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2008 Annual Report
2008 Annual Report
I. Management's Discussion and Analysis
The Year in Review
Highlighted in this section are the Corporation’s 2008 accomplishments in each of its three major business lines – Insurance, Supervision and Consumer protection, and Receivership Management – as well as its program support areas.
Temporary Liquidity Guarantee Program
After issuing an interim final rule on October 23, 2008, the FDIC received more than 700 comments. Based on those comments, the FDIC made several significant changes to the final rule, which the FDIC adopted on November 21, 2008.
The final rule provided that, under the debt guarantee program, the FDIC will guarantee in full, through maturity or June 30, 2012, whichever comes earlier, senior unsecured debt issued by a participating entity between October 14, 2008, and June 30, 2009, up to a maximum of 125 percent of the par value of the entity’s senior unsecured debt that was outstanding as of the close of business September 30, 2008, and that was scheduled to mature on or before June 30, 2009. Banks, thrifts, bank holding companies, and certain thrift holding companies were eligible to participate. In a change from the original terms of the debt guarantee program, the final rule excluded, effective December 5, 2008, all debt with a term of 30 days or less from the definition of senior unsecured debt. The FDIC began charging institutions participating in the debt guarantee program for debt issued on or after November 13, 2008, a fee based on the amount and term of the debt issued. Fees range from 50 to 100 basis points on an annualized basis, depending on the term of the debt.
The final rule also provided that, under the transaction account program, the FDIC will guarantee in full all domestic noninterest-bearing transaction deposit accounts held at participating banks and thrifts through December 31, 2009, regardless of dollar amount. The guarantee also covers negotiable order of withdrawal accounts (NOW accounts) at participating institutions – provided the institution commits to maintaining interest rates on the account at no more than 0.50 percent – and Interest on Lawyers Trust Accounts (IOLTAs) and functional equivalents. The FDIC will assess participating institutions a 10 basis point annual rate surcharge on covered accounts that are not otherwise insured.
The final rule required all institutions to elect whether or not to participate in one or both of the two components of the TLGP by December 5, 2008. As of December 31, 2008, approximately 56 percent of all eligible entities had opted in to the Debt Guarantee Program and 64 financial entities – 39 insured depository institutions and 25 bank and thrift holding companies and nonbank affiliates – had $224 billion in guaranteed debt outstanding. Approximately 87 percent of FDIC-insured institutions opted in to the Transaction Account Guarantee Program, with insured institutions reporting 522,862 non-interest-bearing transaction accounts over $250,000. These accounts totaled $814 billion, of which $684 billion in deposit accounts was guaranteed under the program.
The TLGP does not rely on the taxpayer or the Deposit Insurance Fund to achieve its goals. Participants in the program must pay assessments for coverage. If fees do not cover costs in the TLGP, the FDIC will impose a special assessment under the systemic risk provisions of the Federal Deposit Insurance Act.
Restoration Plan and Rulemaking on Assessments
On October 7, 2008, the FDIC Board adopted a restoration plan to raise the reserve ratio to at least 1.15 percent within five years and a proposed rule that would raise assessment rates beginning January 1, 2009, and make other changes to the assessment system effective April 1, 2009. The other changes were primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments. On December 16, 2008, the Board adopted a final rule raising assessment rates for the first quarter of 2009. On February 27, 2009, the Board amended the restoration plan to extend its horizon from five years to seven years due to extraordinary circumstances. It also adopted a final rule setting rates beginning the second quarter of 2009 and making other changes to the risk-based pricing system.
Rates for the First Quarter of 2009
Changes to Risk-Based Assessments Effective the Second Quarter of 2009
Note: Institutions are categorized based on supervisory ratings, debt ratings and financial data as of December 31, 2008. Rates do not reflect the application of assessment credits. Percentages may not add to 100 percent due to rounding.
Large Risk Category I Institutions
The FDIC anticipates that incorporating the financial ratios method into the large bank method assessment rate will result in a more accurate distribution of initial assessment rates and in timelier assessment rate responses to changing risk profiles, while retaining the market and supervisory perspectives that debt and CAMELS ratings provide.
For institutions in risk categories II, III, or IV, the FDIC proposes to increase an institution’s assessment rate above its initial rate if its ratio of brokered deposits to domestic deposits is greater than 10 percent, regardless of the rate of asset growth. Such an increase would be capped at 10 basis points. As an institution’s financial condition weakens, significant reliance on brokered deposits tends to increase its risk profile. Insured institutions – particularly weaker ones – typically pay higher rates of interest on brokered deposits. When an institution becomes noticeably weaker or its capital declines, the market or statutory restrictions may limit its ability to attract, renew or roll over these deposits, which can create significant liquidity challenges. Also, significant reliance on brokered deposits tends to greatly decrease the franchise value of a failed institution.
The exclusion of secured liabilities can lead to inequity. An institution with secured liabilities in place of another’s deposits pays a smaller deposit insurance assessment, even if both pose the same risk of failure and would cause the same losses to the FDIC in the event of failure. Substituting secured liabilities for deposits can also lower an institution’s franchise value in the event of a failure, which increases the FDIC’s losses, all else equal. Furthermore, substituting secured liabilities for unsecured liabilities (including subordinated debt) raises the FDIC’s loss in the event of failure without providing increased assessment revenue.
Unsecured Debt and Tier I Capital
When an institution fails, holders of unsecured claims, including subordinated debt, receive distributions from the receivership estate only if all secured claims, administrative claims and deposit claims have been paid in full. Consequently, greater amounts of long-term unsecured claims provide a cushion that can reduce the FDIC’s loss in the event of a failure.
Summary of Base Rate Determination
Base Rates and Actual Rates
Center for Financial Research
The 18th Annual Derivatives Securities and Risk Management Conference, which the FDIC
The CFR and The Journal for Financial Services Research (JFSR) hosted the eighth Annual Bank Research Conference in September with over 100 attendees. The conference included the presentation of six papers and focused on issues in securitization and credit risk transfer. Experts discussed analyses on a range of topics, including liquidity issues, lessons learned from the collapse of the auction rate municipal bond market, the laying off of credit risk, and the subprime credit crisis of 2007.
The CFR and the Federal Reserve Bank of Cleveland co-sponsored the “Identifying and Resolving Financial Crises” conference in April 2008. Papers were presented and discussed on topics including the theory and evidence on the resolution of financial firms, identifying policies that lead to contagion or correlated risk, and contingency planning for crises.
The CFR hosted its annual Fall Workshop in October, which included two all-day sessions with research paper presentations and discussions. The Workshop was attended by about 85 researchers and policy makers. Twelve CFR working papers were completed and published through November 2008 on topics dealing with deposit insurance, risk measurement, credit contagion, and the global syndicated loan market.
During the year, two articles were completed within this series. One article, “Building Assets, Building Relationships: Bank Strategies for Encouraging Lower-Income Households to Save”
Participants in the International Association of Deposit Insurers conference.
With FDIC’s Vice Chairman as President of the International Association of Deposit Insurers (IADI) and Chair of the IADI Executive Council, the FDIC had a critical role in fulfilling IADI’s mission throughout the year. In October 2008, the FDIC hosted the seventh annual IADI Conference and Annual General Meeting. The conference themes, Financial Stability and Economic Inclusion, provided an excellent platform for over 250 distinguished presenters and guests from 60 countries to discuss the issues facing global banking and the economy and what steps can be taken by deposit insurers to promote financial stability and inclusion around the world. As Chair of the IADI Training and Conference Standing Committee, the FDIC developed and hosted an executive training program designed to promote core principles and best practices of resolutions management for 39 individuals from 25 countries. The Cross Border Resolution Group (CBRG) of the Basel Committee on Bank Supervision (BCBS), co-chaired by the FDIC, continued its work analyzing national legal and policy regimes for crisis management and resolution of cross-border banks, presenting an interim report to the Basel Committee in December. A subgroup of the CBRG, also co-chaired by the FDIC, in collaboration with IADI and European Forum of Deposit Insurers (EFDI) began work this year to develop an internally agreed-upon set of Recommended Core Principles for Effective Deposit Insurance Systems.
As a member of the Association of Supervisors of Banks in the Americas (ASBA) Board of Directors, the FDIC championed the importance of financial education and highlighted the success of its Money Smart program as a means of promoting healthy economic and banking growth in the Americas. The FDIC’s leadership within ASBA also included providing technical training to ASBA members on supervision of operational risk, bank supervision and resolution. In 2008, the FDIC continued to build its relationship with the EFDI and participated in a joint EFDI/FDIC conference in Dublin on Financial Integration and the Safety Net.
The FDIC entered into a number of Memoranda of Understanding (MOU) this year, three regarding information sharing between bank supervisors of Hong Kong, Mexico and Spain, as well as technical assistance agreements with Colombia’s deposit insurer, Fondo De Garantias De Instituciones Financieras (FOGAFIN), and the United Kingdom’s (UK) Financial Services Authority (FSA). The MOU with the UK provides for formal information-sharing and contingency planning arrangements in connection with cross-border banking activities in the U.S. and the UK. The FDIC’s consultation with the UK has included numerous discussions to share detailed information on the FDIC’s experience in resolution management and asset disposition and consultation on key components of proposed legal changes to the resolution regime for banks in the UK. In addition, the FDIC Chairman met with the FSA Chairman, the Deputy to the Exchequer of Her Majesty’s Treasury, the Governor of the Bank of England and the CEO of the Financial Services Compensation Scheme (FSCS) to continue the dialogue and exchange of information.
In its continuing commitment to fostering sound banking in China, the FDIC and the People’s Bank of China co-sponsored a seminar on rural finance held at the FDIC’s Dallas Regional Office. The seminar provided 55 participants from both countries, including rural finance experts in banking, financial regulation, and academia, with an opportunity to share experiences and engage each other in a dialogue on the challenges, best practices, and innovations in rural finance in their countries today. The FDIC also traveled to China to participate in the U.S.-China Bilateral Bank Supervisors meetings, hosted by the China Banking Regulatory Commission (CBRC).
2 Certain deposits that an insured depository institution receives through a deposit placement network on a reciprocal basis would be excluded from the adjusted brokered deposit ratio in Risk category I. They would not be excluded, however, from the brokered deposit adjustment applicable to risk categories II, III, and IV. back
3 For a Tier I leverage ratio between 5 percent and 6 percent, 10 percent of Tier I capital within this range would qualify for the unsecured debt adjustment; for a Tier I leverage ratio between 6 percent and 7 percent, 20 percent of Tier I capital within this range would qualify; for a Tier I leverage ratio between 7 percent and 8 percent, 30 percent of Tier I capital within this range would qualify; and so forth. Thus, all Tier I capital above a 14 percent leverage ratio would qualify for inclusion in the unsecured debt adjustment. back
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