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2001 Annual Report
Operations of the Corporation The Year in Review
In the face of a changing banking and financial services industry, in 2001 the FDIC continued to protect the insurance funds, financial institutions and the banking public. Among the highlights:
An overview of activity of the year follows.
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 to:
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.
to Emerging Risks
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:
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.
Technology to Operate More Efficiently
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.
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 actions.
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.
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.
Consumer Complaints 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
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.
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.
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.
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Last Updated 10/30/2002