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2006 Annual Report Highlights
2006 Annual Report Highlights
I. Management's Discussion and Analysis
Supervision and Consumer Protection
Supervision and consumer protection are cornerstones of the FDIC's efforts to ensure the stability of and public confidence in the nation's financial system. The FDIC's supervision program promotes the safety and soundness of FDIC-supervised insured depository institutions, protects consumers' rights, and promotes community investment initiatives. In addition to carrying out its established examination program and other supervisory activities, the FDIC initiated in 2006 a substantial expansion of its programs to promote economic inclusion and confronted difficult policy issues regarding industrial loan companies.
The FDIC's strong bank examination program is the core component of its supervisory program. At year-end 2006, the Corporation was the primary federal regulator for 5,237 FDIC-insured state-chartered institutions that are not members of the Federal Reserve System (generally referred to as "state nonmember" institutions). Through safety and soundness, consumer compliance and the Community Reinvestment Act (CRA), and various specialty examinations, the FDIC assesses their operating condition, management practices and policies, and compliance with applicable laws and regulations. The FDIC also educates bankers and consumers on matters of interest and addresses consumers' questions and concerns.
In 2006, the Corporation conducted 2,388 statutorily-required safety and soundness examinations, including a review of Bank Secrecy Act compliance, and all required follow-up examinations for FDIC-supervised problem institutions within prescribed timeframes. The FDIC also conducted 1,959 CRA/Compliance examinations (777 joint compliance-CRA examinations, 1,177 compliance-only examinations,1 and five CRA-only examinations) and 3,052 specialty examinations. All compliance/CRA examinations were also conducted within the time frames established by FDIC policy, including required follow-up examinations of problem institutions. The accompanying table compares the number of examinations conducted in 2004, 2005 and 2006 by type.
As of December 31, 2006, there were 51 insured institutions with total assets of $8.5 billion designated as problem institutions for safety and soundness purposes (defined as those institutions having a composite CAMELS2 rating of 4 or 5), compared to the same number of problem institutions with total assets of $6.6 billion on December 31, 2005. This constituted a 28.7 percent year-over-year increase in the total assets in problem institutions. During 2006, 38 institutions with aggregate assets of $4.7 billion were removed from the list of problem financial institutions, while 38 institutions with aggregate assets of $7.8 billion were added to the list of problem financial institutions. The FDIC is the primary federal regulator for 27 of the 51 problem institutions.
During 2006, the Corporation issued the following formal and informal corrective actions to address safety and soundness concerns: 29 Cease and Desist Orders; one Written Agreement; and 146 Memoranda of Understanding. Of these actions issued, eight Cease and Desist Orders, one Written Agreement and 21 Memoranda of Understanding were issued based on apparent violations of the Bank Secrecy Act.
As of December 31, 2006, four FDIC-supervised institutions were assigned a "4" rating for compliance; no institutions were assigned a "5" rating. All of the "4"-rated institutions were examined in 2006, and Memoranda of Understanding are currently being finalized to address the FDIC's examination findings. In addition, the FDIC developed and began using new screening tools in 2006 to identify those FDIC-supervised institutions with mortgage lending disparities, based upon "higher rate" pricing information supplied by these institutions under the Home Mortgage Disclosure Act (HMDA), and to assess whether the disparities in loan pricing and denial rates resulted from discriminatory lending or reflected other factors, such as creditworthiness, underwriting or other non-discriminatory criteria.3 Compliance examinations were scheduled for all of the institutions with identified lending disparities to determine whether those disparities were the result of discriminatory lending.
Large Complex Financial Institution Program
The FDIC's Large Bank Program was established to address the unique challenges associated with supervising and insuring the deposits of large and complex institutions. A significant share of the assets and insured deposits of the banking industry are today held in a small number of large institutions. The Program ensures a consistent approach to large bank supervision and risk analysis on a national basis by compiling key data and performing analyses of large-bank operations for use by various FDIC divisions and offices and by providing specialists to support supervisory activities for large banks. In 2006, guidelines were developed to enhance the FDIC's risk-monitoring program for large banks with assets greater than $50 billion. Monitoring and assessment activities also continued in 2006 to ensure internal and industry preparedness for the implementation of Basel II. Training on credit and operational risk was conducted for regional and interagency personnel, and numerous "supervisory working group" meetings were held with foreign regulatory authorities to address Basel II home-host and cross-border issues.
Industrial Loan Companies
In 2006, an application for deposit insurance filed by a very large retailer on behalf of a proposed Utah industrial loan company (ILC) generated significant public interest. In April, the FDIC held three days of public hearings on the application. Nearly 70 representatives of financial institutions, trade associations, advocacy groups, the retailer, and others made presentations at the hearing. In addition, the FDIC received written statements from 16 parties who did not request an opportunity to present during the hearings.
As a result of that interest as well as congressional interest and reviews by the GAO and OIG, the FDIC initiated a comprehensive policy review of ILCs. On July 28, 2006, the Board imposed a moratorium extending through January 31, 2007, on the acceptance, approval, or denial of deposit insurance applications and change in control notices submitted by, or on behalf of, any ILC. The purpose of the moratorium was to permit the Corporation to evaluate industry developments; the various issues, facts and arguments raised regarding the ILC charter; whether there are emerging safety and soundness issues or policy issues involving ILCs or other risks to the insurance fund; and whether statutory, regulatory or policy changes should be made in the FDIC's oversight of ILCs in order to protect the Deposit Insurance Fund or important congressional objectives.
The FDIC believes that public participation provides valuable insight into the issues presented by the recent trends and changes in the ILC industry. Accordingly, in order to obtain the public's insights, the FDIC invited comments on the ILC industry during a 45-day period that ended on October 10, 2006. In its Request for Public Comment, the FDIC posed 12 questions that sought public input on various topics, including the current legal framework of ILCs as well as the possible benefits, risks and supervisory issues associated with ILCs. At year-end 2006, eight ILC-related applications for deposit insurance and twochange in control notices were pending.
Promoting Economic Inclusion
The FDIC pursued a number of new initiatives in 2006 to promote broader access to banking services by traditionally underserved populations and to ensure adequate consumer protection in the provision of these services.
Advisory Committee on Economic Inclusion – This committee was created to provide the FDIC with advice and recommendations on important initiatives focused on expanding access to banking services by underserved populations and also explore ways to encourage the banking industry to adopt suitable products and marketing strategies to compete with alternative high-cost providers.
Alliance for Economic Inclusion (AEI) – The AEI was created to work with financial institutions and other partners to bring those currently unbanked and underserved into the financial mainstream. The AEI will focus on expanding banking services in all underserved markets, including low- and moderate-income neighborhoods, minority communities and rural areas.
Affordable Small-Dollar Loan Guidelines – A draft of the guidelines, targeted to the banking industry, was issued for public comment on December 4, 2006. The draft guidelines suggest ways the banking industry can make affordable short-term loan products more accessible to customers, helping to build long-term, profitable multiple-account relationships. The guidelines focus on product development and underwriting, and include information on tools such as consumer financial education and savings that may address longer term financial issues. The FDIC expects to finalize the guidelines in early 2007.
Military Bank Initiative – In late 2006, the FDIC began working closely with the banking industry to explore ways to make affordable short-term loan products more accessible to military personnel who frequently turn to high-cost providers for their financial services needs and to encourage individual and household savings by these borrowers. The FDIC established contact with the Association of Military Banks of America (AMBA) and more than 125 banks located near military bases.
Nontraditional Mortgage Products – In 2006, the FDIC became increasingly concerned with the expansion of nontraditional mortgage products and the potential risk posed by these products to the DIF. While these products, which are also referred to as "alternative" or "exotic" mortgage loans, have been available for many years, the number of institutions offering them has expanded rapidly in recent years. To address these concerns, the FDIC implemented certain enhancements to the supervisory oversight of nontraditional mortgage banking activities and, with the other financial institution regulatory agencies, developed and issued guidance to address the growing risks associated with these loan products. The guidance covers three primary areas: loan terms and underwriting standards, portfolio and risk management practices, and consumer protection issues.
Hurricane Recovery Assistance
Since the Gulf Coast hurricanes of 2005, the FDIC has worked with other federal and state regulatory agencies to address policy issues that arose due to the severity and scale of those events. In 2006, the agencies issued examiner guidance that outlines examination procedures for assessing the financial condition of institutions adversely affected by the hurricanes. Working through the Federal Financial Institutions Examination Council (FFIEC), the agencies also published and distributed to insured financial institutions a booklet entitled Lessons Learned from Hurricane Katrina: Preparing Your Institution for a Catastrophic Event. This booklet compiles the experiences of bank officials in the aftermath of these hurricanes and offers insights to those who are responsible for devising and implementing an institution's disaster recovery and business continuity plans.
In October 2006, the FDIC and NeighborWorks® America jointly released a new homeownership and financial counseling guide called Navigating the Road to Housing Recovery in the Gulf Coast. The guide is designed for evacuees who are now beginning to receive federal and state financial assistance to rebuild or relocate. It was a focal point of two conferences held in late 2006, the "Gulf Coast Housing Summit — Strategies for Redeveloping Communities and Rebuilding Lives," jointly sponsored by the FDIC and NeighborWorks® America in New Orleans, LA, and another housing conference sponsored by Back Bay Mission in Biloxi, MS. The FDIC, in cooperation with NeighborWorks® and an array of local partners, will schedule train-the-trainer sessions through early 2007 to develop 300 potential homeownership counselors.
Minority Depository Institutions
The FDIC has long recognized the importance of minority depository institutions in promoting the economic viability of minority and underserved communities. In August 2006, the FDIC hosted the first "National Minority Depository Institution Conference" in Miami, FL, with attendance from more than 100 bankers; representatives from the Office of the Comptroller of the Currency, the Federal Reserve and the Office of Thrift Supervision; and several private-sector and industry trade group representatives. The conference addressed topics of interest to the minority banking community, with particular emphasis on a shared commitment to expanding financial services available to minority and underserved communities; developing coalitions to improve minority community infrastructures by partnering with organizations such as NeighborWorks® America; and fostering a better understanding by the regulatory community of the unique challenges minority depository institutions face. A second national conference is planned for 2007.
During 2006, an FDIC task force also assisted three minority institutions headquartered in New Orleans, LA, and severely impacted by Hurricane Katrina in improving their liquidity by securing $22 million in deposit pledges from Utah-based ILCs. The ILCs also provided $123,000 in direct cash donations to assist these institutions in meeting the housing and other needs of their employees.
The FDIC has taken a leadership role in ensuring that the financial sector —a critical part of the infrastructure of the United States — is prepared for a financial emergency. As a member of the Financial and Banking Information Infrastructure Committee (FBIIC), the FDIC has sponsored a series of outreach meetings titled "Protecting the Financial Sector: A Public and Private Partnership." During 2006, these Homeland Security meetings were held in 22 cities across the United States. These meetings provided members of the financial sector with the opportunity to communicate with senior government officials, law enforcement personnel, emergency management personnel and private sector leaders about emergency preparedness. Homeland Security meetings are planned for 11 cities in 2007.
Bank Secrecy Act
The FDIC chairs the FFIEC Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Working Group. Under the auspices of the BSA/AML Working Group, the FDIC, the other federal banking agencies, and FinCEN updated the FFIEC BSA/AML Examination Manual in July 2006. The revised manual reflects the ongoing commitment of the federal banking agencies and FinCEN to provide current and consistent guidance on risk-based policies, procedures, and processes for banking organizations to comply with the BSA and safeguarding operations from money laundering and terrorist financing. Following the release of the manual, the FDIC coordinated and hosted four interagency conference calls for the banking industry and examination staff regarding changes to the manual. Over 1,500 examiners and 10,650 bankers and industry representatives participated in those outreach events. During 2006, the FDIC also participated in more than 145 additional industry outreach and regulatory training events nationwide relating to BSA/AML topics.
Cyber Fraud and Financial Crimes
The FDIC continued to take a leadership role in consumer education initiatives related to identity theft with a public education campaign that included sponsoring identity theft symposia focusing on e-commerce. The symposia, held in San Francisco, CA, Mesa, AZ, and Miami Beach, FL, brought together representatives from federal and state governments, industry, consumer and community organizations, and law enforcement to discuss issues related to identity theft and e-commerce.
Other major accomplishments during 2006 in combating identity theft included the following:
Office of International Affairs
Increasing globalization and interdependence heighten the potential for financial and economic instability to transcend national geographic boundaries. The promotion of sound, stable banking systems abroad is a key ingredient for greater global prosperity and stability which, in turn, will benefit the U.S. financial system and the banking public. The FDIC created the Office of International Affairs in 2006 to coordinate the FDIC's international activities with a focus on building strong relationships with foreign regulators and deposit insurers, other U.S. government entities and international organizations. The programs overseen by the office provide training, expert consultation, and technical assistance to foreign deposit insurers, bank supervisory authorities and other foreign government agencies to support the development and maintenance of effective deposit insurance programs and stable, sound banking systems worldwide.
Consumer Complaints and Inquiries
The FDIC investigates consumer complaints about FDIC-supervised institutions and answers inquiries from the public about consumer protection laws and banking practices. In 2006, the FDIC received 9,652 written complaints, of which 3,442 were against state nonmember institutions. The Corporation responded to over 97 percent of these complaints within corporate timeliness standards. The FDIC also responded to 3,870 written and 4,188 telephone inquiries from consumers and members of the banking community about consumer protection issues.
In April 2006, the FDIC hosted the first Interagency Consumer Affairs Conference in Arlington, VA, with approximately 140 attendees, including representatives from the Federal Reserve Board, Office of Thrift Supervision, Office of the Comptroller of the Currency, National Credit Union Administration, and the Federal Trade Commission. Discussions included best practices for investigating and responding to consumer complaints, banking practices, and financial trends that have and will continue to challenge consumers in 2006 and beyond.
Deposit Insurance Education
An important part of the FDIC's role in insuring deposits and protecting the rights of depositors is its responsibility to ensure that bankers and consumers have access to accurate information about the FDIC's deposit insurance rules. The FDIC has an extensive deposit insurance education program consisting of seminars for bankers, electronic tools for estimating deposit insurance coverage, and written and electronic information targeting both bankers and consumers. The FDIC also responds directly to inquiries from bankers and the public about deposit insurance. During 2006, the FDIC responded to over 86,134, or 99 percent, of written and telephone inquiries from bankers and consumers about the FDIC's deposit insurance program and insurance coverage issues within the time frames established by policy. This was an increase of approximately 34 percent over the number of inquiries received in 2005, in large part due to the enactment of new coverage limits as part of deposit insurance reform.
In 2006, the FDIC also completed development of Spanish-language versions of two of its most popular educational resources for consumers and bankers, a Spanish language version of EDIE (available on the FDIC's Web site beginning in early 2007) and a 30-minute Spanish-language video for bank employees and customers (now available on the FDIC's Web site) that provides an overview of the FDIC's rules and requirements for deposit insurance coverage, with specific emphasis on the most common account ownership categories used by individuals and families.
The FDIC continued publication of its quarterly consumer newsletter, FDIC Consumer News, which covers a wide range of financial topics of interest to consumers. Three special age-based issues of FDIC Consumer News for seniors, young adults and teens — were published during the year. The how-to financial guide for seniors won an Achievement in Consumer Education Award from the National Association of Consumer Agency Administrators. Current and past issues of FDIC Consumer News are available online at www.fdic.gov/consumernews.
Financial Education and Community Development
Five years ago, the FDIC — recognizing the need for enhanced financial education across the country — inaugurated its award-winning Money Smart curriculum, which is now available in seven languages as well as in a computer-based instruction version. In 2006, the FDIC introduced the Russian language, large print and Braille versions of Money Smart. The large print and Braille versions are the first financial education program specifically targeted for individuals with visual impairments. Since its inception, over 864,000 individuals (including approximately 207,000 in 2006) have participated in Money Smart classes and approximately 128,000 of these participants have subsequently established new banking relationships.
During 2006, the FDIC also undertook 370 community development, technical assistance and outreach activities. These activities were designed to promote: awareness of investment opportunities to financial institutions, access to capital within communities, knowledge-sharing among the public and private sector, and wealth building opportunities for families. Representatives throughout the financial industry and their stakeholders collaborated with FDIC on a broad range of initiatives structured to meet local and regional needs for financial products and services, credit, asset-building, affordable housing, small business and micro-enterprise development and financial education.
1 Compliance-only examinations are conducted for most institutions at or near the mid-point between joint compliance-CRA examinations under the Community Reinvestment Act of 1977, as amended by the Gramm-Leach-Bliley Act of 1999. CRA examinations of financial institutions with aggregate assets of $250 million or less are subject to a CRA examination no more than once every five years if they receive a CRA rating of "Outstanding" and no more than once every four years if they receive a CRA rating of "Satisfactory" on their most recent examination.
2 The CAMELS composite rating represents the adequacy of Capital, the quality of Assets, the capability of Management, the quality and level of Earnings, the adequacy of Liquidity, and the Sensitivity to market risk, and ranges from "1" (strongest) to "5" (weakest).
3 The Federal Reserve Board began requiring covered institutions to report "higher rate" pricing information in their HMDA reports in 2004.
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