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Federal Deposit
Insurance Corporation

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

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2002 Annual Report

I. Management’s Discussion and Analysis

Operations of the Corporation – The Year in Review


In 2002, the FDIC continued to position itself to meet the demands of an evolving banking industry – one that is being reshaped by institutional consolidation, globalization and technology. The Corporation assumed a major leadership role on significant economic and policy issues, pursuing the enactment of deposit insurance reform legislation and sponsoring several symposia for regulators, policymakers and others on other important public policy issues. It also directed increased attention to new and emerging risks in the banking system, focusing more resources on larger institutions and those identified as posing a higher potential risk to the deposit insurance funds. The FDIC implemented a streamlined organizational and management structure and appointed a new management team to lead it into the future.

Highlights of the Corporation’s 2002 accomplishments in each of its three major business lines are presented below.


The FDIC insures bank and savings association deposits to help ensure the stability of the financial system and the public’s confidence in the U.S. banking system. As insurer, the FDIC continually evaluates how changes in the economy, the financial markets and the banking system affect the adequacy and the viability of the deposit insurance funds.

The FDIC’s efforts in 2002 focused on deposit insurance reform, other activities to promote sound public policies, expanded examination activities and dedicated examiner program, new international capital standards, and resolving failed institutions.

Deposit Insurance Reform
The FDIC gave priority attention to enactment of comprehensive deposit insurance reform legislation in 2002. Legislation containing major elements of the FDIC deposit insurance reform proposals developed over the past three years was introduced both in the House of Representatives and the Senate. On April 23, the FDIC’s Chairman testified before the Senate Banking Committee on the FDIC’s proposals for deposit insurance reform.

The FDIC's recommendations, which were summarized in the testimony, include:

  • Merging the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF).

  • Granting the FDIC's Board of Directors the flexibility to manage the combined deposit insurance fund. Under the present system, statutorily mandated methods of managing the size of the BIF and SAIF may cause large premium swings and could force the FDIC to charge the highest premiums during difficult economic times when the industry can least afford it. Currently, safer institutions subsidize riskier institutions unnecessarily while new entrants and growing institutions avoid paying premiums. To correct these problems, the FDIC recommended that Congress give the Board of Directors the discretion to:

    • Manage the combined fund within a range.

    • Price deposit insurance according to risk at all times and for all insured institutions.

    • Grant a one-time initial assessment credit to recognize institutions’ past contributions to the fund and create an ongoing system of assessment credits and rebates to prevent the fund from growing too large.

  • Indexing deposit insurance coverage to ensure that basic account coverage is not eroded over time by inflation and increasing the current level of deposit insurance coverage for retirement accounts.

The House passed H.R. 3717, the Federal Deposit Insurance Reform Act of 2002, on May 22 by a vote of 408 to 18. Although the Senate did not pass either H.R. 3717 or a similar Senate bill, S. 1945, the Safe and Fair Deposit Insurance Act of 2002, during the 107th Congress, the Corporation successfully addressed many key issues surrounding deposit insurance reform, establishing a sound base for future passage of legislation. Enactment of deposit insurance reform will remain a priority of the FDIC during the 108th Congress. The FDIC will continue to examine in greater detail how to implement risk-based pricing for deposit insurance and methods that could be used to create objective measurements of an insured depository institution’s risk.

Since implementation of pending deposit insurance reform legislation was not enacted, development of a final pricing recommendation and implementation plan for inclusion in a notice and comment rulemaking during 2002 was put on hold. The FDIC continues to refine these options and explore other possibilities for using objective measures to price deposit insurance premiums.

Other Activities to Promote Sound Public Policies
In addition to its leadership on deposit insurance reform, the Corporation sponsored three policy symposia and hosted various conferences and workshops during 2002 on major issues of concern to the banking industry and regulators. In June, the FDIC held a symposium on "Enhancing Financial Transparency" that attracted Congressional members and staff, bankers, academics, regulatory policy makers, financial analysts and the media. In July, the FDIC and Credit Suisse First Boston co-sponsored a symposium on the "Rise of Risk Management: Basel and Beyond." At that meeting, top government officials and leading experts from Wall Street, the business sector, the accounting profession and academia discussed the importance of appropriate risk management policies and procedures. In September, the FDIC co-sponsored with the Journal of Financial Services Research a symposium on pricing the risks of deposit insurance. Leading scholars and researchers examined the latest developments in credit risk modeling and related risk measurement methods and their implications for deposit insurance pricing. The FDIC also hosted economic roundtables on the economic outlook and the risks of deflation and the U.S. housing market and consumer sector.

The FDIC also began publication in early 2002 of an electronic news bulletin called FYI, with over 5,000 subscribers by year-end. FYI summarizes emerging issues in banking, finance and the economy. The format is designed to complement the FDIC’s in-depth reports and publications. FYI also serves as a vehicle for releasing analytical work as it becomes available. In addition, a quarterly communication entitled Letter to the Stakeholders has been released for FDIC-insured institutions, employees, and other stakeholders and highlights the FDIC’s current initiatives and key performance indicators.

In February, Chairman Powell established a new FDIC Advisory Committee on Banking Policy to provide advice and recommendations to the FDIC on a wide range of issues relating to the Corporation’s mission and activities, and examine how the FDIC can improve its effectiveness and address larger issues facing the financial services sector. The committee is composed of 12 members representing a cross-section of distinguished leaders from academia, economics, financial services, private industry, public affairs and the public interest community. The committee convened for the first time on November 13 in Washington, DC.

Expanded Special Examination Activities and Dedicated Examiner Program
In 2002, the FDIC focused increased examination resources on larger institutions and problem institutions where the risks to the funds are greatest, while streamlining examinations for those posing less risk. One key component of this shift was an expansion of special examination activities in non-FDIC supervised institutions.

On January 29, the FDIC Board of Directors adopted an agreement with the Office of Thrift Supervision, the Office of the Comptroller of the Currency, and the Board of Governors of the Federal Reserve System that enables the FDIC to examine insured depository institutions (IDIs) that represent a heightened risk to the deposit insurance funds. The Federal Deposit Insurance Act provides that the FDIC Board can authorize special examinations of any insured depository institution whenever such an examination is necessary for insurance purposes. The FDIC has long considered it a top priority to examine all insured banks and thrifts as needed to assess their financial condition and degree of risk to the insurance funds. This new agreement establishes an improved process for determining when the FDIC will use its authority to examine any insured institution and provides for enhanced coordination and cooperation of the agencies’ supervisory efforts. These measures will ensure that the FDIC will be able to fulfill its responsibilities to protect the deposit insurance funds in the most efficient and least burdensome manner possible.

The agreement provides that the FDIC may conduct special examinations of any IDI that:

  • Has a "3," "4" or "5" CAMELS composite rating (for the adequacy of capital, the quality of assets, the capability of management, the quality and level of earnings, the adequacy of liquidity, and the sensitivity to market risk), or

  • Is undercapitalized as defined under the Prompt Corrective Action provisions of Section 38 of the Federal Deposit Insurance Act.

Under the interagency agreement, the FDIC may seek to participate in examinations or meetings with senior bank management of institutions that exhibit material deteriorating conditions or other adverse developments regardless of their current rating at the invitation of, or without the objection of, the primary federal regulator.

The interagency agreement also provides for the FDIC’s establishment of a dedicated examiner program for the eight largest banking organizations. Because of their size and market share, these eight "large insured depository institutions" (LIDIs) expose the deposit insurance funds to substantial risk. Assets controlled by these eight institutions represent approximately 41 percent of industry assets. A similar level of concentration also exists on the deposit side – approximately nine percent of all domestic deposits are held by one LIDI.

The FDIC is not the primary regulator for the eight LIDIs. However, the FDIC’s eight dedicated examiners, selected in August 2002, serve as the FDIC’s primary points of contact for the oversight of these institutions. Pursuant to the agreement, to the fullest extent possible, the FDIC will continue to rely on results of the work performed by the primary federal bank supervisors in assessing the condition and risk-management practices of individual institutions. The dedicated examiners are provided access to supervisory personnel and supervisory information, including risk assessments, supervisory plans, reports of examination and other documents related to these eight banks, and are invited to participate in certain examination activities. The dedicated examiner program allows the FDIC first hand, timely access to information needed to stay fully abreast of the risks in these institutions and to quickly recognize when new risks emerge.

To assist the FDIC in quickly identifying and prioritizing areas of risk both to groups of banks and to specific institutions, a Risk Analysis Center (RAC) will be established in 2003 to serve as a central clearinghouse for vital bank risk information. The RAC will place special emphasis on the timely analysis of information generated by the dedicated examiner program.

New International Capital Standards
Internationally, the FDIC continues to participate in a number of global supervisory groups, including the Basel Committee on Banking Supervision. The FDIC actively participated in the Committee’s efforts to update and revise the 1988 Basel Capital Accord to make the capital standards of internationally active banks more comprehensive, risk-sensitive, and reflective of advances in banks’ risk measurement and management practices, while continuing to ensure these banks maintain adequate capital reserves.

The FDIC invested resources on several fronts to ensure that the new Accord, when final, will be compatible with the agency’s roles as both insurer and supervisor of banking organizations. The FDIC was well represented on several committees, task forces and groups that published documents for industry review during 2002. These included: "Quantitative Impact Study 3," which is serving as a comprehensive field test of the proposals for revising the 1988 Accord, and the "Second Working Paper on the Treatment of Asset Securitizations," which introduces more risk-sensitive approaches for addressing many of the emerging risks in the rapidly growing securitization market.

Resolving Failed Institutions
During 2002, the FDIC resolved 11 financial institution failures. These failed institutions had a total of $2.6 billion in assets and $2.2 billion in deposits. By the next business day after each failure, the FDIC had issued payout checks to insured depositors, or depositors had access to deposits determined to be insured. (See the accompanying table for details about liquidation activities.)

Liquidation Highlights 2000-2002
Dollars in Billions
  2002 2001 2000
Total Failed Banks 10 3 6
Assets of Failed Banks $2.5 $.05 $.38
Total Failed Savings Associations 1 1 1
Assets of Failed Savings Associations $.05 $2.18 $.03
Net Collections from Assets in Liquidation 1 $1.84 $.31 $.60
Total Assets in Liquidation 1 $1.24 $.57 $.54
Net Collections from Assets Not in Liquidation 1 $.02 $.08 $.16
Total Assets Not in Liquidation 1 $1.24 $1.52 $2.80
1 Also includes assets from thrifts resolved by the former Federal Savings and Loan Insurance Corporation and the Resolution Trust Corporation.

Last Updated 03/31/2003

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