Managing the Crisis: The FDIC and RTC
Experience Chronological Overview: Chapter Nineteen1996
Acting Chairman Andrew C. Hove is quoted in the FDICs 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
Insurance Fund Balance
Insurance 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.
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Source: FDIC, 1996 Annual Report and Reports from FDIC Division of
Finance and FDIC Division of Research and Statistics.
On January 29, Joseph
H. Neely, former Mississippi banking commissioner, was sworn in as
a member of the FDIC Board of Directors. His appointment brought
the Board to its
full membership of five directors for the first time since August
On February 9, at
a FDIC symposium on derivatives, Chairman Helfer announced new efforts
to monitor and assess risk at insured institutions. The efforts were
designed to enhance the FDIC’s traditional approach to risk assessment
allowing the agency to respond more quickly and efficiently to emerging
The FDIC developed specific guidelines for examiners on how to factor
relevant economic and other data into their risk evaluations of specific
On July 16, the FDIC’s
Legal Division issued guidance to help bank and thrifts decide whether
the stored-value cards they issue qualify for federal deposit insurance.
The FDIC Board of Directors approved General Counsel Opinion No.
8 that states in most cases the stored-value cards are not protected
insurance because the issuing institution would typically maintain
a single pooled account to hold the funds represented by all their
On October 29, responding
to the FDIC’s declining workload, Deputy to the Chairman and Chief
Operating Officer Dennis F. Geer outlined the Corporation’s plans
for downsizing in 1997 and subsequent years.
8, the FDIC created the new Division of Resolutions and Receiverships
(DRR), to handle the reduced levels of resolution and liquidation
over the next several years. The new division represented a merger
of the Division of Depositor and Asset Services and the Division
On December 10,
the FDIC unveiled a new service called “Institution Directory,” which
enables the public to obtain information about individual banks
and savings institutions via the Internet.
20, the FDIC Board adopted the interagency Federal Financial
Institutions Examination Council’s revised “CAMELS” rating
system for assessing the soundness of financial institutions
on a uniform basis.
Along with: capital (C), asset quality (A), management (M), earnings
(E), and liquidity (L), the banking agencies added a sixth component
to the rating system – sensitivity to market risk (S).
The U.S. economy grew
rapidly in 1996, as GDP expanded by a robust 5.6 percent. Unemployment reflected
this favorable trend, declining 20 basis points from 5.6 percent to 5.4 percent.
An additional 2,272,000 individuals found employment during 1996. Reflecting
the improved economy, new home sales spiked by 13.5 percent during 1996 to
757,000. Also, new housing starts rose 9.1 percent. This strong performance
in the residential sector is especially impressive in light of the 63 basis-point
rise in the 30 year mortgage rate from 7.51 percent to 8.14 percent. Moving
in the opposite direction was the discount rate which declined modestly from
5.25 percent to 5 percent during the year. Another favorable trend was the
decline in the office vacancy rate from 13.6 percent to 12 percent.19-1
It was a very strong year for commercial banks as profits grew, and there
were high levels of returns on both equity and assets. Commercial bank
assets also grew this year, however slower than in 1995. The increase in
assets was due largely to an increase in loan volume that was spurred by
the strong economy. Net income increased by 8 percent and return on assets
experienced a new high. Security holdings grew less than 1 percent. Both
interest income and interest expense fell. Non-interest income increased
17 basis points and non-interest expense increased 8 basis points as a
percentage of assets. The increase in non-interest expense was attributed
to the restructuring costs of several large bank mergers.
Commercial and Industrial loans grew by 7.25 percent. Good conditions
in the real estate market, an increase in real estate prices, and a reduction
in vacancy rates allowed commercial real estate loans to increase 7.75
percent. The balance of consumer loans increased 5 percent. Delinquency
and charge-off rates were low in business loans, especially in the real
estate area. However, household delinquency rates continued to rise. Core
deposits increased slowly which was partly be explained by low yields on
bank deposits relative to alternative investments.19-2
At end of 1996, there were 11,484 financial institutions in the
United States and 117 institutions on the problem bank list. 19-3
Table 19-2 shows the number and total assets of FDIC insured institutions,
as well as their profitability as of the end of 1996.
Open Financial Institutions Insured by FDIC
($ in Billions)
1996, the FDIC resolved six institutions — five insured by the BIF and
one insured by the SAIF. One of the BIF-insured institutions, however, had
a portion of its deposits insured by the SAIF (this is known as an “Oakar” institution – refer
to Chapter 16 – 1993). The five BIF-insured failures had combined assets
of $200 million. The one SAIF-insured institution that closed, with total
assets of $32.6 million, was the first SAIF-insured failure since the FDIC
took over that responsibility from the Resolution Trust Corporation (RTC).
Purchase-and-assumption (P&A) transactions were used to resolve all
six failures in 1996. In two of the six failures, all deposits were assumed.
In the remaining four failures, the acquiring institution assumed only
the insured deposits, and those depositors with balances above the $100,000
insurance limit received a proportionate share of the proceeds from the
liquidation of the failed institution’s assets.
In 1996, DRR unveiled the Standard Asset Valuation Estimation (SAVE)
project, which provides consistent asset valuation methodology in the
resolution and liquidation process. This is done by employing standard
discounted cash flow models and valuation assumptions in the valuation
of assets. The SAVE methodology is also used to calculate loss reserve
estimations for assets held by the BIF, the SAIF, and the FSLIC Resolution
Fund (FRF) as a part of the FDIC year-end 1996 financial statements.
A recent estimate of losses per transaction type is shown in Table 19-3.
Estimated Losses by FDIC Transaction Type ($ in Millions)
as of 12/31/03
Losses as a
Percent of Assets
*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.
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Source: Reports from FDIC Website – Historical Statistics
Payments to Depositors and Other Creditors
the six financial institutions that failed in 1996, deposits totaled $230.4
million in 16,970 deposit accounts. Dividends paid on all active receiverships
totaled almost $10.2 billion in 1996.
There have been a total of 2,133 19-4 insured financial institution resolutions
since the FDIC began operations in 1934. Of this total, 1,451 were P&A
transactions, 79 were open bank assistance transactions, and 603 were deposit
Total disbursements by the FDIC since January 1, 1934, have amounted to
$104.4 billion. Of that amount, actual and projected recoveries are anticipated
to be approximately $66.5 billion, which equates to a projected loss of
$37.9 billion to the BIF/SAIF funds.
At the beginning of 1996, the FDIC held $10.3 billion in assets from failed
institutions. That total included $8.8 billion in BIF assets, $6 million in
SAIF assets, $1.5 billion in FRF assets. Assets totaling $7.7 billion were transferred
from the RTC to the FDIC at the beginning of 1996. During the year, the FDIC
acquired an additional $213 million in assets from five bank failures and one
thrift failure. The FDIC collected $5.9 billion during the year 19-5 and the
ending balance for assets in liquidation was $8.7 billion, a reduction of $9.3
billion. Of the $8.7 billion, $3.8 billion was assets in liquidation for BIF,
$36 million for SAIF, $476 million for FRF, and $4.4 billion for RTC.
During 1996, the FDIC sold real estate properties for a total of $353 million,
yielding a recovery of 95 percent of average appraised value. More than 17,112
loans and other assets totaling $4.1 billion in book value were sold through
asset marketing efforts, with net sales proceeds during 1996 representing
98 percent of appraised value.
When the RTC’s unfinished work was transferred to the FDIC at the end
of 1995, the FDIC assumed responsibility for the RTC Affordable Housing Program.
The program was revised in 1996 to meet standards for asset disposition set
forth in the FDIC Improvement Act of 1991. The revised program included the
following: a 90-day period during which all single and multi-family properties
designated as affordable housing were to be marketed exclusively to eligible
individuals or organizations; an expanded clearinghouse program to provide
property lists to potential buyers; and a technical assistance program to
advise nonprofit organizations and public agencies when purchasing multifamily
During 1996, the FDIC sold more than 3,266 affordable housing units from
failed thrifts and banks for $39.9 million under this program. Sales included
46 multifamily and 455 single-family properties. Since 1990, the FDIC and
RTC programs have had cumulative sales of more than 123,900 affordable housing
units for $1.8 billion.
In addition, 32 state housing agencies and nonprofit organizations acting
under a memorandum of understanding with the FDIC monitored 38,567 rental
units for low- and very low-income households to ensure that purchasers were
making units available to these households at adjusted rents as specified
in the purchase agreement. These units originally were sold under the FDIC/RTC
affordable housing program. Table 19-4 shows the FDIC’s assets in liquidation
and Chart 19-1 shows the asset mix.
FDIC End of the Year Assets in Liquidation ($ in Billions*)
With the recapitalization of the
BIF in May 1995, the FDIC Board of Directors lowered the assessment
rates for BIF-assessable deposits, creating a significant disparity
in the assessment rates paid to the BIF and the SAIF. This disparity
created incentives for institutions to move deposits from the
SAIF to the BIF which, in turn, raised the question of whether
a shrinking SAIF-assessable deposit base could continue paying
the interest on debt and also capitalize the SAIF.
To address the financial problems of the SAIF, Congress passed
the Deposit Insurance Funds Act of 1996 (DIFA), which became law
on September 30, 1996The DIFA required the FDIC to impose a one-time
special assessment to capitalize the SAIF on October 1, 1996, at
the statutorily required Designated Reserve Ratio of 1.25 percent
of insured deposits.
FDIC Board set the special assessment at 65.7 cents per $100 of
SAIF-assessable deposits. With the SAIF fully capitalized, the Board
approved a reduction
in SAIF assessment rates effective October 1, 1996.
With banks experiencing yet another record-breaking year of profitability
and only a handful of bank failures, 1996 was another positive year
for the BIF. In recent years, the BIF had climbed steadily, reaching
$26.9 billion in 1996, its third consecutive record year-end high.
With the special assessment adding $4.5 billion to the SAIF on October
1, the fund ended the year with a balance of $8.9 billion, a 164.7
percent rise over the $3.4 billion balance at year-end 1995.
The Corporation continued to shrink the size of its workforce substantially
during 1996 because of reduced workload. Total FDIC staffing was reduced
by approximately 22.8 percent, from 11,856 on December 31, 1995 (including
more than 2,000 RTC employees transferred to the FDIC on that date),
to 9,151 on December 31, 1996. This was accomplished primarily through
the expiration of term and temporary appointments, and the second
phase of the buyout program. The program was open to almost 7,000
FDIC and RTC employees from November 1995 through January 1996. Approximately
300 employees applied for buyouts during the first phase and were
required to leave the Corporation by December 31, 1995. About 600
employees applied during the second phase, and most left the Corporation
at various times during 1996. Both phases of the buyout program saved
the Corporation an estimated $97.5 million in employee-related costs.
Chart 19-2 shows the staffing levels for the past five years.
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 83; Number 6; June 1997. Back
FDIC Quarterly Banking Profile, Fourth Quarter 1996. Back
In 1988 there were 21 assistance agreements that resolved 79 institutions.
The FDIC annual report (source data) calculates failure data per transaction;
this report calculates failures per failed institution. Actual resolutions
through 1996 totaled 2,191. Back to Text
After 1996, a joint DRR, DOF, DRS task force redefined what constitutes
a collection. The $5.9 billion in collections is based on the new definition.
In 1996, FDIC actually reported collections of $6.6 billion. Back