The year 2008 proved to be an extremely busy time for the FDIC. In addition to the normal course of business, the Corporation had a major role in creating and implementing government initiatives associated with the Temporary Liquidity Guarantee Program (TLGP) and the Troubled Asset Relief Program. Also, additional resources were needed in response to the increased workload resulting from resolving numerous bank failures. The FDIC continued its work on high-profile policy issues and 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. The FDIC continued expansion of financial education programs with the creation of Money Smart for young adults. The FDIC also sponsored and co-sponsored major conferences and participated in local and global outreach initiatives.
Highlighted in this section are the Corporation’s 2008 accomplishments in each of its three major business lines – Insurance, Supervision and Consumer Protection, and Receivership Management – as well as its program support areas.
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.
Temporary Liquidity Guarantee Program
On October 13, 2008, the Secretary of the Treasury, in consultation with the President and acting upon the recommendations of the FDIC Board of Directors and the Board of Governors of the Federal Reserve System, made a systemic risk determination under section 13(c)(4)(G) of the Federal Deposit Insurance Act (FDIA). The next day, the FDIC announced and implemented the Temporary Liquidity Guarantee Program. The TLGP consists of two components: an FDIC guarantee of certain newly issued senior unsecured debt (the debt guarantee program) and an FDIC guarantee in full of non-interest bearing transaction accounts (the transaction account program). Coverage under both components of the TLGP was provided without charge to all eligible entities for the first 30 days.
After issuing an interim final rule on October 23, 2008, the FDIC received more than 700 comments. Based on those comments, the FDIC made several significant changes to the final rule, which the FDIC adopted on November 21, 2008.
The final rule provided that, under the debt guarantee program, the FDIC will guarantee in full, through maturity or June 30, 2012, whichever comes earlier, senior unsecured debt issued by a participating entity between October 14, 2008, and June 30, 2009, up to a maximum of 125 percent of the par value of the entity’s senior unsecured debt that was outstanding as of the close of business September 30, 2008, and that was scheduled to mature on or before June 30, 2009. Banks, thrifts, bank holding companies, and certain thrift holding companies were eligible to participate. In a change from the original terms of the debt guarantee program, the final rule excluded, effective December 5, 2008, all debt with a term of 30 days or less from the definition of senior unsecured debt.
The final rule also provided that, under the transaction account program, the FDIC will guarantee in full all domestic noninterest-bearing transaction deposit accounts held at participating banks and thrifts through December 31, 2009, regardless of dollar amount. The guarantee also covers negotiable order of withdrawal accounts (NOW accounts) at participating institutions — provided the institution commits to maintaining interest rates on the account at no more than 0.50 percent — and Interest on Lawyers Trust Accounts (IOLTAs) and functional equivalents.
The final rule required all institutions to elect whether or not to participate in one or both of the two components of the TLGP by December 5, 2008. As of December 31, 2008, approximately 56 percent of all eligible entities had opted in to the Debt Guarantee Program. Approximately 87 percent of FDIC-insured institutions opted in to the Transaction Account Guarantee Program.
The TLGP does not rely on the taxpayer or the Deposit Insurance Fund to achieve its goals. Participantsin the program must pay assessments for coverage. If fees do not cover costs in the TLGP, the FDIC will impose a special assessment under the systemic risk provisions of the Federal Deposit Insurance Act.
Restoration Plan and Rulemaking on Assessments
Recent and anticipated bank failures significantly increased Deposit Insurance Fund losses, resulting in a decline in the reserve ratio. As of December 31, 2008, the reserve ratio stood at 0.36 percent, down from 0.76 percent at September 30, and 1.01 percent at June 30, and 1.19 percent as of March 31.
On October 7, 2008, the FDIC Board adopted a restoration plan to raise the reserve ratio to at least 1.15 percent within five years and a proposed rule that would raise assessment rates beginning January 1, 2009, and make other changes to the assessment system effective April 1, 2009. The other changes were primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments. On December 16, 2008, the Board adopted a final rule raising assessment rates for the first quarter of 2009. On February 27, 2009, the Board amended the restoration plan to extend its horizon from five years to seven years due to extraordinary circumstances. It also adopted a final rule setting rates beginning the second quarter of 2009 and making other changes to the risk-based pricing system.
Rates for the First Quarter of 2009
On December 16, 2008, the FDIC adopted a final rule raising risk-based assessment rates uniformly by seven basis points for the first quarter 2009 assessment period. The higher revenue will be reflected in the fund balance as of March 31, 2009. Assessment rates for the first quarter of 2009 will range from 12 to 50 basis points. Institutions in the lowest risk category — Risk Category I — would pay between 12 and 14 basis points.
Changes to Risk-Based Assessments Effective the Second Quarter of 2009
Effective April 1, 2009, the final rule adopted on February 27, 2009, widens the range of rates overall and within Risk Category I. Initial base assessment rates will range between 12 and 45 basis points — 12 to 16 basis points for Risk Category I. The initial base rates for risk categories II, III, and IV will be 22, 32 and 45 basis points, respectively. An institution’s total base assessment rate may be less than or greater than its initial base rate as a result of additional adjustments (discussed below). For Risk Category I, total base assessment rates may be as low as seven basis points or as high as 24 basis points. A Risk Category IV institution could have a total base assessment rate as high as 77.5 basis points.
Large Risk Category I Institutions
Beginning in the second quarter of 2009, the assessment rate for a large institution with a debt rating would depend on (1) long-term debt ratings, (2) the weighted average CAMELS1 component rating, and (3) the rate determined from the financial ratios method, the method used for smaller banks. Each of the three components would receive a one-third weight. The maximum amount of the rate adjustment for large banks based on additional information about risks will be increased from ½ basis point to one basis point.
Distribution of Institutions and Domestic Deposits Among Risk Categories:
Quarter Ending December 31, 2008
(Dollars in billions)
Annual Rate in Basis Points
Number of Institutions
Percent of Total Institutions
Percent of Total Domestic Deposits
I - Minimum
I - Middle
5.01 - 6.00
I - Middle
6.01 - 6.99
I - Maximum
Note: Institutions are categorized based on supervisory ratings, debt ratings and financial data as of December 31, 2008. Rates do not reflect the application of assessment credits. Percentages may not add to 100 percent due to rounding.
The FDIC anticipates that incorporating the financial ratios method into the large bank method assessment rate would result in a more accurate distribution of initial assessment rates and in timelier assessment rate responses to changing risk profiles, while retaining the market and supervisory perspectives that debt and CAMELS ratings provide.
For institutions in Risk Category I, the financial ratios method will include a new financial ratio that may increase the rate of an institution relying significantly on brokered deposits to fund rapid asset growth. This will only apply to institutions with brokered deposits (less reciprocal deposits)2 of more than 10 percent of domestic deposits and cumulative asset growth of more than 40 percent over the last four years, adjusted for mergers and acquisitions. For institutions in risk categories II, III, or IV, the FDIC proposes to increase an institution’s assessment rate above its initial rate if its ratio of brokered deposits to domestic deposits is greater than 10 percent, regardless of the rate of asset growth. Such an increase would be capped at 10 basis points.
For institutions in any risk category, assessment rates will rise above initial rates for institutions relying significantly on secured liabilities. Assessment rates will increase for institutions with a ratio of secured liabilities to domestic deposits of greater than 25 percent, with a maximum increase of 50 percent above the rate before such adjustment. Secured liabilities generally include Federal Home Loan Bank advances, repurchase agreements, secured Federal Funds purchased, and other secured borrowings.
Unsecured Debt and Tier I Capital
Institutions will receive a lower rate if they have long-term unsecured debt, including senior unsecured and subordinated debt with a remaining maturity of one year or more. For a large institution, the rate reduction would be determined by multiplying the institution’s long-term unsecured debt as a percentage of domestic deposits by 40 basis points. The maximum allowable rate reduction would be five basis points. For a small institution (those with less than $10 billion in assets), the unsecured debt adjustment would also include a certain amount of Tier I capital. The percentage of Tier I capital qualifying for inclusion in the unsecured debt adjustment gradually increases for greater amounts of Tier 1 capital exceeding five percent Tier 1 leverage ratio threshold.3
Center for Financial Research
The Center for Financial Research (CFR) was founded by the Corporation in 2004 to encourage and support innovative research on topics that are important to the FDIC’s role as deposit insurer and bank supervisor. During 2008, the CFR co-sponsored three major research conferences.
The 18th Annual Derivatives Securities and Risk Management Conference, which the FDIC co-sponsored with Cornell University’s Johnson Graduate School of Management and the University of Houston’s Bauer College of Business, attracted over 100 researchers from around the world. Conference presentations focused on technical and mathematical aspects of risk measurements and securities pricing, and included several presentations on Basel II related topic.
The CFR and The Journal for Financial Services Research (JFSR) hosted the eighth Annual Bank Research Conference — with over 100 attendees. The conference included the presentation of six papers and focused on issues in securitization and credit risk transfer.
The CFR and the Federal Reserve Bank of Cleveland co-sponsored the “Identifying and Resolving Financial Crises” conference in April 2008. Papers were presented and discussed on topics including the theory and evidence on the resolution of financial firms, identifying policies that lead to contagion or correlated risk, and contingency planning for crises.
Growing concerns surrounding the weakening global economy made 2008 a significant and active year for the FDIC’s international activities. The failure of Northern Rock in the United Kingdom in February 2008 began an upward trend in FDIC consultations with foreign governments considering developing, modernizing, or otherwise strengthening their deposit insurance systems. Efforts included arranging and conducting training sessions, technical assistance missions and foreign visits, leadership roles in international organizations and participating in bilateral consultations with foreign regulators.
With FDIC’s Vice Chairman as President of the International Association of Deposit Insurers (IADI) and Chair of the IADI Executive Council, the FDIC had a critical role in fulfilling IADI’s mission throughout the year. In October 2008, the FDIC hosted the seventh annual IADI Conference and Annual General Meeting. The conference themes, Financial Stability and Economic Inclusion, provided an excellent platform for over 250 distinguished presenters and guests from 60 countries to discuss the issues facing global banking and the economy and what steps can be taken by deposit insurers to promote financial stability and inclusion around the world.
In its continuing commitment to fostering sound banking in China, the FDIC and the People’s Bank of China co-sponsored a seminar on rural finance held at the FDIC’s Dallas Regional Office. The seminar provided 55 participants from both countries, including rural finance experts in banking, financial regulation, and academia, with an opportunity to share experiences and engage each other in a dialogue on the challenges, best practices, and innovations in rural finance in their countries today. The FDIC also traveled to China to participate in the U.S.-China Bilateral Bank Supervisors meetings, hosted by the China Banking Regulatory Commission (CBRC).
1 The CAMELS component ratings represents either 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).
2 Certain deposits that an insured depository institution receives through a deposit placement network on a reciprocal basis would be excluded from the adjusted brokered deposit ratio in Risk category I. They would not be excluded, however, from the brokered deposit adjustment applicable to risk categories II, III, and IV.
3 For a Tier 1 leverage ratio between 5 percent and 6 percent, 10 percent of Tier 1 capital within this range would qualify for the unsecured debt adjustment; for a Tier 1 leverage ratio between 6 percent and 7 percent, 20 percent of Tier 1 capital within this range would qualify; for a Tier 1 leverage ratio between 7 percent and 8 percent, 30 percent of Tier 1 capital within this range would qualify; and so forth. Thus, all Tier 1 capital above a 14 percent leverage ratio would qualify for inclusion in the unsecured debt adjustment.