Supervision Program

Program Description
As insurer, the FDIC is concerned with the safety and soundness of all insured institutions. However, a distinction is made between the FDIC’s role as an insurer and its role as the primary federal supervisor for state non-member banks.⁴ Nonetheless, it is important to note that the FDIC’s roles as an insurer and as a primary supervisor are complementary and that many activities support both the insurance and supervision programs.

In fulfilling its primary supervisory responsibilities, the FDIC pursues two strategic goals:

• FDIC-supervised institutions are safe and sound; and
• Consumers’ rights are protected and FDIC-supervised institutions invest in their communities.

The FDIC promotes safe and sound financial institution practices through examinations, regular communication with industry officials, and the review of applications submitted by FDIC-supervised institutions to expand their activities or locations. When appropriate, the FDIC has a range of informal and formal enforcement options available to resolve problems identified at an FDIC-insured institution.

The FDIC also promotes institution compliance with consumer protection and fair lending laws. The FDIC engages in a variety of activities related to consumer protection and fair lending, including: 1) providing consumers with access to easily understood information about their rights and the disclosures due them under consumer protection and fair lending laws; and 2) examining FDIC-supervised institutions to determine their compliance with consumer protection and fair lending laws and evaluating their performance under the Community Reinvestment Act of 1977 (CRA).

⁴ As of 9/30/2004, the FDIC had primary supervisory responsibility for 5,265 FDIC-insured state-chartered commercial banks that are not members of the Federal Reserve System, state-licensed insured branches of foreign banks, and state-chartered savings banks.

One strategic objective supports the safety and soundness strategic goal:

The means and strategies used to achieve the safety and soundness strategic goal and its associated objective are described below.

FDIC-supervised institutions appropriately manage risk

Means & Strategies:
The FDIC performs safety and soundness, trust, Bank Secrecy Act (BSA), and information system examinations of FDIC-supervised institutions. The majority of the states participate with the FDIC in an examination program under which certain examinations are performed on an alternating basis by the states and the FDIC. The examinations are conducted to assess an institution’s overall financial condition, management practices and policies, and compliance with applicable laws and regulations. Through the examination process, the FDIC also assesses the adequacy of management and internal control systems to identify, measure and control risks. Procedures normally performed in completing examinations may disclose the presence of fraud or insider abuse. The FDIC regularly reviews examination methodologies and adjusts them as necessary to remain effective.

If the examination process reveals weaknesses in an FDIC-supervised institution’s operations or conditions, the FDIC takes appropriate action. Informal or formal enforcement actions may be issued for FDIC-supervised institutions that have significant weaknesses or that are operating in a deteriorated financial condition. The actions remain in effect until corrective actions are taken and the identified weaknesses are cured. If the problems remain unresolved, the FDIC may take further steps to encourage or compel institutions to comply. If these efforts are unsuccessful or if other weaknesses are evident, the institution would be instructed to seek additional capital or merger. If problems remain unresolved, the chartering authority might close the institution, and the FDIC would oversee the resolution of the institution.

Informal enforcement actions require the institution’s acknowledgement and commitment to correct the problem. Informal actions include board resolutions or memoranda of understanding. Formal enforcement actions are taken when an informal action is ineffective or inappropriate. Formal enforcement actions include written agreements, cease and desist orders, the suspension or removal of officers and directors, and civil money penalties.

Communication is an important component of the FDIC’s safety and soundness program. Risks identified during an examination are discussed with the institution’s management and its board of directors. In addition to examinations, the FDIC provides information on a variety of issues through the publication of financial institution letters and financial institution outreach programs. The FDIC’s Risk Analysis Center (RAC), established in March 2003 to coordinate corporate-wide risk-related activities, also offers examiners and other FDIC personnel valuable information about potential risks that could affect the institutions they supervise. The FDIC invites outside speakers into the RAC, including university representatives and law enforcement.

The FDIC also evaluates an FDIC-supervised institution’s ability to manage risk when reviewing applications or notices for new or expanded activities. In order for the FDIC to expedite the review of an institution's application or notice, it must be well-capitalized, possess a qualified management team, be capable of operating in a safe and sound manner, be compliant with applicable laws and regulations, and represent no undue risk to the deposit insurance funds.

External Factors:
The development and implementation of effective risk-management policies and practices are the responsibility of individual financial institutions. As institutions enter new lines of business and activities, implement new technologies, or face changing economic conditions, risk-management policies and oversight become increasingly important.

Although the FDIC prepares its examination staff to recognize indicators of fraudulent activity, fraud is often difficult to detect, and losses may occur before the fraudulent activity is detected.

Under the alternate examination program, certain examinations are conducted in alternate periods by the appropriate state supervisory authority. Constraints outside of the FDIC’s control may affect the completion of examinations by state authorities. However, the FDIC will conduct the examination within a reasonable time frame from the originally scheduled examination date if the state is unable to do so.

Two strategic objectives support the consumer rights strategic goal:

The means and strategies used to achieve the consumer rights strategic goal and its associated objectives are described below.

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

Means & Strategies:
The FDIC makes available information about consumer protection, fair lending and deposit insurance to help consumers understand their rights. This information is provided in brochures and through other media, including the FDIC’s Web site, www.fdic.gov. The FDIC frequently conducts or participates in focus groups, educational seminars and conferences. The FDIC maintains a toll-free call center to respond to questions from consumers related to consumer protection laws and regulations.

External Factors:
If a severe economic downturn resulted in an increased number of troubled institutions, the FDIC might have to reallocate staff resources to respond adequately to supervisory issues posed by troubled institutions. This could result in temporary adjustments to the FDIC’s various examination programs.

FDIC-supervised institutions comply with consumer protection, CRA and fair lending laws

Means & Strategies:
The FDIC participates in various outreach activities and provides technical assistance to the institutions it supervises and to community-based organizations. These activities facilitate their understanding of, and compliance with, CRA and fair lending laws and regulations. The compliance and CRA examination process evaluates FDIC-supervised institutions’ practices regarding consumer protection, CRA, fair lending laws and regulations, and consumer privacy. In addition to the examination process, the FDIC investigates consumer complaints about unfair or deceptive practices. Non-compliance with consumer laws can result in civil liability and negative publicity as well as informal or formal enforcement actions by the FDIC to correct the identified violations. An institution’s compliance with consumer protection, CRA and fair lending laws and regulations is considered when an institution seeks to engage in new or expanded activities.

External Factors:
If a severe economic downturn resulted in an increased number of troubled institutions, the FDIC might have to reallocate its examiner resources to enable it to respond adequately to safety and soundness issues posed by troubled institutions. This could result in temporary adjustments to the FDIC’s various examination programs, including its compliance and CRA examinations.