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.
2010
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
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