The U.S. Congress created the Federal Deposit Insurance Corporation (FDIC) through
enactment of the Banking Act of 1933. The FDIC was created to restore and maintain public
confidence in the nations banking system.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) was
enacted to reform, recapitalize, and consolidate the federal deposit insurance system. The
FIRREA created the Bank Insurance Fund (BIF), the Savings Association Insurance Fund
(SAIF), and the FSLIC Resolution Fund (FRF). It also designated the FDIC as the
administrator of these funds. All three funds are maintained separately to carry out their
The BIF and the SAIF are insurance funds responsible for protecting insured depositors
in operating banks and thrift institutions from loss due to institution failures. The FRF
is a resolution fund responsible for winding up the affairs of the former Federal Savings
and Loan Insurance Corporation (FSLIC) and liquidating the assets and liabilities
transferred from the former Resolution Trust Corporation (RTC).
Pursuant to FIRREA, an active institutions insurance fund membership and primary
federal supervisor are generally determined by the institutions charter type.
Deposits of BIF-member institutions are generally insured by the BIF; BIF members are
predominantly commercial and savings banks supervised by the FDIC, the Office of the
Comptroller of the Currency, or the Federal Reserve. Deposits of SAIF-member institutions
are generally insured by the SAIF; SAIF members are predominantly thrifts supervised by
the Office of Thrift Supervision.
In addition to traditional banks and thrifts, several other categories of institutions
exist. The Federal Deposit Insurance Act (FDI Act), Section 5(d)(3), provides that a
member of one insurance fund may, with the approval of its primary federal supervisor,
merge, consolidate with, or acquire the deposit liabilities of an institution that is a
member of the other insurance fund without changing insurance fund status for the acquired
deposits. These institutions with deposits insured by both insurance funds are referred to
as "Oakars" or Oakar banks. The FDI Act, Section 5(d)(2)(G), allows SAIF-member
thrifts to convert to a bank charter and retain their SAIF membership. These institutions
are referred to as "Sassers." The Home Owners Loan Act (HOLA), Section
5(o), allows BIF-member banks to convert to a thrift charter and retain their BIF
membership. These institutions are referred to as "HOLAs" or HOLA thrifts.
Other Significant Legislation
The Competitive Equality Banking Act of 1987 established the Financing Corporation
(FICO) as a mixed-ownership government corporation whose sole purpose was to function as a
financing vehicle for the FSLIC.
The Omnibus Budget Reconciliation Act of 1990 (1990 OBR Act) and the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA) made changes to the FDICs
assessment authority (see Note 8) and borrowing authority. The FDICIA also requires the
FDIC to: 1) resolve troubled institutions in a manner that will result in the least
possible cost to the deposit insurance funds and 2) maintain the insurance funds at 1.25
percent of insured deposits or a higher percentage as circumstances warrant.
The Deposit Insurance Funds Act of 1996 (DIFA) was enacted to provide for: 1) the
capitalization of the SAIF to its designated reserve ratio (DRR) of 1.25 percent by means
of a one-time special assessment on SAIF-insured deposits; 2) the expansion of the
assessment base for payments of the interest on obligations issued by the FICO to include
all FDIC-insured banks and thrifts; 3) beginning January 1, 1997, the imposition of a FICO
assessment rate on BIF-assessable deposits that is one-fifth of the rate for
SAIF-assessable deposits through the earlier of December 31,1999, or the date on which the
last savings association ceases to exist; 4) the payment of the annual FICO interest
obligation of approximately $790 million on a pro rata basis between banks and thrifts on
the earlier of January 1, 2000, or the date on which the last savings association ceases
to exist; 5) authorization of BIF assessments only if needed to maintain the fund at the
DRR; 6) the refund of amounts in the BIF in excess of the DRR with such refund not to
exceed the previous semiannual assessment; and 7) the merger of the BIF and the SAIF on
January 1, 1999, if no insured depository institution is a savings association on that
date. Subsequently, Congress did not enact legislation during 1998 to either merge the BIF
and the SAIF or to eliminate the thrift charter.
Recent Legislative Initiatives
Congress continues to focus on legislative proposals to achieve modernization of the
financial services industry. Some of these proposals, if enacted into law, may have a
significant impact on the BIF and/or the SAIF. However, these proposals continue to vary
and FDIC management cannot predict which provisions, if any, will ultimately be enacted.
Operations of the BIF
The primary purpose of the BIF is to: 1) insure the deposits and protect the depositors
of BIF-insured banks and 2) resolve failed banks, including managing and liquidating their
assets. In addition, the FDIC, acting on behalf of the BIF, examines state-chartered banks
that are not members of the Federal Reserve System. The FDIC also provides assistance to
troubled banks and monitors compliance with the assistance agreements.
The BIF is primarily funded from the following sources: 1) interest earned on
investments in U.S. Treasury obligations and 2) BIF assessment premiums.
Additional funding sources are U.S. Treasury and Federal Financing Bank (FFB)
borrowings, if necessary. The 1990 OBR Act established the FDICs authority to borrow
working capital from the FFB on behalf of the BIF and the SAIF. The FDICIA increased the
FDICs authority to borrow for insurance losses from the U.S. Treasury, on behalf of
the BIF and the SAIF, from $5 billion to $30 billion. The FDICIA also established a
limitation on obligations that can be incurred by the BIF, known as the maximum obligation
limitation (MOL). At December 31, 1998, the MOL for the BIF was $51.7
The VA, HUD and Independent Agencies Appropriations Acts of 1999 and 1998 appropriated
$34.7 million for fiscal year 1999 (October 1, 1998, through September 30, 1999) and $34
million for fiscal year 1998 (October 1, 1997, through September 30, 1998), respectively,
for operating expenses incurred by the Office of Inspector General (OIG). These Acts
mandate that the funds are to be derived from the BIF, the SAIF, and the FRF.
These financial statements pertain to the financial position, results of operations,
and cash flows of the BIF and are presented in accordance with generally accepted
accounting principles (GAAP). These statements do not include reporting for assets and
liabilities of closed banks for which the FDIC acts as receiver or liquidating agent.
Periodic and final accountability reports of the FDICs activities as receiver or
liquidating agent are furnished to courts, supervisory authorities, and others as
Use of Estimates
FDIC management makes estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from these
estimates. Where it is reasonably possible that changes in estimates will cause a material
change in the financial statements in the near term, the nature and extent of such changes
in estimates have been disclosed.
Cash equivalents are short-term, highly liquid investments with original maturities of
three months or less. Cash equivalents primarily consist of Special U.S. Treasury
Investments in U.S. Treasury Obligations
Investments in U.S. Treasury obligations are recorded pursuant to the provisions of the
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires that securities be
classified in one of three categories: held-to-maturity, available-for-sale, or trading.
Securities designated as held-to-maturity are intended to be held to maturity and are
shown at amortized cost. Amortized cost is the face value of securities plus the
unamortized premium or less the unamortized discount. Amortizations are computed on a
daily basis from the date of acquisition to the date of maturity. Beginning in 1997, the
BIF designated a portion of its securities as available-for-sale. These securities are
shown at fair value with unrealized gains and losses included in the fund balance.
Realized gains and losses are included in other revenue when applicable. Interest on both
types of securities is calculated on a daily basis and recorded monthly using the
effective interest method. The BIF does not have any securities classified as trading.
Allowance for Losses on Receivables From Bank Resolutions and
Assets Acquired From Assisted Banks and Terminated Receiverships
The BIF records a receivable for the amounts advanced and/or obligations incurred for
resolving troubled and failed banks. The BIF also records as an asset the amounts paid for
assets acquired from assisted banks and terminated receiverships. Any related allowance
for loss represents the difference between the funds advanced and/or obligations incurred
and the expected repayment. The latter is based on estimates of discounted cash recoveries
from the assets of assisted or failed banks, net of all estimated liquidation costs.
The FDIC is responsible for managing and disposing of the assets of failed institutions
in an orderly and efficient manner. The assets, and the claims against them, are accounted
for separately to ensure that liquidation proceeds are distributed in accordance with
applicable laws and regulations. Also, the income and expenses attributable to
receiverships are accounted for as transactions of those receiverships. Liquidation
expenses incurred by the BIF on behalf of the receiverships are recovered from those
Cost Allocations Among Funds
Operating expenses not directly charged to the funds are allocated to all funds
administered by the FDIC. Workload-based-allocation percentages are developed during the
annual corporate planning process and through supplemental functional analyses.
Postretirement Benefits Other Than Pensions
The FDIC established an entity to provide the accounting and administration of
postretirement benefits on behalf of the BIF, the SAIF, and the FRF. Each fund pays its
liabilities for these benefits directly to the entity. The BIFs unfunded net
postretirement benefits liability for the plan is presented in the BIFs Statements
of Financial Position.
Disclosure About Recent Accounting Standard Pronouncements
In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 132,
"Employers Disclosures about Pension and Other Postretirement Benefits."
The Statement standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable. Although changes in the BIFs
disclosures for postretirement benefits have been made, the impact is not material.
In June 1998, the FASB also issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Statement requires that all
derivatives be recognized either as assets or liabilities in the statements of financial
position and to measure those instruments at fair value. Based upon analysis, derivative
instruments of the BIF are immaterial to the financial statements.
In March 1998, the American Institute of Certified Public Accountants issued Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This Statement requires the development or purchase cost
of internal-use software to be treated as a capital asset. The FDIC adopted this Statement
effective January 1, 1998. This asset is presented in the "Property and equipment,
net" line item in the BIFs Statements of Financial Position (see Note 6).
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
The FDIC adopted SFAS No. 130 effective on January 1, 1997. Comprehensive income includes
net income as well as certain types of unrealized gain or loss. The only component of SFAS
No. 130 that impacts the BIF is unrealized gain or loss on securities classified as
available-for-sale, which is presented in the BIFs Statements of Financial Position
and the Statements of Income and Fund Balance.
Other recent pronouncements are not applicable to the financial statements.
The FDIC has designated the BIF as administrator of property and equipment used in its
operations. Consequently, the BIF includes the cost of these assets in its financial
statements and provides the necessary funding for them. The BIF charges the other funds
rental and service fees representing an allocated share of its annual depreciation
Prior to January 1, 1998, only buildings owned by the Corporation were depreciated. On
January 1, 1998, FDIC began capitalizing the development and purchase cost of internal-use
software in accordance with the requirements of SOP 98-1. The FDIC also began to
capitalize the cost of furniture, fixtures, and general equipment. These costs were
expensed in prior years on the basis that the costs were immaterial. The expanded
capitalization policy had no material impact on the financial position or operation of the
The Washington, D.C. office buildings and the L. William Seidman Center in Arlington,
Virginia, are depreciated on a straight-line basis over a 50-year estimated life. The San
Francisco condominium offices are depreciated on a straight-line basis over a 35-year
estimated life. Leasehold improvements will be capitalized and depreciated over the lesser
of the remaining life of the lease or the estimated useful life of the improvements, if
determined to be material. Capital assets depreciated on a straight-line basis over a
five-year estimated life include mainframe equipment; furniture, fixtures and general
equipment; and internal-use software. Personal computer equipment is depreciated on a
straight-line basis over a three-year estimated life.
The nature of related parties and a description of related party transactions are
disclosed throughout the financial statements and footnotes.
Reclassifications have been made in the 1997 financial statements to conform to the
presentation used in 1998.
Cash received by the BIF is invested in U.S. Treasury obligations with maturities
exceeding three months unless cash is needed to meet the liquidity needs of the fund. The
BIFs current portfolio includes securities classified as held-to-maturity and
available-for-sale. The BIF also invests in Special U.S. Treasury Certificates that are
included in the "Cash and cash equivalents" line item.
For 1998, the gross realized gain on securities classified as available-for-sale was
$224 thousand. The gain is included in the "Other revenue" line item. Proceeds
from the sale were $186 million. The cost of the securities sold was determined on a
specific identification basis. There were no sales in 1997.
In 1998, the unamortized premium, net of unamortized discount, was $720 million. In 1997,
the unamor- tized premium, net of the unamortized discount, was $589 million.
The bank resolution process takes different forms depending on the unique facts and
circumstances surrounding each failing or failed institution. Payments for institutions
that fail are made to cover obligations to insured depositors and represent claims by the
BIF against the receiverships assets. There were three bank failures in 1998 and one
in 1997, with assets of $370 and $26 million, respectively.
As of December 31, 1998 and 1997, the FDIC, in its receivership capacity for
BIF-insured institutions, held assets with a book value of $1.6 billion and $2.5 billion,
respectively (including cash and
miscellaneous receivables of $480 million and $1 billion at December 31, 1998 and 1997,
respectively). These assets represent a significant source of repayment of the BIFs
receivables from bank resolutions. The estimated cash recoveries from the management and
disposition of these assets that are used to derive the allowance for losses are based in
part on a statistical sampling of receivership assets. The sample was constructed to
produce a statistically valid result. These estimated recoveries are regularly evaluated,
but remain subject to uncertainties because of potential changes in economic conditions.
These factors could cause the BIFs and other claimants actual recoveries to
vary from the level currently estimated.
The BIF has acquired assets from certain troubled and failed banks by either purchasing
an institutions assets outright or purchasing the assets under the terms specified
in each resolution agreement. In addition, the BIF can purchase assets remaining in a
receivership to facilitate termination. The methodology to estimate cash recoveries from
these assets, which are used to derive the related allowance for losses, is the same as
that for receivables from bank resolutions (see Note 4).
The BIF recognizes revenue and expenses on these acquired assets. Revenue consists
primarily of interest earned on performing mortgages and commercial loans. Expenses are
recognized for the management and liquidation of these assets.
The BIF records an estimated liability and a loss provision for banks (including Oakar
and Sasser financial institutions) that are likely to fail, absent some favorable event
such as obtaining additional capital or merging, when the liability becomes probable and
The estimated liabilities for anticipated failure of insured institutions as of
December 31, 1998 and 1997, were $32 million and $11 million, respectively. The estimated
liability is derived in part from estimates of recoveries from the management and
disposition of the assets of these probable bank failures. Therefore, they are subject to
the same uncertainties as those affecting the BIFs receivables from bank resolutions
(see Note 4). This could affect the ultimate costs to the BIF from probable failures.
There are other banks where the risk of failure is less certain, but still considered
reasonably possible. Should these banks fail, the BIF could incur additional estimated
losses of about $204 million.
The accuracy of these estimates will largely depend on future economic conditions. The
FDICs Board of Directors (Board) has the statutory authority to consider the
estimated liability from anticipated failures of insured institutions when setting
Year 2000 Anticipated Failures
The BIF is also subject to a potential loss from banks that may fail if they are unable
to become Year 2000 compliant in a timely manner. In May 1997, the federal financial
institution regulatory agencies developed a program to conduct uniform reviews of all
FDIC-insured institutions Year 2000 readiness. The program assesses the five key
phases of an institutions Year 2000 conversion efforts: 1) awareness, 2) assessment,
3) renovation, 4) validation, and 5) implementation. The reviews classify each institution
as Satisfactory, Needs Improvement, or Unsatisfactory.
Year 2000 efforts of financial institutions and independent data
centers are considered "Satisfactory" if they exhibit acceptable performance in
all key phases of the Year 2000 project management process as set forth in the May 5,
1997, Federal Financial Institutions Examination Council (FFIEC) Interagency Statement on
the Year 2000 and subsequent guidance documents. Performance is satisfactory when project
weaknesses are minor in nature and can be readily corrected within the existing project
management framework. The institutions remediation progress to date meets or nearly
meets expectations laid out in its Year 2000 project plan. Senior management and the board
recognize and understand Year 2000 risk, are active in overseeing institutional corrective
efforts, and have ensured that the necessary resources are available to address this risk
Year 2000 efforts of financial institutions and independent
data centers are evaluated as "Needs Improvement" if they exhibit less than
acceptable performance in all key phases of the Year 2000 project management process.
Project weaknesses are evident, even if deficiencies are correctable within the existing
project management framework. The institutions remediation progress to date is
behind the schedule laid out in its Year 2000 project plan. Senior management or the board
is not fully aware of the status of Year 2000 correction efforts, may not have committed
sufficient financial or human resources to address this risk, or may not fully understand
Year 2000 implications.
Year 2000 efforts of financial institutions and independent data
centers are considered "Unsatisfactory" if they exhibit poor performance in any
of the key phases of the Year 2000 project management process. Project weaknesses are
serious in nature and are not easily corrected within the existing project management
framework. The institutions remediation progress is seriously behind the schedule
laid out in its Year 2000 project plan. Senior management and the board do not understand
or recognize the impact that the Year 2000 will have on the institution. Management or
the board commitment is limited or their oversight activities are not evident.
Based on data updated through April 30, 1999, 10,159 institutions with $6.4 trillion in
assets have received a Satisfactory rating, 216 institutions with $80 billion in assets a
Needs Improvement rating, and 21 institutions with $1 billion in assets an Unsatisfactory
rating (data includes BIF- and SAIF-insured institutions). Although the initial results of
the uniform reviews are encouraging, the Year 2000 issue is unprecedented. Therefore, it
is difficult to determine which institutions, if any, will ultimately fail. Further,
estimates of the cost of resolving Year 2000 failures are complicated by the uncertain
nature of technological disruptions and the associated impact on the BIF, if any. Failures
caused solely by liquidity problems would pose substantially less exposure to the BIF.
Year 2000 failures could conceivably be such liquidity failures. The possibility that any
such failure would occur is quite speculative in view of actions taken by the Federal
Reserve Board to ensure sufficient liquidity and currency to meet the cash needs of
Failures could occur because of the familiar capital insolvency (liabilities exceeding
assets) if a substantial number of bank borrowers were unable to repay loans due to their
own lack of preparedness for the Year 2000. Insured banks are required to be aware of the
measures taken by key customers to protect themselves against adverse impact from the
advent of Year 2000, and compliance with such requirements is monitored via the regulatory
examination program. The extent to which insured institutions, if any, ultimately
experience this type of failure is not measurable.
Financial institutions are required to design a Year 2000 contingency plan to mitigate
the risks associated with the failure of systems at critical dates (Business Resumption
Contingency Planning). A business resumption contingency plan is designed to provide
assurance that core business functions will continue if one or more systems fail.
In order to assess the exposure to the BIF from Year 2000 potential failures, the FDIC
evaluated all information relevant to such an assessment, to include Year 2000 on-site
examination results, institution capital levels and supervisory examination composite
ratings, and other institution past and current financial characteristics. As a result of
this assessment, we conclude that, as of December 31, 1998, there are no probable losses
to the BIF from Year 2000 failures. Further, any reasonably possible losses from Year 2000
failures were not estimable. During the remainder of 1999, the regulatory agencies will
continue their Year 2000 reviews and the FDIC will continue to assess this potential
The estimated liabilities for assistance agreements resulted from several large
transactions where problem assets were purchased by an acquiring institution under an
agreement that calls for the FDIC to absorb credit losses and pay related costs for
funding and asset administration, plus an incentive fee.
The BIF records an estimated loss for unresolved legal cases to the extent those losses are
considered probable and reasonably estimable. In addition to the amount recorded as probable,
the FDIC has determined that losses from unresolved legal cases totaling $178 million are reasonably possible.
Asset Securitization Guarantees
As part of the FDICs efforts to maximize the return from the sale or disposition
of assets from bank resolutions, the FDIC has securitized some receivership assets. To
facilitate the securitizations, the BIF provided limited guarantees to cover certain
losses on the securitized assets up to a specified maximum. In exchange for backing the
limited guarantees, the BIF received assets from the receiverships in an amount equal to
the expected exposure under the guarantees. At December 31, 1998 and 1997, the BIF had an
estimated liability under the guarantees of $7 million and $28 million, respectively. The
maximum off-balance-sheet exposure under the limited guarantees is presented in Note 12.
The 1990 OBR Act removed caps on assessment rate increases and authorized the FDIC to
set assessment rates for BIF members semiannually, to be applied against a members
average assessment base. The FDICIA: 1) required the FDIC to implement a risk-based
assessment system; 2) authorized the FDIC to increase assessment rates for BIF-member
institutions as needed to ensure that funds are available to satisfy the BIFs
obligations; 3) required the FDIC to build and maintain the reserves in the insurance
funds to 1.25 percent of insured deposits; and 4) authorized the FDIC to increase
assessment rates more frequently than semiannually and impose emergency special
assessments as necessary to ensure that funds are available to repay U.S. Treasury
borrowings. In May 1995, the BIF reached the FDICIA mandated capitalization level of 1.25
percent of insured deposits.
The DIFA (see Note 1) provided, among other things, for the elimination of the
mandatory minimum assessment formerly provided for in the FDI Act. It also provided for
the expansion of the assessment base for payments of the interest on obligations issued by
the FICO to include all FDIC-insured institutions (including banks, thrifts, and Oakar and
Sasser financial institutions). On January 1, 1997, BIF-insured banks began paying a FICO
assessment. The FICO assessment rate on BIF-assessable deposits is one-fifth the rate for
SAIF-assessable deposits. The annual FICO interest obligation of
approximately $790 million will be paid on a pro rata basis between banks and thrifts on
the earlier of January 1, 2000, or the date on which the last savings association ceases
The FICO assessment has no financial impact on the BIF. The FICO assessment is separate
from the regular assessments and is imposed on banks and thrifts, not on the insurance
funds. The FDIC, as administrator of the BIF and the SAIF, is acting solely as a
collection agent for the FICO. During 1998 and 1997, $341 million and $338 million
respectively, were collected from banks and remitted to the FICO.
The FDIC uses a risk-based assessment system that charges higher rates to those
institutions that pose greater risks to the BIF. To arrive at a risk-based assessment for
a particular institution, the FDIC places each institution in one of nine risk categories,
using a two-step process based first on capital ratios and then on other relevant
information. The Board reviews premium rates semiannually. The assessment rate averaged
approximately 0.08 cents per $100 of assessable deposits for 1998 and 1997. On October 27,
1998, the Board voted to retain the BIF assessment schedule of 0 to 27 cents per $100 of
assessable deposits (annual rates) for the first semiannual period of 1999.
Provision for insurance losses was a negative $38 million and a negative $495 million
for 1998 and 1997, respectively. In 1998 and 1997, the negative provision resulted
primarily from decreased losses expected for assets in liquidation. The following chart
lists the major components of the negative provision for insurance losses.
Eligible FDIC employees (all permanent and temporary employees with appointments
exceeding one year) are covered by either the Civil Service Retirement System (CSRS) or
the Federal Employee Retirement System (FERS). The CSRS is a defined benefit plan, which
is offset with the Social Security System in certain cases. Plan benefits are determined
on the basis of years of creditable service and compensation levels. The CSRS-covered
employees also can contribute to the tax-deferred Federal Thrift Savings Plan (TSP).
The FERS is a three-part plan consisting of a basic defined benefit plan that provides
benefits based on years of creditable service and compensation levels, Social Security
benefits, and the TSP. Automatic and matching employer contributions to the TSP are
provided up to specified amounts under the FERS.
During 1998, there was an open season that allowed employees to switch from CSRS to
FERS. This did not have a material impact on BIF's operating expenses.
Although the BIF contributes a portion of pension benefits for eligible employees, it
does not account for the assets of either retirement system. The BIF also does not have
actuarial data for accumulated plan benefits or the unfunded liability relative to
eligible employees. These amounts are reported on and accounted for by the U.S. Office of
Personnel Management (OPM).
Eligible FDIC employees also may participate in a FDIC-sponsored tax-deferred savings
plan with matching contributions. The BIF pays its share of the employers portion of
all related costs.
The BIFs pro rata share of the Corporations liability to employees for
accrued annual leave is approx- imately $38.4 million and $35.7 million at December 31,
1998 and 1997, respectively.
On January 2, 1998, BIFs obligation under SFAS No. 106, "Employers
Accounting for Postretirement Benefits Other Than Pensions," for postretirement
health benefits was reduced when over 6,500 employees enrolled in the Federal Employees
Health Benefits (FEHB) Program for their future health insurance coverage. The OPM assumed
the BIFs obligation for postretirement health benefits for these employees at no
initial enrollment cost.
In addition, legislation was passed that allowed the remaining 2,600 retirees and
near-retirees (employees within five years of retirement) in the FDIC health plan to also
enroll in the FEHB Program for their future health insurance coverage, beginning January
1, 1999. The OPM assumed the BIFs obligation for postretirement health benefits for
retirees and near-retirees for a fee of $150 million. The OPM is now responsible for
postretirement health benefits for all employees and covered retirees. The FDIC will
continue to be obligated for dental and life insurance coverage for as long as the
programs are offered and coverage is extended to retirees.
OPMs assumption of the health care obligation constitutes both a settlement and a
curtailment as defined by SFAS No. 106. This conversion resulted in a gain of $201 million
to the BIF.
For measurement purposes, the per capita cost of covered health care benefits was
assumed to increase by an annual rate of 8.75 percent for 1998. Further, the rate was
assumed to decrease gradually each year to a rate of 7.75 percent for the year 2000 and
remain at that level thereafter.
The BIFs allocated share of the FDICs lease commitments totals $177.2
million for future years. The lease agreements contain escalation clauses resulting in
adjustments, usually on an annual basis. The allocation to the BIF of the FDICs
future lease commitments is based upon current relationships of the workloads among the
BIF, the FRF, and the SAIF. Changes in the relative workloads could cause the amounts
allocated to the BIF in the future to vary from the amounts shown below. The BIF
recognized leased space expense of $47.7 million and $43.6 million for the years ended
December 31, 1998 and 1997, respectively.
Asset Securitization Guarantees
As discussed in Note 7, the BIF provided certain limited guarantees to facilitate
securitization transactions. The table below gives the maximum off-balance-sheet exposure
the BIF has under these guarantees.
Concentration of Credit Risk
As of December 31, 1998, the BIF had $18.8 billion in gross receivables from bank
resolutions and $170 million in assets acquired from assisted banks and terminated
receiverships. An allowance for loss of $18 billion and $142 million, respectively, has
been recorded against these assets. The liquidating entities ability to make
repayments to the BIF is largely influenced by the economy of the area in which they are
located. The BIFs maximum exposure to possible accounting loss for these assets is
shown in the table below.
Other Off-Balance-Sheet Risk
As of December 31, 1998, deposits insured by the BIF totaled approximately $2.1
trillion. This would be the accounting loss if all depository institutions were to fail
and the acquired assets provided no recoveries.
Cash equivalents are short-term, highly liquid investments and are shown at current
value. The fair market value of the investment in U.S. Treasury obligations is disclosed
in Note 3 and is based on current market prices. The carrying amount of interest
receivable on investments, short-term receivables, and accounts payable and other
liabilities approximates their fair market value. This is due to their short maturities or
comparisons with current interest rates.
The net receivables from bank resolutions primarily include the BIFs subrogated
claim arising from payments to insured depositors. The receivership assets that will
ultimately be used to pay the
corporate subrogated claim are valued using discount rates that include consideration of
market risk. These discounts ultimately affect the BIFs allowance for loss against
the net receivables
from bank resolutions. Therefore, the corporate subrogated claim indirectly includes the
effect of discounting and should not be viewed as being stated in terms of nominal cash
Although the value of the corporate subrogated claim is influenced by valuation of
receivership assets (see Note 4), such receivership valuation is not equivalent to the
valuation of the corporate claim. Since the corporate claim is unique, not intended for
sale to the private sector, and has no established market, it is not practicable to
estimate its fair market value.
The FDIC believes that a sale to the private sector of the corporate claim would
require indeterminate, but substantial discounts for an interested party to profit from
these assets because of credit and other risks. In addition, the timing of receivership
payments to the BIF on the subrogated claim does not necessarily correspond with the
timing of collections on receivership assets. Therefore, the effect of discounting used by
receiverships should not necessarily be viewed as producing an estimate of market value
for the net receivables from bank resolutions.
The majority of the net assets acquired from assisted banks and terminated
receiverships (except real estate) is comprised of various types of financial instruments,
including investments, loans and accounts receivables. Like receivership assets, assets
acquired from assisted banks and terminated receiverships are valued using discount rates
that include consideration of market risk. However, assets acquired from assisted banks
and terminated receiverships do not involve the unique aspects of the corporate subrogated
claim, and therefore the discounting can be viewed as producing a reasonable estimate of
fair market value.
The FDIC, as administrator for the BIF, is conducting a corporate-wide effort to ensure
that all FDIC information systems are Year 2000 compliant. This means the systems must
accurately process date and time data in calculations, comparisons, and sequences after
December 31, 1999, and be able to correctly deal with leap-year calculations in 2000. The
Year 2000 Oversight Committee is comprised of FDIC division management that oversees the
Year 2000 effort.
The FDICs Division of Information Resources Management (DIRM) leads the internal
Year 2000 effort, under the direction of the Oversight Committee. DIRM used a five-phase
approach for ensuring that all FDIC systems and software are Year 2000 compliant. The five
The first phase of compliance focuses on defining the Year 2000 problem and gaining
executive-level support and sponsorship for the effort.
The second phase of compliance focuses on assessing the Year 2000 impact on the
Corporation as a whole.
The third phase of compliance focuses on converting, replacing or eliminating selected
platforms, applications, databases, and utilities, while modifying interfaces as
Platform is a broad term that encompasses computer hardware (including mainframe
computers, servers, and personal computers) and software (including computer languages and
operating systems). Utility programs, or "utilities," provide file management
capabilities, such as sorting, copying, comparing, listing and searching, as well as
diagnostic and measurement routines that check the health and performance of the system.
The fourth phase of compliance focuses on testing, verifying and validating converted
or replaced platforms, applications, databases, and utilities.
The fifth phase of compliance focuses on implementing converted or replaced platforms,
applications, databases, utilities, and interfaces.
The Awareness, Assessment, and Renovation phases are complete. The Validation phase is
scheduled to be completed during January 1999 when all production applications will be
validated for Year 2000 readiness. Implementation of the majority of production
applications in Year 2000 ready status will be completed by March 31, 1999. Validation and
implementation of new systems and modifications to existing systems will continue
Year 2000 Estimated Costs
Year 2000 compliance expenses for the BIF are estimated at $34.7 million and $1.6
million at December 31, 1998 and 1997, respectively. These expenses are reflected in the
"Operating expenses" line item of the BIFs Statements of Income and Fund
Balance. Future expenses are estimated to be $49 million. Year 2000 estimated future costs
are included in the FDICs budget.
Risks of Year 2000 Issues
The FDICs Division of Supervision has an ongoing aggressive initiative to assess
the BIFs supervised financial institutions for Year 2000 compliance. Other
BIF-insured institutions are being assessed by their respective regulatory agencies. The
BIF is subject to a potential loss from financial institutions that may fail as a result
of Year 2000 related issues. Refer to "Estimated Liabilities for: Anticipated Failure
of Insured Institutions - Year 2000 Anticipated Failures" (Note 7) for additional
No potential loss with internal system failure has been estimated due to the extensive
planning and validation that has occurred.
DIRM is currently developing a disaster recovery plan and contingency plans specific to
each mission-critical application.
Other divisions within the FDIC are working together to develop contingency plans to be
prepared if any FDIC-insured financial institution fails as a result of lack of Year 2000