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1996 Annual Report


Chairman's Statement
For the Federal Deposit Insurance Corporation, 1996 was a year of accomplishment both in putting the problems of the past behind us and in preparing this Corporation for the future.

In the 1980s and early 1990s, the greatest banking crisis since the early 1930s dictated our actions, internally and externally. From 1980 through 1994, the men and women of the Corporation managed the failures of 1,617 banks, either by closing them or assisting them to stay open. As of the end of 1996, the FDIC had liquidated almost all of the $317 billion in assets that the failed banks held. As a result of its actions, the FDIC protected the deposits of tens of millions of Americans. Our goal is to achieve stability in the financial system, and the Corporation, in the banking crisis, achieved that goal with the dedication and professionalism that has characterized the FDIC since its creation three generations ago.

[Photo] Ricki Helfer, Chairman
Chairman Ricki Helfer


In the past two-and-a-half years, the Corporation has changed its focus to help banks stay open and serve their customers and communities. This new mission has required adjustments in how we supervise banks, how we use technology, and how we manage ourselves. In 1996, we were able to turn our full attention to our new mission after Congress in September addressed the last significant issue remaining from the banking and thrift crisis: capitalization of the Savings Association Insurance Fund (SAIF).

In capitalizing the SAIF, Congress repaired a structural defect in the deposit insurance system that threatened not only that insurance fund, but the strength of the deposit insurance system as well. The legislation assured Americans that their deposits would continue to be protected — that the words “insured by the FDIC” would continue to provide certainty in an uncertain financial world, as they have for three generations of Americans. Moreover, in capitalizing the SAIF and repairing its flaws, Congress gave the FDIC the freedom to look ahead to anticipate future problems for the banking industry, rather than simply to react when problems occur.

Conditions in the industry also gave the FDIC the freedom necessary to prepare for the future. In 1996, commercial banks earned a record $52.4 billion, exceeding $50 billion in annual earnings for the first time. Return on assets (ROA) at commercial banks averaged 1.19 percent. Average ROA—a basic yardstick of profitability—has exceeded one percent for the commercial banking industry for four consecutive years. Historically, an ROA of one percent or higher has marked superior performance in banking.

Only five banks insured by the Bank Insurance Fund (BIF) and one thrift insured by the SAIF failed in 1996. The BIF had net income of $1.4 billion in 1996, while the SAIF had net income of $5.5 billion for the year, primarily resulting from a one-time special assessment of $4.5 billion on SAIF members to fully capitalize the fund. At year-end, the BIF held $26.9 billion and the SAIF $8.9 billion, for a combined total of $35.8 billion, the largest reserves in FDIC history.

While we were working with Congress, the other bank regulators, and the Administration to address the problems of the SAIF, we continued to initiate and carry out significant reforms to prepare ourselves for the future.

In early 1996 we announced new efforts to monitor and assess existing and emerging risks at insured institutions, in part by developing a tiered-examination approach that targets the level of risk and risk management practices at specific institutions. The new efforts at risk assessment are designed to enhance the FDIC’s traditional approach so that we can respond to new and emerging risks more quickly and more effectively. As part of those new efforts, we began developing specific guidelines for examiners on how to factor relevant economic and other data into their risk evaluations of specific institutions. While full-scope examinations will continue to be performed, these guidelines will focus examiner resources into areas of a bank that present the most risk. Ultimately, the guidelines will cover 14 areas ranging from management of the loan portfolio to electronic banking.

We implemented similar examination procedures for interest rate risk in October. To assist bankers in preparing for examinations using the new guidelines on interest rate risk, we co-sponsored 10 seminars around the country with the Independent Bankers Association of America, providing training to the more than 1,000 bankers who participated.

A major source of data for our new approach to examinations is our newly created Division of Insurance, which achieved full-scale operations in 1996. The new division analyzes data we have collected, as well as economic and financial data from other public and private sources, to give the FDIC a comprehensive perspective on the industry and the trends that affect it. Along with its staff in Washington, the new division has analysts and economists in each of our eight regions to monitor regional and local trends and conditions.

As the year drew to a close, our economists began to circulate three draft papers on the causes of bank failures in the 1980s and early 1990s. These three papers, which would be presented at an FDIC symposium in January 1997, discussed the major findings of a systematic analysis we undertook two years ago on the causes of the 1,617 bank failures from 1980 through 1994. The report of our “History of the Eighties” project—to be published in late 1997—will tell us what went wrong in the 1980s and will give us a significant point of departure for future research and assessments of risk to the banking industry and to the deposit insurance funds.

Reflecting the heightened emphasis on risk assessment, the FDIC Board in December adopted the new interagency “CAMELS” rating system for assessing the soundness of financial institutions. Along with capital (C), asset quality (A), management (M), earnings (E), and liquidity (L), the banking agencies added a sixth component to the rating —“S” for sensitivity to market risk. In October, the FDIC also became the first federal banking agency to disclose the individual components of the composite rating to banks in order to inform management more precisely where improvements in performance are needed. In doing so, we were adopting the practice of several state bank supervisors. A dynamic dual banking system allows us to learn from each other.

Two years ago, the FDIC adopted the first corporate strategic plan in its history, as the first step in an effort to manage the Corporation the way a business is managed. To implement the goals of the strategic plan, the men and women of the FDIC developed an operating plan consisting of 189 short-term projects as of year-end. Of these projects, 85 were completed by the end of 1996, 32 were either merged into other projects or discontinued as unnecessary; 38 remained active at year-end and 23 were moved to business plans, the latest element in the FDIC planning process. Business plans are developed to cover day-to-day operations. Today, every division and office at the FDIC has a business plan, and no activity is budgeted—or paid for—unless it has been approved in the operating plan or in a business plan.

In initiating and carrying out reforms to improve the quality and effectiveness of our work, we have structured a decision-making process that promotes efficiency, and we have become more effective in anticipating and responding to change. As part of this effort, in 1996 we established a board-level Audit Committee to make certain that standards of sound financial management are met; we created an Office of Internal Control Management to assure that operational problems are discovered and addressed quickly; and we restructured our budget process to impose stronger overall financial accountability by linking budget decisions to planning.

In 1996 the FDIC also prepared for the future by making a commitment to leveraging technology to improve the quality and efficiency of our bank examinations, as well as to enhance our communications with the public.

During the year, our examiners began to use an automated system called ALERT that extracts loan information from bank databases and allows examiners to review the loan data offsite. ALERT reduces the amount of time that examiners spend transcribing data, time that they can use more productively in doing analyses. We have trained examiners from 29 state banking departments to use the ALERT system. In cooperation with the Federal Reserve System and the state bank supervisors, we also began developing an automated examination package called GENESYS, which will allow us to draw analytical data from either FDIC or Federal Reserve mainframes in a common form so that all our examiners can use it. We plan to have GENESYS completed and ready for use in the first quarter of 1998.

Our efforts to enhance communications with the public through technology in 1996 centered on a greatly expanded presence on the Internet. The Division of Research and Statistics at the end of the year began a new service on the FDIC’s Web site, an electronic Institution Directory (I.D.). This system provides significant financial information drawn from Call Report data for every insured bank and thrift institution in the country—11,452 as of year-end.

One example of our success in managing the Corporation the way that businesses are managed was the development in 1996 of a new, integrated financial information management system. The new system replaces 100 separate reporting systems and creates a single automated general ledger for all income and expense flows, a ledger that will be used to make more informed, and therefore better, managerial decisions in the future. Few other large government agencies have achieved this level of integration for their financial information systems.

In 1996, the FDIC also completed its transfer of staff and work from the Resolution Trust Corporation— in all, more than 2,000 employees and $7.7 billion in assets to be liquidated—with no disruptions in our operations at the FDIC.

As part of the new budgeting process, each of our divisions and offices justifies its staffing levels by workload, and 1996 saw continued dramatic reductions in the overall workload of the FDIC. The book value of assets in liquidation at the FDIC peaked in mid-1992 at $44.4 billion. As of year-end 1996, they stood at $8.7 billion—only one-fifth of the 1992 levels—despite $7.7 billion in Resolution Trust Corporation (RTC) assets transferred to the FDIC at the end of 1995, when the RTC sunset occurred. About $4.4 billion of the assets in liquidation on our books at year-end were those assets transferred from the RTC, with the remaining $4.3 billion representing assets from FDIC liquidations.

Staffing size correlates closely with expenses at the FDIC. In the aftermath of the banking crisis of the late 1980s and early 1990s, FDIC staffing peaked in mid-1993 at 15,611. It has been difficult, but necessary, to tell many employees who served the FDIC and this country well during the banking crisis that we no longer have jobs for them. We have sought to be as humane as possible in this process by offering generous cash buyouts, direct job placement assistance, and opportunities to compete for the limited number of jobs open in other parts of the Corporation. The FDIC has been and will continue to be exceedingly well served by the professionalism and dedication of its staff.

As of year-end 1996, staffing was down to 9,151, a reduction of 6,460 positions, or 41 percent from the peak, despite the approximately 2,000 RTC employees transferred to the FDIC in connection with the sunset of the RTC at the end of 1995. In 1996 alone, staffing declined by 2,705 or 23 percent. The level of downsizing we have experienced at the FDIC is largely unprecedented in government.

Most of the reduction since 1993 came from the Division of Resolutions and Receiverships (DRR), formerly the Division of Depositor and Asset Services (DAS) and the Division of Resolutions (DOR), before those two divisions were merged in December of 1996. The staff of those two divisions peaked at 6,966 in mid-1993, but their combined total declined to 1,819 as of year-end 1996.

The reduction in workload and staffing levels were accompanied by significant reductions in FDIC expenses, which peaked in 1993 at $2.003 billion. FDIC expenses in 1996 were $1.127 billion, not counting RTC-work related expenses of $579 million, which are covered by funds appropriated by the Congress.

By the end of the year 2000, we project that $1.5 billion in assets of failed financial institutions will need to be liquidated and the FDIC will have a total staff of approximately 6,600. None of the reductions in staff will come at the expense of bank safety and soundness. More than half of the staff projected for the year 2000 will be in our Division of Supervision and our Division of Compliance and Consumer Affairs, the FDIC’s examination divisions.

The FDIC is stronger today than it has ever been. Its financial resources are greater—and its range of expertise wider—than at any time in its history. In creating the FDIC, our government made a promise to the American people: they would have a haven of security and certainty in the uncertain financial world. We have kept the promise for three generations of Americans. Our parents and grandparents had faith in the Federal Deposit Insurance Corporation. Throughout 1996, we prepared ourselves well—operationally, managerially, and technologically—so that our children will find that they, too, can have faith in the promise of security that the FDIC offers.

Ricki Helfer
Chairman


Chairman Helfer left the agency on June 1, 1997. A successor had not been named so Vice Chairman Hove began a third term as Acting Chairman.


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