2013 Annual Report
I. Management's Discussion and Analysis
The Year in Review
Overview
Although the number of bank failures declined in 2013 compared to the previous year, the FDIC remained fully engaged in its mission-critical responsibilities. In 2013, the FDIC continued to make progress in fulfilling its responsibilities under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and related rulemakings. Also during 2013, the FDIC made progress with community banking initiatives including releasing numerous technical assistance videos on topics relating to risk management and consumer protection. The sections below highlight some of our accomplishments during the year.
Insurance
The FDIC insures bank and savings association deposits. As insurer, the FDIC must continually evaluate and effectively manage how changes in the economy, the financial markets, and the banking system affect the adequacy and the viability of the Deposit Insurance Fund (DIF).
Long-Term Comprehensive Fund Management Plan
In 2010 and 2011, the FDIC developed a comprehensive, long-term management plan designed to reduce the effects of cyclicality and achieve moderate, steady assessment rates throughout economic and credit cycles, while also maintaining a positive fund balance, even during a banking crisis. That plan is combined with the Restoration Plan, originally adopted in 2008 and subsequently revised, which is designed to ensure that the reserve ratio will reach 1.35 percent of estimated insured deposits by September 30, 2020, as required by the Dodd-Frank Act.1 These plans include a reduction in rates that the FDIC Board adopted to become effective once the reserve ratio reaches 1.15 percent.
To increase the probability that the fund reserve ratio will reach a level sufficient to withstand a future crisis, the FDIC Board has—pursuant to the long-term management plan—set the Designated Reserve Ratio (DRR) for the DIF at 2.0 percent. Using historical fund loss and simulated income data from 1950 to 2010, FDIC analysis showed the reserve ratio would have had to exceed 2.0 percent before the onset of the two crises that occurred since the late 1980s to have maintained both a positive fund balance and stable assessment rates throughout both crises. The analysis assumed a moderate, long-term average industry assessment rate, consistent with the rates set forth in the plan. The FDIC views the 2.0 percent DRR as a long-term goal and the minimum level needed to withstand future crises of the magnitude of past crises. Under provisions of the Federal Deposit Insurance Act (FDI Act) that require the FDIC Board to set the DRR for the DIF annually, the FDIC Board voted in October 2013 to maintain the 2.0 percent DRR for 2014.
As part of the long-term management plan, the FDIC also suspended dividends indefinitely when the fund reserve ratio exceeds 1.5 percent. Instead, the plan prescribes progressively lower assessment rates that will become effective when the reserve ratio exceeds 2.0 percent and 2.5 percent. These lower assessment rates serve almost the same function as dividends, but provide more stable and predictable effective assessment rates over time.
State of the Deposit Insurance Fund
Estimated losses to the DIF were $1.2 billion from failures occurring in 2013, and were lower than losses from failures in each of the previous five years. The fund balance continued to grow throughout 2013, with 16 consecutive quarters of positive growth. Assessment revenue, a decrease in the estimate of losses from banks that have failed, and a decline in loss provisions for anticipated bank failures drove the increase in the fund balance during 2013. The fund reserve ratio rose to 0.79 percent of estimated insured deposits at December 31, 2013, from 0.44 percent at the end of 2012.
To ensure that the DIF had sufficient liquidity to handle a high volume of failures during the recent crisis, the Board issued a rule in 2009 that required insured depository institutions to prepay 13 quarters of estimated risk-based assessments.2 The $45.7 billion in assessments prepaid on December 30, 2009, resolved the FDIC’s immediate liquidity needs. As required by the rule, the FDIC refunded in aggregate $5.9 billion in remaining prepaid assessments at the end of June 2013 to 5,625 insured institutions.
Assessment System for Large and Highly Complex Institutions
On October 9, 2012, the FDIC Board approved a final rule to amend the assessment system for large and highly complex institutions. The rule amends definitions adopted in the February 2011 large bank pricing rule used to identify concentrations in higher-risk assets. This rule, which became effective on April 1, 2013, amends the definitions of leveraged loans and subprime loans, which are areas of significant potential risk. The revised definition of leveraged loans, renamed higher-risk C&I (commercial and industrial) loans and securities, focuses on large loans to the riskiest borrowers—those that are highly leveraged as the result of loans to finance a buyout, acquisition, or capital distribution. The revised definition of subprime consumer loans, renamed higher-risk consumer loans, focuses on the most important characteristic—the probability of default.
The final rule resulted from concerns raised by the industry about the cost and burden of reporting under the definitions in the February 2011 rule. Nonetheless, the new definitions better reflect the risk that institutions pose to the DIF.
Definition of Deposit at Foreign Branches of U.S. Banks
On September 10, 2013, the FDIC Board of Directors approved a final rule clarifying that funds on deposit in foreign branches of U.S. banks are not FDIC-insured, even though they can be deposits for purposes of the national depositor preference statute. Under the FDI Act, funds deposited in a foreign branch of a U.S. bank are not considered deposits, unless the deposits are also payable at an office of the bank in the United States (a dually payable deposit). A 2012 Consultation Paper by the United Kingdom’s Prudential Regulation Authority (PRA) proposed that banks from non-European Economic Area countries that have depositor preference laws be prohibited from accepting deposits at their United Kingdom (U.K.) branches, unless the banks take steps to ensure that U.K. depositors are no worse off than depositors in the bank’s home country if the bank fails. The PRA paper mentioned that such efforts could include changing deposit account agreements to make U.K. branch deposits dually payable in the United States, which would put the U.K. branch deposits on the same footing as U.S. deposits under the U.S. depositor preference statute. As a result, the FDIC anticipates that some large U.S. banks will change their deposit agreements to make their U.K. branch deposits payable in both the United Kingdom and the United States to provide depositor preference to U.K. branch deposits. The final rule clarifies that these U.K. branch deposits are not FDIC-insured.
1 The Act also requires that the FDIC offset the effect on institutions with less than $10 billion in assets of increasing the reserve ratio from 1.15 percent to 1.35 percent. The FDIC will promulgate a rulemaking that implements this requirement at a later date to better take into account prevailing industry conditions at the time of the offset.
2 The cash collected from the prepayment did not initially affect the DIF balance (i.e., the DIF's net worth). Rather, each quarter, the DIF recognized as revenue prepaid amounts used to cover each institution's quarterly risk-based assessment.