Managing the Crisis: The FDIC and RTC
Experience Chronological Overview: Chapter Twenty One—1998
The conditions in the industry—and
the strength of the insurance funds—in 1998 gave the FDIC opportunity
to focus on three corporate priorities: Year 2000 readiness; emerging risks
facing insured institutions, and, therefore,
the insurance funds; and diversity in the workforce. Each in its way contributed
to the efforts to ensure that the FDIC remains the world’s leading deposit
Fund Balance as a Percent of Insured Deposits
Fund Balance as a Percent of Insured Deposits
for all resolutions occurring in this calendar year
have been updated through 12/31/03. The loss amounts on open receiverships
adjusted with updated information from new appraisals
and asset sales, which ultimately affect projected recoveries.
1998 Annual Report and Reports from FDIC Division of Finance and
Division of Research and Statistics.
On April 4,
FDIC Board member Eugene A. Ludwig’s tenure on the Board ended
with the expiration of his five-year term as Comptroller of
On April 29, a two-day
symposium, Managing the Crisis: The FDIC and RTC Experience, was
presented. Current and former FDIC and Resolution Trust Corporation
the strategies they used to resolve trouble banks and thrifts during
the financial crisis of the 1980s and 1990s. Between 1980 and 1994,
a total of 1,617 banks and 1,295 thrifts failed and were resolved.
as part of the symposium would soon rank among the most popular publications
in the FDIC history.
On May 26, Donna
Tanoue was sworn in as the 17th Chairman of the FDIC. Andrew C. Hove,
Jr., who had served as Acting Chairman since June 1997, resumed his
position as the agency’s Vice Chairman.
By May 31, FDIC
bank examiners, with assistance from state bank regulators, completed
the first round of on-site Year 2000 assessments for FDIC supervised
institutions, and also all data service providers and vendors
that FDIC is responsible
for examining. By year-end, approximately 97 percent of FDIC
supervised institutions were making satisfactory progress toward
achieving Year 2000
On June 18, the
FDIC announced its “Suspicious Internet Banking” web site
designed to help detect potentially fraudulent Internet banking
activity. The site provides the public and the industry with
for reporting entities on the Internet that may be misrepresenting
themselves as legitimately chartered or federally insured depository
On September 9,
the FDIC hosted the International Deposit Insurance Conference
in Washington, DC to discuss the role of deposit insurance in
sustaining public confidence
in the world’s banking system, drawing top government officials
from 62 countries, including the leaders of deposit insurance
agencies in more than 20 nations.
On September 30,
Joseph H. Neely resigned as a member of the FDIC’s Board of Directors.
He had served since January 29, 1996.
Also on September
30, a “user friendly” electronic deposit insurance estimator
called “EDIE” became available on the FDIC’s web site.
The service enables consumers and financial institutions employees
to quickly check whether a depositor with multiple accounts at
the same institution
has exceeded the $100,000 statutory limit for deposit insurance coverage.
On December 8, John
D. Hawke, Jr., was sworn in as the 28th Comptroller of the Currency,
filling the FDIC Board seat vacated by Eugene A. Ludwig.
The U.S. economy continued
to speed along during 1998, registering a 5.6 percent expansion in GDP growth.
Unemployment declined another 30 basis points to 4.4 percent and the actual
count of employed persons rose 1.4 percent to 132,581,000. Inflation remained
tame, as the cost of living advanced by a modest 1.7 percent. Encouraged
by the low inflation rate, the discount rate was lowered by 50 basis points
to 4.5 percent. Remarkably similar was the decline in interest rates on 30-year
mortgages which fell by 49 basis points to 7.02 percent. Given this rather
idyllic environment, both new home sales (up 10.2 percent) and new housing
starts (up 9.7 percent) rose sharply. Office vacancy rates fell another 100
basis points to 8.7 percent, as all aspects of the economy did well.21-1 The commercial banking industry faired well, but not as well as in previous
years. Both returns on assets and equity were down, 5 basis points, and
75 basis points, respectively. There was a decline in rates earned on interest-bearing
assets. In 1998, 5.8 percent of all commercial banks reported net losses;
compared to 4.9 percent in 1997.
Commercial bank earnings totaled $61.5 billion; an increase of
3.9 percent or $2.3 billion from 1997. Bank assets grew by 8.25
percent. Security holdings rose 8.33 percent. Bank equity grew
9.5 percent. Net-interest income declined 15 basis points. The
net interest margin also declined to a level not seen in seven
years. There were two main reasons attributed to the decline: a
shift in bank assets away from high-yielding assets, and a shift
in bank sources of funding toward more expensive liabilities. Non-interest
income as a percentage of assets rose 18 basis points. Non-interest
expense rose due to merger and restructuring charges, increases
in data processing services, and a rise in wage/occupancy costs.
Overall, loans increased 9 percent. Commercial and Industrial loans expanded
by 13 percent and commercial real estate loans rose 11.3 percent, which
can be attributed to continuing strong conditions in the property market
(especially in the office sector). Loans to consumers expanded by 1 percent.
Bank stock prices rose during the first half of the year as fear of Asian
crisis diminished. However, there was a sharp decline during the middle
of the year due to the Russian debt default. By the end of the year, fears
eased and bank stock prices recovered to around the price they were at
the beginning of year.
Core deposits grew 7 percent and managed liabilities increased 9.5 percent.
Many bank mergers occurred in 1998, resulting in the top 100 banks controlling
70 percent of industry assets.21-2
At end of 1998, there were 10,489 financial institutions in the United
States and 84 institutions on the problem bank list.21-3 Table
21-2 shows the number and total assets of FDIC insured institutions, as
well as their profitability as of the end of 1998.
Financial Institutions Insured by FDIC
($ in Billions)
1998, the FDIC resolved three BIF-insured institutions that failed. OmniBank,
River Rouge, Michigan, with a total of $42 million in assets, was closed
on April 9. The majority of the bank’s assets and all of the
deposits were acquired under a “loss-share agreement.” Q
Bank, Fort Benton, Montana, with total assets of $15 million, was closed
on August 7. The failed bank’s insured deposits and some assets
were acquired by an assuming bank.
The most notable failure in 1998 was the BestBank, Boulder, Colorado.
BestBank with total assets of $233.2 million and total liabilities
of $206.3 million, was closed July 23, 1998, by the Colorado State
Bank Commissioner. Losses associated with pursuing subprime credit
card customers through an allegedly fraudulent telemarketing travel
club program caused the bank’s failure. The bank pursued rapid
growth in subprime credit cards funded primarily by out-of-territory
time deposits. In addition, there was evidence of significant alleged
fraud by the credit card marketer posting internally generated credits
on 40 to 50 percent of the credit card accounts. The principal of
BestBank was arrested based on a 46-count Federal grand jury indictment
of bank fraud, wire fraud, and money laundering from a Denver, Colorado
court. The estimated total loss to the deposit insurance fund is
A more recent estimate of losses per transaction type is shown in
Estimated Losses by FDIC Transaction Type ($ 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.
Source: Reports from FDIC Website – Historical Statistics on Banking.
to Depositors and Other Creditors
the three financial institutions that failed in 1998, deposits totaled
$260.7 million in 12,700 deposit accounts. Dividends paid on all active
receiverships totaled almost $4.8 billion in 1998.
There have been a total of 2,196 insured financial institution resolutions
since the FDIC began operations in 1934. Of this total, 1,452 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
$106.9 billion. Of that amount, actual and projected recoveries are anticipated
to be approximately $69.8 billion, which equates to a cumulative projected
loss of $37.1 billion to the BIF/SAIF funds.
the beginning of 1998, the FDIC held $4.1 billion in assets from failed
institutions. That included $1.7 billion in BIF assets, $17 million
in SAIF assets, $169 million in FSLIC Resolution Fund (FRF) assets,
and $2.2 billion in Resolution Trust Corporation (RTC) assets. During
the year, the
FDIC acquired an additional $370 million in assets from three bank
failures and $17 million from the establishment of a FRF receivership
related to the
closeout of a previous FRF agreement. The FDIC collected $3.5 billion
during the year,21-4and the ending balance for assets in liquidation
was $2.4 billion,
a reduction of $1.7 billion. Of the $2.4 billion, $1.3 billion was
assets in liquidation for BIF, $349 thousand for SAIF, $105 million
for FRF, and
$947 million for RTC.
During 1998, FDIC sold real estate properties for a total of $149 million,
yielding a recovery of 89 percent of average appraised value. More than
6,545 loans and other assets totaling $335 million in book value were sold
through asset marketing efforts. Table 21-4 shows the FDIC’s assets
in liquidation and Chart 21-1 shows the asset mix.
FDIC End of the Year Assets in Liquidation ($ in Billions*)
With banks experiencing another highly profitable
year and only three bank failures, 1998 was another positive
year for the BIF. The BIF continued to grow steadily and stood
at $29.6 billion at year-end 1998. The 1998 fund balance represents
4.7 percent increase over the 1997 balance of $28.3 billion. BIF-insured
deposits grew by 4.1 percent in 1998, yielding a reserve ratio
of 1.38 percent of insured deposits at year-end 1998, unchanged
from year-end 1997.
The SAIF ended 1998 with a fund balance of $9.8 billion, a 5 percent
increase over the year-end 1997 balance of $9.4 billion. Estimated
insured deposits increased by 2.8 percent in 1998. During the year,
ratio of the SAIF grew from 1.36 percent of insured deposits to
1.39 percent. More than 95 percent of BIF members and 90 percent
of SAIF members paid no deposit insurance premiums for the first
half of 1998.
The Corporation continued to reduce the size of its workforce in
1998 to levels consistent with its declining resolutions and liquidation
workload. Total FDIC staffing decreased to 7,359 at year-end 1998,
down 5.6 percent from year-end 1997. Staffing reductions were primarily
due to further declines in the inventory of assets in liquidation
and related workload. They were accomplished largely through the expiration
of non-permanent appointments and by consolidating field operations.
Chart 21-2 shows the staffing levels for the past five years.
In accordance with a 1996 plan for a phased consolidation of its
field operations, the Division of Resolutions and Receiverships (DRR)
in 1998 closed field offices in Irvine, California; Jersey City, New
Jersey; and Boston, Massachusetts; and consolidated the residual workload
from those sites into the Dallas and Washington offices. Only the
Hartford, Connecticut office remained to be closed under DRR’s
1996 field consolidation plan. In December 1998, the FDIC Board of
Directors delayed the Hartford office’s projected closing date
until June 30, 2000. This allowed the Corporation to retain a large
number of experienced staff as part of a contingent workforce ready
to respond to any unexpected increase in bank failures in early 2000
due to Y2K technical issues. The Division of Supervision also continued
to streamline its field office structure in 1998 by closing small
field offices in Bath, Ohio; Cincinnati, Ohio; Macon, Georgia; and
Fort Wayne, Indiana.
Bureau of Labor and Statistics, Department of Labor; Bureau of Economic
Analysis, Department of Commerce; Housing Market Statistics, National Association
Home Builders; and Federal Home Loan Mortgage Corporation. Back
Federal Reserve Bulletin, Volume 85, Number 6, June 1999. Back
FDIC Quarterly Banking Profile, Fourth Quarter 1998. Back
Collections include 68 RTC Securitization deals that were either purchased
by FDIC in its Corporate capacity or were called and the underlying assets
(collateral) were liquidated and the bondholders were paid off ($1.9 billion
in collections). Back
Book Value Recovery excludes 68 RTC Securitization deals that were either
purchased by FDIC in its Corporate capacity or called with the underlying
assets (collateral) disposed and the bondholders paid off ($1.9 billion
in recovery). Back