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2005 Annual Report

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I. Management's Discussion and Analysis - The Year in Review
In 2005, the FDIC continued to pursue an ambitious agenda in meeting its responsibilities. Responding to the multiple hurricanes that occurred this past year tested our readiness, but it also underscored the critical importance of our core mission – maintaining stability of the nation's financial system and public confidence in insured depository institutions.

Highlights of the Corporation's 2005 accomplishments in each of its three major business lines – Insurance, Supervision and Consumer Protection, and Receivership Management – as well as in its program support areas are presented in this section.

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 funds.

Deposit Insurance Reform
The FDIC again gave priority attention to enactment of comprehensive deposit insurance reform legislation in 2005.

Both the House and the Senate passed separate deposit insurance reform bills in 2005. These bills were included as part of S.1932 budget legislation reconciliation that contained many provisions unrelated to reform.

The Senate took final action on S. 1932 on December 21, 2005, passing the measure by voice vote. On February 1, 2006, the House cleared the bill for action by the President by a vote of 216 to 214. The President signed the bill into law on February 8, 2006. The Federal Deposit Insurance Reform Act of 2005, contained in S. 1932, includes the major provisions of the FDIC's deposit insurance reform proposals. H.R. 4636, the Deposit Insurance Reform Conforming Amendments Act of 2005, contains the necessary technical and conforming changes to implement deposit insurance reform. H.R. 4636 was passed by the House and Senate in December 2005, separately from S. 1932. Specifically, together S. 1932 and H.R. 4636 would:

  • Merge the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) into a new fund, the Deposit Insurance Fund (DIF), effective no later than July 1, 2006.
  • Establish a range for the designated reserve ratio of 1.15 percent to 1.50 percent.
  • Allow the FDIC to manage the pace at which the reserve ratio varies within this range. (However, if the reserve ratio falls below 1.15 percent—or is expected to within 6 months—the FDIC must adopt a restoration plan that provides that the DIF will return to 1.15 percent within 5 years.)
  • Eliminate the connection between designated reserve ratio (DRR) and premium rates and grant the FDIC's Board of Directors the discretion to price deposit insurance according to risk for all insured institutions at all times.
  • Mandate rebates to the industry of half of any amount above the 1.35 percent level, unless the FDIC's Board of Directors, considering statutory factors, suspends the rebates.
  • Mandate rebates to the industry of all amounts in the fund above the 1.50 percent level.
  • Grant a one-time initial assessment credit (of approximately $4.7 billion) to recognize institutions' past contributions to the fund.
  • Increase the coverage limit for retirement accounts to $250,000.
  • Index this limit and the general deposit insurance coverage limit to inflation and allow the FDIC (in conjunction with the National Credit Union Administration) to increase the limits every five years beginning January 1, 2011, if warranted.
Implementation of deposit insurance reform will be one of the FDIC's main priorities for 2006.

International Capital Standards
The FDIC, as insurer, has a substantial interest in ensuring that bank capital regulation effectively serves its function of safeguarding the federal bank safety net against excessive loss. During 2005, the FDIC participated on the Basel Committee on Banking Supervision (BCBS) and many of its subgroups. The FDIC also participated in various U.S. regulatory efforts aimed at interpreting international standards and establishing sound policy and procedures for implementing these standards.

The BCBS, jointly with the International Organization of Securities Commissions (IOSCO), published The Application of Basel II to Trading Activities and the Treatment of Double Default Effects in July 2005. The document sets forth new capital treatments for over-the-counter derivatives and short term, repo-style transactions, hedged exposures, trading book exposures, and failed securities trades.

Ensuring the adequacy of insured institutions' capital under Basel II remains a key objective for the FDIC. In 2005, the FDIC devoted substantial resources to domestic and international efforts to ensure these new rules are designed appropriately. These efforts included the continued development of a notice of proposed rulemaking (NPR) and examination guidance, which is intended to provide the industry with regulatory perspectives for implementation. Additionally, the fourth quantitative impact study (QIS-4), which was begun in 2004 to assess the potential impact of the Revised Framework on financial institution and industry-wide capital levels, was completed. The QIS-4 findings suggested that, without modification, the Basel II framework could result in an unacceptable decline in minimum risk-based capital requirements. As a result, on September 30, 2005, the domestic bank and thrift regulatory authorities issued a joint press release stating that while they intend to move forward with the Basel II NPR, prudential safeguards must be incorporated into the Basel II framework to address the concerns created by the QIS-4 findings. FDIC-supervised institutions that plan to operate under the new Basel Capital Accord are making satisfactory progress towards meeting the expected requirements.

Domestic Capital Standards
The FDIC led the development of efforts to revise the existing risk-based capital standards for those banks that will not be subject to Basel II. These efforts are intended to: (a) modernize the risk-based capital rules for non-Basel II banks to ensure that the framework remains a relevant and reliable measure of the risks present in the banking system, and (b) minimize potential competitive inequities that may arise between banks that adopt Basel II and those banks that remain under the existing rules. An Advance Notice of Proposed Rulemaking reflecting these efforts was published in October 2005, with a comment period extended to January 2006. These revisions are currently anticipated to be finalized by domestic bank and thrift regulatory authorities in 2007 for implementation in January 2008.

Regulatory Burden Reduction Initiatives
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) requires the banking agencies to solicit public comments to identify outdated or burdensome regulations, review the comments, and publish a summary in the Federal Register. The agencies must also eliminate unnecessary regulations to the extent appropriate. Finally, the Federal Financial Institutions Examination Council must report to Congress the significant issues and the merit of the issues raised during the public comment period and provide an analysis of whether the agencies are able to address the issues by regulation or whether the burdens must be addressed by legislative action.

During 2005, the agencies published two notices in the Federal Register seeking comments on 56 regulations covering Money Laundering; Safety and Soundness; Securities; Banking Operations; Directors, Officers and Employees; and Rules of Procedure; a total of 155 letters were received. Since June 2003, the agencies have issued five separate Requests for Burden Reduction Recommendations on a total of 127 regulations. More than 900 comments were received in response to those requests for comment. They are being analyzed by staff to determine the feasibility of implementing the recommendations. All of the comment letters received to date are available on the EGRPRA Web site at www.EGRPRA.gov.

The agencies, as part of the EGRPRA initiative to gather recommendations on regulatory burden reduction, held three outreach meetings with bankers in Phoenix, New Orleans and Boston; two meetings with community groups in Boston and Washington, DC; and three joint banker-community group meetings in Los Angeles, Kansas City and Washington, DC. Significant issues have been raised and the agencies are in the process of weighing the issues.

The major success of the EGRPRA project to date is that the agencies, the industry and consumer groups were able to have an open dialogue about regulatory burden. Over 180 legislative proposals for regulatory relief were presented to Congress through testimony by the agencies, the industry and consumer advocates.

Moreover, effective September 1, 2005, the FDIC, the Office of the Comptroller of the Currency (OCC), and the Federal Reserve Board (FRB) made changes to their uniform joint CRA regulations that will provide regulatory relief for smaller community banks and – at the same time – preserve the importance of community development in the CRA evaluations of these banks.

Additionally, the FDIC conducted a comprehensive review of its International Banking Rules. The revised rules, which became effective July 1, 2005, amend Parts 303, 325 and 327 relating to international banking and revise Part 347, Subparts A and B. As a result:

  • The rules were reorganized and clarified to reduce regulatory burden.
  • The availability of general consent for foreign branching and investments by insured state nonmember banks abroad was expanded.
  • The "fixed" percentage asset pledge requirement for existing insured U.S. branches of foreign banks "grandfathered branches" was replaced by a risk-focused asset pledge requirement.
  • The relocation rule for grandfathered branches was amended to address intrastate and interstate relocations.

Center for Financial Research
The FDIC's Center for Financial Research (CFR) was established in 2003 to promote and support innovative research on topics relating to deposit insurance, the financial sector, prudential supervision, risk measurement and management, and regulatory policy that are important to the FDIC's roles as deposit insurer and bank supervisor. The CFR is a partnership between the FDIC and the academic community with prominent scholars actively engaged in administering its research program. The CFR carries out its mission through an agenda of research, analysis, forums and conferences that encourage and facilitate an ongoing dialogue that incorporates industry, academic and public-sector perspectives.

The CFR supports high-quality original research by sponsoring relevant research program lines and soliciting rigorous analysis of the issues within six program areas (Deposit Insurance, Credit and Market Risk, Bank Performance and the Economy, Corporate Finance and Risk Management, Consumer Finance and Credit Issues and Policy and Regulation). These programs benefit from the leadership of program coordinators who are drawn largely from the outside academic community. Input is also obtained from six prominent economists who serve as Senior Fellows. The CFR sponsors a Visiting Research Fellows Program to provide support for in-residence scholars for defined time periods. The CFR also organizes visits and encourages interaction and collaboration between outside scholars and FDIC staff on subjects of mutual interest.

The CFR co-sponsored two premier research conferences during 2005. The fifteenth annual Derivatives Securities and Risk Management Conference, co-sponsored by the FDIC, Cornell University's Johnson Graduate School of Management, and the University of Houston's Bauer College of Business, was held in April 2005. The CFR and The Journal for Financial Services Research (JFSR) sponsored their fifth annual research conference, "Financial Sector Integrity and Emerging Risks in Banking," in September 2005. Both conferences included high-quality presentations and attracted more than 100 researchers, including both domestic and international participants. Fourteen CFR Working Papers have been completed on topics dealing with risk measurement, capital allocation, or regulations related to these topics. The CFR Senior Fellows met in June to discuss ongoing CFR research on Basel II and payday lending, and to discuss CFR activities for the coming year.

FFIEC Central Data Repository
The FFIEC Central Data Repository (CDR) was successfully implemented on October 1, 2005. The CDR is designed to consolidate the collection, validation and publication of quarterly bank financial reports. This multi-year development effort was undertaken by the FDIC, the FRB and the OCC, and in cooperation with the Call Report software vendors and the banking industry. The CDR employs new technology that uses the XBRL (eXtensible Business Reporting Language) data standard to streamline the collection, validation and publication of Call Report data. Over 8,000 financial institutions were enrolled in the CDR and used it to file their financial reports for the third quarter of 2005. The initial quality of the data was much higher than in previous quarters, speeding the availability of the data to our analysts and ultimately the public and fulfilling one of the overarching goals of the CDR project. Higher data integrity, accuracy and consistency will help to increase the efficiency with which the data can be collected, analyzed and released to the public.

In September 2005, the OCC, FRB and the FDIC requested comments on proposed revisions to the Call Report, representing the first set of revisions to the report content since 2002. The proposed changes would affect banks of all sizes and would take effect as of the March 31, 2006, report date. The proposed revisions would enhance the agencies' on- and off-site supervision activities, which should alleviate overall regulatory burden on banks.

Risk Analysis Center
The Risk Analysis Center (RAC) established in 2003 to provide information about current and emerging risk issues is guided by its Management and Operating Committees - represented by the Division of Supervision and Consumer Protection, the Division of Insurance and Research and the Division of Resolutions and Receiverships. These Committees oversee and coordinate risk-monitoring activities that include presentations and reports regarding risk issues, and special projects. The activities in the RAC are guided by the National Risk Committee, which is chaired by the Chief Operating Officer. Major projects in-process or completed for 2005 include the following: Evaluation of Operational and Reputation Risk, Mortgage Credit Trends Analysis, Enhancing the Effectiveness of the Regional Risk Committee Process, Quantification of Bank Vulnerability to Rising Interest Rates, Hedge Funds, Market Data Repository, Offsite Monitoring, and Collateralized Debt Obligations.



Last Updated 01/06/2009 communications@fdic.gov