1

Operations of the

Corporation – 

The Year in Review

As the FDIC marked its 70th anniversary in 2003, it continued to ensure

the stability of the nation’s financial

services industry – the Corporation’s

original mandate in 1933. Much has

changed for the FDIC over seven

decades, including the tools it uses

to conduct bank examinations, the

way it markets failed bank assets,

and the manner in which it assesses

risk to the deposit insurance funds.

However, what has remained 

constant are the reliability of deposit

insurance and the public’s confidence

in the FDIC and the nation’s financial

system. 

During 2003, the FDIC continued 

to strive to meet the challenges of

an ever-evolving banking industry –

challenges associated with globalization, advances in technology and

industry consolidation. The FDIC 

provided leadership on important

economic and policy issues, working

to enact deposit insurance reform

legislation, and holding symposia for

policymakers, regulators and others

to engage in dialogue on significant

public policy concerns. It also continued to monitor emerging risks to 

the deposit insurance funds, while

improving its internal operations to

better meet the challenges of the

future. 

Highlights of the Corporation’s 2003

accomplishments are presented

below for each of its three major

business lines–Insurance, Supervision

and Consumer Protection, and

Receivership Management. 

I. Management’s

Discussion

and Analysis

Insurance

The FDIC insures bank and savings

association deposits. As insurer, the

FDIC must continually evaluate how

changes in the economy, the financial

markets and the banking system

affect the adequacy and the viability

of the deposit insurance funds. During

2003, the FDIC sought to enhance

its risk analysis and management,

promote sound public policies, and

resolve failed institutions in a timely

manner.

Enhanced Risk Analysis 

and Management

The FDIC employs a robust, integrated risk analysis process that 

was strengthened by several initiatives in 2003. The Risk Analysis

Center (RAC) was established 

in March. Located at the FDIC’s

headquarters in Washington, DC, 

the RAC brings together economists,

bank examiners, financial analysts,

and others involved in assessing 

risks to the banking industry and the

insurance funds. Under the auspices

of the RAC, individuals from these

various disciplines work together 

to monitor and analyze economic,

financial, regulatory and supervisory

trends, and their potential implications

for the continued financial health of

the banking industry and the deposit

insurance funds. Comprehensive

solutions are developed to address

risks identified during this process. 

The principle of a coordinated

approach to analyzing and addressing

risks also extends to Regional Risk

Committees (RRCs), which have

operated for a number of years, 

but were formally chartered in

January 2003. Each of the FDIC’s 

six regional offices has an RRC that

meets regularly, engaging individuals

from various disciplines to analyze

and address the unique risks facing

the region. 
In January 2003, the National Risk

Committee (NRC) was chartered to

provide a forum for executive leadership to consider and coordinate risk

management activities across the

FDIC. The RAC and RRCs provide

data and reports to the NRC to support policy and resource allocation

decisions of the NRC. Among other

things, the NRC is responsible for

ensuring that the FDIC takes appropriate actions to address identified

risks and that these risks and FDIC’s

actions are effectively communicated

to internal and external audiences.

Improved Financial Risk

Management Practices

In 2003, the FDIC hired an independent, outside consultant to review 

the FDIC’s financial risk management

practices. This review focused 

particularly on the methodology 

and processes used by the interdivisional Financial Risk Committee

(FRC), which is responsible for 

recommending quarterly the amount

of the BIF and SAIF contingent 

liability for anticipated bank and 

thrift failures. The final report,

Strengthening Financial Risk

Management at the FDIC, reflects

the FDIC’s commitment to ensuring

that our methods and procedures

remain effective and represent

industry best practices. The report

provided meaningful suggestions 

to enhance the overall accuracy,

robustness and transparency of 

the FDIC’s contingent loss-reserving

process. It also laid out a road map

to follow in developing next-generation tools and organizational practices

for managing risk at the FDIC. 

The consultant’s recommendations

span three overlapping time periods

(Horizons 1, 2, and 3). The FDIC

implemented Horizon 1 recommendations in September 2003. The

results of the implementation of

these recommendations are reflected

in our audited 2003 financial 

statements. The Horizon 1 recommendations include:

● Limiting subjective deviations 

from average expected failure 

rates to a range around the recent,

historical average, and developing

explicit guidelines for when the 

FRC may elect to deviate from 

the average,

● Incorporating the asset and liability

compositions of failing banks and 

thrifts into expected loss rates, 

and

● Adopting a set of more formal 

operating procedures for the FRC.

The FDIC will implement Horizon 2

recommendations throughout 2004.

The Horizon 2 recommendations

include:

● Accelerating development of a 

new integrated model for financial

risk management. The FDIC has 

already developed a prototype 

loss distribution model that will be

the centerpiece of the integrated

fund model and will be used by 

the FRC in 2004 to establish the 

contingent liability for anticipated 

failures. A paper describing the 

prototype model was presented 

at the Finance and Banking: 

New Perspectives conference 

in December 2003, and 

● Building a more integrated risk 

management organization by 

enhancing outputs, operations 

and feedback mechanisms of 

the FRC and RAC.

Horizon 3 improvements include

building capabilities such as realtime risk management, programs 

for hedging or reinsurance, and the 

ability to rapidly conduct scenario

analyses. The FDIC will annually

assess whether to implement

Horizon 3 capabilities.

FDIC Center for Financial Research

The Corporation established the

Center for Financial Research (CFR)

in late 2003 to promote research that

would provide meaningful insights into

developments in deposit insurance,

the financial services sector, prudential supervision, risk measurement

and management, regulatory policy

and related topics that are of interest

to the FDIC, the financial services

industry, academia and policymakers.

The CFR will be a partnership

between the FDIC and the academic

community with prominent scholars

actively engaged in overseeing and

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Art Murton, Mike Zamorski, Mitchell Glassman, and

Chairman Powell officially open the RAC.
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directing its research program. The

CFR will carry out its mission through

an agenda of research, analysis,

forums and conferences that 

encourages and facilitates an ongoing

dialogue that incorporates industry,

academic and public-sector perspectives. The CFR will support highquality original research by sponsoring relevant research program lines

and soliciting rigorous analysis of 

the issues within five program areas.

These programs will be under the

leadership of program coordinators

who are drawn largely from the 

outside academic community. 

Input will also be obtained from 

six prominent economists who 

will serve as Senior Fellows. 

The CFR will sponsor a Visiting

Research Fellows Program to provide

support for residence scholars for

defined time periods. The CFR will

also organize visits and encourage

interaction and collaboration between

outside scholars and FDIC staff on

subjects of mutual interest. 

New International Capital

Standards

The FDIC continues to actively participate in the Basel Committee on

Banking Supervision’s (BCBS) efforts

to update and revise the 1988 Basel

Capital Accord. Such revisions are

necessary to align capital standards

with advances in banks’ risk measurement and management practices,

while continuing to assure that these

banks maintain adequate capital

reserves. In addition to the BCBS,

the FDIC is active on a number of

global supervisory groups, including

the Capital Task Force, the Accord

Implementation Group, the Risk

Management Group, and various

subgroups and task forces that 

seek to enhance risk management

practices.

The FDIC invested significant

resources on several fronts during

2003 to ensure that the new capital

rules, when final, will be compatible

with the Corporation’s roles as 

both deposit insurer and supervisor. 

Significant work has been performed,

both internationally and domestically,

to assure that the new Accord is

implemented efficiently, that effective

supervisory oversight will continue,

and that these new rules will not

create unintended and potentially

harmful consequences.

Ensuring the adequacy of capital

requirements under the new Accord

was the FDIC’s main priority during

2003. The FDIC published a study

suggesting that over time and on

average, risk-based capital requirements under the new Accord would

probably decline substantially relative

to the 1988 Accord. In 2004, the

FDIC will seek to ensure that any

reductions in capital requirements

reflect bank risk profiles rather 

than specific statistical modeling

assumptions. The BCBS has established a goal of issuing a final rule 

in mid-2004, with implementation

slated for January 2007.

Deposit Insurance Reform

The FDIC continued to give priority

attention to enactment of comprehensive deposit insurance reform

legislation throughout 2003. Legislation containing major elements

of the deposit insurance reform 

proposals developed by the FDIC

over the past three years was 

introduced in both the House of

Representatives and the Senate.

FDIC Chairman Powell testified in

support of deposit insurance reform

proposals on February 26 before the

Senate Banking Committee and on

March 4 before the House Financial

Services Committee.

The FDIC’s recommendations, which

were summarized in the testimony,

include:

● Merging the Bank Insurance Fund

(BIF) and the Savings Association 

Insurance Fund (SAIF).

● Granting the FDIC’s Board of 

Directors the flexibility to manage 

a combined deposit insurance 

fund. Under the present system, 

statutorily-mandated methods of 

managing the size of the BIF and 

SAIF may cause large premium 

swings and could force the FDIC 

to charge the highest premiums 

during difficult economic times 

when the industry can least afford 

it. Currently, safer institutions 

subsidize riskier institutions 

unnecessarily while new entrants 

and growing institutions avoid 

paying premiums. To correct 

these problems, the FDIC recommended that the Congress give 

the Board of Directors the 

discretion to:

● Manage the combined fund 

within a range.

● Price deposit insurance 

according to risk at all times 

and for all insured institutions.

● Grant a one-time initial

assessment credit to recognize 

institutions’ past contributions 

to the fund and create an 

ongoing system of assessment

credits to prevent the fund 

from growing too large.

● Indexing deposit insurance coverage to ensure that basic account 

coverage is not eroded over time 

by inflation.
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The House passed H.R. 522, the

Federal Deposit Insurance Reform

Act of 2003, on April 2 by a vote 

of 411 to 11. Although the Senate

Banking Committee held a hearing

on deposit insurance reform in

February, it did not act on a deposit

insurance bill during the year. Enactment of deposit insurance reform

will remain a priority of the FDIC 

during 2004. 

FFIEC Central Data Respository 

The FDIC provided leadership for 

a new interagency initiative with 

the Federal Reserve Board and the

Office of the Comptroller of the

Currency under the auspices of the

FFIEC, to consolidate the collection,

editing and publication of quarterly

bank financial reports into a Central

Data Repository (CDR). The CDR will

be implemented during the fourth

quarter of 2004 and will be accessible

to regulators, financial institutions

and the public. This initiative will be

undertaken in cooperation with the

industry and will employ cutting-edge

technology based on the Extensible

Business Reporting Language (XBRL)

standard to define data standards

and streamline the collection and 

validation of the data. The first

reports are expected to be filed

under the new system beginning

with the September 2004 Call Report.

Future of Banking Study

The FDIC conducted a study on the

future of banking during 2003 that

focused on underlying trends in the

economy and the banking industry,

and their implications for different

sectors of the industry and for bank

regulators in the future. FDIC analysts

explored policy issues that included

the mixing of banking and commerce,

regulatory reorganization, consumer

privacy, the role of banks in light 

of the increased importance of nonbank competitors, and the potential

effects of financial services industry

consolidation on small business and

local economies. As part of the study,

FDIC analysts met with representatives from the banking industry and

the regulatory community throughout the year to discuss their views

on the direction of the industry. The

results of the study will be presented

at a conference in 2004 and published

following this conference. The FDIC’s

Advisory Committee on Banking

Policy, formed in 2002 to provide

advice and recommendations relating

to the FDIC’s mission, will also be

reviewing the study. 

Reduced Regulatory Burden

On June 3, 2003, under the leadership

of FDIC’s Vice Chairman John Reich,

the federal thrift and bank regulatory

agencies launched a cooperative,

three-year effort to review all of their

regulations (129 in all) that impose

some burden on the industry. The

purpose of the review, which is mandated by the Economic Growth and

Regulatory Paperwork Reduction Act

of 1996 (EGRPRA), is to identify and

eliminate any regulatory requirements

that are outdated, unnecessary or

unduly burdensome. As a former

community banker, Vice Chairman

Reich understands bankers’ concerns

regarding the extent of regulatory

burden and believes that, with the

assistance of bankers, meaningful

changes can be made. For the purposes of this review, the agencies

categorized their regulations into 

12 separate groups. Every six months,

new groups of regulations will be

published for comment, giving bankers

and others an opportunity to identify

regulatory requirements they believe

are no longer needed. The agencies

will then analyze the comments 

and propose amendments to their

regulations where appropriate.

On June 15, 2003, the agencies

issued the first three groups of 

regulations for comment: Applications

and Reporting, Powers and Activities,

and International Banking. During the

90-day comment period, 17 letters

were received containing more than

150 individual recommendations for

burden reduction. Staff is reviewing

and analyzing all of these recommendations with an eye towards reducing

regulatory burden wherever possible.

If necessary, legislative changes 

may be proposed.

Determined to cut red tape and reduce regulatory burden are (l to r), 

OTS Director James Gilleran, Jim McLaughlin of the American Bankers

Association, Harry Doherty of America’s Community Bankers, 

FDIC Vice Chairman John Reich and Ken Guenther of the Independent

Community Bankers of America.
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As a part of the regulatory burden

reduction effort, the FDIC hosted

five banker outreach meetings during

2003 to facilitate industry awareness

of the EGRPRA project and to listen

to bankers’ comments, complaints

and suggestions on regulatory 

burden. These meetings were

attended by more than 250 bankers.

Chairman Powell, Vice Chairman

Reich, Federal Reserve Board

Governor Mark Olson and Comptroller

John D. Hawke were featured

speakers at the meetings. Project

staff from each of the federal banking

regulatory agencies as well as regional

representatives of the major industry

trade groups attended each of the

meetings. Outreach sessions were

held in Orlando, St. Louis, Denver,

San Francisco and New York. 

Ten major regulatory issues emerged

from the outreach sessions that

appeared to be of the greatest 

concern to bankers:

● Bank Secrecy Act, including 

Suspicious Activity Reports (SARs)

and Currency Transaction Reports

(CTRs) 

● USA PATRIOT Act and “Know 

Your Customer” Requirements

● Withdrawal Limits on Money 

Market Deposit Accounts 

(Regulation D)

● Home Mortgage Disclosure Act 

(HMDA)

● Community Reinvestment Act 

(CRA)

● Truth-in-Lending Act (Regulation Z)

and the Real Estate Settlement 

Procedures Act (RESPA)

● Three-Day Right of Rescission 

● Extensions of Credit to Insiders 

(Regulation O)

● Flood Insurance

● Privacy Notices

The EGRPRA project will give particular attention to these concerns as 

it moves forward.

The FDIC maintains an interagency 

web site on EGRPRA: www.egrpra.gov.

This site contains the agendas and

discussion topics from the outreach

meetings, as well as a summary 

of the issues raised and potential

solutions offered by the participants.

Comments received during the first

comment period are also posted 

on the web site. 

Resolution of Failed Institutions 

During 2003, the FDIC resolved

three financial institution failures.

These failed institutions had a 

total of $1.10 billion in assets and

$908.6 million in deposits. Within

one business day after each failure,

the FDIC had issued payout checks

to insured depositors, or worked

with open institutions to ensure 

that depositors had access to their

insured funds. (See the accompanying table on page 18 for details about

liquidation activities.)

Supervision and Consumer

Protection

Supervision and consumer protection

are the cornerstones of the FDIC’s

efforts to ensure the stability of 

and public confidence in the nation’s

financial system. At year-end 2003,

the Corporation was the primary federal regulator for 5,340 FDIC-insured,

state-chartered institutions that are

not members of the Federal Reserve

System (generally referred to as

“State Nonmember” institutions).

Through safety and soundness, consumer compliance, and Community

Reinvestment Act (CRA) examinations of these FDIC-supervised 

institutions, the FDIC assesses their

operating condition, management

practices and policies as well as their

compliance with applicable laws and

regulations. The FDIC also educates

bankers and consumers on matters

of interest to bank customers and

addresses consumers’ questions 

and concerns.

Safety and Soundness

Examinations

During 2003, the Corporation conducted 2,421 statutorily required

safety and soundness examinations.

The number and total assets of

FDIC-supervised institutions identified

as “problem” institutions (defined as

having a composite CAMELS1 rating

of “4” or “5”) decreased during

2003. As of December 31, 2003, 

73 institutions with total assets of

$8.2 billion had been identified as

problem institutions, compared to 

84 institutions with total assets of

$12.8 billion on December 31, 2002.

These changes represent a decrease

of 13.1 percent and 35.9 percent in

the number and assets of problem

institutions, respectively. During

2003, 58 institutions were removed

from problem institution status 

due to composite rating upgrades,

mergers, consolidations or sales, and

47 were newly identified as problem

institutions. The FDIC is required 

to conduct follow-up examinations 

of all designated problem institutions

within 12 months of the last examination. As of December 31, 2003, 

all follow-up examinations for problem

institutions had been performed on

schedule.

The CAMELS composite rating represents the adequacy of Capital, the quality of Assets, the capability of Management, the

quality and level of Earnings, the adequacy of Liquidity, and the Sensitivity to market risk, and ranges from “1” (strongest) to

“5” (weakest).

1
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Compliance and Community

Reinvestment Act (CRA)

Examinations 

The FDIC conducted1,610comprehensive compliance-CRA examinations,

307 compliance-only examinations2

,

and two CRA-only examinations in

2003, compared to 1,334 comprehensive compliance-CRA examinations,

493 compliance-only examinations,

and 13 CRA-only examinations in

2002. One institution was assigned 

a composite “4” rating for compliance as of year-end 2003. None were

assigned a composite “5” rating. The

“4” rated institution has entered into

a Memorandum of Understanding

(MOU) with the FDIC to correct 

compliance issues. The ratings for

institutions with CRA-only examinations were rated “Satisfactory.” 

(See the accompanying table for

details about the FDIC Examinations.)

Examination Program Efficiencies

The FDIC continues to implement

measures to improve efficiency by

maximizing the use of risk-focused

examination procedures at wellmanaged banks that meet certain 

criteria. The Maximum Efficiency,

Risk-Focused, Institution Targeted

(MERIT) Program provides for the

use of risk-focused safety and

soundness examination procedures

at FDIC-supervised institutions with

assets of $250 million or less that

are well-managed, well-capitalized

and meet other program criteria. 

This program helps ensure that the

FDIC’s resources are focused on

those institutions that pose the

greatest risk to the insurance funds,

while preserving the integrity of 

the examination process. 

The FDIC refocused its compliance

examination approach during the

second half of 2003. The revised

process evaluates a financial institution’s compliance management 

system through a review of policies

and procedures and discussions with

staff from the institution. Examiners

place emphasis on how well the

institution’s own compliance 

management system is working 

to identify emerging risks, monitor

changes to laws and regulations,

ensure employees understand 

their responsibilities, incorporate

compliance into business operations,

review those operations to ensure

compliance with applicable laws 

and regulations, and take effective

corrective actions when necessary.

Based on risks identified in the 

compliance management system,

examiners pinpoint areas for further

evaluation using transaction testing.

USA PATRIOT Act

Since the enactment of the 

USA PATRIOT Act (Uniting and

Strengthening America by Providing

Appropriate Tools Required to

Intercept and Obstruct Terrorism Act

of 2001), the FDIC has participated

in numerous interagency working

groups to draft revisions to the 

Bank Secrecy Act as required by 

the USA PATRIOT Act and to develop

interpretive guidance for the financial

services industry. In May 2003, the

FDIC, in conjunction with other 

regulatory agencies, jointly issued 

a final rule to implement Section 326

of the USA PATRIOT Act. Section

326 requires financial institutions to

implement a customer identification

program to verify the identity of 

customers opening new accounts.

The FDIC has taken steps to educate

its examination staff and members

of the banking industry on the USA

PATRIOT Act at outreach events,

training conferences and seminars.

To assist financial institutions in their

efforts to comply with the Bank

Secrecy Act and the USA PATRIOT

Act, the FDIC publicly released its

examination procedures for the Bank

Secrecy Act in October 2003. 

Compliance-only examinations are conducted for most institutions at or near the mid-point between comprehensive CRA-compliance examinations under the Gramm-Leach-Bliley Act of 1999, which amended the Community Reinvestment Act of 1977.

CRA examinations at small 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.”

2

2003 2002 2001

Safety and Soundness:

State Nonmember Banks 2,182 2,290 2,300

Savings Banks 231 229 241

Savings Associations 0 0 0

National Banks 5 10 16

State Member Banks 3 5 9

Subtotal - Safety and Soundness Examinations 2,421 2,534 2,566

CRA/Compliance Examinations:

Compliance-Community Reinvestment Act 1,610 1,334 709

Compliance-only 307 493 1,465

CRA-only 2 13 5

Subtotal CRA/Compliance Examinations 1,919 1,840 2,179

Specialty Examinations:

Trust Departments 501 524 466

Data Processing Facilities 2,304 1,681 1,625

Subtotal-Specialty Examinations 2,805 2,205 2,091

Total 7,145 6,579 6,836

FDIC Examinations 2001-2003
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To facilitate industry cooperation with

law enforcement authorities in their

ongoing investigation of terrorist

activities through the implementation

of Section 314(a) of the USA PATRIOT

Act, the FDIC also worked with 

other federal banking regulators 

to incorporate point-of-contact 

information as a required item in 

the Call Report, beginning with the

March 2003 Call Report. The FDIC 

is the only banking regulator to use

this mechanism thus far to provide

current point-of-contact information

to the Financial Crimes Enforcement

Network (FinCEN) to aid in its 

distribution of Section 314(a) 

information-sharing requests.

The Director’s Corner

The FDIC and the other banking

agencies frequently publish and issue

guidance for insured institutions and

their officers and directors to use 

to fulfill their responsibilities. This

useful and practical information 

was made available during the first

quarter of 2003, when the FDIC

established the “Director’s Corner” 

on its external Web site. This site

includes items such as Interagency

Policy Statements, Supervisory

Guidance, and Financial Institution

Letters on the topics of Corporate

Governance Practices, Auditing and

Internal Controls, Accounting Practices

and the Allowance for Loan and

Lease Losses, and other areas of

interest to bank directors. 

Payday Lending

In January 2003, the FDIC published

for public review and comment draft

examination guidelines for state 

nonmember institutions that offer

payday loans. More than 1,000 comments were received and considered

prior to implementing final guidelines

in July 2003. Necessitated by the

high-risk nature of the business line

and the substantial growth of the

product, the final guidelines identify

the key safety and soundness and

consumer protection issues that

examiners will consider when 

evaluating payday lending during

examinations. The FDIC’s guidelines,

while similar in many respects to

those issued by other financial 

institution regulatory agencies, are

more explicit on the applicability of

the expanded interagency guidance

to sub-prime lending programs, 

capital requirements, allowance for

loan and lease losses, classifications,

accounting for accrued interest and

fees and recoveries, and lending

concentrations.

Money Smart Financial 

Literacy Program 

One of the Corporation’s top priorities

in 2003 was the continued promotion

of financial education through its

Money Smart Program. The FDIC 

was awarded the prestigious Service

to America Business and Commerce

medal in October 2003 for its efforts

in promoting financial literacy using

the Money Smart curriculum. 

These medals honor people and

organizations that have shown 

a strong commitment to public 

service and have made a significant

contribution in their field of government that is innovative, high-impact

and critical for the nation.

Since its introduction in July 2001,

the Money Smart program has 

generated a great deal of interest.

Primarily designed to help adults

with little or no banking experience

develop positive relationships with

insured depository institutions, 

the program has been widely cited 

in over 100 national and local 

publications. Requests for the 

program have been received from

Mexico, Thailand and Canada. During

2003, the FDIC continued to expand

DSC Money Smart team members (l to r): Pam Bronson, Joan Lok, Kip Child,

Jacqui Gordon, Cathie Davis, Teresa Perez, Jim Pilkington, and Clinton Vaughn

join Chairman Powell and team leader Nelson Hernandez on stage to accept

the Service to America Business and Commerce medal.
17

the public’s access to Money Smart

by translating the program into

Chinese and Korean and expanding

membership in the Money Smart

Alliance. By year-end 2003, the FDIC

had trained over 5,000 volunteer

instructors, taught over 100,000 

consumers and supplied more than

111,000 copies of the Money Smart

training curriculum to various groups,

including government, community,

financial and faith-based organizations.

Consumer Complaints 

and Inquiries

The FDIC investigates and responds

to complaints and inquiries from 

consumers, financial institutions 

and other parties about potential 

violations of consumer protection

and fair lending laws, as well as

deposit insurance matters. As of

December 31, 2003, the FDIC had

received 8,026 complaints, of which

4,047 were against state-chartered

nonmember banks. Approximately

fifty percent of the state nonmember

bank consumer complaints concerned

credit card accounts. The most 

frequent complaints involved loan

denials, billing disputes and account

errors, terms and conditions, collection practices, reporting of erroneous

information, and credit card fees 

and service charges. The FDIC’s 

centralized Consumer Response

Center (CRC) is responsible for

investigating all types of consumer

complaints about FDIC-supervised

institutions and for answering 

consumer inquiries about consumer

protection laws and banking practices. 

During 2003, the FDIC received over

100,000 inquiries from consumers and

members of the banking community.

The FDIC Central Call Center serves

as the primary telephone point of

contact for questions on deposit

insurance coverage from the banking

community and the public. (For more

information on the Call Center, which

can be reached at 1-877-ASK-FDIC,

or 1-877-275-3342, toll free, see

page 129.)

Corporate Governance

The FDIC has long recognized the

importance of good corporate governance in maintaining the integrity

and stability of the nation’s banking

system. The Sarbanes-Oxley Act of

2002 (Act) imposes new reporting,

corporate governance, and auditor

independence requirements on 

companies including insured depository institutions and bank and thrift

holding companies with securities

registered under the federal securities

laws. In response to questions about

the applicability of the Act to insured

depository institutions that are not

public companies, the FDIC issued

comprehensive guidance in March

2003, describing significant provisions of the Act and related rules 

of implementation adopted by the

Securities and Exchange Commission.

The guidance explained how adopting

sound corporate governance practices

outlined in the Act may benefit 

banking organizations, including

those that are not public companies,

and how several of the Act’s requirements mirror existing banking agency

policy guidance related to corporate

governance.

Defense Secretary Donald Rumsfeld and FDIC Chairman Donald Powell

agree, at a meeting at the Pentagon, to make Money Smart training

available to 1.4 million servicemen and servicewomen worldwide.
18

Receivership Management

The FDIC has the unique mission of

protecting the depositors of insured

banks and savings associations.

Since FDIC’s inception over 70 years 

ago, no depositor has ever experienced a loss of insured deposits 

at an FDIC-insured institution due to

a failure. The FDIC protects insured

depositors by prudently managing

the BIF and the SAIF and using the

assets of the funds to make insured

depositors whole at the time of 

institution failure. Once an institution

is closed by its chartering authority –

the state for state-chartered institutions, the OCC for national banks, 

or the OTS for federal savings 

associations –the FDIC is responsible

for the resolution of the failed bank

or savings association. FDIC staff 

gathers data about the troubled 

institution, estimates the potential

loss due to its failure, solicits 

and evaluates bids from potential

acquirers, and then recommends 

the least costly resolution transaction

to the FDIC’s Board of Directors. 

Protecting Insured Depositors

Through Asset Marketing

The FDIC’s ability to attract healthy

FDIC-insured institutions to assume

deposits and to purchase the assets

of failed banks and savings associations ensures that depositors have

prompt access to their insured

deposits, minimizes the disruption 

to the customers and the community,

and allows a fair portion of the failed

institution’s assets to be returned to

the private sector almost immediately.

Assets remaining after the resolution

transaction are liquidated by the

FDIC in an orderly manner, and the

proceeds are used to pay creditors,

uninsured depositors (depositors

whose accounts exceed the $100,000

deposit insurance limits), and 

reimburse the insurance fund that

funded the resolution transaction. 

In 2003, the FDIC again met its goal

of marketing 85 percent of a failed

institution’s marketable assets within

90 days of the institution’s failure. 

During 2003, the FDIC resolved

three BIF-insured institution failures.

Southern Pacific Bank, Torrance,

California, with total assets of $1.052

billion, was closed on February 7.

Southern Pacific’s insured deposits

and a large portion of its assets 

were sold to another FDIC-insured

institution. First National Bank of

Blanchardville, Blanchardville,

Wisconsin, with total assets of

$35.5 million, failed on May 9, 

and all insured deposits were sold 

to another FDIC-insured institution.

Pulaski Savings Bank, Philadelphia,

Pennsylvania, with total assets of

$8.9 million, failed on November 14,

and all insured deposits were sold 

to another FDIC-insured institution.

(See the accompanying table above

for details about liquidation activities.)

The FDIC initiated a number of 

projects in 2003 to better manage

and leverage its resources to meet

potential challenges in the resolution

of future financial institution failures.

These projects are in the areas of

processing depositor claims, franchise

and asset marketing, asset valuation

and sales, asset servicing, receivership operations and management,

information systems, planning and

communication, cost containment,

and field operations. W.

W.Reid

2003 2002 2001

Total Resolved Banks 3 10 3

Assets of Resolved Banks $ 1.10 $ 2.50 $ .05

Total Resolved Savings Associations 0 1 1

Assets of Resolved Savings Associations $ 0 $ .05 $ 2.18

Net Collections from Assets in Liquidation●$ 1.70 $ 1.84 $ .31

Total Assets in Liquidation●$ .81 $ 1.24 $ .57

Total Dividends Paid●$ 1.06 $ 2.12 $ .46

Iincludes activity from thrifts resolved by the former Federal Savings and Loan Insurance Corporation and the Resolution

Trust Corporation. 

Dollars in billions

Liquidation Highlights 2001-2003

●
19

Lessons Learned Symposium

The FDIC, in association with the

SW Graduate School of Banking and

Southern Methodist University’s Cox

School of Business, presented the

Lessons Learned from Recent Bank

Failures symposium on October 24.

This conference served as a forum

for academics, regulators and industry

participants to present analyses 

and to debate the causes and costs

of recent bank failures. Presentations

and discussions centered on the root

causes of recent bank failures, the

impact of new banking activities 

on bank failures, and the costs 

of recent bank failures.

Customer Service Center 

In order to help consumers needing

assistance with matters arising from

failed financial institutions, the FDIC

also operates a Customer Service

Center with staff dedicated to handling records research and collateral

releases. During 2003, FDIC staff

responded to nearly 86,000 inquiries

and was recognized for Outstanding

Customer Service provided through

expanded e-Government initiatives 

at the President’s Quality Awards 

for their innovative work and rapid

response time in this area. The records

research staff reviews the historical

records of failed financial institutions

in order to answer customer questions

on deposit accounts, loan transaction

histories, tax suits for delinquent 

real estate, and other issues. The

collateral release staff researches

and determines ownership of collateral securing loans of failed financial 

institutions in order to provide a

release of lien, assignment or reconveyance to the borrower. This staff

successfully handled over 17,000

collateral release inquiries in 2003.

Finally, the Customer Service Call

Center handled over 85,000 calls

asking for information or assistance.

Terminations

The FDIC, as receiver, manages 

the receivership estate and the 

subsidiaries of failed insured financial

institutions with the goal of achieving

an expeditious and orderly termination.

The oversight and prompt termination

of receiverships help to preserve

value for the uninsured depositors

and creditors by reducing overhead

and other holding costs. For that 

reason, the FDIC has established 

a target of terminating 75 percent 

of receiverships within three years 

of the failure date. The goal would

have been achieved in 2003 except

for outstanding professional liability

claims and other impediments. At

year-end 2003, three receiverships

remained active from the seven

receiverships established following

institution failures in 2000. These

three receiverships could not be 

terminated due to the existence 

of ongoing professional liability 

litigation and non-asset defensive

litigation. These cases continue 

to be vigorously pursued through

appropriate negotiations and 

litigation proceedings. 

Operational Efficiency 

and Effectiveness

Although the FDIC is not subject to

the President’s Management Agenda

(PMA), it has given priority attention

to continuing efforts to improve

operational efficiency and effectiveness, consistent with the PMA.

Major initiatives pursued in this area 

during 2003 are outlined below. 

Managing Human Capital

The FDIC has been downsizing 

its workforce for a decade, as the 

residual workload from the banking

and thrift crises has gradually been

completed. FDIC staffing, including

staff assigned to the Resolution

Trust Corporation, has declined from

approximately 23,000 in 1993 to

about 5,300 at the end of 2003. In

mid-2003, a reduction in force was

implemented to address 43 identified

surplus positions that remained 

following aggressive efforts in 2002

and early 2003 to align staffing with

current workload through voluntary

measures. Like other organizations,

the Corporation will continue to review

its work processes and employ 

technology and other means to

improve operational efficiency,

potentially resulting in excess 

positions. The Corporation expects

to be able to address future surplus

positions, in most instances, through

a continuing process of carefully

managing resources.

The demands placed on the Corporation by a rapidly changing external

environment require a more dynamic

and strategic approach to managing

the Corporation’s human capital in

order to ensure that the FDIC has
20

the skills and staff necessary to 

fulfill its mission in the future. 

The Corporation is in the process 

of revamping its compensation 

program to place greater emphasis

on performance-based incentives. 

A new executive classification and

pay program was implemented 

in 2003 that ties all future pay

increases to performance against

specific measurable objectives. 

The Corporation also implemented 

a new Corporate Success Award 

program that differentiates annual

pay increases for the rest of the

workforce on the basis of performance. A comprehensive review of

the Corporation’s human resource

management processes identified

opportunities to provide increased

flexibility in both the recruitment 

and retention of employees and 

the management of employee 

performance. Implementation of the

recommendations from that review

began in 2003 and will continue in

2004. In addition, the Corporation

began to analyze staffing alternatives

to ensure that it continues to have

the skills it needs in its workforce 

as it deals with a large number of

retirements expected over the next

five to seven years. 

Key Positions Filled – 

Chief Economist, Chief Accountant,

and Chief Information Officer

In February 2003, the FDIC named

the Corporation’s Chief Economist

and Chief Accountant. The Chief

Economist will develop and communicate the FDIC’s perspective on 

a wide range of economic and risk

management issues. The Chief

Accountant will spearhead FDIC

accounting policy development 

(for banks in the U.S. and abroad),

establish regulatory financial reporting

requirements, and review depository

institutions’ accounting for specific

transactions. The Chief Accountant

will also participate in developing the

FDIC’s regulations and supervisory

policies on capital adequacy and

auditing programs and oversee the

FDIC’s securities registration and 

disclosure function under federal

securities laws. In November 2003,

the FDIC filled the vacant Chief

Information Officer (CIO) position.

The CIO will play a crucial role in

overseeing the transformation of the

Corporation’s Division of Information

Resources Management into a more

agile and customer-focused strategic

partner.

Corporate University

In June 2003, the FDIC Chairman

appointed the agency’s first Chief

Learning Officer to head the new

Corporate University (CU). The CU

represents a departure from traditional

training approaches and will provide

a continual learning environment for

FDIC employees. It will use numerous

tools and techniques to prepare them

for a changing banking, economic

and regulatory landscape. The CU

provides opportunities for employees

to enhance their sense of corporate

identity while learning more about

the FDIC’s major program areas 

of Insurance, Supervision and

At their official induction as Deans of the FDIC Corporate University (l to r): Erica Cooper, School of

Leadership Development; Fred Carns, School of Insurance; Nancy Hall, School of Supervision and

Consumer Protection; James Wigand, School of Resolutions and Receiverships; and Miguel Torrado,

School of Corporate Operations. CLO Dave Cooke joined in welcoming the new Deans.
21

transactions were activated to

enable institutions to conduct 

business online with the FDIC. 

These transactions included filing 

of new branch applications by 

insured institutions, collection of 

information for the 2003 summary

of deposits, public retrieval of 

beneficial ownership reports, 

and access to bank assessment 

invoices. 

● In June 2003, FDIC implemented 

the Assessment Information 

Management System (AIMS II), 

which calculates, collects and 

accounts for the quarterly assessment premiums paid by financial 

institutions. The FDIC issues 

over 9,000 invoices quarterly 

and captures a full history of 

assessment-related transactions. 

The assessment function is vital 

to the FDIC, and the improvements

realized by putting this system in 

place have made the Corporation 

more efficient. Assessment 

invoices are now made available 

to insured institutions using 

FDICconnect.

● FDIC partnered with several 

external organizations to emphasize the importance of robust 

information security programs 

to financial institutions. These 

organizations included the Federal

Bureau of Investigation, the 

Financial and Banking Information 

Infrastructure Committee, Financial

Crimes Enforcement Network, and

the Critical Infrastructure Protection

Project of George Mason University

School of Law. In partnership 

with these organizations, the FDIC

sponsored a series of cybersecurity symposia and helped 

to identify and develop a set 

of best practices for cyber-security

for use in financial institutions.

Consumer Protection, and Receivership Management. Further, the CU will

be a leader in leveraging technology 

to improve the efficiency and effectiveness of all Corporate training.

Information Technology Initiatives

To keep pace with an ever-evolving

financial services industry, the FDIC

is utilizing technology to bring stakeholders information in a more timely,

secure manner. Efforts have focused

on improving the FDIC’s public web

site, securing ways to facilitate 

electronic communication with stakeholders, and streamlining examination

efforts through more efficient means

of collecting and disseminating data.

The FDIC also completed in 2003 

a comprehensive review of its

Information Technology (IT) program.

That review evaluated the cost 

and performance of the current 

IT program, identified future skill

requirements and alternative sourcing

strategies, and recommended a new

organizational and staffing structure

to begin to transform the IT organization into a strategic partner with the

Corporation’s major business units

over the next two to three years.

Significant IT-related accomplishments

in 2003 include:

● Considerable progress was 

made in the development and 

implementation of a new Enterprise

Architecture (EA) to guide the 

Corporation’s future IT efforts. 

By following the EA program, 

the FDIC will be able to deploy 

new systems more quickly, reduce

risks normally inherent in largescale systems, and forecast 

system development budgets 

and schedules more accurately, 

thus reducing system development

and support costs. The EA program

will also emphasize security and 

enhance e-government capabilities.

● The FDIC’s public Web site 

(www.fdic.gov) was redesigned 

to make use of the agency’s 

online services faster and easier 

for bankers, financial analysts, 

consumers and others. Products 

and services available on the 

Web site include resources for 

bankers about their requirements 

for safe operations and compliance

with consumer protection laws, 

data about individual banks

and the banking industry, useful 

information for consumers about 

deposit insurance and rights as 

depositors and borrowers, and 

updates on FDIC press releases.

● FDIC achieved several successes 

with FDICconnect, a secure Web 

site developed to facilitate electronic communication with 

insured financial institutions. 

During 2003, twelve business 
22

Improved Information Security

In response to a reportable condition

on information security weaknesses

identified in the GAO’s audit of 

the Corporation’s 2002 financial

statements, the FDIC continued to

give priority attention in 2003 to its

information security management

program. Major program accomplishments in 2003 included the following:

● Updated policies on contractor 

and outside agency security were

issued, and contractor security 

requirements were added to the 

Acquisition Policy Manual. Security

audits of local outside contractor 

sites were also conducted.

● Security performance measures 

were identified and tracked through

quarterly performance reports to 

senior FDIC management.

The annual Federal Information 

Security Management Act audit 

conducted by the OIG noted significant improvement in the FDIC’s 

information security program during 

the prior 12 months. The audit 

assigned an overall “limited 

assurance” rating, but identified 

only one area that was assigned a

“minimal/no assurance” rating,

down from three in 2002. Efforts 

to improve all areas of information

security will continue in 2004.

Financial Highlights

Deposit Insurance Fund

Performance 

The FDIC administers two deposit

insurance funds –the Bank Insurance

Fund (BIF) and the Savings

Association Insurance Fund (SAIF) –

and manages the FSLIC Resolution

Fund (FRF), which fulfills the obligations of the former Federal Savings

and Loan Insurance Corporation

(FSLIC) and the former Resolution

Trust Corporation (RTC). The following summarizes the condition 

of the FDIC’s insurance funds. 

(See the accompanying tables 

on FDIC-Insured Deposits, Insurance

Fund Reserve Ratios and Risk-Related

Premiums on the following pages.)

The BIF reported comprehensive

income (net income plus current

period unrealized gains/losses on

available-for-sale securities) of 

$1.7 billion for the twelve months

ending December 31, 2003, compared to $1.6 billion for the same

period in the prior year. During

2003, estimated losses for future

and actual failures, as well as litigation, decreased by $832 million, and

operating expenses decreased by

$16 million. However, these decreases

in losses and expenses were partially

offset by significant reductions in

unrealized gains on available-for-sale

securities ($576 million) and lower

interest revenue on U.S. Treasury 

obligations ($162 million). As of

December 31, 2003, the fund 

balance was $33.8 billion, up from

$32.1 billion at year-end 2002. 

BIF’s contingent liability for anticipated

failures declined by $830 million, 

or 82 percent, to $178 million for 

the year. This overall reduction in 

the reserves is primarily the result 

of improvements in the loss reserve

methodology and an improvement in

the financial condition of a few large

troubled institutions.

The SAIF reported comprehensive

income of $493 million for the twelve

months, ending December 31, 2003,

compared to $812 million for the

same period in the prior year. This

difference of $318 million was primarily due to a decrease in unrealized

gains on available-for-sale securities

of $198 million, a slight reduction 

in interest revenue of $32 million, and

a reduction in the estimated losses

for future failures of $55 million. As 

of December 31, 2003, the fund 

balance was $12.2 billion, up from

$11.7 billion at year-end 2002.
23

SAIF’s contingent liability for anticipated

failures decreased by $87 million,

or 96 percent, to $3 million for the

year. The overall reduction is the

result of improvements in the 

loss reserve methodology and 

the improved financial condition 

of a few large troubled institutions.

As of December 31, 2003, SAIF’s

current liabilities totaled less than one

percent of the fund balance. 

Operating Expenses

Corporate Operating Budget expenses

totaled $1,008.2 million in 2003,

including $968.6 million for ongoing

operations and $39.6 million for

receivership funding. These 

expenses represented approximately

98 percent of the approved budget

for ongoing operations and 53 percent of the approved budget for

receivership funding. Receivership

funding expenses were down 

significantly from 2002 because

of the smaller number of insured

institution failures.

SAIF-Insured

BIF-Insured

3,000

2,500

2,000

1,500

1,000

500

0

Source: Commercial Bank Call Reports and Thrift Financial Reports

1960 70 80 90 2000

FDIC-Insured Deposits (estimated 1960-2003)

Dollars in billions

03

The Board of Directors approved a

2004 Corporate Operating Budget of

approximately $1.1 billion, including

just over $1.0 billion for ongoing

operations. The level of approved

spending in the 2004 budget remains

virtually the same as that in 2003

due to continuing efforts to identify

operational efficiencies and control

costs. The Corporate Operating

Budget includes funding for a 

number of major new initiatives,

including the Corporate University

and the Center for Financial

Research. 

The 2004 budget includes, for the

first time, estimated funding requirements ($35 million) for litigation

expenses projected to be incurred

on behalf of the FDIC by the 

U.S. Department of Justice. These

expenses have not previously been

included in the annual Corporate

Operating Budget, but were

expensed directly to the appropriate

receivership accounts. This change

will increase the transparency of 

the Corporation’s financial reporting.
24

Investment Spending 

The FDIC has a disciplined process

for reviewing proposed new capital

investment projects and managing

the implementation of approved 

projects. Most of the projects in 

the current investment portfolio 

are major IT systems initiatives.

Proposed projects are carefully

reviewed to ensure that they are

consistent with the Corporation’s

enterprise architecture and include

an appropriate return on investment

for the insurance funds. The process

also enables the FDIC to be aware of

risks to the major capital investment

projects and facilitates appropriate,

timely intervention to address these

risks throughout the development

process. An investment portfolio 

performance review of the major

capital investments is provided 

to the FDIC Board of Directors 

quarterly. During 2003, the Board 

of Directors approved two new

investment projects: (1) Legal

Information Management System -

$3.2 million and (2) Asset Servicing

Technology Enhancement Project -

$31.8 million.

1.45

1.40

1.35

1.30

1.25 (target ratio)

0

12/99 12/00 12/01 3/02 6/02 9/02 12/02 3/03 6/03 9/03 

Insurance Fund Reserve Ratios Percent of Insured Deposits

BIF

SAIF
25

Risk-Related Premiums

The following tables show the number and percentage of institutions insured by the Bank Insurance 

Fund (BIF) and the Savings Association Insurance Fund (SAIF), according to risk classifications effective

for the first semiannual assessment period of 2003. Each institution is categorized based on its 

capitalization and a supervisory subgroup rating (A, B, or C), which is generally determined by on-site

examinations. Assessment rates are basis points, cents per $100 of assessable deposits, per year.

BIF Supervisory Subgroups●

ABC

Well Capitalized:

Assessment Rate 0 3 17

Number of Institutions 7,400 (91.8%) 470 (5.8%) 82 (1.0%)

Adequately Capitalized:

Assessment Rate 3 10 24

Number of Institutions 82 (1.0%) 8 (0.1%) 13 (0.2%)

Undercapitalized:

Assessment Rate 10 24 27

Number of Institutions 0 (0.0%) 2 (0.0%) 1 (0.0%)

SAIF Supervisory Subgroups■

Well Capitalized:

Assessment Rate 0 3 17

Number of Institutions 1,092 (91.5%) 81 (6.8%) 13 (1.1%)

Adequately Capitalized:

Assessment Rate 3 10 24

Number of Institutions 4 (0.3%) 1 (0.1%) 3 (0.3%)

Undercapitalized:

Assessment Rate 10 24 27

Number of Institutions 0 (0.0%) 0 (0.0%) 0 (0.0%)

BIF data exclude SAIF-member “Oakar” institutions that hold BIF-insured deposits. The assessment rate reflects the rate 

for BIF-assessable deposits, which remained the same throughout 2002.

SAIF data exclude BIF-member “Oakar” institutions that hold SAIF-insured deposits. The assessment rate reflects the rate

for SAIF-assessable deposits, which remained the same throughout 2002.

●

■