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Federal Deposit
Insurance Corporation

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

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2005 Annual Report Highlights

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I. Management's Discussion and Analysis - The Year in Review

Supervision and Consumer Protection
Supervision and consumer protection are cornerstones of the FDIC's efforts to ensure the stability of and public confidence in the nation's financial system. The FDIC's supervision program promotes the safety and soundness of FDIC-supervised insured depository institutions, protects consumers' rights, and promotes community investment initiatives by FDIC-supervised insured depository institutions.

At year-end 2005, the Corporation was the primary federal regulator for 5,265 FDIC-insured, state-chartered institutions that are not members of the Federal Reserve System (generally referred to as "state non-member" institutions). Through safety and soundness, consumer compliance and Community Reinvestment Act (CRA) examinations of these FDIC-supervised institutions, the FDIC assesses their operating condition, management practices and policies, and their compliance with applicable laws and regulations. The FDIC also educates bankers and consumers on matters of interest and addresses consumers' questions and concerns.

Hurricane Recovery Assistance
The federal banking regulatory agencies (agencies) worked cooperatively with state banking regulatory agencies and other organizations to determine the operating status of financial institutions located in the areas affected by Hurricanes Katrina and Rita. The agencies quickly released regulatory relief guidance to help rebuild areas affected by these hurricanes and encouraged bankers to work with consumers and business owners experiencing difficulties due to the storms. Exercising their authority under Section 2 of the Depository Institutions Disaster Relief Act of 1992 (DIDRA), the agencies made exceptions to statutory and regulatory requirements relating to appraisals for transactions involving real property in major disaster areas when the exceptions would facilitate recovery from the disaster and would be consistent with principles of safety and soundness.

In the wake of the 2005 hurricane season, the agencies confirmed that the banking industry is resilient in the face of tremendous devastation. There were 280 financial institutions, with approximately $270 billion in total assets, operating in the area impacted by Hurricane Katrina. Only a handful of smaller institutions remain as supervisory concerns. The majority of institutions operating in the path of Hurricane Katrina were well-run, had strong management teams, implemented sound back-up contingency plans, and were well capitalized.

The FFIEC established a formal Katrina Task Force to address policy issues that continue to arise due to the severity and scale of these natural disasters. The Katrina Task Force established a user-friendly, Web-based, frequently asked questions forum on the FFIEC’s Web site at The task force will also publish examiner guidance to clarify expectations with respect to the assessment of credit risk and other supervisory issues.

In addition to interagency efforts, the FDIC established a 24-hour hotline and a Web page devoted to assisting hurricane victims to obtain information about their financial institution’s operating status, as well as tips on other financial matters, such as replacing identification documents, checks and credit cards.

Safety and Soundness Examinations
As of December 31, 2005, the Corporation had conducted 2,399, or 100 percent of the statutorily required safety and soundness examinations. The number and total assets of FDIC-supervised institutions identified as "problem" institutions (defined as having a composite CAMELS1 rating of "4" or "5") declined during 2005. As of December 31, 2005, 29 institutions with total assets of $2.9 billion were identified as problem institutions, compared to 44 institutions with total assets of $5.4 billion on December 31, 2004. These changes represent a decrease of 34.1 percent and 46.3 percent, respectively, in the number and assets of problem institutions. During 2005, 36 institutions were removed from problem institution status due to composite rating upgrades, mergers, consolidations or sales and 19 institutions were newly identified as problem institutions. Additionally, two problem institutions converted to State non-member charters and are now under FDIC supervision. The FDIC is required to conduct follow-up examinations of all designated problem institutions within 12 months of the last examination. As of December 31, 2005, 100 percent of all follow-up examinations for problem institutions had been performed on schedule.

Compliance and Community Reinvestment Act (CRA) Examinations
The FDIC conducted 815 comprehensive compliance-CRA examinations, 1,198 compliance-only examinations2, and seven CRA-only examinations in 2005, compared to 1,459 joint compliance-CRA examinations, 673 compliance-only examinations, and four CRA-only examinations in 2004. The FDIC conducted 100 percent of all joint and comprehensive examinations within established time frames. As of December 31, 2005, three institutions were assigned a "4" rating for compliance, and no institutions were rated "5." The first "4" -rated institution is currently under an outstanding Cease and Desist Order and an on-site examination was underway at year-end. Management of the second institution executed a Memorandum of Understanding on October 5, 2005. The third institution was examined in 2005 and the Regional Office is currently finalizing a Cease and Desist Order to address the FDIC examination findings.

FDIC Examinations 2003-2005
Safety and Soundness: 2005 2004 2003
     State Nonmember Banks 2,198 2,276 2,182
     Savings Banks 199 236 231
     Savings Associations 1 0 0
     National Banks 0 0 5
     State Member Banks 1 3 3
Subtotal - Safety and Soundness Examinations 2,399 2,515 2,421
CRA/Compliance Examinations:
     Compliance - Community Reinvestment Act 815 1,459 1,610
     Compliance - only 1,198 673 307
     CRA - only 7 4 2
Subtotal CRA/Compliance Examinations 2,020 2,136 1,919
Specialty Examinations:
     Trust Departments 450 534 501
     Data Processing Facilities 2,708 2,570 2,304
Subtotal-Specialty Examinations 3,158 3,104 2,805
Total 7,577 7,755 7,145

Relationship Manager Program
On October 1, 2005, the Corporation implemented the Relationship Manager Program for all FDIC-supervised institutions. The program, which was piloted in 390 institutions during 2004, is designed to strengthen communication between bankers and the FDIC, as well as improve the coordination, continuity and effectiveness of regulatory supervision. Each FDIC-supervised institution was assigned a relationship manager, who serves as a local point of contact over an extended period and will often participate in or lead examinations for his or her assigned institution. The program will allow for flexibility in conducting examination activities at various times during the 12- or 18-month examination cycle based on risk or staffing considerations.

IT Examinations
The FDIC has updated its risk-focused information technology (IT) examination procedures for FDIC-supervised financial institutions under its new Information Technology Risk Management Program (IT-RMP). IT-RMP procedures were issued to examiners on August 15, 2005. The new procedures focus on the financial institution's information security program and risk-management practices for securing information assets. The program integrates with the Relationship Manager Program by embedding the IT examination within the Risk Management Report of Examination for all FDIC-supervised financial institutions, regardless of size, technical complexity or prior examination rating. IT-RMP eliminates reporting of IT component ratings and reports only a single technology rating.

Homeland Security
The financial sector is a critical part of the infrastructure in the United States, and the FDIC has taken a leadership role in assisting the financial sector to prepare for emergencies. As a member of the Financial and Banking Information Infrastructure Committee (FBIIC), the FDIC sponsored a series of outreach meetings titled "Protecting the Financial Sector: A Public and Private Partnership." From 2003 to early 2005, the homeland security meetings were held in 29 cities across the United States with the last meeting held in New York City, NY. These meetings provided members of the financial sector with the opportunity to communicate with senior government officials, law enforcement, emergency management personnel and private sector leaders about emergency preparedness. A second round of homeland security meetings started in late 2005 with four meetings held during this timeframe. Homeland Security meetings are planned for 21 cities in 2006.

The FDIC served as the FBIIC's liaison with the Department of Homeland Security (DHS) during 2005 and assisted DHS with items relating to the financial sector.

Bank Secrecy Act
The FDIC is committed to assisting in efforts designed to thwart the inappropriate use of the banking system through activities conducted by terrorists and other criminals. In 2005, the Division of Supervision and Consumer Protection established a new Anti-Money Laundering (AML) and Financial Crimes Branch to focus important resources and attention on our increasing responsibilities in these areas. The new branch brings together specialists to address issues related to Bank Secrecy Act (BSA) compliance, money laundering, financial crimes, terrorist financing, and cyber-fraud.

Minority-Depository Institutions
The FDIC has long recognized the importance of minority depository institutions and their importance in promoting the economic viability of minority and under-served communities. As a reflection of the FDIC's commitment to minority depository institutions, on April 9, 2002, the FDIC issued a Policy Statement Regarding Minority Depository Institutions. The policy, which can be found at, implements an outreach program designed to preserve and encourage minority ownership of financial institutions.

In 2005, the FDIC provided technical assistance, training and educational programs and held interagency forums to address the unique challenges faced by minority depository institutions. Training and educational programs for minority depository institutions included the FDIC’s Director’s College Program and the FDIC’s Money Smart Program. The FDIC co-hosted Regional Forums with the America’s Community Bankers Association and the National Bankers Association in 2005. FDIC also participated in and/or co-sponsored conferences with America’s Community Bankers, National Bankers Association, National Association of Chinese American Bankers, Western Independent Bankers, and Puerto Rico Bankers Association.

FDIC also supported the preservation of minority depository institutions in its response to Hurricane Katrina. The FDIC Task Force on Minority Community Banking and Non-Branch Banking met with representatives from the Utah industrial loan company industry to facilitate their assistance to minority depository institutions in the Gulf Coast region affected by Hurricane Katrina. The result has been that as of year-end 2005, the Utah industrial loans companies have pledged more than $18 million in deposits and over $120,000 in direct grants to this effort. Efforts similar to these made by this FDIC task force will continue in 2006.

Large-Bank Program
In recognition of the increasing concentration of risk exposure in large insured institutions, as well as new challenges posed by the implementation of the Basel II Capital Accord, the FDIC enhanced its large-bank supervision and risk assessment efforts in 2005 by creating two branches—the Large Bank Supervision Branch and the International and Large Bank Policy Branch.

The Large Bank Supervision Branch is responsible for supporting supervisory activities in large banks and establishing minimum standards and supervisory strategies necessary to ensure a consistent approach to large-bank supervision on a national basis. In 2005, Branch staff was actively involved in domestic and international discussions intended to ensure effective implementation of the Basel II Capital Accord, which included participation in numerous "supervisory working group" meetings with foreign regulatory authorities to address Basel II home-host issues.

The International and Large Bank Policy Branch is responsible for supporting supervisory activities in the areas of risk model assessment, economic capital processes, examination work related to market risk under Part 325 Appendix C of the FDIC rules and regulations and other processes that are dependent on quantitative methods. The purpose of Part 325 Appendix C is to ensure that banks with significant exposure to market risk maintain adequate capital to support that exposure. In addition, the International and Large Bank Policy Branch is responsible for policy development regarding large-bank supervision and international matters.

Identity Theft and Consumer Privacy
In 2005, the FDIC continued to take a leading role in helping banks combat identity theft. The FDIC solicited public comment on its study Putting an End to Account Hijacking Identity Theft published in December 2004 and in June 2005, published a study supplement. The study and the supplement took an in-depth look at identity theft, focusing on account hijacking (the unauthorized use of deposit accounts).

The FDIC is one of several federal agencies charged with implementing the provisions of the Fair and Accurate Credit Transactions Act of 2003 (FACT Act), which substantially amended the Fair Credit Reporting Act, particularly in the areas of consumer access to and quality of credit information, privacy, and identity theft. Consistent with the privacy requirements of the FACT Act, the FDIC worked with other federal agencies to finalize rules in 2005 that permit creditors to obtain, use and share medical information only to the degree necessary to facilitate legitimate operational needs. The FDIC is training its examiners on the concepts underlying the entire FACT Act, and is developing examination procedures to evaluate industry compliance.

Consistent with the identity theft provision of the FACT Act, the FDIC worked with other federal agencies in 2004 to propose rules that would require banks to implement a written identity theft protection program which includes procedures to evaluate red flags that might indicate identity theft. The FDIC, with the other agencies, also finalized rules requiring institutions to properly dispose of consumer information derived from credit reports in order to prevent identity theft and other fraud. The rules on disposal of consumer information became effective on July 1, 2005.

Consumer Complaints and Inquiries
The FDIC's centralized Consumer Response Center (CRC) is responsible for investigating all types of consumer complaints about FDIC-supervised institutions and for answering inquiries about consumer protection laws and banking practices. During 2005, the FDIC received 8,851 complaints, of which 3,307 were against state non-member institutions. Approximately 36 percent of the state non-member bank consumer complaints concerned credit card accounts, with the most frequent complaints involving billing disputes and account errors, loan denials, terms and conditions, collection practices, reporting of erroneous information, credit card fees and service charges, interest rates, and disclosures. The FDIC responded to over 97 percent of written complaints on a timely basis.

The FDIC also responded to 4,042 written and 9,395 telephone inquiries from consumers and members of the banking community about consumer protection issues. In addition, the FDIC responded to over 64,000 written and telephone inquiries from bankers and consumers about the FDIC's deposit insurance program and insurance coverage issues.

Deposit Insurance Education
An important part of the FDIC’s role in insuring deposits and protecting the rights of depositors is its responsibility to ensure that bankers and consumers have access to accurate information about FDIC’s deposit insurance rules. To that end, the FDIC has an expansive deposit insurance education program consisting of seminars for bankers, electronic tools for estimating deposit insurance coverage, and written and electronic information targeting both bankers and consumers.

During 2005, the FDIC completed development of a major update of its popular Electronic Deposit Insurance Estimator (EDIE) for consumers, an Internet application located on FDIC’s Web site that estimates insurance coverage for users’ deposit accounts at insured institutions. The new Consumer EDIE offers two different approaches for calculating coverage, one for novice users and one for frequent users. The new Consumer EDIE application is available for public use starting January 2006.

The FDIC conducted a nationwide series of telephone/Internet seminars for bankers and a nationwide survey of insured institutions to gather information about current awareness of, and opinions about, the FDIC’s existing educational resources on the deposit insurance rules. The FDIC also initiated an effort to encourage more bank trade organizations to sponsor FDIC deposit insurance seminars for their members.

In 2005, the FDIC released several new job aids for bankers. The FDIC also released its two most popular brochures for bank customers -- Insuring Your Deposits (a basic primer on deposit insurance coverage) and Your Insured Deposits (a comprehensive guide to deposit insurance coverage) in Chinese and Korean.

The FDIC conducted 27 seminars for financial institution employees and consumer organizations on the rules for deposit insurance coverage. These seminars, which were conducted in a variety of formats, including Internet, teleconference and classroom, provided a comprehensive review of how FDIC insurance works, including the FDIC’s rules for coverage of different types of deposit accounts.

1The CAMELS composite rating represents 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, and ranges from "1" (strongest) to "5" (weakest).
2Compliance-only examinations are conducted for most institutions at or near the mid-point between joint compliance-CRA examinations under the Community Reinvestment Act of 1977, as amended by the Gramm-Leach-Bliley Act of 1999. CRA examinations of financial institutions with aggregate assets of $250 million or less are subject to a CRA examination no more than once every five years if they receive a CRA rating of "Outstanding" and no more than once every four years if they receive a CRA rating of "Satisfactory".

Last Updated 07/19/2006

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