FDIC: Advisory Committee on Banking Policy

Minutes

of

The Meeting of the FDIC Advisory Committee on Banking Policy

of the

Federal Deposit Insurance Corporation

Held in the Board Room

Federal Deposit Insurance Corporation Building

Washington, D. C.

Open to Public Observation

November 13, 2002 - 9:00 A. M.

The meeting was called to order by the Chairman of the Board of Directors of the Federal Deposit Insurance Corporation and Chairman of the FDIC Advisory Committee on Banking Policy, Donald E. Powell.

The members of the Committee present at the meeting were: Sheila C. Bair, Distinguished Scholar, Center for Public Policy and Administration, University of Massachusetts - Amherst, Amherst, Massachusetts; Jean Becker, Chief of Staff, Office of President George H.W. Bush, Houston, Texas; Andrew B. Craig, III, Retired Chairman, NationsBank Corporation (now Bank of America); Rev. Dr. Floyd H. Flake, Senior Pastor, Great Allen A.M.E. Cathedral of New York, Jamaica, New York; Richard R. Hollington, Jr., Lead Director, Sky Financial Group Inc., and Senior Partner, Baker & Hostetler, LLP, Cleveland, Ohio; Terry J. Jorde, President/Chief Executive Officer, CountryBank USA, Cando, North Dakota; Gray D. Lindsey, Senior Vice President, Management Services, and Chief Financial Officer, Coca-Cola North America, The Coca-Cola Company, Atlanta, Georgia; John G. Medlin, Jr., Chairman Emeritus, Wachovia Corporation, Winston-Salem, North Carolina; Louise M. Parent, Esq., Executive Vice President and General Counsel, American Express Company, New York, New York; Dennis D. Powell, Senior Vice President, Corporate Finance, Cisco Systems, Inc., San Jose, California; and John T. Sinnott, Chairman and Chief Executive Officer, Marsh, Inc., New York, New York. Erica F. Cooper, Designated Federal Officer for the Committee and Deputy General Counsel of the Federal Deposit Insurance Corporation, was also present at the meeting. Committee member Roger B. Porter, IBM Professor of Business and Government, John F. Kennedy School of Government, Harvard University, Cambridge, Massachusetts, was absent from the meeting.

John Reich, Director (Appointive) of the Corporation's Board of Directors and the following members of the Corporation's staff were present at the meeting: John F. Bovenzi, Steven O. App, John M. Brennan, Robert W. Russell, Jodey C. Arrington, C. K. Lee, Cynthia L. Keil, Andrew B. Stirling, William F. Kroener, III, Michael J. Zamorski, Arleas Upton Kea, Arthur J. Murton, Frederick S. Selby, Mitchell L. Glassman, Robert E. Feldman; Alice C. Goodman, James Phillip Battey, George E. French, Frederick S. Carns, Jr., Vijay G. Deshpande, Joan S. VanBerg, Valerie J. Best, Donna H. Soto, and David M. Barr.

Chairman Powell, in calling the meeting to order, welcomed the members of the Advisory Committee. He then introduced certain of the Corporation's senior management and staff. On behalf of the Corporation, Chairman Powell extended to the Committee members his appreciation for their willingness to serve on the Committee and assist the Corporation in meeting its mission. He then turned the presentation over to Mr. Bovenzi.

John F. Bovenzi, Deputy to the Chairman and Chief Operating Officer, began by first presenting an overview of the Corporation's functions. He noted that the Corporation was an independent agency created by Congress to contribute to the stability of and public confidence in the nation's financial system. Mr. Bovenzi then outlined and discussed the Corporation's three main business functions--deposit insurance, federal supervisor for state banks that are not members of the Federal Reserve System, and manager and receiver for failed financial institutions. By means of a failed bank scenario, he illustrated how the three functions were interrelated and discussed a variety of issues that the Corporation may encounter in carrying out those functions. Mr. Bovenzi noted that the Corporation also provided support to the United States Department of Justice, the United States Department of the Treasury, the United States Attorney General's Office and the Corporation's Inspector General's Office in their investigations of matters involving failed institutions.

In the discussion that followed, the staff noted the various forms of regulatory oversight relating to failed bank situations and some issues that may affect such oversight. Director Reich pointed out that the Corporation had established a number of performance objectives; that one of the objectives was the identification, at least 12 months in advance, of troubled institutions that could potentially fail so that such institutions could be monitored and perhaps the failures could be averted; and that the relevant information was being monitored continuously by the Corporation's supervisory and research staff.

In discussing the decline in the deposit insurance funds' reserve ratios, staff delineated a number of factors that would affect the ratios, with the two most significant being the losses attributed to potential or actual failed institutions and the increase in insured deposits. Staff indicated that it was not clear at this point whether the ratios would decline further. Staff explained the impact of the overall economic downturn on the reserve level for the insurance funds and pointed out that national and regional economic trends were constantly being monitored to determine the effects, if any, of those trends on the banking industry. Staff noted that the Board was advised accordingly to assist in matters concerning deposit insurance premiums.

At that point, Arthur J. Murton, Director, Division of Insurance and Research, noted that the banking industry had entered into the recent economic downturn in a much stronger capital position than in the past and that had impacted the reserve levels as well. There then followed some general discussion on the impact of the recent large corporate failures on the banking industry.

Next, in response to questions from the members of the Committee, staff explained, among other things, the priority of claims in a receivership, the methodology used by the Corporation and approved by the General Accounting Office for establishing the reserve levels for the insurance funds, and the various forms of public disclosures that are made available to consumers interested in the condition of their financial institutions.

Chairman Powell then announced a recess in the meeting. Accordingly, the meeting stood in recess for a brief period and was then reconvened, at which time Mr. Bovenzi presented an overview of the Corporation's internal operations and some of the measures that had been taken by the Corporation to make those operations more efficient and effective.

Mr. Bovenzi's presentation covered a review of the Corporation's staffing levels over time; the efficiency of the Corporation's operations; employees' compensation and benefits; the Corporation's newly reorganized structure; the Corporation's downsizing efforts; and the establishment and development of a corporate university.

There then followed a discussion during which staff addressed various questions from Committee members. The discussion included a review of the Corporation's practices with regard to engaging the services of contractors to perform certain functions; a review of the Corporation's supervisory and regulatory resources with regard to the ability of Corporation examiners to evaluate complex financial products and services; and a review of the Corporation's training program and its Virginia Square training facilities.

Turning to the Corporation's finances, Steven O. App, Deputy to the Chairman and Chief Financial Officer, next presented an overview of the Corporation's financial structure.

Mr. App began by noting that the Corporation was legally mandated, by statute, to maintain the Bank Insurance Fund ("BIF"), the Savings Association Insurance Fund ("SAIF"), and the FSLIC Resolution Fund separate and distinct in terms of how the funds were managed and how the proceeds were applied; that the FSLIC Resolution Fund was a self-contained fund with a balance of approximately $4 billion, with any proceeds remaining in that fund to be refunded to the Department of the Treasury at some point; that the projected aggregate revenue for the BIF and SAIF for 2002 was approximately $2.5 billion, with approximately $2.4 billion of that representing interest earned on the Corporation's investment portfolio and only about $111 million representing assessment revenue; and that the loss reserves for the two funds was approximately $1.5 billion.

In response to a question from a Committee member, Mr. App engaged in a lengthy discussion on the management of the Corporation's portfolio and its current investment strategies.

Turning to the budget, Mr. App advised that the budget had been declining for some time. In that regard, he noted that in the late 1980s and early 1990s, there were approximately 23,000 employees and a budget that exceeded $2 billion, compared with a projected budget of $1.2 billion for 2003 and a current staffing level of approximately 5,600 employees.

Continuing, Mr. App advised, with regard to budget allocations, that approximately 51 percent had been allocated to the Corporation's supervision functions, approximately 25 percent had been allocated to receivership management functions, approximately 12.2 percent had been allocated to insurance functions, and 11.8 percent had been allocated for corporate expenses. He further advised, with regard to expenses, that approximately 62 percent was budgeted for salaries and benefits, approximately 21 percent for contractor support, and approximately 18 percent for other expenses such as building leases, equipment, and travel. In all, he advised, approximately 15 percent of the total budget was allocated to information technology. Mr. App noted that the BIF funded approximately 82 percent of the Corporation's operations, the SAIF funded approximately 11 percent, and the FSLIC Resolution Fund funded approximately seven percent.

In concluding his presentation, Mr. App reported that a recently established Capital Investment Review Committee would be reviewing proposed major investment projects prior to their submission to the Board and would oversee and monitor their implementation following the Board's approval.

C. K. Lee, Special Advisor to the Chairman, then presented an overview of the Corporation's corporate priorities, noting the importance of good stewardship and management, efficiency, accountability, performance standards, security and stability (with focus on marketplace risk that could impact the banking system), coordination with the other banking regulators, improving the receivership management process with lessons learned from previous bank failure resolutions, and deposit insurance reform.

After further discussion, Chairman Powell announced that the meeting would stand in recess. Accordingly, at 12:39 p.m. the meeting stood in recess.

The meeting was reconvened at 1:30 p.m. that same day at which time Chairman Powell read certain remarks that had been made by one of the members of the Committee in 1997 on capital and the emerging risks in the banking industry. In an effort to ensure that the Committee members were kept informed regarding the Corporation's operations, he proposed to send to each of them certain external and internal publications that he believed would be of interest and advised the Committee that information regarding the next meeting would be forthcoming. Stating that it was necessary for him to leave the meeting at this point, Chairman Powell again extended his appreciation to the Committee members for their willingness to serve on the Committee.

At this point, Chairman Powell was excused from the meeting. William F. Kroener, III, General Counsel, presided thereafter.

Continuing his presentation on corporate priorities, Mr. Lee noted the importance of policy-making, and detecting emerging problems in the industry. He also commented on the number of outreach sessions held by the Corporation with bankers and on the Corporation's efforts to improve relations with its state banking regulatory partners, the banking trade associations, other banking regulators, and the United States Congress. Mr. Lee added that the Corporation was also considering ways to communicate more effectively with the industry and public and would be conducting studies on various issues.

At the conclusion of Mr. Lee's presentation and with Mr. Kroener moderating, members of the Committee discussed with the staff a number of issues regarding, among other things, the current regulatory structure of the banking system, the deposit insurance function, growth of Federal Home Loan Bank advances and the impact of those advances on the Corporation's ability to recover assets in receivership situations, the accumulation of regulatory burden on banks and the complexity of call reports, and improved means for collecting and distributing financial data.

Following that discussion, Director Reich commented on the effective leadership role that Chairman Powell has played since his appointment to the Corporation's Board of Directors. He then concluded the meeting by extending to the Committee members the Corporation's sincere appreciation for their interest and willingness to assist the Corporation in its mission.