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2009 Annual Report
I. Management's Discussion and Analysis
The Year in Review
Highlighted in this section are the Corporation's 2009 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
Under the DGP, the FDIC initially guaranteed in full, through maturity or June 30, 2012, whichever came first, the senior unsecured debt issued by a participating entity between October 14, 2008, and June 30, 2009. Banks, thrifts, bank holding companies, and certain thrift holding companies were eligible to participate. In May 2009, the FDIC Board finalized a rule that extended for four months the period during which participating entities could issue FDIC-guaranteed debt. All participating insured depository institutions and those other participating entities that had issued FDIC-guaranteed debt on or before April 1, 2009, were permitted to participate in the extension of the DGP without further application to the FDIC. Other participating entities were permitted to issue debt during the extended DGP upon receiving approval from the FDIC. In conjunction with the extension of the DGP issuance period, the expiration of the guarantee period was pushed back to December 31, 2012. As a result, approved participating entities could issue FDIC-guaranteed debt through October 31, 2009, and the FDIC's guarantee would expire on the stated maturity date of the debt or December 31, 2012, whichever came first.
Participating entities could issue 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. All debt with a term of 30 days or less was excluded from the definition of senior unsecured debt. The FDIC charged a fee based on the amount and term of the debt issued. Fees ranged from 50 basis points on an annualized basis for debt with a maturity of 180 days or less, increasing to 75 basis points on an annualized basis for debt with a maturity of 181 to 364 days and 100 basis points on an annualized basis for debt with maturities of 365 days or greater. In conjunction with the program extension in 2009, the FDIC assessed an additional surcharge on debt with a maturity of one year or greater issued after April 1, 2009. Unlike the other TLGP fees, which were reserved for possible TLGP losses and not generally available for DIF purposes, the amount of any surcharge collected in connection with the extended DGP was to be deposited into the DIF and used by the FDIC when calculating the reserve ratio of the Fund. The surcharge varied depending on the type of institution issuing the debt with insured depository institutions paying the lowest fees.
The TAGP initially guaranteed in full all domestic noninterest-bearing transaction deposits held at participating banks and thrifts through December 31, 2009. This deadline was later extended through December 31, 2010. The guarantee also covered negotiable order of withdrawal (NOW) accounts at participating institutions—provided the institution committed to maintain interest rates on the accounts of no more than 0.50 percent for the duration of the program—and Interest on Lawyers Trust Accounts (IOLTAs) and functional equivalents. Participating institutions were initially assessed a 10 basis point surcharge on the portion of covered accounts that were not otherwise insured. The fees for the TAGP were increased for the extension to either 15 basis points, 20 basis points, or 25 basis points depending on the institution's deposit insurance assessment category.
During its existence, the DGP guaranteed over $618 billion in debt issued by 120 entities. At its peak, the DGP guaranteed almost $350 billion of debt outstanding. The amount of debt issuance declined as markets improved throughout 2009 and, as the chart shows (see next page), the amount of debt outstanding correspondingly decreased as shorter-term debt matured without being rolled over. Near the program's end on October 31, 2009, however, the volume of debt outstanding increased slightly. As of December 31, 2009, the total amount of FDIC-guaranteed debt outstanding was $309 billion.
Under the TAGP, the FDIC guaranteed an estimated $834 billion of deposits in noninterest-bearing transaction accounts as of December 31, 2009, that would not have otherwise been insured. More than 5,800 FDIC-insured institutions reported having noninterest-bearing transaction accounts over $250,000 in value.
The DGP collected approximately $10 billion in fees under the program. As of December 31, 2009, one participating entity (a holding company) that had issued guaranteed debt had declared bankruptcy and defaulted on its debt. Subsequently, a claim for payment was filed and approved. In early 2010, the FDIC paid off the entire principal balance, including two quarterly interest payments. Very few losses are expected on the remaining outstanding debt through the end of the DGP in 2012. As of December 31, 2009, the FDIC had collected $639 million in fees under the TAGP.1 Estimated TAGP losses on failures as of December 31, 2009, totaled $1.765 billion. Overall, TLGP fees are expected to exceed the losses from the program. At the conclusion of the program, any remaining TLGP funds will be added to the DIF balance. Under the conditions of the systemic risk determination, if fees are insufficient to cover costs of the program, the difference would be made up through a special assessment.
Debt Guarantee Phase-Out and Emergency Guarantee Facility
Transaction Account Guarantee Program Phase-Out
The final rule established higher assessment fees for institutions participating in the extension period. As mentioned earlier, fees were revised from a flat-rate 10 basis points to a risk-based system with an assessment rate of either 15, 20, or 25 basis points depending on the institution's deposit insurance assessment category. The final rule also provided an opportunity for participating entities to opt out of the TAGP extension by November 2, 2009. Over 6,400 institutions (or 93 percent of institutions participating at year-end) elected to continue in the TAGP.
State of the Deposit Insurance Fund and Changes in Assessment Rates
Changes in the Assessment Rates
On February 27, 2009, the FDIC Board issued a rule incorporating adjustments to the risk-based assessment system to improve how the system differentiates for risk. Effective April 1, 2009, the range of rates widened overall and within Risk Category I. Initial base assessment rates within Risk Category I now range from 12 to 16 basis points on an annual basis, while the initial base rates for risk categories II, III, and IV are 22, 32, and 45 basis points, respectively. An institution's total base assessment rate may be less than or greater than its initial base rate as a result of additional adjustments for secured liabilities (increase), brokered deposits (increase), and/or unsecured debt and Tier I capital (decrease). For Risk Category I, total base assessment rates may be as low as 7 basis points or as high as 24 basis points. A Risk Category IV institution could have a total base assessment rate as high as 77.5 basis points. The initial base assessment rates, range of possible rate adjustments, and minimum and maximum total base rates, as of year-end, across all risk categories are as follows:
Setting the Designated Reserve Ratio
Amendments to the Restoration Plan
On February 27, 2009, the FDIC Board first amended the Restoration Plan by extending the time frame for recapitalization of the DIF from five years to seven years due to extraordinary circumstances. To meet this time frame and help maintain public confidence in the banking system, the FDIC Board adopted an interim rule with a request for comment that would have imposed an emergency special assessment on the industry of 20 basis points on the assessment base as of June 30, 2009. The interim rule would also have permitted the FDIC Board to impose an emergency special assessment after June 30, 2009, of up to 10 basis points on the assessment base, if necessary to maintain public confidence in the federal deposit insurance system.
In response to comments, on May 22, 2009, the FDIC Board voted to levy a special assessment of 5 basis points on each FDIC-insured depository institution's assets minus its Tier 1 capital, as of June 30, 2009. The special assessment was collected on September 30, 2009. The assessment was capped at 10 basis points times an institution's assessment base so that no institution paid an amount higher than it would have paid under the interim rule. The FDIC Board also voted to allow additional special assessments in 2009 if conditions affecting the DIF warranted.
In May 2009, Congress amended the statutory provision governing the establishment and implementation of a Restoration Plan giving the FDIC eight years in which to bring the reserve ratio back to 1.15 percent, absent extraordinary circumstances. As a result, on September 29, 2009, the FDIC again adopted amendments to the Amended Restoration Plan that allowed the DIF to return to a reserve ratio of 1.15 percent within eight years. Concurrently, the FDIC adopted a 3 basis point increase in annual risk-based assessment rates effective January 1, 2011. The FDIC Board also voted not to impose any further special assessments on the industry for the remainder of 2009.
Actions to Meet Projected Liquidity Needs
To meet the projected liquidity needs for near-term failures, the FDIC proposed a rulemaking requiring insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. The prepaid assessment for these periods would be collected on December 30, 2009, along with each institution's regular quarterly risk-based deposit insurance assessment for the third quarter of 2009.
In order to calculate an institution's assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, the institution's total base assessment rate in effect on September 30, 2009, would be used. That rate would be increased by an annualized 3 basis points for 2011 and 2012. Again, for purposes of calculating the amount that an institution prepaid on December 30, 2009, an institution's third quarter 2009 assessment base would be increased quarterly at a 5 percent annual growth rate through the end of 2012. The proposal for the prepaid assessment had certain attributes that made it more attractive than imposing another special assessment on the industry. Chief among these was that the prepayment would not affect bank capital and earnings at a time when these were already under pressure. By implementing a prepaid assessment, banks would be able to book the prepayment as an asset with a zero percent risk weight. This asset would then be drawn down as the bank's regular quarterly risk-based assessment was levied. Additionally, those banks that were likely to be severely adversely affected by the prepayment could be exempted from the prepayment, although not from the actual quarterly risk-based assessment.
The comments received by the FDIC were mostly favorable—generally supporting the notion that the industry should fund its own needs to the extent possible. In November, the Board finalized this rulemaking making one substantive change. Any prepaid assessment not exhausted after collection of the amount due on June 30, 2013—moved up from December 31, 2014—will be returned to the institution at that time. Moreover, if conditions improve before that time, the FDIC Board may vote to return funds to the industry sooner. The FDIC collected $45.7 billion from the prepaid assessments—enough to fund its projected liquidity needs.
Center for Financial Research
The CFR organized and sponsored the 19th Annual Derivatives Securities and Risk Management Conference jointly with Cornell University's Johnson Graduate School of Management and the University of Houston's Bauer College of Business. The conference was held in April 2009 at the Seidman Center and attracted over 100 researchers from around the world. Conference presentations included term structure modeling, price dynamics, fixed income, and options pricing and credit risk.
The CFR also organized and sponsored the 9th Annual Bank Research Conference jointly with The Journal for Financial Services Research (JFSR) in September 2009. The conference theme, Governance and Compensation in the Financial Services Industry, included 16 paper presentations and was attended by over 120 participants. Experts discussed a range of banking and financial sector issues—including corporate governance, bank lending behavior, incentive structures, household finance, and the subprime credit crisis.
The CFR held a one-day symposium on mortgage default risk which was jointly organized with the Federal Housing Finance Agency. The symposium attracted more than 200 industry experts, academics, and policy makers. Discussion topics included collateral and appraisal issues, underwriting standards, vendor model developments, subprime and other alternative mortgage product default modeling issues, as well as analysis of various aspects of ongoing loan modification programs.
The CFR hosted its annual Fall Workshop in December, which included three days of research paper presentations and discussions by FDIC staff. The workshop was attended by about 30 external academics and 30 FDIC staff.
In addition to conferences, workshops and symposia, 11 CFR working papers were completed and made public on topics including the costs associated with FDIC bank resolutions, the performance of the Basel II Advanced Internal Model Approach for setting regulatory capital requirements, new econometric methods to handle unit roots, executive compensation in bank holding companies, bank failures and the cost of systemic risk, the political economy associated with the recent bailout, and the role of speculation in creating volatility in the oil markets.
The Financial Stability Institute (FSI) and the BCBS partnered with IADI during IADI's 8th Annual Conference on September 23–24, 2009, at the Bank for International Settlements (BIS) in Basel, Switzerland, to present the Core Principles. More than 200 individuals representing over 100 organizations from more than 80 jurisdictions attended the conference. Participants included, among others, deposit insurers, financial supervisors, and central bankers. The conference was organized to further promote the Core Principles and contribute to their implementation and further development. The event featured presentations by internationally recognized experts Jaime Caruana, General Manager of the BIS; Nout Wellink, Chairman of the BCBS and President, De Nederlandsche Bank; Josef Tosovsky, Chairman of the FSI; William White, Chairman of the Economic and Development Review Committee, Organization for Economic Co-operation and Development; and David Hoelscher, Assistant Director, Monetary and Capital Markets Department, International Monetary Fund.
The FDIC's leadership in developing and implementing training seminars in partnership with IADI, the European Forum of Deposit Insurers (EFDI), and the Association of Supervisors of Banks of the Americas (ASBA) continued in 2009. The FDIC hosted and developed the core curriculum for IADI's executive training seminar on "Claims Management: Reimbursement of Insured Depositors." The FDIC co-sponsored with EFDI a conference on "Deposit Insurance Before and After a Systemic Crisis." The FDIC also delivered training in supervising operational risk under ASBA's training program in Latin America.
The FDIC has also provided leadership through its co-chairing of the BCBS's Cross-border Bank Resolution Group (CBRG), which published its final report and recommendations in March 2010. The CBRG was established in December 2007 under a mandate to analyze existing resolution policies, allocation of responsibilities and legal frameworks of relevant countries as a foundation to a better understanding of the potential impediments and possible improvements to cooperation in the resolution of cross-border banks. During the first half of 2008, the CBRG collected detailed descriptions of national laws and policies on the management and resolution of cross-border banks using an extensive questionnaire completed by countries represented on the Group. The CBRG used the questionnaire responses to identify the most significant potential impediments to the effective management and resolution of cross-border banks and an interim report was prepared in December 2008. Subsequent to the interim report, the Basel Committee asked the CBRG to expand its analysis to review the developments and processes of crisis management and resolutions during the financial crisis with specific reference to case studies of significant actions by relevant authorities, which included the failures of Lehman Brothers, Dexia, Fortis, and the Icelandic banks. In response to this direction and building on this initial stock take, the CBRG provided the Basel Committee with a final report and recommendations to identify concrete and practical steps to improve cross-border crisis management and resolutions. The report and recommendations have been coordinated with and seek to complement the work of the FSB by providing practicable detailed approaches to implement the FSB's Principles for Cross-border Cooperation on Crisis Management of April 2, 2009.
Throughout 2009, the FDIC has provided support to the FSB through its work on the Cross-border Crisis Management Working Group chaired by Paul Tucker. This group has sought to implement the high-level Principles for Cross-border Cooperation on Crisis Management of April 2, 2009. These principles include a commitment to cooperate by the relevant authorities, including supervisory agencies, central banks and finance ministries, both in making advanced preparations for dealing with financial crises and in managing them. They also commit national authorities from relevant countries to meet regularly alongside core colleges to consider together the specific issues and barriers to coordinate action that may arise in handling severe stress at specific firms, to share information where necessary and possible, and to ensure that firms develop adequate contingency plans. The FSB principles cover practical and strategic ex ante preparations and set out expectations for how authorities will relate to one another in a crisis. They draw upon recent and earlier experiences of dealing with cross-border firms in crisis, including the 2001 G10 Joint Taskforce Report on the Winding Down of Large and Complex Financial Institutions, and the 2008 European Union Memorandum of Understanding on Financial Stability. Currently this group is preparing detailed analysis of obstacles to recovery and resolution planning, which will be presented to the G20 in November 2010.
June marked the two-year anniversary of the secondment program agreed upon between the Financial Services Volunteer Corps (FSVC) and the FDIC to place one or more FDIC staff members full-time in FSVC's Washington, DC, office. The projects in 2009 included an in-depth review of bank supervisory practices at the Bank of Albania; a series of commentaries and consultations to assist the Central Bank of Egypt in creating an appropriate and effective approach in the new area of retail bank supervision; adapting FDIC courses for the first time to a format streamlined and relevant for examiners at the Reserve Bank of Malawi, the Banque d'Algerie, and the Central Bank of Egypt; and designing and participating in FSVC's first-ever training and consultations with the Central Bank of Libya and the Central Bank of Iraq on essential bank supervision topics.
The FDIC deepened its key relationship with China by participating in the fourth annual U.S.-China Banking Supervisor's Bilateral Conference that was held at the Federal Reserve in December. The conference addressed approaches and policies with respect to macroprudential supervision; cross-border supervisory cooperation; regulatory reform; and consumer protection. The FDIC has also strengthened its relationship with China by signing an Appendix to the Supervisory Memorandum of Understanding between the FDIC and the China Banking Regulatory Commission on May 26, 2010. The Appendix covers issues relating cross-border contingency planning and the resolution of troubled institutions within China and the United States.
Recognizing India's rising economic role, the FDIC participated in the U.S.-India Finance and Economic Forum hosted by the Indian Ministry of Finance in December in New Delhi, India. The meeting brought together all financial sector regulators from the two countries to discuss a variety of topics, including deposit insurance, banking sector developments, capital and commodities markets, insurance, and financial education. The FDIC shared its responses during the current economic crisis and its view on the value of deposit insurance in a crisis, as well as its efforts in financial education and economic inclusion.
During 2009, FDIC staff shared its expertise with a wide range of individuals from developing and emerging economies as well as from developed economies, with the goal of enhancing capacity in deposit insurance, supervision, and resolutions. During the year, the FDIC hosted 67 individual visits with a total of more than 450 foreign visitors from over 30 countries. The FDIC's response to the financial crisis, U.S. regulatory restructuring options, and resolution methods were frequently discussed during these visits. In addition, two FDIC staff members provided technical assistance through the FSVC on 15 missions covering 12 countries. In November, FDIC staff provided training to 32 Latin American bank supervisors in the supervision of operational risk in Panama as part of ASBA's continental training program. Also, through the FDIC's Corporate University Examiner training program and the State Department's Anti-Money Laundering/Counter-Financing of Terrorism training program, the FDIC provided training to 146 students from 20 countries. Additionally, the FDIC was able to provide deposit insurance claims management training through the IADI Executive Training Program to 128 representatives from over 50 countries. In total, these efforts resulted in the FDIC's engagement with over 560 representatives from 56 emerging or developing markets.
Complex Financial Institution Program
The program increased its on-site presence at the eight large complex institutions, as designated by the FDIC Board of Directors, to assess risk, monitor liquidity, and participate in targeted reviews with the primary federal regulators. Standardized liquidity, and reporting processes are also in place at select large and problem institutions. Off-site monitoring has intensified with weekly reporting on high-risk banks with total assets of $5 billion or greater.
The Large Insured Depository Institution (LIDI) Program remains the primary instrument for off-site monitoring of insured depository institutions with $10 billion or more in total assets, or under this threshold at regional discretion. The LIDI Program continues to provide a comprehensive process to standardize data capture and reporting through nationwide comprehensive quantitative and qualitative risk analysis of large and complex institutions. As of December 31, 2009, the LIDI Program encompassed 109 institutions with total assets of over $10 trillion. In order to enhance large bank oversight, the LIDI Program was refined to better quantify risk to the insurance fund in all large banks. This was accomplished, in collaboration with other divisions and offices, through the implementation of the LIDI Scorecard. The LIDI Scorecard is designed to weigh key risk areas and provide a risk ranking and measurement system that compares insured institutions on the basis of both the probability of failure and exposure to loss at failure. The comprehensive LIDI Program is essential to effective large bank supervision by capturing information on the risks and utilizing that information to best deploy resources to high-risk areas, determine the need for supervisory action, and support insurance assessments and resolution planning.
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