14 FDIC 2009 Annual Report

I. Management’s Discussion and Analysis

The Year in Review

The year 2009 was another extremely busy

one for the FDIC. In addition to the normal

course of business, the Corporation continued to

manage the Temporary Liquidity Guarantee Program (TLGP). Additional resources were needed

in response to the increased workload resulting

from resolving 140 bank failures. The FDIC continued its work on high-profile policy issues and

published numerous Notices of Proposed Rulemaking (NPRs) throughout the year, seeking

comment from the public. The Corporation also

continued to focus on a strong supervisory program.The FDICcontinued expansion offinancial

education programs with the release of a portable

audio version and a Hmong language version of

Money Smart. The FDIC also sponsored and cosponsored major conferences and participated in

local and global outreach initiatives.

Highlighted in this section are the Corporation’s 2009 accomplishments in each of its

three major business lines—Insurance, Supervision and Consumer Protection, and Receivership

Management—as well as its program support

areas.

Insurance

The FDIC insures bank and savings association deposits. As insurer, the FDIC must continually evaluate and effectively manage how

changes in the economy, the financial markets,

and the banking system affect the adequacy

and the viability of the Deposit Insurance Fund

(DIF).

Temporary Liquidity Guarantee Program

On October 14, 2008, the FDIC announced

and implemented the TLGP. The TLGP consists of two components: (1) the Debt Guarantee

Program (DGP)—an FDIC guarantee of certain

newly issued senior unsecured debt; and (2)

the Transaction Account Guarantee Program

(TAGP)—an FDIC guarantee in full of noninterest-bearing transaction accounts.

Under the DGP, the FDIC initially guaranteed in full, through maturity or June 30, 2012,

whichever came first, the senior unsecured debt

issued by a participating entity between October

14, 2008, and June 30, 2009. Banks, thrifts, bank

holding companies, and certain thrift holding

companies were eligible to participate. In May

2009, the FDICBoard finalized a rule that extended for four months the period during which participating entities could issue FDIC-guaranteed

debt. All participating insured depository institutions and those other participating entities that

had issued FDIC-guaranteed debt on or before

April 1, 2009, were permitted to participate in

the extension of the DGP without further application to the FDIC. Other participating entities

were permitted to issue debt during the extended

DGP upon receiving approval from the FDIC.

In conjunction with the extension of the DGP

issuance period, the expiration of the guarantee

period was pushed back to December 31, 2012.

As a result, approved participating entities could

issue FDIC-guaranteed debt through October 31,

2009, and the FDIC’s guarantee would expire on

the stated maturity date of the debt or December

31, 2012, whichever came first.

Participating entities could issue up to a maximum of 125 percent of the par value of the entity’s

senior unsecured debt that was outstanding as of

the close of business September 30, 2008, and

that was scheduled to mature on or before June

30, 2009. All debt with a term of 30 days or less
I. Management’s Discussion and Analysis 15

15 basis points, 20 basis points, or 25 basis points

depending on the institution’s deposit insurance

assessment category.

Program Statistics

Institutions were initially required to elect

whether to participate in one or both of the programs. More than half of the over 14,000 eligible

entities elected to opt-in to the DGP, while over

7,100 banks and thrifts, or 86 percent of FDICinsured institutions, opted into the TAGP. Most

of the institutions that opted out of the DGP had

less than $1 billion in assets and issued no appreciable amount of senior unsecured debt.

During its existence, the DGP guaranteed

over $618 billion in debt issued by 120 entities.

At its peak, the DGP guaranteed almost $350

billion of debt outstanding. The amount of debt

issuance declined as markets improved throughout 2009 and, as the chart shows (see next page),

the amount of debt outstanding correspondingly

decreased as shorter-term debt matured without

being rolled over. Near the program’s end on

October 31, 2009, however, the volume of debt

outstanding increased slightly. As of December

31, 2009, the total amount of FDIC-guaranteed

debt outstanding was $309 billion.

Under the TAGP, the FDIC guaranteed an

estimated $834 billion of deposits in noninterestbearing transaction accounts as of December

31, 2009, that would not have otherwise been

insured. More than 5,800 FDIC-insured institutions reported having noninterest-bearing transaction accounts over $250,000 in value.

The DGP collected approximately $10 billion

in fees under the program. As of December 31,

2009, one participating entity (a holding company) that had issued guaranteed debt had declared

was excluded from the definition of senior unsecured debt. The FDIC charged a fee based on the

amount and term of the debt issued. Fees ranged

from 50 basis points on an annualized basis for

debt with a maturity of 180 days or less, increasing to 75 basis points on an annualized basis for

debt with a maturity of 181 to 364 days and 100

basis points on an annualized basis for debt with

maturities of 365 days or greater. In conjunction

with the program extension in 2009, the FDIC

assessed an additional surcharge on debt with a

maturity of one year or greater issued after April

1, 2009. Unlike the other TLGP fees, which were

reserved for possible TLGP losses and not generally available for DIF purposes, the amount

of any surcharge collected in connection with

the extended DGP was to be deposited into the

DIF and used by the FDIC when calculating the

reserve ratio of the Fund. The surcharge varied

depending on the type of institution issuing the

debt with insured depository institutions paying

the lowest fees.

The TAGP initially guaranteed in full all

domestic noninterest-bearing transaction deposits held at participating banks and thrifts through

December 31, 2009. This deadline was later

extended through December 31, 2010. The guarantee also covered negotiable order of withdrawal

(NOW) accounts at participating institutions—

provided the institution committed to maintain

interest rates on the accounts of no more than

0.50 percentforthe duration ofthe program—and

Interest on Lawyers Trust Accounts (IOLTAs)

and functional equivalents. Participating institutions were initially assessed a 10 basis point

surcharge on the portion of covered accounts

that were not otherwise insured. The fees for the

TAGP were increased for the extension to either
16 FDIC 2009 Annual Report

December 31, 2009, totaled $1.765 billion. Overall, TLGP fees are expected to exceed the losses

from the program. At the conclusion of the program, any remaining TLGP funds will be added

to the DIF balance. Under the conditions of the

systemic risk determination, if fees are insufficient to cover costs of the program, the difference

would be made up through a special assessment.

bankruptcy and defaulted on its debt. Subsequently, a claim for payment was filed and approved.

In early 2010, the FDIC paid off the entire principal balance, including two quarterly interest

payments. Very few losses are expected on the

remaining outstanding debt through the end of

the DGP in 2012. As of December 31, 2009, the

FDIC had collected $639 million in fees under the

TAGP.1 Estimated TAGP losses on failures as of

Average Outstanding TLGP Debt

Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09

$400

350

300

250

200

150

100

50

0

Dollars in Billions

1 This figure reflects fees assessed through September 30, 2009, and collected as of December 31, 2009.
I. Management’s Discussion and Analysis 17

TAGP too quickly could unnerve uninsured

depositors and ultimately reverse the progress

made in restoring credit markets to more normal

conditions. To help transition institutions out of

the TAGP, therefore, the FDIC Board, on August

26, 2009, approved a final rule that extended the

TAGP for an additional six months, through June

30, 2010.

The final rule established higher assessment

fees for institutions participating in the extension

period. As mentioned earlier, fees were revised

from a flat-rate 10 basis points to a risk-based

system with an assessment rate of either 15, 20,

or 25 basis points depending on the institution’s

deposit insurance assessment category. The final

rule also provided an opportunity for participating entities to opt out of the TAGP extension by

November 2, 2009. Over 6,400 institutions (or 93

percent of institutions participating at year-end)

elected to continue in the TAGP.

State of the Deposit Insurance Fund and 

Changes in Assessment Rates

DepositInsuranceFund(DIF)lossesincreased

significantly during 2009, resulting in a negative

fund balance as of September 30, 2009. For the

year, continued and anticipated bank failures

resulted in a decline in the reserve ratio to negative 0.39 percent as of December 31, 2009, down

from 0.36 percent at the beginning of the year.

Changes in the Assessment Rates

The decline in the reserve ratio occurred

despite an increase in assessment rates overall

and several adjustments made to the risk-based

assessment system during the year. In the first

quarter, assessment rates increased across-theboard by 7 basis points. Rates for the first quarter

Debt Guarantee Phase-Out and 

Emergency Guarantee Facility

The DGP enabled financial institutions to

meet their financing needs during a period of

system-wide turmoil. The DGP reopened the

short- and medium-term debt markets for banks

and other eligible institutions by allowing them

to issue an array of debt instruments at a time

when banks were unable to roll over this debt

at reasonable rates and terms. By mid-2009, it

appeared that the financial markets were stabilizing. In September, the FDIC Board authorized an

NPR proposing a phase out of the DGP. Specifically, the NPR asked whether the FDIC should

close the basic DGP as scheduled but establish

a limited six-month emergency guarantee facility to address the possibility that a participating

DGP entity may be unable to replace its maturing senior unsecured debt with non-guaranteed

debt as a result of market disruptions or other

circumstances beyond the entity’s control. Few

comments were received on the proposal and

the FDIC Board voted on October 20, 2009, to

approve a final rule ending the DGP as of October 31, 2009, with only the emergency guarantee facility continuing on a case-by-case basis

through April 30, 2010. As its name implies,

the FDIC always intended the TLGP to be

temporary.

Transaction Account Guarantee Program 

Phase-Out

The TAGP was designed to eliminate potentially disruptive shifts in deposit funding and

thus preserve bank lending capacity. The program proved effective. However, because bank

failures continued to grow during 2009, the

FDIC remained concerned that terminating the
18 FDIC 2009 Annual Report

Setting the Designated Reserve Ratio

At a meeting on December 15, 2009, pursuant

to provisions in the Federal Deposit Insurance

Act that require the FDIC Board to set the Designated Reserve Ratio (DRR) for the DIF annually,

the FDIC Board set the 2010 DRR at 1.25 percent

of estimated insured deposits. The 2010 DRR of

1.25 percent is unchanged from the 2009 DRR.

Amendments to the Restoration Plan

The Federal Deposit Insurance Reform Act of

2005 requires the FDIC Board to adopt a restoration plan when the DIF reserve ratio falls below

1.15 percent or is expected to within six months.

Given the steady decline in the reserve ratio during 2008 and projections for future bank failures, the FDIC Board adopted a Restoration Plan

in October 2008 to restore the reserve ratio to at

least 1.15 percent within five years. The continued decline in the DIF balance throughout 2009,

however, necessitated several amendments to the

Restoration Plan.

On February 27, 2009, the FDIC Board first

amended the Restoration Plan by extending the

time frame for recapitalization of the DIF from

five years to seven years due to extraordinary

of 2009 ranged from 12 to 50 basis points. Institutions in the lowest risk category—Risk Category I—paid between 12 and 14 basis points.

On February 27, 2009, the FDIC Board issued

a rule incorporating adjustments to the riskbased assessment system to improve how the

system differentiates for risk. Effective April

1, 2009, the range of rates widened overall and

within Risk Category I. Initial base assessment

rates within Risk Category I now range from 12

to 16 basis points on an annual basis, while the

initial base rates for risk categories II, III, and IV

are 22, 32, and 45 basis points, respectively. An

institution’stotal base assessmentratemay be less

than or greater than its initial base rate as a result

of additional adjustments for secured liabilities

(increase), brokered deposits (increase), and/or

unsecured debt and Tier I capital (decrease). For

Risk Category I, total base assessment rates may

be as low as 7 basis points or as high as 24 basis

points. A Risk Category IV institution could have

a total base assessment rate as high as 77.5 basis

points. The initial base assessment rates, range

of possible rate adjustments, and minimum and

maximum total base rates, as of year-end, across

all risk categories are as follows:

Risk

Category

I

Risk

Category

II

Risk

Category

III

Risk

Category

IV

Initial Base Assessment Rate 12 – 16 22 32 45

Unsecured Debt Adjustment -5 – 0 -5 – 0 -5 – 0 -5 – 0

Secured Liability Adjustment 0 – 8 0 – 11 0 – 16 0 – 22.5

Brokered Deposit Adjustment 0 – 10 0 – 10 0 – 10

Total Base Assessment Rate 7 – 24 17 – 43 27 – 58 40 – 77.5
I. Management’s Discussion and Analysis 19

Actions to Meet Projected Liquidity Needs

While the Amended Restoration Plan and

higher assessment rates addressed the need to

return the reserve ratio to 1.15 percent, the FDIC

also had to consider its need for cash to pay for

projected near-term failures. In June 2008, before

the number of bank and thrift failures began to

rise significantly and the crisis worsened, total

assets held by the DIF were approximately $55

billion, consisting almost entirely of cash and

marketable securities. As the crisis continued

into 2009, the liquid assets of the DIF were used

to protect depositors of failed institutions. As of

September 30, 2009, cash and marketable securities had fallen to approximately $23 billion and

were projected to decline further as the pace of

resolutions continued to put downward pressure

on cash balances. The FDIC faced an immediate need for more liquid assets to fund near-term

failures.

To meet the projected liquidity needs for nearterm failures, the FDIC proposed a rulemaking

requiring insured institutions to prepay their

estimated quarterly risk-based assessments for

the fourth quarter of 2009, and for all of 2010,

2011, and 2012. The prepaid assessment for these

periods would be collected on December 30,

2009, along with each institution’s regular quarterly risk-based deposit insurance assessment for

the third quarter of 2009.

In order to calculate an institution’s assessments for the fourth quarter of 2009, and for all

of 2010, 2011, and 2012, the institution’s total

base assessment rate in effect on September

30, 2009, would be used. That rate would be

increased by an annualized 3 basis points for

2011 and 2012. Again, for purposes of calculating the amount that an institution prepaid on

circumstances. To meet this time frame and

help maintain public confidence in the banking system, the FDIC Board adopted an interim

rule with a request for comment that would have

imposed an emergency special assessment on

the industry of 20 basis points on the assessment

base as of June 30, 2009. The interim rule would

also have permitted the FDIC Board to impose

an emergency special assessment after June 30,

2009, of up to 10 basis points on the assessment

base, if necessary to maintain public confidence

in the federal deposit insurance system.

In response to comments, on May 22, 2009,

the FDIC Board voted to levy a special assessment of 5 basis points on each FDIC-insured

depository institution’s assets minus its Tier 1

capital, as of June 30, 2009. The special assessment was collected on September 30, 2009. The

assessment was capped at 10 basis points times

an institution’s assessment base so that no institution paid an amount higher than it would have

paid under the interim rule. The FDIC Board also

voted to allow additional special assessments in

2009 if conditions affecting the DIF warranted.

In May 2009, Congress amended the statutory

provision governing the establishment and implementation of a Restoration Plan giving the FDIC

eight years in which to bring the reserve ratio

back to 1.15 percent, absent extraordinary circumstances. As a result, on September 29, 2009, the

FDIC again adopted amendmentsto the Amended

Restoration Plan that allowed the DIF to return to

a reserve ratio of 1.15 percent within eight years.

Concurrently, the FDIC adopted a 3 basis point

increase in annual risk-based assessment rates

effective January 1, 2011. The FDIC Board also

voted not to impose any further special assessments on the industry for the remainder of 2009.
20 FDIC 2009 Annual Report

that are important to the FDIC’s role as deposit

insurer and bank supervisor. During 2009, the

CFR co-sponsored two major research conferences, a workshop, and a symposium.

The CFR organized and sponsored the 19th

Annual Derivatives Securities and Risk Management Conference jointly with Cornell University’s Johnson Graduate School of Management

and the University of Houston’s Bauer College

of Business. The conference was held in April

2009 at the Seidman Center and attracted over

100 researchers from around the world. Conference presentations included term structure modeling, price dynamics, fixed income, and options

pricing and credit risk.

The CFR also organized and sponsored the

9th Annual Bank Research Conference jointly with The Journal for Financial Services 

Research (JFSR) in September 2009. The conference theme, Governance and Compensation

in the Financial Services Industry, included 16

paper presentations and was attended by over

120 participants. Experts discussed a range of

banking and financial sector issues—including

corporate governance, bank lending behavior,

incentive structures, household finance, and the

subprime credit crisis.

The CFR held a one-day symposium on mortgage default risk which was jointly organized

with the Federal Housing Finance Agency. The

symposium attracted more than 200 industry

experts, academics, and policy makers. Discussion topics included collateral and appraisal

issues, underwriting standards, vendor model

developments, subprime and other alternative

mortgage product default modeling issues, as

well as analysis of various aspects of ongoing

loan modification programs.

December 30, 2009, an institution’s third quarter

2009 assessment base would be increased quarterly at a 5 percent annual growth rate through

the end of 2012. The proposal for the prepaid

assessment had certain attributes that made it

more attractive than imposing another special

assessment on the industry. Chief among these

was that the prepayment would not affect bank

capital and earnings at a time when these were

already under pressure. By implementing a prepaid assessment, banks would be able to book the

prepayment as an asset with a zero percent risk

weight. This asset would then be drawn down as

the bank’s regular quarterly risk-based assessment was levied. Additionally, those banks that

were likely to be severely adversely affected by

the prepayment could be exempted from the prepayment, although not from the actual quarterly

risk-based assessment.

The comments received by the FDIC were

mostly favorable—generally supporting the

notion that the industry should fund its own

needs to the extent possible. In November, the

Board finalized this rulemaking making one

substantive change. Any prepaid assessment not

exhausted after collection of the amount due on

June 30, 2013—moved up from December 31,

2014—will be returned to the institution at that

time. Moreover, if conditionsimprove before that

time, the FDIC Board may vote to return funds

to the industry sooner. The FDIC collected $45.7

billion from the prepaid assessments—enough

to fund its projected liquidity needs.

Center for Financial Research

The Center for Financial Research (CFR) was

founded by the Corporation in 2004 to encourage and support innovative research on topics
I. Management’s Discussion and Analysis 21

laborative effort culminated in the issuance of

the Core Principles for Effective Deposit Insurance Systems in June 2009. This is a significant

milestone for improving deposit insurance systems worldwide. The Core Principles were subsequently welcomed by the Financial Stability

Board (FSB) (formerly the Financial Stability

Forum) at its inaugural meeting in June.

The Financial Stability Institute (FSI) and the

BCBS partnered with IADI during IADI’s 8th

Annual Conference on September 23–24, 2009,

at the Bank for International Settlements (BIS)

in Basel, Switzerland, to present the Core Principles. More than 200 individuals representing

over 100 organizations from more than 80 jurisdictions attended the conference. Participants

included, among others, deposit insurers, financial supervisors, and central bankers. The conference was organized to further promote the Core 

Principles and contribute to their implementation

and further development. The event featured presentations by internationally recognized experts

Jaime Caruana, General Manager of the BIS;

Nout Wellink, Chairman of the BCBS and President, De Nederlandsche Bank; Josef Tosovsky,

Chairman of the FSI; William White, Chairman

of the Economic and Development Review Committee, Organization for Economic Co-operation

andDevelopment; andDavidHoelscher, Assista

Director, Monetary and Capital Markets Department, International Monetary Fund.

The FDIC’s leadership in developing and

implementing training seminars in partnership

with IADI, the European Forum of Deposit

Insurers (EFDI), and the Association of Supervisors of Banks of the Americas (ASBA) continued in 2009. The FDIC hosted and developed the

core curriculum for IADI’s executive training

The CFR hosted its annual Fall Workshop in

December, which included three days of research

paper presentations and discussions by FDIC

staff. The workshop was attended by about 30

external academics and 30 FDIC staff.

In addition to conferences, workshops and

symposia, 11 CFR working papers were completed and made public on topics including the

costs associated with FDIC bank resolutions, the

performance of the Basel II Advanced Internal

Model Approach for setting regulatory capital

requirements, new econometric methods to handle unit roots, executive compensation in bank

holding companies, bank failures and the cost of

systemic risk, the political economy associated

with the recent bailout, and the role of speculation in creating volatility in the oil markets.

International Outreach 

The FDIC demonstrated its leadership role

in promoting sound deposit insurance, bank

supervision, and bank resolution practices by

providing technical guidance, training, consulting services, and information to international

governmental banking and deposit insurance

organizations in many areas around the world.

The global crisis that began in the summer of

2007 and intensified in 2008 led many international authorities, including deposit insurers, to take a series of unprecedented actions to

restore public confidence and financial stability. In response to this crisis, the International

Association of Deposit Insurers (IADI), under

the leadership of its President—FDIC’s Vice

Chairman Martin Gruenberg—and the Basel

Committee on Banking Supervision (BCBS)

jointly led an effort to establish an agreed set

of deposit insurance core principles. The col-
22 FDIC 2009 Annual Report

an interim report was prepared in

December 2008. Subsequent to the

interim report, the Basel Committee asked the CBRG to expand its

analysis to review the developments

and processes of crisis management

and resolutions during the financial

crisis with specific reference to case

studies of significant actions by

relevant authorities, which included the failures of Lehman Brothers, Dexia, 

Fortis, and the Icelandic banks. 

response to this direction and building on this

initial stock take, the CBRG provided the Basel

Committee with a final report and recommendations to identify concrete and practical steps

to improve cross-border crisis management and

resolutions. The report and recommendations

have been coordinated with and seek to complement the work of the FSB by providing practicable detailed approaches to implement the FSB’s

Principles for Cross-border Cooperation on 

Crisis Management of April 2, 2009.

Throughout 2009, the FDIC has provided support to the FSB through its work on the Crossborder Crisis Management Working Group

chaired by Paul Tucker. This group has sought to

implement the high-level Principles for Crossborder Cooperation on Crisis Management of 

April 2, 2009. These principles include a commitment to cooperate by the relevant authorities, including supervisory agencies, central

banks and finance ministries, both in making

advanced preparations for dealing with financial

crises and in managing them. They also commit

national authorities from relevant countries to

meet regularly alongside core colleges to consider together the specific issues and barriers

seminar on “Claims Management: Reimbursement of Insured Depositors.” The FDIC cosponsored with EFDI a conference on “Deposit

Insurance Before and After a Systemic Crisis.”

The FDIC also delivered training in supervising

operational risk under ASBA’s training program

in Latin America.

The FDIC has also provided leadership

through its co-chairing of the BCBS’s Crossborder Bank Resolution Group (CBRG), which

published its final report and recommendations

in March 2010. The CBRG was established in

December 2007 under a mandate to analyze

existing resolution policies, allocation of responsibilities and legal frameworks of relevant countries as a foundation to a better understanding of

the potential impediments and possible improvements to cooperation in the resolution of crossborder banks. During the first half of 2008, the

CBRG collected detailed descriptions of national

laws and policies on the management and resolution of cross-border banks using an extensive

questionnaire completed by countries represented on the Group. The CBRG used the questionnaire responses to identify the most significant

potential impediments to the effective management and resolution of cross-border banks and

IADI members and FDIC staff at the executive training conference.
I. Management’s Discussion and Analysis 23

that was held at the Federal Reserve in December. The conference addressed approaches and

policies with respect to macroprudential supervision; cross-border supervisory cooperation;

regulatory reform; and consumer protection. The

FDIC has also strengthened its relationship with

China by signing an Appendix to the Supervisory Memorandum of Understanding between the

FDIC and the China Banking Regulatory Commission on May 26, 2010. The Appendix covers

issues relating cross-border contingency planning and the resolution of troubled institutions

within China and the United States.

Recognizing India’s rising economic role, the

FDIC participated in the U.S.-India Finance and

Economic Forum hosted by the Indian Ministry

of Finance in December in New Delhi, India.

The meeting brought together all financial sector regulators from the two countries to discuss

a variety of topics, including deposit insurance,

banking sector developments, capital and commodities markets, insurance, and financial education. The FDIC shared its responses during

the current economic crisis and its view on the

value of deposit insurance in a crisis, as well as

its efforts in financial education and economic

inclusion.

During 2009, FDIC staff shared its expertise

with a wide range of individuals from developing and emerging economies as well as from

developed economies, with the goal of enhancing

capacity in deposit insurance, supervision, and

resolutions. During the year, the FDIC hosted 67

individual visits with a total of more than 450 foreign visitors from over 30 countries. The FDIC’s

response to the financial crisis, U.S. regulatory

restructuring options, and resolution methods

were frequently discussed during these visits. In

to coordinate action that may arise in handling

severe stress at specific firms, to share information where necessary and possible, and to ensure

that firms develop adequate contingency plans.

The FSB principles cover practical and strategic

ex ante preparations and set out expectations

for how authorities will relate to one another

in a crisis. They draw upon recent and earlier

experiences of dealing with cross-border firms

in crisis, including the 2001 G10 Joint Taskforce

Report on the Winding Down of Large and Complex Financial Institutions, and the 2008 European Union Memorandum of Understanding on

Financial Stability. Currently this group is preparing detailed analysis of obstacles to recovery

and resolution planning, which will be presented

to the G20 in November 2010.

June marked the two-year anniversary of the

secondment program agreed upon between the

Financial Services Volunteer Corps (FSVC) and

the FDIC to place one or more FDIC staff members full-time in FSVC’s Washington, DC, office.

The projects in 2009 included an in-depth review

of bank supervisory practices at theBank of Albania; a series of commentaries and consultations

to assist the Central Bank of Egypt in creating

an appropriate and effective approach in the new

area of retail bank supervision; adapting FDIC

courses for the first time to a format streamlined

and relevant for examiners at the Reserve Bank

of Malawi, the Banque d’Algerie, and the Central

Bank of Egypt; and designing and participating in

FSVC’s first-ever training and consultations with

the Central Bank of Libya and the Central Bank

of Iraq on essential bank supervision topics.

The FDIC deepened its key relationship with

China by participating in the fourth annual U.S.-

ChinaBankingSupervisor’sBilateralConference
24 FDIC 2009 Annual Report

to impact large institutions. Given the increased

risk levels, the FDIC has expanded its presence

at the nation’s largest and most complex institutions through additional and enhanced on-site

and off-site monitoring.

The program increased its on-site presence

at the eight large complex institutions, as designated by the FDIC Board of Directors, to assess

risk, monitor liquidity, and participate in targeted reviews with the primary federal regulators.

Standardized liquidity, and reporting processes

are also in place at select large and problem institutions. Off-site monitoring has intensified with

weekly reporting on high-risk banks with total

assets of $5 billion or greater.

The Large Insured Depository Institution

(LIDI) Program remains the primary instrument for off-site monitoring of insured depository institutions with $10 billion or more in total

assets, or under this threshold at regional discretion. The LIDI Program continues to provide a

comprehensive process to standardize data capture and reporting through nationwide comprehensive quantitative and qualitative risk analysis

of large and complex institutions. As of December 31, 2009, the LIDI Program encompassed

109 institutions with total assets of over $10 trillion. In order to enhance large bank oversight,

the LIDI Program was refined to better quantify

risk to the insurance fund in all large banks. This

was accomplished, in collaboration with other

divisions and offices, through the implementation of the LIDI Scorecard. The LIDI Scorecard

is designed to weigh key risk areas and provide a

risk ranking and measurement system that compares insured institutions on the basis of both

the probability of failure and exposure to loss

at failure. The comprehensive LIDI Program is

addition, two FDIC staff members provided technical assistance through the FSVC on 15 missions

covering 12 countries. In November, FDIC staff

provided training to 32 Latin American bank

supervisors in the supervision of operational risk

in Panama as part of ASBA’s continental training program. Also, through the FDIC’s Corporate University Examiner training program and

the State Department’s Anti-Money Laundering/

Counter-Financing of Terrorism training program, the FDIC provided training to 146 students

from 20 countries. Additionally, the FDIC was

able to provide deposit insurance claims management training through the IADI Executive Training Program to 128 representatives from over 50

countries. In total, these efforts resulted in the

FDIC’s engagement with over 560 representatives

from 56 emerging or developing markets.

Complex Financial Institution Program

The FDIC’s Complex Financial Institution

(CFI) Program addresses the unique challenges

associated with the supervision, insurance, and

potential resolution of large/complex insured

institutions. 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 program provides for a consistent approach to largebank supervision nationwide, allows for analysis

of financial institution risks on an individual and

comparative basis, and enables a quick response

to risks identified at large institutions. The program’s objectives are achieved through extensive

cooperation with the FDIC regional offices, other

FDIC divisions and offices, and the other bank

and thrift regulators. Adverse economic and

market conditions throughout 2009 continued
I. Management’s Discussion and Analysis 25

tions, protects consumers’ rights, and promotes

community investment initiatives.

Examination Program 

The FDIC’s strong bank examination program is the core of its supervisory program.

As of December 31, 2009, the Corporation was

the primary federal regulator for 4,943 FDICinsured, state-chartered institutions that were 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 con

dition, management practices and policies, and

essential to effective large bank supervision by

capturing information on the risks and utilizing that information to best deploy resources to

high-risk areas, determine the need for supervisory action, and support insurance assessments

and resolution planning.

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 instituFDIC Examinations 2007–2009

2009 2008 2007

Risk Management (Safety and Soundness): 

State Non-member Banks 2,398 2,225 2,039

Savings Banks 203 186 213

Savings Associations 1 1 3

National Banks 0 2 0

State Member Banks 2 2 3

Subtotal—Safety and Soundness Examinations 2,604 2,416 2,258

CRA/Compliance Examinations:

Compliance/Community Reinvestment Act 1,435 1,509 1,241

Compliance-only 539 313 528

CRA-only 7 4 4

Subtotal—CRA/Compliance Examinations 1,981 1,826 1,773

Specialty Examinations:

Trust Departments 493 451 418

Data Processing Facilities 2,780 2,577 2,523

Subtotal—Specialty Examinations 3,273 3,028 2,941

Total 7,858 7,270 6,972
26 FDIC 2009 Annual Report

ing of “4” or “5”), compared to the 252 problem

institutions with total assets of $159.4 billion

on December 31, 2008. This constituted a 179

percent increase in the number of problem institutions and a 153 percent increase in problem

institution assets. In 2009, 179 institutions with

aggregate assets of $1.3 trillion were removed

from the list of problem financial institutions,

while 629 institutions with aggregate assets of

$1.6 trillion were added to the list. Eighty-three

institutions are in process of being downgraded

to problem status, reporting total assets of $32.2

billion. Colonial Bank, Montgomery, Alabama,

was the largest failure in 2009, with $25.0 billion

in assets (and was added to the list and resolved

in 2009). The FDIC is the primary federal regulator for 473 of the 702 problem institutions, with

total assets of $242.2 billion and $402.8 billion

respectively.

During 2009, the Corporation issued the following formal and informal corrective actions

to address safety and soundness concerns: 282

Cease and Desist Orders, 3 Temporary Cease and

Desist Orders, and 425 Memoranda of Understanding. Of these actions, 9 Cease and Desist

Orders and 22 Memoranda of Understanding

were issued based, in part, on apparent violations

of the Bank Secrecy Act.

compliance with applicable laws and regulations.

The FDIC also educates bankers and consumers

on matters of interest and addresses consumer

questions and concerns.

As of December 31, 2009, the Corporation

conducted 2,604 statutorily required risk management (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 1,981 CRA/compliance examinations

(1,435 joint CRA/compliance examinations, 5

compliance-only examinations,2 and 7 CRA-only

examinations) and 3,273 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.3

 The accompanying table on page 25 compares the number

of examinations, by type, conducted from 2007

through 2009.

Risk Management

As of December 31, 2009, there were 702

insured institutions with total assets of $402.8

billion designated as problem institutions for

safety and soundness purposes (defined as those

institutions having a composite CAMELS4 rat2 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.

3 The 2009 annual performance goal for compliance examinations on “3-, 4-, and 5-rated” institutions was not fully met. This annual

performance goal and the indicator have been revised for 2010 to be consistent with the goal established in years prior to 2009. The 2009

performance target was not achieved because of the inadvertent inclusion of “3-rated” institutions. The FDIC does not typically issue formal

enforcement actions for “3-rated” institutions. The 2009 performance target was fully met with respect to “4- and 5-rated” institutions.

4The 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).
I. Management’s Discussion and Analysis 27

and supervisory controls, in many cases, are still

under development at year-end. Among the initiatives are the following:

•	 Processing applications for those FDICsupervised institutions applying to the

Department of the Treasury’s Troubled Asset

Relief Program (TARP) Capital Purchase

Program (CPP). This program authorizes

the Treasury to purchase up to $250 billion

of senior preferred shares from qualifying

insured depository institutions. As of September 30, 2009, the FDIC had received over

1,700 applications requesting nearly $35 billion in TARP funding.

•	 As of December 31, 2009, the FDIC’s processing of CPP requests was 100 percent

completed. The Department of Treasury

completed the final disbursements under the

CPP program on December 31, 2009.

•	 Issuing a memorandum on February 10,

2009, to provide examiners with guidance

on reviewing compliance with CPP program

requirements. Examiners have incorporated

these procedures into their on-site reviews of

institutions participating in the CPP. Examination procedures for institutions participating in the TLGP were issued on September

24, 2009.

Joint Examination Teams 

The FDIC used joint compliance/risk management examination teams (JETs) to assess risks

associated with new, nontraditional, and/or highrisk 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 examine

As of December 31, 2009, 327 FDIC-supervised institutions were assigned a “4” rating for

safety and soundness, and 146 institutions were

assigned a “5” rating. Of the “4-rated” institutions, 297 were examined or had examinations

in process as of December 31, 2009, and formal

or informal enforcement actions are in process or

had been finalized to address the FDIC’s examination findings. Further, 131 “5-rated” institutions were examined or had examinations in

process as of December 31, 2009.

Compliance 

As of December 31, 2009, 34 FDIC-supervised

institutions were assigned or in process of being

assigned a “4” rating and one institution was

assigned a “5” rating for compliance. In total,

18 of the “4-rated” and the one “5-rated” institutions were examined in 2009; the remaining 16

were examined prior to 2009 and involved either

appeals or referrals to other agencies. Of these

35 institutions, 1 is under informal enforcement

action, 21 are under Cease and Desist Orders and

13 are in process of enforcement actions.

During 2009, the Corporation issued the following formal and informal corrective actions to

addressCompliance concerns: 18Cease andDesist

Orders and 50 Memoranda of Understanding.

Restoring and Maintaining Public 

Confidence and Stability in the 

Financial System

The FDIC is participating with other regulators, Congress, banks, and other stakeholders in

multiple new and changing initiatives, each with

its unique challenges and risks, to address the

current crises. The initiatives are very large in

scale, and the FDIC’s corresponding governance
28 FDIC 2009 Annual Report

ing, and the Financial Crimes Enforcement Network on the role of financial intelligence units in

detecting and investigating illegal activities.

Additionally, the FDIC hosted 29 representatives from the Central Bank of Russia, sponsored by the Financial Services Volunteer Corps.

Sessions included discussion of AML topics, as

well as supervisory examination processes and

interaction with the financial intelligence unit.

Separately, the FDIC met with five Russian and

three Kazakhstani foreign officials as a part of

the U.S. Department of State’s International Visitor Leadership Program to discuss the FDIC’s

AML Supervisory Program.

Minority Depository Institution Activities

The preservation of Minority Depository

Institutions (MDIs) remains a high priority for

the FDIC. In 2009, the FDIC continued to seek

ways for improving communication and interaction with MDIs, and responding to their concerns. Technical assistance was provided to 51

MDIs in a variety of different areas including,

but not limited to, the following:

•	 Deposit insurance assessments

•	 Proper use of interest reserves

•	 Filing branch and merger applications

•	 Complying with Part 365—Real Estate

Lending Standards

•	 Preparing Call Reports

•	 Performing due diligence for loan

participations

•	 Monitoring CRE concentrations

•	 Reducing adversely classified assets

•	 Stress testing

•	 Identifying and monitoring reputation risk

•	 Maintaining adequate liquidity

•	 Risks related to the use of brokered deposits

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 2009, 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; and institutions

for which the FDIC has received a high volume

of consumer complaints or complaints with serious allegations of improper conduct by banks.

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 2009.

The FDIC conducted three training sessions

in 2009 for 57 central bank representatives from

Bangladesh, Egypt, Ghana, Indonesia, Jordan,

Kuwait, Mali, Nigeria, Pakistan, Saudi Arabia,

Thailand, United Arab Emirates, and Yemen.

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 financ-
I. Management’s Discussion and Analysis 29

lending, liquidity and funding, mortgage foreclosure prevention programs, and accounting issues.

The FDIC held banker roundtables and/or

conference calls with MDIs in their geographic regions. Topics of discussion at roundtables

included the economy, overall banking conditions, agricultural conditions, deposit insurance assessments, accounting, and other bank

examination issues. Also, from December 2-3,

2009, the FDIC, in cooperation with the Puerto

Rico Bankers Association, hosted a compliance

school in Guayabo, PR. The event was attended

by approximately 150 bankers from nine banks.

In addition, the National MDI Coordinator

held conference calls with representatives from

several trade groups, including the Puerto Rico

Bankers Association, the NationalBankers Association, the Korean-American Bankers Association, the Asian-American Bankers Association,

the National Association of Chinese-American

Bankers, and the Hispanic Bankers Association,

to discuss the MDI program and FDIC outreach

activities.

Capital Standards

The FDIC continued to be actively involved in

domestic and international discussions intended

to address the deficiencies in regulatory capital

rules that were brought to light as a result of the

recent financial turmoil and 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.

Internationally, the FDIC is participating in

the Basel Capital Monitoring Group that tracks

the impact on risk-based capital with the implementation of Basel II. The FDIC will continue

•	 Compliance issues

•	 Community Reinvestment Act

•	 Procedures for filing regulatory appeals

•	 Criteria for assigning CAMELS ratings

The FDIC also continued to offer the benefit

of having examiners return to FDIC-supervised

MDIs from 90 to 120 days after examinations, to

assist management in understanding and implementing examination recommendations and to

discuss other issues of interest. Seven MDIs took

advantage of this initiative in 2009. Also, the

FDIC held six regional outreach training efforts

and educational programs to MDIs, three of

which are discussed below.

In February 2009, the FDIC held a conference

call to discuss various facets of the proposed

changes to the insurance assessment criteria,

including (a) the removal of statutory constraints

on the FDIC’s ability to charge institutions for

deposit insurance under the Federal Deposit

Insurance Reform Act of 2005, (b) the temporary

increase in basic deposit insurance coverage from

$100,000 to $250,000 per depositor under the

Emergency Economic Stabilization Act of 2008,

and (c) the insurance assessments for financial

institutions based on their risk category. There

was also a discussion about the criteria for participating in the Troubled Asset Relief Program

(TARP). Seventy-eight bankers participated on

the conference call.

The FDIC hosted the fourth annual MDI

National Conference in Chicago, Illinois, from

July 8-10, 2009. The conference theme was “A

Bridge to Community Stabilization,” and over

220 bankers from MDIs attended. The breakout

sessions focused on topics of interest to bank

management, including commercial real estate
30 FDIC 2009 Annual Report

the Fundamental Review of the Trading Book,

Asset Incumbrance, External Ratings and Securitization, and Macroprudential Supervision,

will continue their work into 2010.

Domestically, the FDIC issued a number of

interagency rulemakings to align regulatory

capital more closely with risk. On November 12,

2009, the FDIC made final the interim final rule

regarding the risk weights for Residential Mortgage Loans Modified Pursuant to the Making

Home Affordable Program (MHAP) of the U.S.

Department of the Treasury.5 This rule was jointly issued with the other federal banking agencies’ support to prevent residential real estate

foreclosures and keep Americans in their homes.

The rule allows an institution to continue to risk

weight a prudently-underwritten mortgage loan

at the preferential risk weight even though it has

been restructured under the Treasury’s program.

The final rule clarified that a banking organization may retain the risk weight assigned to

a mortgage loan before the loan was modified

under the MHAP.

On August 27, 2009, in response to the

financial turmoil and the Financial Accounting

Standards Board’s revisions to accounting rules

for consolidation of variable interest entities—

Statement of Financial Accounting Standards

No. 166, Accounting for Transfers of Financial 

Assets, an Amendment of FASB Statement No. 

140 (FAS 166—now codified as ASC 860), and

Statement of Financial Accounting Standards

No. 167, Amendments to FASB Interpretation No. 

46(R) (FAS 167—now codified as ASC 810)—

the federal banking regulators issued a proposed

to compile and analyze the information on the

international impact of Basel II on regulatory

capital as it becomes available through public

and supervisory sources.

The FDIC continues to participate in international efforts to improve the quality of capital, minimize the procyclicality of risk-based

capital requirements, and ensure the amount of

capital banks hold for risky exposures is commensurate with risk (notably securitization,

re-securitization, and trading book exposures).

The FDIC actively participates in the work of

the Basel Committee on Banking Supervision’s

Policy Development Group and a number of

working groups: AIG Trading Book, Fundamental Review of the Trading Book, Definition of

Capital, Non-Risk Based Supplementary Measure (leverage ratio), Liquidity, External Ratings and Securitizations, Counterparty Credit

Risk, Asset Encumbrance, Procyclicality, and

Macroprudential Supervision. The substantive

work of these groups culminated in the publication in June 2009 of Revisions to the Basel II 

market risk framework, Guidelines for computing capital for incremental risk in the trading 

book, and Enhancements to the Basel II framework—and two consultative papers in December of 2009—Strengthening the resilience of the 

banking sector and International framework for 

liquidity risk measurement, standards and monitoring. The FDIC also participated in drafting

the request for data for the impact studies that

the Basel Committee will undertake in early

2010 to calibrate the proposals in the consultative papers. A number of these groups, including

5 On March 4, 2009, the Treasury announced guidelines under the Making Home Affordable Program (MHAP) to promote sustainable loan

modifications for homeowners at risk of losing their homes due to foreclosure.
I. Management’s Discussion and Analysis 31

Guidance Issued

During 2009, the FDIC issued and participated in the issuance of guidance in several areas as

described below:

Structured Credit Products

FDIC-supervised institutions continued to

invest in structured credit products, including

private label mortgage-backed securities and

collateralized debt obligations. By early 2009,

a growing number of these institutions experienced deterioration in financial performance as

a result of these investments. To reinforce the

federal banking agencies’ existing guidance—

Supervisory Policy Statement on Investment 

Securities and End-User Derivatives Activities

and Uniform Agreement on the Classification of 

Assets and Appraisal of Securities—the agencies

issued new guidance on April 30, 2009, titled Risk 

Management of Investments in Structured Credit 

Products. The guidance reiterates and clarifies

existing supervisory guidance on the purchase

and holding of complex structured credit products. It focuses on the various supervisory concerns related to these securities: pre-purchase

analysis, suitability determination, risk limits,

credit ratings, valuation, ongoing due diligence,

adverse classification, and capital treatment.

Qualifications for Failed Bank Acquisitions

The FDIC developed guidance for private

investors interested in acquiring the deposit

liabilities, or the deposit liabilities and assets, of

failed insured depository institutions. The FDIC

published for comment on July 9, 2009, a Proposed Statement of Policy on Qualifications for

Failed Bank Acquisitions(Proposed Policy Statement). On August 26, 2009, the FDIC’s Board of

rule for comment titled Impact of Modifications

to Generally Accepted Accounting Principles, 

Consolidation of Asset-Backed Commercial 

Paper Programs, and Other Related Issues.

The final rule was approved by the FDIC Board

on December 15, 2009. The rule discussed the

impact of the accounting changes on the agencies’ regulatory capital rules. The rule modified

the general risk-based and advanced risk-based

capital adequacy frameworks to eliminate the

exclusion of certain consolidated asset-backed

commercial paper programs from risk-weighted

assets. The rule provided a reservation of authority in the general risk-based and advanced riskbased capital adequacy frameworks to permit the

agenciesto require banking organizationsto treat

entities that are not consolidated under accounting standards as if they were consolidated for

risk-based capital purposes. The rule included

an optional four-quarter transition period to ease

the impact of the accounting change on a bank’s

risk-based capital requirements but did not delay

the impact of the accounting change on a bank’s

leverage ratio.

The FDIC, with the other federal bank regulators, commenced a number of rulemakingsin late

2009, including a revised Standardized Framework notice of proposed rulemaking (NPR)

that proposes to implement the Basel II Accord

standardized risk-based capital framework, an

NPR to revise the Market Risk Amendment that

proposes higher regulatory capital requirements

for significant trading book activities, and an

NPR that proposes implementation of the Basel

changes to risk-based capital requirements that

doubles the capital charge for re-securitizations

and requires additional disclosures for securitizations and re-securitizations.
32 FDIC 2009 Annual Report

enhances the transparency of workout transactions, and ensures that supervisory policies and

actions do not inadvertently curtail the availability of credit to sound borrowers.

Liquidity Risk Management

On July 31, 2009, the federal banking agencies and the National Credit Union Administration sought comment on a proposed Interagency 

Guidance on Funding and Liquidity Risk Management. The agencies developed the guidance

to provide sound practices for managing funding and liquidity risk and strengthening liquidity

risk management practices. The new guidance

is intended to supplement existing guidance,

including FIL-84-2008, Liquidity Risk Management, issued by the FDIC in 2008, which remains

in effect. Where appropriate, the proposed guidance conforms to the Basel Committee’s Principles for Sound Liquidity Risk Management and 

Supervision. The final guidance was published

on April 15, 2010.

Brokered Deposits

The FDIC issued a final rule on May 29,

2009, effective January 1, 2010, changing the

way it administers statutory restrictions on the

deposit interest rates paid by banks that are

less than well-capitalized. Under Part 337.6 of

the FDIC Rules and Regulations, a less than

well-capitalized insured depository institution

may not pay a rate of interest that significantly

exceeds the prevailing rate in the institution’s

market area or the prevailing rate from which the

deposit is accepted. The final rule is intended to

simplify and strengthen the administration of

this regulation.

Directors voted to adopt the Final Statement of

Policy on Qualifications for Failed Bank Acquisitions (Final Policy Statement), which was published in the Federal Register on September

2, 2009. The Final Policy Statement takes into

account commentsreceived from companies, law

firms, legislators, and other interested parties,

and changed the minimum capital commitment

from 15 percent Tier 1 leverage to 10 percent

Tier 1 common equity. Other key elements of

the Final Policy Statement include cross support

requirements, a prohibition on affiliated lending, a limitation on the sale of acquired shares in

the first three years, a prohibition on bidding by

excessively opaque and complex business structures, and minimum disclosure requirements.

The Final Policy Statement specifies that it does

not apply to investors who hold 5 percent or less

of the total voting power as long as there is no

evidence of concerted action by these investors.

In adopting the Final Policy Statement, the FDIC

sought to strike a balance between the interests

of private investors and the need to provide adequate safeguards for the insured depository institutions involved.

Commercial Real Estate Guidance

In response to deteriorating trends in commercial real estate (CRE) and other commercial

loans, the FDIC, along with the other financial

regulators, issued the Policy Statement on Prudent Commercial Real Estate Loan Workouts(the

CRE Guidance) on October 30, 2009. The CRE

Guidance updates existing guidance to assist

examiners in evaluating institutions’ efforts to

renew or restructure loans to creditworthy borrowers. It promotes supervisory consistency,
I. Management’s Discussion and Analysis 33

cent risk weight for risk-based capital purposes.

The agencies reminded institutions, however,

that they should exercise the same prudent judgment and sound risk management practices with

respect to the registered warrants as they would

with any other obligation of a state.

The FDIC also initiated an interagency interest rate risk advisory to highlight concerns about

banks taking on excessive interest rate risk in

current low interest rate environment. This advisory, which was published in January 2010, clarifies existing guidance and reminds banks not to

lose focus on their management of interest rate

risk. Banks are expected to manage interest rate

risk exposures using policies and procedures

commensurate with their complexity, business

model, risk profile, and scope of operations.

Consumer Protection and Compliance 

Guidance

In January 2009, the FDIC approved, and

issued, along with the other federal bank regulators, updated Final Interagency Questions and

Answers on the Community Reinvestment Act

(CRA) and requested comment on new proposed

guidance. In June, the FDIC joined the other

regulators in requesting comment on CRA regulatory changes to implement statutory requirements relating to student loans and activities in

cooperation with minority- and women-owned

financial institutions and low-income credit

unions. The FDIC contributed to the development and June release of guidance and examination procedures on the 2009 Identity Theft

Red Flags regulations. In July, the FDIC joined

other regulators in issuing Revised Interagency

Questions and Answers Regarding Flood Insurance, updating guidance first issued in 1987,

De Novo Institutions

On August 28, 2009, the FDIC advised the

banking industry ofsupervisory changesforstate

non-member institutions insured seven years

or less (de novo period). Under previous policy,

newly insured institutions were subject to higher

capital requirements and more frequent examination activities during the first three years of

operation. Based on supervisory experience, the

FDIC extended the de novo period from a threeyear period to seven years for examinations, capital, and other requirements. In addition, material

changesin business plansfor newly insured institutions will require prior FDIC approval during

the first seven years of operation.

Regulatory Relief

During 2009, the FDIC issued six 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

American Samoa, Arkansas, Georgia, Kentucky,

Minnesota, and North Dakota were affected.

Other Guidance Issued

On July 8, 2009, in response to the severe

payment situation that the state of California

was experiencing, the federal banking agencies

issued supervisory guidance for institutions

regarding the regulatory capital treatment for

registered warrants issued by the state of California as payment for certain obligations. The

agencies’ risk-based capital standards permit

a banking organization to risk weight general

obligation claims on a state at 20 percent. These

warrants, which are general obligations of the

state, would, therefore, be eligible for the 20 per-
34 FDIC 2009 Annual Report

tions’ risk profiles and ratings. These ongoing

analyses have been augmented with numerous

ad hoc reviews (such as reviews of commercial real estate lending trends, interest rate risk

exposure, allowance-for-loan and lease losses

trends, and dividend payments). Furthermore,

the FDIC replaced its former Underwriting Survey Questionnaire with a Credit and Consumer

Products/Services Survey in October 2009. The

new survey extends beyond underwriting practices and addresses new or evolving products/

strategies and consumer compliance issues and

is now completed by examiners at the conclusion

of each risk management and consumer compliance examination. Supervisory staff monitors

and analyzes this real-time examiner input and

uses the information to help determine the need

for changes in policy guidance or supervisory

strategies as appropriate.

The FDIC continues to work with the FFIEC

to issue supervisory guidance on reverse mortgage products. The FDIC began this effort as

the result of an internal review that highlighted

consumer risks associated with this product. A

2009 GAO report highlighted similar issues. In

addition, the FDIC continues to work with other

agencies to enhance the Truth in Lending examination procedures to assist examiners when

reviewing compliance with reverse mortgage

disclosure requirements.

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 Reports) on a phased-in basis in March,

June, and December 2009. The revisions

and requested comment on additional proposed

guidance. In September, the FDIC alerted banks

to new statutory requirements to protect tenants

occupying foreclosed properties.

In November, the FDIC joined seven other

federal agencies in releasing a model privacy

notice form designed to make it easier for consumers to understand how financial institutions

collect and share their personal information. The

model form resulted from a multi-year consumer testing effort. In December, the FDIC joined

the other Federal Financial Institutions Examination Council (FFIEC) member agencies in

issuing for public comment, supervisory guidance on reverse mortgages, building on FDIC

analysis performed in 2008. In June, August,

and December, the FDIC issued guidance to the

institutions it supervises alerting them to significant changes in the Truth in Lending Act and the

Federal Reserve Board’s Regulation Z (which

implements that Act). In December, the FDIC

reminded institutions of the dramatically revised

Real Estate Settlement Procedures Act regulation issued by the Department of Housing and

Urban Development.

Monitoring Potential Risks from New 

Consumer Products 

The FDIC relies heavily on on-site supervisory activities to identify existing and emerging risks. In addition to on-site supervisory

activities, the FDIC uses several established

off-site processes, including Statistical CAMELS Off-site Rating (SCOR) and Growth Monitoring System (GMS), as well as more recent

comprehensive reviews (such as the Quarterly

Supervisory Risk Profile) to assess how identified risks are likely to affect insured institu-
I. Management’s Discussion and Analysis 35

and a change from annual to quarterly reporting

for small business and small farm lending data.

The agencies will collect new data pertaining to

reverse mortgages annually beginning December 31, 2010.

Promoting Economic Inclusion

The FDIC pursued a number of initiatives in

2009 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

2009 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 2009, over 60 banks and organizations

joined AEI nationwide, bringing the total number of AEI members to 967. More than 72,614

new bank accounts were opened during 2009,

bringing the total number of bank accounts

opened through the AEI to 162,692. During

2009, approximately 68,491 consumers received

financial education through the AEI, bringing the

total number of consumers educated to 142,796.

Also, 35 banks were in the process of offering or

developing small-dollar loans as part of the AEI,

focused on areas in which the banking industry

was experiencing heightened risk as a result of

market turmoil and illiquidity and weakening

economic and credit conditions. The reporting

changes included 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 must report

additional data on recurring fair value measurements, credit derivatives, and over-the-counter

derivative exposures.

In September 2009, the agencies updated

the reporting of data on the amount and number of deposit accounts and estimated uninsured

deposits in the Call Report schedule to reflect

the extension of the temporary increase in the

standard maximum deposit insurance amount

from $100,000 to $250,000 per depositor enacted in the Helping Families Save Their Homes

Act.

In December 2009, the agencies approved

revisions to the Call Report that were implemented in early 2010. The revisions incorporate

modifications made in response to comments

received on the agencies’ August 2009 proposal

and are subject to approval by the U.S. Office of

Management and Budget. The revisions respond

to such recent developments as a temporary

increase in the deposit insurance limit, changes

in accounting standards, and credit availability

concerns. The reporting changes that were effective March 31, 2010, include new data on otherthan-temporary impairments of debt securities,

loans to non-depository financial institutions,

and brokered time deposits; additional data on

certain time deposits and unused commitments;
36 FDIC 2009 Annual Report

demia, consumer or public advocacy organizations, and community-based groups.

The Advisory Committee met three times

during 2009. In February 2009, the meeting

topic was Strategies to Increase Access to the 

Financial Mainstream. The meeting featured an

overview of the FDIC Survey of Banks’ Efforts

to Serve the Unbanked and Underbanked and

focused on effective and innovative products and

services, policy approaches, and supervisory

and regulatory strategies to improve appropriate

engagement with the mainstream financial system, particularly for low- and moderate-income

(LMI) and underserved households.

The Advisory Committee also met in July

2009 to continue its discussion about issues and

challenges related to improving access to the

financial mainstream and to discuss innovative

ways that banks and others are encouraging savings through “game-based” strategies that make

savings fun or exciting, such as sweepstakes,

milestones, or rewards. After this meeting, a

report of the Committee’s views regarding the

issues and challenges of serving LMI and underserved consumers was posted on the FDIC web

site to spark discussion of how best to serve consumers who may be struggling, particularly in

the current economy.

On December 2, 2009, the Committee met to

discuss results of the FDIC National Unbanked 

and Underbanked Household Survey, overdraft

issues, and the strategic focus for the Committee.

As a next step, the Committee will formulate a

strategic plan that will provide a framework for

the Committee’s agenda over the next two years.

Among other things, the Strategic Plan will

include recommendations related to:

and 26 banks were offering remittance products

at the end of 2009.

The FDIC expanded the AEI initiative to two

additional markets during 2009—Detroit/South,

Michigan and Little Rock, Arkansas—bringing

the total number of active AEI markets to 14.

Additionally, the FDIC worked closely during

2009 to provide technical assistance and support

to communities in Milwaukee, Wisconsin and

northwestern Indiana interested in forming AEI

coalitions. The statewide Wisconsin Saves program agreed to lead an initiative in Milwaukee

patterned after the AEI.

The FDIC also worked closely during 2009

with the National League of Cities to provide

technical assistance to facilitate the launch of

Bank On campaigns in Seattle, WA; Savannah,

GA; Houston and San Antonio, TX; and Indianapolis, IN. The FDIC was also invited to serve

as a working committee member and advisor to

facilitate the launch of a Bank On Washington,

DC, campaign launched in April 2010.

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, shortterm loans, savings accounts, and other services

that promote asset accumulation and financial

stability. Committee members represent a crosssection of interests from the banking industry,

state regulatory authorities, government, aca-
I. Management’s Discussion and Analysis 37

ing ways to offer small-dollar loan customers

other mainstream banking services.

There are currently 30 banks of varied sizes

and diverse locations and settings participating

in the pilot. Banks submitted data on a quarterly

basis, which the FDIC analyzed to determine

trends and best practices. The FDIC encourages innovation in program design, but most

programs generally adhere to the FDIC’s SmallDollar Loan Guidelines, issued in June 2007,

and all feature payment periods beyond a single

paycheck, annual percentage rates below 36 percent, and streamlined underwriting and prompt

loan application processing. During seven quarters of the pilot, banks cumulatively originated

about 29,000 loans with a principal balance of

more than $34 million. Bankers involved in the

pilot cite a number of common factors that contributed to the success of their loan programs,

including strong senior management and board

support; an engaged and empowered “champion”

in charge of the program; proximity to large populations of consumers with demand for smalldollar loans; and, in some rural markets, limited

competition. The delinquency ratio for loans in

the pilot tends to be almost three times higher

than for general unsecured loans to individuals.

However, charge-off rates for loans originated

under the program are the same as general unsecured loans to individuals. These statistics show

that while small-dollar loan borrowers are more

likely to have trouble paying on time, they are no

more likely to default than those in the general

population.

Only a few bankers participating in the pilot

have reported that short-term profitability is the

primary goal for their program. Rather, most

pilot banks are using the small-dollar loan prod-

•	 Determining a desirable “base” level of

household savings, and how much households actually have.

•	 Addressing desirable features of safe,

affordable savings and transaction account

products.

•	 Determining how the FDIC can enhance

efforts to promote youth financial education

programs.

•	 Reviewing CRA to ensure that programs

targeted to LMI communities are receiving

appropriate consideration.

•	 Considering ways to scale small-dollar loans,

including standardizing an affordable smalldollar loan product, providing information

about existing programs, seeking philanthropic or government guarantee funds, and

potentially using government workforces as

a test for employer-based small-dollar loans.

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, includ-
38 FDIC 2009 Annual Report

by government bodies or philanthropic

groups. These guarantees provide important

assurances to banks interested in providing loan funds and other support to the

programs. To encourage more institutions

to offer small-dollar loan programs, larger

pools could be created.

•	 Consider Conducting a Pilot Using 

Federal Workforces to Test Innovative 

Small-Dollar Loan Business Models. The 

dominant model in the small-dollar loan pilot

is the “high-touch” relationship building

model. Peer-to-peer technology and employer-based lending are promising technologies

to reduce handling costs, and, with employer-based models, potentially credit losses.

To the extent legally permissible, the FDIC

or other federal workforces could explore

serving as pilots for testing innovative smalldollar loan business models.

FDIC Advisory Committee on 

Community Banking

On May 29, 2009, the FDIC Board of Directors

approved establishing the FDIC Advisory Committee on Community Banking. This commituct as a cornerstone for profitable relationships,

which also creates goodwill in their community.

A few banks’ business models focus exclusively

on the goodwill aspect and generating an opportunity for positive Community Reinvestment

Act consideration. Regardless of the business

model, all of the bankers involved in the pilot

have indicated that small-dollar lending is something they believe they should be doing to serve

their communities.

Through the Advisory Committee on Economic Inclusion, the FDIC is considering pursuing several initiatives to broaden the availability

of small-dollar loans at mainstream financial

institutions, including, but not limited to, the

following:

•	 Conduct a Close-Out Symposium, 

Article, and “Branding Effort” for the 

Small-Dollar Loan Pilot. The close-out

symposium will highlight final pilot findings, summarize technology and other innovations in small-dollar loans, and address

progress on incentives to scale small-dollar

loans across the financial mainstream. The

features identified in the pilot could also be

“branded” as the ideal for affordable, feasible small-dollar loan

programs.

•	 Consider Creating Pools of 

Non-Profit Funds or Government Operating Funds to Serve 

as “Guarantees” for Acceptable 

Small-Dollar Loan Programs.

Several existing small-dollar loan

programs feature “guarantees” in

the form of loan loss reserves or

linked, low-cost deposits provided Members of the Advisory Committee on Community Banking with Chairman Sheila C. Bair.
I. Management’s Discussion and Analysis 39

Unbanked and Underbanked Households,

breaking new ground in gaining understanding

of which Americans remain outside the banking

system. The survey, conducted on behalf of the

FDIC by the U.S. Bureau of the Census, was a

supplement to the Census Bureau’s Current Population Survey during January 2009. The study,

which is the most comprehensive survey to

date of the unbanked and underbanked, reveals

that more than one quarter (25.6 percent) of all

households in the United States are unbanked

or underbanked and that those households are

disproportionately low-income and/or minority. 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 or underbanked. The survey represents the first time that this data has been

collected to produce estimates at the national,

regional, state, and large metropolitan statistical

area (MSA) levels. 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.

Information Technology, Cyber Fraud, 

and Financial Crimes 

The FDIC issued Special Alertsin August and

October 2009 notifying financial institutions of

an alarming increase in reports of fraudulent

electronic funds transfer transactions resulting

from compromised login credentials. During

2009, the FDIC detected an increase in both the

number of such incidents and the losses resulting

tee was formed to provide the FDIC with advice

and guidance on a broad range of important

policy issues impacting small community banks

throughout the country, as well as the local communities they serve, with a focus on rural areas.

The 14-member committee represents a crosssection of community bankers from around the

nation, as well as a member from academia. The

first meeting, held on October 15, 2009, covered

the impact of the financial crisis on community

banks. Other issues addressed were regulatory

reform proposals under consideration by Congress and their effect on community banks, the

impact of FDIC supervisory proposals on these

banks, and community banks’ perspectives on

funding the FDIC’s Deposit Insurance Fund.

Survey Results of the Unbanked and 

Underbanked 

In February 2009, the FDIC transmitted to

Congress the results of the first national survey

of banks’ efforts to serve unbanked and underbanked individuals and families in their market

areas. The survey, conducted pursuant to a mandate in Section 7 of the Federal Deposit Insurance Reform Conforming Amendments Act of

2005, found that improvement may be possible

in the areas of institution focus, outreach, and

commitment to unbanked and underbanked

populations. The survey found that a majority

of banks—63 percent—offers basic financial

education materials, but fewer participate in the

types of outreach efforts that are viewed by the

industry as most effective to attract and maintain

unbanked and underbanked individuals as longterm customers.

On December 2, 2009, the FDIC released

the findings of its FDIC National Survey of
40 FDIC 2009 Annual Report

breaches and natural disasters that may impact

financial institution operations or customers.

As an additional element of its leadership role

in promoting effective bank supervision practices, the FDIC provides technical assistance,

training, and consultations to international governmental banking regulators in the area of IT

examinations. In 2009, through our secondment

program with the Financial Services Volunteer

Corps, the FDIC provided assistance in developing IT examination programs to the Central

Bank of Iraq, the Central Bank of Libya, Banque

d’Algerie, and Bank of Albania. The FDIC also

hosted a visit by the China Banking Regulatory

Commission to learn about our IT examination

programs, and the FDIC hosted an international

conference of bank regulators to discuss emerging technology risks and to compare supervisory

approaches.

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, 2009, the FDIChad received 17,245

written complaints, of which 8,280 involved

complaints against state non-member institutions. The FDIC responded to over 96 percent of

these complaints within the two-week standard

established by Corporate policy. The FDIC also

responded to 2,797 written inquiries, of which

503 involved state non-member institutions. In

addition, the FDIC responded to 6,491 telephone

calls from the public and members of the banking community, 3,878 of which concerned state

non-member institutions.

from them. Other major accomplishments during 2009 in combating identity theft included the

following:

•	 Assisted financial institutions in identifying and shutting down approximately

651 “phishing” web sites. The term

“phishing”—as in fishing for confidential 

information—refers to a scam th

encompasses fraudulently obtaining and

using an individual’s personal or financial

information.

•	 Issued 219 Special Alerts to FDICsupervised institutions on reported cases of

counterfeit or fraudulent bank checks.

•	 Issued, in conjunction with the other

FFIEC agencies, frequently asked questions (FAQs) concerning “Identity Theft

Red Flags, Address Discrepancies, and

Change of Address Regulations.” These

FAQs are designed to assist financial institutions in complying with the new regulations

and examiners in assessing institutions’

compliance.

The FDIC conducts information technology

(IT) 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 interagency examinations of significant technology

service providers. In 2009, the FDIC conducted

2,780 IT examinations at financial institutions

and technology service providers. The FDIC

also monitors significant events, such as data
I. Management’s Discussion and Analysis 41

seminars reached an estimated 35,000 bankers participating at approximately 10,000 bank

locations throughout the country. The FDIC also

continued to work with industry trade groups 

provide training for bank employees.

Deposit Insurance Coverage Inquiries

During 2009, the FDIC received 4,782 written

deposit insurance inquiries from consumers and

bankers. Of these inquiries, 99 percent received

responses from the FDIC within two weeks,

as required by Corporate policy. In addition to

written deposit insurance inquiries, the FDIC

received and answered 41,259 telephone inquiries from consumers and bankers during 2009.

The 46,041 total deposit insurance inquiries received in 2009 is significantly less than

the 100,933 total deposit insurance inquiries

received in 2008, when there was an unprecedented surge in deposit insurance questions following the failure of IndyMac Bank. However,

the 2009 deposit insurance inquiries represent a

130 percent increase compared to 2007, when the

FDIC received a total of 20,024 inquiries about

deposit insurance coverage.

Foreclosure Prevention

In 2009, the FDIC launched an initiative to

help consumers and the banking industry avoid

unnecessary foreclosures and stop foreclosure

“rescue” scams that promise false hope to consumers at risk of losing their homes.

The FDIC focused its foreclosure mitigation

efforts in three areas during 2009:

•	 Direct outreach to consumers with information, education, counseling, and referrals.

During 2009, the FDIC hosted or co-hosted

over 82 consumer outreach events that

Deposit Insurance Education

An important part of the FDIC’s deposit insurance mission is ensuring that bankers and consumers have accessto 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.

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.

In 2009, the FDIC continued with its 2008 initiatives aimed at raising the public’s awareness

of the benefits and limitations of federal deposit

insurance. The FDIC continued its campaign

of public service announcements for television,

radio, and print media; these public service

announcements encouraged bank customers to

visit myFDICinsurance.gov to learn about FDIC

insurance coverage. In addition to our efforts

to raise public awareness, the FDIC expanded

its efforts to educate bankers about the rules and

requirementsfor FDICinsurance coverage.In the

fall of 2009, after all legislative and regulatory

changes were implemented, the FDIC conducted

a series of six nationwide telephone seminars for

bankers on deposit insurance coverage. These
42 FDIC 2009 Annual Report

The FDIC also worked collaboratively with

other key partners, both inside and outside federal

government, on post-foreclosure neighborhood

stabilization efforts. These efforts will continue in

2010.

Financial Education and Community 

Development

In 2001, the FDIC—recognizing the need

for enhanced financial education across t

country—inaugurated its award-winning Money 

Smart curriculum, which was, until 2009, available in six languages, large print and Braille versions for individuals with visual impairments,

and a computer-based instruction version. Since

its inception, over 2.4 million individuals have

participated in Money Smart classes and selfpaced computer-based instruction. Approximately 300,000 of these participants subsequently

established new banking relationships.

The FDIC significantly expanded its financial

education efforts during 2009 through a multipart strategy that included making available

timely, high-quality financial education products, expanded delivery channels, and the sharing of best practices.

Two new Money Smart products were released

in 2009. First, as part of efforts to reach underserved communities, the FDIC released a Hmong

(an Asian dialect found in Vietnam, Laos, Thailand, and Myanmar) language version of Money 

Smart, making it the seventh language in which

the curriculum is offered. Second, the FDIC

released the Money Smart Podcast Network, a 

portable audio version of Money Smart suitable

for use with virtually all MP3 players. It was

created as a tool for consumers to use to learn

on their own or for educators seeking an innoreached over 17,000 consumers. The FDIC

also released an informational toolkit and

launched a phone referral service to help

homeowners avoid scams and reach their

servicer.

•	 Industry outreach and education targeted 

to lenders, loan servicers, local governmental agencies, housing counselors, and first 

responders (faith-based organizations, advocacy organizations, social service organizations, etc.). The FDIC worked collaboratively

throughout 2009 with local foreclosure coalitions, AEI partners, and others to co-host

industry-wide events. Approximately 20 such

events were conducted during 2009.

•	 Support for capacity building initiatives to 

help expand the quantity and quality of foreclosure counseling assistance that is available within the industry. Working closely

with NeighborWorks® America and other

national and local counselor training and

intermediaries, the FDIC worked to support

industry efforts to build the capacity of housing counseling agencies.

As part of the FDIC’s foreclosure prevention

efforts, the FDIC released two new educational

brochures during 2009 (in both English and

Spanish) to help consumers avoid scams and

turn to legitimate sources of assistance. The Is 

Foreclosure Knocking at Your Door? brochure

encourages consumers to seek a loan modification. The Beware of Foreclosure Rescue Scams

brochure alerts homeowners to common scams

and directs them to legitimate sources of assistance. The demand for both brochures was

strong—over 150,000 copies were requested and

distributed.
I. Management’s Discussion and Analysis 43

new savings deposits in financial institutions.

Also, recognizing the importance of small business growth and job creation as an essential

component in America’s economic recovery, the

FDIC expanded its emphasis on facilitating small

business development, expansion and recovery

during 2009. Thisincluded hosting well-received

events to help small businesses identify supportive programs, including mainstream lending options. The FDIC also helped facilitate the

establishment of two new small business loan

pools during 2009 to originate loans to eligible

entrepreneurs and small businesses unable to

obtain traditional loans because of an elevated

risk profile (e.g., start-up businesses with insufficient cash flow or collateral). These new loan

pools were launched in Alexandria, Virginia,

and Baton Rouge, Louisiana.

Resolutions and Receiverships 

The FDIC has the unique mission of protecting depositors of insured banks and savings

associations. No depositor has ever experienced

a loss on the insured amount of his or her deposit

in an FDIC-insured institution due to a failure.

Once an institution is closed by its chartering

authority—the state for state-chartered institutions, the Office of the Comptroller of the Currency (OCC) for national banks, and the Office

of Thrift Supervision (OTS) for federal savings

associations—and the FDIC is appointed receiver, the FDIC is responsible for resolving the

failed bank or savings association.

The FDIC employs a variety of business practices to resolve a failed institution. These business practices are typically associated with the

resolution process or the receivership process.

Depending on the characteristics of the instituvative way to supplement traditional classroom

instruction. The new MP3 version received more

than 328,716 hits from 11,015 individual visitors

between its release on May 27, 2009, and yearend 2009. Showing its appeal, visitors to the web

site spent an average of 38 minutes on the site.

Additionally, to enhance the quality of existing

products, information on foreclosure prevention scams and legitimate sources of foreclosure

assistance was added to the adult instructor-led

and self-paced versions of Money Smart.

The FDIC also expanded its delivery channels

for financial education. For example, 237 new

organizations joined the FDIC’s Money Smart 

Alliance. Finally, best practices were shared

through four editions published of Money Smart 

News, which reached over 40,000 subscribers.

During 2009, the FDIC undertook over 200

community development, technical assistance,

financial education, 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.

For example, the FDIC participated in 15

local savings campaigns during the 2009 America Saves week to encourage consumers to build

wealth. The FDIC’s leadership of one such local

campaign helped facilitate nearly $10 million in
44 FDIC 2009 Annual Report

assets” for a specific period of time (for example,

five to ten years). The economic rationale for

these transactions is that retention of shared loss

assets in the banking sector can produce a better

net recovery than would the FDIC’s immediate

liquidation of these assets.

Deposit payoffs are only executed if a bid

for a P&A transaction does not meet the leastcost test or if no bids are received, in which case

the FDIC, in its corporate capacity as deposit

insurer, makes sure that the customers of the

failed institution receive the full amount of their

insured deposits.

The Banking Act of 1933 authorized the FDIC

to establish a DINB to assume the insured deposits of a failed bank. A DINB is a new national

bank with limited life and powers that allows

failed bank customers a brief period of time to

move their deposit account(s) to other insured

institutions. A DINB allows for a failed bank to

be liquidated in an orderly fashion, minimizing

disruption to local communities and financial

markets. Another resolution option, open bank

assistance transactions, generally can only be

used in the event the bank’s failure would result

in systemic risk.

The receivership process involves performing the closing functions at the failed institution, liquidating any remaining failed institution

assets, and distributing any proceeds of the liquidation to the FDIC and other creditors of the

receivership. In its role as receiver, the FDIC

has used a wide variety of strategies and tools to

manage and sell retained assets. These include,

but are not limited to asset sale and/or management agreements, partnership agreements, and

securitizations.

tion, the FDIC may recommend several of these

practices to ensure prompt and smooth payment

of deposit insurance to insured depositors, to

minimize impact on the Deposit Insurance Fund,

and to speed dividend payments to creditors of

the failed institution.

The resolution process involves valuing a

failing institution, marketing it, soliciting and

accepting bids for the sale of the institution,

determining which bid is least costly to the

insurance fund, and working with the acquiring

institution through the closing process.

In order to minimize disruption to the local

community, the resolution process must be performed quickly and as smoothly as possible.

There are three basic resolution methods: purchase and assumption transactions, deposit payoffs, and utilizing a Deposit Insurance National

Bank (DINB).

The purchase and assumption (P&A) transaction is the most common resolution method used

for failing institutions. In a P&A transaction, a

healthy institution purchases certain assets and

assumes certain liabilities of the failed institution. There are a variety of P&A transactions that

can be used. Since each failing bank situation is

different, P&A transactions provide flexibility

to structure deals that result in the highest value

for the failed institution. For each possible P&A

transaction, the acquirer may either acquire all

or only the insured portion of the deposits. Loss

sharing may be offered by the receiver in connection with a P&A transaction. In a loss sharing

transaction, the FDIC as receiver agrees to share

losses on certain loans with the acquirer. The

FDIC usually agrees to absorb a significant portion (for example, 80 percent) of future losses on

assets that have been designated as “shared loss
I. Management’s Discussion and Analysis 45

marketed to be sold within 90 days of an institution’s failure.

Structured asset sales in 2009 included

$1.3 billion of residential loans from Franklin

National Bank. This transaction involved FDICguaranteed purchase money debt, and equity

in a Limited Liability Company (LLC) shared

between the receiver and the successful bidder.

The Corus Construction Venture LLC structured asset sale consisted of $4.5 billion of condominium and office construction loans from

Corus Bank. In this transaction, the FDIC structured the purchase money debt at an initial term

leverage of one-to-one to the bidders and structured the notes to be in the form of multiple bullet maturity notes guaranteed by the FDIC.

In 2009, the book value of assets under management increased by $26.2 billion to $41.4 billion. The following chart shows beginning and

ending balances of assets by asset type.

Assets in Inventory by Asset Type

Dollars in Millions

Asset Type

Assets in 

Inventory 

01/01/09

Assets in 

Inventory 

12/31/09

Securities $467 $12,425

Consumer Loans 204 475

Commercial Loans 2,985 4,423

Real Estate Mortgages 9,808 15,613

Other Assets/Judgments 703 4,096

Owned Assets 832 3,257

Net Investments in Subsidiaries 108 1,066

Total $15,107 $41,355

Financial Institution Failures 

The FDIC experienced a significant increase

in the number and size of institution failures as

compared to previous years. During 2009, 140

financial institutions failed. For the institutions

that failed, the FDIC successfully contacted all

known qualified and interested bidders to market

these institutions. Additionally, the FDIC marketed over 80 percent of the marketable assets of

these institutions at the time of failure and made

insured funds available to all depositors within

one business day of the failure. There were no

losses on insured deposits, and no appropriated

funds were required to pay insured deposits.

The following chart provides a comparison of

failure activity over the last three years.

Failure Activity 2007–2009

Dollars in Billions

2009 2008 2007

Total Institutions 140 25 3

Total Assets of Failed 

Institutions* $169.7 $371.9 $2.6

Total Deposits of Failed 

Institutions* $137.1 $234.3 $2.4

Estimated Loss to the DIF $35.6 $19.8 $0.2

*Total Assets and Total Deposits data are based on the last Call Report filed by 

the institution prior to failure.

Asset Management and Sales

As part of its resolution process, the FDIC

makes every effort to sell as many assets as

possible to an assuming institution and generally is successful in doing this. Assets that are

passed to the receivership are evaluated, and

those that are determined to be marketable are
46 FDIC 2009 Annual Report

tion. The FDIC conducts outreach to encourage

and inform MWOBs about the procurement process and opportunities for prime and subcontract

awards. For 2010, the FDIC seeks to increase the

number of awards and dollar value of the awards

made to MWOBs in all racial, gender, and ethnic

categories in the financial services industry.

Protecting Insured Depositors 

With the increase in failure activity in 2009,

the FDIC’s focus on protecting deposits in institutions that fail was of critical importance. Confidence in the banking system hinges on deposit

insurance, and no insured deposits went unpaid

in 2009.

The FDIC’s ability to attract healthy institutions to assume deposits and purchase assets

of failed banks and savings associations at the

time of failure minimizes the disruption to customers and allows assets to be returned to the

private sector immediately. Assets remaining

after resolution are liquidated by the FDIC in an

orderly manner, and the proceeds are used to pay

creditors, including depositors whose accounts

exceeded the insurance limit. Effective October

3, 2008, through December 31, 2009, the standard

maximum deposit insurance amount increased

from $100,000 to $250,000, and this increase

was later extended to December 31, 2013. During

2009, the FDIC paid dividends of $21.0 million to

depositors whose accounts exceeded the insured

limit(s).

Professional Liability and Financial 

Crimes Recoveries

The FDIC staff works to identify potential

claims against directors, officers, accountants,

appraisers, attorneys, and other professionals

Receivership Management Activities

The FDIC, as receiver, manages failed banks

and their subsidiaries with the goal of expeditiously winding up their affairs. The oversight

and prompt termination of receiverships help to

preserve value for the uninsured depositors and

other creditors by reducing overhead and other

holding costs. Once the assets of a failed institution have been sold and the final distribution

of any proceeds is made, the FDIC terminates

the receivership estate. In 2009, the number of

receiverships under management increased by

74 percent due to the increase in failure activity.

The following chart shows overall receivership

activity for the FDIC in 2009.

Receivership Activity

Active Receiverships as of 01/01/09* 49

New Receiverships 140

Receiverships Inactivated 2

Active Receiverships as of 12/31/09* 187

*Includes eight FSLIC Resolution Fund receiverships.

Minority and Women Owned Businesses

The significant increase in the number of

financial institution failures over the last two

years has resulted in the FDIC’s increased reliance on contractors to assist in resolving receiverships created from failed financial institutions

and liquidating their assets. In 2009, the FDIC

made 1,212 contract awardstotaling $2.66 billon;

376 (31%) of those awards, valued at $862 million

(32%), were to minority and women-owned businesses (MWOBs). The FDIC promotes the inclusion of MWOBs in its procurement program,

which relies on competitive bidding by invita-
I. Management’s Discussion and Analysis 47

operational effectiveness and minimize potential

financial risks to the DIF.

Human Capital Management

The FDIC’s human capital management programs are designed to recruit, develop, reward,

and retain a highly skilled, cross-trained,

diverse, and results-oriented workforce. In 2009,

the FDIC stepped up workforce planning and

development initiatives that emphasized hiring

the additional skill sets needed to address the

greatly increased number of financial institution

failures and institutions in at-risk categories. The

Corporation also deployed a number of strategies

to more fully engage all employees in advancing

the FDIC’s mission.

Succession Management

In 2009, the Corporation significantly expanded its education and training curriculum for

employees in the business lines, support functions, and leadership development. Additionally,

learning and development was supplemented and

supported with the expansion of e-learning, job

aids, and tool kits that were made available to new

and tenured employees to facilitate work processes and overall efficiencies.

A leadership development curriculum was

launched to expand opportunities to all employees, including newly-hired employees. This new

curriculum takes a comprehensive approach,

aligning leadership development with critical

corporate goals and objectives, and promotes

desired culture. By developing employees across

the span of their careers, the Corporation builds

a culture of leadership and further promotes a

leadership succession strategy.

who may have contributed to the failure of an

insured financial institution. Once a claim is

deemed meritorious and cost-effective to pursue, the FDIC initiates legal action against the

appropriate parties. During the year, the FDIC

recovered approximately $53.5 million from

these professional liability claims/settlements.

In addition, as part of the sentencing process for

those convicted of criminal wrongdoing against

institutions that later failed, a court may order a

defendant to pay restitution or to forfeit funds or

property to the receivership. The FDIC, working in conjunction with the U.S. Department of

Justice, collected $5.5 million in criminal restitutions and forfeitures during the year. At the

end of 2009, the FDIC’s caseload was composed

of 25 professional liability lawsuits (up from 17

at year-end 2008) and 1,878 open investigations

(up from 284). There also were 3,379 active restitution and forfeiture orders (up from 638 at

year-end 2008). This includes 190 FSLIC Resolution Fund orders—i.e., orders inherited from

the Federal Savings and Loan Insurance Corporation on August 10, 1989, and orders inherited

from the Resolution Trust Corporation on January 1, 1996.

Effective Management of 

Strategic Resources

The FDIC recognizes that it must effectively

manage its human, financial, and technological

resources in order to successfully carry out its

mission and meet the performance goals and targets set forth in its annual performance plan. The

Corporation must align these strategic resources

with its mission and goals and deploy them where

they are most needed in order to enhance its
48 FDIC 2009 Annual Report

human resources resulting

from the increased number

of failed financial institutions and the volume of additional examinations. Among

these strategies, the FDIC

reemployed over 200 retired

FDIC examiners, attorneys,

resolutions and receiverships

specialists, and support personnel; hired employees of

failed institutions in temporary and term positions;

recruited mid-career examiners who had developed their

skills in other organizations;

recruited term loan review

specialists and compliance analysts from the

private sector; and redeployed current FDIC

employees with the requisite skills from other

parts of the Corporation.

As the number of failed financial institutions

proliferated in 2009, the FDIC Board authorized

the opening of two temporary satellite offices on both the west coast and the east coast to

bring resources in areas hit especially hard. The

West Coast Temporary Satellite Office opened

in Irvine, California, in early spring and as of

year-end had over 400 employees with a target

of over 500. The East Coast Temporary Satellite

Office opened in Jacksonville, Florida, in the

fall. Although the Corporation is still recruiting

for this office, eventually it too will have over

500 employees. The Corporation also increased

resolutions and receiverships staff in the Dallas

regional office. Almost all of the new employees

in these new offices have been hired on a nonpermanent basisto handle the temporary increase

Also in 2009, the Corporation completed a

pilot Corporate Executive Development Program. This comprehensive 18-month succession

program provided a formalized process to identify and develop high-performing, high-potential

supervisors and senior technical specialists. Pilot

results are being evaluated and will be leveraged

in future succession management strategies and

decisions.

Additionally, the Corporation formalized its

Master of Business Administration (MBA) program for Corporate Managers and Executive

Managers, in conjunction with a major university.

The evaluation results of the pilot MBA program

were overwhelmingly positive, and participants

provided explicit examples of direct application

to their jobs and improved strategic thinking.

Strategic Workforce Planning and Readiness

The FDIC utilized a number of employment

strategies in 2009 to meet the need for additional

Senior leaders meet with CEDP participants to discuss their first year (l to r): Rich Brown, Rex Taylor,

Maureen Sweeney, Laura Lapin, Kathy Norcross, Mickey Collins, Steve Mosier, Rus Pittman, Erica

Bovenzi, Andrew Stirling, Bob Mooney, and Ira Kitmacher. Executive advisors and host supervisors not

shown: Glen Bjorklund, Jim LaPierre, and Lisa Roy.
I. Management’s Discussion and Analysis 49

the Federal Human Capital Survey mandated by

Congress. A corporate Culture Change Initiative

was instituted in 2008 to address issues resulting

from the survey.

The Culture Change Initiative has continued

to gain momentum, and progress is occurring

toward completion of goals identified in the Culture Change Strategic Plan. The 2008 employee

survey results showed marked improvement in

the areas of opportunity, while maintaining or

improving on areas of strength. The Corporation

worked with the National Treasury Employees’

Union to develop a new pay-for-performance system that is perceived to be more transparent and

fair to employees. The new system was implemented in 2009. Also in 2009, the Corporation

delivered training to its Corporate Managers on

trust. It offered leadership enrichment activities

that provided continual learning. Culture Change

dialogue sessions were held across the country,

with approximately 5,500 employees participating. Analysisindicates a positive response to these

events and a willingness to engage in the change

process. The question-and-answer mailbox and

quarterly all-employee teleconferences with the

Chairman continued so that employees could provide input, make suggestions, and ask questions.

The next phase of the Initiative was started

in September 2009 with the selection of a new

Program Manager. The Internal Ombudsman

Program, initiated as part of the Culture Change

Initiative, continued, providing another avenue

for following up on employee issues. The Culture Change Council is being reconstituted, with

at least six former Council and Team members

returning to ensure continuity and up to six new

members being selected. Best practices in public

and private sector organizations on sustaining

in bank closing and asset management activities

expected over the next two to four years. To staff

these offices and meet other needs brought on by

the financial crisis, the Corporation hired nearly

1,800 additional employees in 2009. The use of

term appointments will allow the FDIC staff to

return to an adjusted normal size once the crisis

is over without the disruptions that reductions in

permanent staff would cause.

The FDIC continued its efforts to build workforce flexibility and readiness by increasing its

entry-level hiring into the Corporate Employee

Program (CEP). The CEP is a multi-year development program designed to cross-train new

employees in the FDIC’s major business lines.

In 2009, 206 new business line employees (736

since program inception) entered the multidisciplined program. At its largest participant

capacity since inception, the CEP continues to

provide a foundation across the full spectrum

of the Corporation’s business lines, allowing for

greater flexibility to respond to changes in the

financial services industry and in meeting the

Corporation’s staff needs. As in years past, the

program continues to provide the FDIC those

flexibilities as program participants were called

upon to assist with both bank examination and

bank closing activities based on the skills they

obtained through their program requirements

and experiences.

Employee Engagement

The FDIC continually evaluates its human

capital programs and strategies to ensure that

the Corporation remains an employer of choice

and that all of its employees are fully engaged

and aligned with its mission. The FDIC’s annual

employee survey incorporates and expands on
50 FDIC 2009 Annual Report

To provide additional flexibility in employee

learning and growth, the FDIC assisted in meeting the challenge of increased activity by locating training facilities within satellite offices in

Jacksonville and Irvine. This helped to ensure

that necessary training could be provided locally, reducing the need for employee travel.

In 2009, the Corporation provided its employees with over 100 instructor-led courses and 600

web-based courses in support of varied mission

requirements. There were over 7,000 instances

of completed instructor-led courses and 18,000

instances of completed web-based courses.

Information Technology Management

Information technology (IT) resources are one

of the most valuable assets available to the FDIC

in fulfilling its corporate mission. In today’s rapidly changing business environment, technology

is frequently the foundation for achieving many

FDIC business goals, especially those addressing efficiency and effectiveness in an industry

where timely and accurate communication and

data are paramount for supervising institutions,

resolving institution failures, and monitoring

associated risks in the marketplace.

During 2009, the FDIC was faced with many

challenges stemming from the economic downturn and its historic impact on the financial

industry. To help meet those challenges, the FDIC

continued to leverage innovative, timely, reliable,

and secure IT products and services to meet priority business drivers and adapt to a myriad of

new financial programs.

Enterprise Architecture

The overall vision of the FDIC’s enterprise

architecture is to provide an efficient, agile, flexculture and organizational change were studied

in 2009 and will be summarized, with recommendations made on sustaining the FDIC’s Culture Change Initiative.

Employee Learning and Growth 

The FDIC offers a range of learning and

growth opportunities to meet the varied needs

of its employees. It uses innovative solutions

to prepare new and existing employees for the

challenges ahead. By streamlining existing

courses, promoting blended learning, and creating online just-in-time toolkits and job aids,

the FDIC has allowed new employees to more

quickly and thoroughly assume their job functions. In order to meet the 2009 learning needs of

new employees, the FDIC responded with flexible course scheduling and additional instructorled and 

computer-based courses, including t

new Continuing Professional Education Centre,

which allows employees to more easily maintain their Certified Public Accountant accreditation and other certifications, despite increased

workloads.

The Corporation dealt with new challenges in

2009 and supported employees by providing justin-time training to address specific issues, such

as managing and selling an ever increasing number of loans acquired from failed institutions. To

better prepare employees to perform this task,

the FDIC undertook a multi-pronged approach

that consisted of online presentations, online

job aids, online simulations, and instructor-led

courses. The Corporation focused its efforts on

providing multiple points of access to learning

delivered quickly and with the least disruption to

ongoing work activities.
I. Management’s Discussion and Analysis 51

chosen as recipients of the “Excellence Award for

Open Source Business Use in Government” in

the category of “Safe Computing Environment”

at the 2009 Government Open Source Conference. The award recognized government employees or teams for significant accomplishments in

Open Source Technology that meet governme

business or mission requirements.

Securing the FDIC Through Strong 

Privacy Initiatives

The FDIC continued to strengthen privacy by

providing a risk-based, enterprise-wide Privacy

Program that maintains and builds public trust,

and is based on sound privacy practices in compliance with applicable laws. In 2009, the FDIC

experienced a significant increase in bank closing activities. As a result, the FDIC performed a

number of Corporate-wide initiatives to increase

the identification, protection, and control of personally identifiable information.

ible and cost-effective environment that supports

the corporate strategic goals and objectives for

the FDIC and its customers. During 2009, modernization of the infrastructure continued. Also

a roadmap of the security architecture was developed with functionality based on global industry standards, which will facilitate the sharing

of information and resources, while protecting

access to sensitive and privacy information.

Improving Application Systems 

In 2009, the FDIC enhanced several application systems that support the FDIC’s business,

including the:

•	 Assessment Information Management

System—used to calculate, collect, and

account for the quarterly assessment premiums paid by insured financial institutions;

•	 Central Data Repository—used in the collection and management of call report data from

the U.S. financial institutions;

•	 New Financial Environment—state-of-theart financial system; and

•	 Risk Related Premium System—provides

core business functionality related to deposit

insurance risk premium calculations for individual financial institutions.

Security Outreach, Education, 

and Awareness 

The FDIC worked collectively with the U.S.

Department of Agriculture and the Department

of Education’s Office of Federal Student Aid on

the OpenFISMA (Federal Information Security

Management Act) Interagency Initiative. This

initiative developed a system to track vulnerabilities that affect the security of systems and applications. The FDIC and these departments were