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 industry.
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 rule.
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 for assessments.
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.
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 implementation.
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.
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.
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.
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.
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.