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Federal Deposit
Insurance Corporation

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

Home > About FDIC > Financial Reports > 1997 Annual Report

1997 Annual Report

Supervision and Enforcement

At year-end 1997, the FDIC was the primary federal regulator of 5,561 state-chartered banks that are not members of the Federal Reserve System and 565 state-chartered savings banks. The FDIC also had back-up supervisory responsibility over the remaining 4,811 federally insured banks and savings associations.

The Division of Supervision (DOS) leads the FDIC's supervisory efforts through on-site examinations and off-site analyses. When DOS identifies excessive risk-taking, it employs various corrective methods and it works closely with other divisions to develop regulations and issue enforcement actions designed to prevent or curtail imprudent activities that might otherwise result in significant losses to the deposit insurance funds.

Assistant Director Chris Spoth of the Division of Supervision.
Assistant Director Chris Spoth of the Division of Supervision helped get the Case Manager Program up and running.
Taking the opportunity provided by the continued good health of the banking industry in 1997, the FDIC implemented several initiatives to address changes in the industry and provide a more dynamic supervisory approach to its mission. DOS completed the development and implementation of new examination procedures, improved its off-site monitoring capabilities and information systems, reorganized the supervisory structure of its regional offices, staffed specialty areas to meet the challenges of the future, and created a multi-divisional committee to oversee the Year 2000 remediation process. The agency also initiated outreach programs on several emerging issues for bankers and other regulators. These initiatives illustrated the FDIC’s continuing commitment to improve efficiency throughout the organization and reduce regulatory burden on the industry.

Refining Examination and Risk-Assessment Procedures

In 1997, the FDIC implemented several programs intended to improve the agency’s risk-assessment capabilities and to streamline examination and other supervisory functions. DOS examiners began using the revised Uniform Financial Institutions Rating System (UFIRS); a new system of risk-focused examination modules; and new examination procedures that assess nondeposit investment products, electronic banking and Year 2000 readiness. The FDIC also devoted considerable resources to analyzing industry and economic trends and the potential impact of these trends on the deposit insurance system.

Revisions to the Federal Financial Institutions Examination Council (FFIEC) Policy Statement on the UFIRS became effective in January 1997. These revisions updated the CAMEL (capital, asset quality, management, earnings, and liquidity) rating system to address changes in the financial services industry and in supervisory policies that occurred since the original rating system was adopted in 1979. The revised CAMEL system emphasizes the quality of risk management practices and adds a sixth component-"S," for sensitivity to market risk. The updated rating system also redefines the other five components and highlights risks that may be considered when assigning component ratings.

The FDIC implemented risk-focused examination modules on October 1,1997. The uniform procedures, developed jointly by the FDIC and the Federal Reserve in conjunction with the Conference of State Bank Supervisors (CSBS), refine the examination process by dividing tasks into a series of diagnostic modules that help identify a bank's greatest risks. The modules employ a tiered approach that assists examiners in establishing an appropriate examination scope and managing examiner resources. This structured risk assessment approach focuses on a bank's risk management practices, thereby allowing examiners to look beyond the static condition of a bank to how well it can respond to changing market conditions given its particular risk profile. The Examiner Laptop Visual Information System (ELVIS), an automated version of the diagnostic modules, was developed concurrently with the new examination procedures. This software application helps to organize data and comments, generates examination workpapers and allows information to be exported into the report of examination.

FDIC Examinations 1995-1997 In addition, the FDIC continued to develop and improve other automation tools designed to make examinations more productive, efficient and risk-focused. The Automated Loan Exami nation Review Tool (ALERT), which debuted in 1996, was greatly improved in 1997. The new version, introduced in June, not only gives examiners the ability to collect loan data from institutions electronically,
but also allows for a more refined selection of loans to be reviewed through a sophisticated query function.The FDIC also continued to develop the General Examination System (GENESYS), which will automate the preparation of the entire examination report. When completed in 1998, the GENESYS software package will allow examiners to access and analyze financial information and prior examination report data electronically for use in the current examination report, incorporate data generated by the ALERT and ELVIS programs, and better manage examination resources through automated task assignments. These tools enable examiners to perform a significant portion of their analysis off-site, thereby minimizing time spent in a financial institution. The FDIC has worked closely with the Federal Reserve Board and the CSBS in developing these programs. This cooperation has promoted consistency among the agencies and will further reduce regulatory burden on state banks. For more information on other automated examination programs (click here).

New examination procedures for non-deposit investment products were developed and implemented during 1997. These revised procedures enable examiners to evaluate bank sales of products such as mutual funds and annuities to retail customers, to identify any safety and soundness concerns, and to streamline examinations. A new automated tracking system was developed in conjunction with the new procedures to capture the results from examinations and provide a clear analysis of banks' retail investment sales activities.

The FDIC has taken a leading role in recognizing and responding to electronic banking developments, which present new risks and supervisory issues to the financial system. As of year-end 1997, the FDIC had approved two applications for banks that plan to operate solely through the Internet or other electronic means. These applications present a number of complex issues relating to business strategy, system security and geographic market. In 1997, the FDIC became the first federal supervisor to develop and publish electronic banking examination guidelines. These examination procedures focus on safety and soundness functions such as planning, administration, internal controls, and policies and procedures. The procedures are non-technical; they are designed with the flexibility to be applied to a wide range of electronic banking activities. DOS also developed and began field-testing more technical work programs that evaluate the safety of various operating systems and firewalls in 1997; general distribution and use of these work programs will begin early in 1998. For more information on electronic banking (click here).

In addition to refining programs that assess risk in individual institutions, the FDIC has also developed several programs to better evaluate risks that affect either the industry or groups of institutions with common geographic or business profiles. The Division of Insurance (DOI) identifies and monitors emerging and existing risks in both the financial services industry and the economy by drawing on a wide variety of internal and external information sources. DOI has worked closely with DOS on several projects to help examiners and case managers assess emerging risk exposure for individual institutions as well as groups of institutions. One of these is the Regional Economic Conditions Report for Examiners (RECON), which will provide timely, comprehensive regional economic data to examiners through the FDIC's Intranet site. RECON, which is scheduled for release in 1998, will serve as a valuable resource for examiners evaluating the potential impact of external risks on an institution.

In 1997, the FDIC monitored a number of significant trends, including the increase in credit card charge-off rates, the rise of bankruptcy filings, the growth of home equity loans, the expansion of the subprime and syndicated lending markets, and the growing concentration of commercial real estate loans in certain markets. In addition, the agency analyzed industry underwriting standards by having field examiners complete a questionnaire at the end of each examination. The questionnaire helps identify material changes in underwriting standards for new loans and the degree of risk in current lending practices. This system, which began in 1995, provides an "early warning" mechanism to identify potential lending problems that could eventually lead to an increase in bank failures. While underwriting practices remained sound overall in 1997, examiners noted a few trends that warrant closer scrutiny in the future, such as an increase in speculative construction loans and a general loosening of credit in some geographic regions.   Risk-Related Premiums
Reorganizing to Reflect Industry Changes

In April 1997, the FDIC reorganized the structure and risk-assessment programs of its regional offices to accommodate interstate branching and consolidation. The case manager program consolidates under one FDIC regional office the supervision and monitoring responsibilities for a group of related institutions regardless of the number of regions in which subsidiary banks and branches operate (click here). This approach differs from the past, when the risk assessment of banks and their affiliates was broken down by geographic areas, sometimes resulting in more than one FDIC regional office supervising interstate banking organizations. The new program more closely matches the level regional office supervising interstate banking organizations. The new program more closely matches the level of regulatory oversight with the level of risk an organization poses to the deposit insurance fund. The case manager system helps the FDIC better understand the risks presented by large banking organizations and reduces burden for bankers by designating a single contact person for questions about applications and supervisory issues.

To address the growing complexity of the banking industry, DOS expanded the number and variety of regional office specialists as part of its supervisory reorganization. In addition to case managers, each regional office appointed experts in the areas of capital markets, accounting, trust activities, information systems, fraud detection and prevention, and internal information management.

The FDIC also was faced with the challenge of supervising an increasingly global industry. Foreign banking organizations (FBOs) operating in the U.S. control nearly one-fifth of the U.S. banking industry's asset base. DOS created an international branch, which became operational and fully staffed in 1997, to monitor the activities of U.S. banks operating abroad and foreign banks operating in the U.S. The international branch also completes risk profiles of various countries whose banking systems are of potential interest to the FDIC. DOS personnel are involved in numerous international supervisory working groups, including the Basle Committee on Banking Supervision and the Interagency Country Exposure Review Committee. The FDIC is also working with the U.S. Department of the Treasury on information-sharing initiatives with other industrialized nations as well as training programs for banking supervisors in Asia and Latin America.

Examiner Michael Fullick from the Division of Supervision's Indianapolis office
Examiner Michael Fullick from the Division
of Supervision's Indianapolis office instructs examiners on Year 2000 issues.


Addressing "Year 2000" Computer Challenges

The potential inability of computer systems to accurately perform tasks using dates beyond 1999 (the "Year 2000" problem) is a significant concern for the financial services industry and its regulators. The problem stems from many systems and programs using only two digits to designate the year. Unless these programs are modified, computers may interpret "00" as the year 1900 instead of 2000. Financial institutions are vulnerable to the Year 2000 problem in a number of areas:

  • Data processing systems, including; mainframe, network and personal; computers, may be unable to record; and process financial information; accurately.

  • Equipment such as automated teller; machines, vault locks, security; systems, elevators and climate  control systems may malfunction.

  • Data exchanges with business partners outside the financial institution, such as transactions with correspondent banks, may be disrupted.

  • Credit quality issues could arise as borrowers encounter their own Year 2000 vulnerabilities.

  • Corrupt data create the potential for fraud against the industry and its customers.

The FDIC is working with the other financial institution regulatory agencies to monitor the potential risk to the insurance funds if institutions fail because of the Year 2000 problem. The FDIC has devoted significant resources to developing and implementing programs designed to ensure that all FDIC-supervised financial institutions deal with the problem. These efforts include industry awareness campaigns, a comprehensive examiner training program, off-site and on-site Year 2000 reviews of all FDIC-supervised institutions, and the creation of a centralized tracking system to manage the large volume of data generated by the Year 2000 reviews.

To improve the industry’s awareness, the FDIC, in cooperation with the other federal and state supervisors, has taken steps to highlight the importance of Year 2000 issues. During 1997, the FFIEC issued interagency statements that provided detailed guidance on Year 2000 project management and outlined the responsibilities of an institution’s senior management and board of directors in addressing business risks. The FDIC also began developing a public awareness campaign to promote consumer awareness of the Year 2000 issue without creating unnecessary concern. The campaign will encourage consumers to seek answers from their financial institutions regarding potential disruptions to their accounts, while assuring depositors that their accounts remain insured up to statutory limits. The FDIC in 1997 completed an initial assessment of all the banks it supervises to determine their awareness of the Year 2000 problem and identify any corrective programs initiated. The agency will also conduct on-site Year 2000 reviews of all FDIC-supervised institutions by June 1998; thereafter, the FDIC, in conjunction with state authorities, will follow up with each institution at least twice annually. Institutions that fail to adequately address the business risks posed by the Year 2000 problem will be subject to supervisory action, including formal enforcement action. The FDIC issued three such actions in 1997.

Additional information on Year 2000 issues is available through the FDIC’s Internet site.

Reducing Regulatory Burden

The FDIC continued to streamline its regulations and policies as mandated by the Riegle Community Development and Regulatory Improvement Act of 1994 (CDRI). This effort was led by FDIC Board member Joseph Neely and involved more than 300 employees. Throughout 1997, FDIC staff worked diligently to develop and implement recommendations, which called for the rescission or revision of 90 regulations and policy statements.

Perhaps the most important single achievement from these reviews was the proposal to consolidate and simplify the FDIC’s application requirements. The revised application procedures would streamline the processing of more than 90 percent of the applications received by allowing most applications filed by well-managed, well-capitalized institutions to be treated as notices. The proposed procedures will result in significantly reduced processing times for all applications.

  FDIC Director Joseph H. Neely
FDIC Director Joseph H. Neely spearheaded the agency's efforts to reduce regulatory burden.

The FDIC also proposed combining regulations governing activities and investments of insured state nonmember banks and savings associations into a single regulation. The proposed changes will allow institutions to engage in certain activities and make certain investments by filing a notice with the FDIC rather than an application. The proposal should relieve regulatory burden significantly without affecting safety and soundness because the FDIC retains the ability to place restrictions on an activity or prohibit a particular institution from engaging in the activity.

Other significant actions taken in 1997 as a result of the CDRI review included

  • Streamlining the FDIC's securities; registration and disclosure rules by cross-referencing the Securities and Exchange Commission's regulations;

  • Increasing the flexibility of the FDIC’s audit regulations and policies, and streamlining external auditing program procedures;

  • Revising disclosure regulations to make information more accessible to the public;

  • Simplifying reporting requirements for suspected criminal activity;

  • Proposing simplified deposit insurance rules; and  

  • Proposing consolidation of regulations regarding international and foreign activities.

The FDIC, along with the other federal banking regulators, also worked to simplify other reporting requirements for financial institutions. Effective March 31, 1997, the FFIEC adopted generally accepted accounting principles (GAAP) as the reporting basis for most Reports of Condition and Income (Call Reports), which financial institutions must file quarterly with their primary federal supervisor. The adoption of GAAP as the reporting basis for most Call Report schedules will eliminate the need for some institutions to maintain two sets of books. The FDIC also published guidelines to assist smaller institutions in preparing error-free Call Reports. This publication, along with Call Report forms and instructions, is readily available from the FDIC's Internet site.

FDIC Applications 1995-1997 Maintaining Open Communication

The FDIC has worked diligently to establish and maintain open lines of communication regarding supervisory matters with both the financial services industry and other regulators. FDIC representatives routinely attend or participate in events sponsored by trade associations, foreign and domestic regulatory agencies, as well as FDIC-sponsored outreach meetings. The FDIC also serves as a chief source of public information on banking industry supervision through a variety of publications and an extensive Internet site. Communication efforts initiated or expanded in 1997 included:

  • Seminars on nondeposit investment products,conducted in collaboration with the Independent Bankers Association of America and the American Bankers Association,   held across the country and attended by more than 1,000 bankers;
  • The Division of Insurance’s quarterly Regional Outlook publication, which provides an in-depth discussion of trends that affect the financial services industry from national and regional perspectives; and

  • Timely, useful and easily accessible information for bankers and the general public on the FDIC’s Internet home page, located at

For more information on the FDIC’s outreach efforts (click here).

Enforcement and Applications

DOS works closely with the Legal Division to initiate supervisory enforce-ment actions against FDIC-supervised institutions and their employees. The FDIC initiated just 127 enforcement actions in 1997, nearly two-thirds of the 186 actions begun in 1996 and almost one-third of the 338 actions initiated just five years ago. This indicates the continued health and stability of the banking industry.

The trends of continued health and further consolidation of the industry also are evident in both the number and types of applications processed by the FDIC. Nevertheless, merger applications continue to outnumber new entrants by nearly two to one as the industry consolidates.  Efforts to reduce regulatory burden on the industry are also evident in the significantly lower volume of applications for new branches and notifications of changes in directors and

  Compliance, Enforcement and Other Related Legal Actions 1995-1997
officers. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 eliminated the need for institutions to file branch applications for remote service facilities and narrowed the circumstances under which institutions must notify the FDIC of changes in directors and senior executive officers.


Last Updated 02/18/1999

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