The year 2000 may well
be remembered as a watershed in the history of the FDIC. The Corporation undertook a
comprehensive review of the deposit insurance system with an eye toward addressing its
weaknesses. As part of that effort, the Corporation commissioned a national household
survey, conducted by the Gallup Organization, to measure public understanding ofand
support for the deposit insurance program. Also, the FDIC sponsored global efforts
to establish or improve deposit insurance systems. In May, for example, the Corporation
and the Financial Stability Institute co-hosted a seminar on these issues in Basel,
Switzerland a seminar that drew approximately 150 people who represented more than
60 countries. And in June the Corporation hosted a meeting in Washington, DC, of the
Financial Stability Forums (FSF) Working Group on Deposit Insurance. The FSF was
created in 1999 by the finance ministers and other officials of the G-7 industrial nations
as a way to promote international financial stability through information exchange and
FDIC participants in the "Seminar on
Establishing a Deposit Insurance System" in Basel, Switzerland, were: (l to r) James
McFadyen, Christie Sciacca, George Hanc, Rose Kushmeider, Detta Voesar, Claude Rollin,
Stanley Ivie and Christine Blair.
In addition to deposit insurance, the year 2000 might be considered a watershed
in other ways. Concerns began to grow about the condition of the industry, which had
experienced unprecedented profitability during the 1990s. And, though industry conditions
did not significantly affect the deposit insurance funds, the Corporation in 2000
undertook several safety and soundness initiatives to address emerging risks. It also
developed contingency plans for the failure of a very large institution, or an institution
that operates on the Internet. It addressed the effects of evolving technology, both
internally and externally. The Corporation invested in its employees through its diversity
program. Andworking with other bank regulatorsit dealt with many of the
demands of the landmark financial modernization legislation enacted in 1999, the
Gramm-Leach-Bliley Act. In summary, the FDIC spent the year 2000 responding to changes
in the industry it insures and supervises, and in doing so prepared itself for the new
financial world technology continues to create.
Overview of the Industry and the Deposit
During 2000, insured commercial banks and savings institutions reported a slight
decline in earnings performance from the record levels of 1999, higher levels of provision
expenses, and an increase in loan losses from commercial and industrial borrowers.
Commercial banks eight consecutive years of record earnings came to an end
in 2000, as net income of $71.2 billion fell $380 million (0.5 percent) short of
1999s record total. The industrys earnings decline was mostly attributable to
problems at a few large banks. The average return on assets (ROA) of 1.19 percent was down
from the record 1.31 percent registered in 1999. Even so, 2000 marks the eighth
consecutive year that the industry had an ROA above one percent. The industrys net
interest margin of 3.95 percent was the lowest level since 1990. In 2000, securities sales
produced net losses and provision expenses rose sharply with loan-loss provisions totaling
$29.3 billion, an increase of $7.4 billion (34.1 percent) over 1999. Noninterest income
growth was sluggish in 2000; however, this was aided by slower growth in noninterest
expenses. From 1999 to 2000, the annualized net charge-off rate on commercial and
industrial (C&I) loans rose to 1.15 percent, from 0.79 percent a year ago. Noncurrent
loans during 2000 increased by $9.9 billion (30.0 percent), with C&I loans accounting for $6.1 billion (61.4 percent) of the increase.
Insured savings institutions earned $10.7 billion in 2000, down $126 million
from the record earnings of 1999. This was the third year in a row that industry earnings
were over $10 billion. The average ROA was 0.92 percent, down from 1.00 percent in 1999.
Increased noninterest expenses negated improvements in noninterest income, while an
inverted yield curve continued to put downward pressure on thrifts net interest
margins. Net charge-offs, at 0.20 percent of loans, were $349 million (29 percent) higher
than in 1999, but provisions for loan losses exceeded these charges by over 30 percent in
The FDIC administers two deposit insurance fundsthe Bank Insurance Fund
(BIF) and the Savings Association Insurance Fund (SAIF)and manages the FSLIC
Resolution Fund (FRF), which fulfills the obligations of the former Federal Savings and
Loan Insurance Corporation (FSLIC) and the former Resolution Trust Corporation (RTC). The
following summarizes the condition of insured institutions and the FDICs insurance
Deposit insurance assessment rates remained unchanged from 1999 for both the BIF
and the SAIF, ranging from 0 to 27 cents annually per $100 of assessable deposits. Under
the assessment rate schedule, 92.7 percent of BIF-member institutions and 88.8 percent of
SAIF-member institutions were in the lowest risk-assessment rate category and paid no
deposit insurance assessments for the first semiannual period of 2001.
Deposits insured by the FDIC moved past the $3 trillion level in 2000, to $3.05
trillion, despite the number of insured institutions falling below the 10,000 mark for the
first time. Insured deposits rose by 2.1 percent in the final three months of 2000,
bringing the growth rate for 2000 to 6.5 percent. This annual growth rate for federally
insured deposits is the highest since 1986, when deposits insured by the FDIC and the
FSLIC increased by eight percent. Insured deposits reported by the 9,924 FDIC-insured
institutions rose by $185 billion in 2000, including a $73 billion increase (81 percent)
in insured brokered deposits. About half of the latter amount was attributable to two
insured banks with brokerage affiliates that "sweep" cash management account
balances into FDIC-insured bank accounts.
By year-end 2000, deposits insured by the BIF grew at seven percent and reached
$2.3 trillion. This annual growth rate for BIF-insured deposits was the highest since
1989. The BIF balance was $31 billion at year-end 2000, or 1.35 percent of estimated
insured deposits. This was down from the year-end 1999 reserve ratio of 1.36 percent as
the $1.6 billion growth of the funds balance during 2000 was more than offset by the
growth of insured deposits.
Research by FDIC staff, including (l to r) senior financial analyst Thomas Murray, senior analyst Charles Collier and economist Daniel Nuxoll, identifies potential risks to banks and cities from commercial real estate development.
The reserve ratio of the SAIF was 1.43 percent at year-end 2000, down slightly
from 1.45 percent at year-end 1999. The balance of the SAIF was $10.8 billion on December
31, 2000. SAIF-insured deposits were $753 billion at year-end 2000, having grown 5.8
percent for the year. The annual growth rate was the highest since the inception of the
SAIF in 1989.
Despite the relatively rapid growth of insured deposits, insured institutions
continued to rely increasingly on other funding alternatives. Insured deposits as a
percentage of domestic liabilities continued a steady, nine-year decline, falling to 51.7
percent at the end of 2000, compared to 52.6 percent a year earlier and 70 percent in
1992. At year-end 2000, the ratio was 46.4 percent for institutions with total assets
greater than $1 billion, and 74 percent for smaller institutions.
During 2000, seven FDIC-insured institutions failed. Six of those institutions
were insured by the BIF and one was insured by the SAIF. The failed institutions had
combined assets of approximately $408 million. Losses for the seven failures are estimated
at $40 million. In 1999, there were eight failures of insured institutions, with total
assets of $1.5 billion and estimated losses of $839 million. The contingent liability for
anticipated failures of BIF- and SAIF-insured institutions as of December 31, 2000, was
$141 million and $234 million, respectively.
Responding to Emerging Risks
In the first quarter of 2000, the FDIC announced enhancements to the Risk-Related
Premium System that will provide a more flexible, forward-looking system that keeps pace
with new and emerging risks to the insurance funds. The enhancements focus on
"outliers"institutions with atypically high-risk profiles among those in
the best-rated premium categoryto ensure that the FDIC is making all possible
efforts within the existing deposit insurance system to maintain the insurance funds
strong condition. Refinements were made to identify the outlier institutions among those
in the best-rated premium category, and to determine whether there are unresolved
supervisory concerns regarding the risk-management practices of these institutions. Where
such concerns are present, the institutions are given an opportunity to address the
deficiencies in their risk-management practices before higher premiums are assessed.
Keith Ligon, chief of FDIC
supervision policy for bank securities, capital markets and trust activities, discusses
proposed capital rules at an interagency staff meeting.
FDIC-Insured Deposits (estimated year-end through 2000)
Dollars in billions
Source: Commercial Bank Call
Reports and Thrift Financial Reports
Note: For more details, See pages (BIF) and (SAIF)
Dollars in Millions
New "screens," or models designed to flag outlier statistics and ratios,
based on quarterly financial data, were added to the process for assigning assessment risk
classifications. These screens identify institutions in the best-rated category with
atypically high-risk profiles. The screens flag combinations of rapid loan growth,
high-yielding loan portfolios, concentrations in high-risk assets, and recent changes in
business mix. For the institutions identified, a supervisory review is conducted to
determine if concerns exist regarding risk-management practices. If so, the institution is
notified that unless actions are taken to address the concerns before the next semiannual
assessment period, a higher premium may be assessed.
During the year, the FDIC developed a training program to instruct examiners in
methods of fraud detection and investigation, desirable skills when technology makes fraud
ever easier to commit and harder to detect. The FDIC also participated in a number of
local, state and national working groups relating to financial institution fraud and money
laundering. These groups seek to improve information sharing and to develop uniform
policies and approaches to deterring and detecting fraud.
Stephen M. Cross, Director of
the FDIC's Division of Compliance and Consumer Affairs
In September 2000, the FDIC, along with the other banking and thrift agencies,
proposed a revision to the capital treatment for residual interests in securitizations or
other transfers of assets. Residual interests are typically the assets an institution
retains in connection with its securitization activities. The proposed rule would require
an institution to hold a dollar of capital for every dollar in residual interests, and
would make related changes in Tier 1 capital.
Lastly, to keep pace with the evolving banking industry, the FDIC continued its
contingency planning for possible future failures. In light of the banking industrys
increasing consolidation and reliance on and use of the Internet and electronic commerce,
the FDIC focused its planning in 2000 on the need to address possible technological
failures and large insured depository institution failures. As a result, the FDIC began
modifying its resolution procedures to address issues associated with larger, more
complex, institutions and electronic banking and commerce. Additionally, the FDIC began
implementing a core training program to cross-train personnel to maintain its readiness
Liquidation Highlights 1998-2000
Dollars in billions
Total Failed Banks
Assets of Failed Banks
Total Failed Savings Associations
Assets of Failed Savings Associations
Net Collections from Assets in Liquidation 1
Total Assets in Liquidation 1
Net Collections from Assets Not in Liquidation 1
Total Assets Not in Liquidation1
1Also includes assets from thrifts resolved by the former
Federal Savings and Loan Insurance Corporation and the Resolution Trust Corporation.
In late 1999, Chairman Tanoue initiated a project to evaluate the FDICs
preparedness in continuing to keep pace with the dynamics of bank technology. The project
concluded in early 2000 with the establishment of an internal Bank Technology Group to
help ensure that the FDIC adopts an integrated approach to risks and opportunities
associated with emerging bank technologies, such as Internet banking, electronic cash,
electronic lending, and wireless banking.
FDIC in March hosted an interagency forum on the privacy of consumer financial information
that was attended by bankers, consumer advocates, regulators and others. Chairman
Tanoue (far right) is shown here with other audience members.
Significant growth in electronic banking or "E-Banking" was evidenced
by the 64 percent increase in the number of FDIC-insured banks offering transactional
services over the Internet (1,850 institutions at year-end 2000 compared to 1,130 a year
earlier), as well as the increasing sophistication of technology used in E-banking
activities. The FDIC at year-end 2000 had 288 specially trained electronic banking
examiners and similar specialists nationwide, and it established the Electronic Banking
Branch in its Division of Supervision. This newly created branch will provide oversight of
information systems and E-banking activities for all state nonmember banks. The FDIC also
worked with the Federal Reserve to enhance the risk-focused examination module for
electronic banking used in bank examinations. In addition, general electronic banking
training also was provided to examiners.
And, the FDIC continued to use technology to improve the failed-bank resolution
and asset marketing processes. In 2000, the FDIC conducted its first teleconference with
prospective acquirers for a failed bank at five locations across the country; established
a secure Web site allowing for the rapid sharing of confidential information with
prospective acquirers of a failed institution; and conducted its first sale of financial
assets over the Internet, with approximately $12.3 million of loans at a recovery that was
16 percent higher than expected.
FDIC Examinations 1998-2000
Safety and Soundness:
State Nonmember Banks
State Member Banks
Compliance/Community Reinvestment Act
Data Processing Facilities
Under the Gramm-Leach-Bliley Act (GLBA), banking organizations may more freely
provide a full range of financial services including brokerage, underwriting, and even
sponsoring and distributing mutual funds. During 2000, the FDIC took many steps to deal
with its demands.
For example, the Corporation began working with the National Association of
Insurance Commissioners to explore ways that information can be shared among the banking
and insurance regulators to improve regulation. Similar arrangements will be explored with
The Corporation also revised its regulatory standards to reflect aspects of GLBA
that require separate adequate capital for a bank and its securities subsidiary, and
restrict financial dealings between the bank and its securities affiliate or subsidiary.
GLBA also made Federal Home Loan Bank (FHLB) membership available to more
institutions and permitted certain FHLB-member institutions to obtain more advance
funding. In response to these changes, the FDIC issued supplemental examination guidance
in August 2000. The guidance provides an overview of FHLB advance strategies and presents
a framework for examining the effects of these strategies when determining the adequacy of
an institutions policies, practices and financial condition.
Lastly, the FDIC and the other banking agencies implemented regulations
protecting consumers purchasing insurance products and annuities through the bank. The new
rules govern the sale and solicitation of insurance products and annuities made by the
bank as well as by others selling on the banks behalf. These protections include
customer disclosures, advertising requirements, standards regarding the physical location
where sales may occur, and prohibitions against tying the purchase of insurance products
to the use of any bank product.This regulation will go into effect late in 2001.
In 2000, the FDIC advanced many of the goals and strategies of its first corporate
Diversity Strategic Plan, which reflects the Corporations commitment to a fair and
inclusive work environment. To gauge employee opinion about the FDICs work
environment and culture, the FDIC engaged the Gallup Organization to design an
organizational assessment survey that was administered in 2000. The survey results
provided baseline data for planning and instituting a range of programs and policy
initiatives promoting and maintaining the FDICs position as an employer of choice.
Directors Mickey Collins (left) of the FDIC's
Office of Diversity and Economic Opportunity and Arleas Upton Kea (center) of the Division
of Administration accept an award on behalf of the FDIC from the Federal Asian Pacific
American Council for the agency's excellence in diverstiy programs.
In Washington, DC, and around the nation, FDIC
employees gather to discuss the agency's first Diversity Strategic Plan.
Also in 2000, the Corporation:
Provided diversity training to 6,315 employees, representing
about 95 percent of all headquarters and field staff.
Established new guidelines ensuring that groups making selections
for merit promotions represent our diverse workforce.
Sponsored 200 employees in a mentoring program in which
more-experienced employees are paired with less-experienced ones to share their knowledge
Instituted a permanent Career Management Program to help
employees assess and develop their career plans.
Expanded its Employee Advisory Resources program with a LifeWorks
programa one-stop resource for consultation, information, direction and referrals to
help employees balance the demands of work with their personal lives.
Compliance, Enforcement and Other Related Legal Actions 1998-2000
Total Number of Actions Initiated by the FDIC
Termination of Insurance
Sec. 8a For Violations, Unsafe/Unsound Practices or Condition
1 Under Section
19 of the Federal Deposit Insurance Act, an insured institution must receive FDIC approval
before employing a person convicted of dishonesty or breach of trust. Under Section 32,
the FDIC must approve any change of directors or senior executive officers at a state
nonmember bank that is not in compliance with capital requirements or is otherwise in
2 Amendments to Part 303 of the FDIC Rules and Regulations changed FDIC oversight
responsibility in October 1998.
3 Section 24 of the FDI Act, generally, precludes an insured state bank
from engaging in an activity not permissible for a national bank and requires notices to
be filed with the FDIC.
Consumer Complaints and Inquiries
The FDIC investigates and responds to consumer complaints of unfair or deceptive acts or
practices by financial institutions. The agency also responds to inquiries from consumers,
financial institutions and other parties about consumer protection and fair lending
matters and deposit insurance. The FDICs Consumer Affairs Program informs
depositors, financial institutions and others about the FDICs responsibilities for
enforcing consumer protection and fair lending laws and regulations.
In 2000, the FDIC received nearly 4,500
written consumer complaints against state-chartered nonmember banks. The agency tracks the
volume and nature of complaints to monitor trends and identify emerging issues. Nearly
two-thirds of these complaints concerned credit card accounts. The most frequent
complaints involved billing disputes and account errors; loan denials; credit card fees
and service charges; and collection practices.
The FDIC also received over 2,000 written
inquiries from consumers and over 200 written inquiries from bankers as to whether
specific financial institutions are insured by the FDIC, or questions about FDIC deposit
insurance coverage. Other common inquiries were requests for copies of FDIC consumer
publications, questions about banking practices and consumers rights under federal
consumer protection laws, and questions related to obtaining a personal credit report.