Federal Deposit
Insurance Corporation

Appendix

• Program Resource Requirements
• The FDIC's Planning Process
• Program Evaluation
• Interagency Relationships
• External Factors

The FDIC's Planning Process
The FDIC has a long-range strategic plan that identifies strategic goals and objectives for its three major programs: Insurance, Supervision, and Receivership Management. The plan is reviewed and updated every three years. The Corporation also develops Annual Performance Plans that identify annual goals, indicators, and targets for each strategic objective.

In developing its Strategic and Annual Performance Plans, the FDIC uses an integrated planning process in which guidance and direction are provided by senior management, and plans and budgets are developed with input from program personnel. Business requirements, industry information, human capital, technology and financial data are considered in preparing annual performance plans and budgets. Factors influencing the FDIC’s plans include changes in the financial services industry, program evaluations and other management studies, and prior period performance.

The FDIC’s strategic goals and objectives and its annual performance goals, indicators, and targets are communicated to its employees via the FDIC’s internal website and through internal communication mechanisms, such as newsletters and staff meetings. The Corporation also establishes on an annual basis additional “stretch” objectives that further challenge FDIC employees to pursue strategic initiatives and results. FDIC pay and award/recognition programs are structured to reward employee contributions to the achievement of the Corporation’s annual goals and objectives.

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Program Evaluation
The Office of Enterprise Risk Management has primary responsibility for coordinating and reporting on evaluations of the Corporation’s programs. This role is independent of the program areas; however, program evaluations are interdivisional, collaborative efforts, and they involve management and staff from all affected divisions and offices. Such participation is critical to fully understanding the program being evaluated. The results of program evaluations are the basis for annual assurances made by division and office directors to the Chairman that operations are effective and efficient; financial data and reporting are reliable; laws and regulations are followed; and internal controls are adequate. These results are also considered in making strategic decisions for the FDIC.

Over the past three years, numerous program evaluations have been carried out in each of the Corporation’s three program areas:

• Insurance – implementation of Deposit Insurance Reform and implementation of major initiatives of the Temporary Liquidity Guarantee Program;

• Supervision – monitoring or addressing regulatory concerns regarding areas of heightened risk, such as subprime and nontraditional real estate lending practices; unfair and deceptive lending practices; niche and de novo banks; concentrations in commercial real estate; effects of economic decline in certain sectors; and situations of rapid growth; and

• Receivership Management – maintaining readiness and productivity of the receivership functions and transitioning resources to conduct financial institution closings.

During the period covered by this Plan, the FDIC will continue to perform risk-based reviews in each strategic area of the Corporation. Results of these reviews will assist management by confirming that programs are strategically aligned or by identifying changes that need to be made to a particular program. Program evaluation activities in 2010 will focus on key corporate issues, including the six Program Management Office organizations, control testing, and continuous improvements to the FDIC’s core business functions.

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Interagency Relationships

The FDIC has very productive working relationships with agencies at the state, federal and international levels. It leverages those relationships to achieve the goals outlined in this Plan and to promote confidence in the U.S. banking system. Listed below are examples of the many important relationships that the FDIC has built with other agencies, seeking to promote strength, stability and confidence in the financial services industry.

Other Financial Institution Regulatory Agencies
The FDIC works closely with other federal financial institution regulators—principally the Board of Governors of the Federal Reserve System (FRB), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS)—to address issues and programs that transcend the jurisdiction of each agency. Regulations are, in many cases, interagency efforts. For example, the rulemaking that addressed accounting changes for securitization and the majority of supervisory policies are written on an interagency basis. Examples include policies addressing capital adequacy, structured products, liquidity risk management, fraud information-sharing, and offsite monitoring systems. In addition, the Comptroller of the Currency and the OTS Director are members of the FDIC Board of Directors, which facilitates crosscutting policy development and regulatory practices among the FDIC, the OCC, and the OTS.

The FDIC, the FRB, the OCC, and the OTS also work closely with the National Credit Union Administration (NCUA), which supervises and insures credit unions; the Conference of State Bank Supervisors (CSBS), which represents the state regulatory authorities; and individual state regulatory agencies.

The Federal Financial Institutions Examination Council (FFIEC)
The FFIEC is a formal interagency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. The member agencies of the FFIEC are the FDIC, FRB, OTS, OCC and NCUA. As the result of legislation in 2006, the Chair of the FFIEC State Liaison Committee now serves as a sixth member of the FFIEC. The State Liaison Committee is composed of five representatives of state supervisory agencies. To foster interagency cooperation, the FFIEC has established interagency task forces on consumer compliance, examiner education, information sharing, regulatory reports, surveillance systems, and supervision. The FFIEC has statutory responsibilities to facilitate public access to data that depository institutions must disclose under the Home Mortgage Disclosure Act of 1975 (HMDA) and the aggregation of annual HMDA data for each metropolitan statistical area. The FFIEC publishes handbooks, catalogs and databases that provide uniform guidance and information to promote a consistent examination process among the agencies and make information available to the public.

This includes a central data repository for Community Reinvestment Act (CRA) ratings and Public Evaluations. The FFIEC now also provides an online Consumer Help Center that connects consumers with the appropriate federal regulator for a particular financial institution.

State Banking Departments
The FDIC works closely with state banking departments as well as the Conference of State Bank Supervisors to provide greater efficiencies in examining financial institutions and promote a uniform approach to the examination process. In most states, alternating examination programs reduce the number of examinations at financial institutions, thereby reducing regulatory burden. Joint examinations at larger financial institutions also optimize the utilization of state and FDIC resources when examining large, complex, and problem FDIC-supervised financial institutions.

Basel Committee on Banking Supervision
The FDIC participates on the Basel Committee on Banking Supervision (BCBS), a forum for international cooperation on matters relating to financial institution supervision, and on numerous subcommittees of the committee. The Committee aims to improve the consistency of capital regulations internationally, make regulatory capital more risk-sensitive and promote enhanced risk-management practices among large internationally active banking organizations. The Basel II Capital Accord is an effort by international banking supervisors to update the original international bank capital accord (Basel I), which has been in effect since 1988. Throughout 2009, the FDIC and the other federal banking agencies worked closely with the Committee to implement improvements in the Basel II Capital Accord to strengthen the resiliency of the banking sector and improve liquidity risk management. The FDIC also established working relationships with international regulatory authorities to ensure effective supervision of domestic insured institutions that are wholly owned by foreign entities, which includes coordination of efforts to implement the Basel II Capital Accord.

BCBS - International Liaison Group
In addition to the FDIC’s membership on the BCBS, the FDIC is a member of a BCBS subcommittee called the International Liaison Group (ILG). The ILG provides a forum for deepening engagement and cooperation with supervisors from around the world on a broad range of issues involving banking and supervision. In addition to the United States, the ILG has senior representatives from seven other member countries, including France, Germany, Italy, Japan, the Netherlands, Spain, and the United Kingdom.

Interagency Country Exposure Review Committee
The Interagency Country Exposure Review Committee (ICERC) was established by the FDIC, the FRB, and the OCC to ensure consistent treatment of the transfer risk associated with banks’ foreign exposures to both public and private sector entities. The ICERC assesses the degree of transfer risk inherent in cross-border and cross-currency exposures of U.S. banks, assigns ratings based on its risk assessment and publishes annual reports of these risks by country.

International Association of Deposit Insurers
The FDIC plays a leadership role in the International Association of Deposit Insurers (IADI) and participates in associated activities. The IADI contributes to the stability of the financial system by promoting international cooperation in the field of deposit insurance. Through IADI, the FDIC focuses its efforts to build strong bilateral and multilateral relationships with foreign regulators and insurers, U.S. government entities, and international organizations. The FDIC also provides technical assistance and conducts outreach activities with foreign entities to help in the development and maintenance of sound banking and deposit insurance systems. The FDIC’s Vice Chairman currently serves as President of the IADI.

Association of Supervisors of Banks of the Americas
The FDIC, as Director of the North American Group, exercises a leadership role in the Association of Supervisors of Banks of the Americas (ASBA) and actively participates in the organization’s activities. The ASBA develops, disseminates, and promotes sound banking supervisory practices throughout the Americas in line with international standards. The FDIC supports the organization’s mission and activities by actively contributing to ASBA’s research and guidance initiatives and its education and training services.

Shared National Credit Program
The FDIC participates with the other federal financial institution regulatory agencies in the Shared National Credit Program, an interagency effort to perform a uniform credit review of financial institution loans that exceed $20 million and are shared by three or more financial institutions. The results of these reviews are used to identify trends in industry sectors and banks’ credit risk-management practices. These trends are typically published in September of each year to aid the industry in understanding economic and credit risk-management trends.

Joint Agency Task Force on Discrimination in Lending
The FDIC participates on the Joint Agency Task Force on Discrimination in Lending with all five of the federal financial institution regulators (FDIC, FRB, OCC, OTS and NCUA) along with the Department of Housing and Urban Development, the Federal Housing Finance Agency, the Department of Justice (DOJ), and the Federal Trade Commission. The agencies exchange information about fair lending issues, examination and investigation techniques, and interpretations of statutes, regulations and case precedents.

European Forum of Deposit Insurers
he FDIC shares mutual interests with the European Forum of Deposit Insurers (EFDI) and supports the organization’s mission to contribute to the stability of financial systems by promoting European cooperation in the field of deposit insurance.

As such, the FDIC contributes its expertise and experience in supervision and deposit insurance, and openly shares this expertise through discussions and exchanges on issues that are of mutual interest and concern (e.g., cross-border issues, bilateral and multilateral relations, and financial customers’ protections).

Bank Secrecy Act, Anti-Money Laundering, Counter-Financing of Terrorism, and Anti-Fraud Working Groups
The FDIC works with the Department of Homeland Security and the Office of Cyberspace Security through the Finance and Banking Information Infrastructure Committee (FBIIC) to improve the reliability and security of the financial industry’s infrastructure. Other members of FBIIC include: the Commodity Futures Trading Commission (CFTC), FRB, NCUA, OCC, OTS, the Securities and Exchange Commission (SEC), the Department of the Treasury, and the National Association of Insurance Commissioners (NAIC).

The FDIC participates in several other interagency groups, described below, to assist in efforts to combat fraud and money laundering, and to implement the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act):

• The Bank Secrecy Act Advisory Group, a public/private partnership of agencies and organizations that meets to discuss strategies and industry efforts to address money laundering controls.

• The National Secrecy Act Advisory Group, a public/private partnership of agencies and organizations that meets to discuss strategies and industry efforts to curb money laundering.

• • The FFIEC Bank Secrecy Act/Anti-Money Laundering Working Group, composed of representatives from the federal bank regulatory agencies, FinCEN and the CSBS, whose purpose is to coordinate BSA/AML training and awareness efforts and to improve communications among the agencies. The BSA/AML working group builds on existing activities and works to strengthen initiatives that are already being pursued by other formal and informal interagency groups providing oversight of various BSA/AML-related matters.

• The National Bank Fraud Working Group, which is sponsored by DOJ.

• The Check Fraud Working Group (a subcommittee of the National Bank Fraud Working Group), which is co-chaired by the FDIC and the Federal Bureau of Investigation (FBI) and is composed of the federal bank regulatory agencies, DOJ, the FBI, FinCEN, the Internal Revenue Service (IRS), the Bureau of Public Debt (BPD), and the U.S. Postal Service.

• The Cyber Fraud Working Group (a subcommittee of the National Bank Fraud Working Group), which is composed of the federal bank regulatory agencies, DOJ, the FBI, FinCEN, the IRS, and the BPD.

• The National Money Laundering Strategy Steering Committee, which is co-chaired by DOJ and the Department of the Treasury.

• The Terrorist Finance Working Group, which is sponsored by the State Department to assist in the AML training effort internationally and the assessment of foreign countries’ financial structures for potential money laundering and terrorist financing vulnerabilities.

• Other working groups that are sponsored by the Department of the Treasury to develop USA PATRIOT Act rules, interpretive guidance, and other relevant BSA materials applicable to insured financial institutions.

Money Services Business Working Group
The FDIC is working with FinCEN, the Money Transmitters Regulators Association, the CSBS, and the IRS to address the discontinuance of banking services to money services businesses (MSBs). The group submitted a survey to all states and U.S. territories to better understand state licensing and AML requirements.

Financial Literacy and Education Commission
The FDIC is a member of the Financial Literacy and Education Commission (FLEC), as mandated by the Fair and Accurate Credit Transactions (FACT) Act of 2003. The FDIC actively supports the FLEC’s efforts to improve financial literacy in America by assigning experienced staff to work with the Office of Financial Education; providing leadership in the development and maintenance of Commission initiatives, such as the My Money hotline and toolkits; and participating in ongoing meetings that address issues affecting the promotion of financial literacy and education.

Financial Education
The FDIC launched the Money Smart initiative in 2001 to help individuals outside the financial mainstream enhance their money skills and create positive banking relationships. The FDIC has partnered with several federal agencies on this initiative. In 2008, the FDIC signed a partnership agreement with the U.S. Office of Personnel Management (OPM) that provides for FDIC and OPM collaboration to provide financial literacy and education resources and training to over 300 federal government benefits officers and 1,500 benefits specialists nationwide. Work done as a result of this agreement during 2009 resulted in approximately 140 benefits staff from various federal agencies being trained in the Money Smart program and Money Smart being highlighted by OPM at training events for benefits staff.

Alliance for Economic Inclusion
The FDIC established and leads the Alliance for Economic Inclusion (AEI), a national initiative to bring all unbanked and underserved populations into the financial mainstream. The AEI is comprised of broad-based coalitions of financial institutions, community-based organizations and other partners in 11 markets across the country. The coalitions work to increase banking services for underserved consumers in low- and moderate-income neighborhoods, minority and immigrant communities, and rural areas. These expanded services include savings accounts, affordable remittance products, targeted financial education programs, short-term loans, alternative delivery channels, and other asset-building programs.

Government Performance and Results Act Financial Institutions Regulatory Working Group
In support of the Government Performance and Results Act (GPRA), the interagency Financial Institutions Regulatory Working Group, comprising all five federal financial institution regulators (OTS, FRB, OCC, NCUA and FDIC), was formed in October 1997. This group works to identify the general goals and objectives that cross these organizations and their programs and activities, as well as other general GPRA requirements.

Federal Trade Commission, National Association of Insurance Commissioners and the Securities and Exchange Commission
The Gramm-Leach-Bliley Act (GLBA) was enacted in 1999. It permitted insured financial institutions to expand the products they offer to include insurance and securities. This act also included increased security requirements and disclosures to protect consumer privacy. The FDIC and other FFIEC agencies coordinate with the FTC, the SEC, and NAIC to develop industry research and guidelines relating to these products.

GLBA also requires the SEC to consult and coordinate with the appropriate federal banking agency on certain loan-loss allowance matters involving public bank and thrift holding companies. The SEC and the agencies have an established consultation process designed to fully comply with this requirement, while avoiding unnecessary delays in processing holding company filings with the SEC and providing these institutions access to the securities markets.

In addition, the accounting policy staffs of the FDIC and the other FFIEC agencies and the SEC’s Office of the Chief Accountant meet quarterly to discuss accounting matters of mutual interest and maintain ongoing communications on accounting issues relevant to financial institutions, either on an individual agency or interagency basis, depending on the circumstances.

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External Factors: The Economy and Its Impact on the Banking Industry and the FDIC
Economic conditions at the national, regional, and local levels affect banking strategies and the industry’s overall performance. Economic conditions also affect the performance of businesses and consumers, which impact loan growth and credit exposure for the banking industry. Overall business conditions and macroeconomic policies are key determinants of inflation, domestic interest rates, the exchange value of the dollar, and equity market valuations, which in turn influence the lending, funding, and off-balance-sheet activities of FDIC-insured depository institutions.

Adverse economic conditions, such as a national or regional economic downturn, raise the risk profile of the banking industry or select groups of insured institutions. An economic downturn may lead to an increase in problem banks, which accelerates examination frequencies, and may increase the incidence of failures, resolution costs, and the pace at which the FDIC markets assets and terminates receiverships. Adverse economic scenarios may also divert FDIC staff from other activities to address these or other operational concerns.

Slow economic recovery expected in 2010
After four consecutive quarters of decline during the second half of 2008 and first half of 2009, the U.S. economy now appears to have entered a fragile recovery period. The recession that began in December 2007 was the longest and deepest since World War II, with a 3.7 percent decline in output through the second quarter of 2009 and 8.4 million lost jobs through January 2010. Credit markets experienced severe disruptions during the second half of 2008, but they largely recovered during 2009 following unprecedented government stabilization initiatives.

While economic conditions show some signs of improvement, they remain at generally weak levels and continue to place a strain on banking industry performance. Consumer spending rose in the third and fourth quarters of 2009, but weak labor markets and reduced household wealth continue to pose risks to consumer credit performance. The housing sector shows signs of improvement in sales and prices, but concerns remain about how the market will perform after federal tax credits and the Federal Reserve’s mortgage market intervention end in the first half of 2010. In addition, while manufacturing and business investment have shown some improvement recently, commercial real estate and business loan portfolios remain under pressure.

The economic recovery still faces several downside risks—including weak labor markets and the waning impact of fiscal stimulus—that may contribute to continued stress on the banking industry over the coming year. Non-farm payrolls continue to decline, though at a much slower pace than a year ago, and the unemployment rate remains near a 26-year high at 9.7 percent. The economic recovery depends to a large extent on the results of U.S. and foreign government fiscal stimulus efforts and initiatives to restore financial stability.

The events surrounding the financial crisis of 2008 continue to have an effect on U.S. economic performance and FDIC-insured institutions. Government stabilization efforts, including several FDIC initiatives, have helped to preserve public confidence and mitigate the impact of the economic downturn. However, most analysts believe that the maximum impact of the fiscal stimulus on GDP growth was reached during the third quarter of 2009 and will make little to no contribution after mid-2010. Any further deterioration in labor, credit, consumer, or housing markets poses threats to an already weak economic recovery.

Banking industry performance in 2009 reflected the continued impacts of the economic slowdown.
FDIC-insured commercial banks and savings institutions reported net income of $12.5 billion for the year, up from $4.5 billion in 2008, but well below the $100 billion that insured institutions earned in 2007. The average return on assets (ROA) was 0.09 percent, compared to 0.03 percent in 2008. These are the two lowest annual ROAs for the industry in the past 22 years, and most of the year-over-year improvement in industry profitability occurred at the largest institutions. Almost two out of every three insured institutions (63.2 percent) reported a lower ROA in 2009 than in 2008, and 29.5 percent of all institutions reported a net loss for the year. This is the highest percentage of unprofitable institutions in the 26 years for which data are available.

High expenses for credit-quality problems have been the principal cause of earnings weakness. Insured institutions set aside $247.7 billion in loan-loss provisions during 2009, compared to $176.2 billion a year earlier. Total loss provisions in 2009 represented 38 percent of the industry’s net operating revenue (net interest income plus total non-interest income) for the year, the largest proportion in any year since the creation of the FDIC. Increases in provisions were outweighed by increases in net operating revenue, which totaled $656.3 billion, an increase of $90.9 billion (16.1 percent) over 2008. Net interest income was $38.1 billion (10.7 percent) higher than a year earlier, while non-interest income increased by $52.8 billion (25.4 percent).

The industry’s troubled loans continued to increase in 2009. At the end of December, the amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) was $391.3 billion, compared to $233.6 billion at the end of 2008. Non-current loans and leases represented 5.37 percent of all loans and leases, the highest percentage in the 26 years that insured institutions have reported non-current loan data. Residential mortgage loans accounted for more than half (51.2 percent) of the total increase in non-current loans in 2009, rising by $80.7 billion. Non-current real estate construction and development loans rose by $20.3 billion, noncurrent loans to commercial and industrial (C&I) borrowers increased by $16.7 billion, and noncurrent real estate loans secured by nonfarm nonresidential properties increased by $24.3 billion.

Net charge-offs of loans and leases totaled $186.8 billion in 2009, compared to $100.4 billion in 2008. Net charge-offs of credit card loans totaled $37.5 billion for the year, net charge-offs of residential mortgage loans were $33.9 billion, C&I loan charge-offs totaled $31.8 billion, and net charge-offs of real estate construction and development loans were $27.3 billion.

Total assets of insured institutions registered an historic decline in 2009. Assets fell by $731.7 billion (5.3 percent) during the year, the largest annual percentage decline since the inception of the FDIC. The asset decline was led by a $640.9 billion (8.3 percent) decline in net loans and leases. C&I loan balances declined by $273.2 billion (18.3 percent), residential mortgage loans fell by $128.5 billion (6.3 percent), and real estate construction and development loans declined by $139.4 billion (23.6 percent). Real estate loans secured by nonfarm nonresidential properties (up $25.2 billion, or 2.4 percent) were the only major loan category that had meaningful growth in 2009.

In contrast to the shrinkage in industry assets, deposit balances increased, rising by $191.1 billion (2.1 percent). Nondeposit liabilities fell by $1 trillion (31.3 percent) during the year. At year end, deposits funded 70.4 percent of total industry assets, the highest proportion since March 31, 1996.

The number of insured institutions on the FDIC’s “Problem List” rose from 252 institutions with assets of $159 billion to 702 institutions with assets of $403 billion at the end of 2009. This is the largest number and asset total of “problem” institutions since the middle of 1993. While these institutions have been determined to have financial, operational, or managerial weaknesses that threaten their viability, historical analysis shows that most problem institutions do not fail, even in periods of banking industry distress.

The costs associated with recent and anticipated bank failures have pushed the DIF balance below zero. In 2009, there were 140 failures with a combined $172 billion in assets. At year-end 2009, the DIF stood at negative $20.9 billion, down from positive $34.6 billion a year earlier, and the reserve ratio was negative 0.39 (based on unaudited fund balance results). Total reserves (the DIF balance plus the contingent loss reserve) were $23.1 billion. The FDIC adopted an amended restoration plan on September 29, 2009, that will raise risk-based assessment rates and make other changes to restore the DIF reserve ratio to at least 1.15 over an eight-year period. At that time, total DIF losses for the period 2009-2013 were projected to be $100 billion, most of which had already been incurred or reserved for as of year- end 2009. In order to address liquidity needs to fund projected failure resolutions, the FDIC adopted a rule on November 12, 2009, that required insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012. Insured institutions prepaid approximately $45.7 billion in assessments on December 30, 2009.

The banking industry has the capacity to provide the necessary backing to the insurance fund, given its historically strong capital levels. As of the fourth quarter of 2009, 95.5 percent of all FDIC-insured institutions were well-capitalized according to the regulatory capital definition for Prompt Corrective Action. This capacity, together with the backing of the full faith and credit of the U.S. government, provides confidence that the FDIC will continue to protect insured depositors.

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