I. Management's Discussion and Analysis - The Year in Review In
FDIC continued to pursue an ambitious agenda in meeting its responsibilities.
Responding to the multiple hurricanes that occurred
this past year tested our readiness, but it also underscored the critical importance
of our core mission – maintaining stability of the nation's financial
system and public confidence in insured depository institutions.
Highlights of the Corporation's 2005 accomplishments in each of its
three major business lines – Insurance, Supervision and Consumer Protection,
and Receivership Management – as well as in its program support areas
are presented in this section.
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 funds.
Deposit Insurance Reform The FDIC again gave priority attention to enactment of comprehensive deposit
insurance reform legislation in 2005.
Both the House and the Senate passed separate deposit insurance reform bills
in 2005. These bills were included as part of S.1932 budget legislation reconciliation
that contained many provisions unrelated to reform.
The Senate took final action
on S. 1932 on December 21, 2005, passing the measure by voice vote. On February
1, 2006, the House cleared the bill for
action by the President by a vote of 216 to 214. The President signed the bill
into law on February 8, 2006. The Federal Deposit Insurance Reform Act of 2005,
contained in S. 1932, includes the major provisions of the FDIC's deposit
insurance reform proposals. H.R. 4636, the Deposit Insurance Reform Conforming
Amendments Act of 2005, contains the necessary technical and conforming changes
to implement deposit insurance reform. H.R. 4636 was passed by the House and
Senate in December 2005, separately from S. 1932. Specifically, together S.
1932 and H.R. 4636 would:
Merge the Bank
Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) into
a new fund,
the Deposit Insurance Fund (DIF), effective no
later than July 1, 2006.
Establish a range for the designated reserve ratio of 1.15 percent to
Allow the FDIC to manage the pace at which the reserve ratio varies within
this range. (However, if the reserve ratio falls below 1.15 percent—or
is expected to within 6 months—the FDIC must adopt a restoration plan
that provides that the DIF will return to 1.15 percent within 5 years.)
Eliminate the connection between designated reserve ratio (DRR) and premium
rates and grant the FDIC's Board of Directors the discretion to price
deposit insurance according to risk for all insured institutions at all times.
Mandate rebates to the industry of half of any amount above the 1.35 percent
level, unless the FDIC's Board of Directors, considering statutory factors,
suspends the rebates.
Mandate rebates to the industry of all amounts in the fund above the
1.50 percent level.
Grant a one-time initial assessment credit (of approximately $4.7 billion)
to recognize institutions' past contributions to the fund.
Increase the coverage limit for retirement accounts to $250,000.
Index this limit and the general deposit insurance coverage limit to
inflation and allow the FDIC (in conjunction with the National Credit Union Administration)
to increase the limits every five years beginning January 1, 2011, if warranted.
Implementation of deposit insurance reform will be one of the FDIC's
main priorities for 2006.
International Capital Standards The FDIC, as insurer, has a substantial interest in ensuring that bank capital
regulation effectively serves its function of safeguarding the federal bank
safety net against excessive loss. During 2005, the FDIC participated on 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 standards and establishing sound policy and procedures for implementing
The BCBS, jointly with the International Organization of Securities Commissions
(IOSCO), published The Application of Basel II to Trading Activities and
the Treatment of Double Default Effects in July 2005. The document sets forth new
capital treatments for over-the-counter derivatives and short term, repo-style
transactions, hedged exposures, trading book exposures, and failed securities
Ensuring the adequacy of
insured institutions' capital under Basel II
remains a key objective for the FDIC. In 2005, the FDIC devoted substantial
resources to domestic and international efforts to ensure these new rules are
designed appropriately. These efforts included the continued development of
a notice of proposed rulemaking (NPR) and examination guidance, which is intended
to provide the industry with regulatory perspectives for implementation. Additionally,
the fourth quantitative impact study (QIS-4), which was begun in 2004 to assess
the potential impact of the Revised Framework on financial institution and
industry-wide capital levels, was completed. The QIS-4 findings suggested that,
without modification, the Basel II framework could result in an unacceptable
decline in minimum risk-based capital requirements. As a result, on September
30, 2005, the domestic bank and thrift regulatory authorities issued a joint
press release stating that while they intend to move forward with the Basel
II NPR, prudential safeguards must be incorporated into the Basel II framework
to address the concerns created by the QIS-4 findings. FDIC-supervised institutions
that plan to operate under the new Basel Capital Accord are making satisfactory
progress towards meeting the expected requirements.
Domestic Capital Standards The FDIC led the development of efforts to revise the existing risk-based
capital standards for those banks that will not be subject to Basel II. These
efforts are intended to: (a) modernize the risk-based capital rules for non-Basel
II banks to ensure that the framework remains a relevant and reliable measure
of the risks present in the banking system, and (b) minimize potential competitive
inequities that may arise between banks that adopt Basel II and those banks
that remain under the existing rules. An Advance Notice of Proposed Rulemaking
reflecting these efforts was published in October 2005, with a comment period
extended to January 2006. These revisions are currently anticipated to be finalized
by domestic bank and thrift regulatory authorities in 2007 for implementation
in January 2008.
Regulatory Burden Reduction Initiatives The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA)
requires the banking agencies to solicit public comments to identify outdated
or burdensome regulations, review the comments, and publish a summary in the
Federal Register. The agencies must also eliminate unnecessary regulations
to the extent appropriate. Finally, the Federal Financial Institutions Examination
Council must report to Congress the significant issues and the merit of the
issues raised during the public comment period and provide an analysis of whether
the agencies are able to address the issues by regulation or whether the burdens
must be addressed by legislative action.
During 2005, the agencies published two notices in the Federal Register seeking
comments on 56 regulations covering Money Laundering; Safety and Soundness;
Securities; Banking Operations; Directors, Officers and Employees; and Rules
of Procedure; a total of 155 letters were received. Since June 2003, the agencies
have issued five separate Requests for Burden Reduction Recommendations on
a total of 127 regulations. More than 900 comments were received in response
to those requests for comment. They are being analyzed by staff to determine
the feasibility of implementing the recommendations. All of the comment letters
received to date are available on the EGRPRA Web site at www.EGRPRA.gov.
The agencies, as part of the EGRPRA initiative to gather recommendations on
regulatory burden reduction, held three outreach meetings with bankers in Phoenix,
New Orleans and Boston; two meetings with community groups in Boston and Washington,
DC; and three joint banker-community group meetings in Los Angeles, Kansas
City and Washington, DC. Significant issues have been raised and the agencies
are in the process of weighing the issues.
The major success of the EGRPRA project to date is that the agencies, the
industry and consumer groups were able to have an open dialogue about regulatory
burden. Over 180 legislative proposals for regulatory relief were presented
to Congress through testimony by the agencies, the industry and consumer advocates.
Moreover, effective September 1, 2005, the FDIC, the Office of the Comptroller
of the Currency (OCC), and the Federal Reserve Board (FRB) made changes to
their uniform joint CRA regulations that will provide regulatory relief for
smaller community banks and – at the same time – preserve the importance of community
development in the CRA evaluations of these banks.
Additionally, the FDIC conducted a comprehensive review of its International
Banking Rules. The revised rules, which became effective July 1, 2005, amend
Parts 303, 325 and 327 relating to international banking and revise Part 347,
Subparts A and B. As a result:
The rules were
reorganized and clarified to reduce regulatory burden.
The availability of general consent for foreign branching and investments
by insured state nonmember banks abroad was expanded.
The "fixed" percentage asset pledge requirement for existing insured
U.S. branches of foreign banks "grandfathered branches" was replaced
by a risk-focused asset pledge requirement.
The relocation rule for grandfathered branches was amended to address
intrastate and interstate relocations.
Center for Financial Research The
FDIC's Center for Financial Research (CFR) was established in 2003
to promote and support innovative research on topics relating to deposit insurance,
the financial sector, prudential supervision, risk measurement and management,
and regulatory policy that are important to the FDIC's roles as deposit
insurer and bank supervisor. The CFR is a partnership between the FDIC and
the academic community with prominent scholars actively engaged in administering
its research program. The CFR carries out its mission through an agenda of
research, analysis, forums and conferences that encourage and facilitate an
ongoing dialogue that incorporates industry, academic and public-sector perspectives.
The CFR supports high-quality original research by sponsoring relevant research
program lines and soliciting rigorous analysis of the issues within six program
areas (Deposit Insurance, Credit and Market Risk, Bank Performance and the
Economy, Corporate Finance and Risk Management, Consumer Finance and Credit
Issues and Policy and Regulation). These programs benefit from the leadership
of program coordinators who are drawn largely from the outside academic community.
Input is also obtained from six prominent economists who serve as Senior Fellows.
The CFR sponsors a Visiting Research Fellows Program to provide support for
in-residence scholars for defined time periods. The CFR also organizes visits
and encourages interaction and collaboration between outside scholars and FDIC
staff on subjects of mutual interest.
The CFR co-sponsored two
premier research conferences during 2005. The fifteenth annual Derivatives
and Risk Management Conference, co-sponsored
by the FDIC, Cornell University's Johnson Graduate School of Management,
and the University of Houston's Bauer College of Business, was held in
April 2005. The CFR and The Journal for Financial Services Research (JFSR) sponsored their fifth annual research conference, "Financial Sector Integrity
and Emerging Risks in Banking," in September 2005. Both conferences included
high-quality presentations and attracted more than 100 researchers, including
both domestic and international participants. Fourteen CFR Working Papers have
been completed on topics dealing with risk measurement, capital allocation,
or regulations related to these topics. The CFR Senior Fellows met in June
to discuss ongoing CFR research on Basel II and payday lending, and to discuss
CFR activities for the coming year.
FFIEC Central Data Repository The FFIEC Central Data Repository (CDR) was successfully implemented on October
1, 2005. The CDR is designed to consolidate the collection, validation and
publication of quarterly bank financial reports. This multi-year development
effort was undertaken by the FDIC, the FRB and the OCC, and in cooperation
with the Call Report software vendors and the banking industry. The CDR employs
new technology that uses the XBRL (eXtensible Business Reporting Language)
data standard to streamline the collection, validation and publication of Call
Report data. Over 8,000 financial institutions were enrolled in the CDR and
used it to file their financial reports for the third quarter of 2005. The
initial quality of the data was much higher than in previous quarters, speeding
the availability of the data to our analysts and ultimately the public and
fulfilling one of the overarching goals of the CDR project. Higher data integrity,
accuracy and consistency will help to increase the efficiency with which the
data can be collected, analyzed and released to the public.
In September 2005, the
OCC, FRB and the FDIC requested comments on proposed revisions to the Call
representing the first set of revisions to the
report content since 2002. The proposed changes would affect banks of all sizes
and would take effect as of the March 31, 2006, report date. The proposed revisions
would enhance the agencies' on- and off-site supervision activities,
which should alleviate overall regulatory burden on banks.
Risk Analysis Center The Risk Analysis Center (RAC) established in 2003 to provide information
about current and emerging risk issues is guided by its Management and Operating
Committees - represented by the Division of Supervision and Consumer Protection,
the Division of Insurance and Research and the Division of Resolutions and
Receiverships. These Committees oversee and coordinate risk-monitoring activities
that include presentations and reports regarding risk issues, and special projects.
The activities in the RAC are guided by the National Risk Committee, which
is chaired by the Chief Operating Officer. Major projects in-process or completed
for 2005 include the following: Evaluation of Operational and Reputation Risk,
Mortgage Credit Trends Analysis, Enhancing the Effectiveness of the Regional
Risk Committee Process, Quantification of Bank Vulnerability to Rising Interest
Rates, Hedge Funds, Market Data Repository, Offsite Monitoring, and Collateralized