Managing the Crisis: The FDIC and RTC
Experience Chronological Overview: Chapter Twenty—1997
Acting Chairman Andrew C. Hove is quoted in the FDIC’s 1997
Annual Report as stating, “The FDIC spent much of 1997 preparing for a new financial
world being shaped by consolidation and technical change. Our freedom to
focus on the future was, in large part, a reflection of the extraordinary
healthy state of the banking and thrift industries. Low and stable interest
a growing economy, gave both industries the opportunity to register record
profits in 1997.”.
Fund Balance as a Percent of Insured Deposits
Fund Balance as a Percent of Insured Deposits
one SAIF institution failure in 1996.
*Losses for all resolutions occurring in this calendar year have
been updated through 12/31/03. The loss amounts on open receiverships
are routinely adjusted with updated information from new appraisals
and asset sales, which ultimately affect projected recoveries.
Source: FDIC, 1997
Annual Report and Reports from FDIC Division of Finance and FDIC
Division of Research and Statistics.
On January 16, experts
from around the country gathered at a FDIC-sponsored symposium, History
of the Eighties – Lessons for the Future, to
examine the causes of the crisis in the savings & loan and the banking
industry during the 1980s and early 1990s.
On January 29, the
FDIC became the first federal banking agency to issue examination
procedures on electronic banking and associated risks to its staff.
The FDIC also
provided the examination guidance to financial institutions, assisting
them in the early development of their electronic banking systems.
On April 28, the
FDIC announced a series of seminars to educate bankers about its
new examination procedures for the sale of non-deposit investment
products, such as mutual
funds and annuities.
On May 9, the Federal
Financial Institutions Examination Council issued guidance on
the activities necessary for insured financial institutions to
make computer systems
capable of recognizing dates in the Year 2000 and beyond. Unless
the computers were capable of distinguishing 2000 from 1900,
the institutions faced
substantial risks from faulty accounting and recordkeeping to system
On June 1, Andrew
C. Hove, Jr., became Acting Chairman of the FDIC for the third time,
succeeding Ricki Helfer, who left the Corporation after more than
two and a half years.
On July 30, Acting
Chairman Hove told Congress that FDIC-supervised banks are generally
aware they face serious disruptions if their computer systems
are not modified
to handle transactions starting January 1, 2000. The FDIC monitored
the situation closely and took supervisory and enforcement action,
did not address the problem.
On November 17,
the FDIC and the Georgia Department of Banking and Finance jointly
issued cease and desist orders against three affiliated Georgia
banks in the
government’s first enforcement actions to address Year 2000 compliance
in the banking industry.
On November 21,
the only commercial bank failure of 1997 occurred, marking 1997 as
the first year since 1972 with
only one commercial bank failure. In 1997, there were no insured
failures, the first year without a thrift failure since 1959.
the FDIC had approved two applications for banks that plan to
operate solely through the Internet or other electronic means.
The U.S. economy roared
forward during 1997, as GDP advanced by a whopping 6.5 percent, and
unemployment fell by 60 basis points to 4.7 percent. The number of
employed persons rose
by 2,833,000 or 2.2 percent. While new home sales increased a healthy
6.5 percent, housing starts was virtually unchanged. Office vacancy
the biggest news in the real estate sector during 1997, plummeting
by 230 basis points from 12 percent to 9.7 percent. The discount rate
at 5 percent, and the 30-year mortgage rate fell by 63 basis points
to 7.51 percent.20-1
It was a good year for commercial banks as returns on equity and assets
increased. In fact, the return on assets reaching another new high. Due to
the strong economy, bank loans increased by 8.25 percent, and loan losses
remained low. Although banks earned lower rates on interest earning assets
and paid more for liabilities, increased efficiency and higher fee income
offset these costs. Stock prices overall matched those of the broader market.
Although in the fourth quarter, stock prices were ‘buffeted’ because
of concerns over economic problems in Asia.
Banks earned $59.2 billion; this is up 12.75 percent from 1996. Assets
grew by 9.25 percent; the fastest growth in more than a decade. Total bank
equity grew by10.25 percent. Securities that had been unchanged for last
couple of years, expanded 8.75 percent. Non-interest income passed the
$100 billion mark to $105.7 billion (up $10.5 billion in 1996). The net
interest margin declined to 4.21 percent (from 4.27 percent in 1996). This
is the fifth consecutive year it has declined. Net interest income as a
percentage of average assets declined 6 basis points because of a decline
in net interest margin. Non-interest income increased by 5 basis points.
Commercial and Industrial loans expanded by 12.25 percent. This is the
second largest increase in 17 years. Non-current loans fell by $659 million.
Commercial real estate loans increased by more than 9.75 percent. Home
mortgages secured by first liens also expanded by 8.75 percent.
Bank core deposits grew 4.5 percent and savings accounts continued to
expand rapidly because of the increased use of ‘sweep’ programs.
In June, most of the remaining legal restrictions on interstate mergers
were removed and many bank holding companies combined subsidiary banks
that had been operating in different regions. Mergers accounted for 599
commercial banks absorptions, and 190 of these were in interstate mergers.
By the end of the year, the largest 100 banks accounted for two-thirds
of bank assets.
An Asian financial crisis primarily affected the trading income of the
ten largest banks in America. The Asian crisis began when the Thai baht
dropped sharply and the Thai authorities no longer defended the baht’s
peg to the dollar. In response, other East Asian economies experienced
downward pressure on their currencies and equity prices and there was an
upward pressure on interest rates. The crisis quickly spread to Korea and
other countries as markets in Thailand, Indonesia, and Korea were turbulent
At end of 1997, there were 10,950 financial institutions in the United
States and 92 institutions on the problem bank list.20-3 Table 20-3 shows
the number and total assets of FDIC insured institutions, as well as their
profitability as of the end of 1997.
Open Financial Institutions Insured by FDIC
($ in Billions)
During 1997, the FDIC resolved only one institution, the fewest
in one year since 1972. Southwest Bank, Jennings, Louisiana, which was insured
by the BIF, was closed by the state banking commissioner on November 21, 1997.
It had total deposits of $27.5 million and total assets of $27.9 million.
The FDIC was able to find a bank to assume all of the bank’s deposits
and $20 million of its assets.
A more recent estimate of losses per transaction type is shown in Table
Estimated Losses by FDIC Transaction Type ($ in Millions)
as of 12/31/03
Losses as a
Percent of Assets
for all resolutions occurring in this calendar year have been updated
through 12/31/03. The loss amounts on open receiverships are routinely
adjusted with updated information from new appraisals and asset
sales, which ultimately affect projected recoveries.
Back to Table
Source: Reports from FDIC Website – Historical Statistics
Payments to Depositors and Other Creditors
the one financial institution that failed in 1997, deposits totaled $27.5 million
in 2,000 deposit accounts. Dividends paid on all active receiverships totaled
almost $5.6 billion in 1997.
There have been a total of 2,193 20-4 insured financial institution resolutions
since the FDIC began operations in 1934. Of this total, 1,449 were P&A
transactions, 141 were open bank assistance transactions, and 603 were
deposit payoff transactions.
Total disbursements by the FDIC since January 1, 1934, have amounted to
$106.6 billion. Of that amount, actual and projected recoveries are anticipated
to be approximately $69.5 billion, which equates to a projected loss of
$37.1 billion to the BIF/SAIF funds.
the beginning of 1997, the FDIC held $8.7 billion in assets from failed institutions.
That included $3.8 billion in BIF assets, $36 million in SAIF assets, $476 million
in FSLIC Resolution Fund (FRF) assets, and $4.4 billion in Resolution Trust
Corporation (RTC) assets. During the year, the FDIC acquired an additional $26
million in assets from one bank failure. The FDIC collected $3.6 billion during
the year, and the ending balance for assets in liquidation was $4.1 billion,
a reduction of $4.6 billion. Of the $4.1 billion, $1.7 billion was assets in
liquidation for BIF, $17 million for SAIF, $169 million for FRF, and $2.2 billion
During 1997, the FDIC sold real estate properties for a total of $321
million, yielding a recovery of 102 percent of average appraised value.
More than 23,207 loans and other assets totaling $1.5 billion in book value
were sold through asset marketing efforts, with net sales proceeds during
1997 representing 111 percent of appraised value.
The FDIC Affordable Housing Disposition Program sold 37 multifamily and
25 single-family properties consisting of 1,755 units for $9.8 million.
Since 1990, the FDIC and RTC affordable housing programs had cumulative
sales of more than 125,000 affordable housing units for $18 billion. In
addition, 30 state housing agencies and nonprofit organizations, acting
under a memorandum of understanding with the FDIC, monitored 93,409 multifamily
rental units to ensure that the purchasers were making units available
at adjusted rents as specified in the purchase agreements.
Table 20-4 shows the FDIC’s assets in liquidation and Chart 20-1
shows the asset mix.
FDIC End of the Year Assets in Liquidation ($ in Billions*)
The BIF grew to $28.3 billion by
December 31, 1997. BIF-insured deposits grew at
rate and the fund’s reserve ratio totaled 1.38 percent. The
balance of the SAIF increased to $9.4 billion, and SAIF-insured
deposits grew at a slightly slower pace, to $690 billion at the
end of 1997.
As a result, the reserve ratio of the SAIF edged upward to 1.36
percent. The near-term prospects for both insurance funds remained
and investment income was expected to be sufficient to meet expenses.
The Corporation continued to shrink the size of its workforce in
1997 due to a further decline in workload. Total FDIC staffing
in 1997 fell by approximately
14.8 percent. Staffing for the Division of Resolutions and Receiverships
(DRR), which liquidates
the assets of failed institutions, fell by over 39.9 percent during
the year. Chart 20-2 shows the staffing levels for the past five
DRR staffing reductions were accomplished primarily through the expiration
of term and temporary appointments and by consolidating field liquidation
operations. DRR operations and related Legal Division and other support
activities in San Francisco, New York, Chicago, Atlanta, and Franklin,
MA, were consolidated into other offices during the year. This was
part of a three-year phased consolidation plan announced the previous
year. DRR field operations are expected to be fully consolidated into
a single site in Dallas by year-end 1999. In addition, the Division
of Finance’s field financial activities were consolidated in
Dallas in 1997, and three Division of Supervision (DOS) field offices
and a Division of Compliance and Consumer Affairs (DCA) satellite
office were closed.
As a result of the buyout programs initiated in 1995 and 1996,
a total of 379 employees left the Corporation during 1997. Another
87 permanent employees elected buyouts in 1997 in lieu of being
reassigned to other areas of the country. In late 1997, the Corporation
announced that new buyout and early retirement opportunities
would be available during 1998 for selected employees in overstaffed
divisions and offices.
20-1: Bureau of Labor and Statistics, Department of Labor; Bureau of Economic Analysis, Department of Commerce; Housing Market Statistics, National Association of Home Builders; and Federal Home Loan Mortgage Corporation. Back to Text
20-2: Federal Reserve Bulletin Volume 84, Number 6, June 1998.Back to Text
20-3: FDIC Quarterly Banking Profile, Fourth Quarter 1997. Back to Text
Beginning with the 1997 Annual Report, the number of financial institutions
listed in the open bank assistance transactions column for 1988 was changed
from 21 to 80 and the total number of insured financial institution resolutions
column was changed from 221 to 280 to reflect that one assistance transaction
encompassed 60 institutions. Also, certain 1982, 1983, 1989, and 1992 resolutions
previously reported in either the deposit payoff or P&A transactions categories
were reclassified. Back to Text