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Managing the Crisis: The FDIC and RTC
Experience
Chronological Overview: Chapter Twenty
Four—2001
Chairman Donald E. Powell is quoted in the FDIC’s 2001
Annual Report as stating, “We must be ready to meet the challenges of
the future, and we are not there yet. I believe history will see 2001 as
a setup year for the FDIC. We spent a lot of time working on initiatives that
will bear
fruit in 2002 and beyond.”
Table 24-1
|
2000 - 2001: FDIC at a Glance ($ in Millions) |
| Item |
12/31/00 |
12/31/01 |
Percent Change |
| Number
of Bank Failures#* |
7 |
4 |
-42.86% |
| Total Assets
of Failed and Assisted Banks |
$414.5 |
$1,821.8 |
339.52% |
| Estimated Losses
on Failed and Assisted Banks* |
$37.3 |
$433.5 |
1,062.20% |
Estimated Losses
as a Percent of Total Assets |
9.00% |
23.80% |
164.44% |
| Assets in Liquidation |
$535.5 |
$573.4 |
7.08% |
| FDIC Staffing |
6,452 |
6,167 |
-4.42% |
| Number of Problem
Financial Institutions |
94 |
114 |
21.28% |
| Bank Insurance
Fund Balance |
$30,975.2 |
$30,438.8 |
-1.73% |
| Bank Insurance
Fund Balance as a Percent of Insured Deposits |
1.35% |
1.26% |
-6.67% |
| Savings Insurance
Fund Balance |
$10,758.6 |
$10,935.0 |
1.64% |
| Savings Insurance
Fund Balance as a Percent of Insured Deposits |
1.43% |
1.36% |
-4.90% |
# Includes
two SAIF institution failures, one each in 2000 and 2001.
*Losses
for all resolutions occurring in this calendar year have been updated
through 12/31/03. The loss amounts on open receiverships are routinely adjusted with updated information
from new appraisals and asset sales, which ultimately affect projected
recoveries. Back to table
Source: FDIC,
2001 Annual Report and Reports from FDIC Division of Finance and
Division of Research and Statistics. |
Notable Events
- For the first time,
the FDIC in January 2001 used the Internet to sell a failing institution’s
deposits and assets. The Internet had previously been used to sell
assets after a resolution.
- On January 16, longtime
community banker, John M. Reich was appointed to the FDIC Board of
Directors. Following Chairman Tanoue’s resignation in July 2001 until
Mr. Powell took office in August 2001, Mr. Reich was Acting Chairman
of the FDIC.
- In April, the FDIC
published Keeping the Promise: Recommendations for Deposit Insurance
Reform which included, among other initiatives, proposed changes
to the method
for assessing deposit insurance premiums, and indexing the $100,000
coverage limit to keep pace with inflation.
- In July, the FDIC
unveiled its Money Smart program, which was designed to promote
and facilitate financial education for adults outside of the
financial mainstream.
- On August 29, Donald
E. Powell was sworn in as the 18th Chairman of the FDIC. Prior
to his appointment, Mr. Powell was President and CEO of The First
National Bank
of Amarillo, Amarillo, Texas. He began his banking career in
1963 at First Federal Savings & Loan
of Amarillo.
- On December 7, by
virtue of his appointment as Director of the Office of Thrift
Supervision , James E. Gilleran, also became a member of the
FDIC Board.
The FDIC Reacts to the September 11 Terrorist Attacks
The terrorist attacks
against the United States on September 11, 2001, shook the country and the
world. Among the fallout, the tragedy jolted business and consumer confidence,
impairing economic activity in virtually every region of the country. The
banking industry and others near “Ground Zero”—the site
of the attacks on the World Trade Center towers in New York—responded
with remarkable resiliency to maintain the continuity of the financial system.
What many Americans do not know is how the FDIC and other bank regulatory
agencies reacted during the crisis to ensure the continuity of their operations
and the stability of the banking system.
With the evacuation of the New York Regional Office, located just six
blocks from the World Trade Center, the FDIC faced significant operational
challenges, yet contingency planning and interagency coordination enabled
the FDIC to resume in a timely manner all of its crucial business in New
York from two satellite offices in New Jersey. Interim contact information
was posted on the FDIC’s public Web site. The New York Regional Office
reopened on September 17.
In the days and weeks following the attacks, the New York staff actively
monitored the operational and financial condition of depository institutions
in the region. FDIC headquarters staff, along with the other federal banking
regulators and the state chartering authorities, monitored the attacks’ impact
on the banking system. Immediate concerns about the continued operations
of affected institutions were constantly monitored, and senior officials
at the regulatory agencies were briefed daily. Liquidity concerns nationwide
were monitored through daily conference calls between the various regional
offices of each of the agencies until the situation had stabilized and
concerns had been mitigated. In conjunction with other bank regulators,
the FDIC assessed the long-term impact of these events on the U.S. banking
industry. The FDIC also issued supervisory guidance to the industry similar
to guidance normally issued when natural disasters occur, and encouraged
FDIC-supervised institutions to cooperate with law enforcement agencies
in the investigation of terrorist activity.
Following the terrorist attacks, economists and financial analysts in
the eight FDIC regional offices worked with their counterparts in Washington
to stay abreast of regional and national economic developments and to evaluate
their likely effects on the banking system. FDIC staff delivered a report
to the FDIC Board of Directors on October 9 detailing the effects on the
banking industry up to that time. A summary of that report was published
in the FDIC’s fourth quarter Regional Outlook. The third quarter
2001 edition of the FDIC’s Quarterly Banking Profile, which provides
a comprehensive analysis of banking industry statistics and trends, included
the supplement “How the Banking Industry Has Responded to Crises.” This
piece chronicled the history of bank performance indicators during previous
historical periods of national and international crisis.
Economic/Banking
Conditions
With the demise
of the ‘tech boom’ and ‘nine-eleven’ the U.S.
economy weathered a short lived recession with some corresponding significant
downturn in certain economic factors. After enjoying four years of
single digit rates, office vacancies spiked up almost 600 basis points
to 14.2 percent. GDP dropped over 300 basis points to 3.2 percent.
Unemployment moved up over 200 basis points to 6.1 percent overshadowing
any overall job growth as total employment decreased by 1.1 percent,
a net decrease of over 1.5 million jobs.
Government action put significant downward pressure on interest rates
to respond. By the end of the year, the discount rate was down to 1.3 percent
from a beginning rate of 6 percent. The prime rate was cut by almost 50
percent to 4.8 percent from 9.5 percent, and the 30-year mortgage rates
started a modest decline of 0.3 percent to 7.1 percent. With other sectors
not being as hard hit as technology combined with more favorable interest
rates, housing starts were up 2.2 per cent at 1,602,700, existing home
sales were up 3.5 percent, and there was a decrease in the inflation rate
to 1.6 percent from 3.4 percent in 2000.24-1
The economic slowdown did not affect commercial bank profitability. Bank
assets grew 5.2 percent. Net income rose 8 percent to $75.3 billion. Interest
expense dropped 14 percent, while interest income fell only 3.8 percent.
There was a 5.4 percent growth in non-interest income. Securities expanded
7.6 percent. Investment accounts grew 9.3 percent. Lower short-term interest
rates caused an increase in core deposits, which grew from 7.5 percent
in 2000 to 10.7 percent in 2001. Equity capital increased $67 billion or
12.8 percent.
Commercial and Industrial loans declined 6.6 percent. This can be attributed
to more conservative lending patterns and a slower economy. Banks tended
to shift assets away from loan/leases to government/agency securities (less
risk involved in latter). Growth in commercial real estate loans was stronger,
but was still slightly down from 2000. Loans to consumers (that were either
held or securitized) grew 7.6 percent. Delinquency and charge-offs rose
on credit card and other consumer loans caused by the increased economic
uncertainty. Loan provisions rose, but were offset by gains in investment
account securities.24-2
Overall, 9,632 financial institutions were in operation at the
end of 2001. The number of banks on the problem bank list continued
to grow and increased from 94 to 114.24-3 Table 24-2 shows the number
and total assets of FDIC insured institutions, as well as their
profitability as of the end of 2001.
|
Figure
24-2
Open
Financial Institutions Insured by FDIC
($ in Billions)
|
2000 |
2001 |
Percent
Change |
| Number
|
8,572 |
8,327 |
-2.86% |
| Total
Assets |
$6,510.7 |
$6,857.5 |
5.33% |
| Return
on Assets |
1.18% |
1.14% |
-3.39% |
| Return
on Equity |
13.86% |
12.91% |
-6.85% |
|
2000 |
2001 |
Percent Change |
| Number
|
1,332 |
1,287 |
-3.38% |
| Total
Assets |
$952.2
|
$1,011.7 |
6.25% |
| Return
on Assets |
0.89% |
1.11% |
24.72% |
| Return
on Equity |
11.12% |
13.46% |
21.04% |
| US
Branches of Foreign Banks |
19 |
18 |
-5.26% |
Source:
FDIC Quarterly Banking Profile, Fourth Quarter 2003.
Bank
Failures
During 2001, four
FDIC-insured institutions failed. Three of those institutions, with combined
assets of $56.3 million, were insured by the BIF. The other institution,
with assets of $1.8 billion, was insured by the SAIF. All four resolutions
were purchase and assumption transactions.
For the first time, the FDIC used the Internet to sell the deposits and
assets of a failing institution. This process marks a significant departure
from the FDIC’s normal procedure of selling the assets and deposits
of failing institutions by inviting several hundred potential bidders to
a meeting location near the failing bank. Only those attending would then
obtain the confidential information necessary to complete the bidding process.
The Internet was used to market all four failures in 2001.
First Alliance Bank and Trust Company, Manchester, New Hampshire, with
assets of $17.4 million, was the first failing bank to be marketed by the
FDIC on the Internet. Interested parties were registered and given a unique
password to gain access to a secure Web site containing the confidential
bidding information and materials. Potential bidders avoided the time and
expense of attending the bidders meeting and had immediate and around-the-clock
access to information about the failing bank and the bidding process.
On July 27, 2001 the FDIC was named receiver of Superior Bank, FSB, Hinsdale,
Illinois (Superior). Superior was closed and placed into receivership on
very short notice, and therefore the FDIC had no opportunity to market
the franchise prior to the failure. Therefore, simultaneous with its appointment
as receiver, the FDIC transferred substantially all of Superior’s
assets and insured deposits to a newly chartered mutual savings bank operated
under the FDIC’s conservatorship powers. The conservatorship continued
to maintain the depository base, the loan origination platform, and loan
servicing operation in an attempt to maximize the value of each business
line. While the operation of a conservatorship is not new to the FDIC,
the Superior resolution represented the first time that this liquidation
approach had been used for a SAIF-insured institution.
Ultimately, through the operation of the conservatorship the FDIC obtained
a $52.4 million premium for the deposit franchise. The conservatorship
produced positive results on the loan side as well. Prior to its failure,
Superior had entered into forward loan commitments (loan sale agreements)
with several brokerage firm investors under which Superior was to provide
pools of residential mortgage loans, at specified dates in the future.
As part of the effort to maintain the viability of Superior’s loan
origination and servicing operations, it was determined that the conservatorship
would continue to generate loans to fulfill these commitments. During 2001,
the conservatorship successfully completed the sale of almost 2,500 loans
under the forward loan commitments, at an average sales price of 102.9
percent.
The FDIC also reached a settlement of the claims against the primary shareholders
of Superior during 2001. The FDIC received $100 million in cash in December,
and a note for an additional $360 million to be repaid over the next 15
years.
A more recent estimate of losses per transaction type is shown in Table
24-3.
Figure
24-3
|
2001
Estimated Losses by FDIC Transaction Type ($ in Millions) |
Transaction
Type |
Number
of
Transaction |
Total
Assets |
Estimated
Loss*
as of 12/31/03 |
Estimated
Losses as a
Percent of Assets |
P&As
|
4 |
$1,821.8 |
$433.5 |
23.80% |
*Losses
for all resolutions occurring in this calendar year have been updated
through 12/31/03. The loss amounts on open receiverships are routinely
adjusted with updated information from new appraisals and asset
sales, which ultimately affect projected recoveries.
Source: Reports from FDIC Website – Historical Statistics on Banking.
Payments
to Depositors and Other Creditors
In the four financial
institutions that failed in 2001, deposits totaled $1.7 billion in 95,036
deposit accounts. Dividends paid on all active receiverships totaled almost
$465 million in 2001.
There have been a total of 2,215 insured financial institution resolutions
since the FDIC began operations in 1934. Of this total, 1,471 were P&A
transactions, 141 were open bank assistance transactions, and 603 were
deposit payoff transactions.
Total disbursements by the FDIC since January 1, 1934, have amounted to
$109.5 billion. Of that amount, actual and projected recoveries are anticipated
to be approximately $71.1 billion, which equates to a projected loss of
$38.4 billion to the BIF/SAIF funds.
Asset
Disposition
At the beginning
of 2001, the FDIC held $535.5 million in assets from failed institutions.
That included $226.2 million was assets in liquidation for BIF, $8.1 million
for SAIF, $28.3 million for the FSLIC Resolution Fund (FRF), and $272.9
million for the Resolution Trust Corporation (RTC). During the year, the
FDIC acquired an additional $213.2 million in assets from four bank failures.
Asset acquisitions would have been significantly greater if not for the
fact that Superior Bank, which held almost $2 billion in assets at the
time of failure, was operated as a conservatorship for almost one year,
and the bulk of the assets were liquidated during the conservatorship.
For accounting purposes, conservatorship activities are reflected separately
from receivership activities. The FDIC collected $219 million during the
year, and the ending balance for assets in liquidation was $573.4 million.
Of the $573.4 million, $131.7 million was assets in liquidation for BIF,
$233.6 million for RTC, $14.2 million for FRF, and $193.9 million for SAIF.
Asset marketing continued to play a key role in asset liquidations
for the FDIC as their efforts contributed almost $35 million (2,100
loans sold) to the recoveries. However, asset marketing’s most
significant contribution during the year was its sale of 14,036 loans
for the Superior conservatorship, which resulted in recoveries of
over $72 million during the year attributed to the conservatorship.
The FDIC also had over $89 million in non-asset related collections during
this year. While these collections came from a number of different sources,
almost $28 million represented recoveries of state and federal tax benefits
due to failed institutions, and another $28 million was the result of recoveries
from fidelity bond insurance claims, director and professional liability
settlements, and criminal restitutions. Table 24-4 shows the FDIC’s
assets in liquidation and Chart 24-1 shows the asset mix.
Figure
24-4
|
2001
FDIC End of the Year Assets in Liquidation ($ in Billions*) |
| Asset
Type |
12/31/00
Book
Value |
2001
Assets
Acquired |
2001
Asset
Adj. |
2001
Coll. & Write Downs |
12/31/01
Book
Value |
12/31/01
Est. Rec. Value |
| Commercial Loans |
$39.1 |
$3.0 |
$18.5 |
$35.8 |
$24.8 |
$27.6 |
| Mortgage Loans |
45.6 |
9.3 |
-1.7 |
39.7 |
13.6 |
38.0 |
| Other Loans |
28.4 |
10.7 |
-23.1 |
15.0 |
1.0 |
8.2 |
| Real Estate
Owned |
16.3 |
1.2 |
1.0 |
6.1 |
12.4 |
6.4 |
| Judgments |
43.6 |
0.0 |
5.1 |
5.6 |
43.0 |
51.8 |
| Securities |
132.1 |
0.5 |
11.5 |
21.5 |
122.6 |
-77.2 |
| Other Assets |
59.8 |
188.0 |
-65.3 |
33.4 |
149.1 |
0.5 |
| Equity in
Subs. |
161.1 |
0.5 |
123.4 |
84.7 |
200.2 |
1.7 |
| Deficiencies |
9.5 |
0.0 |
0.0 |
2.8 |
6.7 |
19.4 |
| Total |
$535.5 |
$213.2 |
$69.4 |
$244.6 |
$573.4 |
$76.4 |
*Totals
may not foot due to rounding differences.
Source: Reports from FDIC Division of Finance.
Figure
24-1
2001
FDIC End of Year Asset Mix
Figure
24-2
FDIC
Staffing
 d |
Insurance
Fund and Staffing
During 2001, the BIF balance was $30.4 billion at year-end 2001, or
1.26 percent of estimated insured deposits. The balance of the SAIF was $10.9
billion on December 31, 2001. SAIF-insured deposits were $802 billion at
year-end 2001, having grown 6.2 percent for the year. This was the highest
growth rate of insured deposits since the inception of SAIF in 1989. This
stellar growth rate, however, decreased the reserve ratio from 1.43 percent
at year-end 2000 to 1.36 at year-end 2001.
Staffing decreased by 285 (4.4 percent) during the year, down to 6,167
as the Corporation continued its efforts to match staffing with
its declining workload
|
| Approximately
one third of this decline was accomplished through the expiration
of temporary and term appointments. Additionally, the Legal Division,
the Office of Ombudsman, and the Office of Diversity and Economic
Opportunity offered buyout opportunities to its staff members.
Chart 24-2 shows the staffing levels for the past five years. |
|
24_1:
Bureau of Labor and Statistics, Department of Labor; Bureau of Economic
Analysis, Department of Commerce; Housing Market Statistics, National Association
of
Home Builders; and Federal Home Loan Mortgage Corporation. Back
to Text
24_2:
Federal Reserve Bulletin Volume 88, Number 6, June 2002. Back
to Text
24_3:
FDIC Quarterly Banking Profile, Fourth Quarter 2001. Back
to Text
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