2008 Annual Report
I. Management's Discussion and Analysis
Supervision and Consumer Protection
Supervision and consumer protection are cornerstones of the FDIC’s efforts to ensure the stability of and public confidence in the nation’s financial system. The FDIC’s supervision program promotes the safety and soundness of FDIC-supervised insured depository institutions, protects consumers’ rights, and promotes community investment initiatives.
The FDIC’s strong bank examination program is the core of its supervisory program. As of December 31, 2008, the Corporation was the primary federal regulator for 5,116 FDIC-insured state-chartered institutions that are not members of the Federal Reserve System (generally referred to as “state non-member” institutions). Through safety and soundness, consumer compliance and Community Reinvestment Act (CRA), and other specialty examinations, the FDIC assesses an institution’s operating condition, management practices and policies, and compliance with applicable laws and regulations. The FDIC also educates bankers and consumers on matters of interest and addresses consumer questions and concerns.
During 2008, the Corporation conducted 2,416 statutorily required safety and soundness examinations, including a review of Bank Secrecy Act compliance, and all required follow-up examinations for FDIC-supervised problem institutions within prescribed time frames. The FDIC also conducted 1,826 CRA/compliance examinations (1,509 joint CRA/compliance examinations, 313 compliance-only examinations,4 and 4 CRA-only examinations) and 3,028 specialty examinations. All CRA/compliance examinations were also conducted within the time frames established by FDIC policy, including required follow-up examinations of problem institutions. The accompanying table compares the number of examinations, by type, conducted in 2006 – 2008.
As of December 31, 2008, there were 252 insured institutions with total assets of $159.4 billion designated as problem institutions for safety and soundness purposes (defined as those institutions having a composite CAMELS5 rating of “4” or “5”), compared to the 77 problem institutions with total assets of $22.2 billion on December 31, 2007. This constituted a 227 percent year-over-year increase in the number of problem institutions and a 618 percent increase in problem institution assets. In 2008, 67 institutions with aggregate assets of $383.3 billion were removed from the list of problem financial institutions, while 243 institutions with aggregate assets of $532.6 billion were added to the list of problem financial institutions. Washington Mutual, the single largest failure in history, with $307.0 billion in assets, was added to the list and resolved in 2008. The FDIC is the primary federal regulator for 170 of the 252 problem institutions.
During 2008, the Corporation issued the following formal and informal corrective actions to address safety and soundness concerns: 83 Cease and Desist Orders, one Temporary Cease and Desist Order, and 210 Memoranda of Understanding. Of these actions issued, 10 Cease and Desist Orders and 29 Memoranda of Understanding were issued based, in part, on apparent violations of the Bank Secrecy Act.
|FDIC Examinations 2006 – 2008
|Safety and Soundness:
|State Non-member Banks
|State Member Banks
|Subtotal – Safety and Soundness Examinations
|Compliance - Community Reinvestment Act
|Subtotal CRA/Compliance Examinations
|Data Processing Facilities
As of December 31, 2008, 140 FDIC-supervised institutions were assigned a “4” rating for safety and soundness and 30 institutions were assigned a “5” rating.
Of the “4”-rated institutions, 126 were examined in 2008, and formal or informal enforcement actions are in process or have been finalized to address the FDIC’s examination findings. Twenty eight “5”-rated institutions were examined and the remaining two were in the process of being examined in 2008 and completed in February 2009.
As of December 31, 2008, 16 FDIC-supervised institutions were assigned a “4” rating for compliance and no institutions were assigned a “5” rating. In total, nine of the “4”-rated institutions were examined in 2008; the remaining seven were examined prior to 2008 and involved either appeals or referrals to other agencies. These 16 institutions are under informal enforcement actions (3) or Cease and Desist Orders (six are final and six are in process), with one in process of appealing the examination. The Corporation has issued or is pursuing enforcement actions to address the examination findings for all 170 of the problem institutions for which it is the primary federal regulator. These actions include 159 Cease and Desist Orders and 11 Memoranda of Understanding.
Troubled Asset Relief Program’s Capital Purchase Program
The FDIC has worked with the Treasury Department to process applications for the Troubled Asset Relief Program’s (TARP) Capital Purchase Program (CPP). The TARP CPP, funded at $250 billion in 2008, is designed to strengthen the capital of financial institutions and enhance their ability to make credit available to consumers and businesses. (An additional $100 billion was forwarded to the AIG and auto industries.) All U.S. bank holding companies, banks, and thrifts are eligible to participate in the CPP by making an application to their primary federal regulator. The FDIC has processed 1,600 CPP applications from state non-member institutions. It is expected that all TARP CPP capital infusions will be completed by mid 2009.
Joint Examination Teams
The FDIC used joint compliance/risk management examination teams (JETs) to assess risks associated with new, nontraditional and/or high-risk products being offered by FDIC-supervised institutions. The JET approach recognizes that to fully understand the potential risks inherent in certain products and services, the expertise of both compliance and risk management examiners is required. The JET approach has three primary objectives:
- To enhance the effectiveness of the FDIC’s supervisory examinations in unique situations;
- To leverage the skills of examiners who have experience with emerging and alternative loan and deposit products; and
- To ensure that similar supervisory issues identified in different areas of the country are addressed consistently.
In 2008, the FDIC used JETs within institutions involved in significant subprime or nontraditional mortgage activities; institutions affiliated with or utilizing third parties to conduct significant consumer lending activities, especially in the credit card area; institutions offering refund anticipation loans (RAL) products; and institutions for which the FDIC has received a high volume of consumer complaints or complaints with serious allegations of improper conduct by banks.
Large Complex Financial Institution Program
The FDIC’s Large Complex Financial Institution Program addresses the unique challenges associated with the supervision, insurance and potential resolution of large and complex financial institutions. With the challenges posed by economic and market developments in 2008, large institutions have been significantly affected. The FDIC’s ability to analyze and respond to risks in these institutions is of particular importance as they make up a significant share of the banking industry’s assets. The focus of the program is to ensure a consistent approach to large-bank supervision and risk analysis on a national basis and to provide a quick response to risks that are identified in large institutions. This is achieved through extensive cooperation with the FDIC regional offices, other FDIC divisions and offices, and the other banking and thrift regulators.
In 2008, the Large Insured Depository Institution (LIDI) Program implemented a comprehensive process to standardize data capture and reporting. Under this program, supervisory staff throughout the nation performs comprehensive quantitative and qualitative risk analysis of institutions with assets over $10 billion, or under this threshold at regional discretion. This information has been instrumental in providing the basis for supervisory actions, supporting insurance assessments and resolution planning.
The LIDI Program continued to assess internal and industry preparedness relative to Basel II capital rules and was actively involved in domestic and international discussions intended to ensure effective implementation of the New Capital Accord. This included participation in numerous supervisory working group meetings with foreign regulatory authorities to address Basel II
Bank Secrecy Act/Anti-Money Laundering
The FDIC pursued a number of Bank Secrecy Act (BSA), Counter-Financing of Terrorism (CFT) and Anti-Money Laundering (AML) initiatives in 2008.
International AML/CFT Initiatives
The FDIC conducted three training sessions in 2008 for 49 central bank representatives from Jordan, Kuwait, Paraguay, Qatar, Saudi Arabia, Senegal, Thailand, and the West Africa Central Bank. The training focused on AML/CFT controls, the AML examination process, customer due diligence, suspicious activity monitoring and foreign correspondent banking. The sessions also included presentations from the Federal Bureau of Investigation on combating terrorist financing, and the Financial Crimes Enforcement Network (FinCEN) on the role of financial intelligence units in detecting and investigating illegal activities.
In addition to hosting on-site AML/CFT instruction, the FDIC participated in the second annual U.S.-Latin America Private Sector Dialogue in Miami, Florida. The focus of this Treasury Department initiative is to provide a forum for discussing common issues related to money laundering and terrorist financing. The FDIC also participated in a seminar focusing on Islamic Banking hosted by Perbadanan Insurans Deposit Malaysia (PIDM) in Kuala Lumpur, Malaysia. Additionally, the FDIC traveled to Uruguay to provide instruction focused on AML/CFT practices to approximately 40 regulators from the Banco Central del Uruguay. Also presented was an overview of the FDIC’s role as a supervisor to approximately 100 bankers and government officials.
The FDIC also participates on the Basel AML/CFT committee. In 2008, the committee published views on supervisory expectations relating to transparency in payment messages, particularly in anticipation of changes to technical standards for cross-border wire transfers.
Money Services Business Project
As part of the FDIC’s Money Services Business (MSB) Project, the FDIC continued to work on establishing information-sharing agreements with state authorities responsible for examining MSBs. The agreements allow for the exchange of information relating to MSB supervision and provide for a formal information-sharing process. The agreements were developed to limit regulatory redundancies by providing relevant supervisory information for MSB customers with banking relationships at FDIC-supervised financial institutions. Additionally, the agreements provide assistance to each agency in promoting opportunities to learn from the other’s industry expertise.
Based on challenges faced by the MSB industry in obtaining and maintaining banking services, the FDIC partnered with several state MSB supervisors. Information gained is intended to streamline the BSA/AML examination process for financial institutions serving the MSB industry. To date, agreements have been signed with state representatives from New York, Pennsylvania and Texas.
Minority Depository Institution (MDI) Activities
The FDIC continues to seek avenues for improving communication and interaction with MDIs, and responding to concerns.
In July of 2008, the FDIC issued a Financial Institution Letter (FIL) aimed at enhancing procedures for providing technical assistance to MDIs. Although the FDIC routinely contacts MDIs to offer return visits and technical assistance following the conclusion of each examination, the FIL expanded the guidelines to encourage banks to initiate contact to request technical assistance at any time. The guidance specifically delineates that the FDIC can assist in reviewing and offering feedback and recommendations on a variety of matters, including:
- Proposed written policies for major operational areas, such as the lending, investment, and funds management functions;
- Proposed strategic plans;
- Proposed budgets;
- Proposed applications or notices for new branches and/or new activities; and
- Any other operational matters where MDI bank management would like FDIC input.
Also, as suggested by MDIs, the guidance provides that the institutions can contact any region, regardless of its geographic location, to initiate discussions for technical assistance.
During 2008, the FDIC provided technical assistance to 54 MDIs on a broad range of topics, including strategies for addressing BSA deficiencies, strengthening budget processes, and revising and developing policies. The FDIC also held discussions on the de novo application process with prospective organizers of new minority banks.
In partnership with the Puerto Rico Bankers Association, the FDIC hosted a Compliance seminar in San Juan in December 2008. The seminar focused on pertinent compliance-related matters, including the Fair and Accurate Credit Transaction Act implementation, unfair and deceptive practices, and recent changes to the FDIC’s examination procedures.
In response to comments provided by MDIs, the FDIC launched a program for enhanced peer group reviews and comparisons, specifically targeted for MDIs. This custom peer report is designed to facilitate comparison of an institution’s performance with that of all MDIs that meet the FDIC’s definition, as well as all FDIC-insured institutions. The custom peer report contains earnings, capital, asset quality, and liquidity performance measures, which should assist MDIs in comparing performance against similar institutions.
In July of 2008, the FDIC hosted the third annual Interagency Minority Depository Institution National Conference in Chicago, Illinois. The theme of the conference was “Know Your Business, Grow Your Business.” The event drew over 250 attendees, representing an increase in participation of 47 percent from the previous year. In addition to presentations by senior officials from all federal banking regulatory authorities, industry experts and regulators, the program covered the state of the economy as it relates to mortgage markets, the current credit environment, and the process of bidding on distressed banks. An MDI bankers’ panel discussed strategies for identifying opportunities for success in the current environment. The program also included workshops on commercial real estate trends and best practices, troubled debt restructuring, the development of profitable lines of business, SBA-guaranteed lending programs, and the Community Development Financial Institution Fund certification process. Feedback from the attendees was overwhelmingly positive.
In the third quarter of 2008, the FDIC launched a series of quarterly conference calls with FDIC-supervised MDIs, covering relevant regulatory topics. The initial call was held in September 2008, and covered funding risks associated with banks’ dependence on brokered and above-market rate deposits. The second call was held in November 2008, and covered the Temporary Liquidity Guarantee Program and the Treasury Department’s Capital Purchase Program. The third was held in December 2008, and covered accounting issues. The new conference call series has been well received by the MDIs, with participation averaging approximately 75 bankers for each event.
The FDIC continued to be actively involved in domestic and international discussions intended to ensure capital standards adequately support the safe and sound operation of banks. This included participation in a number of supervisory working group meetings with foreign regulatory authorities. On June 26, 2008, the FDIC Board and the Federal Reserve Board of Governors approved the publication of the Basel II Standardized Approach Notice of Proposed Rulemaking (NPR). The NPR was published in the Federal Register on July 29, 2008, with comments due October 27, 2008. Because of the priority of dealing with the current market turmoil and an unexpected delay in many banks’ plans for implementing the advanced approaches, the agencies deferred finalizing the Standardized Framework NPR. Only one institution began Basel II Parallel Run in 2008. The FDIC will compile and analyze the information as it becomes available through public and supervisory sources.
The FDIC is involved in Basel Committee work teams to develop proposals that would strengthen each of the three pillars of the Basel II framework. The FDIC also is working with another subgroup of the Basel Committee to develop a proposal to strengthen the market risk capital requirements. The FDIC worked with other U.S. financial regulators to complete final guidance on the supervisory review process (Pillar 2) for banks using the advanced approaches of Basel II. The final guidance includes several refinements to the draft guidance that are intended to address weaknesses revealed by the market turmoil. This guidance was published in the Federal Register on July 31, 2008.
The FDIC finalized the Goodwill Net of Associated Deferred Tax Liability rule for regulatory capital on December 16, 2008, and jointly issued the Final Rule with the other federal banking agencies. This Final Rule allows goodwill, which must be deducted from Tier I capital, to be reduced by the amount of any associated deferred tax liability. The new rule continues to adhere to the statutory requirement that all of a bank’s exposure to goodwill will be deducted from capital. The final rule took effect January 29, 2009. However, a bank may elect to apply this final rule for regulatory capital reporting purposes as of December 31, 2008. The federal banking agencies decided not to extend similar treatment to other intangible assets currently required to be deducted fully from Tier I capital.
During 2008, the FDIC issued and participated in the issuance of guidance in several areas as described below:
Commercial Real Estate Guidance
In response to deteriorating trends in construction and development (C&D) lending and other commercial real estate (CRE) sectors, the FDIC issued “Managing Commercial Real Estate Concentrations in a Challenging Environment” on March 17, 2008. The guidance re-emphasizes the importance of strong capital and allowance for loan and lease loss levels and robust credit risk management practices for institutions with concentrated CRE exposures. The guidance further encourages institutions to continue making C&D and CRE credit available in their communities using prudent lending standards.
Liquidity Risk Management
In 2008, disruptions in the credit and capital markets exposed weaknesses in many banks’ liquidity risk measurement and management systems. To address these concerns, the FDIC issued guidance highlighting the importance of liquidity risk management at FDIC-supervised institutions. This guidance noted that institutions using wholesale funding, securitizations, brokered deposits and other high-rate funding strategies should measure liquidity risk using pro forma cash flows/scenario analysis and should have contingency funding plans in place that address relevant bank-specific and systemic stress events. The guidance further states that institutions using volatile, credit sensitive, or concentrated funding sources are generally expected to hold capital above regulatory minimum levels to compensate for the elevated levels of liquidity risk present in their operations.
On June 6, 2008, the FDIC issued “Guidance for Managing Third-Party Risk” which identifies sound practices that can help banks avoid significant safety-and-soundness and compliance problems that may be associated with some
third-party relationships. This guidance describes potential risks arising from third-party relationships and outlines risk management principles that financial institutions may tailor to suit the complexity and risk potential of their significant third-party relationships. On November 7, 2008, the FDIC issued “Guidance on Payment Processor Relationships” which identifies potential risks and recommended controls associated with relationships with entities that process payments for telemarketers and other merchant clients.
In 2008, the FDIC completed significant revisions and additions to the FDIC Trust Examination Manual. Most notably, substantial material was added to the sections covering employee benefit plans, the Employee Retirement Income Security Act of 1974, the Gramm-Leach-Bliley Act, and Regulation R exceptions and exemptions for banks from the definition of “broker” in the Securities Exchange Act of 1934.
The Federal Housing Finance Agency placed Fannie Mae and Freddie Mac into conservatorship on September 7, 2008. The FDIC believes these government-sponsored enterprises are important to the home mortgage market and, along with the other federal banking agencies, issued a statement on September 7, 2008, indicating that it will work with institutions with significant holdings of Fannie Mae or Freddie Mac common and preferred shares in relation to their capital.
Home Equity Lines of Credit
The FDIC completed an Issues Review of the emerging practice of lenders suspending or terminating home equity lines of credit due to substantially decreased collateral values. Several consumer protection regulations, including Truth in Lending, and fair lending laws bear on this practice. As a result, on June 26, 2008, the FDIC issued “Home Equity Lines of Credit: Consumer Protection and Risk Management Considerations When Changing Credit Limits and Suggested Best Practices” to remind FDIC-supervised financial institutions that if, for risk management purposes, they decide to reduce or suspend home equity lines of credit, certain legal requirements designed to protect consumers must be followed.
Other Real Estate
Continued weakness in the housing market and the rapid rise in foreclosures increased the potential for higher levels of other real estate held by FDIC-supervised institutions. Accordingly, on July 1, 2008, the FDIC issued “Other Real Estate: Guidance on Other Real Estate” to remind bank management of the importance of developing and implementing policies and procedures for acquiring, holding, and disposing of other real estate.
Hope for Homeowners
As a member of the Board of Directors of the HOPE for Homeowners Program, the FDIC joined the Departments of Housing and Urban Development, Treasury and the Federal Reserve in establishing requirements and standards for the Program that are not otherwise specified in the legislation, and prescribing necessary regulations and guidance to implement those requirements and standards.
In 2008, the FDIC issued 12 Financial Institution Letters that provided guidance to help financial institutions and facilitate recovery in areas damaged by severe storms, tornadoes, flooding, and other natural disasters. Areas within Alabama, Arkansas, Florida, Indiana, Iowa, Louisiana, Mississippi, Missouri, Nebraska, Tennessee, Texas, and Wisconsin were affected.
Other Guidance Issued
The FDIC also contributed to the release of guidance on Subprime Mortgage Product Illustrations and on Identity Theft Red Flags regulations and examination procedures, and changes to the Truth in Lending Act and the Home Mortgage Disclosure Act regulations relating to higher-priced mortgages.
Monitoring Potential Risks from New Consumer Products and Developing a Supervisory Response Program
The FDIC is revising the former Underwriting Survey, completed by examiners at the conclusion of each examination to aid in identifying new products and emerging risks. This will provide examiners the opportunity to submit information to a central database at the conclusion of each examination. Policy staff will monitor and analyze this real-time examiner input and use the information to formulate policy guidance to allow supervisory strategies as appropriate.
The FDIC completed an Issues Review of reverse mortgages that outlined the types of products and features, as well as risks, from both a consumer and safety-and-soundness perspective. The results of this review will be used in the ongoing FFIEC Consumer Compliance Task Force project on reverse mortgages. As part of the Issues Review, the FDIC also participated in an examination of a specialized reverse mortgage lender.
Regulatory Reporting Revisions
The FDIC, jointly with the Office of the Comptroller of the Currency and the Federal Reserve Board, implemented revisions to the Consolidated Reports of Condition and Income (Call Report) in first quarter 2008. These revisions included new data related to residential mortgages (such as restructured troubled mortgages, mortgages in foreclosure, and mortgage repurchases and indemnifications) and expanded data on trading assets and liabilities and fair value measurements. In September 2008, the three agencies requested comment on proposed Call Report revisions that would take effect on a phased-in basis in March, June, and December 2009. Certain revisions address areas in which the banking industry has experienced heightened risk as a result of market turmoil and illiquidity and weakening economic and credit conditions. The reporting changes include new data on real estate construction loans with interest reserves, structured financial products such as collateralized debt obligations, commercial mortgage-backed securities, pledged loans, and fiduciary assets and income. Selected institutions would report additional data on recurring fair value measurements, credit derivatives, and over-the-counter derivative exposures. The agencies made limited modifications to the proposed changes in response to comments received. In November 2008, the FDIC and the other banking agencies obtained emergency approval from the U.S. Office of Management and Budget to collect data in the regulatory reports for all insured institutions beginning in December 2008 to support the quarterly assessment process for the FDIC’s Transaction Account Guarantee Program.
Promoting Economic Inclusion
The FDIC pursued a number of initiatives in 2008 to facilitate underserved populations using mainstream banking services rather than higher cost, non-bank alternatives and to ensure protection of consumers in the provision of these services.
Alliance for Economic Inclusion
The goal of the FDIC’s Alliance for Economic Inclusion (AEI) initiative is to collaborate with financial institutions, community organizations, local, state and federal agencies, and other partners in select markets to launch broad-based coalitions to bring unbanked and underserved consumers into the financial mainstream.
The FDIC expanded its AEI efforts during 2008 to increase measurable results in the areas of new bank accounts, small-dollar loan products, remittance products, and delivery of financial education to more underserved consumers. During 2008, over 200 banks and organizations joined AEI nationwide, bringing the total number of AEI members to 924. More than 56,000 new bank accounts were opened during 2008, bringing the total number of bank accounts opened through the AEI to 90,000. During 2008 approximately 43,000 consumers received financial education through the AEI, bringing the total number of consumers educated to 73,000. Also, 53 banks were in the process of offering or developing small-dollar loans as part of the AEI and 34 banks were offering remittance products at the end of 2008.
The FDIC launched the tenth AEI initiative in Rochester, New York, on May 15. The launch was held in partnership with the New York State Banking Superintendent, Mayor of Rochester, and other partners. As a result of the FDIC’s leadership and initial success with AEI in its ten primary markets, the FDIC was asked to provide technical assistance to several other cities that are launching city-wide campaigns to increase access by the underserved to mainstream financial services.
Two major national AEI partnerships were also signed during 2008. The first, with the National Association of Affordable Housing Lenders (NAAHL), expanded the two organizations’ collaboration in furtherance of economic inclusion. The second, with the United Way of America, strengthened mutual efforts to serve the underserved through the United Way of America’s Financial Stability Partnership.
During 2008, the FDIC included a component of its foreclosure prevention efforts within the AEI. The FDIC sponsored or co-sponsored more than 164 local outreach and training events, many in partnership with NeighborWorks® America and its affiliates. These sessions were designed to educate at-risk homeowners about the availability of foreclosure prevention counseling services and other resources. A new Web page was also launched to provide resources, tools and technical assistance to consumers and others at risk of foreclosure or involved in foreclosure prevention efforts.
Forum on Mortgage Lending for Low- and Moderate-Income (LMI) Households
On July 8, 2008, the FDIC held a “Forum on Mortgage LMI Households.” The purpose of the forum was to explore a framework for LMI mortgage lending in the future, in light of current problems in the mortgage market. The forum examined ways to encourage profitable, responsible, and sustainable mortgage lending to lower-income households and strategies to rejuvenate the secondary market for these loans. Speakers at the forum included Treasury Secretary Henry M. Paulson, Federal Reserve Chairman Ben S. Bernanke, and JPMorgan Chase Chairman and CEO James Dimon.
On September 4, 2008, the FDIC issued a Financial Institution Letter (FIL) for bankers and other mortgage professionals to highlight best practices discussed at the forum. These best practices focused on the following:
- Back-to-basics underwriting
- Ensuring that incentives and compensation for all parties to mortgage transactions are aligned with the long-term outcome of the transactions
- Improving mortgage transaction transparency and due diligence
- Expanding existing reasonable LMI mortgage products and encouraging innovations
- Fostering public/private partnerships
FDIC Advisory Committee on Economic Inclusion
The FDIC’s Advisory Committee on Economic Inclusion was established in 2006 and provides the FDIC with advice and recommendations on initiatives focused on expanding access to banking services by underserved populations. This may include reviewing basic retail financial services such as check cashing, money orders, remittances, stored value cards, short-term loans, savings accounts, and other services that promote asset accumulation and financial stability. Committee members represent a cross-section of interests from the banking industry, state regulatory authorities, government, academia, consumer or public advocacy organizations and community-based groups.
The Advisory Committee met twice during 2008. In March 2008, the meeting topic was “Asset-Building Opportunities for Individuals and Banks.” The meeting focused on policy approaches, supervisory and regulatory strategies, and product innovations to enhance household saving, particularly for LMI households. The Advisory Committee also met after the LMI forum in July 2008, to discuss the forum in general, and best practices raised at the forum in particular that were later issued in a FIL as discussed above. At that meeting, the Chairman also announced the formation of an FDIC working group to explore the feasibility of prize-linked savings programs. Among other things, this group is exploring whether the operational, marketing, and distribution networks of state lottery systems can be leveraged to encourage saving.
Affordable Small-Dollar Loan Guidelines and Pilot Program
Many consumers, even those who have bank accounts, turn to high-cost payday or other
non-bank lenders to quickly obtain small loans to cover unforeseen circumstances. To help insured institutions better serve an underserved and potentially profitable market while enabling consumers to transition away from reliance on high-cost debt, the FDIC launched a two-year small-dollar loan pilot project in February 2008. The pilot is designed to review affordable and responsible small-dollar loan programs offered by insured financial institutions and assist the banking industry by identifying and disseminating information on replicable business models and best practices for small-dollar loans, including ways to offer small-dollar loan customers other mainstream banking services.
The FDIC selected an initial group of 31 banks of varied sizes and diverse locations and settings for participation in the study. Banks in the pilot meet the FDIC’s Small-Dollar Loan guidelines, and several have already reported using the small-dollar product as a cornerstone for profitable relationships. After three quarters of data collection, participating banks have also demonstrated innovative strategies in areas such as underwriting, advertising and linking automatic savings features that could prove to be replicable for other banks. These early results provide some indication that banks can profitably provide affordable alternatives to high-cost, short-term credit. The FDIC will continue to explore profitability and other noteworthy features of participating bank programs as the pilot progresses.
FDIC Study of Bank Overdraft Programs
In 2008, the FDIC completed a Study of Bank Overdraft Programs, a two-part study that gathered empirical data on the types, characteristics, and use of overdraft programs operated by FDIC-supervised banks. The study was undertaken in response to the growth in automated overdraft programs, defined as programs in which the bank honors a customer’s overdraft obligations using standardized procedures to determine whether the non-sufficient fund (NSF) transaction qualifies for overdraft coverage. Data and information for the FDIC’s study were gathered through a survey collection representative of 1,171 FDIC-supervised institutions, and a separate data request of customer account and transaction-level data from a smaller set of 39 institutions.
The survey instrument was designed to obtain the following types of information related to overdraft programs: characteristics, features, and fees of overdraft programs; transaction processing policies; marketing and disclosure practices; internal controls and monitoring practices; the role of vendors and third parties in overdraft program implementation; and NSF-related fee income and growth. The customer account and transaction-level data collection was designed to gather information on the provision of overdraft services on customer accounts, the occurrence of NSF activity covered under automated overdraft programs, and the characteristics of customer accounts that tend to incur the highest volume of overdraft fees. A final report was released in February 2009. The FDIC believes that objective information on these programs will help policymakers make better-informed policy decisions and will help the public better understand the features and costs related to automated overdraft programs.
National Survey of Banks’ Efforts to Serve the Unbanked and Underbanked
In 2008, the FDIC conducted the first of a series of national surveys on banks’ efforts to serve the unbanked and underbanked. For the purposes of this survey effort, unbanked individuals and families are those who rarely, if ever, held a checking account, savings account, or other type of transaction or check cashing account at an insured depository institution in the conventional finance system. Underbanked individuals and families are those who have an account with an insured depository institution but also rely on non-bank alternative financial service providers for transaction services or high-cost credit products. The survey was conducted in response to a mandate under section 7 of the Federal Deposit Insurance Reform Conforming Amendments Act of 2005 (Reform Act) which calls for the FDIC to conduct ongoing surveys on efforts by insured depository institutions to bring unbanked individuals and families into the conventional finance system. This initial survey effort had three objectives:
- Identify and quantify the extent to which insured depositories undertake outreach efforts, serve, and meet the banking needs of the unbanked
- Identify challenges affecting the ability of insured depository institutions to serve the unbanked and underbanked, including but not limited to cultural, language, identification issues, and spatial/location issues; and
- Identify innovative efforts depositories use to serve the unbanked and underbanked, including community storefronts, small-dollar loans,
basic banking accounts, remittances, and other low-cost products and services used by the unbanked and underbanked.
The study involved a survey of insured depository institutions and development of a limited number of case studies. The survey was administered to a sample that was representative of all FDIC-insured commercial banks and savings institutions having standard retail banking operations. In-depth case studies were conducted of 16 surveyed institutions that were identified as offering innovative approaches to serving unbanked and underbanked individuals. The report was transmitted to Congress in early 2009.
Household Survey of the Unbanked and Underbanked
In January 2009, the U.S. Bureau of the Census conducted, on behalf of the FDIC, the first National Household Survey of the Unbanked and Underbanked. The survey was conducted as a supplement to Census’ Current Population Survey. In addition to collecting accurate estimates of the number of unbanked and underbanked households in the U.S., the survey was designed to provide insights into their demographic characteristics and reasons why the households are unbanked and/or underbanked. This effort is being undertaken in response to the Reform Act, which calls for the FDIC to provide an estimate of the size of the U.S. unbanked market and to identify issues that cause individuals and families to be unbanked. The FDIC plans to release survey results during 2009.
Information Technology, Cyber Fraud and Financial Crimes
The President’s Identity Theft Task Force, of which the FDIC is a member, submitted its follow-up report to the President in September 2008. The report documents the efforts of the Task Force to implement the 2007 Strategic Plan’s 31 recommendations concerning strengthening data protection, improving consumer authentication, assisting identity theft victims, and investigating, prosecuting, and punishing identity thieves.
Other major accomplishments during 2008 in combating identity theft included the following:
- Assisted financial institutions in identifying and shutting down approximately 1,223 “phishing” Web sites. The term “phishing” – as in fishing for confidential information – refers to a scam that encompasses fraudulently obtaining and using an individual’s personal or financial information.
- Utilized a brand protection service provider in taking down instances of abuse of the FDIC name or logo. In 2008, 14 active sites were closed (sites claiming to be FDIC or FDIC authorized).
- Issued 219 Special Alerts to FDIC-supervised institutions of reported cases of counterfeit or fraudulent bank checks.
- Issued, in conjunction with the other Federal Financial Institution Examination Council (FFIEC) agencies, examination procedures for “Identity Theft Red Flags, Address Discrepancies, and Change of Address Regulations.” These procedures are designed to assist financial institutions in complying with these new regulations and to provide examiners with a consistent methodology for assessing compliance. Examiners began reviewing bank compliance with the new regulations on the mandatory compliance date of November 1, 2008.
The FDIC conducts information technology examinations at each safety and soundness examination to ensure that institutions have implemented adequate risk management practices for the confidentiality, integrity, and availability of the institution’s sensitive, material, and critical information assets using the FFIEC Uniform Rating System for Information Technology (URSIT). The FDIC also participates in inter-agency examinations of significant technology service providers. In 2008, the FDIC conducted 2,577 information technology (IT) examinations at financial institutions and technology service providers. The FDIC also monitors significant events such as data breaches and natural disasters that may impact financial institution operations
The FDIC updated its risk-focused IT examination procedures for FDIC-supervised financial institutions. The procedures include an updated IT Officer’s Questionnaire which newly highlights risk issues related to vendor management.
The FDIC and other FFIEC regulatory agencies completed guidance concerning the risks associated with financial institutions’ use of remote deposit capture technology. The guidance, which discusses various risk mitigation techniques that institutions should use, was issued in January 2009.
The FDIC, in conjunction with the other FFIEC agencies issued guidance to financial institutions to enhance business continuity planning. On February 6, 2008, the FDIC, with the other FFIEC agencies, issued “Interagency Statement on Pandemic Planning” identifying actions that financial institutions should consider to minimize the adverse effects of a pandemic event. The Business Continuity Planning booklet, part of the FFIEC IT Examination Handbook series, was updated in March 2008 to address emerging threats such as pandemic planning and lessons learned from Hurricanes Katrina and Rita as well as additional testing guidelines. The guidance provides an enterprise-wide approach to a financial institution’s business continuity planning. The FDIC also participated in and hosted the Roundtable on Pandemic Planning sponsored by the FFIEC and the American Bankers Association with approximately 170 participants.
Consumer Complaints and Inquiries
The FDIC investigates consumer complaints concerning FDIC-supervised institutions and answers inquiries from the public about consumer protection laws and banking practices. As of December 31, 2008, the FDIC had received 14,169 written complaints, of which 6,267 involved complaints against state non-member institutions. The FDIC responded to over 96 percent of these complaints within timeliness standards established by corporate policy. The FDIC also responded to 3,588 written inquiries, of which 502 involved state non-member institutions. In addition, the FDIC responded to 4,789 written inquiries, of which 595 involved state non-member institutions. The FDIC also responded to 7,536 telephone calls from the public and members of the banking community in which 4,211 were regarding state non-member institutions.
Deposit Insurance Education
An important part of the FDIC’s deposit insurance mission is ensuring that bankers and consumers have access to accurate information about the FDIC’s rules for deposit insurance coverage. The FDIC has an extensive deposit insurance education program consisting of seminars for bankers, electronic tools for estimating deposit insurance coverage, and written and electronic information targeted for both bankers and consumers. The FDIC also responds to thousands of telephone and written inquiries each year from consumers and bankers regarding FDIC deposit insurance coverage.
|Directing the Electronic Deposit Insurance Estimator and Public Service Announcements (PSA) campaign (l to r): Kathy Nagle, Tibby Ford and Andrew Gray showcase material, including television PSAs.
Economic conditions in 2008 helped to spur a significant interest by bank customers in learning more about FDIC deposit insurance coverage. To meet the increased public demand for deposit insurance information, the FDIC implemented two major initiatives to help raise public awareness of the benefits and limitations of FDIC deposit insurance coverage:
- On June 16, 2008, in connection with the observation of the FDIC’s 75th anniversary, the FDIC embarked on a campaign to raise public awareness regarding FDIC deposit insurance coverage. As part of this effort, the FDIC facilitated a series of ads in selected national newspapers and magazines encouraging consumers to learn more about their FDIC insurance coverage. In addition, the FDIC sent all insured institutions a Portfolio of Deposit Insurance Coverage Resources for Bankers, containing copies of several education tools and publications on deposit insurance coverage; these products are designed to help bank employees who answer depositor questions about FDIC coverage.
- In September 2008, the FDIC launched a second major initiative to raise public awareness of the benefits and limitations of federal deposit insurance. The goal of this campaign, which involves a series of public service announcements for television, radio and print media, is to encourage bank customers to visit myFDICinsurance.gov, where they can use “EDIE the Estimator.” “EDIE the Estimator” is an online deposit insurance calculator that has been available to the public for a number of years but was simplified and made more accessible as part of this campaign. The public service announcements feature personal finance expert Suze Orman, who donated her time to this initiative. This campaign has been highly successful and prompted the FDIC to launch a Spanish language campaign, which also includes an updated deposit insurance calculator, in late 2008.
In addition to these significant public outreach initiatives, the FDIC continued its efforts to educate bankers who work with depositors about the rules and requirements for FDIC insurance coverage. In the summer of 2008, the FDIC conducted a series of 12 nationwide telephone seminars for bankers on deposit insurance coverage; these seminars were very well received, with an estimated 66,000 bankers participating at approximately 22,000 bank locations throughout the country. The FDIC also continued to work with industry trade groups to provide training for bank employees.
Deposit Insurance Coverage Inquiries
During 2008, the FDIC received 18,953 written deposit insurance inquiries from consumers and bankers. Of these inquiries, 99 percent received responses from the FDIC within the timeframes required by policy. This activity represents a 360 percent increase over 2007, where the FDIC received 4,125 written deposit insurance inquiries.
In addition to written deposit insurance inquiries, the FDIC received and responded to 81,979 telephone inquiries from consumer and bankers during 2008. In contrast, the FDIC replied to 15,899 deposit insurance telephone inquiries for the entire year in 2007. The 2008 activity represents a 416 percent increase over 2007.
Financial Education and Community Development
In 2001, the FDIC – recognizing the need for enhanced financial education across the country – inaugurated its award-winning Money Smart curriculum, which is now available in six languages, large print and Braille versions for individuals with visual impairments and a computer-based instruction version. Since its inception, over 1.8 million individuals (including approximately 235,000 in 2008) had participated in Money Smart classes and self-paced computer-based instruction. Approximately 300,000 of these participants subsequently established new banking relationships.
The FDIC extended the Money Smart program to the age 12-21 audience with the creation of a complementary program, “Money Smart for Young Adults.” All eight modules of the new curriculum are aligned with state educational standards, as well as Jump$tart national financial literacy standards and the National Council on Economics Education national economics standards. Through year-end 2008, the FDIC had received orders for more than 20,000 copies of the new curriculum since its launch on April 14, 2008. Over 40 outreach activities have taken place to specifically promote the curriculum, ranging from presentations and resource tables at events targeted at teachers, outreach activities to school district curriculum directors, and train-the-trainer sessions. Two new nationwide partnerships were also signed to facilitate the delivery of the new curriculum, one with Operation Hope and the other with Campfire USA, in addition to 33 local/regional partnerships. Additionally, the FDIC developed a portable audio format version of Money Smart that will be ready for launch near mid 2009.
During 2008, the FDIC also undertook over 400 community development, technical assistance and outreach activities and events. These activities were designed to promote awareness of investment opportunities to financial institutions, access to capital within communities, knowledge-sharing among the public and private sector, and wealth-building opportunities for families. Representatives throughout the financial industry and their stakeholders collaborated with the FDIC on a broad range of initiatives structured to meet local and regional needs for financial products and services, credit, asset-building, affordable housing, small business and micro-enterprise development and financial education.
In particular, the FDIC engaged in a number of activities as part of an effort to raise consumer awareness of the importance of personal savings and responsible financial management. A new Web page was launched to provide technical assistance and other resources to financial institutions, community-based organizations, and others to encourage the promotion of savings. The FDIC also undertook several speaking opportunities specifically on asset-building and the importance of personal savings. Additionally, the FDIC participated in 19 local savings campaigns during the 2008 America Saves week to encourage consumers to build wealth. FDIC’s involvement included providing technical assistance and training, participating in the launch of a new Saves initiative, and facilitating participants in the Saves initiatives in several markets receiving copies of Money Smart.
4 Compliance-only examinations are conducted for most institutions at or near the mid-point between joint compliance-CRA examinations under the Community Reinvestment Act of 1977, as amended by the Gramm-Leach-Bliley Act of 1999. CRA examinations of financial institutions with aggregate assets of $250 million or less are subject to a CRA examination no more than once every five years if they receive a CRA rating of “Outstanding” and no more than once every four years if they receive a CRA rating of “Satisfactory” on their most recent examination. back
5 The CAMELS composite rating represents the adequacy of Capital, the quality of Assets, the capability of Management, the quality and level of Earnings, the adequacy of Liquidity, and the Sensitivity to market risk, and ranges from “1” (strongest) to “5” (weakest). back