The Federal Deposit Insurance Corporation
spent much of 1997 preparing for a new financial world being shaped by consolidation and
technological change. In previous years, as geographic and other barriers fell, it had
became increasingly clear that we had to alter many of our ways of doing business
if we were to continue to meet our responsibilities as a bank supervisor and the insurer
of the publics deposits. By the end of the year, we had achieved a number of important
objectives that will enable us to take a more dynamic approach to our mission.
In 1997, the Corporation implemented several programs to improve our risk-assessment
capabilities. Our safety and soundness examiners began using the revised Uniform Financial
Institutions Rating System, a new system of risk-focused examination modules; and new
examination procedures that assess nondeposit investment products and electronic banking.
Acting Chairman Andrew C. Hove, Jr.
The revised rating system emphasizes the quality of risk-management practices at an
individual institution and explicitly adds "sensitivity to market risk" as a
sixth component in rating institutions.
Our new approach to safety and soundness examinations, which was fully implemented in
October, refines the
examination process by dividing tasks into a series of diagnostic modules that help
identify a bank's greatest risks. The approach assists examiners in structuring
examinations that are appropriate to the risks the individual institution presents. The
approach focuses on a bank's risk-management practices, thus allowing examiners to
look beyond the static condition of a bank to how well it can respond to changing market
conditions, given its particular risk profile. Concurrently, the Examiner Laptop Visual
Information System (ELVIS), software that is an automated version of the diagnostic
modules, helps to organize data and comments and to generate examination workpapers. These
two developments, in turn, enable the Corporation to automate the preparation of the
entire examination report, which will occur in 1998.
Our new procedures for nondeposit investment products enable examiners to evaluate bank
sales of products such as mutual funds and annuities to retail customers and to identity any
safety and soundness concerns. In conjunction with the new procedures, a new tracking
system was developed to capture the results from examinations and to provide analysis of
During the year, the Corporation took a leading role in recognizing and responding to
electronic banking developments. In 1997, we became the first of the federal bank
supervisors to develop and publish electronic banking examination guidelines. These
procedures focus on safety and soundness. We also began field-testing more technical work
programs that evaluate the safety of various operating systems and firewalls. General
distribution and use of these work programs will begin early in 1998.
In April 1997, the Corporation reorganized the structure and risk-assessment programs of
its regional offices to accommodate interstate banking and consolidation. A "case
manager" program consolidated the supervision of related
institutions under one FDIC regional office
regardless of where the institutions operate. This new program more closely matches the
level of regulatory oversight with the level of risk an organization poses to the deposit
insurance fund. It also strengthens the Corporation's enforcement of an
institution's compliance with fair lending, community reinvestment and other consumer
In parallel with automating safety-and-soundness supervision, the Corporation during the
year developed or began developing automated programs for compliance examinations. These
programs will help examiners target potential risk areas for a more detailed review. One
example is our Community Reinvestment Act Mapping and Analysis System, which integrates
demographic, loan and economic information from a variety of sources.
Our freedom to focus on the future was, in large part, a reflection of the extraordinarily
healthy state of the banking and thrift industries. Low and stable interest rates and a
growing economy gave both industries the opportunity to register record profits in 1997.
Commercial bank earnings totaled $59.2 billion in 1997, up more than 13 percent from the
previous year. The return on assets (ROA) for the industry was 1.23 percent, the highest
annual rate reported in the 64-year history of the Corporation. One commercial bank failed
during 1997, the first year with only one commercial bank failure since 1972. Insured
savings institutions reported total earnings of $8.8 billion in 1997the first time
industry earnings exceeded $8 billion. The thrift industry's ROA rose to 0.93
percent, the highest annual rate since 1946. No insured savings institutions failed in
1997, the first year without a thrift failure since 1959.
The number of commercial banks on the FDIC's "Problem List" declined from
82 to 71 during the year, while the total of thrifts on the list declined from 35 to 21.
At year-end, problem institutions held $7.2 billion in assets.
The extraordinary earnings figuresand the lack of bank failuresenabled the
insurance funds to grow. At year-end, the balance in the Bank Insurance Fund was $28.3
billion, a 5.4 percent increase over the year-end 1996 balance of $26.9 billion.
(BIF-insured deposits grew 2.4 percent in 1997). As a result of the strength of the
industry, 19-out-of-20 BIF-insured institutions paid no insurance premium during 1997.
The balance of the Savings Association Insurance Fund at year-end was $9.4 billion, a 5.6
percent increase over 1996 (SAIF-insured deposits grew 1 percent in 1997). About
9-out-of-10 SAIF-insured institutions paid no insurance premium during 1997.
These conditionsin the industry and of the insurance fundscontrast greatly
with the conditions at the time I came to the Corporation in 1990. Former Chairman L.
William Seidman wrote of that year: "Entering 1990, it was clear to everyone
associated with the FDIC that it would be a very difficult year for the agency. We would
struggle with mounting problems in the banking industry, particularly in real estate
portfolios. We would face the prospect of additional losses to the Bank Insurance Fund. We
would have our first full year addressing the savings and loan industry problems through
the operation of the Resolution Trust Corporation and as back-up supervisor of savings
associations. As the year unfolded, 1990 presented difficulties and challenges far beyond
anyone's expectations." The following year, the BIF reported a negative balance.
Things changebut as it has shown again and again, the Corporation can change with
On June 1,1997, I assumed the duties of Acting Chairman againfor the third
timeupon the resignation of Ricki Helfer as Chairman. I have always considered
heading the agency as an honor and a dutyI would not seek the office, but I did not
shirk the responsibility when it came. As a banker for 30 years, I saw how federal deposit
insurance provides many people with the only real assurance in the financial markets that
they will ever know. Here at the Corporation, I saw the difference that it made in the
banking crisis during the early 1990s. I know first-hand that America banks on deposit
insurance. The threats to financial stability have changed over time, too, but the FDIC
has been there to protect the savings of the public for 64 years. I hope that all the men
and women who have worked to achieve this accomplishment are as proud of it as I am, and
that they are as confident as I am that the Corporation will be just as successful in the
new financial world that consolidation and technology are now creating.