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Federal Deposit
Insurance Corporation

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

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2006 Annual Report

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

Receivership Management

The FDIC has the unique mission of protecting depositors of insured banks and savings associations. No depositor has ever experienced a loss on the insured amount of their deposit in an FDIC-insured institution due to a failure. Once an institution is closed by its chartering authority – the state for state-chartered institutions, the Office of the Comptroller of the Currency (OCC) for national banks and the Office of Thrift Supervision (OTS) for federal savings associations – the FDIC is responsible for resolving that failed bank or savings association. The FDIC gathers data about the troubled institution, estimates the potential loss to the insurance fund from various resolution alternatives, solicits and evaluates bids from potential acquirers, and recommends the least-costly resolution method to the FDIC's Board of Directors.

Resolving Financial Institution Failures

For the second consecutive calendar year, there was no failure of an insured depository institution in 2006, further extending the longest period in the history of the FDIC during which no insured institution failed-a record 31 months. The Corporation's remaining receivership management workload also continued to decline. The accompanying chart provides liquidation highlights and trends for the past three years.

Liquidation Highlights 2004-2006
Dollars in billions (except where noted)
 2006* 2005* 2004
Total Resolved Banks 0 0 3
Assets of Resolved Banks $0.00 $0.00 $0.15
Total Resolved Savings Associations 0 0 1
Assets of Resolved Savings Associations $0.00 $0.00 $0.01
Net Collections from Assets in Liquidation@ $0.17 $0.37 $0.38
Total Assets in Liquidation@ $0.35 $0.44 $0.61
Total Dividends Paid@ $0.17 $0.44 $0.38
Savings Over Cost of Liquidation# 0011.6 million
*No failures in 2005 or 2006
@Includes activity from thrifts resolved by the former Federal Savings and Loan Insurance Corporation and the Resolution Trust Corporation
#Least Cost Test Savings

Large Bank Contingency Planning

The FDIC must ensure that it has the tools and strategies necessary to fulfill its missions as deposit insurer and receiver for all insured banks and thrifts. As the banking industry has become more concentrated and as larger insured institutions have grown significantly, the FDIC has undertaken a number of concrete steps to enhance its capabilities to manage the resolution of a large bank. Some of the initiatives involved in this ongoing process are contingency planning exercises, system and process improvements for determination of deposit insurance claims and management of failing bank assets, consultations with domestic and international regulators, improvements to the FDIC's supervisory program for larger banks, and the designation of internal and external expertise to focus on larger bank issues. The Claims Administration System (CAS), described in the following section, is one of these initiatives. This effort will continue and evolve as the challenges change in the future.

Claims Modernization Project

The FDIC is taking advantage of the hiatus in resolution activity by modernizing the way it determines the insurance status of depositors in the event of failure by streamlining its business processes and modernizing the internal systems used to facilitate a deposit insurance determination through improved use of current technology. This includes development and implementation of a new insurance determination system called the Claims Administration System (CAS) to be implemented in 2008, which will provide an integrated solution that will meet the current and future deposit insurance determination needs of the FDIC. The new system will minimize the potential for FDIC losses, reduce any spillover effects that could lead to systemic risks, preserve franchise value, and produce deposit insurance results in a timely manner in order to quickly provide funds to claimants.

The Corporation is also seeking cooperation from the largest insured institutions to assist in the insurance determination process in the event of failure. During 2006, the FDIC reviewed 28 comment letters received in response to an advance notice of proposed rulemaking (ANPR) published in December 2005, requesting input on three options that could be applied to the largest 145 insured institutions. Based on this review, a new ANPR was published in December 2006, seeking comment on a new option and strategy for this purpose. The FDIC is currently awaiting comments on this revised proposal.

Receivership Management

The FDIC, as receiver, manages failed banks and their subsidiaries with the goal of expeditiously winding up their affairs. The oversight and prompt termination of receiverships help to preserve value for the uninsured depositors and other creditors by reducing overhead and other holding costs. Once the assets of a failed institution have been sold and all impediments to termination have been resolved, the FDIC makes the final distribution of any proceeds and terminates the receivership estate. In 2006, the number of receiverships under management was reduced by 15.4 percent (from 65 to 55), while the book value of assets under management was reduced by 20.2 percent (from $441 million to $352 million). The ten receiverships terminated in 2006 were all terminated within 90 days of the resolution of all impediments.

Professional Liability Recoveries

The FDIC works to identify potential claims against directors and officers, accountants, appraisers, attorneys and other professionals who may have contributed to the failure of an insured financial institution. Once a claim is deemed viable and cost-effective to pursue, the FDIC initiates legal action against the appropriate parties. The FDIC strives to make a decision to close or pursue 80 percent of all potential claims within 18 months of the failure date.5

During 2006, the FDIC recovered approximately $36.2 million from these professional liability suits. In addition, as part of the sentencing process for those convicted of criminal wrongdoing against failed institutions, the court may order a defendant to pay restitution to the receivership. The FDIC, working in conjunction with the U.S. Department of Justice, collected approximately $10.5 million in criminal restitution payments during the year. The FDIC's caseload at the end of 2006 included investigations, lawsuits and ongoing settlement collections involving 13 claims and 95 other active collection matters, down from 127 at the beginning of 2006. At the end of 2006, there were 814 pending restitution orders, down from 995. This includes orders won by the former Resolution Trust Corporation for which the FDIC assumed responsibility on January 1, 1996.

Protecting Insured Depositors

Although the FDIC's focus in recent years has shifted from resolving large numbers of failed institutions to addressing existing and emerging risks in insured depository institutions, the FDIC continues to protect depositors and other stakeholders of those institutions that fail. The FDIC's ability to attract healthy institutions to assume deposits and purchase assets of failed banks and savings associations minimizes the disruption to customers and allows some assets to be returned to the private sector immediately. Assets remaining after resolution are liquidated by the FDIC in an orderly manner, and the proceeds are used to pay creditors, including depositors whose accounts exceeded the insured limit. During 2006, the FDIC paid dividends of 80.2 percent of the deposit amount exceeding the insured limit, which represents an increase of 2.3 percent from 2005.

5 This performance target did not apply in 2006, because no failures occurred during the 18-month period prior to the start of the year.

Last Updated 04/04/2007

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