2015 Annual Report

I. Management’s Discussion and Analysis

The Year in Review

OVERVIEW

The FDIC continued to fulfill its mission-critical responsibilities during 2015. The agency adopted and issued final rules on key regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and engaged in several community banking and community development initiatives. Cybersecurity remained a high priority for the FDIC in 2015; the agency worked to strengthen cybersecurity oversight, help financial institutions mitigate increasing risks, and respond to cyber threats. The sections below highlight these and some of our other accomplishments during the year.

IMPLEMENTATION OF KEY REGULATIONS

Capital Rulemaking and Guidance

The revised capital rules, which generally implemented Basel III international capital standards and addressed the removal of references to external credit ratings as standards of creditworthiness, became effective for community banks on January 1, 2015. The FDIC and other federal banking agencies continued efforts to implement the revised capital rules, including finalizing regulatory reporting, making technical corrections to the rule, and issuing guidance throughout 2015. In February 2015, the FDIC adopted another aspect of Basel III regarding certain regulatory reporting under the final capital rule. In June 2015, the FDIC adopted as final its amendments to the advanced approaches risk-based capital rule. The rule addresses certain technical adjustments to the advanced approaches risk-based capital rule to enhance consistency of the U.S. capital rules with international standards for the use of the advanced approaches framework. The agencies also provided capital guidance to banks by issuing a calculation tool that helps certain institutions determine risk-weighted assets and by releasing frequently asked questions (FAQs) on the revised rules. Finally, the agencies issued joint supervisory guidance in November 2015 concerning the capital treatment for certain covered funds under the final rule implementing Section 13 of the Bank Holding Company Act (Volcker Rule).

Regulatory Reporting Under the Final Capital Rule

In February 2015, the FDIC, the Federal Reserve Board (FRB), and the Office of the Comptroller of the Currency (OCC), under the auspices of the Federal Financial Institutions Examination Council (FFIEC), announced changes to regulatory capital reporting on the Consolidated Reports of Condition and Income (Call Report). The changes update the risk-weighted assets portion of the regulatory capital schedule to reflect the standardized approach to risk weighting in the revised capital rules. These regulatory capital reporting changes were effective as of the March 31, 2015 report date for all institutions. As of the same report date, the revisions to the regulatory capital components and ratios portion of the Call Report regulatory capital schedule that were effective as of March 31, 2014, for advanced approaches institutions became applicable to all other institutions.

In February and December 2015, the FDIC and the other banking agencies, under the auspices of the FFIEC, held national teleconferences for depository institutions to help them better understand the revisions to the regulatory capital schedule. More than 2,600 people participated in the February call, and 1,200 took part in the December event.

In March 2015, the FDIC and the other federal banking agencies also implemented the new FFIEC 102 market risk regulatory report. This quarterly report collects key information from the limited number of institutions subject to the Basel III market risk capital rules on how they measure and calculate market risk under these rules. The report was approved by the Office of Management and Budget (OMB) and took effect as of the March 31, 2015, report date.

Regulatory Capital — Revisions Applicable to Banking Organizations Subject to the Advanced Approaches Risk-Based Capital Rule

In June 2015, the FDIC Board approved a joint final rule that made technical corrections to the advanced approaches risk-based capital rules and rectified certain missing internal ratings-based requirements that were identified as part of the Regulatory Consistency Assessment Program. The final rule was published in the Federal Register on July 15, 2015.

Regulatory Capital Guidance

The FDIC led the development of a calculation tool to help institutions that have securitization exposures calculate their risk-weighted assets under the Simplified Supervisory Formula Approach. The FDIC released the calculator in February 2015, through a Financial Institution Letter (FIL), and the tool is available on the FDIC’s website as well as the websites of the other federal banking agencies.

In addition, in April 2015, the federal banking agencies released an initial set of FAQs on the revised capital rules, many of which are focused on community bank issues. The capital FAQs are posted on the FDIC website and are expanded as additional questions are raised.

Capital Deduction Guidance for Non-Legacy Covered Funds Under the Volcker Rule

In November 2015, the FDIC, jointly with the FRB and OCC, issued guidance that clarifies the interaction between the regulatory capital rule and the Volcker Rule with respect to the appropriate capital treatment for investments in certain private equity funds and hedge funds (covered funds). The FDIC issued FIL 50-2015 titled Supervisory Guidance on the Capital Treatment of Certain Investments in Covered Transactions to notify FDIC-supervised institutions of the calculations. The Volcker Rule prohibits banking organizations from holding ownership interests in covered funds after the relevant conformance period, unless such ownership interests are covered under certain exceptions/exemptions in the final rule. An exception is permitted for ownership interests arising from sponsoring covered funds totaling less than 3 percent of Tier 1 capital and subject to certain seeding period provisions. Under the rule, investments in covered funds purchased or acquired after December 31, 2013, must be deducted from Tier 1 capital after an initial conformance period that ended on July 21, 2015. The conformance period for legacy covered funds will end in July 2017. The guidance and instructions regarding legacy covered funds will be available at a later time. The November supervisory guidance describes the mechanics for making capital deductions under the Volcker Rule and how these relate to deductions required under the regulatory capital rule for investments in the capital instruments of unconsolidated financial institutions. These mechanics are intended to ensure no “double deductions” from Tier 1 capital.

Other Rulemaking and Guidance Under the Dodd-Frank Act

The Dodd-Frank Act requires various agencies to publish regulations in a number of areas. The following is a summary of significant rulemaking activity relating to the Dodd-Frank Act and other accomplishments during the year.

Minimum Requirements for Appraisal Management Companies

In April 2015, the FDIC, jointly with the OCC, FRB, National Credit Union Administration (NCUA), Consumer Financial Protection Bureau (CFPB), and the Federal Housing Finance Agency (FHFA), issued a final rule to implement the minimum requirements for registration and supervision of appraisal management companies (AMCs) under the Dodd-Frank Act. The final rule establishes the minimum requirements set forth in Section 1473 of the Act (Section 1473) for state registration and supervision of AMCs; outlines the minimum requirements for AMCs that register with a state under Section 1473; requires federally regulated AMCs to meet the minimum requirements of Section 1473 (other than registering with a state); and requires the reporting of certain AMC information to the Appraisal Subcommittee of the FFIEC. The final rule was published in the Federal Register on June 9, 2015, and the effective date was August 10, 2015.

The Volcker Rule

The Volcker Rule (Rule) contains restrictions and prohibitions on the ability of banks and their affiliates to engage in proprietary trading and have interests in, or relationships with, a hedge fund or a private equity fund. The Rule was adopted on December 10, 2013, and became effective on April 1, 2014. The Volcker Rule was subject to an extended conformance period that expired on July 21, 2015. In April and December of 2014, the FRB issued Orders announcing that it planned to extend the conformance period for certain covered funds for two additional one-year periods, so that the conformance period for these “legacy” covered funds would end July 21, 2017.

In January 2014, the Volcker Rule agencies [FDIC, OCC, FRB, Commodity Futures Trading Commission (CFTC), and Securities and Exchange Commission (SEC)] adopted a joint interim final rule that permits banking entities subject to the Rule to retain investments in certain collateralized debt obligations backed primarily by trust preferred securities.

To help ensure consistent implementation of the Volcker Rule, the agencies established an interagency working group that meets regularly to discuss issues and the application and enforcement of the Rule. During 2015, the interagency Volcker Rule working group posted 11 joint FAQs on their websites to address certain implementation issues presented by banking entities subject to the Rule. The questions addressed such matters as:

• Chief Executive Officer Certification for Prime Brokerage Transactions
• Compliance for Market Making and the Identification of Covered Funds
• Termination of Market-Making Activity: Treatment of Residual Positions
• Conformance Period
• Seeding Period Treatment of Registered Investment Companies and Foreign Public Funds
• Foreign Public Funds Sponsored by a Banking Entity
• Joint Venture Exclusion for Covered Funds
• Solely Outside the United States Covered Fund Exemption: Marketing Restriction
• Applicability of the Restrictions in Section 13(f) of the Bank Holding Company Act (Super 23A)
• 30-Day Metrics Reporting During the Conformance Period
• Treasury Separate Trading of Registered Interest and Principal Securities (STRIPS)
  

Margin and Capital Requirements for Covered Swaps Entities

In October 2015, the FDIC approved a final rule to establish margin requirements for swaps that are not cleared through a clearinghouse. The final rule takes into account the risk posed by a swaps dealer’s counterparties in establishing the minimum amount of initial and variation margin that the covered swaps entity must exchange with such counterparties.

The final rule was issued jointly with the OCC, the FRB, the Farm Credit Administration (FCA), and the FHFA. The rule will apply to entities supervised by these agencies that register with the CFTC or SEC as a dealer or major participant in swaps. The joint final rule was developed in consultation with the CFTC and the SEC, as required by the Dodd-Frank Act.

The final rule implements certain requirements contained in Sections 731 and 764 of the Dodd-Frank Act, which requires the prudential regulators to establish initial and variation margin requirements for the largest and most active participants in the over-the-counter (OTC) derivatives market. The Dodd-Frank Act required the agencies to impose margin requirements to help ensure the safety and soundness of swaps dealers in light of the risk to the financial system associated with non-cleared swaps activity. The rule is also consistent with the international framework on margin requirements published in September 2013 by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions.

The final rule requires insured depository institutions (IDIs) that are covered swaps entities— the large dealers subject to the rule—to collect and post initial margin on non-cleared swaps entered into with other dealers, and with financial end users that have at least $8 billion, notional, in non-cleared swaps. The final rule also requires covered swaps entities to post and collect daily variation margin for swaps with other swaps entities or with financial end-user counterparties, regardless of the level of swaps exposure if the required amount of variation margin and initial margin exceeds $500,000. For non-cleared swaps with financial affiliates, an IDI swaps dealer would be required to post and collect daily variation margin, but only collect initial margin from the affiliate. The final margin rule will be phased in beginning September 2016 and applies only to new swaps entered into after the applicable compliance dates.

Also in October 2015, the agencies approved an interim final rule, as required by Title III of the Terrorism Risk Insurance Program Reauthorization Act of 2015, so that the margin requirements do not apply to non-cleared swaps that a covered swaps entity enters into with a commercial end user, a small financial institution with total assets of $10 billion or less, or certain cooperatives if the counterparty uses the swaps for hedging purposes. This exemption parallels an exemption from a mandate in the Dodd-Frank Act to clear standardized swaps. The interim final rule is effective April 1, 2016.

Capital requirements under Sections 731 and 764 have been previously incorporated in the agencies’ capital rules, with the exception of the FCA.

Liquidity and Funds Management Rulemaking

Net Stable Funding Ratio

The net stable funding ratio (NSFR) is designed to complement the liquidity coverage ratio (LCR), which took effect January 1, 2015. While the LCR focuses on having sufficient liquid asset holdings to weather a short-term severe stress, the goal of the NSFR is to stabilize funding over a longer horizon. Specifically, the NSFR would require the largest banks to maintain a stable funding profile in relation to their on- and off-balance sheet activities, comparing an entity’s available stable funding sources over a one-year horizon against asset and off-balance sheet obligations. In October 2014, the BCBS published a final standard to implement the NSFR. Throughout 2015, the FDIC, the OCC, and the FRB devoted substantial resources to develop an interagency notice of proposed rulemaking (NPR) to implement the NSFR rule, with a target of issuing the NPR by year-end 2015. However, the agencies decided in late 2015 to delay issuance of the NPR until 2016 to allow additional analysis.

Financial Sector Assessment Program

The FDIC participated in the International Monetary Fund’s (IMF) Financial Sector Assessment Program (FSAP). The goal of FSAP assessments is twofold: (1) to gauge the stability of the financial sector and (2) to assess its potential contribution to growth and development. To assess the stability of the financial sector, FSAP teams examine the soundness and resilience of the banking and other financial sectors; conduct stress tests and analyze linkages among financial institutions, including across borders; rate the quality of bank, insurance, and financial market supervision against accepted international standards; and evaluate the ability of supervisors. In addition, FSAPs examine the quality of the legal framework and of financial infrastructure, such as the payments and settlements system; identify obstacles to the competitiveness and efficiency of the sector; and examine its contribution to economic growth and development. FDIC staff provided expertise and comprehensive feedback to the IMF to support the FSAP as it related to the FDIC’s Banking, Insurance, and Resolution business lines. The FDIC worked collaboratively with other U.S. financial institution regulatory authorities throughout this review to provide data. The results of the FSAP review were detailed in a report published on July 7, 2015. The report states that the banking agencies have improved effectiveness since the 2010 FSAP assessment and have achieved a high degree of compliance with international banking standards, although some recommendations for improvement were noted. The FDIC worked with other federal banking regulators to provide a consolidated response to IMF findings.