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2009 Annual Report
I. Management's Discussion and Analysis
Supervision and Consumer Protection
As of December 31, 2009, the Corporation conducted 2,604 statutorily required risk management (safety and soundness) examinations, including a review of Bank Secrecy Act compliance, and all required follow-up examinations for FDIC-supervised problem institutions within prescribed time frames. The FDIC also conducted 1,981 CRA/compliance examinations (1,435 joint CRA/compliance examinations, 539 compliance-only examinations,2 and 7 CRA-only examinations) and 3,273 specialty examinations. All CRA/compliance examinations were also conducted within the time frames established by FDIC policy, including required follow-up examinations of problem institutions.3 The accompanying table on page 25 compares the number of examinations, by type, conducted from 2007 through 2009.
During 2009, the Corporation issued the following formal and informal corrective actions to address safety and soundness concerns: 282 Cease and Desist Orders, 3 Temporary Cease and Desist Orders, and 425 Memoranda of Understanding. Of these actions, 9 Cease and Desist Orders and 22 Memoranda of Understanding were issued based, in part, on apparent violations of the Bank Secrecy Act.
As of December 31, 2009, 327 FDIC-supervised institutions were assigned a "4" rating for safety and soundness, and 146 institutions were assigned a "5" rating. Of the "4-rated" institutions, 297 were examined or had examinations in process as of December 31, 2009, and formal or informal enforcement actions are in process or had been finalized to address the FDIC's examination findings. Further, 131 "5-rated" institutions were examined or had examinations in process as of December 31, 2009.
During 2009, the Corporation issued the following formal and informal corrective actions to address Compliance concerns: 18 Cease and Desist Orders and 50 Memoranda of Understanding.
Restoring and Maintaining Public Confidence and Stability in the
Joint Examination Teams
In 2009, the FDIC used JETs within institutions involved in significant subprime or nontraditional mortgage activities; institutions affiliated with or utilizing third parties to conduct significant consumer lending activities, especially in the credit card area; and institutions for which the FDIC has received a high volume of consumer complaints or complaints with serious allegations of improper conduct by banks.
Bank Secrecy Act/Anti-Money Laundering
The FDIC conducted three training sessions in 2009 for 57 central bank representatives from Bangladesh, Egypt, Ghana, Indonesia, Jordan, Kuwait, Mali, Nigeria, Pakistan, Saudi Arabia, Thailand, United Arab Emirates, and Yemen. The training focused on AML/CFT controls, the AML examination process, customer due diligence, suspicious activity monitoring, and foreign correspondent banking. The sessions also included presentations from the Federal Bureau of Investigation on combating terrorist financing, and the Financial Crimes Enforcement Network on the role of financial intelligence units in detecting and investigating illegal activities.
Additionally, the FDIC hosted 29 representatives from the Central Bank of Russia, sponsored by the Financial Services Volunteer Corps. Sessions included discussion of AML topics, as well as supervisory examination processes and interaction with the financial intelligence unit. Separately, the FDIC met with five Russian and three Kazakhstani foreign officials as a part of the U.S. Department of State's International Visitor Leadership Program to discuss the FDIC's AML Supervisory Program.
Minority Depository Institution Activities
The FDIC also continued to offer the benefit of having examiners return to FDIC-supervised MDIs from 90 to 120 days after examinations, to assist management in understanding and implementing examination recommendations and to discuss other issues of interest. Seven MDIs took advantage of this initiative in 2009. Also, the FDIC held six regional outreach training efforts and educational programs to MDIs, three of which are discussed below.
In February 2009, the FDIC held a conference call to discuss various facets of the proposed changes to the insurance assessment criteria, including (a) the removal of statutory constraints on the FDIC's ability to charge institutions for deposit insurance under the Federal Deposit Insurance Reform Act of 2005, (b) the temporary increase in basic deposit insurance coverage from $100,000 to $250,000 per depositor under the Emergency Economic Stabilization Act of 2008, and (c) the insurance assessments for financial institutions based on their risk category. There was also a discussion about the criteria for participating in the Troubled Asset Relief Program (TARP). Seventy-eight bankers participated on the conference call.
The FDIC hosted the fourth annual MDI National Conference in Chicago, Illinois, from July 8–10, 2009. The conference theme was "A Bridge to Community Stabilization," and over 220 bankers from MDIs attended. The breakout sessions focused on topics of interest to bank management, including commercial real estate lending, liquidity and funding, mortgage foreclosure prevention programs, and accounting issues.
The FDIC held banker roundtables and/or conference calls with MDIs in their geographic regions. Topics of discussion at roundtables included the economy, overall banking conditions, agricultural conditions, deposit insurance assessments, accounting, and other bank examination issues. Also, from December 2–3, 2009, the FDIC, in cooperation with the Puerto Rico Bankers Association, hosted a compliance school in Guayabo, PR. The event was attended by approximately 150 bankers from nine banks.
In addition, the National MDI Coordinator held conference calls with representatives from several trade groups, including the Puerto Rico Bankers Association, the National Bankers Association, the Korean-American Bankers Association, the Asian-American Bankers Association, the National Association of Chinese-American Bankers, and the Hispanic Bankers Association, to discuss the MDI program and FDIC outreach activities.
Internationally, the FDIC is participating in the Basel Capital Monitoring Group that tracks the impact on risk-based capital with the implementation of Basel II. The FDIC will continue to compile and analyze the information on the international impact of Basel II on regulatory capital as it becomes available through public and supervisory sources.
The FDIC continues to participate in international efforts to improve the quality of capital, minimize the procyclicality of risk-based capital requirements, and ensure the amount of capital banks hold for risky exposures is commensurate with risk (notably securitization, re-securitization, and trading book exposures). The FDIC actively participates in the work of the Basel Committee on Banking Supervision's Policy Development Group and a number of working groups: AIG Trading Book, Fundamental Review of the Trading Book, Definition of Capital, Non-Risk Based Supplementary Measure (leverage ratio), Liquidity, External Ratings and Securitizations, Counterparty Credit Risk, Asset Encumbrance, Procyclicality, and Macroprudential Supervision. The substantive work of these groups culminated in the publication in June 2009 of Revisions to the Basel II market risk framework, Guidelines for computing capital for incremental risk in the trading book, and Enhancements to the Basel II framework—and two consultative papers in December of 2009-Strengthening the resilience of the banking sector and International framework for liquidity risk measurement, standards and monitoring. The FDIC also participated in drafting the request for data for the impact studies that the Basel Committee will undertake in early 2010 to calibrate the proposals in the consultative papers. A number of these groups, including the Fundamental Review of the Trading Book, Asset Incumbrance, External Ratings and Securitization, and Macroprudential Supervision, will continue their work into 2010.
Domestically, the FDIC issued a number of interagency rulemakings to align regulatory capital more closely with risk. On November 12, 2009, the FDIC made final the interim final rule regarding the risk weights for Residential Mortgage Loans Modified Pursuant to the Making Home Affordable Program (MHAP) of the U.S. Department of the Treasury.5 This rule was jointly issued with the other federal banking agencies' support to prevent residential real estate foreclosures and keep Americans in their homes. The rule allows an institution to continue to risk weight a prudently-underwritten mortgage loan at the preferential risk weight even though it has been restructured under the Treasury's program. The final rule clarified that a banking organization may retain the risk weight assigned to a mortgage loan before the loan was modified under the MHAP.
On August 27, 2009, in response to the financial turmoil and the Financial Accounting Standards Board's revisions to accounting rules for consolidation of variable interest entities—Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (FAS 166—now codified as ASC 860), and Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167—now codified as ASC 810)—the federal banking regulators issued a proposed rule for comment titled Impact of Modifications to Generally Accepted Accounting Principles, Consolidation of Asset-Backed Commercial Paper Programs, and Other Related Issues. The final rule was approved by the FDIC Board on December 15, 2009. The rule discussed the impact of the accounting changes on the agencies' regulatory capital rules. The rule modified the general risk-based and advanced risk-based capital adequacy frameworks to eliminate the exclusion of certain consolidated asset-backed commercial paper programs from risk-weighted assets. The rule provided a reservation of authority in the general risk-based and advanced risk-based capital adequacy frameworks to permit the agencies to require banking organizations to treat entities that are not consolidated under accounting standards as if they were consolidated for risk-based capital purposes. The rule included an optional four-quarter transition period to ease the impact of the accounting change on a bank's risk-based capital requirements but did not delay the impact of the accounting change on a bank's leverage ratio.
The FDIC, with the other federal bank regulators, commenced a number of rulemakings in late 2009, including a revised Standardized Framework notice of proposed rulemaking (NPR) that proposes to implement the Basel II Accord standardized risk-based capital framework, an NPR to revise the Market Risk Amendment that proposes higher regulatory capital requirements for significant trading book activities, and an NPR that proposes implementation of the Basel changes to risk-based capital requirements that doubles the capital charge for re-securitizations and requires additional disclosures for securitizations and re-securitizations.
Structured Credit Products
Qualifications for Failed Bank Acquisitions
Commercial Real Estate Guidance
Liquidity Risk Management
De Novo Institutions
Other Guidance Issued
The FDIC also initiated an interagency interest rate risk advisory to highlight concerns about banks taking on excessive interest rate risk in current low interest rate environment. This advisory, which was published in January 2010, clarifies existing guidance and reminds banks not to lose focus on their management of interest rate risk. Banks are expected to manage interest rate risk exposures using policies and procedures commensurate with their complexity, business model, risk profile, and scope of operations.
Consumer Protection and Compliance Guidance
In November, the FDIC joined seven other federal agencies in releasing a model privacy notice form designed to make it easier for consumers to understand how financial institutions collect and share their personal information. The model form resulted from a multi-year consumer testing effort. In December, the FDIC joined the other Federal Financial Institutions Examination Council (FFIEC) member agencies in issuing for public comment, supervisory guidance on reverse mortgages, building on FDIC analysis performed in 2008. In June, August, and December, the FDIC issued guidance to the institutions it supervises alerting them to significant changes in the Truth in Lending Act and the Federal Reserve Board's Regulation Z (which implements that Act). In December, the FDIC reminded institutions of the dramatically revised Real Estate Settlement Procedures Act regulation issued by the Department of Housing and Urban Development.
Monitoring Potential Risks from New Consumer Products
The FDIC continues to work with the FFIEC to issue supervisory guidance on reverse mortgage products. The FDIC began this effort as the result of an internal review that highlighted consumer risks associated with this product. A 2009 GAO report highlighted similar issues. In addition, the FDIC continues to work with other agencies to enhance the Truth in Lending examination procedures to assist examiners when reviewing compliance with reverse mortgage disclosure requirements.
Regulatory Reporting Revisions
In September 2009, the agencies updated the reporting of data on the amount and number of deposit accounts and estimated uninsured deposits in the Call Report schedule to reflect the extension of the temporary increase in the standard maximum deposit insurance amount from $100,000 to $250,000 per depositor enacted in the Helping Families Save Their Homes Act.
In December 2009, the agencies approved revisions to the Call Report that were implemented in early 2010. The revisions incorporate modifications made in response to comments received on the agencies' August 2009 proposal and are subject to approval by the U.S. Office of Management and Budget. The revisions respond to such recent developments as a temporary increase in the deposit insurance limit, changes in accounting standards, and credit availability concerns. The reporting changes that were effective March 31, 2010, include new data on other-than-temporary impairments of debt securities, loans to non-depository financial institutions, and brokered time deposits; additional data on certain time deposits and unused commitments; and a change from annual to quarterly reporting for small business and small farm lending data. The agencies will collect new data pertaining to reverse mortgages annually beginning December 31, 2010.
Promoting Economic Inclusion
Alliance for Economic Inclusion
The FDIC expanded its AEI efforts during 2009 to increase measurable results in the areas of new bank accounts, small-dollar loan products, remittance products, and delivery of financial education to more underserved consumers. During 2009, over 60 banks and organizations joined AEI nationwide, bringing the total number of AEI members to 967. More than 72,614 new bank accounts were opened during 2009, bringing the total number of bank accounts opened through the AEI to 162,692. During 2009, approximately 68,491 consumers received financial education through the AEI, bringing the total number of consumers educated to 142,796. Also, 35 banks were in the process of offering or developing small-dollar loans as part of the AEI, and 26 banks were offering remittance products at the end of 2009.
The FDIC expanded the AEI initiative to two additional markets during 2009—Detroit/South, Michigan and Little Rock, Arkansas—bringing the total number of active AEI markets to 14. Additionally, the FDIC worked closely during 2009 to provide technical assistance and support to communities in Milwaukee, Wisconsin and northwestern Indiana interested in forming AEI coalitions. The statewide Wisconsin Saves program agreed to lead an initiative in Milwaukee patterned after the AEI.
The FDIC also worked closely during 2009 with the National League of Cities to provide technical assistance to facilitate the launch of Bank On campaigns in Seattle, WA; Savannah, GA; Houston and San Antonio, TX; and Indianapolis, IN. The FDIC was also invited to serve as a working committee member and advisor to facilitate the launch of a Bank On Washington, DC, campaign launched in April 2010.
FDIC Advisory Committee on
The Advisory Committee met three times during 2009. In February 2009, the meeting topic was Strategies to Increase Access to the Financial Mainstream. The meeting featured an overview of the FDIC Survey of Banks' Efforts to Serve the Unbanked and Underbanked and focused on effective and innovative products and services, policy approaches, and supervisory and regulatory strategies to improve appropriate engagement with the mainstream financial system, particularly for low- and moderate-income (LMI) and underserved households.
The Advisory Committee also met in July 2009 to continue its discussion about issues and challenges related to improving access to the financial mainstream and to discuss innovative ways that banks and others are encouraging savings through "game-based" strategies that make savings fun or exciting, such as sweepstakes, milestones, or rewards. After this meeting, a report of the Committee's views regarding the issues and challenges of serving LMI and underserved consumers was posted on the FDIC web site to spark discussion of how best to serve consumers who may be struggling, particularly in the current economy.
On December 2, 2009, the Committee met to discuss results of the FDIC National Unbanked and Underbanked Household Survey, overdraft issues, and the strategic focus for the Committee. As a next step, the Committee will formulate a strategic plan that will provide a framework for the Committee's agenda over the next two years. Among other things, the Strategic Plan will include recommendations related to:
Affordable Small-Dollar Loan Guidelines and Pilot Program
There are currently 30 banks of varied sizes and diverse locations and settings participating in the pilot. Banks submitted data on a quarterly basis, which the FDIC analyzed to determine trends and best practices. The FDIC encourages innovation in program design, but most programs generally adhere to the FDIC's Small-Dollar Loan Guidelines, issued in June 2007, and all feature payment periods beyond a single paycheck, annual percentage rates below 36 percent, and streamlined underwriting and prompt loan application processing. During seven quarters of the pilot, banks cumulatively originated about 29,000 loans with a principal balance of more than $34 million. Bankers involved in the pilot cite a number of common factors that contributed to the success of their loan programs, including strong senior management and board support; an engaged and empowered "champion" in charge of the program; proximity to large populations of consumers with demand for small-dollar loans; and, in some rural markets, limited competition. The delinquency ratio for loans in the pilot tends to be almost three times higher than for general unsecured loans to individuals. However, charge-off rates for loans originated under the program are the same as general unsecured loans to individuals. These statistics show that while small-dollar loan borrowers are more likely to have trouble paying on time, they are no more likely to default than those in the general population.
Only a few bankers participating in the pilot have reported that short-term profitability is the primary goal for their program. Rather, most pilot banks are using the small-dollar loan product as a cornerstone for profitable relationships, which also creates good-will in their community. A few banks' business models focus exclusively on the goodwill aspect and generating an opportunity for positive Community Reinvestment Act consideration. Regardless of the business model, all of the bankers involved in the pilot have indicated that small-dollar lending is something they believe they should be doing to serve their communities.
Through the Advisory Committee on Economic Inclusion, the FDIC is considering pursuing several initiatives to broaden the availability of small-dollar loans at mainstream financial institutions, including, but not limited to, the following:
FDIC Advisory Committee on Community Banking
On May 29, 2009, the FDIC Board of Directors approved establishing the FDIC Advisory Committee on Community Banking. This committee was formed to provide the FDIC with advice and guidance on a broad range of important policy issues impacting small community banks throughout the country, as well as the local communities they serve, with a focus on rural areas.
The 14-member committee represents a cross-section of community bankers from around the nation, as well as a member from academia. The first meeting, held on October 15, 2009, covered the impact of the financial crisis on community banks. Other issues addressed were regulatory reform proposals under consideration by Congress and their effect on community banks, the impact of FDIC supervisory proposals on these banks, and community banks' perspectives on funding the FDIC's Deposit Insurance Fund.
Survey Results of the Unbanked and Underbanked
On December 2, 2009, the FDIC released the findings of its FDIC National Survey of Unbanked and Underbanked Households, breaking new ground in gaining understanding of which Americans remain outside the banking system. The survey, conducted on behalf of the FDIC by the U.S. Bureau of the Census, was a supplement to the Census Bureau's Current Population Survey during January 2009. The study, which is the most comprehensive survey to date of the unbanked and underbanked, reveals that more than one quarter (25.6 percent) of all households in the United States are unbanked or underbanked and that those households are disproportionately low-income and/or minority. In addition to collecting accurate estimates of the number of unbanked and underbanked households in the U.S., the survey was designed to provide insights into their demographic characteristics and reasons why the households are unbanked or underbanked. The survey represents the first time that this data has been collected to produce estimates at the national, regional, state, and large metropolitan statistical area (MSA) levels. This effort is being undertaken in response to the Reform Act, which calls for the FDIC to provide an estimate of the size of the U.S. unbanked market and to identify issues that cause individuals and families to be unbanked.
Information Technology, Cyber Fraud, and Financial Crimes
The FDIC conducts information technology (IT) examinations at each safety and soundness examination to ensure that institutions have implemented adequate risk management practices for the confidentiality, integrity, and availability of the institution's sensitive, material, and critical information assets using the FFIEC Uniform Rating System for Information Technology (URSIT). The FDIC also participates in interagency examinations of significant technology service providers. In 2009, the FDIC conducted 2,780 IT examinations at financial institutions and technology service providers. The FDIC also monitors significant events, such as data breaches and natural disasters that may impact financial institution operations or customers.
As an additional element of its leadership role in promoting effective bank supervision practices, the FDIC provides technical assistance, training, and consultations to international governmental banking regulators in the area of IT examinations. In 2009, through our secondment program with the Financial Services Volunteer Corps, the FDIC provided assistance in developing IT examination programs to the Central Bank of Iraq, the Central Bank of Libya, Banque d'Algerie, and Bank of Albania. The FDIC also hosted a visit by the China Banking Regulatory Commission to learn about our IT examination programs, and the FDIC hosted an international conference of bank regulators to discuss emerging technology risks and to compare supervisory approaches.
Consumer Complaints and Inquiries
Deposit Insurance Education
Economic conditions in 2008 helped to spur a significant interest by bank customers in learning more about FDIC deposit insurance coverage. To meet the increased public demand for deposit insurance information, the FDIC implemented two major initiatives to help raise public awareness of the benefits and limitations of FDIC deposit insurance coverage.
In 2009, the FDIC continued with its 2008 initiatives aimed at raising the public's awareness of the benefits and limitations of federal deposit insurance. The FDIC continued its campaign of public service announcements for television, radio, and print media; these public service announcements encouraged bank customers to visit myFDICinsurance.gov to learn about FDIC insurance coverage. In addition to our efforts to raise public awareness, the FDIC expanded its efforts to educate bankers about the rules and requirements for FDIC insurance coverage. In the fall of 2009, after all legislative and regulatory changes were implemented, the FDIC conducted a series of six nationwide telephone seminars for bankers on deposit insurance coverage. These seminars reached an estimated 35,000 bankers participating at approximately 10,000 bank locations throughout the country. The FDIC also continued to work with industry trade groups to provide training for bank employees.
Deposit Insurance Coverage Inquiries
The 46,041 total deposit insurance inquiries received in 2009 is significantly less than the 100,933 total deposit insurance inquiries received in 2008, when there was an unprecedented surge in deposit insurance questions following the failure of IndyMac Bank. However, the 2009 deposit insurance inquiries represent a 130 percent increase compared to 2007, when the FDIC received a total of 20,024 inquiries about deposit insurance coverage.
The FDIC focused its foreclosure mitigation efforts in three areas during 2009:
As part of the FDIC's foreclosure prevention efforts, the FDIC released two new educational brochures during 2009 (in both English and Spanish) to help consumers avoid scams and turn to legitimate sources of assistance. The Is Foreclosure Knocking at Your Door? brochure encourages consumers to seek a loan modification. The Beware of Foreclosure Rescue Scams brochure alerts homeowners to common scams and directs them to legitimate sources of assistance. The demand for both brochures was strong—over 150,000 copies were requested and distributed.
The FDIC also worked collaboratively with other key partners, both inside and outside federal government, on post-foreclosure neighborhood stabilization efforts. These efforts will continue in 2010.
Financial Education and Community Development
The FDIC significantly expanded its financial education efforts during 2009 through a multi-part strategy that included making available timely, high-quality financial education products, expanded delivery channels, and the sharing of best practices.
Two new Money Smart products were released in 2009. First, as part of efforts to reach underserved communities, the FDIC released a Hmong (an Asian dialect found in Vietnam, Laos, Thailand, and Myanmar) language version of Money Smart, making it the seventh language in which the curriculum is offered. Second, the FDIC released the Money Smart Podcast Network, a portable audio version of Money Smart suitable for use with virtually all MP3 players. It was created as a tool for consumers to use to learn on their own or for educators seeking an innovative way to supplement traditional classroom instruction. The new MP3 version received more than 328,716 hits from 11,015 individual visitors between its release on May 27, 2009, and year-end 2009. Showing its appeal, visitors to the web site spent an average of 38 minutes on the site. Additionally, to enhance the quality of existing products, information on foreclosure prevention scams and legitimate sources of foreclosure assistance was added to the adult instructor-led and self-paced versions of Money Smart.
The FDIC also expanded its delivery channels for financial education. For example, 237 new organizations joined the FDIC's Money Smart Alliance. Finally, best practices were shared through four editions published of Money Smart News, which reached over 40,000 subscribers.
During 2009, the FDIC undertook over 200 community development, technical assistance, financial education, and outreach activities and events. These activities were designed to promote awareness of investment opportunities to financial institutions, access to capital within communities, knowledge-sharing among the public and private sector, and wealth-building opportunities for families. Representatives throughout the financial industry and their stakeholders collaborated with the FDIC on a broad range of initiatives structured to meet local and regional needs for financial products and services, credit, asset-building, affordable housing, small business and micro-enterprise development and financial education.
For example, the FDIC participated in 15 local savings campaigns during the 2009 America Saves week to encourage consumers to build wealth. The FDIC's leadership of one such local campaign helped facilitate nearly $10 million in new savings deposits in financial institutions. Also, recognizing the importance of small business growth and job creation as an essential component in America's economic recovery, the FDIC expanded its emphasis on facilitating small business development, expansion and recovery during 2009. This included hosting well-received events to help small businesses identify supportive programs, including mainstream lending options. The FDIC also helped facilitate the establishment of two new small business loan pools during 2009 to originate loans to eligible entrepreneurs and small businesses unable to obtain traditional loans because of an elevated risk profile (e.g., start-up businesses with insufficient cash flow or collateral). These new loan pools were launched in Alexandria, Virginia, and Baton Rouge, Louisiana.
3 The 2009 annual performance goal for compliance examinations on “3-, 4-, and 5-rated” institutions was not fully met. This annual performance goal and the indicator have been revised for 2010 to be consistent with the goal established in years prior to 2009. The 2009 performance target was not achieved because of the inadvertent inclusion of “3-rated” institutions. The FDIC does not typically issue formal enforcement actions for “3-rated" institutions. The 2009 performance target was fully met with respect to “4- and 5-rated” institutions. back
4 The CAMELS composite rating represents the adequacy of Capital, the quality of Assets, the capability of Management, the quality and level of Earnings, the adequacy of Liquidity, and the Sensitivity to market risk, and ranges from “1” (strongest) to “5” (weakest). back
5 On March 4, 2009, the Treasury announced guidelines under the Making Home Affordable Program (MHAP) to promote sustainable loan modifications for homeowners at risk of losing their homes due to foreclosure. back
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