At year-end 1997, the FDIC was the primary
federal regulator of 5,561 state-chartered banks that are not members of the Federal
Reserve System and 565 state-chartered savings banks. The FDIC also had back-up
supervisory responsibility over the remaining 4,811 federally insured banks and savings
The Division of Supervision (DOS) leads the FDIC's supervisory efforts
through on-site examinations and off-site analyses. When DOS identifies excessive
risk-taking, it employs various corrective methods and it works closely with other
divisions to develop regulations and issue enforcement actions designed to prevent or
curtail imprudent activities that might otherwise result in significant losses to the
deposit insurance funds.
Assistant Director Chris Spoth of the
Division of Supervision helped get the
Case Manager Program up and running.
Taking the opportunity provided by the continued good health of
the banking industry in 1997, the FDIC implemented several initiatives to address changes
in the industry and provide a more dynamic supervisory approach to its mission. DOS
completed the development and implementation of new examination procedures, improved its
off-site monitoring capabilities and information systems, reorganized the supervisory
structure of its regional offices, staffed specialty areas to meet the challenges of the
future, and created a multi-divisional committee to oversee the Year 2000 remediation
process. The agency also initiated outreach programs on several emerging issues for
bankers and other regulators. These initiatives illustrated the FDICs continuing
commitment to improve efficiency throughout the organization and reduce regulatory burden
on the industry.
In 1997, the FDIC implemented several programs intended to improve the agencys
risk-assessment capabilities and to streamline examination and other supervisory
functions. DOS examiners began using the revised Uniform Financial Institutions Rating
System (UFIRS); a new system of risk-focused examination modules; and new examination
procedures that assess nondeposit investment products, electronic banking and Year 2000
readiness. The FDIC also devoted considerable resources to analyzing industry and economic
trends and the potential impact of these trends on the deposit insurance system.
Revisions to the Federal Financial Institutions Examination Council (FFIEC) Policy
Statement on the UFIRS became effective in January 1997. These revisions updated the CAMEL
(capital, asset quality, management, earnings, and liquidity) rating system to address
changes in the financial services industry and in supervisory policies that occurred since
the original rating system was adopted in 1979. The revised CAMEL system emphasizes the
quality of risk management practices and adds a sixth component-"S," for
sensitivity to market risk. The updated rating system also redefines the other five
components and highlights risks that may be considered when assigning component ratings.
The FDIC implemented risk-focused examination modules on October 1,1997. The uniform
procedures, developed jointly by the FDIC and the Federal Reserve in conjunction with the
Conference of State Bank Supervisors (CSBS), refine the examination process by dividing
tasks into a series of diagnostic modules that help identify a bank's greatest risks. The
modules employ a tiered approach that assists examiners in establishing an appropriate
examination scope and managing examiner resources. This structured risk assessment
approach focuses on a bank's risk management practices, thereby allowing examiners to look
beyond the static condition of a bank to how well it can respond to changing market
conditions given its particular risk profile. The Examiner Laptop Visual Information
System (ELVIS), an automated version of the diagnostic modules, was developed concurrently
with the new examination procedures. This software application helps to organize data and
comments, generates examination workpapers and allows information to be exported into the
report of examination.
In addition, the FDIC continued to develop and improve
other automation tools designed to make examinations more productive, efficient and
risk-focused. The Automated Loan Exami nation Review Tool (ALERT), which debuted in 1996,
was greatly improved in 1997. The new version, introduced in
June, not only gives examiners the ability to collect loan data from institutions
but also allows for a more refined selection of loans to be reviewed
through a sophisticated query function.The FDIC also continued to develop the General
Examination System (GENESYS), which will automate the preparation of the entire
examination report. When completed in 1998, the GENESYS software package will allow
examiners to access and analyze financial information and prior examination report data
electronically for use in the current examination report, incorporate data generated by
the ALERT and ELVIS programs, and better manage examination resources through automated
task assignments. These tools enable examiners to perform a significant portion of their
analysis off-site, thereby minimizing time spent in a financial institution. The FDIC has
worked closely with the Federal Reserve Board and the CSBS in developing these programs.
This cooperation has promoted consistency among the agencies and will further reduce
regulatory burden on state banks. For more information on other automated examination
programs (click here).
New examination procedures for non-deposit investment products were developed and implemented
during 1997. These revised procedures enable examiners to evaluate bank sales of products
such as mutual funds and annuities to retail customers, to identify any safety and
soundness concerns, and to streamline examinations. A new automated tracking system was
developed in conjunction with the new procedures to capture the results from examinations
and provide a clear analysis of banks' retail investment sales activities.
The FDIC has taken a leading role in recognizing and
responding to electronic banking developments, which present new risks and supervisory
issues to the financial system. As of year-end 1997, the FDIC had approved two
applications for banks that plan to operate solely through the Internet or other
electronic means. These applications present a number of complex issues relating to
business strategy, system security and geographic market. In 1997, the FDIC became the
first federal supervisor to develop and publish electronic banking examination guidelines.
These examination procedures focus on safety and soundness functions such as planning,
administration, internal controls, and policies and procedures. The procedures are
non-technical; they are designed with the flexibility to be applied to a wide range of
electronic banking activities. DOS also developed and began field-testing more technical
work programs that evaluate the safety of various operating systems and firewalls in 1997;
general distribution and use of these work programs will begin early in 1998. For more
information on electronic banking (click here).
In addition to refining programs that assess risk in individual institutions, the FDIC
has also developed several programs to better evaluate risks that affect either the
industry or groups of institutions with common geographic or business profiles. The
Division of Insurance (DOI) identifies and monitors emerging and existing risks in both
the financial services industry and the economy by drawing on a wide variety of internal
and external information sources. DOI has worked closely with DOS on several projects to
help examiners and case managers assess emerging risk exposure for individual institutions
as well as groups of institutions. One of these is the Regional Economic Conditions Report
for Examiners (RECON), which will provide timely, comprehensive regional economic data to
examiners through the FDIC's Intranet site. RECON, which is scheduled for release in 1998,
will serve as a valuable resource for examiners evaluating the potential impact of
external risks on an institution.
In 1997, the FDIC monitored a number of
significant trends, including the increase in credit card charge-off rates, the rise of
bankruptcy filings, the growth of home equity loans, the expansion of the subprime and
syndicated lending markets, and the growing concentration of commercial real estate loans
in certain markets. In addition, the agency analyzed industry underwriting standards by
having field examiners complete a questionnaire at the end of each examination. The
questionnaire helps identify material changes in underwriting standards for new loans and
the degree of risk in current lending practices. This system, which began in 1995,
provides an "early warning" mechanism to identify potential lending problems
that could eventually lead to an increase in bank failures.
practices remained sound overall in 1997, examiners noted a few trends that warrant closer
scrutiny in the future, such as an increase in speculative construction loans and a
general loosening of credit in some geographic regions.
In April 1997, the FDIC reorganized the structure and
risk-assessment programs of its regional offices to accommodate interstate branching and
consolidation. The case manager program consolidates under one FDIC regional office the
supervision and monitoring responsibilities for a group of related institutions regardless
of the number of regions in which subsidiary banks and branches operate (click here). This approach differs from the past,
when the risk assessment of banks and their affiliates was broken down by geographic
areas, sometimes resulting in more than one FDIC regional office supervising interstate
banking organizations. The new program more closely matches the level regional office
supervising interstate banking organizations. The new program more closely matches the
level of regulatory oversight with the level of risk an organization poses to the deposit
insurance fund. The case manager system helps the FDIC better understand the risks
presented by large banking organizations and reduces burden for bankers by designating a
single contact person for questions about applications and supervisory issues.
To address the growing complexity of the banking industry, DOS expanded the number and
variety of regional office specialists as part of its supervisory reorganization. In
addition to case managers, each regional office appointed experts in the areas of capital
markets, accounting, trust activities, information systems, fraud detection and
prevention, and internal information management.
The FDIC also was faced with the challenge of supervising an increasingly global
industry. Foreign banking organizations (FBOs) operating in the U.S. control nearly
one-fifth of the U.S. banking industry's asset base. DOS created an international branch,
which became operational and fully staffed in 1997, to monitor the activities of U.S.
banks operating abroad and foreign banks operating in the U.S. The international branch
also completes risk profiles of various countries whose banking systems are of potential
interest to the FDIC. DOS personnel are involved in numerous international supervisory
working groups, including the Basle Committee on Banking Supervision and the Interagency
Country Exposure Review Committee.
The FDIC is also working with the U.S. Department of the Treasury on information-sharing
initiatives with other industrialized nations as well as training programs for banking
supervisors in Asia and Latin America.
Examiner Michael Fullick from the Division of
Supervision's Indianapolis office instructs examiners on Year 2000 issues.
The potential inability of computer systems to accurately perform tasks using dates
beyond 1999 (the "Year 2000" problem) is a significant concern for the financial
services industry and its regulators.
The problem stems from many systems and programs using only two digits to designate the
year. Unless these programs are modified, computers may interpret "00" as the
year 1900 instead of 2000. Financial institutions are vulnerable to the Year 2000 problem
in a number of areas:
Data processing systems, including; mainframe, network and personal; computers, may be
unable to record; and process financial information; accurately.
Equipment such as automated teller; machines, vault locks, security; systems, elevators
and climate control systems may malfunction.
Data exchanges with business partners outside the financial institution, such as
transactions with correspondent banks, may be disrupted.
Credit quality issues could arise as borrowers encounter their own Year 2000
Corrupt data create the potential for fraud against the industry and its customers.
The FDIC is working with the other financial institution regulatory agencies to monitor
the potential risk to the insurance funds if institutions fail because of the Year 2000
problem. The FDIC has devoted significant resources to developing and implementing
programs designed to ensure that all FDIC-supervised financial institutions deal with the
problem. These efforts include industry awareness campaigns, a comprehensive examiner
training program, off-site and on-site Year 2000 reviews of all FDIC-supervised
institutions, and the creation of a centralized tracking system to manage the large volume
of data generated by the Year 2000 reviews.
To improve the industrys awareness,
the FDIC, in cooperation with the other federal and state supervisors, has taken steps to
highlight the importance of Year 2000 issues. During 1997, the FFIEC issued interagency
statements that provided detailed guidance on Year 2000 project management and outlined
the responsibilities of an institutions senior management and board of directors in
addressing business risks. The FDIC also began developing a public awareness campaign to
promote consumer awareness of the Year 2000 issue without creating unnecessary concern.
The campaign will encourage consumers to seek answers from their financial institutions
regarding potential disruptions to their accounts, while assuring depositors that their
accounts remain insured up to statutory limits. The FDIC in 1997 completed an initial
assessment of all the banks it supervises to determine their awareness of the Year 2000
problem and identify any corrective programs initiated. The agency will also conduct
on-site Year 2000 reviews of all FDIC-supervised institutions by June 1998; thereafter,
the FDIC, in conjunction with state authorities, will follow up with each institution at
least twice annually. Institutions that fail to adequately address the business risks
posed by the Year 2000 problem will be subject to supervisory action, including formal
enforcement action. The FDIC issued three such actions in 1997.
Additional information on
Year 2000 issues is available through the FDICs Internet site.
The FDIC continued to streamline its regulations and policies as mandated by the Riegle
Community Development and Regulatory Improvement Act of 1994 (CDRI). This effort was led
by FDIC Board member Joseph Neely and involved more than 300 employees. Throughout 1997,
FDIC staff worked diligently to develop and implement recommendations, which called for
the rescission or revision of 90 regulations and policy statements.
Perhaps the most important single achievement from these reviews was the proposal
to consolidate and simplify the FDICs application requirements. The revised
application procedures would streamline the processing of more than 90 percent of the
applications received by allowing most applications filed by well-managed,
well-capitalized institutions to be treated as notices. The proposed procedures will
result in significantly reduced processing times for all applications.
FDIC Director Joseph H. Neely spearheaded the
agency's efforts to reduce regulatory burden.
The FDIC also
proposed combining regulations governing activities and investments of insured state
nonmember banks and savings associations into a single regulation. The proposed changes
will allow institutions to engage in certain activities and make certain investments by
filing a notice with the FDIC rather than an application. The proposal should relieve
regulatory burden significantly without affecting safety and soundness because the FDIC
retains the ability to place restrictions on an activity or prohibit a particular
institution from engaging in the activity.
Other significant actions taken in 1997 as a result of the CDRI review included
Streamlining the FDIC's securities; registration and disclosure rules by
cross-referencing the Securities and Exchange Commission's regulations;
Increasing the flexibility of the FDICs audit regulations and policies, and
streamlining external auditing program procedures;
Revising disclosure regulations to make information more accessible to the public;
Simplifying reporting requirements for suspected criminal activity;
Proposing simplified deposit insurance rules; and
Proposing consolidation of regulations regarding international and foreign activities.
The FDIC, along with the other federal banking regulators, also worked to simplify
other reporting requirements for financial institutions. Effective March 31, 1997, the
FFIEC adopted generally accepted accounting principles (GAAP) as the reporting basis for
most Reports of Condition and Income (Call Reports), which financial institutions must
file quarterly with their primary federal supervisor. The adoption of GAAP as the
reporting basis for most Call Report schedules will eliminate the need for some
institutions to maintain two sets of books. The FDIC also published guidelines to assist
smaller institutions in preparing error-free Call Reports. This publication, along with
Call Report forms and instructions, is readily available from the FDIC's Internet site.
The FDIC has worked
diligently to establish and maintain open lines of communication regarding supervisory
matters with both the financial services industry and other regulators. FDIC
representatives routinely attend or participate in events sponsored by trade associations,
foreign and domestic regulatory agencies, as well as FDIC-sponsored outreach meetings. The
FDIC also serves as a chief source of public information on banking industry supervision
through a variety of publications and an extensive Internet site. Communication efforts
initiated or expanded in 1997 included:
Seminars on nondeposit investment products,conducted in collaboration with the
Independent Bankers Association of America and the American Bankers Association,
held across the country and attended by more than 1,000 bankers;
The Division of Insurances quarterly Regional Outlook publication, which
provides an in-depth discussion of trends that affect the financial services industry from
national and regional perspectives; and
Timely, useful and easily accessible information for bankers and the general public on
the FDICs Internet home page, located at www.fdic.gov.
For more information on the FDICs outreach efforts (click here).
Enforcement and Applications
DOS works closely with the Legal Division to initiate supervisory enforce-ment actions
against FDIC-supervised institutions and their employees. The FDIC initiated just 127
enforcement actions in 1997, nearly two-thirds of the 186 actions begun in 1996 and almost
one-third of the 338 actions initiated just five years ago. This indicates the continued
health and stability of the banking industry.
The trends of continued health and further consolidation of the industry also are evident in both the number and types of
applications processed by the FDIC. Nevertheless, merger applications continue to
outnumber new entrants by nearly two to one as the industry consolidates. Efforts to
reduce regulatory burden on the industry are also evident in the significantly lower volume of applications for
new branches and notifications of changes in directors and
officers. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 eliminated the need for institutions
to file branch applications for remote service facilities and narrowed the circumstances
under which institutions must notify the FDIC of changes in directors and senior executive