Supervision and consumer protection are cornerstones of the FDIC’s efforts to ensure the stability of and public confidence in the nation’s financial system. The FDIC’s supervision program promotes the safety and soundness of FDIC-supervised insured depository institutions, protects consumers’ rights, and promotes community investment initiatives.
The FDIC’s strong bank examination program is the core of its supervisory program. As of December 31, 2008, the Corporation was the primary federal regulator for 5,116 FDIC-insured state-chartered institutions that are not members of the Federal Reserve System (generally referred to as “state non-member” institutions). Through safety and soundness, consumer compliance and Community Reinvestment Act (CRA), and other specialty examinations, the FDIC assesses an institution’s operating condition, management practices and policies, and compliance with applicable laws and regulations. The FDIC also educates bankers and consumers on matters of interest and addresses consumer questions and concerns.
During 2008, the Corporation conducted 2,416 statutorily required safety and soundness examinations, including a review of Bank Secrecy Act compliance, and all required follow-up examinations for FDIC-supervised problem institutions within prescribed time frames. The FDIC also conducted 1,826 CRA/compliance examinations (1,509 joint CRA/compliance examinations, 313 compliance-only examinations,4 and 4 CRA-only examinations) and 3,028 specialty examinations. All CRA/compliance examinations were also conducted within the time frames established by FDIC policy, including required follow-up examinations of problem institutions. The accompanying table compares the number of examinations, by type, conducted in 2006 – 2008.
FDIC Examinations 2006 – 2008
Safety and Soundness:
State Non-member Banks
State Member Banks
Subtotal – Safety and Soundness Examinations
Compliance - Community Reinvestment Act
Subtotal CRA/Compliance Examinations
Data Processing Facilities
As of December 31, 2008, there were 252 insured institutions with total assets of $159.4 billion designated as problem institutions for safety and soundness purposes (defined as those institutions having a composite CAMELS5 rating of “4” or “5”), compared to the 77 problem institutions with total assets of $22.2 billion on December 31, 2007. This constituted a 227 percent year-over-year increase in the number of problem institutions and a 618 percent increase in problem institution assets. In 2008, 67 institutions with aggregate assets of $383.3 billion were removed from the list of problem financial institutions, while 243 institutions with aggregate assets of $532.6 billion were added to the list of problem financial institutions. Washington Mutual, the single largest failure in history, with $307.0 billion in assets, was added to the list and resolved in 2008. The FDIC is the primary federal regulator for 170 of the 252 problem institutions.
During 2008, the Corporation issued the following formal and informal corrective actions to address safety and soundness concerns: 83 Cease and Desist Orders, one Temporary Cease and Desist Order, and 210 Memoranda of Understanding. Of these actions issued, 10 Cease and Desist Orders and 29 Memoranda of Understanding were issued based, in part, on apparent violations of the Bank Secrecy Act.
As of December 31, 2008, 140 FDIC-supervised institutions were assigned a “4” rating for safety and soundness and 30 institutions were assigned a “5” rating.
Of the “4”-rated institutions, 126 were examined in 2008, and formal or informal enforcement actions are in process or have been finalized to address the FDIC’s examination findings. Twenty eight “5”-rated institutions were examined and the remaining two were in the process of being examined in 2008, and completed in February 2009.
As of December 31, 2008, 16 FDIC-supervised institutions were assigned a “4” rating for compliance and no institutions were assigned a “5” rating. In total, nine of the “4”-rated institutions were examined in 2008; the remaining seven were examined prior to 2008 and involved either appeals or referrals to other agencies. These 16 institutions are under informal enforcement actions (three) or Cease and Desist Orders (six are final and six are in process), with one in process of appealing the examination. The Corporation has issued or is pursuing enforcement actions to address the examination findings for all 170 of the problem institutions for which it is the primary federal regulator. These actions include 159 Ceaseand Desist Orders and 11 Memoranda of Understanding.
Troubled Asset Relief Program’s Capital Purchase Program
The FDIC has worked with the Treasury Department to process applications for the Troubled Asset Relief Program’s (TARP) Capital Purchase Program (CPP). The TARP CPP, funded at $250 billion in 2008, is designed to strengthen the capital of financial institutions and enhance their ability to make credit available to consumers and businesses. (An additional $100 billion was forwarded to the AIG and auto industries.) All U.S. bank holding companies, banks, and thrifts are eligible to participate in the CPP by making an application to their primary federal regulator. The FDIC has processed 1,600 CPP applications from state non-member institutions. It is expected that all TARP CPP capital infusions will be completed by mid-2009.
Joint Examination Teams
The FDIC used joint compliance/risk management examination teams (JETs) to assess risks associated with new, nontraditional and/or high-risk products being offered by FDIC-supervised institutions. The JET approach recognizes that to fully understand the potential risks inherent in certain products and services, the expertise of both compliance and risk management examiners is required. In 2008, the FDIC used JETs within institutions involved in significant subprime or nontraditional mortgage activities; institutions affiliated with or utilizing third parties to conduct significant consumer lending activities, especially in the credit card area; institutions offering refund anticipation loans (RAL) products; and institutions for which the FDIC has received a high volume of consumer complaints or complaints with serious allegations of improper conduct by banks.
Large Complex Financial Institution Program
The FDIC’s Large Complex Financial Institution Program addresses the unique challenges associated with the supervision, insurance and potential resolution of large and complex financial institutions. With the challenges posed by economic and market developments in 2008, large institutions have been significantly affected. The FDIC’s ability to analyze and respond to risks in these institutions is of particular importance as they make up a significant share of the banking industry’s assets. The focus of the program is to ensure a consistent approach to large-bank supervision and risk analysis on a national basis and to provide a quick response to risks that are identified in large institutions. This is achieved through extensive cooperation with the FDIC regional offices, other FDIC divisions and offices, and the other banking and thrift regulators.
In 2008, the Large Insured Depository Institution (LIDI) Program implemented a comprehensive process to standardize data capture and reporting. Under this program, supervisory staff throughout the nation performs comprehensive quantitative and qualitative risk analysis of institutions with assets over $10 billion, or under this threshold at regional discretion. This information has been instrumental in providing the basis for supervisory actions, supporting insurance assessments and resolution planning.
Money Services Business Project
As part of the FDIC’s Money Services Business (MSB) Project, the FDIC continued to work on establishing information-sharing agreements with state authorities responsible for examining MSBs. The agreements allow for the exchange of information relating to MSB supervision and provide for a formal information-sharing process. The agreements were developed to limit regulatory redundancies by providing relevant supervisory information for MSB customers with banking relationships at FDIC-supervised financial institutions. Additionally, the agreements provide assistance to each agency in promoting opportunities to learn from the other’s industry expertise.
Minority Depository Institution (MDI) Activities
The FDIC continues to seek avenues for improving communication and interaction with MDIs, and responding to concerns. During 2008, the FDIC provided technical assistance to 54 MDIs on a broad range of topics, including strategies for addressing BSA deficiencies, strengthening budget processes, and revising and developing policies. The FDIC also held discussions on the de novo application process with prospective organizers of new minority banks.
In partnership with the Puerto Rico Bankers Association, the FDIC hosted a Compliance seminar in San Juan in December 2008. The seminar focused on pertinent compliance-related matters, including the Fair and Accurate Credit Transaction Act implementation, unfair and deceptive practices, and recent changes to the FDIC’s examination procedures.
In response to comments provided by MDIs, the FDIC launched a program for enhanced peer group reviews and comparisons, specifically targeted for MDIs. This custom peer report is designed to facilitate comparison of an institution’s performance with that of all MDIs that meet the FDIC’s definition, as well as all FDIC-insured institutions. The custom peer report contains earnings, capital, asset quality, and liquidity performance measures, which should assist MDIs in comparing performance against similar institutions.
In July of 2008, the FDIC hosted the third annual Interagency Minority Depository Institution National Conference in Chicago, Illinois. The theme of the conference was “Know Your Business, Grow Your Business.” The event drew over 250 attendees, representing an increase in participation of 47 percent from the previous year. In addition to presentations by senior officials from all federal banking regulatory authorities, industry experts and regulators, the program covered the state of the economy as it relates to mortgage markets, the current credit environment, and the process of bidding on distressed banks.
4 Compliance-only examinations are conducted for most institutions at or near the mid-point between joint compliance-CRA examinations under the Community Reinvestment Act of 1977, as amended by the Gramm-Leach-Bliley Act of 1999. CRA examinations of financial institutions with aggregate assets of $250 million or less are subject to a CRA examination no more than once every five years if they receive a CRA rating of “Outstanding” and no more than once every four years if they receive a CRA rating of “Satisfactory” on their most recent examination.
5 The CAMELS composite rating represents 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).