The FDIC continued its comprehensive review of the deposit insurance system
begun in 2000. In April 2001, the FDIC published a paper called Keeping
the Promise: Recommendations for Deposit Insurance Reform. These recommendations
were summarized in the FDICs 2000 Annual Report. Former Chairman
Donna Tanoue testified in favor of the recommendations in 2001 before
the House Financial Services Committees Subcommittee on Financial
Institutions and Consumer Credit on May 16 and before the Senate Committee
on Banking, Housing and Urban Affairs on June 20.
Chairman Donald Powell also has expressed full confidence
in the FDICs recommendations. On October 17, in testimony before
the same Subcommittee on Financial Institutions and Consumer Credit, Chairman
Powell added his thoughts on the deposit insurance reform recommendations:
First, the Bank Insurance Fund (BIF) and the Savings Association Insurance
Fund (SAIF) should be merged.
Second, the FDIC Board of Directors needs the flexibility to manage the
fund. At present, there are two statutorily mandated methods for managing
the size of the fund. One of these methods prohibits the FDIC from charging
premiums to well-capitalized, well-rated institutions when a funds
reserve ratio is at or above the 1.25 percent designated reserve ratio.
This method effectively prevents the FDIC from charging appropriately
for risk during good economic times. In 2001, for example, 92 percent
of banks and thrifts paid nothing for deposit insurance. The other method
can put undue pressure on the industry during an economic downturn because
it mandates a minimum of 23 basis point premiums unless the funds
reserve ratio returns to the 1.25 percent designated reserve ratio within
one year. Together, the two existing methods of managing the fund can
lead to volatile premiums. This makes the system pro-cyclical and could
require the FDIC to charge the highest premiums during difficult economic
times when the industry can least afford it. To correct these problems,
the FDIC in 2001 recommended to Congress that the Board have the discretion
Set the target size for the
fund ratio and determine how quickly to bring the fund back toward the
target. The current 1.25 percent target would be a reasonable starting
point for the target size.
Price deposit insurance according
to risk. Because all banks and thrifts pose some risk, all should pay
premiums, regardless of the funds level. Adjustments to the FDICs
current assessment system would be needed to allow the FDIC to properly
differentiate for risk. Whenever possible, the FDIC would use objective
factors to distinguish institutions and price for risk.
Give assessment credits or cash
rebates, if the fund grows too large, and levy surcharges in a crisis.
Chairman Powell expressed reluctance to mandate an initial cash payment
out of the fund, given the uncertain economic environment. He recommended,
instead, giving banks a credit toward future assessments. These credits
should be based on past contributions to the fund, not on the current
assessment base. This would avoid artificial incentives for growth and
provide the largest credits to those institutions that built the funds
to where they stand today. Going forward, newer institutions and fast-growing
institutions would also earn a right to share in the assessment credits
as they pay into the fund.
Third, the basic coverage level
of $100,000 need not be raised immediately, but should be indexed to maintain
its value. Chairman Powell suggested using the Consumer Price Index and
adjusting the limit every five years, beginning January 1, 2005. Adjustments
to the level should be in round numbers and the limit should not decline
if the price level falls. Congress should also consider raising the insurance
limit for Individual Retirement Accounts (IRAs) and Keogh accounts.
The FDIC will continue working
with Congress on these deposit insurance reform recommendations.
Reedy from the Division of Supervision's New York Regional Office
was among the more than 200 instructors preparing assistant bank
examiners to become commissioned examiners.
The four federal bank and thrift regulators amended the capital standards
for recourse arrangements, direct credit substitutes and residual interests
in asset securitizations. The final rule will ensure that the amount of
regulatory capital that institutions must hold against credit enhancements
and securitization positions will better match their relative exposure
to credit risk. It will also result in more consistent regulatory capital
treatment for securitization transactions involving similar risk. Among
the rules highlights is the use of external ratings for setting
risk-based capital requirements for most asset-backed and mortgage-backed
securities, and the establishment of new standards for residual interests,
a subordinated asset class that exposes institutions to a higher level
of credit risk than traditional bank assets. Transactions settling on
or after January 1, 2002, are subject to the new rule. Institutions have
until December 31, 2002, to apply the new rule to transactions that settled
before January 1, 2002.
To focus on technology risks that
may jeopardize a safe and sound banking environment, the FDIC is realigning
its supervisory strategies. During 2001, traditional financial services
continued to be altered by advances in Internet banking, online bill payment
and presentment, electronic funds transfers and other sophisticated technologies.
These advancements have allowed financial institutions to expand and enhance
customer service and take advantage of improved operational efficiencies.
However, the industrys growing reliance on technologies, particularly
the Internet, has changed the risk profile of the banking industry. Banks
especially are exposed to risks from technologies being misused by criminals.
The rapid growth of technology has dictated a need for improved monitoring
and risk assessment by the FDIC. As a result, the agency began several
strategic initiatives aimed at improving its approach to identifying,
assessing and monitoring technology risks, such as:
Developing ongoing risk assessment
and monitoring systems to be able to proactively identify technology
risks that impact the banking system;
Expanding mechanisms to effectively
communicate technology risk information to the FDIC workforce and to
the financial industry; and
Ensuring that examiners receive
advanced training and have state-of-the-art tools for focusing examination
efforts on technology risks, as required.
Finally, to improve and streamline
the examination process, the FDIC in 2001 initiated a major review of
examination and other supervisory methodologies. Five study groupssoliciting
input from within the FDIC and from other federal and state bank regulatorsevaluated
the examination process and policies, and came up with numerous recommendations.
One of the most significant recommendations was to revise the report of
examination to enhance the presentation of examination findings and focus
more on key risk areas. The revisions with implementing instructions were
completed in October 2001. A second recommendation was to enhance the
General Examination System (GENESYS) software, used in preparing the safety
and soundness report of examination, in order to improve, among other
things, data flow and the softwares compatibility with other systems.
This recommendation was implemented in the second quarter of 2002. Another
recommendation under review was to increase delegations of authority to
improve workflow through the FDICs regional offices.
In 2001, the FDIC continually looked toward technology advancements to
conduct its business more efficiently, primarily in terms of dealing with
bank examinations and open and closed institutions.
The FDIC has made significant progress
over the past few years improving its offsite monitoring systems to identify
evolving risks within the industry and at individual institutions. This
progress has been achieved by applying new technology and combining economists
expertise with examiners experience. Offsite monitoring, for example,
uses statistical models and screens to identify outliersinstitutions
with atypically high-risk profiles among those in the best-rated premium
category. It allows the FDIC to detect risk early to reduce vulnerabilities
to the insurance funds.
The FDIC also uses offsite monitoring
and risk data for a number of other supervisory and insurance purposes.
For example, risk data are reviewed by examiners as part of their pre-examination
activity. The FDICs Financial Risk Committee also uses risk data
in recommending reserve levels for the funds. To further improve FDIC
risk identification, a number of recommendations were made in 2001 including
improving and enhancing analysis of risks within large banking organizations
and de novo (new) institutions. These systems will also support the agencys
goal of improved pricing of deposit insurance premiums, which is included
in the FDICs April 2001 Keeping the Promise: Recommendations
for Deposit Insurance Reform.
For the first time, the FDIC in
2001 used the Internet to sell the deposits and assets of a failing institution.
This process marks a significant departure from the FDICs normal
procedure of selling the assets and deposits of failing institutions by
inviting several hundred potential bidders to a meeting near the failing
bank, and only those attending would then obtain the confidential information
necessary to complete the bidding process. The Internet was used for all
four failures in 2001.
First Alliance Bank and Trust Company,
Manchester, New Hampshire, with assets of $16.8 million, was the first
failing bank to be marketed by the FDIC on the Internet. Interested parties
were registered and given a unique password to gain access to a secure
Web site containing the confidential bidding information and materials.
Potential bidders avoided the time and expense of attending the bidders
meeting and had immediate and around-the-clock access to information about
the failing bank and the bidding process.
The largest failing institution
to be sold on the Internet was Superior Bank, FSB, Hinsdale, Illinois,
with total assets of $2.2 billion. Its assets and insured deposits were
transferred to a newly chartered savings bank (New Superior) and placed
into conservatorship under FDIC management. After marketing New Superior
on a secured Web site, the FDIC approved the sale of the branches and
deposits to Charter One Bank, FSB, Cleveland, Ohio. The vast majority
of New Superiors assets, however, were retained by the conservator
to be marketed later. The FDIC turned to the Internet to sell the bulk
of the assets, and as of early spring 2002, only about $550 million of
loans were left to sell.
With the success of selling failed
banks on the Web, the FDIC expanded the use of the Internet to include
selling the assets (primarily residential and commercial loans) from existing
receiverships. Potential investors are able to download encrypted loan
and payment information and then submit a sealed bid or participate in
a live electronic auction where all bidders can see the high bid and who
submitted it. The FDIC has been using these improved systems to attract
new potential bidders and increase competition, and thereby increase sales
prices for deposits and assets. Also, in an attempt to find the owners
of abandoned deposits that can accumulate at failed banks, the FDIC created
a Web page to allow users to search a database of unclaimed funds from
failed financial institutions. This page was launched in late August and
in the first six months of operations assisted 84 people in finding $264,212.
Enforcement and Other Related Legal Actions 1999-2001
Total Number of Actions Initiated
by the FDIC
8a for Violations, Unsafe/Unsound Practices or Condition
In its role of enforcing bank compliance with consumer protection laws
and educating bankers and consumers on banking-related issues, the FDIC
took a number of actions this year.
In July, the FDIC unveiled a significant initiativecalled Money
Smartto promote and facilitate financial education. The Money Smart
curriculum was specifically designed to help adults outside the financial
mainstream develop positive relationships with insured depository institutions.
The instructor-led program helps explain basic financial terms, products
and services. The FDIC developed a partnership with the U.S. Department
of Labor to make the Money Smart program available to more than 800 employment
centers, called One Stop Career Centers, and through financial institutions
and community-based groups. As of year-end, more than 5,000 orders for
the curriculum were filled, including requests from more than 2,000 financial
institutions. Money Smart has received outstanding reviews from bankers,
consumers and other participants. For instance, one graduate in California
who previously experienced serious credit problems said she wont
make those mistakes again because of the Money Smart program. Thank
you so much for helping me be money smart, not money stupid.
The FDIC joined the other federal banking agencies in a full review of
Community Reinvestment Act (CRA) regulations to evaluate the effectiveness
of major CRA revisions completed in 1995. The agencies want to determine
whether the 1995 evaluation standards have effectively emphasized performance
over process, promoted consistency in CRA evaluations, and eliminated
unnecessary burden. Through an Advance Notice of Proposed Rulemaking in
July 2001, the agencies also sought public comment on whether, and to
what extent, the CRA regulations should be revised. The FDIC received
almost 300 comments, which will be carefully considered in shaping future
Nelson Hernandez joined the FDIC's
Division of Compliance and Consumer Affairs to coordinate the agency's
national community reinvestment, community development and outreach
New requirements for financial institutions concerning the privacy of
consumer financial information took effect on July 1, 2001. The privacy
regulation (Part 332 of FDICs Rules and Regulations) implements
provisions of the Gramm-Leach-Bliley Act of 1999. The regulation requires
financial institutions to issue notices to consumers explaining their
privacy policies and, in some cases, provide consumers an opportunity
to opt out or say no to certain information-sharing
with third parties. The FDIC issued several significant pieces of guidance
to foster compliance with the new privacy requirements. For example, the
FDIC: published the Privacy Rule Handbook designed to help state
nonmember banks prepare for the July 1 mandatory compliance date; joined
the other federal banking regulatory agencies in distributing privacy
examination procedures; distributed an interagency CD-ROM to FDIC-supervised
institutions that included multimedia presentations on the privacy rule
and other privacy-related resources; and issued Frequently Asked
Questions, an interagency document covering almost every aspect
of the regulation.
To help banks and consumers understand their rights and responsibilities
under the new privacy regulation, the FDIC engaged in a variety of outreach
activities. Throughout the year, FDIC speakers appeared at trade association
conferences and meetings to discuss the new regulatory requirements, and
participated in interagency seminars for community bankers. The Corporation
also participated in an interagency public workshop held December 4 in
Washington, DC, discussing effective privacy notices. Articles designed
to answer consumers questions about privacy policies and opt-out
rights appeared in the Winter 2000/2001 and the Summer 2001 issues of
the quarterly newsletter FDIC Consumer News.
George Hanc (right), Chair of
the Research Committee supporting the Working Group on Deposit Insurancecomprising
representatives from 12 countries, the International Monetary Fund
and The World Bankand committee members (l to r) Rose Kushmeider,
Christine Blair and Detta Voesar.
As a member of the Financial Stability Forums Working Group on Deposit
Insurance, the FDIC contributes to global efforts to establish or improve
deposit insurance systems. The Financial Stability Forum was created in
1999 by the finance ministers and other officials of the G-7 industrial
nations as a way to promote international financial stability through
information exchange and international cooperation. The Working Group,
comprising representatives of 12 countries, the International Monetary
Fund and The World Bank, was established in 2000 to develop guidance for
countries seeking to establish or reform a deposit insurance system. In
2001, the FDIC chaired and provided staff to the research committee, which
assisted the Working Group in deliberating and developing guidance. FDIC
staff worked with finance ministers, bank regulators and deposit insurance
officials from various countries to develop and refine guidelines that
were flexible enough to be useful for countries with different banking
and legal systems. The Working Groups final report, Guidance
for Establishing Effective Deposit Insurance Systems, was presented
to the Financial Stability Forum in September 2001, and is available on
the FDICs Web site at www.fdic.gov.
The FDIC, as a member of the Basel
Committee on Banking Supervision, is continuing to work with U.S. and
foreign supervisors on developing a revised Capital Adequacy Framework
for internationally active banks. A revised Basel Capital Accord will
be more risk-sensitive in measuring the capital adequacy of internationally
active banks in the U.S. and overseas. The FDIC also served as technical
advisor to the U.S. Treasury Department on several global initiatives,
including developing anti-money-laundering programs. As part of its outreach
efforts, the FDIC designed a training program for foreign banking regulators
on bank supervision, deposit insurance and problem bank resolution.
The FDIC is taking the lead among
the bank regulatory agencies in implementing a new international standard
for exchanging financial data called Extensible Business Reporting Language
(XBRL). In 2001, the FDIC, as the regulatory chair of the international
financial reporting standards body developing XBRL, participated in three
international conferences to design a technical specification that can
significantly improve the precision and timeliness of financial reporting.
The FDIC is consulting with international accountancy, regulatory and
industry representatives and working to promote understanding about potential
uses of this financial data exchange standard.
Under Section 19 of the Federal Deposit Insurance 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 changes 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.
2 Amendments to Part 303 of FDIC Rules
and Regulations changed FDIC oversight responsibility in October 1998.
3 Section 24 of the FDI Act, in general,
precludes an insured state bank from engaging in an activity not permissible
for a national bank and requires notices to be filed with the FDIC.
Consumer Complaints and
The FDIC investigates and responds to consumer complaints of unfair or
deceptive acts or practices by financial institutions and allegations
that a bank has violated a consumer protection law or regulation. The
agency also responds to inquiries from consumers, financial institutions,
and other parties about consumer protection and fair lending matters and
In 2001, the FDIC received 4,141
written consumer complaints against state-chartered nonmember banks. The
agency tracks the volume and nature of complaints to monitor trends and
identify emerging issues. Nearly 60 percent of these complaints concerned
credit card accounts. The most frequent complaints involved billing disputes
and account errors, loan denials, credit card fees and service charges,
and collection practices.
The FDIC also received 3,024 written
inquiries from consumers and 390 written inquiries from bankers regarding
FDIC insurance and consumer protection issues. The Corporation received
more than 46,000 telephone inquiries related to deposit insurance. The
largest percentage of inquiries related to whether specific financial
institutions were insured by the FDIC and questions about deposit insurance
coverage. Other common inquiries were requests for copies of FDIC consumer
publications, questions about banking practices and consumers rights
under federal consumer protection laws, and matters related to obtaining
a personal credit report.
FDIC Reacts to the September 11 Terrorist Attacks
attacks against the United States on September 11, 2001, shook the country
and the world. Among the fallout, the tragedy jolted business and consumer
confidence, impairing economic activity in virtually every region of the
country. The banking industry and others near Ground Zerothe
site of the attacks on the World Trade Center towers in New Yorkresponded
with remarkable resiliency to maintain the continuity of the financial
system. What many Americans do not know is how the FDIC and other bank
regulatory agencies reacted during the crisis to ensure the continuity
of their operations and the stability of the banking system.
With the evacuation of the New
York Regional Office, located just six blocks from the World Trade Center,
the FDIC faced significant operational challenges, yet contingency planning
and interagency coordination enabled the FDIC to resume in a timely manner
all of its crucial business in New York from two satellite offices in
New Jersey. Interim contact information was posted on the FDICs
public Web site. The New York Regional Office reopened on September 17.
September 28, Chairman Powell visited the staff of the FDIC's New
York Regional Office in Manhattan to address their concerns following
the terrorist attacks on the World Trade Center just a few weeks
In the days and weeks following
the attacks, the New York staff actively monitored the operational and
financial condition of depository institutions in the region. FDIC headquarters
staff, along with the other federal banking regulators and the state chartering
authorities, monitored the attacks impact on the banking system,
particularly the payment settlement mechanisms. Immediate concerns about
the continued operations of affected institutions were constantly monitored,
and senior officials at the regulatory agencies were briefed daily until
crucial services for clearing and settling transactions were restored.
Liquidity concerns nationwide were monitored through daily conference
calls between the various regional offices of each of the agencies until
the situation had stabilized and concerns had been mitigated. In conjunction
with other bank regulators, the FDIC assessed the long-term impact of
these events on the U.S. banking industry. The FDIC also issued supervisory
guidance to the industry similar to guidance normally issued when natural
disasters occur, and encouraged FDIC-supervised institutions to cooperate
with law enforcement agencies in the investigation of terrorist activity.
Following the terrorist attacks,
economists and financial analysts in the eight FDIC regional offices worked
with their counterparts in Washington to stay abreast of regional and
national economic developments and to evaluate their likely effects on
the banking system. FDIC staff delivered a report to the FDIC Board of
Directors on October 9 detailing the effects on the banking industry up
to that time. A summary of that report was published in the FDICs
fourth quarter Regional Outlook. The third quarter 2001 edition
of the FDICs Quarterly Banking Profile, which provides a
comprehensive analysis of banking industry statistics and trends, included
the supplement How the Banking Industry Has Responded to Crises.
This piece chronicled the history of bank performance indicators during
previous historical periods of national and international crisis.
Womble, the FDIC's Chief of Disaster Preparedness, at the agency's
primary evacuation center, the Virginia Square facility in Arlington,
To support rebuilding in New York
and Washington following the terrorist attacks, the FDIC announced on
October 4 that it will give the banks it supervises credit under the Community
Reinvestment Act (CRA) when they lend for reconstruction. CRA has always
encouraged banks to lend and provide other services to the entire community
in which they do business, including low- and moderate-income neighborhoods.
The FDIC wanted to make it clear, however, that banks that lend and otherwise
support this rebuilding can expect to receive favorable consideration
for these efforts during CRA examinations.