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Federal Deposit
Insurance Corporation

Each depositor insured to at least $250,000 per insured bank

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2010 Annual Report

C. Office of Inspector General’s Assessment of the Management and Performance Challenges Facing the FDIC

Under the Reports Consolidation Act of 2000, the Office of Inspector General (OIG) is required to identify the most significant management and performance challenges facing the Corporation and provide its assessment to the Corporation for inclusion in its annual performance and accountability report. The OIG conducts this assessment annually and identifies specific areas of challenge facing the Corporation at the time. In identifying the challenges, we keep in mind the Corporation’s overall program and operational responsibilities; financial industry, economic, and technological conditions and trends; areas of congressional interest and concern; relevant laws and regulations; the Chairman’s priorities and corresponding corporate goals; and the ongoing activities to address the issues involved. Taking time to reexamine the corporate mission and priorities as the OIG identifies the challenges helps in planning assignments and directing OIG resources to key areas of risk.

A significant milestone that will impact multiple facets of the FDIC’s programs and operations was the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) on July 21, 2010. The stated aim of the Dodd-Frank Act is “To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes”.

In looking at the recent past and the current environment and anticipating—to the extent possible—what the future holds, the OIG believes that the FDIC faces challenges in the areas listed below. While the Corporation will sustain its efforts to restore and maintain public confidence and stability, particularly as it implements key provisions of the Dodd-Frank Act, challenges will persist in other areas as well. We note in particular that the Corporation is devoting significant additional resources to carrying out its massive resolution and receivership workload, brought on by 140 financial institution failures during 2009 and an additional 157 during 2010. At the same time, the FDIC will face continuing challenges in meeting its deposit insurance responsibilities, enhancing its supervision of financial institutions, protecting consumers, and managing its expanded internal workforce and other corporate resources.

The Corporation can take pride in having made great efforts to maintain stability and confidence in the nation’s banking system: completing or sustaining a number of new initiatives, responding to new demands, and playing a key part in shaping the future of bank regulation over the past year. Passage of the Dodd-Frank Act presents new opportunities and challenges for the FDIC to continue its efforts in restoring the vitality and stability of the financial system over the coming months.

Restoring and Maintaining Public Confidence and Stability in the Financial System

With signs of recovery in the economy and the financial services industry, the FDIC and other regulators have turned a corner, but much work remains. Institutions continue to fail, and the economy is still stressed. Public confidence has been shaken and still needs to be bolstered. Reforms under the Dodd-Frank Act involve far-reaching changes designed to restore market discipline, internalize the costs of risk-taking, protect consumers, and make the regulatory process more attuned to systemic risks. The FDIC will have significant involvement in this regard during the upcoming year.

The Dodd-Frank Act created the Financial Stability Oversight Council (FSOC), of which the FDIC is a voting member. The FSOC will monitor sources of systemic risk and promulgate rules that will be implemented by the various financial regulators represented on the FSOC’s 10 voting members. In certain circumstances, however, a supermajority of seven votes will be required, one of which must be cast by the Secretary of the Treasury. The Dodd-Frank Act also establishes an independent Consumer Financial Protection Bureau (CFPB) within the Federal Reserve System; abolishes the Office of Thrift Supervision (OTS) and transfers its supervisory responsibilities for federal and state-chartered thrift institutions and thrift holding companies to the Office of the Comptroller of the Currency (OCC), the FDIC, and the Federal Reserve System, respectively; and gives the FDIC new authorities to help address the risks in systemically important financial companies.

So that the FDIC can best carry out its responsibilities under the Dodd-Frank Act, the Board of Directors approved a number of internal organizational changes, establishing a new Office of Complex Financial Institutions (OCFI) and a new Division of Depositor and Consumer Protection (DCP). In connection with these changes, the Division of Supervision and Consumer Protection (DSC) has been renamed the Division of Risk Management Supervision (RMS). New leadership impacting these organizations was announced, effective December 31, 2010, and those named to lead them will face challenges in establishing policies, procedures, and practices to guide their new efforts.

Taken together, and along with lessons learned from the past several years, these changes to the FDIC’s responsibilities and organizational structure should go a long way toward restoring confidence and public trust in the nation’s financial system. The coming months will be challenging for the FDIC and all of the regulatory agencies as they work collaboratively to reposition themselves to carry out the mandates of the Dodd- Frank Act, writing rules to implement key sections and undertaking their new responsibilities.

Assuming New Resolution Authority, Resolving Failed Institutions, and Managing Receiverships

Perhaps the most fundamental reform under the Dodd-Frank Act is the new resolution authority for large bank holding companies and systemically important nonbank financial companies. The FDIC has historically carried out a prompt and orderly resolution process under its receivership authority for insured banks and thrifts. The Dodd-Frank Act now gives the FDIC a similar set of receivership powers to liquidate failed systemically important financial firms.

A new challenge associated with this responsibility includes determining how to handle the claims process under this new authority. The FDIC has proposed a rule to ensure that all creditors—shareholders and holders of subordinated, unsecured, and secured debt—know they are at risk of loss in a failure. This proposed rule is an important step in implementing the resolution authority under the Dodd-Frank Act and ending “Too Big to Fail.”

Another challenging key step will be to develop requirements for the resolution plans that all systemically important financial companies now have to establish. These resolution plans are essentially blueprints for the orderly unwinding of these companies should they run into serious problems. Under the Dodd-Frank Act, the FDIC and the Federal Reserve can exercise considerable authority to shape the content of these plans in the interest of ensuring that they are an effective means to guide the resolution of these companies.

In addition to the future challenges associated with exercising this new resolution authority, the Corporation is currently dealing with a daunting resolution and receivership workload. One-hundred-forty institutions failed during 2009, with total assets, based upon last call reports filed, of $171.2 billion and total estimated losses to the Deposit Insurance Fund (DIF) of approximately $37.1 billion. By year-end 2009, the number of institutions on the FDIC’s “Problem List” also rose to its highest level in 16 years. During 2010, an additional 157 institutions failed, and there were 884 insured institutions on the “Problem List” at the end of the year, indicating a probability of more failures to come and an increased asset disposition workload. Total assets of problem institutions decreased to $390.0 billion as of year-end 2010.

Franchise marketing activities are at the heart of the FDIC’s resolution and receivership work. The FDIC pursues the least costly resolution to the DIF for each failing institution. Each failing institution is subject to the FDIC’s franchise marketing process, which includes valuation, marketing, bidding and bid evaluation, and sale components. The FDIC is often able to market institutions such that all deposits, not just insured deposits, are purchased by the acquiring institution, thus avoiding losses to uninsured depositors.

Of special note, through purchase and assumption (P&A) agreements with acquiring institutions, the Corporation has entered into 223 loss-share agreements covering $193 billion in assets (at inception). Under these agreements, the FDIC agrees to absorb a portion of the loss—generally 80-95 percent—which may be experienced by the acquiring institution with regard to those assets, for a period of up to 10 years. In addition, the FDIC has entered into a series of structured asset sales to dispose of assets with an unpaid principal balance of $22.5 billion (at inception). Under these arrangements, the FDIC retains a participation interest in future net positive cash flows derived from third-party management of these assets.

Other post-closing asset management activities will continue to require much FDIC attention. FDIC receiverships manage assets from failed institutions, mostly those that are not purchased by acquiring institutions through P&A agreements or involved in structured sales. The FDIC is managing 344 receiverships holding about $27.0 billion in assets, mostly securities, delinquent commercial real-estate and single-family loans, and participation loans. Post-closing asset managers are responsible for managing many of these assets and rely on receivership assistance contractors to perform day-to-day asset management functions. Since these loans are often sub-performing or nonperforming, workout and asset disposition efforts are more intensive.

The FDIC has increased its permanent resolution and receivership staffing and has significantly increased its reliance on contractor and term employees to fulfill the critical resolution and receivership responsibilities associated with the ongoing FDIC interest in the assets of failed financial institutions. At the end of 2008, on-board resolution and receivership staff totaled 491, while on-board staffing at the end of 2010 was 2,118. As of year-end 2010, the FDIC also had about 1,900 active contracts valued at $4.5 billion; approximately 1,700 of these were related to the receivership function and accounted for approximately $3.5 billion of the total value.

The significant surge in failed-bank assets and associated contracting activities requires effective and efficient contractor oversight management and technical monitoring functions. Bringing on so many contractors and new employees in a short period of time can strain personnel and administrative resources in such areas as employee background checks, which, if not timely and properly executed, can compromise the integrity of FDIC programs and operations.

As the Corporation’s workforce responds to institution failures and carries out all of the resolution and receivership responsibilities outlined above, it will face a number of challenges. To summarize, first and foremost, it needs to ensure that it develops and implements strong and effective controls to mitigate the risks involved in all of its business dealings with acquirers, contractors, and other third parties. It also needs to ensure that related processes, negotiations, and decisions regarding the future status of the failed or failing institutions are marked by fairness, transparency, and integrity. Marketing failing institutions to qualified and interested potential bidders, selling assets, and maximizing potential values of failed bank franchises will continue to challenge FDIC staff. Over time, these tasks may be even more difficult, given concentrations of assets in the same geographic area, a decreasing pool of interested buyers, and an inventory of less attractive, hard-to-sell assets. It is also possible that individuals or entities that may have been involved in previous institution failures or activities contributing to losses to the insurance fund could try to reenter the FDIC’s asset purchase and management arena. Appropriate safeguards must be in place to ensure that the Corporation knows the backgrounds of its bidders to prevent those parties from profiting at the expense of the Corporation. Finally, in order to minimize costs, it is important to terminate in a timely manner those receiverships not subject to loss-share agreements, structured sales, or other legal impediments.

Ensuring and Maintaining the Viability of the Deposit Insurance Fund

As of December 31, 2010, there were 7,657 FDIC-insured banking institutions with FDIC-estimated insured deposits of $6.2 trillion. A critical priority for the FDIC is to ensure that the DIF remains viable to protect insured depositors in the event of an institution’s failure. The DIF has suffered from the failures of the past several years. Losses from failures in 2008 and 2009 totaled $19.6 billion and $37.1 billion, respectively. As of year-end, 2010, failures during 2010 had caused losses of approximately $24.2 billion. In September 2009, the DIF’s fund balance—or net worth—fell below zero for the first time since the third quarter of 1992. Although the balance of the DIF declined by $38.1 billion during 2009 and totaled negative $7.4 billion as of December 31, 2010, the DIF’s liquidity was enhanced during the fourth quarter of 2009 by 3 years of prepaid assessments and the DIF has been well positioned to fund resolution activity in 2010 and beyond. To maintain a sufficient fund balance, the FDIC collects risk-based insurance premiums from insured institutions and invests DIF funds.

The FDIC Board of Directors recently voted in December 2010 to set the DIF’s designated reserve ratio at 2 percent of estimated insured deposits. The Dodd-Frank Act set a minimum designated reserve ratio of 1.35 percent, and left unchanged the requirement that the FDIC Board set a designated reserve ratio annually. The Board sets the reserve ratio according to risk of loss to the DIF, economic conditions affecting the banking industry, preventing sharp swings in the assessment rates, and any other factors it deems important. The decision to set the designated reserve ratio at 2 percent was based on a historical analysis of losses to the DIF. The analysis showed that in order to maintain a positive fund balance and steady, predictable assessment rates, the reserve ratio should be at least 2 percent as a long-term, minimum goal.

The final rule for the reserve ratio is part of a comprehensive fund management plan proposed by the Board in October 2010. The plan is intended to provide insured institutions with moderate, steady assessment rates throughout economic cycles, and to maintain a positive fund balance even during severe economic times. The Board acted on other aspects of the comprehensive plan—assessments, dividends, assessment base, and large bank pricing—during the first quarter of 2011.

Importantly, with respect to the largest institutions and any potential negative impact of their failure on the fund, Title II of the Dodd-Frank Act helps to address the notion of “Too Big to Fail.” The largest institutions will be subjected to the same type of market discipline facing smaller institutions. Title II provides the FDIC authority to wind down systemically important bank holding companies and nonbank financial companies as a companion to the FDIC’s existing authority to resolve insured depository institutions. As noted earlier, the FDIC’s new Office of Complex Financial Institutions will play a key role in overseeing these new functions.

Ensuring Institution Safety and Soundness Through an Effective Examination and Supervision Program

The Corporation’s supervision program promotes the safety and soundness of FDIC-supervised insured depository institutions. The FDIC is the primary federal regulator for approximately 4,700 FDIC-insured, state-chartered institutions that are not members of the Federal Reserve System—often referred to as “state non-member” institutions. The OCC, OTS, and Federal Reserve supervise other banks and thrifts, depending on the institution’s charter. (Note that the institutions under the OTS’s purview will be transferred to the other regulators when the OTS is abolished pursuant to the Dodd-Frank Act, as referenced previously.) As insurer, the Corporation also has backup examination authority to protect the interests of the DIF for about 2,800 national banks, state-chartered banks that are members of the Federal Reserve System, and savings associations.

In the current environment, efforts to continue to ensure safety and soundness and to carry out the examination function will be challenging in a number of ways. Of particular importance for 2011 is that the Corporation needs to continue to assess the implications of the recent financial and economic crisis and to integrate lessons learned and any needed changes to the examination program into the supervisory process. At the same time, it needs to continue to conduct scheduled examinations to ensure the safety and soundness of the thousands of institutions that it regulates.

The Corporation has developed a comprehensive “forward-looking supervision” training program and will need to continue to put that training into practice going forward. This approach involves carefully assessing the institution’s overall risks, and basing ratings not on current financial condition alone, but rather on consideration of possible future risks. These risks should be identified by rigorous and effective on-site and off-site review mechanisms and accurate metrics that identify risks embedded in the balance sheets and operations of the insured depository institutions so that steps can be taken to mitigate their impact on the institutions.

In all cases, examiners need to continue to bring any identified problems to the bank’s board’s and management’s attention, assign appropriate ratings, and make actionable recommendations to address areas of concern. Subsequently, the FDIC’s corrective action and follow-up processes must be effective to ensure that institutions are acting on recommendations and promptly complying with any supervisory enforcement actions—informal or formal—resulting from the FDIC’s risk-management examination process. In some cases, to maintain the integrity of the banking system, the Corporation will also need to aggressively pursue prompt actions against bank boards of directors or senior officers who may have contributed to an institution’s failure.

The rapid changes in the banking industry, increase in electronic and online banking, growing sophistication of fraud schemes, and the mere complexity of financial transactions and financial instruments all create potential risks at FDIC-insured institutions and their service providers. These risks can negatively impact the FDIC and the integrity of the U.S. financial system and contribute to institution failures if existing checks and balances falter or are intentionally bypassed. The FDIC must seek to minimize the extent to which the institutions it supervises are involved in or victims of financial crimes and other abuses. It needs to continue to focus on Bank Secrecy Act examinations to prevent banks and other financial service providers from being used as intermediaries for, or to hide the transfer or deposit of money derived from, criminal activity. FDIC examiners need to be alert to the possibility of other fraudulent activity in financial institutions and make full use of reports, information, and other resources available to them to help detect such fraud.

With the passage of the Dodd-Frank Act, the coming months will bring significant organizational changes to the FDIC’s current supervision program, as well as corresponding challenges. As referenced earlier, the FDIC Board of Directors approved the establishment of the OCFI and DCP. In conjunction with these changes, DSC has been renamed RMS, and its mandate will be focused on supervision rather than consumer protection, the function of which is being transferred to DCP. OCFI has begun operations and will focus on overseeing bank holding companies with more than $100 billion in assets and their corresponding insured depository institutions. OCFI will also be responsible for nonbank financial companies designated as systemically important by the FSOC. OCFI and RMS will coordinate closely on all supervisory activities for state non-member institutions that exceed $100 billion in assets; RMS will be responsible for the overall Large Insured Depository Institution program.

Protecting and Educating Consumers and Ensuring an Effective Compliance Program

The FDIC’s efforts to ensure that banks serve their communities and treat consumers fairly continue to be a priority. The FDIC carries out its consumer protection role by educating consumers, providing them with access to information about their rights and disclosures that are required by federal laws and regulations, and examining the banks where the FDIC is the primary federal regulator to determine the institutions’ compliance with laws and regulations governing consumer protection, unfair or deceptive acts and practices, fair lending, and community investment. The FDIC’s compliance program, including examinations, visitations, and follow-up supervisory attention on violations and other program deficiencies, is critical to ensuring that consumers and businesses obtain the benefits and protections afforded them by law. Proactively identifying and assessing potential risks associated with new and existing consumer products will continue to challenge the FDIC. As a further means of remaining responsive to consumers, the FDIC’s Consumer Response Center investigates consumer complaints about FDIC-supervised institutions and responds to inquiries from the public about consumer laws and regulations, consumer products, and banking practices.

Going forward, the FDIC will be experiencing and implementing changes related to the Dodd-Frank Act that have direct bearing on consumer protection. The Dodd-Frank Act establishes a new Consumer Financial Protection Bureau within the Federal Reserve and transfers to this bureau the FDIC’s examination and enforcement responsibilities over most federal consumer financial laws for insured depository institutions with over $10 billion in assets and their insured depository institution affiliates. However, even for these large organizations, the FDIC will have backup authority to enforce federal consumer laws and address violations. Under the Dodd-Frank Act, the FDIC will maintain compliance, examination, and enforcement responsibility for over 4,700 insured institutions with $10 billion or less in assets. As previously discussed, during early 2011, the FDIC established DCP, responsible for the Corporation’s compliance examination and enforcement program, as well as the depositor protection and consumer and community affairs activities that support that program.

Effectively Managing the FDIC Workforce and Other Corporate Resources

The FDIC must effectively manage and utilize a number of critical strategic resources in order to carry out its mission successfully, particularly its human, financial, information technology, and physical resources. These resources have been stretched over the past year, and the Corporation will continue to face challenges during 2011.

Importantly, and as referenced earlier, in the coming months, as the Corporation responds to Dodd-Frank Act requirements and continues to pursue its long-standing mission in the face of lingering financial and economic turmoil, the resources of the entire FDIC will be challenged. For example, as required by the Dodd-Frank Act, the Corporation established an Office of Minority and Women Inclusion responsible for all agency matters relating to diversity in management, employment, and business activities. The Corporation has transferred its former Office of Diversity and Economic Opportunity staff to this new office. Other new responsibilities, reorganizations, and changes in senior leadership and in the makeup of the FDIC Board will greatly impact the FDIC workforce in the months ahead. Promoting sound governance and effective stewardship of its core business processes and human and physical resources will be key to the Corporation’s success.

Of particular note, FDIC staffing levels have increased dramatically. The Board approved an authorized 2011 staffing level of 9,252 employees, up about 2.5 percent from the 2010 authorization of 9,029. Thirty-nine percent of the total 9,252 authorized positions for 2011 are temporary positions. Temporary employees have been hired by the FDIC to assist with bank closings, management and sale of failed bank assets, and other activities that are expected to diminish substantially as the industry returns to more stable conditions. To that end, the FDIC opened three temporary satellite offices (East Coast, West Coast, and Midwest) for resolving failed financial institutions and managing the resulting receiverships.

The Corporation’s contracting level has also grown significantly, especially with respect to resolution and receivership work. Over $1.6 billion was available for contracting for receivership-related services during 2010. To support the increases in FDIC staff and contractor resources, the Board of Directors approved a $3.9 billion Corporate Operating Budget for 2011, down slightly from the 2010 budget the Board approved in December 2009. The FDIC’s operating expenses are paid from the DIF, and consistent with sound corporate governance principles, the Corporation’s financial management efforts must continuously seek to be efficient and cost-conscious.

Opening new offices, rapidly hiring and training many new employees, expanding contracting activity, and training those with contract oversight responsibilities are all placing heavy demands on the Corporation’s personnel and administrative staff and operations. When conditions improve throughout the industry and the economy, a number of employees will need to be released and staffing levels will move closer to a pre-crisis level, which may cause additional disruption to ongoing operations and current workplaces and working environments. Among other challenges, pre- and post-employment checks for employees and contractors will need to ensure the highest standards of ethical conduct, and for all employees, the Corporation will seek to sustain its emphasis on fostering employee engagement and morale.

From an information technology perspective, amidst the heightened activity in the industry and economy, the FDIC is engaging in massive amounts of information sharing, both internally and with external partners. FDIC systems contain voluminous amounts of critical data. The Corporation needs to ensure the integrity, availability, and appropriate confidentiality of bank data, personally identifiable information, and other sensitive information in an environment of increasingly sophisticated security threats and global connectivity. Continued attention to ensuring the physical security of all FDIC resources is also a priority. The FDIC needs to be sure that its emergency response plans provide for the safety and physical security of its personnel and ensure that its business continuity planning and disaster recovery capability keep critical business functions operational during any emergency.

The FDIC is led by a five-member Board of Directors, all of whom are appointed by the President and confirmed by the Senate, with no more than three being from the same political party. The FDIC has three internal directors—the Chairman, Vice Chairman, and one independent Director—and two ex officio directors, the Comptroller of the Currency and the Director of OTS. With the passage of the Dodd-Frank Act, the OTS will no longer exist and the Director of OTS will be replaced on the FDIC Board by the Director of the CFPB in mid-2011. The FDIC Chairman has announced her intention to leave the Corporation when her term expires—by the end of June 2011. Given the relatively frequent turnover on the Board, it is essential that strong and sustainable governance and communication processes be in place throughout the FDIC and that Board members possess and share the information needed at all times to understand existing and emerging risks and to make sound policy and management decisions.

Enterprise risk management is a key component of governance at the FDIC. The FDIC’s numerous enterprise risk management activities need to consistently identify, analyze, and mitigate operational risks on an integrated, corporate-wide basis. Additionally, such risks need to be communicated throughout the Corporation, and the relationship between internal and external risks and related risk mitigation activities should be understood by all involved. To further enhance risk monitoring efforts, the Corporation established six Program Management Offices to address risks associated with such activities as loss-share agreements, contracting oversight for new programs and resolution activities, the systemic resolution authority program, and human resource management concerns. Lessons from these areas need to be integrated into corporate thinking and decision-making. Additionally, the FDIC Chairman charged members of her senior staff with planning for and presenting a case to the Board for the establishment of a Chief Risk Officer at the FDIC to better ensure that risks to the Corporation are identified and mitigated to the fullest extent. In 2011, the Chairman announced creation of a new Office of Corporate Risk Management to be led by a Chief Risk Officer. The addition of such a function is another important organizational change that will require carefully thought-out and effective implementation in order to be successful.


Federal Deposit Insurance Corporation

This Annual Report was produced by talented and dedicated staff. To these individuals, we would like to offer our sincere thanks and appreciation. Special recognition is given to the following individuals for their contributions.

  • Jannie F. Eaddy
  • Barbara Glasby
  • David Kornreich
  • Robert Nolan
  • Patricia Hughes
  • Meredith Robinson
Last Updated 5/5/2011

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