I. Management’s Discussion and Analysis
Supervision and Consumer Protection
Supervision and consumer protection are cornerstones of the FDICís efforts to ensure the stability of and public confidence in the nationís financial system. The FDICís supervision program promotes the safety and soundness of FDIC-supervised IDIs, protects consumersí rights, and promotes community investment initiatives.
The FDICís strong bank examination program is the core of its supervisory program. As of December 31, 2010, the Corporation was the primary federal regulator for 4,386 FDIC-insured, state-chartered institutions that were not members of the Federal Reserve System (generally referred to as ďstate non-memberĒ institutions). Through risk management (safety and soundness), consumer compliance and Community Reinvestment Act (CRA), and other specialty examinations, the FDIC assesses an institutionís operating condition, management practices and policies, and compliance with applicable laws and regulations. The FDIC also educates bankers and consumers on matters of interest and addresses consumer questions and concerns.
As of December 31, 2010, the Corporation conducted 2,720 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 1,780 CRA/compliance examinations (914 joint CRA/compliance examinations, 854 compliance-only examinations,≤ and 12 CRA-only examinations) and 3,276 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. The table below compares the number of examinations, by type, conducted from 2008 through 2010.
FDIC Examinations 2008–2010
|Risk Management (Safety and Soundness):
|State Non-member Banks
|State Member Banks
|Subtotal – Risk Management Examinations
|Compliance/Community Reinvestment Act
|Subtotal – CRA/Compliance Examinations
|Data Processing Facilities
|Subtotal – Specialty Examinations
As of December 31, 2010, there were 884 insured institutions with total assets of $390.0 billion designated as problem institutions for safety and soundness purposes (defined as those institutions having a composite CAMELS³ rating of "4" or "5"), compared to the 702 problem institutions with total assets of $402.8 billion on December 31, 2009. This constituted a 26 percent increase in the number of problem institutions and a 3 percent decrease in problem institution assets. In 2010, 267 institutions with aggregate assets of $157 billion were removed from the list of problem financial institutions, while 449 institutions with aggregate assets of $198 billion were added to the list. Westernbank Puerto Rico, Mayaguez, Puerto Rico, which was the largest failure in 2010, with $11.9 billion in assets, was added to the problem institution list in 2008 and resolved in 2010. The FDIC is the primary federal regulator for 583 of the 884 problem institutions, with total assets of $202.5 billion and $390.0 billion respectively.
During 2010, the Corporation issued the following formal and informal corrective actions to address safety and soundness concerns: 300 Consent Orders, and 424 Memoranda of Understanding. Of these actions, 9 Consent Orders and 16 Memoranda of Understanding were issued based, in part, on apparent violations of the Bank Secrecy Act.
The FDIC is required to conduct follow-up examinations of all state non-member institutions designated as problem institutions within 12 months of the last examination. As of December 31, 2010, all follow-up examinations for problem institutions were performed on schedule.
As of December 31, 2010, 54 insured state non-member institutions with total assets of $36.4 billion, rated “4” or “5” for consumer compliance purposes. All follow-up examinations for these institutions were performed on schedule.
During 2010, the Corporation issued the following formal and informal corrective actions to address compliance concerns: 23 Consent Orders and 122 Memoranda of Understanding.
Bank Secrecy Act/Anti-Money Laundering
The FDIC pursued a number of Bank Secrecy Act (BSA), Counter-Financing of Terrorism (CFT), and Anti-Money Laundering (AML) initiatives in 2010.
The FDIC conducted three training sessions in 2010 for 65 central bank representatives from Afghanistan, Argentina, Ghana, Iraq, Jordan, Kuwait, Mali, Mauritania, Morocco, Nigeria, Pakistan, Paraguay, Qatar, Senegal, and Turkey. 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 (FBI) on combating terrorist financing, and the Financial Crimes Enforcement Network (FinCEN) on the role of financial intelligence units in detecting and investigating illegal activities. Additionally, the FDIC met with eight Namibian and Zambian foreign officials and 14 European representatives 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 preservation of Minority Depository Institutions (MDIs) remains a high priority for the FDIC. In 2010, the FDIC continued to seek ways to improve communication and interaction with MDIs and to respond to the concerns of minority bankers. Many of the MDIs took advantage of the technical assistance offered by the FDIC, requesting technical assistance on a number of bank supervision issues, including but not limited to, the following:
- Troubled Asset Relief Program (TARP)
- Deposit insurance assessments
- Proper use of interest reserves
- Filing branch and merger applications
- Complying with Part 365–Real Estate
- Preparing Call Reports
- Performing due diligence for loan
- Monitoring CRE concentrations
- Reducing adversely classified assets
- Identifying and monitoring reputation risk
- Maintaining adequate liquidity
- Compliance issues
- Community Reinvestment Act (CRA)
- Procedures for filing regulatory appeals
- Criteria for assigning CAMELS ratings
The FDIC continued to offer the benefit of having an examiner or a member of regional office management return to FDIC-supervised MDIs from 90 to 120 days after examinations to assist management in understanding and implementing examination recommendations or to discuss other issues of interest. Ten MDIs took advantage of this initiative in 2010. Also, the FDIC regional offices held outreach training efforts and educational programs for MDIs.
Capital and Liquidity Rulemaking and Guidance
During 2010, the FDIC issued and participated in the issuance of guidance in the following areas.
Credit Ratings ANPR
The FDIC, along with the other federal banking agencies, published an Advance Notice of Proposed Rulemaking (ANPR) regarding alternatives to the use of credit ratings in the risk-based capital rules for banking organizations. The ANPR was issued in response to section 939(A) of the Dodd-Frank Act, which requires the agencies to review regulations that (1) require an assessment of the creditworthiness of a security or money market instrument and (2) contain references to or requirements regarding credit ratings.
Market Risk NPR
The FDIC Board of Directors approved the publication of a joint Notice of Proposed Rulemaking (NPR) designed to enhance the market risk capital framework by addressing default and credit risk migration, innovations in trading book exposures, and other deficiencies revealed during the recent financial crisis.
Advanced Approaches Floor NPR
The FDIC Board of Directors approved a joint NPR to implement certain requirements of Section 171 of the Dodd-Frank Act. Section 171 requires, among other things, that the agenciesí generally applicable capital requirements serve as a floor for other capital requirements the agencies may establish and, specifically, as a permanent floor for the advanced approaches risk-based capital rule. Final rulemaking will be completed in 2011.
FAS 166 and 167 Final Rule
The agencies finalized the amendment to the risk-based capital rules to reflect the issuance of FAS 166 and 167, which required certain off-balance-sheet assets to be moved back onto a bankís balance sheet. The final rule provided an optional transition period that allowed a bank to phase in over one year the impact on risk-weighted assets of the change in the U.S. generally accepted accounting rules. The rule also eliminated the exclusion of certain consolidated asset-backed commercial paper programs from risk-weighted assets.
Interest Rate Risk
In the prevailing interest rate environment, taking advantage of a steeply upward sloping yield curve by funding longer-term assets with shorter-term liabilities may have provided short-term gains to earnings helping off set losses, but could pose risks to an institutionís capital and future earnings should short-term interest rates rise. To reinforce the federal banking agenciesí existing guidance—The Joint Agency Policy Statement on Interest Rate Risk—and to remind institutions to not lose focus on their management of interest rate risk, the agencies issued new guidance—Advisory on Interest Rate Risk Management.
To emphasize the importance of cash flow projections, diversified funding sources, stress testing, a cushion of liquid assets, and a formal, well-developed contingency funding plan as primary tools for measuring and managing liquidity risk, the federal banking agencies issued new guidance—Funding and Liquidity Risk Management.
Other Guidance Issued
During 2010, the FDIC issued and participated in the issuance of other guidance in several areas as described below.
Bargain Purchases and Assisted Acquisitions
A bargain purchase occurs when the fair value of the net assets acquired in a business combination exceeds the fair value of any consideration transferred by the acquiring institution. To address the supervisory issues arising from business combinations that result in bargain purchase gains, the FDIC, along with the other financial regulators, issued Interagency Supervisory Guidance on Bargain Purchases and FDIC- and NCUA-Assisted Acquisitions.
Examinations of Institutions with FDIC
Beginning in 2009, the FDIC increasingly entered into loss-share agreements with institutions acquiring failed IDIs. Under such an agreement, the FDIC and an acquiring institution share in the losses on a specified pool of a failed institutionís assets, which maximizes asset recoveries and minimizes losses to the DIF. The FDIC issued guidance to its examination staff on how examiners should take into account the implications and benefits of loss-share in their supervision of banks that have acquired assets of failed institutions covered by loss-share agreements. Examiners are expected to consider the impact of these agreements when performing asset reviews, assessing accounting entries, assigning adverse classifications, and determining CAMELS ratings and examination conclusions.
Meeting the Credit Needs of Creditworthy
Small Business Borrowers
In response to difficulties some small business owners are experiencing in obtaining or renewing credit to support their operations, the FDIC, along with other financial regulators, issued Interagency Statement on Meeting the Credit Needs of Creditworthy Small Business Borrowers.
The FDIC joined the other federal banking agencies in issuing interagency Guidance on Sound Incentive Compensation Policies. This guidance was issued to address incentive compensation practices in the financial services industry that contributed to the recent financial crisis.
As part of supervisory efforts to address executive compensation in the financial services industry, the FDIC issued Guidance on Golden Parachute Applications, to clarify the golden parachute application process for troubled institutions, specify the type of information necessary to satisfy the certification requirements, and highlight factors considered by supervisory staff when determining whether to approve a golden parachute payment. A golden parachute payment refers to amounts paid by troubled entities to an institution-affiliated party (IAP) that are contingent on the IAP’s termination.
The FDIC issued 23 Financial Institutions Letters (FILs) that provided guidance to help financial institutions and facilitate recovery in areas damaged by severe storms, tornadoes, flooding, and other natural disasters.
Promoting Economic Inclusion
The FDIC undertook a number of initiatives in 2010 to promote financial access to IDIs for low- and moderate-income communities.
Alliance for Economic Inclusion
The goal of the FDICís Alliance for Economic Inclusion (AEI) initiative is to collaborate with financial institutions; community organizations; local, state, and federal agencies; and other partners in select markets to launch broad-based coalitions to bring unbanked and underserved consumers into the financial mainstream.
The FDIC expanded its AEI efforts during 2010 to increase measurable results in the areas of new bank accounts, small-dollar loan products, remittance products, and the delivery of financial education to more underserved consumers. During 2010, over 152 banks and organizations joined AEI nationwide, bringing the total number of AEI members to 1,119. There were 45,776 new bank accounts opened during 2010, bringing the total number of bank accounts opened through the AEI to 208,458. During 2010, approximately 56,556 consumers received financial education through the AEI, bringing the total number of consumers educated to 199,392. Also, 48 banks were in the process of offering or developing small-dollar loans, 27 banks were offering remittance products, and 26 banks were providing innovative savings products through the AEI at the end of 2010.
During 2010, the FDIC expanded its efforts to address additional markets with high concentrations of unbanked and underbanked households and aligned its targeted efforts with the results of its 2009 unbanked survey. Presently in 14 markets, the FDIC began the initial organization and planning for AEI initiatives in two additional markets: Milwaukee, WI, and St. Louis, MO. Additionally, the FDIC worked closely during 2010 to provide technical assistance and support to communities in Ohio and northwestern Indiana interested in forming AEI coalitions, and provided a loaned executive to lead the Bank On California campaign.
Advancing Financial Education
The FDICís award-winning Money Smart curriculum is available in seven languages, large-print and Braille, as computer-based instruction, and as podcast audio instruction. Since its inception, over 2.4 million individuals have participated in Money Smart classes and self-paced computer-based instruction. Approximately 300,000 of these participants subsequently established new banking relationships.
The FDIC significantly expanded its financial education efforts during 2010 through a multi-part strategy that included making available timely, high-quality financial education products, expanding delivery channels, and sharing best practices.
The FDIC also took a leadership role among federal agencies to promote the 2010 America Saves Week to encourage consumers to establish a basic savings account or boost existing savings. Chairman Bair authored the nationally distributed Your Savings—Good for You, Your Family, and Your Peace of Mind op-ed. In addition, a video featuring Chairman Bair encouraging consumers to save and participate in America Saves Week received over 6,000 views on YouTube and was featured on the homepage of America Saves. The FDIC also provided technical assistance or other involvement to at least 15 America Saves coalitions.
Leading Community Development
FDIC community affairs staff are located in each of the FDICís regions and lead a range of community development activities. In 2010, 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.
The FDIC continued its initiative to help consumers and the banking industry avoid unnecessary foreclosures and stop foreclosure "rescue" scams that promise false hope to consumers at risk of losing their homes.
The FDIC focused its foreclosure mitigation efforts in three areas during 2010:
- Direct outreach to consumers with
information, education, counseling, and
- Industry outreach and education
targeted to lenders, loan servicers, local
governmental agencies, housing counselors,
and first responders (faith-based
organizations, advocacy organizations,
social service organizations, etc.).
- Support for capacity-building initiatives
to help expand the quantity and quality
of foreclosure counseling assistance that
is available within the industry.
Gulf Coast Oil Spill Response
The FDIC strongly supported efforts to expedite a recovery from the April 22, 2010, Deepwater Horizon oil spill in the Gulf Coast region. At the onset of this spill of national significance, the FDIC recognized that some borrowers' cash flow and repayment capacity would be unexpectedly impaired, and that banks should consider assisting borrowers that would be severely impacted. Accordingly, on May 7, 2010, the FDIC issued FIL 24-2010, Guidance for Financial Institutions Working with Borrowers in the Gulf Coast Region Affected by a "Spill of National Significance". This guidance encourages banks to work constructively with borrowers experiencing difficulties beyond their control because of damage caused by the spill. It also encourages banks to extend repayment terms, restructure existing loans, or ease terms for new loans in a manner consistent with sound banking practices.
Affordable Small-Dollar Loan Guidelines
and Pilot Program
The FDICís two-year Small-Dollar Loan Pilot Program concluded in the fourth quarter of 2009, with final data reported to the FDIC in mid-May 2010. The pilot was a case study designed to illustrate how banks can profitably offer affordable small-dollar loans as an alternative to high-cost credit products such as payday loans and fee-based overdraft programs. At the end of the pilot, 28 banks were participating with total assets ranging from $28 million to $10 billion and operations in 28 states. Over the course of the pilot, participating banks originated more than 34,400 small-dollar loans with a principal balance of $40.2 million.
The pilot demonstrated that banks can offer alternatives to costly forms of emergency credit, and resulted in a template of essential product design and delivery elements for safe, affordable, and feasible small-dollar loans that can be replicated by other banks. (See www.fdic.gov/smalldollarloans/ for the template). Going forward, the FDIC is working with the banking industry, consumer and community groups, nonprofit organizations, other government agencies, and others to research and pursue strategies that could prove useful in expanding the supply of small-dollar loans.
Information Technology, Cyber Fraud, and
The FDIC sponsored a Combating Commercial Payments Fraud Symposium in March 2010 that focused on the nature of this increasingly sophisticated form of financial fraud and how the industry and regulators can effectively respond. Other major accomplishments during 2010 in promoting information technology (IT) security and combating cyber fraud and other financial crimes included the following:
- Published, in conjunction with the other
FFIEC agencies, a Retail Payment Systems
Handbook. The booklet discusses various
technologies and products used in payment
systems and the risk management techniques
that institutions should use.
- Issued, in conjunction with the other FFIEC
agencies, an updated and expanded program
to review specialized software used by financial
- Published, in conjunction with the other
FFIEC agencies, a white paper entitled “The
Detection and Deterrence of Mortgage Fraud
Against Financial Institutions”.
- Issued Guidance on Mitigating Risk Posed
by Information Stored on Photocopiers, Fax
Machines and Printers.
- Assisted financial institutions in identifying
and shutting down approximately 47
“phishing” websites. The term “phishing”—as
in fishing for confidential information—refers
to a scam that encompasses fraudulently
obtaining and using an individual’s personal or
- Issued 130 Special Alerts to FDIC-supervised
institutions on reported cases of counterfeit or
fraudulent bank checks.
- Issued 3 Consumer Alerts pertaining to
e-mails and telephone calls fraudulently
claiming to be from the FDIC.
Consumer Complaints and Inquiries
The FDIC investigates consumer complaints concerning FDIC-supervised institutions and answers inquiries from the public about consumer protection laws and banking practices. As of December 31, 2010, the FDIC received 13,756 written complaints, of which 6,862 involved complaints against state non-member institutions. The FDIC responded to over 97 percent of these complaints within time frames established by corporate policy, and acknowledged 100 percent of all consumer complaints and inquiries within 14 days. The FDIC also responded to 1,960 written inquiries, of which 388 involved state non-member institutions. In addition, the FDIC responded to 6,666 telephone calls from the public and members of the banking community, 4,375 of which concerned state non-member institutions.
Deposit Insurance Education
An important part of the FDIC's deposit insurance mission is ensuring that bankers and consumers have access to accurate information about the FDIC's rules for deposit insurance coverage. The FDIC has an extensive deposit insurance education program consisting of seminars for bankers, electronic tools for estimating deposit insurance coverage, and written and electronic information targeted for both bankers and consumers.
In 2010, the FDIC continued its efforts to educate bankers and consumers about the rules and requirements for FDIC insurance coverage. The FDIC conducted a series of eight nationwide telephone seminars for bankers on deposit insurance coverage. These seminars reached an estimated 60,000 bankers participating at over 16,000 bank locations throughout the country. The FDIC also updated its deposit insurance coverage publications and educational tools for consumers and bankers, including brochures, resource guides, videos, and the Electronic Deposit Insurance Estimator (EDIE).
Deposit Insurance Coverage Inquiries
During 2010, the FDIC received and answered approximately 143,000 telephone deposit insurance-related inquiries from consumers and bankers. Of these inquiries, 119,000 were addressed by the FDIC Call Center and 24,000 were handled by deposit insurance coverage subject matter experts. In addition to telephone deposit insurance inquiries, the FDIC received 3,000 written deposit insurance coverage inquiries from consumers and bankers. Of these inquiries, 99 percent received responses within two weeks, as required by corporate policy.