Supervision Program

The FDIC’s Supervision Program promotes the safety and soundness of FDIC-supervised insured depository institutions, protects consumers’ rights and promotes community investment initiatives by FDIC-supervised insured depository institutions. In 2008, the FDIC will continue its efforts to increase the effectiveness and efficiency of all of its supervisory programs. Ongoing industry consolidation, new technologies and product innovation have resulted in larger, more complex organizations. The FDIC will continue to focus increased resources on the larger, more complex financial institutions that constitute the most risk to the DIF. The FDIC will also continue to assess and modify, as appropriate, its examination procedures for all institutions in light of changing risk profiles for the industry and for individual institutions.

The FDIC is the primary federal regulator for 5,197³ state-chartered banks that are not members of the Federal Reserve System, generally known as state non-member banks, and includes state-licensed insured branches of foreign banks and state-chartered savings institutions. As insurer, the FDIC also has special examination authority for state member banks that are supervised by the Federal Reserve Board (FRB), national banks that are supervised by the Office of the Comptroller of the Currency (OCC) and savings associations that are supervised by the Office of Thrift Supervision (OTS).

As the primary federal regulator of all insured state non-member banks, the FDIC performs periodic examinations of these institutions to assess their overall financial condition, management policies and practices, and compliance with applicable laws and regulations. Through the examination process, the FDIC also assesses the adequacy of management and internal control systems to identify and control risks and to detect the risks of fraud or insider abuse. In separate examinations, the FDIC assesses institutions’ programs for compliance with consumer protection, fair lending, privacy and Community Reinvestment Act (CRA) statutes. As part of the compliance examination process, the FDIC reviews substantive issues as well as the information and disclosures that are provided to consumers by the institutions.

If weaknesses are identified through the examination process, the FDIC promptly takes appropriate supervisory action. Formal and informal enforcement actions may be issued for institutions identified as having significant weaknesses or operating in a deteriorated financial condition. The institution must operate under the action until the weakness is remedied. Non-compliance with consumer protection or fair lending laws can result in civil liability and negative publicity as well as the imposition of formal or informal actions by the FDIC to correct the identified violations.

The FDIC also investigates consumer complaints about FDIC-supervised insured depository institutions. Consumers write or electronically submit to the FDIC complaints and inquiries regarding consumer protection and fair lending issues. The FDIC attempts, through its investigation and response to consumer complaints and inquiries, to help consumers better understand their rights under federal consumer protection and fair lending laws. The FDIC monitors the level of public satisfaction with its responses to consumer complaints and inquiries. Information on complaints is also reviewed as part of the supervisory process.

The FDIC also acts on applications for new or expanded activities from FDIC-supervised insured depository institutions. When institutions apply for expansion of existing activities or locations, various factors are evaluated, including capital adequacy, quality of management, financial condition and compliance with applicable laws and regulations. An institution's compliance with consumer protection, fair lending and privacy laws and its performance under the CRA are also considered when an institution applies to expand its business organization within the insured depository institution system.

Information about the FDIC’s supervisory program is available at www.FDIC.gov, which includes information about current laws and regulations and regulatory guidance. The FDIC’s semiannual Supervisory Insights journal provides information about bank supervision for bankers, bank examiners and other practitioners.

³ As published in the December 2007 FDIC Quarterly Banking Profile.

The following table depicts the strategic goal, strategic objective and annual performance goals for the Risk Management component of the Supervision Program.

The following table depicts the strategic goal, strategic objectives and annual performance goals for the Consumer Protection component of the Supervision Program.

Strategic Goal 2:
FDIC-supervised institutions are safe and sound.

Strategic Objective 2.1
FDIC-supervised institutions appropriately manage risk.

Annual Performance Goal 2.1-1
Conduct onsite risk-management examinations to assess the overall financial condition, management practices and policies, and compliance with applicable laws and regulations of FDIC-supervised depository institutions.

Indicator and Target
Percentage of required examinations conducted in accordance with statutory requirements and FDIC policy

• 100 percent of required risk management examinations are conducted on schedule.

Means and Strategies

Operational Processes (initiatives and strategies):
Risk management examinations assess the overall financial condition, management practices and policies, and compliance with applicable regulations of FDIC-supervised depository institutions. The FDIC performs safety and soundness, Bank Secrecy Act (BSA) and information technology (IT) reviews at each examination of an FDIC-supervised insured depository institution. As applicable, the FDIC also conducts reviews of trust, registered transfer agent, municipal securities dealer and government security dealer activities at these examinations. In 2008, the FDIC projects that it will conduct approximately 2,300 risk-management examinations required under statute, FDIC policy, or agreement with state supervisors. The FDIC follows a risk-focused approach to examinations, which allows examiners to focus resources on those areas with the greatest potential risk. The FDIC has several analytical models to identify higher risk financial institutions by considering factors such as rapid growth, fluctuating earnings, economic downturns and concentrations in vulnerable industry sectors. Examiners use these offsite tools to better focus on higher risk areas during onsite examinations. These models are also used to identify the need for inquiries or onsite visits to FDIC-supervised institutions outside of the regular examination cycle.

The FDIC also continues to focus on risks posed by technology. Onsite examinations review technology-related activities to determine how each FDIC-supervised depository institution manages IT risks. The FDIC proactively monitors indicators of technology risks that may impact FDIC-supervised institutions and provides information to the industry about risks associated with technology outsourcing practices (e.g., contracting for computer services). The FDIC is engaged in an ongoing dialogue with technology vendors, bank trade associations, and standards and rule-setting entities to identify effective risk-management practices for emerging technologies.

During 2007, the FDIC continued to work closely with state and other federal agencies to monitor those financial institutions most impacted by the 2005 hurricane season through onsite and offsite programs. The FDIC has found that institutions in the affected area have generally benefited from the influx of insurance proceeds and grant proceeds from federal assistance programs and have sought methods to deploy these funds into earning assets. Financial institutions in the hurricane zone continue to face significant challenges, including displaced customers and employees and uncertainties regarding infrastructure reconstruction. Going forward, the FDIC, in concert with the other federal bank regulatory agencies, will continue to monitor the affected financial institutions for any residual impact of the 2005 hurricane season. The FDIC will also continue to monitor available public information on population, economic and other pertinent trends that could impact the business environments in which the affected institutions operate.

Resource constraints at the state level may impact the completion of examinations in accordance with this annual goal. Should a state supervisor responsible for completing an examination experience scheduling, staffing or other resource constraints, the statutory examination requirement may not be met. In such cases, the FDIC will work with the state supervisor to ensure that any delinquent examination is expeditiously scheduled and completed. When appropriate, the FDIC may conduct the examination in lieu of the state supervisor.

The number of risk management examinations conducted during 2008 may fluctuate as the number of FDIC-supervised insured depository institutions changes due to mergers, closings, newly approved charters and other actions. Increases in asset size or changes to condition or capital levels may accelerate examination cycles and increase the number of required examinations. In addition, the Corporation implemented a number of regulatory relief provisions in 2007 that were included in the Financial Services Regulatory Relief Act of 2006. These included lengthening from 12 to 18 months the examination cycle for additional “1” and “2” rated banks by raising the program’s asset threshold from $250 million to $500 million.

Human Resources (staffing and training):
Staffing and training needs are reviewed on an ongoing basis to ensure that the staff resources supporting the examination program are adequate and that those employees possess the skill and knowledge to effectively and successfully examine emerging risks.

The FDIC will continue to augment its general examiner training curriculum with courses on the impact of technology issues on safety and soundness. As in previous years, the FDIC will continue to build upon risk-management examiners’ solid base of general technology knowledge by providing refresher training on pertinent technology topics in order to ensure that all risk-management examiners and IT examination specialists have the knowledge needed to perform their duties in light of the increased complexity of technology in the banking industry.

Information Technology:
The FDIC will continue to employ automated tools, such as the General Examination System (GENESYS), Examination Documentation modules, Interest Rate Risk Sensitivity Analysis (IRRSA) software, and the Automated Loan Examination and Review Tool (ALERT) to improve the efficiency of its examinations.

Verification and Validation
The actual number of examinations conducted and adherence to required examination time frames will be tracked through internal management systems and reported in the 2008 FDIC Annual Report.

2007 Performance Results
This annual performance goal and the associated performance indicator and target are unchanged from 2007. In 2007, the FDIC completed all required safety and soundness examinations (including IT reviews) within prescribed time frames.

Annual Performance Goal 2.1-2
Take prompt and effective supervisory action to address problems identified during the FDIC examination of FDIC supervised institutions that receive a composite Uniform Financial Institutions Rating of “4” or “5” (problem institution). Monitor FDIC-supervised insured depository institutions’ compliance with formal and informal enforcement actions.

Indicator and Target
Percentage of follow-up examinations of problem institutions conducted within required time frames

• 100 percent of follow-up examinations are conducted within 12 months of completion of the prior examination.

Means and Strategies

Operational Processes (initiatives and strategies):
Problem institutions are identified primarily through the examination process. While reason and moral suasion are the primary corrective tools, the FDIC has broad enforcement powers to correct practices, conditions or violations of law that threaten an insured depository institution's safe and sound condition. The FDIC may use informal and formal enforcement actions against the institution or responsible individuals to address identified problems. In all cases, follow up examinations of these institutions will include a review of compliance with supervisory actions, and additional follow up action will be taken where corrective action is insufficient.

The responsible case manager and senior regional officials will closely monitor problem depository institutions. Progress in complying with enforcement actions will be assessed through progress reports from institutions, offsite monitoring tools, and direct communication with financial institution management and/or onsite visits.

Human Resources (staffing and training):
Staffing and training needs will be reviewed on an ongoing basis to ensure resources supporting the examination program are adequate and those employees possess the skill and knowledge to effectively examine problem institutions.

Information Technology:
The ViSION system is used to monitor all enforcement action activity and other significant events at problem institutions.

Verification and Validation
The examination report identifies corrective actions to be taken. If deemed necessary, a formal or informal enforcement action is transmitted to the financial institution along with the report of examination. To ensure that supervisory actions are taken promptly, the FDIC monitors the time it takes to provide examination reports to FDIC supervised problem institutions after the completion of an examination.

The FDIC will continue to use the Regional Office Internal Control Review program to ensure that the regions are monitoring FDIC-supervised insured depository institutions’ compliance with formal and informal enforcement actions. This review incorporates various components of the supervisory process, including assessment of the appropriateness, implementation and follow-up of formal and informal corrective actions. Any material exceptions noted during the reviews will be brought to management’s attention for appropriate action.

2007 Performance Results
This annual performance goal and the associated performance indicator and target are unchanged from 2007. In 2007, the FDIC conducted all follow-up examinations of problem institutions within the prescribed time frame.

Annual Performance Goal 2.1-3
Assist in protecting the infrastructure of the U.S. banking system against terrorist financing, money laundering and other financial crimes.

Indicator and Target
Percentage of required examinations conducted in accordance with statutory requirements and FDIC policy

• 100 percent of required Bank Secrecy Act examinations are conducted on schedule.

Means and Strategies

Operational Processes (initiatives and strategies):
Bank Secrecy Act/Anti-Money Laundering (BSA/AML) examinations and Office of Foreign Assets Control (OFAC) reviews assess an institution’s overall BSA/AML and OFAC compliance programs. These reviews encompass sound risk management, compliance with recordkeeping requirements, and the ability of the institution to identify and report suspicious activity. The FDIC performs BSA/AML and OFAC reviews as a part of all risk-management examinations of FDIC-supervised insured depository institutions. In 2008, the FDIC projects that it will conduct over 2,300 BSA/AML examinations required under statute, FDIC policy, or agreement with state supervisors. The FDIC will also conduct BSA/AML examinations in conjunction with risk management examinations conducted by state regulators for the small number of state bank regulatory agencies (currently fewer than 10) that do not incorporate BSA/AML examination procedures into their own examinations. The FDIC follows a risk-focused approach to BSA/AML examinations and OFAC reviews, which allows examiners to focus resources on those areas with the greatest potential risk.

Human Resources (staffing and training):
The FDIC currently has 340 examiners who are designated as BSA/AML subject matter experts, including 87 with advanced certifications for this discipline. Staffing and training needs are reviewed on an ongoing basis to ensure that the staff resources supporting the BSA/AML examination program are adequate and that those employees possess the skill and knowledge to effectively and successfully assess compliance with BSA/AML requirements and detect any emerging risks.

In 2008, the FDIC will work with the other federal banking agencies, the Financial Crimes Enforcement Network (FinCEN) and the Conference of State Bank Supervisors (CSBS) to update, if necessary, the Federal Financial Institutions Examination Council (FFIEC) BSA/AML Examination Manual to ensure that the guidance remains current for existing laws, regulations and policy interpretations. The Corporation also plans to update the Spanish translation of the 2007 FFIEC BSA/AML Examination Manual, as necessary. Further guidance will be provided to risk management staff through written memoranda, participation in the FFIEC BSA/AML Examination Workshop, or attendance at the Advanced BSA/AML Specialists Conference.

Information Technology:
BSA examinations are tracked in ViSION. BSA/AML reference materials are available on the FDIC’s website (www.FDIC.gov). This link allows the banking industry and the regulatory community centralized and expanded access to BSA/AML resources. The link provides updated information and instruction related to examination procedures, interpretive guidance, websites of related agencies, instructions for reporting suspicious activity and terrorist-financing activity, and an overview of governing rules and regulations. In concert with the release of the interagency FFIEC BSA/AML Examination Manual, the federal banking agencies have also made available through the FFIEC website (www.ffiec.gov) a BSA/AML Examination Manual InfoBase. It includes the interagency BSA/AML Examination Manual, BSA regulations, and guidance provided by each federal banking agency.

2007 Performance Results
This annual performance goal and the associated performance indicator are new (previously included in Annual Performance Goal 2.1-1). All BSA/AML examinations were conducted within required time frames in 2007.

Annual Performance Goal 2.1-4
More closely align regulatory capital with risk in large or multinational banks while maintaining capital at prudential levels.

Indicator and Targets

1. Preliminary results of Basel II Parallel Run
   • Conduct analyses of early results of the new capital regime as information becomes available.


2. Changes to Basel II Capital Framework
   • Develop options for refining Basel II that are responsive to lessons learned from the 2007-2008 market turmoil.

Means and Strategies

Operational Processes (initiatives and strategies):
The objective of Basel II is to more closely align regulatory capital with risk in large or multinational banks. The FDIC is working with the Basel Committee on Banking Supervision and the other federal bank regulatory agencies to plan for the implementation of Basel II. The agencies expect that only a small number of large, internationally active U.S. banking organizations will be required to use the Basel II Advanced Approach framework. Under the Basel II Advanced Approach final rule, those institutions would be required to use the most advanced approaches of Basel II for determining their risk-based capital requirements. As such, implementation of the Basel II Advanced Approach would require that they adopt very complex internal models to estimate capital requirements and assess capital adequacy.

The first opportunity for U.S. banking institutions to conduct a parallel run under the Basel II Advanced Approach will be in April 2008. U.S. institutions adopting the Basel II-based capital rules will be subject to a minimum three-year transition period during which the agencies will apply floors that limit the amount by which each institution's risk-based capital could decline under Basel II. The floors will be applied in the following manner: 2009 – 95%, 2010 – 90% and 2011 – 85%. In addition, the leverage ratio requirements contained in the agencies’ Prompt Corrective Action regulations are unchanged. The agencies will issue a series of annual reports during the transition period that will provide timely and relevant information on the implementation of the advanced approaches. In addition, after the end of the second transition year, the agencies will publish a study (interagency study) that will evaluate the advanced approaches to determine if there are any material deficiencies. Before any primary Federal supervisor authorizes any bank to exit the third transitional floor period, the study must determine that there are no such material deficiencies that cannot be addressed by then-existing tools, or, if such deficiencies are found, they must be first remedied by changes to the regulation. A primary federal supervisor that disagrees with the finding of material deficiency may not authorize a bank under its jurisdiction to exit the third transitional floor period unless the supervisor first provides a public report explaining its reasoning.

Through the FDIC’s participation on the Basel Committee on Banking Supervision and its various subgroups, the FDIC will continue to work to promote strong international bank capital standards. This annual performance goal will be pursued over a multi-year time frame because of the extended timeline for Basel II implementation and the lack of currently available data to assess compliance with the Committee’s and the FDIC’s overall capital objectives. The FDIC will participate in the Basel Committee’s Capital Monitoring Group, which will identify the extent of reductions in capital requirements. The FDIC will also participate in the Committee’s Definition of Capital Subgroup, which will evaluate the loss-absorbing capacity and other features of regulatory capital instruments.

Human Resources (staffing and training):
The breadth and depth of knowledge among FDIC staff on Basel II matters have expanded greatly due, in part, to FDIC staff’s continued participation and active involvement in guidance development groups. The FDIC has also augmented its skill sets by hiring several analysts to assist with Basel II implementation who are highly skilled in advanced quantitative methods. The FDIC will continue to use internal and external training to augment the skill sets of its staff.

Information Technology:
The FDIC will utilize existing technology to accomplish this annual performance goal.

Verification and Validation
Progress in meeting this annual performance goal will be tracked through periodic meetings and established reporting processes.

2007 Performance Results
This annual performance goal and the associated performance indicator are unchanged from 2006. Both 2007 performance targets were met and new performance targets have been established for 2008 that reflect the agreement among the U.S. bank regulatory agencies to establish a three-year period for transition to the Basel II capital standards.

Annual Performance Goal 2.1-5
More closely align regulatory capital with risk in banks not subject to Basel II capital rules while maintaining capital at prudential levels.

Indicator and Target
Development of a revised capital framework proposal for institutions not subject to Basel II.

• Finalize a regulatory capital framework based on the Basel II "Standardized Approach" as an option for U.S. banks not required to use the new advanced approaches.

Means and Strategies

Operational Processes (initiatives and strategies):
In conjunction with the transition to Basel II for the largest insured institutions, the FDIC and the other federal bank regulatory agencies are pursuing a more risk sensitive capital framework for institutions that are not subject to (or opt out of) Basel II. The agencies previously sought comment on whether alternatives to the Advanced Approach, such as the Basel IA proposal or the Standardized Approach, should be available for Basel II banking organizations. In response to those comments, the agencies set aside the Basel IA proposal in favor of the Basel II Standardized Approach. The agencies anticipate issuing a Basel II Standardized Approach NPR during 2008. The NPR will be closely aligned with the Basel Capital Accord. The adoption of the domestic Basel II Standardized Approach framework by U.S. banking organizations would be at the option of the individual banking organization and subject to the institution meeting certain predefined qualification standards. The existing capital rules, as amended, would continue to apply to those institutions that did not elect to use the framework.

The Basel II Standardized Approach Interagency Working Group (Working Group) is responsible for developing the framework that will formalize the FDIC’s current plans and proposals for implementing the Basel II Standardized Approach in the United States. The Working Group will use the Basel Committee’s text on the “International Convergence of Capital Measurement and Capital Standards,” comments received in response to the forthcoming NPR, as well as other resources to develop a regulation that more closely aligns regulatory capital with risk.

This new Standardized Approach capital framework will seek to minimize potential competitive inequities between large and small banks resulting from the implementation of Basel II, while maintaining adequate capital levels and avoiding undue burden on the affected institutions.

Human Resources (staffing and training):
The Working Group will draw from various disciplines and skill sets within the federal bank regulatory agencies to ensure that a final rule is completed within the target time frame and that the proposed capital framework effectively addresses the objectives identified above.

Information Technology:
The Working Group will utilize existing technology to accomplish this annual performance goal. The Working Group does not envision expanding or enhancing existing technology during the policy development stage of this project.

Verification and Validation
Progress in meeting this annual performance goal will be tracked through periodic meetings and established reporting processes.

2007 Performance Results
This annual performance goal and the associated performance indicator are unchanged from 2007. As a result of the decision to withdraw the Basel IA NPR proposal in favor of the Basel II Standardized Approach, the 2007 performance target became inapplicable. For 2008, a new performance target has been established seeking completion of rulemaking on the Basel II Standardized Approach.

Annual Performance Goal 2.1-6
Ensure that FDIC-supervised institutions that plan to operate under the new Basel II Capital Accord are well-positioned to respond to new capital requirements.

Indicator and Target
Percentage of onsite examinations or offsite analyses performed

• Perform onsite examinations or offsite analyses of all FDIC-supervised banks that have indicated a possible intention to operate under Basel II to ensure that they are effectively working toward meeting required qualification standards.

Means and Strategies

Operational Processes (initiatives and strategies):
The Basel II Advanced Approach will become effective on April 1, 2008. None of the insured institutions for which the FDIC is the primary federal regulator has formally indicated that it intends to opt-in for treatment under Basel II, although three institutions will likely be required to opt-in based on consolidated reporting requirements of foreign parent organizations that will adopt Basel II. FDIC staff continues to work closely with these institutions and to conduct outreach with other institutions that may be considering operating under the new rules. Outreach efforts include responding to requests to review and discuss progress in developing project plans or designing systems in accordance with the rule and draft examination guidance. FDIC staff also continues to work closely with other primary federal regulators to ensure uniform application of Basel II among all insured institutions. In addition, the FDIC actively participates on various international and domestic working groups relating to Basel II, including those focusing on implementation issues.

Human Resources (staffing and training):
The FDIC hired additional large-bank staff in 2007, with the goal of better aligning staff to address complex financial institution issues, including the expected workload for Basel II preparations. Designated staff members will continue to receive training to ensure that they have the requisite knowledge, expertise and experience to meet the supervisory challenges posed by Basel II.

Information Technology:
Existing technology will be used to accomplish this goal. No new information systems or automated tools will be developed in support of this annual performance goal in 2008.

Verification and Validation
Progress in meeting this annual performance goal will be tracked through periodic meetings and established reporting processes.

2007 Performance Results
This annual performance goal and its associated performance indicator and target are unchanged from 2007. The 2007 performance target was met through outreach to all institutions that have expressed interest in opting in for treatment under Basel II and assessments of progress for wholly-owned insured subsidiaries of foreign institutions that will adopt Basel II. FDIC staff also coordinated meetings with domestic and international supervisory authorities to ensure consistency in approaches to implementation.

Annual Performance Goal 2.1-7
Reduce regulatory burden on the banking industry while maintaining appropriate consumer protection and safety and soundness safeguards.

Indicator and Targets
Completion of analysis of regulatory burden associated with the BSA/AML examination process

• Complete and evaluate options for refining the current risk-focused approach used in the conduct of BSA/AML examinations to reduce the burden they impose on FDIC-supervised institutions.

Means and Strategies

Operational Processes (initiatives and strategies):
In 2007, the FDIC conducted a pilot project to determine how it might factor state AML examination assessments of money services businesses (MSBs) into its risk-focused BSA/AML examination procedures, or how it might use those assessments in other ways to encourage banks to continue to serve MSBs. Although many FDIC-supervised institutions provide banking services to MSBs, the FDIC is concerned with the discontinuance of those services to the MSB industry by banks, which may be, in part, related to customer monitoring and documentation requirements for MSB account relationships. The FDIC consulted with FinCEN, the Internal Revenue Service, the CSBS, and the Money Transmitter Regulators Association and interviewed several state supervisors to gain a better understanding of state AML regulation and oversight of the MSB industry. The FDIC also evaluated the legal framework and authority of those states with respect to AML and their information-sharing rules in conjunction with its consideration of options for incorporating state MSB AML examination programs and/or findings into the FDIC’s BSA/AML examination process. Based upon that analysis, the FDIC will coordinate with selected state supervisors that are willing and able to provide MSB AML information.

The FDIC remains committed to minimizing the regulatory burden on the banking industry and will work with FinCEN in 2008 to develop and implement changes to simplify or streamline AML and counter-financing of terrorism (CFT) reporting requirements for smaller institutions without sacrificing national security safeguards. In this effort, the FDIC will work with FinCEN to issue guidance on suspicious activity report sharing with affiliates as well as guidance on suspicious activity reporting and recordkeeping obligations for functions that are outsourced to both domestic and foreign-based third-party service providers. The Corporation will also discuss with FinCEN draft recommendations from the U.S. Government Accountability Office’s 2008 Currency Transaction Report (CTR) audit recommendations, which could reduce CTR filings for smaller banks by clarifying and encouraging the use of the CTR exemption process. The FDIC will also provide comments on FinCEN’s restructuring of BSA rules.

The FDIC will work to refine the current risk-focused approach used when conducting BSA/AML examinations of FDIC-supervised institutions and determine when streamlined BSA/AML procedures may be considered for low-risk depository institutions. Additional guidance will be issued, as necessary.

Human Resources (staffing and training):
FDIC management and subject matter experts familiar with the FDIC’s BSA/AML examination requirements will provide the necessary information, develop options for review, and provide recommendations on possible changes in guidance.

Information Technology:
Existing technology will be used in conjunction with this goal. The ViSION system may be used to track comments from BSA/AML examinations conducted under the risk-focused approach.

Verification and Validation
Progress in completing this goal will be tracked through periodic meetings and established reporting processes.

2007 Program Results
This annual performance goal is unchanged from 2007, but the performance target and indicator have been updated for 2008. The 2007 performance targets were largely achieved. Although most of the changes required by the Financial Services Regulatory Relief Act of 2006 were completed, as required, some further regulatory changes remain to be completed in 2008. In addition the FDIC completed a pilot project in 2007 on the possible use of state MSB AML assessments in FDIC risk management examinations, but has not yet incorporated the results of that project into risk management examinations. Work will continue on that effort in 2008.

Strategic Goal 3:
Consumers’ rights are protected and FDIC-supervised institutions invest in their communities.

Strategic Objective 3.1
FDIC-supervised institutions comply with consumer protection, CRA, and fair lending laws.

Annual Performance Goal 3.1-1
Conduct CRA and compliance examinations in accordance with the FDIC’s examination frequency policy.

Indicator and Target
Percentage of examinations conducted in accordance with required time frames

• 100 percent of required examinations are conducted within time frames established by FDIC policy.

Means and Strategies

Operational Processes (initiatives and strategies):
The FDIC conducts CRA and compliance examinations of FDIC-supervised depository institutions in order to determine the institution’s compliance with consumer protection and fair lending laws and its performance under CRA. The frequency of these examinations is specified by FDIC policy and applicable law. For CRA examinations, the FDIC's examination frequency policy conforms to applicable provisions of the Gramm Leach Bliley Act (GLBA), which establishes the CRA examination cycle for most small banks. In 2008, the FDIC estimates that it will conduct approximately 2,000 compliance and/or CRA examinations.

The FDIC’s compliance examination approach places great emphasis on an institution’s compliance risk-management practices as opposed to exhaustive transactional testing. This approach involves an expanded review of an institution’s systems and compliance policies so that transaction testing can be better targeted and focused on areas of greatest risk exposure. This approach creates a more efficient and effective use of examination resources, especially in financial institutions with high compliance risk profiles.

Human Resources (staffing and training):
Staffing and training needs are reviewed on an ongoing basis to ensure that staff resources supporting the examination program are adequate and that employees possess the skills and knowledge to effectively and successfully implement this program.

Information Technology:
The System of Uniform Reporting of Compliance and CRA Examinations (SOURCE) is used to schedule and track financial institution compliance examinations, support pre-examination planning and provide management information.

Verification and Validation
The FDIC will analyze examination-related data collected in SOURCE to determine whether targeted performance levels were achieved during the reporting period.

2007 Performance Results
This annual performance goal and the associated performance indicator and target are unchanged from 2007. In 2007, the FDIC conducted 1,773 compliance and CRA examinations, all within prescribed time frames.

Annual Performance Goal 3.1-2
Take prompt and effective supervisory action to monitor and address problems identified during compliance examinations of FDIC-supervised institutions that receive an overall “4” or “5” rating for compliance with consumer protection and fair lending laws.

Indicator and Target
Percentage of follow-up examinations or related activities conducted within required time frames

• 100 percent of follow-up examinations or related activities are conducted within 12 months from the date of a formal enforcement action to confirm that the institution is in compliance with the enforcement action.

Means and Strategies

Operational Processes (initiatives and strategies):
Problem institutions are identified primarily through the examination process. While discussions with bank management are usually sufficient to correct deficiencies, the FDIC has broad enforcement powers to correct practices, conditions or violations of law that threaten an institution's compliance with consumer protection and fair lending laws or a consumer's rights under those laws. The FDIC may use informal and formal enforcement actions against the institution or responsible individuals to address identified problems. In all cases, follow up examinations of these institutions will include a review of compliance with supervisory actions, and additional follow up action will be taken where corrective action is insufficient.

Human Resources (staffing and training):
Staffing and training needs are reviewed on an ongoing basis to ensure that resources supporting the examination program are adequate and that employees possess the skills and knowledge to effectively examine problem institutions. In 2007, the FDIC developed a post-commissioning training program, the Advanced Compliance Examination School (ACES). All field compliance examiners will be required to complete the course over a three-year period from 2007 to 2009, to ensure that they have sufficient knowledge to assess compliance with increasingly complex consumer protection regulations and consumer products.

Information Technology:
The SOURCE system is used for examination scheduling and processing. The ViSION system is used to monitor all enforcement action activity.

Verification and Validation
The examination report identifies recommended corrective actions. If deemed necessary, a formal or informal enforcement action is transmitted to the financial institution with the report of examination. To ensure that supervisory actions are taken promptly, the FDIC monitors the time it takes to provide examination reports to FDIC-supervised problem institutions after the completion of an examination.

The FDIC will continue to use the Regional Office Internal Control Review program to ensure that regions are monitoring FDIC-supervised insured depository institutions’ compliance with formal and informal enforcement actions. This review incorporates various components of the supervisory process, including an assessment of the appropriateness, implementation and follow-up on formal and informal corrective actions. Any material exceptions noted during the reviews will be brought to management’s attention for appropriate action.

2007 Performance Results
This annual performance goal and the associated performance indicator and target are unchanged from 2007. In 2007, the FDIC conducted all required follow-up examinations of problem institutions within the prescribed time frame.

Annual Performance Goal 3.1-3
Determine the need for changes in current FDIC practices for following up on significant violations of consumer compliance laws and regulations identified during examinations of banks for compliance with consumer protection and fair lending laws.

Indicator and Target
Implementation review of new practices instituted in 2007

• Complete a review of the effectiveness of the 2007 instructions issued on the handling of repeat instances of significant violations identified during compliance examinations.

Means and Strategies

Operational Processes (initiatives and strategies):
The FDIC takes its responsibilities for enforcement of consumer protection and fair lending laws very seriously and has issued hundreds of formal and informal enforcement actions in recent years to ensure that FDIC-supervised institutions comply with these laws. The FDIC also requires financial reimbursement for those harmed by violations of consumer protection laws.

Violations occur even at institutions that have otherwise implemented a strong compliance program. Examiners use judgment and experience to place violations into the proper context when they draw conclusions from examination findings. During 2007, the FDIC completed an internal analysis of significant, repeat violations and post-examination follow-up activities. As a result, amendments to the examination process were made to clarify the definitions of “significant” and “repeat” violations. In addition, the FDIC’s regional offices were instructed to implement new post-examination follow-up activities when significant violations are cited in compliance reports of examination. The FDIC will perform a post-implementation analysis of these changes in 2008, after they have been in effect for one year.

Human Resources (staffing and training):
The implementation of post-examination follow-up activities has been incorporated into the regional and field territory review programs. Any deficiencies that require corrective action will be discussed with regional and field office management.

Information Technology:
The FDIC will use current technology systems to obtain the information necessary to complete this analysis.

Verification and Validation
Progress in meeting this annual performance goal will be tracked through periodic meetings and established reporting processes.

2007 Performance Results
This annual performance goal is unchanged from 2007. However, the associated performance indicator and target are new for 2008. The 2007 performance targets were successfully met. The 2008 performance target is a follow-on activity.

Annual Performance Goal 3.1-4
Scrutinize evolving consumer products, analyze their current or potential impact on consumers and identify potentially harmful or illegal practices. Promptly institute a supervisory response program across FDIC-supervised institutions when such practices are identified.

Indicator and Target
Establishment of supervisory response programs to address potential risks posed by new consumer products

• Revise the FDIC’s system for identifying, reviewing and addressing potentially harmful or illegal practices associated with evolving consumer products.
• Develop and implement new supervisory response programs across all FDIC-supervised institutions to address potential risks posed by new consumer products.

Means and Strategies

Operational Processes (initiatives and strategies):
The FDIC conducts consumer compliance examinations at all state non-member banks. As part of this process, examiners review bank products and practices to ensure that they do not harm consumers and/or violate applicable laws. In addition, the FDIC plans to use information derived from external sources, including consumer and industry groups and other sources, to identify product-related trends and practices that may be unlawful and/or harmful to consumers. When issues are identified, the FDIC will assess the effects on consumers and promptly institute a consistent supervisory policy response across FDIC-supervised institutions, where appropriate.

Human Resources (staffing and training):
Staffing and training needs will be reviewed on an ongoing basis to ensure that the resources supporting its compliance examination and offsite monitoring programs are adequate to identify and recommend a consistent policy response.

Information Technology:
The SOURCE and STARS systems, as well as publicly available information, will be used to help identify and monitor evolving consumer products/practices.

Verification and Validation
Progress in meeting this annual performance goal will be tracked through periodic meetings and reporting processes.

2007 Performance Results
This annual performance goal and the associated performance indicator and targets are new for 2008. There were no related 2007 performance results.

Strategic Objective 3.2
Consumers have access to easily understood information about their rights and the disclosures due them under consumer protection and fair lending laws.

Annual Performance Goal 3.2-1
Effectively investigate and respond to consumer complaints about FDIC-supervised financial institutions.

Indicator and Target
Timely responses to written complaints and inquiries

• Responses are provided to 90 percent of written complaints and inquiries within time frames established by policy.

Means and Strategies

Operational Processes (initiatives and strategies):
The FDIC investigates and responds to written complaints regarding consumer protection and fair lending issues, including those received electronically through the Customer Assistance Form on the FDIC’s website. The Corporation also provides consumer protection information to financial institutions and the public. When performed effectively, these activities help consumers better understand their rights under consumer protection and federal fair lending laws.

In 2008, the FDIC projects that it will receive approximately 13,000 written complaints and 3,700 inquiries and will closely monitor the timeliness of its responses. Additionally, the FDIC surveys a sample of consumers who have filed written consumer protection and fair lending complaints in order to assess their satisfaction with the FDIC’s investigations and responses.

Human Resources (staffing and training):
The FDIC’s Consumer Response Center responds to consumer complaints and inquiries about consumer protection matters. This centralized program helps maintain staff knowledge and expertise, and it provides greater flexibility in balancing staff resources and workload.

Information Technology:
The FDIC uses the Specialized Tracking and Reporting System (STARS) to capture and report information, including response time, about complaints.

Verification and Validation
To maintain the integrity of STARS data, system edit checks and data field requirements are designed to eliminate inaccurate and illogical data. During periodic system testing and internal control reviews, existing data verification and validation procedures and controls are evaluated for adequacy. Accepted survey research methods have been employed to ensure the validity of the customer satisfaction survey instrument and to verify the accuracy of the survey results.

2007 Performance Results
This annual performance goal and the associated performance indicator and target are unchanged from 2007. The Corporation exceeded the 2007 performance target, responding to over 93 percent of the 11,624 written consumer complaints within the time frames established under FDIC policy.

Annual Performance Goal 3.2-2
Provide effective outreach related to CRA, fair lending and community development.

Indicator and Targets

1. Number of outreach activities conducted, including technical assistance activities
   • Conduct 125 technical assistance (examination support) efforts or banker/community outreach activities related to CRA, fair lending and community development.


2. Expanded access to high quality financial education through the Money Smart curriculum
   • Release a “Young Adult” version of the Money Smart curriculum.
   • Distribute at least 10,000 copies of the “Young Adult” version of Money Smart.

3. Scope and timeliness of dissemination of the results of the unbanked survey
   • Analysis of survey results is disseminated within six months of completion of the survey through regular publications, ad hoc reports and other means.

4. Support for expanded foreclosure prevention efforts for consumers at risk of foreclosure (in partnership with NeighborWorks® America and other organizations)
   • Provide technical assistance, support and consumer outreach activities in all six FDIC regions to at least eight local NeighborWorks® America affiliates or local coalitions that are providing foreclosure mitigation counseling in high need areas.

Means and Strategies

Operational Processes (initiatives and strategies):
The FDIC participates in a variety of community outreach activities designed to increase awareness of community and economic development; increase knowledge of CRA regulations and fair lending laws; enhance lending, investment and service performance; and assist FDIC-supervised insured depository institutions in developing strategies to respond to credit, investment and service opportunities. To facilitate compliance, the FDIC provides supervised insured depository institutions with updated information on laws, regulations and guidance. This information is provided in brochures, instructional curriculum and through other media, including the FDIC’s website (www.fdic.gov). Through community outreach efforts and technical assistance, the FDIC encourages lenders to work with members of their local communities in meeting the communities’ credit needs. The FDIC also develops publications, such as FDIC Consumer News, specifically for consumers to increase awareness and improve their understanding of consumer rights and responsibilities.

The FDIC will continue to implement initiatives to promote the extension of financial institutions’ services and programs that facilitate the opening of bank accounts and asset building by traditionally underserved populations. For example, Money Smart is a highly praised, well-received mechanism for promoting economic inclusion and financial literacy. The FDIC will continue to develop and promote Money Smart financial education products in response to market demand. In 2008, the FDIC will release a version of Money Smart targeted to young adults. As part of the release, a strategy will be developed to distribute at least 10,000 copies of the new curriculum.

The FDIC will also complete surveys on the unbanked and publish the study results in 2008. The Corporation expects to initiate and implement appropriate changes to supervisory and other policies and procedures, as necessary, to address the study’s findings. In addition, through a continuing partnership with NeighborWorks® America and other organizations, the FDIC will actively work to further foreclosure prevention activities.

Human Resources (staffing and training):
Workload and staffing resources trained in technical assistance and outreach are located in Washington, D.C., and the FDIC’s six regional and two area offices. These resources ensure that the FDIC can respond to outreach needs in communities nationwide.

Information Technology:
The FDIC uses the Community Affairs Database System (CARDS) and Community Affairs Reporting System (CARS) to capture and report information about activities related to technical assistance, community development, outreach and Money Smart.

Verification and Validation
Progress in meeting this annual performance goal will be tracked through periodic meetings and established reporting processes.

2007 Program Results
This annual performance goal as well as performance indicator #1 and its associated performance target are unchanged from 2007. The FDIC exceeded the related 2007 performance target, undertaking 179 technical assistance and related outreach activities relating to CRA, fair lending or community development. Performance indicators #2, #3, and #4 and their associated performance targets are new for 2008, although performance indicators #2 and #3 and their associated performance targets are closely related to 2007 performance targets. The FDIC largely met the other 2007 performance targets for this goal, except for completion of a planned pilot project with banks near military installations to provide small-dollar loan alternatives to high-cost payday lending. That planned 2007 initiative was incorporated into a larger, two-year pilot project on small-dollar lending (see Annual Performance Goal 3.2-3).

Annual Performance Goal 3.2-3
Continue to expand the FDIC’s national leadership role in developing and implementing programs and strategies to encourage and promote broader economic inclusion within the nation’s banking system.

Indicator and Targets

1. Results of pilot small-dollar lending program conducted by participating financial institutions
   • Analyze quarterly data submitted by participating institutions to identify early trends and potential best practices.


2. 2. Degree of success achieved in bringing the unbanked/underserved into the financial mainstream through the Alliance for Economic Inclusion
   • Open 27,000 new bank accounts.
   • Initiate new small-dollar loan products in 32 financial institutions.
   • Initiate remittance products in 32 financial institutions.
   • Reach 18,000 consumers through financial education initiatives

Means and Strategies

Operational Processes (initiatives and strategies):
The FDIC is conducting a two-year study, in cooperation with a set of 30 diverse participating institutions, to identify best practices and replicable business models for small-dollar lending. Data is collected from these institutions on a quarterly basis. Designated FDIC points of contact maintain ongoing relationships with the participating institutions to share information and assist with the filing of the quarterly reports. The FDIC’s research and supervision staffs are responsible for compiling and analyzing the data from this pilot program. The pilot will be completed and the FDIC expects to publish the results of this study in 2010.

In addition, the FDIC will continue to provide ongoing leadership, encouragement and support to nine broad-based coalitions that bring financial institutions, community-based organizations, researchers, employers, faith-based organizations, state and local governmental agencies, and federal bank regulators together to address the specific financial service needs of their communities. In addition to the nine existing coalitions, the FDIC plans to expand to at least one additional market in 2008. Through community outreach efforts and technical assistance, the FDIC will encourage lenders to work with members of their local communities to meet their credit needs.

Human Resources (staffing and training):
Analysis of data from the small-dollar lending pilot program will be conducted by the FDIC’s existing research and supervision staffs in Washington, D.C. Staff resources trained in technical assistance and outreach is located in Washington, D.C., and the FDIC’s six regional and two area offices. These resources provide the FDIC with the capability of responding to outreach needs in communities nationwide.

Information Technology:
The FDIC uses FDICconnect to collect data from participating institutions on the small-dollar lending pilot program. CARDS and CARS are used to capture and report information about activities related to technical assistance, community development, outreach and Money Smart.

Verification and Validation
Progress in meeting this annual performance goal will be tracked through periodic meetings and established reporting processes.

2007 Program Results
This annual performance goal and the associated performance indicators and targets are new for 2008. There were no related 2007 performance results.