Program Resource Requirements
The chart below breaks out the 2012 Corporate Operating Budget by the FDIC’s three major program areas: insurance, supervision, and receivership management. It shows the budgetary resources that the FDIC estimates it will spend on these programs during 2012 to pursue the strategic goals and objectives and the annual performance goals in this plan and to carry out other program-related activities. The estimates include each program’s share of common support services that are provided on a consolidated basis.
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The FDIC's Planning Process
The FDIC has a long-range Strategic Plan that identifies goals and objectives for its three major programs: insurance, supervision, and receivership management. It also develops an Annual Performance Plan that identifies 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 past performance.
The FDIC communicates its strategic goals and objectives and its annual performance goals, indicators, and targets to employees through the internal website and internal communications, such as newsletters and staff meetings. The FDIC also establishes annual “stretch” goals that further challenge employees to pursue strategic results. Pay and recognition programs are structured to reward employee contributions to the achievement of the FDIC’s annual goals.
Throughout the year, FDIC senior management reviews progress reports. At the end of the year, the FDIC submits its Annual Report to Congress. That report, which is posted on the FDIC’s website (www.fdic.gov), compares actual performance results to the performance targets for each annual performance goal.
The Corporate Management Control Group in the Division of Finance (DOF) evaluates the FDIC’s programs and issues follow-up reports. However, program evaluations are interdivisional, collaborative efforts, and they involve management and staff from all affected divisions and offices. Division and office directors use the results of the program evaluations to assure 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 strategic planning for the FDIC.
Since the beginning of the financial crisis, the FDIC has expanded the range of issues receiving close management scrutiny to encompass crisis-related challenges. Management continues to pay particular attention to the areas of contracting, loss-share operations, expanded staffing and (new) operations, and development of performance metrics in several areas. In 2012, risk-based reviews will continue to be performed in each of the FDIC’s strategic program areas. Results of these reviews will assist management by confirming that these programs are strategically aligned or by identifying changes that need to be made.
The FDIC has 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.
Financial Institution Regulatory Agencies
The FDIC works closely with other federal financial institution regulators—principally the Board of Governors of the Federal Reserve Board (FRB) and the Office of the Comptroller of the Currency (OCC)—to address issues and programs that transcend the jurisdiction of each agency. Regulations are, in many cases, interagency efforts. For example, rules were written on an interagency basis to address accounting changes for securitizations and most other supervisory policies, including policies addressing capital adequacy, structured products, liquidity risk management, fraud information-sharing, and off-site monitoring systems. In addition, the Comptroller of the Currency is a member of the FDIC Board of Directors, which facilitates crosscutting policy development and regulatory practices between the FDIC and the OCC.
The FDIC works closely with the Consumer Financial Protection Bureau (CFPB) to address consumer protection issues. The CFPB is responsible for issuing consumer protection rules and regulations; however, the CFPB is required to consult with the FDIC, the FRB, and the OCC on these matters. Enforcement jurisdiction for insured, state nonmember banks with less than $10 billion in assets remains with the FDIC, unless the institution is an affiliate of another insured institution with $10 billion or more in assets that is supervised by the CFPB. The CFPB Director is also a member of the FDIC Board of Directors. As with the OCC, participation on the FDIC Board facilitates crosscutting policy development and regulatory practices among the FDIC, the CFPB, and the OCC.
The FDIC, the FRB, and the OCC 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.
Federal Financial Institutions Examination Council (FFIEC)
The Federal Financial Institutions Examination Council (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, the FRB, the OCC, and the 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. It also 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 maintenance of a central data repository for Community Reinvestment Act ratings and public evaluations. The FFIEC also provides an online Consumer Help Center that connects consumers with the appropriate federal regulator for a particular financial institution.
The FDIC, the FRB, and the OCC work cooperatively with the CSBS and with individual state regulatory agencies to make the bank examination process more efficient and uniform. In most states, alternating examination programs reduce the number of examinations that are conducted at insured financial institutions, thereby reducing regulatory burden. Joint examinations of larger financial institutions also optimize the use of state and FDIC resources in the examination of large, complex, and problem state nonmember banks and state-chartered thrift institutions.
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 BCBS. The BCBS 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. In 2011, the FDIC and the other federal banking agencies worked closely with the BCBS to improve the Basel II Capital Accord to strengthen the resiliency of the banking sector and improve liquidity risk management. As a result, the BCBS published Basel III, a global regulatory framework for more resilient banks and banking systems. Basel III aims to improve the banking sector’s ability to absorb shocks arising from financial and economic stress while improving risk management and governance and increasing transparency. The FDIC also has established working relationships with various international regulatory authorities to ensure effective supervision of domestic insured institutions that are wholly owned by foreign entities.
BCBS – Anti-Money Laundering/Counter-Financing of Terrorism Experts Group
The FDIC is also a member of a BCBS subcommittee called the Anti-Money Laundering/ Counter-Financing of Terrorism Experts Group (AMLEG). AMLEG provides a forum for supervisors to discuss the types of guidance that should be provided to banks on anti-money laundering and terrorist financing initiatives. In addition to the United States, 18 other countries and monetary authorities participate in this group.
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 the exposure of banks to both public and private sector entities outside the United States. 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
The FDIC plays a leadership role in the International Association of Deposit Insurers (IADI) and participates in associated activities. 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 develop and maintain sound banking and deposit insurance systems. The FDIC’s Acting Chairman currently serves as President of IADI.
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. ASBA develops, disseminates, and promotes sound bank 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. In addition, the Director of the FDIC’s Division of Risk Management Supervision began serving a two-year term as Vice Chairman of the ASBA Board of Directors in 2011.
National Credit Program
The FDIC participates with the other federal financial institution regulatory agencies in the Shared National Credit Program, an interagency program that performs a uniform credit review annually 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 the credit risk management practices of banks. The reviews, which are typically published in September of each year, help the industry better understand economic and credit risk management trends.
Agency Task Force on Discrimination in Lending
The FDIC participates on the Joint Agency Task Force on Discrimination in Lending with several other federal financial institution regulators (FDIC, FRB, OCC, 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.
Forum of Deposit Insurers
The FDIC and the European Forum of Deposit Insurers share similar interests, and the FDIC supports the organization’s mission to contribute to the stability of financial systems by promoting European cooperation in the field of deposit insurance. The FDIC openly shares its expertise and experience in supervision and deposit insurance through discussions and exchanges on issues that are of mutual interest and concern (e.g., cross-border issues, bilateral and multilateral relations, and customer protection).
Finance and Banking Information Infrastructure Committee
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), the FRB, the NCUA, the OCC, the Securities and Exchange Commission (SEC), the Department of the Treasury, and the National Association of Insurance Commissioners (NAIC).
Secrecy Act, Anti-Money Laundering, Counter-Financing
of Terrorism, and Anti-Fraud Working Groups
The FDIC participates in several interagency groups, described below, to help 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 is a public/private partnership of agencies and organizations that meets to discuss strategies and industry efforts to address money laundering controls.
- The FFIEC Bank Secrecy Act/Anti-Money Laundering Working Group is composed of representatives from the federal bank regulatory agencies, FinCEN, and the CSBS 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 the ongoing initiatives of other formal and informal interagency groups that oversee various BSA/AML-related matters. This working group meets quarterly and includes representatives from the CFTC, the SEC, Department of the Treasury, and the Office of Foreign Assets Control to ensure coordination of BSA/AML matters.
- The National Bank Fraud Working Group is sponsored by the DOJ to share information on fraud detection. It has two subgroups in which the FDIC actively participates:
- The Check Fraud Working Group 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 is composed of the federal bank regulatory agencies, DOJ, the FBI, FinCEN, the IRS, and the BPD.
- The Terrorist Finance Working Group is sponsored by the State Department to assist in the AML training effort internationally and to assess the financial structures of foreign countries for potential money laundering and terrorist financing vulnerabilities.
- Other working groups 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.
Financial Literacy and Education Commission
The FDIC is a member of the Financial Literacy and Education Commission (FLEC), which was established by the Fair and Accurate Credit Transactions Act of 2003. The FDIC actively supports the FLEC’s efforts to improve financial literacy in America by assigning experienced staff to provide leadership and support for FLEC initiatives, including leadership of two FLEC workgroups.
Financial Education Partnership
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) to collaborate in providing financial literacy and education resources and training to more than 300 federal government benefits officers and 1,500 benefits specialists nationwide.
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 composed of broad-based coalitions of financial institutions, community-based organizations, and other partners in numerous markets across the country. These 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.
and Results Act
In support of the GPRA and GPRA Modernization Act, the interagency Financial Institutions Regulatory Working Group, composed of representatives from all of the federal financial institution regulators (the FDIC, FRB, OCC, and NCUA), was formed in October 1997. This group works to identify and share information and best practices on the strategic and annual performance goals and objectives that are common to the programs and activities of these organizations and compliance with GPRA and GPRA Modernization Act requirements.
Federal Trade Commission,
National Association of
and the Securities and
The Gramm-Leach-Bliley Act (GLBA), which was enacted in 1999, permits insured financial institutions to expand the products they offer to include insurance and securities. GLBA also includes increased security requirements and disclosures to protect consumer privacy. The FDIC and other FFIEC agencies coordinate with the FTC, the SEC, and the 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 (OCA) meet quarterly to discuss accounting matters of mutual interest and maintain ongoing communications on accounting issues relevant to financial institutions. Other meetings are held with the OCA, as necessary, either on an individual agency or interagency basis.
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. Business activity tends to be cyclical, and as business and household spending fluctuate over time, these trends influence loan growth and credit performance for the banking industry. Business conditions and macroeconomic policies combine to determine the rate of inflation, domestic interest rates, the exchange value of the dollar, and equity market valuations, which also in turn influence the lending, funding, and off-balance sheet activities of FDIC-insured depository institutions.
The recent financial crisis and the associated deep recession of 2007-2009 highlighted the critical links between the health of the banking sector and the performance of the real economy. Not only do economic trends affect the performance of the banking industry, but, as the events of late 2008 prove, a systemic breakdown in the functioning of financial markets and institutions can have serious adverse consequences for real economic activity. Inevitably, when conditions deteriorate in the economy and the banking industry, banks are examined more frequently, failures increase, and resolution costs rise. These trends have important operational implications for the FDIC, often requiring an increase in staff or a diversion of staff from other activities to meet the increased demand for resources in bank supervision and resolutions.
The U.S. economic recovery is approaching three years in duration
Real Gross Domestic Product (GDP) grew at a lower-than-expected annual pace of 1.7 percent in 2011 following 3.0 percent growth in 2010. Consensus forecasts for real GDP growth in 2012 range from 2.0 to 2.5 percent. While some of the shocks that slowed growth in 2011 (e.g., supply chain disruptions following the Japanese earthquake, rising commodities prices, and concerns over the European debt crisis) have diminished in importance, the recovery will remain vulnerable to similar shocks in 2012. Already, the strength of the expansion has fallen short of past recoveries because of the serious disruptions in labor and real estate markets that resulted from the financial crisis. The balance sheets of governments at all levels also have been weakened by the downturn. At the federal level, fiscal tightening has begun and could significantly intensify if past tax cuts expire as scheduled later this year and if large, automatic spending cuts in defense and domestic spending occur in 2013.
The U.S. economy also continues to face significant uncertainties related to potential instability in oil-producing regions and from the effects of the European sovereign debt crisis. If continued, recent increases in the price of crude oil and gasoline could place upward pressure on U.S. inflation and dampen growth in real incomes and consumer spending. In Europe, financial market conditions have improved following the European Central Bank’s large-scale provision of liquidity support to the banking sector. However, euro zone countries will likely face slow or negative growth as they attempt to reduce their fiscal burdens. The ongoing situation will continue to create the potential for adverse shocks to international trade and financial market stability.
In summary, the expected path of the U.S. economy is a steady, if slow, expansion that should continue to support the gradual repair of balance sheets by FDIC-insured depository institutions and other sectors hard hit by the financial crisis. However, the post-crisis environment continues to pose some unique challenges and risks that merit the continued attention of regulators.
The banking industry continued to recover in 2011.
The 7,357 FDIC-insured commercial banks and savings institutions that filed financial results at year-end 2011 reported net income of $119.5 billion for the year, an increase of $34.0 billion compared with full-year 2010. This is the highest annual earnings total since 2006, when insured institutions reported $145.2 billion in net income. The year-over-year improvement was made possible by large reductions in provisions for loan and lease losses, reflecting an improving trend in credit quality. The improvement in earnings was fairly widespread; more than two out of every three insured institutions (66.9 percent) reported higher net income than in 2010. Less than one in seven institutions (15.5 percent) reported a net loss for the year, the lowest proportion since 2007. Reduced loss provisioning expenses made up for a year-over-year decline in the industry’s revenues. Net operating revenue (the sum of net interest income and total noninterest income) was $12.8 billion lower than in 2010.
The average return on assets (ROA) rose to 0.88 percent from 0.65 percent a year earlier. This is the highest full year ROA for the industry since 2006. More than 59 percent of insured institutions had higher ROAs in 2011 than in 2010. Insured institutions set aside $76.9 billion in provisions for loan and lease losses during 2011, a reduction of $81.1 billion (51.3 percent) compared to 2010. The industry’s total noninterest income declined by $5.3 billion (2.3 percent), as income from asset servicing fell by $8.0 billion (48.6 percent), gains on loan sales dropped by $4.8 billion (43.0 percent), and income from service charges on deposit accounts declined by $2.2 billion (5.9 percent). These declines were partially offset by a $2.2 billion (9.5 percent) increase in trading income. Net interest income was $7.5 billion (1.7 percent) lower than in 2010. Total noninterest expenses were $19.8 billion (5.1 percent) higher.
An interest-rate environment characterized by historically low short-term interest rates contributed to a decline in the industry’s net interest margin. The average margin fell from 3.76 percent in 2010 to 3.60 percent in 2011. Narrower spreads between the yields on interest-earning assets and the costs of funding those assets combined with weak growth in earning assets to produce the year-over-year decline in net interest income. The greatest margin declines occurred at the largest banks, where much of the growth in interest-earning assets consisted of low-yield investments, such as balances with Federal Reserve banks.
An improving trend in asset quality indicators that began in the second half of 2010 continued through the end of 2011. For the 12 months ended December 31, total noncurrent loans and leases—those that were 90 days or more past due or in nonaccrual status—fell by $53.5 billion (14.9 percent). All major loan categories registered improvements, with loans secured by real estate properties accounting for more than two-thirds (68 percent) of the total decline in noncurrent loan balances. Noncurrent real estate construction and development loans declined by $19.3 billion, while balances of loans to commercial and industrial (C&I) borrowers that were noncurrent fell by $11.7 billion.
Noncurrent real estate loans secured by nonfarm nonresidential properties declined by $6.1 billion, and noncurrent residential mortgage balances dropped by $5.6 billion. Net charge-offs of loans and leases (NCOs) totaled $113.0 billion in 2011, a $74.7 billion decline from 2010. This is the fourth consecutive year that industry charge-offs exceeded $100 billion. Credit card loan NCOs had the largest year-over-year decline, falling by $27.9 billion. NCOs of real estate construction loans were $11.8 billion lower, C&I NCOs were down by $9.8 billion, and residential mortgage NCOs fell by $8.3 billion.
Asset growth picked up in 2011, funded by strong deposit inflows. During the 12 months ended December 31, total assets of insured institutions increased by $564.4 billion (4.2 percent). Cash and balances due from depository institutions (including balances with Federal Reserve banks) accounted for $298.4 billion (52.9 percent) of the growth in assets. Securities portfolios rose by $182.6 billion (6.8 percent). Net loans and leases increased by $130.8 billion, as C&I loan balances rose by $160.9 billion (13.6 percent). Balances fell in most other major loan categories in 2011. The largest declines occurred in real estate construction and development loans, where balances fell by $81.4 billion (25.3 percent), and in home equity lines of credit, which declined by $33.5 billion (5.3 percent). Banks reduced their reserves for loan losses by $40.5 billion (17.5 percent) during 2011, while increasing their equity capital by $68.0 billion (4.6 percent).
Growth in deposits outpaced the increase in total assets in 2011. Deposits in domestic offices of insured institutions increased by $881.9 billion (11.2 percent), while deposits in foreign offices fell by $121.4 billion (7.8 percent). A large portion of the increase in domestic deposits occurred in noninterest-bearing transaction accounts with balances greater than $250,000 that are fully insured until the end of 2012. Balances in these accounts increased by $569.1 billion (56 percent) during the year. Nondeposit liabilities fell by $255.6 billion (10.7 percent), as banks reduced their Federal Home Loan Bank advances by $59.1 billion (15.3 percent), Fed funds purchased declined by $72.5 billion (60.9 percent), securities sold under repurchase agreements dropped by $30.3 billion (6.6 percent), and other secured borrowings fell by $76.4 billion (19.6 percent).
At the end of 2011, there were 813 institutions on the FDIC’s “Problem Bank List,” down from 884 problem institutions at the beginning of the year. Total assets of problem institutions declined to $319 billion from $390 billion a year earlier. Although these institutions are identified as having financial, operational, or managerial weaknesses that threaten their viability, historical analysis shows that most problem institutions do not fail.
In 2011, 92 banks failed, representing a combined $34.9 billion in assets. The DIF balance, which fell below zero in 2009, returned to a positive balance in 2011. As of December 31, 2011, the DIF balance stood at $11.8 billion, up from negative $7.4 billion at year-end 2010. The reserve ratio was positive 0.17 percent at the end of 2011, up from negative 0.12 percent at the end of 2010.
The FDIC adopted an amended Restoration Plan on October 14, 2010, that will restore the DIF reserve ratio to 1.35 percent by September 2020, as required by DFA. In October 2011, the FDIC projected total DIF losses for the period 2011 to 2015 of $19 billion, $2 billion less than the FDIC’s April 2011 projection.
The modest reduction in projected losses over the 2011-2015 period reflects improved prospects for individual troubled banks, an expected continued decline in the pace of CAMELS rating downgrades, and a reduction in the rate at which troubled banks fail. Based on the most recent projections, the FDIC estimates that the DIF reserve ratio will reach 1.15 percent in 2018 under current assessment rates.
The banking industry has the capacity to provide the necessary backing to the insurance fund, given its historically strong capital levels. As of September 2011, over 96 percent of all FDIC-insured institutions, representing more than 99 percent of all insured institution assets, met or exceeded the quantitative requirements to be 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, provide confidence that the FDIC will continue to have the resources to protect insured depositors.