Message from the Chairman • Sheila C. Bair

I am pleased to present the Federal Deposit Insurance Corporation’s (FDIC) 2007 

Annual Report (also referred to as the Performance and Accountability Report). 

The year posed major challenges to financial institutions and to the economy as 

a whole. Slumping housing markets and escalating problems, particularly related 

to subprime mortgage lending, were among the chief contributors to increased 

uncertainty in the financial markets and widespread reductions in asset values. 

In spite of these challenges, the FDIC continued to ensure public confidence and 

stability in the nation’s financial system. FDIC-insured institutions entered 2007 

with strong earnings and capital, and consequently, were in a good position to 

absorb the initial stresses associated with last summer’s market events.

The problems that have emerged in the subprime mortgage market underscore 

my longstanding view that consumer protection and safe and sound lending 

go hand in hand. Most insured institutions have a good performance record in 

both areas. However, failure by some lenders to uphold adequate standards in 

the increasingly complex mortgage industry has caused serious problems for 

consumers, lenders, investors, and the economy. Many of the more troubling 

lending practices were found in institutions that are not subject to federal supervision, rather than in insured banks and thrifts. Nationally, the home foreclosure 

rate has nearly doubled in the past two years. An estimated 1.7 million owneroccupied, subprime hybrid adjustable rate mortgages (ARMs) will reset in 2008 

and 2009, and the combination of declining home prices and scarce refinancing 

options could result in hundreds of thousands of additional foreclosures. The 

FDIC is committed to working with market participants to develop solutions that 

would help prevent unnecessary foreclosures and keep homeowners in their 

homes. 

Throughout 2007, I urged servicers and lenders to voluntarily restructure some 

of their performing loans. Specifically, I endorsed a streamlined process to 

keep homeowners with resetting subprime mortgages at their starter rate for 

five or more years if they were current on their payments, but could not make 

the higher payments after the loan reset. Using a streamlined process to keep 

subprime borrowers paying affordable mortgages frees up resources for lenders 

and servicers to respond to problems in other categories of loans. On December 

6, 2007, Treasury Secretary Paulson called for accelerated and systematic loan 

modifications – a plan endorsed by President Bush along with the other federal 

banking regulators, and agreed to by many representatives of the mortgage 

lending industry. I view this as a very positive initial step towards avoiding 

hundreds of thousands of foreclosures and the ensuing economic consequences. 

Three FDIC-insured banks failed in 2007. All three failures posed unique 

challenges for the FDIC – one, in particular, because it was an Internet bank 

with no physical branches. It was also the FDIC’s largest bank closing in 

14 years. While the industry had experienced no failures for two-and-a-half-years, 

the FDIC remained ready and able to respond and incorporated innovations to 

address new and challenging issues. In all three bank failures, the FDIC effectively 

responded to the needs of the failed banks’ depositors – as it has since 1934 – 

ensuring timely payments of insured deposits. 


In spite of its record of success, the FDIC has remained focused on improving 

its ability to resolve financial institution failures. As financial institutions have 

grown in both size and complexity, the challenges facing the FDIC, if one or more 

should fail, have likewise grown. In response, the FDIC has strived to balance 

the need for readiness with the goal of maximizing operational efficiencies. 

These objectives are being met through a combination of contingency planning, 

cross-training of staff, development of enhanced systems for managing both the 

assets and liabilities of future failures, and proposed improvements in financial 

institution recordkeeping. Through this combination of strategies, the FDIC 

will continue its strong record of service, reliability, efficiency, and providing 

outstanding value to its stakeholders.

The U.S. financial system benefits from a balance between large and complex 

banks, regionally focused banks, and community banks. Community banks are 

integral to their local economies and to the customers they serve – individuals 

and businesses alike. Overall it is impressive that community banks, while facing 

intensified competition, have been able to achieve both respectable earnings and 

growth in recent years. Community banks possess certain advantages as lenders 

to local households, small businesses, and farmers. The willingness of private 

investors to risk their own money to create new banks is a powerful market 

indicator of the viability of small banks, especially in areas of high population 

density. Community banks will continue to occupy an important position in the 

banking industry for the foreseeable future. 

We were busy in other areas as well, among them: implementing significant 

policies to implement deposit insurance reform, working towards an agreement 

on Basel II capital standards, modernizing the claims business process, maintaining a strong supervisory program, and promoting economic inclusion. Below are 

a few highlights of our activities in 2007, as well as some challenges we will face 

in 2008.

Policy

On January 1, 2007, new risk-based deposit insurance assessment rates became 

effective as part of implementation of the Federal Deposit Insurance Reform 

Act of 2005. We distributed credits totaling $4.7 billion to those institutions that 

contributed to the buildup of the insurance funds through 1996, and issued an 

Advance Notice of Proposed Rulemaking (ANPR) seeking comments on alternative 

methods for allocating future dividends.

Our efforts on capital reform continued in 2007, with our active participation – 

along with our fellow U.S. banking regulators – in shared implementation of the 

Basel II Capital Accord. On November 5th, the FDIC Board of Directors jointly 

approved, along with the other federal banking regulators, the final rule to implement the advanced approaches of the Basel II Capital Accord in the U.S. (Basel II 

AIRB final rule). The final rule is consistent in most respects with the rules that

are being implemented in other jurisdictions. At the request of the FDIC, the 

agencies also included safeguards in the event that the new rules do not work as 

intended. For instance, the final regulation implements the agencies’ agreement 

not to allow any bank to exit its transitional risk-based capital floors unless and 


until the agencies publish a study finding that there are no material deficiencies in 

the framework after two years experience in implementation or unless identified 

defects are remedied. If any agency allows its banks to exit the floors in a way 

that departs from this consensus approach, the rule requires that agency to 

publish a report explaining its reasoning. The final rule will become effective 

on April 1, 2008.

The agencies have agreed to issue a proposed rule that would provide all noncore banks with the option to adopt a standardized approach under the Basel II 

Capital Accord. This would replace the earlier proposed rule to adopt the “Basel 

IA” option. Basel IA was a new capital framework to be used by banks that 

chose not to use the Basel II framework. As we enter the new year, the FDIC 

will continue to provide leadership for this effort and work toward the goal of 

publishing a Notice of Proposed Rulemaking (NPR) to implement the standardized 

approaches of Basel II in the U.S. (Basel II Standardized NPR). Both the Basel 

II AIRB final rule and the Basel II Standardized NPR are part of our effort to 

enhance the risk sensitivity of the existing risk-based capital framework, while 

maintaining safety and soundness within the banking and thrift industries.

We also moved forward with our deposit insurance claims and modernization 

initiative that has been ongoing for the past several years. We published an NPR 

broken into two parts. The first part applies to all FDIC-insured institutions and 

governs the specific time and circumstances under which account balances 

will be determined, for deposit insurance purposes, in the event of a failure. 

The second part applies only to the largest FDIC-insured institutions – 

approximately 160 institutions with at least $2 billion in domestic deposits and 

more than 250,000 deposit accounts, or total assets of more than $20 billion, 

regardless of the dollar amount of deposits or number of accounts. Under the 

proposal, these institutions would be required to adopt mechanisms that would, 

in the event of the institution’s failure: place provisional holds on large deposit 

accounts in a percentage specified by the FDIC; provide the FDIC with deposit 

account data in a standard format; and allow automatic removal of provisional 

holds once the FDIC makes an insurance determination. The FDIC places a high 

priority on providing access to insured deposits promptly and, in the past, has 

usually been able to allow most depositors access to their deposits on the next 

business day. If adopted, the proposed rule would better enable the FDIC to 

continue this practice, especially for the larger, more complex institutions it 

insures.

Supervisory Program

Along with successfully managing an unusually large policy agenda in 2007, 

we continued to administer strong and effective supervisory programs in both 

the risk-management and compliance areas. We performed 2,258 safety and 

soundness examinations; 1,773 compliance and Community Reinvestment Act 

exams; and 2,941 specialty exams. The FDIC is the primary federal regulator 

for state nonmember banks, the vast majority of which are community banks. 

The core work of our examination staff continues to be the on-site evaluations 

and assessment of these banks’ risk management, compliance and consumer 

programs. Our field examiners are on the frontline and their work in identifying 

emerging risks and promoting stability in our nation’s economic system has been 

the hallmark of the FDIC for 75 years.
During the year, as the FDIC and fellow banking regulators became increasingly 

concerned with the expansion of subprime hybrid ARMs and the potential risk 

posed by these products, we took a leading role with the other regulators in 

issuing the Statement on Subprime Mortgage Lending. The statement describes 

the prudent safety and soundness and consumer protection standards that institutions should follow to ensure borrowers obtain loans they can afford to repay. 

We also took a leading role in developing the interagency Statement on Working 

with Mortgage Borrowers, encouraging financial institutions to pursue strategies

to mitigate losses while preserving homeownership for borrowers that are 

delinquent or in default, or are at imminent risk of default. To provide guidance 

to entities that service residential mortgage loans for others, the FDIC, along 

with the other federal financial regulatory agencies, issued the Statement on 

Loss Mitigation Strategies for Servicers of Residential Mortgages. 

To improve the quality of our examination programs, we launched our successful

Joint Examination Teams (JETs) initiative, in which examiners from both the 

compliance and the risk-management sides examine FDIC-supervised institutions 

identified as offering certain consumer credit products, such as subprime loans, 

nontraditional mortgage loans, and third-party loan origination arrangements. 

Through this team effort, we can more fully assess institutions’ various risks 

as well as their ability to control those risks. Our compliance examiners have 

expertise in such areas as unfair and deceptive acts or practices, the Truth-inLending Act, the Real Estate Settlement Procedures Act, and the Equal Credit 

Opportunity Act, while our risk-management examiners’ expertise covers such 

areas as credit card and mortgage banking activities, securitization and assetliability modeling. 

As part of our continued effort to develop and maintain a highly skilled and 

flexible workforce, we have expanded our internal certificate program to include 

the Bank Secrecy Act, Receivership Claims, Franchise and Asset Marketing, and 

Basic Compliance Examination functions. This program allows employees to earn 

industry-recognized professional certifications. 

Also in 2007, we implemented a number of regulatory relief provisions included 

in the Financial Services Regulatory Relief Act of 2006. These included revising 

Regulation R, which sets forth circumstances and conditions under which banks 

can continue to effect securities transactions for customers without being 

subject to registration as a broker under the Securities Exchange Act of 1934; 

expanding the examination cycle for “1” and “2”-rated banks to 18 months 

by raising the program’s asset threshold from $250 million to $500 million; and 

developing model privacy notices – along with other federal financial institution 

regulatory agencies, the Securities and Exchange Commission and the Federal 

Trade Commission – which financial institutions have the option to use. We are 

mindful of unnecessary regulatory burden and will continue to eliminate it where 

possible. 


Finally, during a year in which we witnessed a range of natural disasters around 

the country, we issued 12 financial institution letters announcing steps to provide 

regulatory relief to institutions and to facilitate recovery in areas damaged by 

fire, flood and other natural disasters. Recognizing the lasting damage caused by 

Hurricane Katrina, we also issued guidance to remind examination personnel and 

the industry that communities and families impacted by Hurricane Katrina may 

need additional time to recover. 

Economic Inclusion

The FDIC is strongly committed to advancing economic inclusion for all segments 

of society. In 2007, we launched our Alliance for Economic Inclusion initiative in 

nine markets across the country, promoting the expanded use of insured financial 

institutions by segments of the U.S. population that are currently underserved by 

the banking industry. Broad-based coalitions of financial institutions, communitybased organizations and other partners were formed to focus on expanding basic 

retail financial services for underserved populations. Services include savings 

accounts, affordable remittance products, small-dollar loan programs, targeted 

financial education programs, alternative delivery channels and other assetbuilding programs. Also, foreclosure-prevention efforts have been integrated. 

As part of our economic inclusion effort this year, we focused on assisting 

financially stressed residential borrowers. Working through our Alliance for 

Economic Inclusion and with NeighborWorks® America, we are promoting 

a broad foreclosure-prevention initiative for consumers at risk of foreclosure 

from subprime and nontraditional mortgage lending. 

In addition, we hosted three meetings of the FDIC Advisory Committee on 

Economic Inclusion (ComE-IN), which was approved by the FDIC Board of 

Directors pursuant to the Federal Advisory Committee Act in November 2006. 

The Committee provides the FDIC with advice and recommendations on important 

initiatives focused on expanding access to banking services by underserved 

populations. The topics addressed during the 2007 meetings were access 

to small dollar loans, the subprime mortgage situation and money services 

businesses and their access to the banking system.

Based on a recommendation from the Advisory Committee on Economic 

Inclusion, the FDIC Board approved a two-year pilot project to review affordable 

and responsible small-dollar loan programs in thirty diverse financial institutions 

across the country. This program will assist bankers by identifying and 

disseminating information on replicable business models for small-dollar 

loans by evaluating data submitted to the FDIC about the bank’s small dollar 

loans, the overall value and profitability of their program, and the benefit 

to consumers. 


During 2007, the FDIC also commenced work on two surveys intended to provide 

extensive new data regarding economic inclusion. Both of these survey efforts 

are related to a mandate in section 7 of the Federal Deposit Insurance Reform 

Conforming Amendments Act of 2005 requiring the FDIC to conduct a survey 

of FDIC-insured institutions every two years regarding their efforts to serve the 

unbanked. The first of these surveys, the Survey of Banks’ Efforts to Serve the 

Unbanked and Underbanked, will be conducted during 2008 and is expected to 

yield significant insight about bank efforts to serve unbanked and underbanked 

populations. The FDIC is also exploring the feasibility of conducting a survey 

of U.S. households to estimate the percentage of the U.S. population that is 

unbanked and underbanked. The survey is scheduled to be conducted in January 

2009 as a supplement to the Bureau of the Census’s Current Population Survey. 

It is expected to yield significant new data on the extent of the population that 

is unbanked and/or underbanked and the reasons why some households do not 

make greater use of traditional banking services.

We also continued promoting financial education to the unbanked and underbanked populations around the country, expanding our efforts to integrate 

our Money Smart financial education program into public schools. To reach an 

even wider audience with Money Smart, we distributed a revised version of 

our instructor-led curriculum and an online computer-based instruction. In 2007, 

the FDIC surpassed its goal established at the inception of the Money Smart

program to provide financial education to 1 million consumers. To date, over 

1.4 million consumers have taken the Money Smart curriculum.

Conclusion 

As we begin 2008, the FDIC aspires to be recognized by its employees and 

stakeholders as an outstanding employer with a highly motivated and engaged 

workforce that understands and is committed to the Corporation’s mission, goals 

and objectives. To that end, during 2007 we conducted a comprehensive employee 

survey and have plans underway to further improve the Corporation in the areas 

of communication, empowerment, employee performance, and compensation 

systems. Our employees have been and always will be the FDIC’s most important 

resource in completing its mission. I look forward to continued work with our 

dedicated staff and exceptional Board of Directors in 2008.

The FDIC remains committed to working with bankers, consumers, fellow 

regulators, Congress and others to keep the banking industry healthy and the 

economy strong – a commitment that we will continue to keep into 2008 and 

well beyond.

Sincerely,

Sheila C. Bair