above, the FRF received appropriations from the U.S. Treasury to fund these
payments. At December 31, 2007, the FRF accrued a $35.4 million contingent
liability and offsetting receivable from the U.S. Treasury for judgments in two
additional cases that were fully adjudicated as of year end. These funds were
paid in January 2008.
In addition, the FRF-FSLIC pays the goodwill litigation expenses incurred by
DOJ based on a Memorandum of Understanding (MOU) dated October 2, 1998,
between the FDIC and DOJ. Under the terms of the MOU, the FRF-FSLIC paid
$11.4 million and $17.5 million to DOJ for fiscal years (FY) 2008 and 2007,
respectively. As in prior years, DOJ carried over and applied all unused funds
toward current FY charges. At September 30, 2007, DOJ had an additional
$5.6 million in unused FY 2007 funds that were applied against FY 2008
charges of $17 million.
Guarini Litigation
Paralleling the goodwill cases are similar cases alleging that the government
breached agreements regarding tax benefits associated with certain FSLICassisted acquisitions. These agreements allegedly contained the promise of
tax deductions for losses incurred on the sale of certain thrift assets purchased
by plaintiffs from the FSLIC, even though the FSLIC provided the plaintiffs with
tax-exempt reimbursement. A provision in the Omnibus Budget Reconciliation
Act of 1993 (popularly referred to as the “Guarini legislation”) eliminated the
tax deductions for these losses.
Eight Guarini cases were originally filed seeking damages relating to the
government’s elimination of certain tax deductions. The last of these eight
cases concluded in 2007 with a settlement of $23 million being paid. In a
case settled in 2006, the settlement agreement further obligates the FRFFSLIC as a guarantor for all tax liabilities in the event the settlement amount
is determined by tax authorities to be taxable. The maximum potential
exposure under this guarantee through 2009 is approximately $81 million.
After reviewing relevant case law in relation to the nature of the settlement,
the FDIC believes that it is very unlikely the settlement will be subject to taxation.
Therefore, the FRF is not expected to fund any payment under this guarantee
and no liability has been recorded.
90
Representations and Warranties
As part of the RTC’s efforts to maximize the return from the sale of assets from
thrift resolutions, representations and warranties, and guarantees were offered
on certain loan sales. The majority of loans subject to these agreements have
been paid off, refinanced, or the period for filing claims has expired. The
FDIC’s estimate of maximum potential exposure to the FRF is $18.7 million.
No claims in connection with representations and warranties have been asserted
since 1998 on the remaining open agreements. Because of the age of the
remaining portfolio and lack of claim activity, the FDIC does not expect new
claims to be asserted in the future. Consequently, the financial statements at
December 31, 2007 and 2006 do not include a liability for these agreements.
5
Resolution Equity
As stated in the Legislative History section of Note 1, the FRF is comprised
of two distinct pools: the FRF-FSLIC and the FRF-RTC. The FRF-FSLIC consists
of the assets and liabilities of the former FSLIC. The FRF-RTC consists of the
assets and liabilities of the former RTC. Pursuant to legal restrictions, the two
pools are maintained separately and the assets of one pool are not available
to satisfy obligations of the other.
The following table shows the contributed capital, accumulated deficit, and
resulting resolution equity for each pool.
Resolution Equity at December 31, 2007
Dollars in Thousands
Contributed capital - beginning
Add: U.S. Treasury payments/receivable for goodwill litigation
Less: REFCORP payments
Contributed capital - ending
Accumulated deficit
Total
$
FRF-RTC
82,199,337
FRF
Consolidated
$ 127,453,996
188,586
0
0
(225,000)
188,586
(225,000)
45,443,245
81,974,337
127,417,582
FRF-FSLIC
45,254,659
$
(42,185,100)
(81,584,813)
(123,769,913)
$ 3,258,145
$ 389,524
$ 3,647,669
91
FSLIC Resolution Fund
Contributed Capital
The FRF-FSLIC and the former RTC received $43.5 billion and $60.1 billion
from the U.S. Treasury, respectively, to fund losses from thrift resolutions
prior to July 1, 1995. Additionally, the FRF-FSLIC issued $670 million in capital
certificates to the Financing Corporation (a mixed-ownership government
corporation established to function solely as a financing vehicle for the FSLIC)
and the RTC issued $31.3 billion of these instruments to the REFCORP.
FIRREA prohibited the payment of dividends on any of these capital certificates.
Through December 31, 2007, the FRF-RTC has returned $4.556 billion to the
U.S. Treasury and made payments of $4.797 billion to the REFCORP. Subsequent
to year-end, FRF-RTC paid an additional $225 million to the REFCORP on
January 10, 2008. These actions serve to reduce contributed capital.
FRF-FSLIC received $405.1 million in U.S. Treasury payments for goodwill litigation
in 2007. Furthermore, $35.4 million and $251.8 million were accrued for as
receivables at year-end 2007 and 2006, respectively. The effect of this activity
was an increase in contributed capital of $188.6 million in 2007.
Accumulated Deficit
The accumulated deficit represents the cumulative excess of expenses over
revenue for activity related to the FRF-FSLIC and the FRF-RTC. Approximately
$29.8 billion and $87.9 billion were brought forward from the former FSLIC
and the former RTC on August 9, 1989, and January 1, 1996, respectively.
The FRF-FSLIC accumulated deficit has increased by $12.4 billion, whereas
the FRF-RTC accumulated deficit has decreased by $6.3 billion, since their
dissolution dates.
92
6
Employee Benefits
Pension Benefits
Eligible FDIC employees (permanent and term employees with appointments
exceeding one year) are covered by the federal government retirement plans,
either the Civil Service Retirement System (CSRS) or the Federal Employees
Retirement System (FERS). Although the FRF contributes a portion of pension
benefits for eligible employees, it does not account for the assets of either
retirement system. The FRF also does not have actuarial data for accumulated
plan benefits or the unfunded liability relative to eligible employees. These
amounts are reported on and accounted for by the U.S. Office of Personnel
Management. The FRF’s pension-related expenses were $252 thousand and
$850 thousand for 2007 and 2006, respectively.
Postretirement Benefits Other Than Pensions
The FRF no longer records a liability for the postretirement benefits of life and
dental insurance (a long-term liability), due to the expected dissolution of the FRF.
The liability is recorded by the DIF. However, the FRF does continue to pay its
proportionate share of the yearly claim expenses associated with these benefits.
93
To the Board of Directors
The Federal Deposit Insurance Corporation
In accordance with Section 17 of the Federal Deposit Insurance Act,
as amended, we are responsible for conducting audits of the financial
statements of the two funds administered by the Federal Deposit
Insurance Corporation (FDIC). In our audits of the Deposit Insurance
Fund’s (DIF) and the FSLIC Resolution Fund’s (FRF) financial
statements for 2007 and 2006, we found
• the financial statements as of and for the years ended
December 31, 2007, and 2006, are presented fairly, in all
material respects, in conformity with U.S. generally accepted
accounting principles;
• FDIC had effective internal control over financial reporting
(including safeguarding assets) and compliance with laws and
regulations for each fund; and
• no reportable noncompliance with laws and regulations we
tested.
The following sections discuss in more detail (1) these conclusions;
(2) our audit objectives, scope, and methodology; and (3) agency
comments and our evaluation.
Opinion on DIF's
Financial Statements
The financial statements, including the accompanying notes, present
fairly, in all material respects, in conformity with U.S. generally
accepted accounting principles, DIF’s assets, liabilities, and fund
balance as of December 31, 2007, and 2006, and its income and fund
balance and its cash flows for the years then ended.
As discussed in note 6 to DIF’s financial statements, FDIC’s insured
financial institutions faced increased challenges in 2007. The downturn
in housing markets led to asset-quality problems and volatility
in financial markets, which hurt banking industry performance and
94
threatened the viability of some institutions that had significant
exposure to higher-risk residential mortgages. It is uncertain how
long the effects of this downturn will last. In addition to a recorded
estimated liability of $124 million as of December 31, 2007, for
the anticipated failure of some DIF insured institutions, FDIC has
identified additional risk that could result in a further estimated loss
to the DIF of $1.7 billion should potentially vulnerable insured
institutions ultimately fail. FDIC continues to evaluate the risks to
affected institutions in light of evolving economic conditions, but
the impact of such risks on the DIF cannot be reasonably estimated
at this time. Actual losses, if any, will largely depend on future
economic and market conditions and could differ materially from
FDIC’s estimates.
Opinion on FRF's
Financial Statements
The financial statements, including the accompanying notes, present
fairly, in all material respects, in conformity with U.S. generally
accepted accounting principles, FRF’s assets, liabilities, and resolution
equity as of December 31, 2007, and 2006, and its income and
accumulated deficit and its cash flows for the years then ended.
Opinion on Internal
Control
FDIC management maintained, in all material respects, effective
internal control over financial reporting (including safeguarding
assets) and compliance as of December 31, 2007, that provided
reasonable assurance that misstatements, losses, or noncompliance
material in relation to the financial statements for each fund would
be prevented or detected on a timely basis. Our opinion is based
on criteria established under 31 U.S.C. 3512 (c), (d), commonly
known as the Federal Managers’ Financial Integrity Act (FMFIA).
We did identify certain control deficiencies during our 2007
audits. However, we do not consider these control deficiencies
to be significant deficiencies.1 We will be reporting separately
to FDIC management on these matters.
1
A significant deficiency is a control deficiency, or combination of deficiencies, that adversely
affects the entity’s ability to initiate, authorize, record, process, or report financial data reliably
in accordance with generally accepted accounting principles such that there is more than a remote
likelihood that a misstatement of the entity’s financial statements that is more than inconsequential will not be prevented or detected.
95
Compliance with Laws
and Regulations
Our tests for compliance with selected provisions of laws and
regulations disclosed no instances of noncompliance that would
be reportable under U.S. generally accepted government auditing
standards. However, the objective of our audits was not to provide an
opinion on overall compliance with laws and regulations. Accordingly,
we do not express such an opinion.
Objectives, Scope, and
Methodology
FDIC management is responsible for (1) preparing the annual financial
statements in conformity with U.S. generally accepted accounting
principles; (2) establishing, maintaining, and assessing internal
control to provide reasonable assurance that the broad control
objectives of FMFIA are met; and (3) complying with applicable
laws and regulations.
We are responsible for obtaining reasonable assurance about whether
(1) the financial statements are presented fairly, in all material
respects, in conformity with U.S. generally accepted accounting
principles, and (2) management maintained effective internal control,
the objectives of which are the following:
1. financial reporting–transactions are properly recorded, processed,
and summarized to permit the preparation of financial statements
in conformity with U.S. generally accepted accounting principles,
and assets are safeguarded against loss from unauthorized acquisition,
use, or disposition, and
2. compliance with laws and regulations–transactions are executed
in accordance with laws and regulations that could have a direct
and material effect on the financial statements.
We are also responsible for testing compliance with selected provisions
of laws and regulations that could have a direct and material effect
on the financial statements.
In order to fulfill these responsibilities, we
• examined, on a test basis, evidence supporting the amounts and
disclosures in the financial statements;
• assessed the accounting principles used and significant estimates
made by management;
• evaluated the overall presentation of the financial statements;
96
• obtained an understanding of the entity and its operations, including
its internal control related to financial reporting (including safeguarding assets) and compliance with laws and regulations;
• tested relevant internal controls over financial reporting and
compliance, and evaluated the design and operating effectiveness
of internal control;
• considered FDIC’s process for evaluating and reporting on
internal control based on criteria established by FMFIA; and
• tested compliance with certain laws and regulations, including
selected provisions of the Federal Deposit Insurance Act, as
amended, and the Federal Deposit Insurance Reform Act of 2005.
We did not evaluate all internal controls relevant to operating
objectives as broadly defined by FMFIA, such as those controls
relevant to preparing statistical reports and ensuring efficient
operations. We limited our internal control testing to controls over
financial reporting and compliance. Because of inherent limitations
in internal control, misstatements due to error or fraud, losses, or
noncompliance may nevertheless occur and not be detected. We
also caution that projecting our evaluation to future periods is
subject to the risk that controls may become inadequate because
of changes in conditions or that the degree of compliance with
controls may deteriorate.
We did not test compliance with all laws and regulations applicable
to FDIC. We limited our tests of compliance to those laws and
regulations that could have a direct and material effect on the financial
statements for the year ended December 31, 2007. We caution that
noncompliance may occur and not be detected by these tests and that
such testing may not be sufficient for other purposes.
We performed our work in accordance with U.S. generally accepted
government auditing standards.
97
FDIC Comments and
Our Evaluation
In commenting on a draft of this report, FDIC’s Chief Financial
Officer (CFO) reported the agency was pleased to receive unqualified
opinions on the DIF and FRF financial statements and that GAO
did not identify any material weaknesses or significant deficiencies
during the 2007 audits. FDIC’s CFO also expressed appreciation for
GAO’s recognition of FDIC’s accomplishments during the 2007 audit
year. The CFO added that FDIC is dedicated to promoting the highest
standard of financial management and that FDIC will work diligently
to sustain that focus. Furthermore, the CFO added that continued
improvements in operations remain a priority for FDIC.
The complete text of FDIC’s comments is reprinted in appendix I.
David M. Walker
Comptroller General
of the United States
February 4, 2008
98
Appendix I
Federal Deposit Insurance Corporation
550 17th Street, NW Washington, DC 20429 9990
Deputy to the Chairman and Chief Financial Officer
February 4, 2008
Mr. David M. Walker
Comptroller General of the United States
U.S. Government Accountability Office
441 G Street, NW
Washington, DC 20548
Re: FDIC Management Response on the GAO 2007 Financial Statements Audit Report
Dear Mr. Walker:
Thank you for the opportunity to comment on the U.S. Government Accountability Office’s
(GAO) draft audit report titled, Financial Audit: Federal Deposit Insurance Corporation
Funds’ 2007 and 2006 Financial Statements, GAO-08-416. The report presents GAO’s
opinions on the calendar year 2007 and 2006 financial statements of the Deposit Insurance
Fund (DIF) and the Federal Savings and Loan Insurance Corporation Resolution Fund (FRF).
The report also presents GAO’s opinion on the effectiveness of the Federal Deposit Insurance
Corporation’s (FDIC’s) internal control over financial reporting and compliance with laws and
regulations for each of the funds as of December 31, 2007, and GAO’s evaluation of FDIC’s
compliance with selected laws and regulations.
We are pleased that FDIC received unqualified opinions on its financial statements for the sixteenth
consecutive year and that there were no material weaknesses or significant deficiencies identified
during the 2007 audits. The GAO reported that the funds’ financial statements were presented
fairly, in all material respects, in conformity with U.S. generally accepted accounting principles;
FDIC had effective internal control over financial reporting and compliance with laws and
regulations for each fund; and there was no reportable noncompliance with laws and regulations
that were tested.
We appreciate GAO’s recognition of our accomplishments during the 2007 audit year. As
always, our management team is dedicated to promoting the highest standard of financial
management, and we will work diligently to sustain that focus. Continued improvements
in operations remain a priority for FDIC.
In addition, I want to recognize the GAO’s support throughout the audit and to acknowledge
you and the GAO staff for your efforts and dedication in working with FDIC again this year
to meet the accelerated reporting deadline for our audited financial statements. We look forward
to continuing this productive and successful relationship in the coming year.
If you have any questions or concerns, please do not hesitate to contact me.
Sincerely,
Steven O. App
Deputy to the Chairman and
Chief Financial Officer
99
Overview of the Industry
The 8,560 FDIC-insured commercial
banks and savings institutions that
filed financial results for the first
nine months of 2007 reported net
income of $100.7 billion, a decline
of 10.7 percent compared to the
first nine months of 2006. This is the
first year-over-year decline in industry
earnings in seven years. The decline
in earnings was caused by sharply
higher expenses for bad loans, weakness in market-sensitive noninterest
revenues, and narrower net interest
margins. Fewer than half of all
institutions – 49.5 percent – reported
year-over-year increases in net income,
and the percentage of institutions
with negative net income for the
first nine months of the year rose
to 10.2 percent, up from 7.0 percent
a year earlier.
The average return on assets (ROA)
for the first nine months was
1.11 percent, down from 1.33 percent
for the same period of 2006. This
is the lowest nine-month industry
ROA since 1996. More than 60 percent of insured institutions had lower
ROAs in 2007 than in 2006. Insured
institutions set aside $37.1 billion
in provisions for loan and lease
losses during the first nine months
of 2007, an increase of $17.2 billion
(86.8 percent) compared to the same
period in 2006. The industry’s total
100
noninterest income increased by only
$1.3 billion (0.7 percent), as income
from securitization activities fell
by $3.6 billion (18.4 percent), and
gains on sales of loans declined
by $1.8 billion (32.5 percent).
Total noninterest expenses were
$11.2 billion (4.4 percent) higher,
led by a $5.7-billion (5.0-percent)
increase in salary and benefit
expenses.
One of the positive trends in income
and expenses was the $10.3-billion
(4.0-percent) year-over-year increase
in net interest income. A difficult
interest-rate environment characterized by a flat yield curve contributed
to a decline in the industry’s net
interest margin. The average margin
fell from 3.43 percent in the first
three quarters of 2006 to 3.32 percent
for the first three quarters of 2007.
However, the industry’s interestearning assets grew by 7.5 percent
from the end of September 2006
through the end of September 2007,
helping to boost net interest income.
Signs of asset quality deterioration
were clearly evident in 2007. For
the 12 months ended September 30,
total noncurrent loans and leases –
those that were 90 days or more
past due or in nonaccrual status –
increased by $30.4 billion (57.9 percent). Loans secured by real estate
properties accounted for 92 percent
($28.0 billion) of the increase in noncurrent loans. Residential mortgage
loans accounted for more than half
($15.4 billion) of the increase in
noncurrent loans, while noncurrent
real estate construction and development loans increased by $8.4 billion
(283 percent). Net charge-offs of
loans and leases totaled $27.9 billion
in the first three quarters of 2007, an
increase of $9.3 billion (49.7 percent)
over the same period in 2006. Loans
to individuals other than credit
cards had the largest year-over-year
increase, rising by $2.2 billion
(53.8 percent). Net charge-offs of
loans to commercial and industrial
(C&I) borrowers were $1.8 billion
(84.6 percent) higher, and net chargeoffs of credit card loans increased
by $1.5 billion (15.5 percent). Net
charge-offs of residential mortgage
loans increased by $1.4 billion
(137.5 percent). At the end of
September 2007, 65 institutions
were on the FDIC’s “Problem List,”
up from a 36-year low of 47 “problem”
institutions a year earlier.
Asset growth slowed in 2007, but
remained strong by historic standards.
During the 12 months ended
September 30, total assets of insured
institutions increased by $954 billion
(8.1 percent). Loans and leases
accounted for more than half of
the increase in total assets, rising
by $527 billion (7.4 percent). Loans
to C&I borrowers increased by
$208.8 billion (17.7 percent), real
estate construction and development
loans rose by $71.4 billion (13.1 percent), and real estate loans secured
by nonfarm nonresidential properties
grew by $53.6 billion (6.1 percent).
Growth in deposits did not keep pace
with the increase in total assets. In
the 12 months ended September 30,
total deposits of insured institutions
increased by $603.6 billion (8.0 percent). During that period, growth in
foreign office deposits (up $336.6
billion, or 30.5 percent) surpassed
growth in domestic office deposits
(up $267.0 billion, or 4.1 percent).
Nondeposit liabilities increased by
$246.5 billion (8.4 percent), and
equity capital rose by $103.5 billion
(8.5 percent). Merger-related goodwill
accounted for almost two-thirds
(63 percent) of the increase in equity.
At the end of September 2007, more
than 99 percent of all FDIC-insured
institutions met or exceeded the
highest regulatory capital standards4.
4 For purposes of Prompt Corrective Action, FDIC-insured institutions are generally considered “well capitalized,“ the highest category, if they have a total risk-based capital ratio of 10.0 percent
or greater, a Tier 1 risk-based capital ratio of 6.0 percent or greater, and a leverage ratio of 5.0 percent or greater.
101
V. Management Control
Enterprise Risk Management
The Office of Enterprise Risk
Management, under the auspices of
the Chief Financial Officer organization,
is responsible for corporate oversight
of internal control and enterprise risk
management (ERM). This includes
ensuring that the FDIC’s operations
and programs are effective and
efficient and that internal controls
are sufficient to minimize exposure
to waste and mismanagement. The
FDIC recognizes the importance of a
strong risk management and internal
control program and has adopted a
more proactive and enterprise-wide
approach to managing risk. This
approach focuses on the identification
and mitigation of risk consistently
and effectively throughout the
Corporation, with emphasis on those
areas/issues most directly related
to the FDIC’s overall mission. As an
independent government corporation,
the FDIC has different requirements
than appropriated federal government
agencies; nevertheless, its ERM
program seeks to comply with the
spirit of the following standards,
among others:
• Federal Managers’ Financial
Integrity Act (FMFIA);
• Chief Financial Officers Act
(CFO Act);
• Government Performance
and Results Act (GPRA);
• Federal Information Security
Management Act (FISMA); and
• OMB Circular A-123.
102
The CFO Act extends to the FDIC
the FMFIA requirements for establishing, evaluating and reporting on
internal controls. The FMFIA requires
agencies to annually provide a
statement of assurance regarding
the effectiveness of management,
administrative and accounting
controls, and financial management
systems.
The FDIC has developed and implemented management, administrative
and financial system controls that
reasonably ensure that:
• Programs are efficiently and
effectively carried out in
accordance with applicable
laws and management policies;
• Programs and resources are
safeguarded against waste,
fraud and mismanagement;
• Obligations and costs comply
with applicable laws; and
• Reliable, complete, and timely
data are maintained for decisionmaking and reporting purposes.
The FDIC’s control standards incorporate the Government Accountability
Office’s (GAO) Standards for Internal
Control in the Federal Government.
Good internal control systems are
essential for ensuring the proper
conduct of FDIC business and the
accomplishment of management
objectives by serving as checks and
balances against undesirable actions
or outcomes.
As part of the Corporation’s continued
commitment to establish and maintain
effective and efficient internal controls,
FDIC management routinely conducts
reviews of internal control systems.
The results of these reviews, as well
as consideration of the results of
audits, evaluations and reviews
conducted by the GAO, the Office
of Inspector General (OIG) and
other outside entities, are used as
a basis for the FDIC’s reporting on
the condition of the Corporation’s
internal control activities.
Material Weaknesses
Material weaknesses are control
shortcomings in operations or systems
that, among other things, severely
impair or threaten the organization’s
ability to accomplish its mission or
to prepare timely, accurate financial
statements or reports. The shortcomings are of sufficient magnitude
that the Corporation is obliged to
report them to external stakeholders.
To determine the existence of material
weaknesses, the FDIC has assessed
the results of management evaluations
and external audits of the Corporation’s
risk management and internal control
systems conducted in 2007, as well
as management actions taken to
address issues identified in these
audits and evaluations. Based on this
assessment and application of other
criteria, the FDIC concludes that no
material weaknesses existed within
the Corporation’s operations for 2007.
This is the tenth consecutive year
that the FDIC has not had a material
weakness; however, FDIC management will continue to focus on high
priority areas, including IT systems
security, privacy, international and
premium travel, and the New Financial
Environment, among others. The FDIC
will also address all control issues
raised by GAO related to its 2007
financial statement audits.
Management Report
on Final Actions
As required under amended Section 5
of the Inspector General Act of 1978,
the tables on the following pages
provide information on final action
taken by management on audit
reports for the federal fiscal year
period, October 1, 2006, through
September 30, 2007.
103
Table 1
Management Report
on Final Action on Audits
with Disallowed Costs
For Fiscal Year 2007
Table 2
Management Report
on Final Action on Audits
with Recommendations
to Put Funds to Better Use
For Fiscal Year 2007
104
Audit Reports
Number
of
Reports
Disallowed
Costs
(000’s)
A. Management decisions – final action
not taken at beginning of period
0
$
0
B. Management decisions made
during the period
0
$
0
C. Total reports pending final action
during the period (A and B)
0
$
0
D. Final action taken during the period:
1. Recoveries:
a. Collections and offsets
0
b. Other
0
2. Write-offs
0
3. Total of 1(a), 1(b), and 2
0
$
$
$
$
0
0
0
0
E. Audit reports needing final action
at the end of the period
$
0
Audit Reports
0
Number
of
Reports
Funds Put to
Better Use
(000’s)
A. Management decisions – final action
not taken at beginning of period
0
$
0
B. Management decisions made
during the period
0
$
0
C. Total reports pending final action
during the period (A and B)
0
$
0
D. Final Action taken during the period:
1. Value of recommendations
implemented (completed)
2. Value of recommendations that
management concluded should not or
could not be implemented or completed
3. Total of 1 and 2
0
$
0
0
0
$
$
0
0
E. Audit reports needing final action
at the end of the period
0
$
0
Table 3
Audit Reports Without Final Actions But With Management Decisions Over One Year Old
For Fiscal Year 2007
Management Action in Process
Report Number
and Issue Date
OIG Audit Finding
Management Action
Disallowed
Costs
06- 014
The OIG recommended that the FDIC
07-20-2006
should issue guidance to: a) clarify
corporate expectations for deposit
insurance investigations, and
b) emphasize that examiners should
document the basis for their
conclusions.
The FDIC is in process of clarifying corporate
$
0
expectations for reviewing the statutory factors
and will emphasize that examiners should
document the basis for their conclusions in
the “Convenience and Needs of the Community
to be Served” area of their report.
2.
06-026
The OIG recommended that the FDIC
09-29-2006
should ensure that requirements for
the new automated procurement
system are well defined.
The original schedule was re-baselined to provide
for additional time to complete the system, due
to the exploration and review of a new PeopleSoft
acquisition module and consideration of year-end
close-out.
Expected completion date: 1st quarter 2008.
1.
Expected completion date: 1st quarter 2008.
$
0
105
Appendix A - Key Statistics
VI. Appendices
FDIC Expenditures 1997-2007
Dollars in Millions
DIF
FRF
$ 2,000
1,500
1,000
500
0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Notes:
The Deposit Insurance Fund (DIF) includes expenditures of the former Bank Insurance Fund (BIF) and the
Savings Association Insurance Fund (SAIF). The FSLIC Resolution Fund (FRF) includes expenditures relating
to the former Federal Savings and Loan Insurance Corporation (FSLIC) and the Resolution Trust Corporation (RTC).
The FDIC’s Strategic Plan and Annual Performance Plan provide
the basis for annual planning and budgeting for needed resources.
The 2007 aggregate budget (for corporate, receivership and
investment spending) was $1.12 billion, while actual expenditures
for the year were $1.01 billion, about $16 million more than 2006
expenditures.
Over the past ten years, the FDIC’s expenditures have varied
in response to workload. During the past decade, expenditures
generally declined due to decreasing resolution and receivership
activity. Total expenditures increased in 2002 due to an increase
in receivership-related expenses.
The largest component of FDIC spending is for costs associated
with staffing. Staffing increased by one percent in 2007, from
4,476 employees at the beginning of the year to 4,532 at the
end of the year.
106
2007
Estimated Insured Deposits and the Deposit Insurance Fund, December 31, 1934, through September 30, 20071
Dollars in millions
Insurance Fund as a Percentage of
Deposits in Insured Institutions
Insurance
4
Year
Coverage
Total
Domestic
Deposits
Estimated
Insured
Deposits 2
Percentage
of Insured
Deposits
Deposit
Insurance
Fund
Total
Domestic
Deposits
Estimated
Insured
Deposits
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
$ 100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
$ 6,881,843
6,595,357
6,168,146
5,686,680
5,182,016
4,857,327
4,481,888
4,149,355
3,802,744
3,747,809
3,507,493
$ 4,241,307
4,151,966
3,890,911
3,623,713
3,451,117
3,387,799
3,210,727
3,054,360
2,868,881
2,850,227
2,746,006
61.6
63.0
63.1
63.7
66.6
69.7
71.6
73.6
75.4
76.1
78.3
$ 51,754.4
50,165.3
48,596.6
47,506.8
46,022.3
43,797.0
41,373.8
41,733.8
39,694.9
39,452.1
37,660.8
0.75
0.76
0.79
0.84
0.89
0.90
0.92
1.01
1.04
1.05
1.07
1.22
1.21
1.25
1.31
1.33
1.29
1.29
1.37
1.38
1.38
1.37
1996
1995
1994
1993
1992
1991
1990
1989
1988
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
3,350,856
3,318,513
3,184,636
3,220,109
3,273,180
3,330,738
3,415,668
3,414,066
2,330,768
2,690,537
2,663,560
2,588,686
2,602,043
2.675,081
2,734,073
2,759,640
2,756,757
1,750,259
80.3
80.3
81.3
80.8
81.7
82.1
80.8
80.7
75.1
35,742.8
28,811.5
23,784.5
14,277.3
178.4
(6,934.0)
4,062.7
13,209.5
14,061.1
1.07
0.87
0.75
0.44
0.01
(0.21)
0.12
0.39
0.60
1.33
1.08
0.92
0.55
0.01
(0.25)
0.15
0.48
0.80
1987
1986
1985
1984
1983
1982
1981
1980
1979
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
40,000
2,201,549
2,167,596
1,974,512
1,806,520
1,690,576
1,544,697
1,409,322
1,324,463
1,226,943
1,658,802
1,634,302
1,503,393
1,389,874
1,268,332
1,134,221
988,898
948,717
808,555
75.3
75.4
76.1
76.9
75.0
73.4
70.2
71.6
65.9
18,301.8
18,253.3
17,956.9
16,529.4
15,429.1
13,770.9
12,246.1
11,019.5
9,792.7
0.83
0.84
0.91
0.92
0.91
0.89
0.87
0.83
0.80
1.10
1.12
1.19
1.19
1.22
1.21
1.24
1.16
1.21
1978
1977
1976
1975
1974
1973
1972
1971
1970
40,000
40,000
40,000
40,000
40,000
20,000
20,000
20,000
20,000
1,145,835
1,050,435
941,923
875,985
833,277
766,509
697,480
610,685
545,198
760,706
692,533
628,263
569,101
520,309
465,600
419,756
374,568
349,581
66.4
65.9
66.7
65.0
62.5
60.7
60.2
61.3
64.1
8,796.0
7,992.8
7,268.8
6,716.0
6,124.2
5,615.3
5,158.7
4,739.9
4,379.6
0.77
0.76
0.77
0.77
0.73
0.73
0.74
0.78
0.80
1.16
1.15
1.16
1.18
1.18
1.21
1.23
1.27
1.25
1969
1968
1967
1966
1965
1964
1963
1962
1961
20,000
15,000
15,000
15,000
10,000
10,000
10,000
10,000
10,000
495,858
491,513
448,709
401,096
377,400
348,981
313,304
297,548
281,304
313,085
296,701
261,149
234,150
209,690
191,787
177,381
170,210
160,309
63.1
60.2
58.2
58.4
55.6
55.0
56.6
57.2
57.0
4,051.1
3,749.2
3,485.5
3,252.0
3,036.3
2,844.7
2,667.9
2,502.0
2,353.8
0.82
0.76
0.78
0.81
0.80
0.82
0.85
0.84
0.84
1.29
1.26
1.33
1.39
1.45
1.48
1.50
1.47
1.47
1960
1959
1958
1957
1956
1955
1954
1953
1952
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
260,495
247,589
242,445
225,507
219,393
212,226
203,195
193,466
188,142
149,684
142,131
137,698
127,055
121,008
116,380
110,973
105,610
101,841
57.5
57.4
56.8
56.3
55.2
54.8
54.6
54.6
54.1
2,222.2
2,089.8
1,965.4
1,850.5
1,742.1
1,639.6
1,542.7
1,450.7
1,363.5
0.85
0.84
0.81
0.82
0.79
0.77
0.76
0.75
0.72
1.48
1.47
1.43
1.46
1.44
1.41
1.39
1.37
1.34
1951
1950
1949
1948
1947
1946
1945
1944
1943
10,000
10,000
5,000
5,000
5,000
5,000
5,000
5,000
5,000
178,540
167,818
156,786
153,454
154,096
148,458
157,174
134,662
111,650
96,713
91,359
76,589
75,320
76,254
73,759
67,021
56,398
48,440
54.2
54.4
48.8
49.1
49.5
49.7
42.4
41.9
43.4
1,282.2
1,243.9
1,203.9
1,065.9
1,006.1
1,058.5
929.2
804.3
703.1
0.72
0.74
0.77
0.69
0.65
0.71
0.59
0.60
0.63
1.33
1.36
1.57
1.42
1.32
1.44
1.39
1.43
1.45
1942
1941
1940
1939
1938
1937
1936
1935
3
1934
5,000
5,000
5,000
5,000
5,000
5,000
5,000
5,000
5,000
89,869
71,209
65,288
57,485
50,791
48,228
50,281
45,125
40,060
32,837
28,249
26,638
24,650
23,121
22,557
22,330
20,158
18,075
36.5
39.7
40.8
42.9
45.5
46.8
44.4
44.7
45.1
616.9
553.5
496.0
452.7
420.5
383.1
343.4
306.0
291.7
0.69
0.78
0.76
0.79
0.83
0.79
0.68
0.68
0.73
1.88
1.96
1.86
1.84
1.82
1.70
1.54
1.52
1.61
1 For
2007, the numbers are as of September 30, and prior years reflect December 31.
insured deposits reflect deposit information as reported in the fourth quarter FDIC Quarterly Banking Profile. Before 1991, insured deposits were estimated using percentages
determined from the June 30 Call Reports.
3 Initial coverage was $2,500 from January 1 to June 30, 1934.
4 For 1989 through 2005, amounts represent sum of separate BIF and SAIF amounts.
2 Estimated
107
Income and Expenses, Deposit Insurance Fund, from Beginning of Operations,
September 11, 1933, through December 31, 2007
Dollars in Millions
Expenses and Losses
Income
Investment
Effective Provision
Administrative
Assessment Assessment
and Other Assessment
for
and Operating
7
1
Total
Losses
Expenses2
Year
Total
Income
Credits
Sources
Rate
Interest
and Other
Insurance
Expenses
Total $ 110,388.7
$ 54,777.0
Funding
Transfer from
the FSLIC
Net Income/
Resolution Fund
(Loss)
$ 62,909.8
$ 6,709.1
$ 59,216.0
$ 36,191.8
$ 15,834.3
$ 7,195.9
$ 139.5
$ 51,312.2
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
3,196.2
2,643.5
2,420.5
2,240.4
2,174.0
1,795.9
2,729.7
2,569.9
2,416.6
2,584.3
642.9
31.9
60.6
104.3
95.2
108.0
82.8
64.1
48.3
36.7
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
2,553.3
2,611.6
2,359.9
2,136.1
2,078.8
2,276.9
2,646.9
2,505.8
2,368.3
2,547.6
0.0094%
0.0005%
0.0010%
0.0019%
0.0019%
0.0022%
0.0019%
0.0016%
0.0013%
0.0010%
1,090.9
904.3
809.5
607.6
(67.7)
719.6
3,123.4
945.2
2,047.0
817.5
95.0
(52.1)
(160.2)
(353.4)
(1,010.5)
(243.0)
2,199.3
28.0
1,199.7
(5.7)
992.6
950.6
966.2
941.3
935.5
945.1
887.9
883.9
823.4
782.6
3.3
5.8
3.5
19.7
7.3
17.5
36.2
33.3
23.9
40.6
0
0
0
0
0
0
0
0
0
0
2,105.3
1,739.2
1,611.0
1,632.8
2,241.7
1,076.3
(393.7)
1,624.7
369.6
1,766.8
1997
1996
1995
1994
1993
1992
1991
1990
1989
2,165.6
7,157.3
5,229.1
7,682.0
7,356.8
6,480.5
5,887.0
3,856.3
3,496.6
38.7
5,294.7
3,876.9
6,722.6
6,684.3
5,759.8
5,254.5
2,873.3
1,885.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
2,126.9
1,862.6
1,352.2
959.4
672.5
720.7
632.5
983.0
1,611.6
0.0015%
0.1627%
0.1242%
0.2185%
0.2146%
0.1807%
0.1605%
0.0867%
0.0833%
247.3
353.6
202.2
(1,825.1)
(6,744.4)
(596.8)
16,925.3
13,059.3
4,352.2
(505.7)
(417.2)
(354.2)
(2,459.4)
(7,660.4)
(2,274.7)
15,496.2
12,133.1
3,811.3
677.2
568.3
510.6
443.2
418.5
3
614.8
326.1
275.6
219.9
75.8
202.5
45.8
191.1
497.5
1,063.1
1,103.0
650.6
321.0
0
0
0
0
0
35.4
42.4
56.1
5.6
1,918.3
6,803.7
5,026.9
9,507.1
14,101.2
7,112.7
(10,995.9)
(9,146.9)
(850.0)
1988
1987
1986
1985
1984
1983
1982
1981
1980
3,347.7
3,319.4
3,260.1
3,385.4
3,099.5
2,628.1
2,524.6
2,074.7
1,310.4
1,773.0
1,696.0
1,516.9
1,433.4
1,321.5
1,214.9
1,108.9
1,039.0
951.9
0.0
0.0
0.0
0.0
0.0
164.0
96.2
117.1
521.1
1,574.7
1,623.4
1,743.2
1,952.0
1,778.0
1,577.2
1,511.9
1,152.8
879.6
0.0833%
0.0833%
0.0833%
0.0833%
0.0800%
0.0714%
0.0769%
0.0714%
0.0370%
7,588.4
3,270.9
2,963.7
1,957.9
1,999.2
969.9
999.8
848.1
83.6
6,298.3
2,996.9
2,827.7
1,569.0
1,633.4
675.1
126.4
320.4
(38.1)
223.9
204.9
180.3
179.2
151.2
135.7
129.9
127.2
118.2
1,066.2
69.1
(44.3)
209.7
214.6
159.1
743.5
400.5
3.5
0
0
0
0
0
0
0
0
0
(4,240.7)
48.5
296.4
1,427.5
1,100.3
1,658.2
1,524.8
1,226.6
1,226.8
1979
1978
1977
1976
1975
1974
1973
1972
1971
1,090.4
952.1
837.8
764.9
689.3
668.1
561.0
467.0
415.3
881.0
810.1
731.3
676.1
641.3
587.4
529.4
468.8
417.2
524.6
443.1
411.9
379.6
362.4
285.4
283.4
280.3
241.4
734.0
585.1
518.4
468.4
410.4
366.1
315.0
278.5
239.5
0.0333%
0.0385%
0.0370%
0.0370%
0.0357%
0.0435%
0.0385%
0.0333%
0.0345%
93.7
148.9
113.6
212.3
97.5
159.2
108.2
59.7
60.3
(17.2)
36.5
20.8
28.0
27.6
97.9
52.5
10.1
13.4
1970
1969
1968
1967
1966
1965
1964
1963
1962
382.7
335.8
295.0
263.0
241.0
214.6
197.1
181.9
161.1
369.3
364.2
334.5
303.1
284.3
260.5
238.2
220.6
203.4
210.0
220.2
202.1
182.4
172.6
158.3
145.2
136.4
126.9
223.4
191.8
162.6
142.3
129.3
112.4
104.1
97.7
84.6
0.0357%
0.0333%
0.0333%
0.0333%
0.0323%
0.0323%
0.0323%
0.0313%
0.0313%
46.0
34.5
29.1
27.3
19.9
22.9
18.4
15.1
13.8
3.8
1.0
0.1
2.9
0.1
5.2
2.9
0.7
0.1
106.8
103.3
89.3
4
180.4
67.7
59.2
54.4
49.6
46.9
4.1
9.1
3.5
3.9
2.2
2.1
1.3
5
6.0
0.0
0
0
0
0
0
0
0
0
0
996.7
803.2
724.2
552.6
591.8
508.9
452.8
407.3
355.0
42.2
33.5
29.0
24.4
19.8
17.7
15.5
14.4
13.7
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0
0
0
0
0
0
0
0
0
336.7
301.3
265.9
235.7
221.1
191.7
178.7
166.8
147.3
continued on next page
108
Income and Expenses, Deposit Insurance Fund, from Beginning of Operations,
September 11, 1933, through December 31, 2007 (continued)
Dollars in Millions
Expenses and Losses
Income
Investment
Effective Provision
Administrative
Assessment Assessment
and Other Assessment
for
and Operating
7
1
Total
Losses
Expenses2
Year
Total
Income
Credits
Sources
Rate
1961
1960
1959
1958
1957
1956
1955
1954
1953
1952
147.3
144.6
136.5
126.8
117.3
111.9
105.8
99.7
94.2
88.6
188.9
180.4
178.2
166.8
159.3
155.5
151.5
144.2
138.7
131.0
115.5
100.8
99.6
93.0
90.2
87.3
85.4
81.8
78.5
73.7
73.9
65.0
57.9
53.0
48.2
43.7
39.7
37.3
34.0
31.3
0.0323%
0.0370%
0.0370%
0.0370%
0.0357%
0.0370%
0.0370%
0.0357%
0.0357%
0.0370%
14.8
12.5
12.1
11.6
9.7
9.4
9.0
7.8
7.3
7.8
1.6
0.1
0.2
0.0
0.1
0.3
0.3
0.1
0.1
0.8
1951
1950
1949
1948
1947
1946
1945
1944
1943
83.5
84.8
151.1
145.6
157.5
130.7
121.0
99.3
86.6
124.3
122.9
122.7
119.3
114.4
107.0
93.7
80.9
70.0
70.0
68.7
0.0
0.0
0.0
0.0
0.0
0.0
0.0
29.2
30.6
28.4
26.3
43.1
23.7
27.3
18.4
16.6
0.0370%
0.0370%
0.0833%
0.0833%
0.0833%
0.0833%
0.0833%
0.0833%
0.0833%
6.6
7.8
6.4
7.0
9.9
10.0
9.4
9.3
9.8
0.0
1.4
0.3
0.7
0.1
0.1
0.1
0.1
0.2
69.1
62.0
55.9
51.2
47.7
48.2
43.8
20.8
7.0
56.5
51.4
46.2
40.7
38.3
38.8
35.6
11.5
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
12.6
10.6
9.7
10.5
9.4
9.4
8.2
9.3
7.0
0.0833%
0.0833%
0.0833%
0.0833%
0.0833%
0.0833%
0.0833%
0.0833%
N/A
10.1
10.1
12.9
16.4
11.3
12.2
10.9
11.3
10.0
0.5
0.6
3.5
7.2
2.5
3.7
2.6
2.8
0.2
9.6
6
9.5
6
9.4
6
9.2
6
8.8
6
8.5
6
8.3
6
8.5
6
9.8
1942
1941
1940
1939
1938
1937
1936
1935
1933/4
13.2
12.4
11.9
11.6
9.6
9.1
8.7
7.7
7.2
7.0
Interest
and Other
Insurance
Expenses
Funding
Transfer from
the FSLIC
Net Income/
Resolution Fund
(Loss)
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0
0
0
0
0
0
0
0
0
0
132.5
132.1
124.4
115.2
107.6
102.5
96.8
91.9
86.9
80.8
6.6
6.4
6.1
6
6.3
6
9.8
6
9.9
6
9.3
6
9.2
6
9.6
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0
0
0
0
0
0
0
0
0
76.9
77.0
144.7
138.6
147.6
120.7
111.6
90.0
76.8
6
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0
0
0
0
0
0
0
0
0
59.0
51.9
43.0
34.8
36.4
36.0
32.9
9.5
(3.0)
1 The
effective rates from 1950 through 1984 vary from the statutory rate of 0.0833 percent due to assessment credits provided in those years. The statutory rate increased to 0.12 percent
in 1990 and to a minimum of 0.15 percent in 1991. The effective rates in 1991 and 1992 vary because the FDIC exercised new authority to increase assessments above the statutory rate
when needed. Beginning in 1993, the effective rate is based on a risk-related premium system under which institutions pay assessments in the range of 0.23 percent to 0.31 percent.
In May 1995, the BIF reached the mandatory recapitalization level of 1.25 percent. As a result, BIF assessment rates were reduced to a range of 0.04 percent to 0.31 percent of assessable
deposits, effective June 1995, and assessments totaling $1.5 billion were refunded in September 1995. Assessment rates for BIF were lowered again to a range of 0 to 0.27 percent of
assessable deposits, effective the start of 1996. In 1996, the SAIF collected a one-time special assessment of $4.5 billion that fully capitalized the fund. Consequently, assessment rates
for SAIF were lowered to the same range as DIF, effective October 1996. This range of rates remained unchanged for both funds through 2006. As part of the implementation of the
Federal Deposit Insurance Reform Act of 2005, assessment rates were increased to a range of 0.05 percent to 0.43 percent of assessable deposits effective at the start of 2007, but
many institutions received a one-time assessment credit ($4.7 billion in total) to offset the new assessments.
2 These
expenses, which are presented as operating expenses in the Statements of Income and Fund Balance, pertain to the FDIC in its corporate capacity only and do not include
costs that are charged to the failed bank receiverships that are managed by the FDIC. The receivership expenses are presented as part of the “Receivables from Resolutions, net” line
on the Balance Sheets. The information presented in the "FDIC Expenditures" table on page 108 of this report shows the aggregate (corporate and receivership) expenditures of the FDIC.
3
Includes $210 million for the cumulative effect of an accounting change for certain postretirement benefits.
4
Includes $105.6 million net loss on government securities.
5 This
amount represents interest and other insurance expenses from 1933 to 1972.
6 Includes
7 For
interest paid on capital stock.
1989 through 2005, amounts represent sum of separate BIF and SAIF amounts.
109
Recoveries and Losses by the Deposit Insurance Fund on Disbursements for the Protection of Depositors,
1934 through 2007
All Cases
Dollars in Thousands
Year
3
1
Number
of
Estimated
Banks/
Total
Total
Additional
Thrifts
Assets
Deposits Disbursements
Recoveries
Recoveries
Estimated
Losses
Total
2,237
$ 304,015,397
$ 248,393,951
$ 116,900,087
$ 77,665,701
$ 797,140
$ 38,437,246
2007
2006
2005
2004
2003
2002
2001
2000
3
0
0
4
3
11
4
7
2,614,928
0
0
165,866
1,096,724
2,557,811
2,234,253
407,618
2,026,648
0
0
145,885
903,504
2,175,043
1,610,474
340,533
1,909,549
0
0
138,895
883,772
2,068,519
1,605,147
297,313
1,315,770
0
0
134,978
812,933
1,628,771
1,113,270
265,175
474,240
0
0
0
4,852
63,928
220,457
0
119,539
0
0
3,917
65,987
375,820
271,420
32,138
1999
1998
1997
1996
1995
1994
1993
8
3
1
6
6
13
42
1,486,775
370,400
25,921
215,078
753,024
1,392,140
4,405,373
1,331,578
335,076
26,800
200,973
632,700
1,236,488
3,827,177
1,307,045
286,678
25,546
201,533
609,043
1,224,769
3,841,658
685,154
52,248
20,520
140,904
524,571
1,045,718
3,199,024
6,324
8,388
0
0
0
0
9,884
615,567
226,042
5,026
60,629
84,472
179,051
632,750
1992
1991
1990
1989
1988
1987
1986
122
127
169
207
280
203
145
44,231,922
63,203,713
15,676,700
29,168,596
70,065,789
9,366,300
7,710,400
41,184,366
53,832,141
14,488,900
24,090,551
45,499,102
8,399,500
7,056,700
14,175,372
21,196,493
10,817,419
11,445,829
12,163,006
5,037,871
4,790,969
10,506,614
15,197,510
8,041,634
5,248,247
5,244,866
3,015,215
3,015,252
1,772
2,636
4,659
0
0
0
0
3,666,986
5,996,347
2,771,126
6,197,582
6,918,140
2,022,656
1,775,717
1985
1984
1983
1982
1981
1980
1934-79
120
80
48
42
10
11
562
8,741,268
3,276,411
7,026,923
11,632,415
4,863,898
244,117
11,081,034
8,059,441
2,883,162
5,441,608
9,908,379
3,829,936
221,302
8,705,984
2,920,687
7,696,215
3,807,082
2,275,150
888,999
152,355
5,133,173
1,913,452
6,056,061
2,400,044
1,106,579
107,221
121,675
4,752,295
0
0
0
0
0
0
0
1,007,235
1,640,154
1,407,038
1,168,571
781,778
30,680
380,878
Estimated
Additional
Recoveries
Estimated
Losses
Deposit Assumption Cases
Year
110
3
Number
of
Banks/
Total
Total
Thrifts
Assets
Deposits Disbursements
Recoveries
Total
1,487
$ 225,210,798
$ 187,228,603
$ 89,334,347
$ 60,163,198
$ 734,127
$ 28,437,022
2007
2006
2005
2004
2003
2002
2001
2000
3
0
0
3
3
6
4
7
2,614,928
0
0
150,520
1,096,724
569,332
2,234,253
407,618
2,026,648
0
0
132,880
903,504
511,782
1.610,474
340,533
1,909,549
0
0
132,781
883,772
483,461
1,605,147
297,313
1,315,770
0
0
128,864
812,933
342,991
1,113,270
265,175
474,240
0
0
0
4,852
5,574
220,457
0
119,539
0
0
3,917
65,987
134,896
271,420
32,138
1999
1998
1997
1996
1995
1994
1993
8
3
1
6
6
13
37
1,486,775
370,400
25,921
215,078
753,024
1,392,140
4,098,618
1,331,578
335,076
26,800
200,973
632,700
1,236,488
3,556,005
1,307,045
286,678
25,546
201,533
609,043
1,224,769
3,580,297
685,154
52,248
20,520
140,904
524,571
1,045,718
3,036,275
6,324
8,388
0
0
0
0
9,884
615,567
226,042
5,026
60,629
84,472
179,051
534,138
1992
1991
1990
1989
1988
1987
1986
95
103
148
174
164
133
98
42,147,689
61,593,332
13,138,300
26,811,496
34,421,089
4,311,700
5,657,100
39,132,496
52,274,435
12,215,600
21,931,451
23,652,902
4,020,700
5,217,200
12,280,562
19,938,700
8,629,084
9,326,725
9,180,495
2,773,202
3,476,140
9,104,192
14,410,415
6,397,473
3,985,855
4,232,545
1,613,502
2,209,924
1,772
2,636
0
0
0
0
0
3,174,598
5,525,649
2,231,611
5,340,870
4,947,950
1,159,700
1,266,216
1985
1984
1983
1982
1981
1980
1934-79
87
62
35
25
5
7
251
2,235,182
1,905,924
3,194,452
681,025
4,808,042
218,332
8,671,804
2,000,044
1,603,923
2,275,313
552,436
3,778,486
199,846
5,528,330
1,631,166
1,373,198
2,893,969
268,372
79,208
138,623
4,797,969
1,095,601
941,674
1,850,553
213,578
71,358
110,248
4,441,887
0
0
0
0
0
0
0
535,565
431,524
1,043,416
54,794
7,850
28,375
356,082
Recoveries and Losses by the Deposit Insurance Fund on Disbursements for the Protection of Depositors,
1934 through 2007 (continued)
Deposit Payoff Cases
3
Year
2
Dollars in Thousands
Number
of
Estimated
Banks/
Total
Total
Additional
Estimated
Thrifts
Assets
Deposit Disbursements
Recoveries
Recoveries
Losses
Total
609
$ 18,687,250
$ 17,157,091
$ 15,935,384
$ 11,302,628
63,013
$ 4,569,743
2007
2006
2005
2004
2003
2002
2001
2000
0
0
0
1
0
5
0
0
0
0
0
15,346
0
1,988,479
0
0
0
0
0
13,005
0
1,663,261
0
0
0
0
0
6,114
0
1,585,058
0
0
0
0
0
6,114
0
1,285,780
0
0
0
0
0
0
0
58,354
0
0
0
0
0
0
0
240,924
0
0
1999
1998
1997
1996
1995
1994
1993
0
0
0
0
0
0
5
0
0
0
0
0
0
306,755
0
0
0
0
0
0
271,172
0
0
0
0
0
0
261,361
0
0
0
0
0
0
162,749
0
0
0
0
0
0
0
0
0
0
0
0
0
98,612
1992
1991
1990
1989
1988
1987
1986
25
21
20
32
36
51
40
2,049,320
1,526,538
2,522,500
2,280,100
1,276,700
2,539,000
1,334,500
2,018,402
1,477,328
2,257,700
2,086,100
1,278,400
2,260,800
1,253,900
1,893,324
1,251,676
2,183,400
2,116,556
1,252,160
2,103,792
1,155,981
1,401,186
784,002
1,641,564
1,262,140
822,612
1,401,000
739,659
0
0
4,659
0
0
0
0
492,138
467,674
537,177
854,416
429,548
702,792
416,322
29
16
9
7
2
3
307
610,156
855,568
164,037
585,418
51,018
17,832
563,983
548,986
784,597
160,998
538,917
47,536
16,454
479,535
523,789
791,838
148,423
277,240
35,736
13,732
335,204
411,175
699,483
122,484
206,247
34,598
11,427
310,408
0
0
0
0
0
0
0
112,614
92,355
25,939
70,993
1,138
2,305
24,796
Number
of
Banks/
Total
Total
Thrifts
Assets
Deposits Disbursements
Recoveries
Estimated
Additional
Recoveries
Estimated
Losses
1985
1984
1983
1982
1981
1980
1934-79
$
Assistance Transactions
Year
3
Total
141
$ 60,117,349
$ 44,008,257
$ 11,630,356
$ 6,199,875
2007
2006
2005
2004
2003
2002
2001
2000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1999
1998
1997
1996
1995
1994
1993
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1992
1991
1990
1989
1988
1987
1986
2
3
1
1
80
19
7
34,913
83,843
15,900
77,000
34,368,000
2,515,600
718,800
1985
1984
1983
1982
1981
1980
1934-79
4
2
4
10
3
1
4
5,895,930
514,919
3,668,434
10,365,972
4,838
7,953
1,845,247
$
0
$ 5,430,481
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
33,468
80,378
15,600
73,000
20,567,800
2,118,000
585,600
1,486
6,117
4,935
2,548
1,730,351
160,877
158,848
1,236
3,093
2,597
252
189,709
713
65,669
0
0
0
0
0
0
0
250
3,024
2,338
2,296
1,540,642
160,164
93,179
5,510,411
494,642
3,005,297
8,817,026
3,914
5,002
2,698,119
765,732
5,531,179
764,690
1,729,538
774,055
0
0
406,676
4,414,904
427,007
686,754
1,265
0
0
0
0
0
0
0
0
0
359,056
1,116,275
337,683
1,042,784
772,790
0
0
1 Totals
do not include dollar amounts for
the five open bank assistance transactions
between 1971 and 1980. Excludes eight
transactions prior to 1962 that required
no disbursements. Also, disbursements,
recoveries, and estimated additional
recoveries do not include working
capital advances to and repayments
by receiverships.
2 Includes
3
insured deposit transfer cases.
For 1989 through 2005, amounts represent
sum of separate BIF and SAIF amounts.
Note:
Total Assets and Total Deposits data is based
upon the last Call Report filed by institution
prior to failure.
Beginning with the 1997 Annual Report,
the number of banks in the Assistance
Transactions column for 1988 was changed
from 21 to 80 and the number of banks
in the All Cases column was changed from
221 to 280 to reflect that one assistance
transaction encompassed 60 institutions.
Also, certain 1982, 1983, 1989 and 1992
resolutions previously reported in either
the Deposit Payoff or Deposit Assumption
categories were reclassified.
111
Number, Assets, Deposits, Losses, and Loss to Funds of Insured Thrifts
1
Taken Over or Closed Because of Financial Difficulties, 1989 through 1995
Dollars in Thousands
Year 2
Total
Assets
Deposits
Estimated
Receivership
3
Loss
Total
748
$ 395,017,406
$ 318,328,770
$ 75,318,451
$ 81,584,813
1995
1994
1993
1992
1991
1990
1989 5
2
2
10
59
144
213
318
423,819
136,815
7,178,794
44,196,946
78,898,904
129,662,498
134,519,630
414,692
127,508
5,708,253
34,773,224
65,173,122
98,963,962
113,168,009
28,192
11,472
267,595
3,234,872
8,625,587
16,063,996
47,086,737
27,750
14,599
65,212
3,780,109
9,123,993
19,258,889
49,314,261
4
Loss to Funds
1
Prior to July 1, 1995, all thrift closings were the responsibility of the Resolution Trust Corporation (RTC). Since the RTC was terminated on December 31, 1995, and all assets and liabilities
transferred to the FSLIC Resolution Fund (FRF), all the results of the thrift closing activity from 1989 through 1995 are now reflected on FRF’s books.
2
Year is the year of failure, not the year of resolution.
3
4
5
The estimated losses represent the projected loss at the fund level from receiverships for unreimbursed subrogated claims of the FRF and unpaid advances to receiverships from
the FRF.
The Loss to Funds represents the total resolution cost of the failed thrifts in the FRF-RTC funds, which includes corporate revenue and expense items such as interest expense
on Federal Financing Bank debt, interest expense on escrowed funds, and interest revenue on advances to receiverships, in addition to the estimated losses for receiverships.
Total for 1989 excludes nine failures of the former FSLIC.
112
FDIC-Insured Institutions Closed During 2007
Dollars in Thousands
Name and
Bank
Location
Class
Number of
Deposit
Total
Total
FDIC
Estimated
Accounts
Assets 2
Deposits 2 Disbursements
Loss1
Date of
Closing or
Acquisition
Receiver/
Assuming Bank
and Location
Purchase and Assumption – Insured Deposits
Metropolitan Savings Bank
Pittsburgh, PA
SB
1,534
$
15,760
$
17,587
$
17,671
$
8,906
02-02-07
Allegheny Valley Bank
Pittsburgh, PA
NetBank
Alpharetta, GA
09-28-07
ING Bank
Wilmington, DE
Miami Valley Bank
Lakeview, OH
NM
3,938
$
125,362
$
64,965
$
56,412
$
2,969
10-04-07
Citizens Banking Company
Sandusky, OH
SB
174,555
$ 2,473,806
$ 1,944,096
$ 1,835,466
$
107,664
Codes for
Bank Class:
1
2
NM–
State-chartered bank that is not
a member of the Federal Reserve System
N
National bank
SB –
Savings Bank
SM –
State-chartered bank that is a member
of the Federal Reserve System
Estimated losses are as of December 31, 2007. Estimated losses are routinely adjusted with updated information from new appraisals and asset sales, which ultimately affect the asset
values and projected recoveries.
Total Assets and Total Deposits data is based upon the last Call Report filed by institution prior to failure.
113
FDIC Actions on Financial Institutions Applications 2005-2007
Deposit Insurance
Approved
Denied
New Branches
Approved
Denied
Mergers
Approved
Denied
Requests for Consent to Serve
Approved
Section 19
Section 32
Denied
Section 19
Section 32
Notices of Change in Control
Letters of Intent Not to Disapprove
Disapproved
Brokered Deposit Waivers
Approved
Denied
Savings Association Activities
Approved
Denied
▼
State Bank Activities / Investments
Approved
Denied
Conversions of Mutual Institutions
Non-Objection
Objection
●
■
114
2007
215
215
0
1,480
1,480
0
306
306
0
177
177
24
153
0
0
0
17
15
2
22
22
0
54
54
0
21
21
0
10
10
0
2006
142
142
0
1,257
1,257
0
229
229
0
138
138
11
127
0
0
0
3
2
1
26
26
0
33
33
0
14
14
0
9
9
0
2005
219
219
0
1,575
1,575
0
286
286
0
170
170
13
157
0
0
0
9
9
0
40
40
0
59
59
0
18
18
0
11
11
0
●
Under Section 19 of the Federal Deposit Insurance (FDI) Act, an insured institution must receive FDIC approval before
employing a person convicted of dishonesty or breach of trust. Under Section 32, the FDIC must approve any change
of directors or senior executive officers at a state nonmember bank that is not in compliance with capital requirements
or is otherwise in troubled condition.
■
Amendments to Part 303 of the FDIC Rules and Regulations changed FDIC oversight responsibility in October 1998.
In 1998, Part 303 changed the Delegations of Authority to act upon applications.
▼
Section 24 of the FDI Act, in general, precludes a federally insured state bank from engaging in an activity not
permissible for a national bank and requires notices to be filed with the FDIC.
Compliance, Enforcement and Other Related Legal Actions 2005-2007
2007
Total Number of Actions Initiated by the FDIC
208
Termination of Insurance
Involuntary Termination
Sec. 8a For Violations, Unsafe/Unsound Practices or Condition 0
Voluntary Termination
Sec. 8a By Order Upon Request
0
Sec. 8p No Deposits
2
Sec. 8q Deposits Assumed
4
2006
244
2005
192
0
0
1
2
3
0
2
11
Sec. 8 b Cease-and-Desist Actions
Notices of Charges Issued
Consent Orders
3
48
0
29
0
20
Sec. 8e Removal/ Prohibition of Director or Officer
Notices of Intention to Remove/Prohibit
Consent Orders
1
40
3
89
2
73
●
Sec. 8g Suspension/Removal When Charged With Crime
0
0
0
Civil Money Penalties Issued
Sec. 7a Call Report Penalties
Sec. 8 i Civil Money Penalties
0
96
0
93
0
69
Sec. 10c Orders of Investigation
7
17
15
Sec. 19 Denials of Service After Criminal Conviction
0
0
0
Sec. 32 Notices Disapproving Officer/Director’s Request for Review 0
0
0
0
0
91
0
2
110
0
0
78
137,548
119,384
102,080
7
5
0
Truth - in - Lending Act Reimbursement Actions
Denials of Requests for Relief
Grants of Relief
Banks Making Reimbursement
●
Suspicious Activity Reports (Open and closed institutions)
Other Actions Not Listedt
●
●
These actions do not constitute the initiation of a formal enforcement action and, therefore, are not included in the total
number of actions initiated.
t
Other Actions Not Listed includes six Section 19 Waiver grants and one Other Formal Action.
115
Appendix B - More About the FDIC
FDIC Board of Directors
Martin J. Gruenberg, Sheila C. Bair, Chairman (seated),
John C. Dugan, Thomas J. Curry, and John M. Reich (standing, left to right)
Sheila C. Bair
Sheila C. Bair was sworn in as the
19th Chairman of the Federal Deposit
Insurance Corporation (FDIC) on
June 26, 2006. She was appointed
Chairman for a five-year term, and
as a member of the FDIC Board of
Directors through July 2013.
Before her appointment to the FDIC,
Ms. Bair was the Dean’s Professor
of Financial Regulatory Policy for the
Isenberg School of Management at
the University of MassachusettsAmherst since 2002. Other career
116
experience includes serving as
Assistant Secretary for Financial
Institutions at the U.S. Department
of the Treasury (2001 to 2002),
Senior Vice President for Government
Relations of the New York Stock
Exchange (1995 to 2000), a
Commissioner and Acting Chairman
of the Commodity Futures Trading
Commission (1991 to 1995), and
Research Director, Deputy Counsel
and Counsel to Senate Majority
Leader Robert Dole (1981 to 1988).
While an academic, Chairman Bair
also served on the FDIC’s Advisory
Committee on Banking Policy.
Chairman Bair’s prior work focused
heavily on the banking sector. As
the Assistant Treasury Secretary
for Financial Institutions, she was
charged with helping to develop the
Administration’s positions on banking
policy issues. She worked closely
with Treasury’s own banking
regulatory bureaus, the Office of
the Comptroller of the Currency and
the Office of Thrift Supervision, as
well as the Federal Reserve Board
and the FDIC. Ms. Bair’s teaching
and research at the University of
Massachusetts also dealt extensively
with banking and related issues.
Ms. Bair has served as a member
of several professional and nonprofit organizations, including the
Insurance Marketplace Standards
Association, Women in Housing
and Finance, Center for Responsible
Lending, NASD Ahead-of-the-Curve
Advisory Committee, Massachusetts
Savings Makes Cents, American Bar
Association, Exchequer Club, and
Society of Children’s Book Writers
and Illustrators.
Five months after becoming
Chairman, Ms. Bair was named
to The Wall Street Journal magazine
Smart Money’s (November 2006)
“Power 30” list – the magazine’s
lineup of the 30 most influential
people in investing. Chairman Bair
has also received several honors
for her published work on financial
issues, including her educational
writings on money and finance
for children, and for professional
achievement. Among the honors
she has received are: Distinguished
Achievement Award, Association
of Education Publishers (2005);
Personal Service Feature of the Year,
and Author of the Month Awards,
Highlights Magazine for Children
(2002, 2003 and 2004); and The
Treasury Medal (2002). Her first
book – Rock, Brock and the Savings
Shock, a publication for children –
was published in 2006.
Chairman Bair received a bachelor’s
degree from Kansas University and
a J.D. from Kansas University
School of Law. She is married
to Scott P. Cooper and has two
children.
Martin J. Gruenberg
Thomas J. Curry
Martin J. Gruenberg was sworn in
as Vice Chairman of the FDIC Board
of Directors on August 22, 2005.
Upon the resignation of Chairman
Donald Powell, he served as Acting
Chairman from November 15, 2005, to
June 26, 2006. On November 2, 2007,
Mr. Gruenberg was named Chairman
of the Executive Council and President
of the International Association of
Deposit Insurers (IADI).
Thomas J. Curry took office on
January 12, 2004, as a member of
the Board of Directors of the Federal
Deposit Insurance Corporation for
a six-year term. Mr. Curry serves as
Chairman of the FDIC's Assessment
Appeals Committee and Case
Review Committee.
Mr. Gruenberg joined the FDIC
Board after broad congressional
experience in the financial services
and regulatory areas. He served
as Senior Counsel to Senator
Paul S. Sarbanes (D-MD) on the
staff of the Senate Committee on
Banking, Housing, and Urban Affairs
from 1993 to 2005. Mr. Gruenberg
advised the Senator on issues of
domestic and international financial
regulation, monetary policy and
trade. He also served as Staff
Director of the Banking Committee’s
Subcommittee on International
Finance and Monetary Policy from
1987 to 1992. Major legislation in
which Mr. Gruenberg played an
active role during his service on the
Committee includes the Financial
Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA),
the Federal Deposit Insurance
Corporation Improvement Act of
1991 (FDICIA), the Gramm-LeachBliley Act, and the Sarbanes-Oxley
Act of 2002.
Mr. Gruenberg holds a J.D. from
Case Western Reserve Law School
and an A.B. from Princeton University,
Woodrow Wilson School of Public
and International Affairs.
Mr. Curry also serves as the Chairman
of the NeighborWorks® America
Board of Directors. NeighborWorks®
America is a national nonprofit
organization chartered by Congress
to provide financial support,
technical assistance, and training
for community-based neighborhood
revitalization efforts.
Prior to joining the FDIC's Board
of Directors, Mr. Curry served five
Massachusetts Governors as the
Commonwealth's Commissioner of
Banks from 1990 to 1991 and from
1995 to 2003. He served as Acting
Commissioner from February 1994
to June 1995. He previously served
as First Deputy Commissioner and
Assistant General Counsel within the
Massachusetts Division of Banks. He
entered state government in 1982 as
an attorney with the Massachusetts
Secretary of State's Office.
Director Curry served as the
Chairman of the Conference of State
Bank Supervisors from 2000 to 2001.
He served two terms on the State
Liaison Committee of the Federal
Financial Institutions Examination
Council, including a term as
Committee chairman.
He is a graduate of Manhattan College
(summa cum laude), where he
was elected to Phi Beta Kappa. He
received his law degree from the
New England School of Law.
117
John C. Dugan
John C. Dugan was sworn in as the
29th Comptroller of the Currency
on August 4, 2005. In addition to
serving as a director of the FDIC,
Comptroller Dugan also serves as
chairman of the Joint Forum, a group
of senior financial sector regulators
from the United States, Canada,
Europe, Japan, and Australia,
and as a director of the Federal
Financial Institutions Examination
Council and NeighborWorks®
America.
Prior to his appointment as
Comptroller, Mr. Dugan was a partner
at the law firm of Covington &
Burling, where he chaired the firm's
Financial Institutions Group. He
specialized in banking and financial
institution regulation. He also served
as outside counsel to the ABA
Securities Association.
He served at the Department of
Treasury from 1989 to 1993 and
was appointed assistant secretary
for domestic finance in 1992. In
1991, he oversaw a comprehensive
study of the banking industry that
formed the basis for the financial
modernization legislation proposed
by the administration of the first
President Bush. From 1985 to 1989,
Mr. Dugan was minority counsel
and minority general counsel for the
U.S. Senate Committee on Banking,
Housing, and Urban Affairs.
Among his professional and
volunteer activities before becoming
Comptroller, he served as a director
of Minbanc, a charitable organization
whose mission is to enhance professional and educational opportunities
for minorities in the banking industry.
He was also a member of the
American Bar Association's committee
on banking law, the Federal Bar
118
Association's section of financial
institutions and the economy,
and the District of Columbia Bar
Association's section of corporations,
finance, and securities laws.
A graduate of the University of
Michigan in 1977 with an A.B. in
English literature, Mr. Dugan also
earned his J.D. from Harvard Law
School in 1981.
John M. Reich
John M. Reich was sworn in
August 9, 2005, as Director of the
Office of Thrift Supervision (OTS).
The President nominated Mr. Reich
to be OTS Director on June 7, 2005,
and the Senate confirmed his
nomination on July 29, 2005. In this
capacity, Mr. Reich also serves as a
member of the Board of Directors
of the FDIC.
Prior to joining OTS, Mr. Reich
served as Vice Chairman of the
Board of Directors of the Federal
Deposit Insurance Corporation
(FDIC) since November 2002. He
has been a member of the FDIC
Board since January 2001. He also
served as Acting Chairman of the
FDIC from July to August 2001.
Prior to coming to Washington, DC,
Mr. Reich spent 23 years as a community banker in Illinois and Florida,
including ten years as President
and CEO of the National Bank of
Sarasota, in Sarasota, Florida.
Mr. Reich also served 12 years on
the staff of U.S. Senator Connie
Mack (R-FL), before joining the
FDIC. From 1998 through 2000,
he was Senator Mack’s Chief of
Staff, directing and overseeing
all of the Senator’s offices and
committee activities, including
those at the Senate Banking
Committee.
Mr. Reich’s community service
includes serving as Chairman of
the Board of Trustees of a public
hospital facility in Ft. Myers, FL,
and Chairman of the Board of
Directors of the Sarasota Family
YMCA. He has also served as a
Board member for a number of
civic organizations, and was active
for many years in youth baseball
programs.
Mr. Reich holds a B.S. degree from
Southern Illinois University and an
M.B.A. from the University of South
Florida. He is also a graduate of
Louisiana State University’s School
of Banking of the South.
FDIC Organization Chart/Officials
as of December 31, 2007
Board of Directors
Sheila C. Bair
Martin J. Gruenberg
Thomas J. Curry
John C. Dugan
John M. Reich
Office of the Chairman
Vice Chairman
Sheila C. Bair
Chairman
Martin J. Gruenberg
Office of
Inspector General
Chief Information Officer
and Chief Privacy Officer
Jon T. Rymer
Inspector General
Michael E. Bartell
Chief of Staff
Office of Public Affairs
Jesse O. Villarreal, Jr.
Andrew Gray
Director
Deputy to the Chairman
and Chief Financial Officer
Deputy to the Chairman
and Chief Operating Officer
Deputy to the Chairman
General Counsel
Steven O. App
John F. Bovenzi
Alice C. Goodman
Sara A. Kelsey
Division of Finance
Bret D. Edwards
Division of Supervision
and Consumer Protection
Sandra L. Thompson
Division of Insurance
and Research
Arthur J. Murton
Director
Director
Director
Office of Enterprise
Risk Management
Division of Information
Technology
Division of Resolutions
and Receiverships
James H. Angel, Jr.
Director
Michael E. Bartell
Director
Office of Diversity and
Economic Opportunity
Division of
Administration
Director
Office of the
Ombudsman
Corporate
University
Cottrell L. Webster
Sara A. Kelsey
General Counsel
Arleas Upton Kea
Director
Ombudsman
Eric J. Spitler
Director
Legal
Division
Mitchell L. Glassman
Director
D. Michael Collins
Office of
Legislative Affairs
Thom H. Terwilliger
Chief Learning Officer
Office of International
Affairs
Fred S. Carns
Director
119
Corporate Staffing
Staffing Trends 1998- 2007
8,000
6,000
4,000
2,000
0
1998
FDIC Staffing
7,359
1999
2001
2002
2003
7,266 6,452 6,167 5,430 5,311
Note:
All staffing totals reflect year-end balances.
120
2000
2004
2005
2006
2007
5,078 4,514 4,476 4,532
Number of Employees of the FDIC by Division/Office 2006-2007 (year-end)
Total
2006
2007
2006
2007
2006
Executive Offices
Division of Supervision and Consumer Protection
Division of Resolutions and Receiverships
Legal Division
Division of Finance
Division of Information Technology
Division of Insurance and Research
Division of Administration
Office of Inspector General
Office of Diversity and Economic Opportunity
Office of the Ombudsman
Office of Enterprise Risk Management
Corporate University
46
2,557
218
398
167
276
177
310
114
31
12
12
214
39
2,517
231
413
161
274
185
311
124
28
12
11
170
46
183
56
252
155
213
145
208
81
31
12
12
52
39
195
57
263
161
214
152
207
91
28
10
11
38
0
2,374
162
146
12
63
32
102
33
0
0
0
162
0
2,322
174
150
0
60
33
104
33
0
2
0
132
Total
4,532
4,476
1,446
1,466
3,086
3,010
●
▼
▼
●
▼
Washington Regional / Field
2007
Includes the Offices of the Chairman, Vice Chairman, Director (Appointive), Chief Operating Officer, Chief Financial Officer, Legislative Affairs, Public Affairs and International Affairs.
On January 26, 2007, the Deposit Compliance Audit Section was transferred from the Division of Resolutions and Receiverships to the Division of Finance.
121
Sources of Information
Home Page on the Internet
FDIC Call Center
www.fdic.gov
Phone:
877-275-3342
(877-ASK FDIC)
A wide range of banking, consumer
and financial information is available
on the FDIC’s Internet home page.
This includes the FDIC’s Electronic
Deposit Insurance Estimator (EDIE),
which estimates an individual’s
deposit insurance coverage; the
Institution Directory – financial
profiles of FDIC-insured institutions;
Community Reinvestment Act
evaluations and ratings for institutions
supervised by the FDIC; Call Reports–
banks’ reports of condition and
income; and Money Smart, a
training program to help individuals
outside the financial mainstream
enhance their money management
skills and create positive banking
relationships. Readers also can
access a variety of consumer
pamphlets, FDIC press releases,
speeches and other updates on
the agency’s activities, as well as
corporate databases and customized
reports of FDIC and banking industry
information.
703-562-2222
Hearing
Impaired: 800-925-4618
The FDIC Call Center in Washington, DC,
is the primary telephone point of
contact for general questions from
the banking community, the public and
FDIC employees. The Call Center
directly, or in concert with other FDIC
subject-matter experts, responds to
questions about deposit insurance and
other consumer issues and concerns,
as well as questions about FDIC
programs and activities. The Call
Center also makes referrals to other
federal and state agencies as needed.
Hours of operation are 8:00 a.m. to
8:00 p.m. Eastern Time. Information
is also available in Spanish. Recorded
information about deposit insurance
and other topics is available 24 hours
a day at the same telephone number.
Public Information Center
3501 Fairfax Drive
Room E-1002
Arlington, VA 22226
Phone: 877-275-3342
(877-ASK FDIC), or
703-562-2200
Fax:
703-562-2296
E-mail: publicinfo@fdic.gov
FDIC publications, press releases,
speeches and congressional
testimony, directives to financial
institutions, policy manuals and other
documents are available on request
or by subscription through the
Public Information Center. These
documents include the Quarterly
Banking Profile, FDIC Consumer
News and a variety of deposit
insurance and consumer pamphlets.
122
Office of the Ombudsman
3501 Fairfax Drive
Room E-2022
Arlington, VA 22226
Phone: 877-275-3342
(877- ASK FDIC)
Fax:
703-562-6057
E-mail: ombudsman@fdic.gov
The Office of the Ombudsman (OO)
is an independent, neutral and
confidential resource and liaison
for the banking industry and the
general public. The OO responds
to inquiries about the FDIC in a
fair, impartial and timely manner. It
researches questions and complaints
primarily from bankers. The OO also
recommends ways to improve FDIC
operations, regulations and customer
service.
Regional and Area Offices
Atlanta Regional Office
Chicago Regional Office
Dallas Regional Office
10 Tenth Street, NE
Suite 800
Atlanta, Georgia 30309
(678) 916-2200
500 West Monroe Street
Suite 3500
Chicago, Illinois 60661
(312) 382-7500
1601 Bryan Street
Dallas, Texas 75201
(214 ) 754-0098
Alabama
Florida
Georgia
North Carolina
South Carolina
Illinois
Indiana
Kentucky
Michigan
Ohio
Virginia
West Virginia
Wisconsin
Colorado
New Mexico
Oklahoma
Texas
Memphis Area Office
5100 Poplar Avenue
Suite 1900
Memphis, Tennessee 38137
(901) 685-1603
Kansas City Regional Office
New York Regional Office
2345 Grand Boulevard
Suite 1200
Kansas City, Missouri 64108
(816) 234 - 8000
20 Exchange Place
4th Floor
New York, New York 10005
(917) 320-2500
Iowa
Kansas
Minnesota
Missouri
Nebraska
Delaware
District of Columbia
Maryland
New Jersey
New York
Pennsylvania
North Dakota
South Dakota
Puerto Rico
Virgin Islands
Boston Area Office
15 Braintree Hill Office Park
Suite 100
Braintree, Massachusetts 02184
(781) 794-5500
Connecticut
Maine
Massachusetts
New Hampshire
Rhode Island
Vermont
Arkansas
Louisiana
Mississippi
Tennessee
San Francisco Regional Office
25 Ecker Street
Suite 2300
San Francisco, California 94105
(415) 546-0160
Alaska
Arizona
California
Guam
Hawaii
Idaho
Montana
Nevada
Oregon
Utah
Washington
Wyoming
123
Appendix C –
Office of Inspector General’s Assessment of the Management and Performance Challenges
Facing the FDIC
2008 Management and
Performance Challenges
The following discussion reflects the Office of Inspector General’s (OIG) view
of the management and performance challenges facing the FDIC as it works
to accomplish its mission in the coming year. Overall, and as discussed in
more detail below, these challenges primarily exist due to significant changes
impacting the Corporation—changes in the economy, including systemic risk
caused by subprime mortgage lending; the financial services industry; the
characteristics of today’s depository institutions, including the existence
of many more large, complex banks; the regulatory arena; lending practices;
information technology; and the examination processes, work environment,
and priorities of the FDIC. Key elements in addressing these challenges
are cooperation, coordination, and communication among federal and state
banking regulators; the Congress; others in the financial services industry,
both domestically and abroad; and the public. Such activities need to be
complemented by a vigilant, well trained and prepared FDIC workforce that
is fully engaged in insurance and supervisory programs and other supporting
processes that identify and address risky products, practices, and activities
that can threaten the viability of the insurance fund, harm consumers, and
undermine stability and public confidence in the banking system. Likewise,
in light of the existence of more large, complex banks, the FDIC must
ensure that it has the necessary skills, processes, and systems to carry out
its resolution mission in the event that such a bank would fail.
In our view, the FDIC is fully committed to addressing these challenges and
has many actions underway in that regard. The OIG is prepared to continue
to work with our corporate colleagues throughout the coming year to assist
them in successfully doing so.
Identifying and Mitigating Risks
to the Deposit Inurance Fund
As of the end of the third quarter of 2007, the Deposit Insurance Fund
balance was $51.8 billion. The FDIC insured $4.241 trillion in deposits in 8,571
institutions. Of these FDIC-insured institutions, as of September 30, 2007,
the 10 largest ones controlled almost 46 percent of the total assets of
all insured financial institutions. The FDIC is the primary federal regulator
for none of these institutions but is responsible for insuring their deposits
and for resolution in the unlikely event of failure of one or more of these
institutions. The Corporation is also working to maintain strong regulatory
capital standards under the Basel accord and has been implementing
legislated reforms to deposit insurance. The Corporation also continues to
address matters related to industrial loan companies and to address potential
risks that a volatile economy can pose to the fund. Finally, the Corporation
has taken on a leadership role as it works with other governments
implementing or strengthening deposit insurance and bank supervision
around the world. Given these circumstances, the Corporation faces a
number of challenges:
Assessing and Managing Risks in Large Banks
The Corporation must ensure it has ready access to the information it needs
to effectively identify and assess risks that large institutions, including those
it does not supervise, pose to the Deposit Insurance Fund (DIF). Effective
communication and coordination with the other primary federal banking
regulators is central to the Corporation’s ability to meet this challenge.
Moreover, given the inherent complexity of these large institutions, the
FDIC must have or develop the capability to assess and fully understand
the risks associated with these institutions, which are different from those
found in the smaller banks with which the FDIC has historical experience.
124
To strengthen its oversight of large institutions, the Corporation has
implemented some key programs: the Large Insured Depository Institutions
program, Dedicated Examiner program, and Off-site Review program. The
FDIC also participates with the other federal regulators in the Shared
National Credit program. The FDIC is also emphasizing liquidity management
due to uncertainties in the financial markets area from the subprime
mortgage turmoil.
Maintaining Strong Regulatory Capital Standards
The FDIC and other federal banking agencies agreed to finalize rules
implementing Basel II advanced capital requirements for large, complex
banks. The agreement contains important safeguards against unrestrained
reductions in risk-based capital requirements for these large institutions. It
also provides for the development in the U.S. of the Basel II standardized
approach as an option for other banks. The FDIC must continue its work in
this realm to ensure strong regulatory capital standards.
Implementing New Deposit Insurance Regulations
On February 6, 2006, President Bush signed into law the Federal Deposit
Insurance (FDI) Reform Act of 2005. The FDI Reform Conforming
Amendments Act of 2005, enacted on February 15, 2006, contains
necessary technical and conforming changes to implement deposit
insurance reform as well as a number of study and survey requirements.
In 2006, the Board adopted a number of final rules implementing specific
reforms concerning the one-time assessment credit, risk-based assessments,
and the designated reserve ratio, and put in place a temporary rule for
dividends. In 2007, the Corporation made significant changes to its IT
systems and business processes in order to prepare invoices and collect
assessments in accordance with the new risk-based assessment and
credit rules. In September 2007, the Board adopted an advance notice
of proposed rulemaking seeking comment on alternative approaches to
allocate dividends. In 2008, the FDIC expects to publish proposed and
final dividend rules to replace the temporary rule, which will sunset at the
end of this year. Also in 2008, the Corporation will continue to modify, as
necessary, the processes and systems implementing the new rules and
to begin evaluating the effectiveness of the new assessment methods
and processes. Finally, for both 2007 and 2008, the Board adopted a
designated (target) reserve ratio of 1.25 percent, which has resulted in
the need to set risk-based assessment rates above the base rate schedule
in order to gradually raise the reserve ratio to the target.
Granting Insurance to and Supervising Industrial Loan Companies
In January 2007, the FDIC Board of Directors voted to continue for one year
a moratorium on applications for deposit insurance and change in control
notices for industrial loan companies (ILCs) that will be owned by commercial
companies. The moratorium does not apply to ILCs owned by financial
companies. The Board also issued a proposed rule to strengthen the framework
for consideration of applications or notices for industrial banks owned by
financial companies not subject to federal consolidated bank supervision.
According to FDIC Chairman Bair, the growth in commercial ownership of
ILCs raises public policy concerns. The moratorium would provide Congress
an opportunity to address the issue legislatively while the FDIC considers
how best to respond to any safety and soundness issues surrounding
commercial ownership under existing law. This area will continue to require
FDIC attention.
125
Serving as a Model for Deposit Insurers
and Bank Supervisors Around the World
Deposit insurance helps maintain financial stability—on a national or international
scale—in times of economic stress. Increasingly, the Corporation is playing a
leadership role in the global arena as foreign governments look to the FDIC as a
model for establishing or strengthening their systems of deposit insurance
and bank supervision. For example, in August 2007, the FDIC and the
People’s Republic of China signed a Memorandum of Understanding (MOU)
forging an international working relationship to develop and expand methods
of interaction on economic and financial issues. The MOU is a positive step
in establishing a deposit insurance system in China. In November 2007, an
MOU was signed with the Korean Deposit Insurance Corporation (KDIC),
which provides for a KDIC employee to be temporarily assigned to the
FDIC. The FDIC is joining others in the International Association of Deposit
Insurers (IADI) to help strengthen the role of deposit insurance around the
world. In 2007, FDIC Vice Chairman Gruenberg was elected to serve as
Chairman of the Executive Council and President of the IADI. The FDIC
was also elected as the North American Region Board member for the
Association of Supervisors of Banks in the Americas (ASBA), providing
leadership to several ASBA working groups and instruction for ASBA operational
risk management courses. The FDIC may face new challenges as it expands
its role in these types of international activities.
Ensuring Institution Safety and
Soundness Through Effective
Examinations, Enforcement, and
Follow-Up
Effective supervision is a cornerstone of the FDIC’s efforts to ensure stability
and public confidence in the nation’s financial system. As of the third quarter
2007, the FDIC was the primary federal regulator for more than 5,200
institutions. The FDIC performs risk management, information technology,
trust, and other types of examinations of FDIC-supervised insured depository
institutions. (See also a discussion of compliance examinations under Protecting
and Educating Consumers and Ensuring Compliance Through Effective
Examinations, Enforcement, and Follow-up.) As part of risk management
examinations, the FDIC also ensures that institutions comply with the
regulatory requirements of the Bank Secrecy Act. The Corporation’s system
of supervisory controls must identify and effectively address financial institution
activities that are unsafe, unsound, illegal, or improper. Specific challenges
related to this core FDIC function include:
Maintaining an Effective Examination and Supervision Program
The FDIC has adopted a risk-focused approach to examinations to minimize
regulatory burden and direct its resources to those areas that carry the greatest
potential risk. At the end of the year, the FDIC Chairman voiced her support and
trust in examiner judgment; announced elimination of the Maximum Efficiency,
Risk-Focused, Institution Targeted (MERIT) examination program; and recommended
other changes to the examination program to allow examiners more flexibility
in planning and conducting examinations. Further details on the changes to
this core FDIC function will be forthcoming and will likely have a significant
impact on the FDIC’s examination workforce, which is expected to total 1,808
by the end of 2008 (1,423 risk management examiners; 385 compliance
examiners). Examiners today work in an environment where risk may be
increasingly difficult to ascertain and quantify, for example as a result of the
lack of financial statement transparency that derives from off-bank balance
sheet liabilities at a time when, for instance, the FDIC increasingly employs
off-site monitoring. The FDIC must also ensure that financial institutions
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have adequate corporate governance structures relative to the bank’s size,
complexity, and risk profile to prevent financial losses and maintain confidence
in those entrusted with operating the institutions. The FDIC’s follow-up
processes must be effective to ensure institutions are promptly complying
with supervisory actions resulting from the FDIC’s examination process. The
FDIC Board approved an increase in authorized staffing from 4,716 in 2007
to 4,810 for 2008, primarily for additional bank examiners, including the
rehiring of retired examiners to return to the FDIC temporarily in the
interest of ensuring an examination workforce with the breadth of experience
needed to detect risk management concerns during the examination
process.
Identifying and Addressing Risks Related to Consumer Debt
The past several years have been marked by increased participation in the
mortgage market by providers other than insured banks and thrift institutions.
About half of subprime mortgage originations in 2005 and 2006 were carried out
by companies that were not subject to examination by a federal supervisor.
The use of securitization as a funding method also has changed the financial
system by moving large volumes of assets off the balance sheets of federally
insured financial institutions. As industry practices changed, a number of
risk management fundamentals were seemingly ignored or weakened. Practices
such as limited or no income verification, faulty appraisals, risk layering through
combinations of loan products, and no money down or interest-only loan
products all serve to heighten risk when combined with the ability to securitize
and sell the loans. Lax lending standards and inadequate consumer protections
resulted in widespread failure to underwrite loans to borrowers based on the
borrowers’ ability to pay at the fully indexed rate. As the Chairman pointed
out in December 2007, there are an estimated 1.7 million owner-occupied
subprime hybrid adjustable rate mortgages, with outstanding balances of
$367 billion, that are scheduled to have their interest rates reset in 2008 and
2009. The impact of poor underwriting practices has spread throughout the
economy, harming consumers and investors while creating volatility in the
financial markets. The FDIC is working with other regulators in urging banks
and mortgage servicers to restructure loans, as feasible, to avoid foreclosures
and keep consumers in their homes. The full ramifications of the troubled
subprime mortgage market have yet to be seen, and the months ahead
will be challenging ones. Similar concerns related to other consumer debt
such as credit card lending may also require focused FDIC attention in
the future.
Contributing to Public Confidence
in Insured Depository Institutions
Guarding Against Financial Crimes in Insured Institutions
All financial institutions are at risk of being used to facilitate or being victimized
by criminal activities such as money laundering and terrorist financing. Such
activities serve to undermine public confidence in the nation’s financial system.
The Corporation’s challenge is to develop and implement programs and activities
to minimize the extent to which the institutions it supervises are involved in or
victims of financial crimes and other abuse. Increased reliance by both financial
institutions and non-financial institution lenders on third-party brokers has also
created opportunities for increased real-estate frauds, including certain property
flipping schemes and other mortgage frauds. Examiners must be alert to the
possibility of multiple types of fraudulent activity in financial institutions, and
make good use of reports, information, and other resources available to them
to help detect such fraud.
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The Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act),
enacted on October 26, 2001, was passed by the United States Congress
in response to the September 11, 2001, attacks and made a number of
amendments to the anti-money laundering provisions of the Bank Secrecy
Act (BSA). Congress found that money laundering “provides the financial
fuel that permits transnational criminal enterprises to conduct and expand
their operations to the detriment of the safety and security of American
citizens” and that it is critical to the financing of global terrorism and terrorist
attacks. Accordingly, FDIC examiners play an important role in ensuring that
the institutions for which they serve as primary federal regulator comply
with the Act.
Part of the FDIC’s overall responsibility and authority to examine banks for
safety and soundness relates to compliance with the BSA, which requires
financial institutions to keep records and file reports on certain financial
transactions. FDIC-supervised institutions must establish and maintain
procedures to comply with BSA requirements. An institution’s level of risk
for potential terrorist financing and money laundering determines the
necessary scope of the BSA examination. In a related vein, the U.S.
Department of the Treasury’s Office of Foreign Assets Control (OFAC)
promulgates, develops, and administers economic and trade sanctions
such as trade embargoes, blocked assets controls, and other commercial
and financial restrictions under the provisions of various laws. Generally,
OFAC regulations prohibit financial institutions from engaging in transactions
with the governments of, or individuals or entities associated with, foreign
countries against which federal law imposes economic sanctions. A challenge
for the FDIC is to provide effective oversight of FDIC-supervised institutions’
compliance with BSA and OFAC regulations.
In its supervisory capacity, the FDIC also analyzes data security threats,
occurrences of bank security breaches, and incidents of electronic crime
that involve financial institutions. Despite generally strong controls and
practices by financial institutions, new methods for stealing personal data
and committing fraud with that data continue to emerge. The FDIC needs
to continue its work to ensure the security of customer data against such
criminal activity to help maintain the public’s trust and confidence in the
banking system.
Protecting and Educating
Consumers and Ensuring
Compliance Through Effective
Examinations, Enforcement,
and Follow-up
The FDIC protects consumers by overseeing a variety of statutory and
regulatory requirements aimed at safeguarding consumer privacy and
preventing unfair or deceptive practices involving FDIC-supervised
institutions. Through community outreach efforts and technical assistance,
the FDIC educates consumers and encourages lenders to work with
members of their local communities in meeting the communities’ credit
needs and to serve the unbanked and underbanked members of their
communities. Specific challenges include:
Safeguarding the Privacy of Consumer Information
The FDIC conducts periodic examinations to verify that institutions comply
with laws designed to protect personal information. The FDIC evaluates
the adequacy of financial institutions’ programs for securing customer
data and may pursue informal or formal supervisory action if it finds a
deficiency. As an added challenge, banks are increasingly using third-party
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servicers to provide support for core information and transaction processing
functions, and these servicers may operate domestically or abroad. The
obligations of a financial institution to protect the privacy and security of
customer information under U.S. laws and regulations remain in full effect.
Promoting Fairness and Inclusion in the Delivery of Information,
Products, and Services to Consumers and Communities
FDIC Chairman Bair has stressed the importance of economic inclusion and
has voiced concern that market mechanisms may not work as well as they
should for low-to-moderate income families who must often pay relatively
higher amounts for basic financial services that others obtain at far less
cost. Many people lack the financial skills needed to analyze and compare
products and their prices or to understand disclosures that describe a product
and its true costs. As the Chairman has pointed out, continuing dialogue
among consumer advocates, regulators, and the banking industry is key to
the challenge of closing the gap between what the unbanked and underbanked pay for credit and what those in the mainstream pay. An additional
challenge is to balance the need for regulation with undue interference in
legitimate business activities.
Ensuring Compliance with Laws and Regulations
and Follow-up on Violations
The FDIC’s compliance program, including examinations, visitations, and
follow-up supervisory attention on violations and other program deficiencies,
is critical to ensuring that consumers and businesses obtain the benefits
and protections afforded them by law. The compliance examination is the
primary means by which the FDIC determines the extent to which a financial
institution complies with more than 20 consumer protection laws and related
regulations. The FDIC also conducts Community Reinvestment Act (CRA)
examinations in accordance with the Community Reinvestment Act, a 1977
law intended to encourage insured banks and thrifts to help meet the credit
needs of the communities in which they are chartered to do business, including
low- and moderate-income neighborhoods, consistent with safe and sound
operations.
Additionally, the Real Estate Settlement Procedures Act of 1974 (RESPA)
is applicable to all federally-related mortgage loans, except for certain
types of loans that are exempted. Although overall authority for RESPA
compliance and enforcement remains with the Department of Housing and
Urban Development, the FDIC and other federal banking agencies examine
financial institutions for compliance. There is significant risk in this area due
to downturns in the residential real estate market, which could cause mortgage
lenders to be more aggressive in their lending practices; anticipation of large
restructuring and refinancing of nontraditional real estate loans in the near
future; and the need to determine whether financial institutions are providing
adequate disclosure to ensure consumers understand the types of real
estate loans they are obtaining.
As with risk management examinations discussed earlier, the changes that
the Chairman announced at the end of 2007 will have a definite impact on
the FDIC’s compliance examination activities as well and will pose new
challenges. Among those changes, the Chairman indicated that rules associated
with report of examination content would be eliminated and workpaper
requirements would be altered, with the report of examination becoming
the principal document of record.
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Visitations are an important means of reviewing the compliance posture of
newly chartered institutions coming under FDIC supervision or for following
up on an institution’s progress on corrective actions. Investigations are used
to follow up on a particular consumer’s inquiries or complaints. In instances
where repeat violations occur, the FDIC must remain vigilant in ensuring
appropriate corrective actions are taken.
Being Ready for Potential
Insured Institution Failures
The FDIC is responsible for the resolution of failed banks or savings
associations and needs to be ready for the resolution of any institution
that fails, regardless of size. The challenge is especially great if a large
and complex bank fails. By carefully managing the Deposit Insurance
Fund, the FDIC can protect insured depositors by using fund assets to
pay insured deposits at the time of institution failure. After a relatively
long period during which no banks failed, the FDIC was appointed receiver
of Metropolitan Savings Bank, Pittsburgh, Pennsylvania on February 2, 2007.
Metropolitan was the first FDIC-insured institution to fail since June 25, 2004.
Metropolitan’s failure was followed by two additional closings: NetBank, FSB,
Alpharetta, Georgia, a $2.2 billion Internet bank on September 28, 2007, and
Miami Valley Bank, a $92.6 million institution in Lakeview, Ohio, which
failed on October 4, 2007.
In total, the FDIC insures more than 8,560 commercial banks and savings
institutions, which together hold more than $12 trillion in assets. While
over 90 percent of U.S. banks and thrifts are small community-based
institutions, the 25 largest banking organizations hold about 71 percent of
the industry’s assets. Thus, the FDIC could face the challenge of handling
a failing institution with a significantly larger number of insured deposits
than it has had to in the past. In recent history, the largest number of
deposit accounts in a failed institution for which the FDIC had to make
an insurance determination was about 175,000 for NetBank, referenced
above. Today, however, some of the larger banks have more than 50 million
deposit accounts.
The Corporation’s ability to rapidly and accurately determine the insured
status of deposit accounts is essential to resolving bank failures in the
most cost-effective and least disruptive manner and preserving the
public’s confidence in the FDIC. To that end, the Corporation needs to
continue to explore new strategies and ensure corporate readiness to
handle failing and failed institutions, including large or multiple bank
failures. It needs to do so in light of past FDIC downsizing activities––
which could prove especially burdensome for current receivership and
resolutions staff; corresponding loss of institutional knowledge and
expertise; and the relative lack of recent experience with failed banks.
The FDIC is focusing on developing a strategy for closing a very large,
non-systemic bank. In that connection, the Corporation has conducted a
Strategic Readiness Simulation and plans others to simulate and stress
the FDIC’s decision-making processes, strategies, and planning for a large
bank failure. The FDIC also has an ongoing initiative to modernize the way
it determines the insurance status of depositors in the event of failure by
streamlining its business processes and modernizing the internal systems
used to facilitate a deposit insurance determination through improved use
of current technology. This includes developing and implementing a new
insurance determination system by 2009 called the Claims Administration
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System (CAS), which will provide an integrated solution that will meet
the current and future deposit insurance determination needs of the FDIC.
These are all positive steps, yet the Corporation faces significant challenges
in ensuring that it has the requisite resources and expertise to efficiently and
effectively resolve failed banks, completing contingency resolution plans,
and implementing the CAS system.
Promoting Sound Governance
and Managing and Protecting Human,
Financial, Information Technology,
Physical, and Procurement Resources
The FDIC must practice sound governance and risk mitigation practices
and effectively manage a number of critical strategic resources in order to
carry out its mission successfully, particularly its human, financial, information
technology (IT), physical, and procurement resources. A number of key
management activities pose challenges to corporate leadership and managers,
as discussed below:
Corporate Governance and Enterprise Risk Management
The FDIC is managed by a five-person Board of Directors, all of whom are
appointed by the President and confirmed by the Senate, with no more than
three being from the same political party. At least one Board member must
have State bank supervisory experience. The Board includes the Comptroller
of the Currency and the Director of the Office of Thrift Supervision. Given the
relatively frequent changes in the Board make-up, it is essential that strong
and sustainable governance and communication processes are in place
throughout the FDIC and that Board members possess and share the
information needed at all times to understand existing and emerging risks
and make sound policy and management decisions.
Enterprise risk management (ERM) is a key component of governance. The
FDIC’s numerous risk management activities need to consistently identify,
analyze, and mitigate operational risks on an integrated, corporate-wide basis.
Additionally, such risks need to be communicated throughout the Corporation,
and the relationship between internal and external risks and related risk
mitigation activities should be understood by all involved. To that end, the
FDIC plans to develop a more comprehensive blueprint to enhance
coordination among the various committees and groups that contribute
to ERM.
Human Capital Management
The FDIC has undergone significant restructuring and downsizing in response
to changes in the industry, technological advances, and business process
improvements and, as with many government agencies, the FDIC anticipates
a high level of retirement in the next 5 years. The Corporation needs to
continue to focus on ensuring that employees have the necessary skill sets
to address the issues confronting the FDIC now and into the future—
oftentimes issues that are extremely complex and technically challenging.
Further, with a large number of employees eligible to retire, succession
planning efforts are key to ensuring that institutional knowledge is
maintained and a new group of FDIC employees is well prepared to
carry out the corporate mission going forward.
In the interest of making the FDIC an employer of choice, increasing FDIC
employee engagement and empowerment, enhancing trust between FDIC
managers and employees, and refining the Corporation’s pay-for-performance
system, the Chairman of the FDIC spearheaded a comprehensive employee
survey that was carried out by an independent consulting group. The
Chairman is committed to effecting necessary changes based on the results
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of the survey, as evidenced by her announcement regarding improvements
to the pay-for-performance program for pay determinations that were due
in early 2008. In the upcoming months, many in the Corporation will be
challenged as they take steps to address the concerns and issues identified
in the employee engagement survey.
Finally, in an age of identity theft risks, another human capital management
challenge is to maintain effective controls to protect personal employee-related
information that the Corporation possesses. The appointment of a chief
privacy officer and implementation of a privacy program have been positive
steps in addressing that challenge. Further, the FDIC has established a
process for conducting privacy impact assessments of its information
systems containing personally identifiable information (PII) that is consistent
with relevant privacy-related policy, guidance, and standards. The FDIC is
making progress towards completing initiatives to safeguard its PII and
related systems consistent with privacy-related statutes, policies, and
guidelines. The FDIC recognizes that implementing effective measures
to protect PII will require a sustained effort.
Financial Management
As referenced above, the Deposit Insurance Fund totals $51.8 billion. Given
such magnitude, FDIC investment policies must require that these funds
be invested in accordance with applicable requirements and sound investment
strategies. The Board approved a $1.14 billion 2008 Corporate Operating
Budget, approximately 3.1 percent higher than for 2007. The FDIC’s
operating expenses are largely paid from the insurance fund, and consistent
with sound corporate governance principles, the Corporation must
continuously seek to be efficient and cost-conscious. The FDIC uses
its New Financial Environment to better manage and track costs across
the Corporation.
With respect to capital investments, effective planning and management
of information technology (IT) and non-IT capital investments are mandated
by Congress and by the Office of Management and Budget for most federal
agencies. Although many of these laws and executive orders are not legally
binding on the FDIC, the Corporation recognizes that they constitute sound
business practices and has decided to voluntarily adopt them in whole or
in part. The FDIC is taking steps to help ensure that approved investment
projects are executed on time and within budget, and that they realize
anticipated benefits.
Information Technology Management
To address IT management challenges, the FDIC must focus on the effectiveness
of the Chief Information Officer Council and Project Management Office,
both of which play an important role in reviewing the portfolio of approved IT
projects and other initiatives. FDIC processes in this area are at varying degrees
of maturity, and the Corporation has activities underway and planned to
further strengthen its processes to optimize IT capital investments. It must
continue to enhance its Enterprise Architecture (EA) program by identifying
duplicative resources/investments and opportunities for internal and external
collaboration to promote operational improvements and cost-effective
solutions to business requirements. Further, the FDIC should continue to
focus attention on improving cost estimation; building project management
skills; implementing project management process improvements related
to project planning, coordination, and reporting; and establishing procedures
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to ensure that post-project recommendations, best practices, and lessons
learned are integrated into the governance process. Making sound IT
business decisions while containing IT costs to the fullest extent possible
will continue to challenge corporate officials.
The establishment of an integrated and streamlined e-government infrastructure
is a key component of the Corporation’s target EA. In this regard, the
Corporation has initiated a number of major projects designed to improve
internal operations, communications, and service to members of the public,
business, and other government entities. The challenge is to ensure that
such projects are consistent with e-government principles and implementing
guidance from the Office of Management and Budget.
IT and Physical Security
The FDIC relies on automated information systems to collect, process, and
store vast amounts of banking and other sensitive information. Much of this
information is used by financial regulators, academia, and the public to monitor
bank performance, develop regulatory policy, and to research and analyze
important banking issues. Ensuring the integrity, availability, and appropriate
confidentiality of this information in an environment of increasingly sophisticated
security threats and global connectivity requires a strong records management
program and a correspondingly effective enterprise-wide information security
program. The Corporation has made significant progress in improving its
information security and privacy program and practices. However, as shown
in our annual evaluation under the Federal Information Security Management
Act, continued management attention is needed in certain key security
control areas. These include: access control; identification and authentication;
certification, accreditation, and security assessments; risk assessment;
personnel security; and audit and accountability.
The FDIC must be sure that its emergency response plans provide for the
safety and physical security of its personnel and ensure that its business
continuity planning and disaster recovery capability keep critical business
functions operational during any emergency. Threats to public health such
as a pandemic influenza could also put the Corporation’s internal emergency
preparedness to the test. In this regard, it is important that the Corporation
follow through on its planned completion of a Pandemic Influenza Preparedness
Plan by April 2008.
Procurement Management
According to the Corporation’s New Financial Environment data, the FDIC
had $1.52 billion in outstanding contracts as of December 31, 2007, and
awarded approximately $379 million in contracts during 2007. Over the past
few years, the FDIC has increased its reliance on outsourcing for services
such as IT infrastructure support, IT application system development, and
facilities maintenance. Additionally, the Corporation negotiated certain “nonfederal” employee benefits with the National Treasury Employees Union as
part of the 2006-2009 Compensation Agreement. The FDIC has established
agreements with benefits service providers to support its employee benefits
program. The Corporation has also downsized and reduced its contracting
staff over the same time frame, which has posed challenges to contract
administration activities. Given this environment, effective and efficient
processes and related controls for identifying needed goods and services,
acquiring them, and monitoring contractors after the contract award must
be in place and operate well. Such attention will serve the Corporation well
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as it plans for its 2009 reprocurement of IT infrastructure support services,
one of its largest procurements. Also, a number of new contracting vehicles
and approaches have been implemented requiring different oversight mechanisms
and strategies and increasing the need for the FDIC to complete revisions to
its acquisition policies that reflect the current procurement environment.
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Notes
136
Notes
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138
Cover Photograph and Book Design: FDIC/DOA/CSB/Graphic Design Unit
Federal
Deposit
Insurance
Corporation
2007
This Annual Report was produced
by talented and dedicated staff.
To these individuals, we would
like to offer our sincere thanks
and appreciation. Special recognition
is given to the following individuals
for their contributions:
Sam Collicchio
Pearline Crosland
Jannie F. Eaddy
Barbara Glasby
Patricia Hughes
Mia Jordan
Robert Nolan
Michelle Watson
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@FedFRASER