2016 Annual Report

I. Management’s Discussion and Analysis

The Year in Review

OVERVIEW

The FDIC continued to fulfill its mission-critical responsibilities during 2016. Insuring deposits, examining and supervising financial institutions, and managing receiverships are the core responsibilities of the FDIC. The agency adopted and issued final rules on key regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and engaged in several community banking and community development initiatives. Cybersecurity remained a high priority for the FDIC in 2016; the agency worked to strengthen cybersecurity oversight, help financial institutions mitigate increasing risks, and respond to cyber threats. The sections below highlight these and other accomplishments during the year.

IMPLEMENTATION OF KEY REGULATIONS

Alternatives to Credit Ratings in the FDIC’s International Banking Regulations

In June 2016, the FDIC issued a Notice of Proposed Rulemaking (NPR) to conform the FDIC’s international banking regulations (Part 347) to the requirements of Section 939A of the Dodd-Frank Act, which directs each federal agency to review and modify regulations that reference credit ratings. The NPR would replace references to credit ratings in Part 347’s definition of “investment grade” with a standard of creditworthiness that has been adopted in other federal regulations. The NPR would also amend the FDIC’s asset pledge requirement for insured U.S. branches of foreign banks by revising the eligibility criteria for the types of assets that may be pledged to the FDIC.

Banking Activities and Investments

In September 2016, the FDIC, OCC, and FRB submitted to Congress and the Financial Stability Oversight Council (FSOC), a study required under Section 620 of the Dodd-Frank Act of investments and activities that a banking entity may engage in under federal and state law. The study considers the types of activities in which banking entities may engage and investments they may make, associated risks, and risk mitigation activities undertaken by the banking entities with regard to those risks. In addition, each of the federal banking agencies provided recommendations and considerations for future regulatory action or supervisory guidance.

Minimum Reserve Ratio

In March 2016, the FDIC approved a final rule to implement Section 334 of the Dodd-Frank Act, which increased the minimum reserve ratio of the Deposit Insurance Fund from 1.15 percent to 1.35 percent, requires that the reserve ratio reach that level by September 30, 2020, and mandates that the FDIC offset the effect of the increase on insured depository institutions (IDIs) with assets of less than $10 billion. The final rule imposes surcharges on IDIs with $10 billion or more in assets and provides credits to IDIs with assets below $10 billion for the portion of their regular assessments that contribute to growth in the reserve ratio between 1.15 percent and 1.35 percent. This rule is discussed in greater detail in the section on Deposit Insurance.

Volcker Rule Frequently Asked Questions

The “Volcker Rule” is a provision of the Dodd-Frank Act that contains restrictions and prohibitions on the ability of banks and their affiliates to engage in proprietary trading and have interests in, or relationships with, a hedge fund or a private equity fund. Banking entities that are subject to the rule are permitted to retain investments in certain collateralized debt obligations (CDOs) backed primarily by trust preferred securities. In March 2016, the FDIC, Office of the Comptroller of the Currency (OCC), Federal Reserve Board (FRB), Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission (CFTC) updated their Frequently Asked Questions (FAQs) about the Volcker Rule to clarify the capital treatment of permitted investments in those CDOs.

External Audits of Internationally Active U.S. Financial Institutions

In January 2016, the FDIC, OCC, and FRB issued an advisory to indicate their support for the principles and expectations set forth in the Basel Committee on Banking Supervision’s (BCBS) March 2014 guidance on “external audits of banks.” The advisory also explains the agencies’ supervisory expectations regarding how internationally active U.S. financial institutions should address differences between the standards and practices followed in the United States and the principles and expectations in the BCBS external audit guidance. For purposes of the advisory, internationally active U.S. financial institutions include insured depository institutions with consolidated total assets of $250 billion or more or consolidated total on-balance-sheet foreign exposure of $10 billion or more.

Expanded Eligibility of 18-Month Examination Cycle

In December 2016, the FDIC, OCC, and FRB jointly finalized the interim final rule that increased the number of small banks and savings associations eligible for an 18-month examination cycle rather than a 12-month cycle. Under the final rules, qualifying well-capitalized and well-managed banks and savings associations with less than $1 billion in total assets are eligible for an 18-month examination cycle. Previously, only banks and savings associations with less than $500 million in total assets could be eligible for the expanded examination cycle. The examination cycle changes also apply to qualifying well-capitalized and well-managed U.S. branches and agencies of foreign banks with less than $1 billion in total assets. The final rules increase the number of institutions that may qualify for an 18-month examination cycle by more than 600 to approximately 4,800 banks and savings associations. In addition, the final rules increase the number of U.S. branches and agencies of foreign banks that may qualify for an 18-month examination cycle by 30 branches and agencies, to a total of 89.

Use of Evaluations in Certain Real Estate-Related Financial Transactions

In March 2016, the FDIC, OCC, and FRB issued an advisory to clarify expectations for the use of property evaluations by banking institutions. The advisory responds to questions about the use of evaluations and appraisals that were raised during outreach meetings held by the agencies pursuant to the Economic Growth and Regulatory Paperwork Reduction Act. Among other things, the advisory states that regardless of the approach or method used to estimate the market value of real property, an evaluation report should contain sufficient information and analysis to support the value conclusion and the institution’s decision to engage in the transaction.

Issuance of Prepaid Cards

In March 2016, the FDIC, OCC, FRB, National Credit Union Administration (NCUA), and the Financial Crimes Enforcement Network (FinCEN) developed and issued guidance to clarify the requirements for customer identification programs (CIPs) and regulatory expectations for depository institutions that issue certain prepaid cards. The guidance addresses the establishment of a formal account relationship and when the depository institution is responsible for collecting CIP information.

Funds Transfer Pricing Related to Funding and Contingent Liquidity Risk

In March 2016, the FDIC, OCC, and FRB issued joint guidance on Funds Transfer Pricing (FTP) to banks with assets of $250 billion or more. The guidance describes four key principles that should comprise an FTP framework and includes examples for implementing these principles.

Net Stable Funding Ratio

In May 2016, the FDIC, OCC, and FRB jointly issued a proposed rule that would implement a liquidity requirement consistent with the net stable funding ratio agreed to by the Basel Committee on Banking Supervision and complementary to the Liquidity Coverage Ratio rule issued by the agencies in 2014. The proposal would require large, internationally active banking organizations to maintain a minimum level of stable funding over a one-year time horizon. This measure would reduce the likelihood that disruptions to a banking organization’s regular sources of funding would compromise its liquidity position. The proposal also would promote improvements in the measurement and management of liquidity risk and enhance financial stability. The comment period closed on August 5, 2016, and the agencies are collaborating on a final rule making.

Margin and Capital Requirements for Covered Swaps

In August 2016, the FDIC, OCC, FRB, Federal Housing Finance Agency, and Farm Credit Administration issued a final rule that exempts certain commercial and financial end users from margin requirements for certain swaps not cleared through a clearinghouse. Specifically, the final rule exempts non-cleared swaps of small banks, savings associations, Farm Credit System institutions, and credit unions with $10 billion or less in total assets. This exemption parallels an exemption from a mandate in the Dodd-Frank Act to clear standardized swaps.

New Accounting Standard on Financial Instruments – Credit Losses

In June 2016, the FDIC, OCC, FRB, and NCUA issued a joint statement on the new accounting standard released by the Financial Accounting Standards Board (FASB) regarding Financial Instruments – Credit Losses. The statement summarizes key elements of the new standard, which introduces the current expected credit losses methodology for estimating allowances for credit losses. It also provides initial supervisory views regarding the implementation of the new accounting standard.

Qualified Master Netting Agreements

In October 2016, the FDIC issued a final rule that changes the regulatory capital and liquidity coverage ratio (LCR) rules to ensure consistency with new International Swaps and Derivatives Association (ISDA) Resolution Stay Protocols. The protocols impose a stay on cross-default and early termination rights within standard ISDA derivatives contracts. The final rule also revised the definition of “qualifying master netting agreement” and other related definitions, under the regulatory capital rules and the LCR, to reflect the recent changes to the ISDA Master Agreement. The FDIC action followed earlier rule makings by the OCC and FRB.

Fact Sheet on Foreign Correspondent Banking

In August 2016, the U.S. Department of the Treasury issued a Fact Sheet developed jointly with the FDIC, OCC, FRB, and NCUA that outlines the agencies’ anti-money laundering and economic sanctions positions with respect to foreign correspondent banking. The Fact Sheet summarizes the U.S. regulators’ existing expectations regarding foreign correspondent banking relationships, the supervisory examination process, and instances in which enforcement actions might be taken.

Enhanced Cyber Risk Management Standard

In October 2016, the FDIC, OCC, and FRB issued a joint Advance Notice of Proposed Rulemaking (ANPR) seeking comment on enhanced cybersecurity risk-management and resilience standards that would apply to large and interconnected entities under their supervision. The standards also would apply to services provided by third parties to these firms. The agencies are considering applying the enhanced standards to depository institutions and depository institution holding companies with total consolidated assets of $50 billion or more, the U.S. operations of foreign banking organizations with total U.S. assets of $50 billion or more, and financial market infrastructure companies and non bank financial companies supervised by the FRB. The standards would be tiered, with an additional set of higher standards for systems that provide critical functionality to the financial sector. For these sector-critical systems, the agencies are considering requiring firms to mitigate substantially the risk of a disruption or failure due to a cyber event. The comment period will close on February 17, 2017, and the agencies will collaborate in the review of comments received.

Recordkeeping for Deposit Accounts

In November 2016, the FDIC approved a rule establishing recordkeeping requirements for FDIC- insured institutions with a large number of deposit accounts to facilitate rapid payment of insured deposits to customers if the institutions were to fail. The FDIC anticipates that the rule will become effective on April 1, 2017. The FDIC will work closely with institutions as they develop new capabilities, and intends to issue functional design assistance for system programming prior to the effective date to aid in this process.

Proposed Guidelines for Appeals of Material Supervisory Determinations

In July 2016, the FDIC published for public comment a proposal to amend its Guidelines for Appeals of Material Supervisory Determinations. The amendments were proposed to give institutions additional avenues of redress with respect to supervisory determinations and to make the FDIC’s appeals process more consistent with those of the other federal banking agencies. The comment period ended on October 3, 2016. The comments have been reviewed by the FDIC, and final action is anticipated in early 2017.