Managing the Crisis: The FDIC and RTC
Experience Chronological Overview: Chapter Twenty
In 1999, the U.S. economy marked its ninth year of a remarkably
strong economic expansion, which contributed to record profits for the banking
industry. Insured commercial banks posted record earnings for the eighth
consecutive year, and insured savings institutions recorded their third consecutive
of record earnings.
Fund Balance as a percent of Insured Deposits
Fund Balance as a Percent of Insured Deposits
# Includes one SAIF institution failure in 1999.
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
1999 Annual Report and Reports from FDIC Division of Finance and
Division of Research and Statistics.
During 1999, the
FDIC took an aggressive approach to supervising insured financial
institutions to assure readiness for the Year 2000
conversion and engaged in an extensive program of Y2K public education
Throughout the year,
FDIC’s Division of Supervision (DOS) examiners, with assistance from
state bank regulators, performed comprehensive on-site Y2K readiness
assessments of FDIC supervised financial institutions and their service
a well as software vendors that the FDIC is responsible for examining.
On December 13, FDIC Chairman Donna Tanoue announced that every FDIC-insured
financial institution in the nation had achieved a satisfactory assessment.
During the year,
the Y2K issue of FDIC Consumer News was one of the most popular publications
offered by the Consumer Information Center, which distributed more
than 500,000 copies to the public.
Throughout the day
on January 1, 2000, Chairman Tanoue appeared on NBC and CNN, withdrawing
money from an automated teller machine illustrating that it was business
as usual for banking. Banks reported no significant Y2K problems.
Public confidence in the banking sector was maintained.
On November 12, the
Gramm-Leach-Bliley Act, was signed by President Clinton. The Act
(Public Law 106-102) repeals Sections 20 and 32 of the Banking Act
of 1933 (Glass-Steagall
Act) and amends the Bank Holding Company Act of 1956. The amendment
allows affiliations between any insured depository institution and
any “financial” company,
including securities and insurance firms, in new types of bank holding
companies known as financial holding companies. The Act also allows
certain financial activities, permitted by financial holding companies,
to be carried
out through bank subsidiaries, subject to safe guards and restrictions.
While the U.S.
economy as a whole continued to steam forward throughout 1999,
the breadth of prosperity was not as great as during 1998. On the
bullish side, GDP growth climbed sharply once again, rising by
5.6 percent. Likewise, unemployment fell another 30 basis points
to 4.1 percent, a very low level by historical standards. Moreover
total employment, rose by 1.5 percent, as 1,857,000 more individuals
found work. Also bullish was the inflation rate which added only
a modest 2.7 percent to the average cost of goods and services.
The final piece of bullish economic news came from a 3 percent
increase in new housing starts, to 1,665,000.
By contrast, new home sales were flat to down slightly, losing
70 basis points from the 1998 level. Also bearish were the 60
basis-point rise in office vacancy, a 50 basis-point climb in
the discount rate, and a 104 basis-point rise in interest charged
on 30-year mortgages.22-1
This was an extremely strong year for banks. Both returns on
assets and equity rose above last year’s levels. Profits
were concentrated in the top 100 banks because of a large increase
in non-interest income and a decrease in non-interest expense.
Growth in commercial bank assets decreased from 8.2 percent
to 5.4 percent. Net income grew 16 percent (to $71.5 billion)
while capital growth slowed 4 percent. Growth of securities slowed
to 5.1 percent.
There were record profits due to an increase in non-interest
income, which was largely due to non-deposit fee income. The
net interest margin remained constant at 4.1 percent. Most profitability
was evident in medium to large size banks. The top ten banks
held 35 percent of industry’s assets, and the next 90 also
held 35 percent. The next 900 held 18 percent, and the remaining
banks held 12 percent.
Total Loans expanded 8 percent. Commercial and Industrial loans
expanded 8.1 percent, however this pace was slower than the past
two years. Commercial real estate loans increased more than 15
percent; the greatest increase since 1987. The largest loan category
increase was in construction and land development loans, which
increased 27 percent. There were three main reasons for the strong
increase commercial real estate loans: the strong economy, the
decrease in REITs (which allowed private developers to develop),
and the issuance of domestic securities backed by commercial
mortgages was off 24 percent. Consumer loans grew 4.7 percent
and home equity loans increased 5.9 percent.
Core deposits were constant for the entire year. As a share
of total liabilities, core deposits were down 3 basis points,
to about 52 percent. This caused banks to rely on more expensive
managed liabilities—this area advanced more than 15 percent.
Foreign deposits and large time deposits rose. Dividends (primarily
paid to parent companies) increased more than 26 percent. Bank
holding companies’ stock prices were down 20 percent.22-2
Overall, 10,242 financial institutions were in operation at
the end of 1999 and there were 79 banks on the problem bank list.22-3
Table 22-2 shows the number and total assets of FDIC insured
institutions, as well as their profitability as of the end of
Financial Institutions Insured by FDIC
($ in Billions)
institutions insured by the FDIC were closed during 1999. Seven
of those institutions
were insured by the BIF and one was insured by the SAIF. These
failed entities had combined assets of approximately $1.6 billion.
All eight resolutions involved purchase and assumption transactions.
The First National Bank of Keystone, Keystone, West Virginia,
was closed on September 1, 1999, by the Office of the Comptroller
of the Currency. The bank’s failure was the result of fraudulent
activities involving $515 million in loans carried on the bank’s
books that should have been removed after they were securitized
and sold, along with embezzlement and excessive compensation
in the form of fees and commissions. The bank reported total
assets of just over $1 billion and total liabilities of $976.4
million. On September 3, 1999, the FDIC and AmeriBank, Inc.,
Welch, West Virginia, reached an agreement whereby AmeriBank
would assume the insured local deposits totaling $135 million
and purchase $74.2 million in assets for a discount of $105,000.
The FDIC paid out the non-local insured deposits not assumed
by AmeriBank. The uninsured deposits totaled approximately $27.9
million in about 674 accounts. The estimated total loss to the
deposit insurance fund is $751 million.
A more recent estimate of losses per transaction type is shown
in Table 22-3.
Estimated Losses by FDIC Transaction Type ($ 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
Payments to Depositors and Other Creditors
In the eight
financial institutions that failed in 1999, deposits totaled $1.3
billion in 59,601 deposit accounts. Dividends paid on all active
receiverships totaled almost $959 million in 1999.
There have been a total of 2,204 insured financial institution
resolutions since the FDIC began operations in 1934. Of this
total, 1,460 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 $108.1 billion. Of that amount, actual and projected
recoveries are anticipated to be approximately $70.1 billion,
which equates to a projected loss of $38 billion to the BIF/SAIF
At the beginning
of 1999, the FDIC held $2.4 billion in assets from failed institutions.
That included $1.3 billion in BIF assets, $349 thousand in SAIF
assets, $105 million in FSLIC Resolution Fund (FRF) assets, and
$947 million in Resolution Trust Corporation (RTC) assets. During
the year, the FDIC acquired an additional $1.5 billion in assets
from seven bank failures and one thrift failure. The FDIC collected
$980 million during the year, and the ending balance for assets
in liquidation was $2 billion, a reduction of $394 million. Of
the $2 billion, $1.5 billion was assets in liquidation for BIF,
$10 million for SAIF, $42 million for FRF, and $467 million for
During 1999, the FDIC sold real estate properties for a total
of $67 million, yielding a recovery of 83 percent of average
appraised value. More than 16,976 loans and other assets totaling
$567 million in book value were sold through asset marketing
efforts. Table 22-4 shows the FDIC’s assets in liquidation
and Chart 22-1 shows the asset mix.
FDIC End of the Year Assets in Liquidation ($ in Billions*)
At year-end 1999, the BIF had a balance of $29.4 billion, representing
a loss of $198 million for the year. This was the first year-end
loss reported since 1991 and the loss was primarily attributable
to insurance losses recognized in 1999. During the year, BIF-insured
deposits grew by 0.76 percent, yielding a reserve ratio of 1.36
percent of insured deposits at year-end 1999. The reserve ratio
at year-end 1998 was slightly higher, at 1.39 percent.
The SAIF ended 1999 with a fund balance of $10.3 billion, a 4.5 percent
increase over the year-end 1998 balance of $9.8 billion. Estimated
insured deposits increased by 0.34 percent in 1999. The reserve
ratio grew from 1.39 percent of insured deposits at year-end 1998
to 1.45 percent
After reducing the size of its workforce by over 4,500 or 38.7 percent
over the previous four years, staffing remained relatively constant
during 1999, decreasing by only 93 (1.3 percent) down to 7,266. The
Corporation continued its practicing of allowing temporary and term
appointments to expire, which accounted for almost 50 percent of the
staff reductions. Additionally, the Corporation utilized an Early
Out Retirement authority, and the Legal Division offered a buyout
opportunity in its continued efforts to remedy staffing imbalances.
Chart 22-2 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
of Home Builders; and Federal Home Loan Mortgage Corporation. Back
Federal Reserve Bulletin Volume 86 Number 6 June 2000. Back
FDIC Quarterly Banking Profile, Fourth Quarter 1999. Back