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2008 Annual Report
2008 Annual Report
IV. Financial Statements and Notes
Deposit Insurance Fund (DIF) – Cont.
5. Property and Equipment, Net
The depreciation expense was $55 million and
6. Liabilities Due
7. Contingent Liabilities for:
The contingent liability is derived by applying expected failure rates and loss rates to institutions based on supervisory ratings, balance sheet characteristics, and projected capital levels. In addition, institution-specific analysis is performed on those institutions where failure is imminent absent institution management resolution of existing problems, or where additional information is available that may affect the estimate of losses. Due to the rapid deterioration in industry conditions, the FDIC modified the process of establishing the loss reserve by identifying vulnerable institutions deemed likely to have failure risks similar to those on the problem bank list based on certain financial ratios and other risk measures. The FDIC also increased loss rates for institutions included in the reserve to reflect the results of recent valuations of loan portfolios of imminent failures and current year resolutions. As of December 31, 2008 and 2007, the contingent liabilities for anticipated failure of insured institutions were $24.0 billion and $124.3 million, respectively.
In addition to these recorded contingent liabilities, the FDIC has identified risk in the financial services industry that could result in an additional loss to the DIF should potentially vulnerable insured institutions ultimately fail. As a result of these risks, the FDIC believes that it is reasonably possible that the DIF could incur additional estimated losses up to approximately $25.1 billion. The actual losses, if any, will largely depend on future economic and market conditions and could differ materially from this estimate.
During 2008, financial market disruptions evolved into a crisis that challenged the soundness and profitability of some FDIC-insured institutions. Declining housing and equity prices, financial market turmoil, and deteriorating economic conditions exerted significant stress on banking industry performance and threatened the viability of some institutions, particularly those that had significant exposure to higher risk residential mortgages or residential construction loans. In 2008, 25 banks with combined assets of about $361 billion failed. It is uncertain how long and how deep this downturn will be. Supervisory and market data suggest that the banking industry will continue to experience elevated levels of stress over the coming year. The FDIC continues to evaluate the ongoing risks to affected institutions in light of the deterioration in economic and financial conditions, and the effect of such risks will continue to put stress on the resources of the insurance fund.
In addition, future losses could be incurred until the contracts offering the representations and warranties, and guarantees have expired, some as late as 2032. Consequently, the FDIC believes it is possible that additional losses may be incurred by the DIF from the universe of outstanding contracts with unasserted representation and warranty claims. However, because of the uncertainties surrounding the timing of when claims may be asserted, the FDIC is unable to reasonably estimate a range of loss to the DIF from outstanding contracts with unasserted representation and warranty claims.
Purchase and Assumption Indemnification
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