I. Management's Discussion and Analysis
During 2006, the FDIC faced many high-profile policy issues, ranging from deposit insurance
reform, to capital reform, to the appropriate role of industrial loan companies. In addressing
these issues the Corporation published numerous notices of proposed rulemaking throughout the
year, seeking comment from the public, and issued final rules to implement most of the
components of deposit insurance reform legislation enacted early in the year. The Corporation
also maintained its emphasis on a strong supervisory program, and pursued financial education
and outreach initiatives focusing primarily on those adversely affected by Hurricanes Katrina and
Rita and those not participating in the banking system. For the second year in a row, there were
no insured institution failures, reflecting the continued strong health of the banking and thrift
Highlighted in this section are the Corporation's 2006 accomplishments in each of its three major
business lines - Insurance; Supervision and Consumer Protection; and Receivership
Management - as well as its program support areas.
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.
Deposit Insurance Reform
In February 2006, the President signed into law the Federal Deposit Insurance Reform Act of
2005 and the Federal Deposit Insurance Reform Conforming Amendments Act of 2005. These
new statutes instituted most of the key changes in the deposit insurance system that the FDIC had
been pursuing for the previous five years:
- Merges the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) into the new Deposit Insurance Fund (DIF).
- Permits the FDIC's Board of Directors to price deposit insurance according to risk for all insured institutions, regardless of the level of the reserve ratio.
- Grants a one-time initial assessment credit of approximately $4.7 billion to recognize institutions' past contributions to the combined fund.
- Establishes a range for the Designated Reserve Ratio (DRR) of 1.15 percent to 1.50 percent, and allows the FDIC to manage the reserve ratio within this range. Also requires that, if the reserve ratio falls below 1.15 percent or is expected to do so within six months, the FDIC must adopt a restoration plan that provides that the DIF will return the reserve ratio to 1.15 percent within five years.
- Generally mandates dividends to the industry of one-half of any amount above the 1.35 percent level and of all amounts in the fund above the 1.50 percent level.
- Increases the coverage limit for certain retirement accounts to $250,000 but leaves the basic insurance limit for other deposits at $100,000.
- Indexes both coverage limits for inflation, and allows 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 was a major initiative for the FDIC in 2006.
On March 14, 2006, the Board adopted an interim final rule implementing the substantive
changes to the FDIC's insurance coverage rules, effective April 1, 2006. (The final rule was
adopted on September 5, 2006.) In addition, the FDIC merged the BIF and SAIF into the newly-
created DIF, effective March 31, 2006, and adopted all of the required implementing regulations
prior to the statutory deadline effective date of July 1, 2006.
On October 10, 2006, after considering comments on a notice of proposed rulemaking (NPR)
published in May 2006, the Board adopted a final rule governing the distribution and use of the
$4.7 billion one-time assessment credit. After considering comments on another NPR published
in May 2006, the FDIC Board also adopted on October 10, 2006, a temporary final rule
governing dividends from the DIF. Under this temporary rule, any dividend will be distributed
based upon an institution's portion of the December 31, 1996, assessment base. In 2007, the
FDIC will undertake a more comprehensive rulemaking on dividends to replace the temporary
On November 2, 2006, after considering comments on an NPR published in July 2006, the Board
adopted a final rule setting the DRR at 1.25 percent. The Board also adopted two final rules
governing assessments after considering comments on NPRs published in May and July 2006.
One of these rules makes operational changes to the assessment system. Under that rule,
assessments will be determined and collected after the end of each quarter, which will permit
consideration of more current supervisory information and capital data. Among its other
provisions, the rule requires larger institutions to use average daily deposit balances as the basis
The other rule establishes new assessment rates based on four new risk categories. Effective
January 1, 2007, assessment rates will range from 5 to 7 basis points for Risk Category I
institutions and will be 10 basis points for Risk Category II institutions, 28 basis points for Risk
Category III institutions and 43 basis points for Risk Category IV institutions. Base assessment
rates range from 2 to 4 basis points for Risk Category I institutions and are 7 basis points for
Risk Category II institutions, 25 basis points for Risk Category III institutions and 40 basis
points for Risk Category IV institutions. The Board retains the flexibility to adjust rates in the
future, within limits, without further notice-and-comment rulemaking.
In addition to the extensive rulemaking required in conjunction with the implementation of
deposit insurance reform, fundamental changes were made in the FDIC's business functions
including modification to major application systems such as the Risk-Related Premium System,
Electronic Deposit Insurance Estimator, the Corporate Business Information System and the
Assessment Information Management System. As part of the implementation, the FDIC also
made available online new tools such as the One-Time Assessment Credit Search Tool and the
Assessment Rate Calculator for insured institutions. System changes in support of deposit
insurance reform will continue in 2007.
The following table shows the number and percentage of institutions insured by the Deposit
Insurance Fund (DIF), according to risk classifications effective for the first semiannual
assessment period of 2006. Each institution is categorized based on its capital group (1, 2, or 3)
and supervisory subgroup (A, B, or C), which is generally determined by on-site examinations.
Assessment rates are basis points, cents per $100 of assessable deposits, per year.
|Supervisory Risk Subgroup |
|Capital Group||A ||B ||C |
|1. Well-Capitalized:|| || || |
|Assessment Rate ||0 ||3 ||17 |
|Number of Institutions ||8,324 (95.1%) ||345 (4.0%) ||38 (0.4%) |
|2. Adequately Capitalized:|| || || |
|Assessment Rate ||3 ||10 ||24 |
|Number of Institutions ||39 (0.5%) ||3 (0.0%) ||1 (0.0%) |
|3. Undercapitalized:|| || || |
|Assessment Rate ||10 ||24 ||27 |
|Number of Institutions ||2 (0.0%) ||0 (0.0%) ||3 (0.0%) |
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 2006, the FDIC participated on the Basel Committee on Banking Supervision 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.
One of the FDIC's key objectives has been to ensure the adequacy of insured institutions' capital
under Basel II. In 2006, the FDIC devoted substantial resources to domestic and international
efforts to ensure that the new capital rules are designed and implemented appropriately. These
efforts included the publication in September 2006 of an NPR seeking comment on draft rules
for Basel II and revisions to the Market Risk Rule and the continued development of
examination guidance, which is intended to provide the industry with regulatory perspectives on
The findings of the fourth quantitative impact study (QIS-4), which were completed in 2005,
suggested that, without modification, the Basel II framework could result in a significant decline
in minimum risk-based capital requirements. As a result, several safeguards were incorporated
into the Basel II NPR to protect against a significant decline in minimum risk-based capital
requirements. These safeguards included a one-year delay in the targeted effective date of the
regulation, a longer transition period, limitations on the amount that risk-based capital at
individual banks could decline during the transition period, the retention of the U.S. leverage
ratio and Prompt Corrective Action requirements, and a 10 percent downward limit on the
aggregate reduction in minimum risk-based capital that could result from the implementation of
Basel II. Through continuing on-site and off-site reviews of all FDIC-supervised institutions that
have indicated possible plans to operate under the new Basel Capital Accord, the Corporation
has confirmed that those institutions are making satisfactory progress towards meeting the
The FDIC is actively involved in efforts to revise the existing risk-based capital standards for
those banks that will not be subject to Basel II. These efforts, referred to as Basel IA, are
intended to 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 to minimize potential competitive inequities that may arise between banks that adopt Basel II
and those banks that remain under the existing capital rules. The revisions proposed in the Basel
IA NPR are anticipated to be finalized by domestic bank and thrift regulatory authorities in 2007
for implementation in January 2008. The Basel IA NPR was published in the Federal Register
for public comment in December 2006.
Regulatory Burden Reduction
Pursuant to Section 2222 of the Economic Growth and Regulatory Paperwork Reduction Act of
1996 (EGRPRA), federal banking regulators are required to review existing regulations to
identify and eliminate those that are outdated, unnecessary or unduly burdensome on insured
depository institutions. An interagency EGRPRA work group completed a comprehensive three-
year review in 2006, analyzing the comments received on the last sets of regulations and
publishing a summary of those comments. The interagency working group also prepared a report
to Congress, which identified significant issues raised during the public comment period.
The Financial Services Regulatory Relief Act of 2006 was enacted into law in October 2006.
This Act requires the SEC and FRB to jointly issue a rule to implement the exceptions to the
definition of broker in accordance with section 3(a)(4)(F) of the Securities Exchange Act of
1934, permits the Federal Reserve to pay interest on balances kept at the Federal Reserve Banks,
increases the Federal Reserve Board's flexibility in setting certain reserve requirements, reduces
some redundant bank filing requirements and makes numerous changes designed to enhance
banking agency efficiency and effectiveness. The new law also expands eligibility for inclusion
in the 18-month safety and soundness examination cycle to insured institutions with CAMELS1
"1" ratings with up to $500 million in assets (an increase from the previous threshold of $250
million). Congress subsequently enacted legislation expanding eligibility for the 18-month
examination cycle to insured institutions with CAMELS "2" ratings up to $500 million in assets.
Center for Financial Research
The FDIC's Center for Financial Research (CFR) co-sponsored two research conferences during
2006. The 16th annual Derivatives Securities and Risk Management Conference, which the FDIC
co-sponsored with Cornell University's Johnson Graduate School of Management and the
University of Houston's Bauer College of Business, was held in April 2006. In addition, the CFR
and the Journal for Financial Services Research (JFSR) sponsored their sixth annual research
conference in September 2006. The conference attracted academics from U.S. and foreign
universities, U.S. and foreign bank supervisors, congressional staff, consultants and bankers. As
a part of the conference, the CFR sponsored a symposium entitled "U.S. Implementation of
Basel II," at which academics and U.S. and foreign bank regulators presented 12 research papers
analyzing the potential effects of the new capital standards.
In addition to these conferences, the CFR and Harvard University jointly sponsored a
brainstorming symposium to advance research on consumer finance in October 2006. Individuals
from academia, businesses, public policy, consumer advocacy and philanthropy groups discussed
and proposed a research agenda in the field of consumer finance.
Thirteen CFR working papers were completed and published in 2006 on topics dealing with risk
measurement, capital allocation, deposit insurance, community development or regulations
related to these topics. The CFR Senior Fellows met in January 2006 to discuss ongoing CFR
research on Basel II, deposit insurance reform, developments in the area of consumer finance and
CFR activities for the coming year.
Central Data Repository
The FDIC continued to leverage its investment in the Federal Financial Institutions Examination
Council's (FFIEC) Central Data Repository (CDR). The CDR streamlines the collection,
validation and publication of financial institutions' Call Report data. The CDR was used to
successfully collect Call Report data from approximately 8,000 reporting institutions for each
quarter of 2006. The FFIEC also began work during 2006 on enhancing the CDR to publish data
to the public and produce bank performance reports, and an interagency team began work on
modifications that will increase the flexibility of the CDR to process additional data series.
The FDIC also continued to lead in the promulgation of the CDR's underlying financial
reporting standard, XBRL (eXtensible Business Reporting Language), to increase financial
transparency. Early in 2006, the FDIC formed an XBRL Advisory Group to build upon the
success of the CDR program. Leveraging the FDIC's demonstrated expertise and leadership in
the field, the group will expand the use of XBRL technologies and promote their use among
other FDIC business partners. Internal and external collaboration Web sites were established to
allow the exchange of information and to disseminate lessons learned.
Risk Analysis Center
The Risk Analysis Center (RAC) was established in 2003 to provide information about current
and emerging risk issues. It is staffed with employees on detail from each of the FDIC's three
business lines. The RAC uses interdivisional teams to analyze selected risk areas and carry out
special projects which culminate in presentations and reports regarding these risk issues. The
activities of the RAC are guided by the National Risk Committee, which is chaired by the Chief
Operating Officer. In 2006, major projects of the RAC focused on collateralized debt obligations,
operational risk, and the housing sector/alternative mortgage products. The RAC also reported
to the National Risk Committee on a variety of other topics, including economic conditions,
industry risk exposure, credit underwriting practices, and consumer protection issues.
Other Risk Identification Activities
During 2006, the FDIC continued to research and analyze trends in the banking sector, financial
markets, and the overall economy to identify emerging risks to the banking industry and the DIF.
The identified risks were highlighted throughout the year in presentations and written reports.
The FDIC prepared summary analyses semi-annually on the condition of large insured financial
institutions, mainly based on information provided by FDIC examiners and these institutions'
primary federal regulators. Institution-specific concerns were directed to FDIC regional offices
for appropriate action. Additionally, the FDIC continued to analyze the regional economies
adversely affected by hurricanes Katrina and Rita throughout the year.
The FDIC published a variety of studies in quarterly FDIC Outlook issues and periodic FYI
reports that addressed a range of current topics in the banking sector, financial markets and the
economy. In addition, quarterly FDIC State Profiles were released for each state during 2006.
The FDIC also published the Quarterly Banking Profile, which discusses current conditions,
trends and changes in the performance of insured institutions, and Supervisory Insights, which
discusses implementation of regulatory policy, shares best practices and communicates emerging
issues in bank supervision.
Throughout the year, the FDIC conducted numerous outreach activities addressing economic and
banking risk analysis. Presentations were made to financial institutions and related trade groups,
bank directors' colleges, community groups, foreign visitors and other regulators. The FDIC also
sponsored a roundtable discussion that addressed possible scenarios for the next recession.