Federal Deposit Insurance Corporation: Human Capital and Risk Assessment Programs Appear Sound, but Evaluations of Their Effectiveness Should Be Improved
Published: 2007-02-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Federal Deposit Insurance Reform Conforming Amendments Act of 2005 requires GAO to report on the effectiveness of Federal Deposit Insurance Corporation's (FDIC) organizational structure and internal controls. GAO reviewed (1) mechanisms the board of directors uses to oversee the agency, (2) FDIC's human capital strategies and how its training initiatives are evaluated, and (3) FDIC's process for monitoring and assessing risks to the banking industry and the deposit insurance fund, including its oversight and evaluation. To answer these objectives, GAO analyzed FDIC documents, reviewed recommended practices and GAO guidance, conducted interviews with FDIC officials and board members, and conducted site visits to FDIC regional and field offices in three states.
section_title: What GAO Found
paragraphs: FDIC's five-member board of directors is responsible for managing FDIC. Information and communication channels have been established to provide board members with information on the agency's operations and to help them oversee the agency. The board also has four standing committees for key oversight functions. For example, the audit committee primarily oversees the agency's implementation of FDIC Inspector General audit recommendations. Finally, because the board cannot oversee all day-to-day operations, the board delegates certain responsibilities to senior management. FDIC has procedures for issuing and revising its delegations of authority, which help ensure that the delegations are appropriate for its current structure and banking environment. FDIC has reviewed specific delegations on occasion at the request of a board member, management, and more recently in response to an Inspector General report's recommendation. Management of human capital is critical at FDIC because the agency's workload can shift dramatically depending on the financial condition of the banking industry. FDIC uses an integrated approach, where senior executives come together with division managers, to develop human capital initiatives, and the agency has undertaken activities to strengthen its human capital framework. FDIC created the Corporate Employee Program to develop new employees and provide training in multiple disciplines so they are better prepared to serve the needs of the agency, particularly when the banking environment changes. Some FDIC employees thought the program had merit, but they expressed concerns about whether certain aspects of the program could slow down the development of expertise in certain areas. FDIC, through its Corporate University, evaluates its training programs, and officials are developing a scorecard that includes certain output measures showing progress of key training initiatives towards its goals. Officials told us that they would like to have outcome measures showing the effectiveness of their key training initiatives but have faced challenges developing them. However, outcome measures could help address employee concerns and ensure that the Corporate Employee Program achieves the agency's goals. FDIC has an extensive system for assessing and monitoring external risks. FDIC's system includes supervision of individual financial institutions and analysis of trends affecting the health of financial institutions. FDIC has also developed contingency plans for handling the greatest dangers to the deposit insurance fund--particularly the failure(s) of large institutions. In addition to risk assessment, a key internal control is monitoring risk assessment activities on an ongoing basis. FDIC has evaluated several of its risk activities, but most of the evaluations we reviewed were not conducted regularly or comprehensively. For example, some simulations of its plans for handling large bank failures were either out of date or inconsistent with FDIC's guidance. Developing policies and procedures and clearly defining how it will monitor and evaluate its risk activities could assist FDIC in addressing or preventing weaknesses in its evaluations.

section_title: Letter
paragraphs: In recent years, the U.S. banking industry has become more complex, both  through an increased diversity and sophistication of products and  activities as well as through growth in globalization of operations. At the  same time, industry consolidation has sharply reduced the number of  institutions and concentrated assets in a small number of large financial  institutions. Among commercial banks for example, as of September 2006,  just 1.2 percent of some 7,450 institutions now hold 76.4 percent of all  assets; similarly, 3.9 percent of all thrifts hold 75.7 percent of all assets.  This concentration of assets means an increased probability that a single  large bank or thrift failure could potentially overwhelm the deposit  insurance fund.
Against this backdrop, Congress recently granted the Federal Deposit  Insurance Corporation (FDIC)—the guarantor of over $4 trillion in  deposits in the nation’s banks and thrift institutions—broad new powers  for managing its insurance fund. In February 2006, the President signed  the Federal Deposit Insurance Reform Act of 2005 (Reform Act), which  amended the Federal Deposit Insurance Act (FDIA), to expand FDIC’s  authority to price its insurance according to the risk a particular  institution presents to the fund. Today FDIC has a much smaller  workforce than it did when it handled the banking crisis of the late 1980s  and early 1990s. As of June 2006, FDIC has reduced its workforce by about  80 percent since 1991. However, FDIC has adopted and is implementing  strategies to reduce the impact of a smaller workforce. Further, the  banking industry has been remarkably healthy, recording strong earnings  and not experiencing a single failure between June 2004 and January 2007.  However, FDIC must be prepared to respond to future situations in which  the banking environment may be more volatile and uncertain.
This report responds to the mandate included in the Federal Deposit  Insurance Reform Conforming Amendments Act of 2005 requiring the  Comptroller General to report on the effectiveness of FDIC’s  organizational structure and internal controls. Specifically, this report  examines: (1) mechanisms used by the FDIC board of directors to oversee  and manage the agency; (2) FDIC’s human capital strategies and how  training and development programs are evaluated; and (3) FDIC’s process  for monitoring and assessing risks to the industry and the deposit  insurance fund and how that process is overseen and evaluated.
To respond to these objectives, we analyzed agency data and documents,  and identified and reviewed recommended practices on board  management and oversight, human capital and workforce planning, risk  management, and internal controls through a review of management  literature and our guidance. We also interviewed members of FDIC’s  Human Resources Committee, senior managers in FDIC’s three main  business lines—the Divisions of Insurance and Research, Resolutions and  Receiverships, and Supervision and Consumer Protection, and senior staff  in other FDIC divisions, such as Corporate University and the Division of  Finance. We also met with senior agency executives—such as the Chief  Operating Officer, Chief Financial Officer, and Acting General Counsel—to  obtain their views on board oversight, human capital, and risk  management issues. To obtain more information on how FDIC’s board  manages and oversees the agency, we conducted interviews with members  of FDIC’s current board of directors, their deputies, and the board’s Audit  Committee members using the same set of questions with all interview  participants. To obtain independent views from board members, we met  with each board member separately; each board member’s deputies or  other senior staff also participated in the interviews. We also interviewed  academicians and industry observers to obtain their views on management  practices at organizations overseen by boards of directors. In addition, we  conducted site visits at FDIC regional and field offices in three states  (California, Georgia, and Texas) to obtain more in-depth information on  the FDIC board of directors’ management and oversight responsibilities;  issues related to human capital, workforce planning, and training and  development; FDIC’s methods for identifying, assessing, and monitoring  risk; and FDIC’s methods of evaluating its progress toward meeting agency  goals. At these locations, we conducted interviews with division managers,  division staff, case managers, and financial institution examiners using the  same set of questions for each interview session. We met with field office  employee groups separately from regional office managers. We conducted  our work in the previously mentioned three states and Washington, D.C.,  from May 2006 through January 2007 in accordance with generally  accepted government auditing standards. Appendix I provides a detailed  description of our objectives, scope, and methodology.
subsections: section_title: Background
subsections: section_title: FDIC’s Mission and Structure
paragraphs: FDIC was created in 1933 in response to the thousands of bank failures  that occurred in the 1920s and early 1930s. FDIC’s mission is to maintain  the stability and public confidence in the U.S. financial system by insuring  depositor accounts in banks and thrifts, examining and supervising  financial institutions, and managing receiverships. Currently, FDIC  insures individual accounts at insured institutions for up to $100,000 per  depositor and up to $250,000 for certain retirement accounts. FDIC says  that since the start of its insurance coverage in January 1934, depositors  have not lost any insured funds to a bank failure. Today, FDIC’s  obligations are considerable—as of September 2006, 8,743 insured U.S.  institutions held $6.47 trillion in domestic deposits, of which an estimated  63.2 percent, or $4.09 trillion, were insured. To protect depositors, FDIC  held insurance reserves of $50 billion, as of September 2006.
FDIC directly supervises about 5,237 banks and thrifts, more than half of  the institutions in a banking system jointly overseen by four federal  regulators. By assets, however, FDIC-supervised institutions account for  only 18.1 percent of the industry. Banks and thrifts can receive charters  from the states or from the federal government; state-chartered banks may  elect to join the Federal Reserve System. FDIC’s role as the primary  federal regulator is for banks chartered by the states that are not members  of the Federal Reserve System. In addition, FDIC is the back-up supervisor  for insured banks and thrift institutions that are either state-chartered  institutions or are under the direct supervision of one of the other federal  banking regulators. FDIC receives no congressional appropriations; it  receives funds from premiums that banks and thrift institutions pay for  deposit insurance coverage and from earnings on investments in U.S.  Treasury securities.
FDIC’s five board members (known as directors) manage the agency.  FDIC’s chairman manages and directs the daily executive and  administrative operations of the agency. The chairman also has the general  powers and duties that the chief executive officer for a private corporation  usually has, even though FDIC is a federal government agency. Executive  and senior FDIC staff report to the chairman directly or indirectly through  the Deputy to the Chairman and Chief Operating Officer, or the Deputy to  the Chairman and Chief Financial Officer; no other board director has  similar authority or responsibility within the agency. The President  appoints three of the members, two of whom he designates as the board’s  chairman and vice chairman. The other two members, the Comptroller of  the Currency and the Director of the Office of Thrift Supervision, serve as  ex-officio board members. The three members directly appointed to  FDIC’s board are often referred to as inside board directors, while the  other two are referred to as outside board directors.
FDIC operates principally through three divisions:  the Division of Supervision and Consumer Protection, which supervises  insured institutions and is responsible for promoting compliance with  consumer protection, fair lending, community reinvestment, civil rights,  and other laws; the Division of Insurance and Research, which assesses risks to the  insurance fund, manages FDIC’s risk-related premium system, conducts  banking research, publishes banking data and statistics, analyzes policy  alternatives, and advises the board of directors and others in the agency;  and the Division of Resolutions and Receiverships, which handles closure and  liquidation of failed institutions.
Other divisions include the Division of Administration, the Division of  Finance, the Legal Division, and the Division of Information Technology  (see fig. 1). FDIC currently employs about 4,500 people throughout 6  regional offices, 2 area offices, and 85 field offices that are geographically  dispersed, with centralized operations in Washington, D.C.
section_title: Changes in the Size of FDIC’s Workforce
paragraphs: Following the resolution of the banking crisis of the 1980s and early 1990s,  FDIC significantly reduced its workforce—down by about 80 percent,  from a peak of about 23,000 employees in 1991 to about 4,500 employees  as of June 2006. This trend is illustrated in figure 2. A significant portion  of the reductions were staff in FDIC absorbed from the former Resolution  Trust Corporation (RTC).
FDIC’s downsizing generally reduced jobs across the agency, and some  occupational categories experienced sizeable reductions in staff. For  example, the attorney workforce decreased by 83 percent, from 1,452  attorneys in 1992 to 249 attorneys in 2005. The composition of FDIC’s  examination staff also experienced significant change. Although there was  a 35 percent decrease in the number of examiners (from 3,305 in 1992 to  2,157 in 2005), the percentage of FDIC’s workforce devoted to  examinations increased, from 15 percent in 1992 to 47 percent for 2005.  Like other federal banking regulators, FDIC is generally required to  conduct full-scope, on-site examinations of institutions it directly  supervises at least annually, although it can extend the interval to 18  months for certain small institutions.
FDIC’s downsizing activities also resulted in a loss of institutional  knowledge and expertise, and FDIC will have to replace a significant  percentage of its current, highly experienced executive and management  staff due to projected retirements over the next 5 years. An estimated 8 to  16 percent of FDIC’s remaining permanent workforce is projected to retire  over the next 5 years. In some FDIC divisions, projected retirements are  almost double these percentages.
section_title: Board Oversight Accomplished through Communication and Information Channels, Committees, and Delegations of Authority
paragraphs: FDIC’s board of directors has a mix of knowledge and skills that  contribute diverse perspectives in the board’s decision making, and the  board relies on communication with deputies and senior management  within FDIC to provide timely and useful information for effective and  informed decision making. The board has also established standing  committees to conduct certain oversight functions, such as monitoring the  implementation of audit report recommendations, to help manage the  agency. Further, FDIC’s board of directors has the ability to broadly  delegate its authority to allow the agency to operate efficiently. These  delegations are extensive and have been reviewed periodically to ensure  they are appropriate for FDIC’s current size and structure, and the current  banking environment.
subsections: section_title: A Variety of Perspectives and Interaction with FDIC Management Helps Board of Directors Make Informed Decisions
paragraphs: The literature we reviewed on best practices for boards of directors states  that the composition of the board should be tailored to meet the needs of  the organization, but there should also be a mix of knowledge and skills.  FDIC’s board of directors reflects a mix of knowledge, perspectives, and  political affiliations; for example, FDIC’s board includes the directors of  the Office of the Comptroller of the Currency and Office of Thrift  Supervision as well as a director with experience in state bank  supervision. Further, after February 28, 1993, no more than three of the  members of the board of directors could be members of the same political  party.
According to FDIC board members, each director provides a different  perspective that contributes to board diversity. Additionally, officials told  us that the presence of the outside directors on the board helps to  represent the views of their respective agencies during joint rule making.  Senior FDIC officials and board directors agreed that the board functions  best with a full complement of directors. Vacancies on the board could  result in the board not benefiting from the perspectives of a full  complement of directors. Board members told us that without a full  complement, there would be fewer ideas and opinions during board  deliberations. For example, one board member stated that the possible  absence of a member with state bank supervisory experience might affect  discussions on state banks. However, FDIC board members told us that  board vacancies would not negatively affect the daily operation of the  agency.
According to our standards for internal control, effective communications  should occur in a broad sense with information flowing down, across, and  up the organization. The literature we reviewed related to best practices  for boards of directors suggests that boards need quality and timely  information to help them obtain a thorough understanding of important  issues. The literature states that board members should receive  information through formal channels, such as management reports and  committee meetings, and informal channels, such as phone or e-mail  discussions. FDIC directors told us that board members are fully aware  of and familiar with operations at the agency, frequently communicating  and interacting with senior management and staff on a broad range of  issues. For example, board directors told us they have regular meetings  with various division managers to discuss agency issues. We also observed  a November 2006 board meeting, where it appeared from the board  members’ few questions and supportive comments to the FDIC staff that  the board members were informed of the staff’s recommendations.
Directors explained that there is a free flow of information between  directors and FDIC senior management and staff as well as between  directors and the board chairman. Each director also has a deputy who  assists him or her in carrying out his or her duties and responsibilities.
With the assistance of their deputies, outside (ex-officio) directors are able  to remain engaged in pertinent issues at FDIC. The deputies also assist  directors in examining diverse policy issues of concern to the agency,  either initiated by the director, or at the request of the chairperson. Also,  FDIC management provides the bulk of information that directors receive  to make decisions. For example, FDIC management provides briefings to  board directors on various issues as well as detailed briefing books in  advance of FDIC board meetings so that directors may ask questions or  request more information to prepare to provide input and make decisions  at board meetings. In one May 2006 board meeting, we observed FDIC  staff making brief presentations to the board highlighting various trends  and factors that they considered in developing recommended action or  inaction for several agenda items. We also reviewed board meeting  agendas that outlined substantive issues considered by the board of  directors. In one example, the Director of the Division of Supervision and  Consumer Protection provided a detailed written overview of a notice of  proposed rule making informing board members weeks before the official  board meeting. Further, directors told us that informal communication  with their deputies, other board members, and senior management occurs  through phone conversations, e-mail discussions, and impromptu  meetings.
section_title: Standing Committees Conduct Certain Oversight Functions to Assist the Board in Managing FDIC
paragraphs: FDIC’s board of directors established standing committees to conduct  certain oversight functions that assist it in managing the agency. The board  provides authority to these committees to act on certain matters or to  make recommendations to the board of directors on various matters  presented to it. Currently, the board has four standing committees: (1)  Case Review Committee, (2) Supervision Appeals Review Committee, (3)  Assessment Appeals Committee, and (4) Audit Committee. Each  committee is governed by formal rules that cover areas such as  membership, functions and duties, and other process and reporting  requirements such as frequency and scope of committee meetings and, in  some cases, submission of activity reports to the board.
The Case Review Committee is comprised of six members who adopt  guidelines for taking enforcement actions against individuals, for example,  to remove an individual from participating in the affairs of an insured  depository institution. Under authority granted to it by the board of  directors, this committee also reviews and approves the initiation of  certain enforcement actions upon determination by a designated  representative of the Division of Supervision and Consumer Protection or  upon request by the chair of the committee. The Supervision Appeals  Review Committee, comprised of four members, considers and decides  appeals of material supervisory determination made by FDIC -supervised  institutions; for example, an institution may appeal a rating in its report of  examination. The Assessment Appeals Committee is a six-member  committee that considers and decides appeals regarding assessments to  insured depository institutions. As an appellate entity, the committee is  responsible for making final determinations pursuant to regulations  regarding the assessment risk classification and the assessment payment  calculation of insured depository institutions. Last, the Audit Committee is  comprised of three members who are charged with reviewing reports of  completed audits and requesting necessary follow-up on the audit  recommendations. The committee also oversees the agency’s financial  reporting and internal controls, including reviewing and approving plans  for compliance with the audit and financial reporting provisions applicable  to government corporations, assessing the sufficiency of FDIC’s internal  control structure, and ensuring compliance with applicable laws,  regulations, and internal and external audit recommendations, all for the  purpose of rendering advice to the chairman of the board of directors.
The literature we reviewed on recommended practices for boards of  directors of publicly traded corporations states that audit committees play  a critical role in the board oversight process. In most publicly traded  corporations, the primary role of an audit committee of its board of  directors is oversight of the preparation and filing of financial statements  with the appropriate regulators and exchanges. However FDIC’s board  directors and officials told us that FDIC’s Audit Committee does not serve  the same function as an audit committee of a private sector corporation.
FDIC’s Audit Committee is an advisory body that, in practice, conducts a  more limited scope of duties than what is authorized in its formal rules.  Further, as stated above, FDIC is subject to certain audit and financial  reporting provisions. FDIC’s board has established the position of chief  financial officer as FDIC’s chief financial, accounting and budget officer.  Although FDIC is not subject to title II of the Chief Financial Officers Act  of 1990 (CFO Act), which requires 24 executive agencies to appoint chief  financial officers, FDIC’s chief financial officer’s duties include  implementing programs consistent with the CFO Act. Thus, FDIC’s Audit  Committee’s responsibilities do not include oversight of the preparation  and filing of financial statements and other activities generally conducted  by private sector audit committees. Instead, FDIC’s Audit Committee’s  primary responsibility is ensuring that the recommendations of FDIC’s  Inspector General are appropriately implemented.
Also, section 301 of the Sarbanes Oxley Act requires audit committees of  publicly traded corporations to be composed entirely of independent  members. Although FDIC is not bound by these requirements, according  to FDIC officials, Audit Committee members are considered independent  of FDIC management because they do not have direct responsibility over  any FDIC division or office. However, in one instance, FDIC revised the  composition of the Audit Committee because there was a perception of  impairment to independence. FDIC’s Chief Financial Officer was a  member of the Audit Committee because this official was also a deputy to  the chairman and therefore eligible for the senior employee position on  the Audit Committee. However, FDIC thought it was inappropriate to have  the Chief Financial Officer serve on the Audit Committee because certain  Audit Committee functions—reviewing materials related to FDIC’s  finances, for example—may have had the potential to conflict with the  professional interests of the Chief Financial Officer. FDIC officials stated  that interactions between FDIC’s Inspector General and the Audit  Committee also help mitigate concerns about impairments to  independence and conflicts of interest. For example, officials from  FDIC’s Office of the Inspector General can attend Audit Committee  meetings. Audit Committee members noted that they valued the insights  provided by officials from the Office of the Inspector General because they  have an opportunity to weigh in on instances where the Audit Committee  may not be able to sufficiently distance itself in order to provide objective  oversight.
section_title: Formal Procedures and Periodic Reviews Help Ensure Appropriate Delegations of Authority
paragraphs: FDIC’s board of directors delegates much of the agency’s operational  responsibilities to various committees and offices within FDIC. These  delegations allow the board to concentrate on policy matters as opposed  to daily agency operations. FDIC’s current delegations of authority were  influenced by prior events that necessitated broad delegations. According  to an FDIC official, very few activities were initially delegated to FDIC  staff. However, during the banking crisis of the 1980s and early 1990s  when FDIC resolved many institutions, there were significant transfers of  authority from the board to divisional personnel. During that period, FDIC  had over 20,000 employees and the need for sweeping delegations was  appropriate for the size of the agency and the industry’s conditions. The  board was overwhelmed with making decisions stemming from the  agency’s increased workload and decided to delegate many routine  matters to FDIC staff. However, there are some activities that the board  cannot delegate. For example, only the board can decide to deny an  application for deposit insurance, terminate deposit insurance, or take  enforcement actions using the board’s backup authority.
According to our Standards for Internal Control in the Federal  Government, conscientious management and effective internal controls  are affected by the way in which the agency delegates authority and  responsibility throughout the organization. An agency’s delegations  should cover authority and responsibility for operating activities, reporting  relationships, and authorization protocols. Once the board has a full  understanding of an issue, it may allow others to make decisions  concerning that issue through delegations. FDIC officials explained that  delegations of authority are documented, and there are associated  reporting requirements. Further, FDIC has procedures for issuing,  reviewing, and amending delegations of authority within FDIC divisions  and offices. Once delegations of authority have been issued by the board,  officials who are recipients of those delegations are to observe an FDIC  directive in properly redelegating their authority. The February 2004  directive to all FDIC divisions and offices formalizes policies and  procedures for issuing delegations of authority throughout the agency and  applies to all delegations issued by the board as well as redelegations and  subdelegations to FDIC managers, supervisors, and other staff.
According to the directive, the headquarters division or office issuing a  delegation of authority is to prepare its delegations, including any  revisions, in coordination with FDIC’s Legal Division and submit the  delegations to FDIC’s executive secretary. Further, according to the  directive, the divisions are to review delegations at least once a year for  accuracy. After each review, the Executive Secretary Section of FDIC’s  Legal Division is to review submitted delegations for completeness and  compile any revisions to the delegations. The Executive Secretary Section  should also track board and other FDIC management activity, for example  corporate reorganizations and title changes, to ensure that the delegations  of authority fully reflect these changes. We reviewed FDIC documents that  track delegations of authority related to the processing of financial  institution applications, for example, applications to engage in real estate  investment activities. The document indicates changes in or clarifications  of delegations of authority from existing delegation guidance.
Furthermore, the Executive Secretary Section is to regularly monitor,  issue periodic notices, and follow up, if necessary, with senior-level  officials to ensure that all divisions and offices comply with established  procedures and deadlines for FDIC headquarters delegations of authority.  FDIC officials told us that the annual reviews required by the directive are  undertaken to assess the technical conformity and consistency of  delegations. Although the directive only requires an annual review, FDIC  officials stated that in practice, the Executive Secretary Section works  with FDIC’s divisions and offices on a continuous basis to ensure  delegations are complete, consistent, and comply with standard  procedures. The officials added that divisions appreciate having a  standard format for issuing and documenting delegations.
In addition to the periodic reviews required by the directive, FDIC has  broadly reviewed its delegations of authority on other occasions. One  broad review of its delegations occurred during 1995 to 1997, after the  banking crisis and the merger with the Resolution Trust Corporation,  which resulted in a significant reduction in staff. A corporate delegation  task force was assembled to review existing delegations, comment on  them, and make recommendations on how they could be improved. The  scope of the review was intended to encompass all aspects of FDIC’s  delegations, from those governing internal management and  administration to those governing how FDIC accomplished its mission. An  FDIC official noted that it was vital that the agency have logical, well- reasoned delegations of authority and that they be kept current, which  underlined the basis of the task force’s work. FDIC’s Office of the  Executive Secretary (currently the Executive Secretary Section)  coordinated the review of delegations by the board of directors and the  development of recommendations for changes that would reduce  processing time, empower employees, and promote accountability. FDIC  also completed a broad review of its delegations in 2002. At the time, FDIC  rescinded a series of delegations that were previously codified in the Code  of Federal Regulations in favor of adopting a board resolution that  contained a master set of delegations. This format made modifying the  delegations more efficient. During the consolidation process, FDIC made  several changes to certain delegations, for example, delegations related to  FDIC’s receivership activities were amended to streamline the process for  approving receivership-related actions.
There were also occasions that necessitated the reexamination of specific  delegations. According to a senior FDIC official, any board member has  the right to request a review of any delegated authority. The officials  stated that it is not uncommon for a newly appointed chairman to review  existing delegations of authority to ensure they are aligned with his or her  vision and management style. In one recent instance, delegations related  to the processing of industrial loan corporation applications were  rescinded and a 6 month moratorium implemented to allow the agency,  upon the request of the current chairman, the opportunity to examine  developments related to these specialized institutions. Further, the  official stated that FDIC divisions and offices can request a review of their  delegations of authority. As noted earlier, technical changes to the  delegations covered by the directive, such as position titles and division  names, are typically handled between the Executive Secretary Section and  the divisions. However, officials explained that the board would be  informed of more substantive issues that would require a board vote. In  most instances, the request for a review is related to a delegation that is  outdated or needs clarification. The board reviews the request and any  relevant information and votes to amend or rescind delegations.
Although FDIC has a process for making substantive changes to  delegations, instances may arise that prompt the need for specific reviews  of delegations that are perceived as vague or ambiguous. For example, a  2006 FDIC Inspector General’s report found a lack of clarity as to whether  the board could delegate the calculation of the reserve ratio to FDIC  officials. According to the report, the nature, timing, and application of a  new method for estimating certain insured deposits could have had a  significant impact on the deposit insurance fund’s reserve ratios. The  report concluded that the delegations to the Director of the Division of  Insurance and Research established an expectation that the Director  should communicate and advise the board on financial matters of  importance to the agency and the banking industry. However, the report  found that communication between the FDIC board and deputies on the  issue of estimated insurance deposit allocations was limited, and FDIC  staff should have more fully involved the board in the decision of whether  and how to apply a new method for estimating certain insured deposits.  The report recommended a review of the agency’s existing bylaws,  specifically, the powers and duties delegated to the Chief Financial Officer  and to the Directors of the Division of Finance and the Division of  Insurance and Research, to ensure that those delegations reflect the  board’s intent and expectation for the deposit insurance fund reserve ratio  and assessment determination process. The report recommended that  FDIC review its delegations related to the assessment determination  process to determine whether the delegations needed to be clarified or  modified. In response to the Inspector General’s recommendations, FDIC  is currently reviewing specific delegations of authority. As of December  2006, a senior FDIC official was in the process of preparing a proposal to  present to the Audit Committee outlining the details of the review.
section_title: FDIC’s Integrated Approach to Addressing Human Capital Issues Has Produced Key Initiatives, but the Agency Has Not Developed Outcome- Based Performance Measures
paragraphs: FDIC has strengthened its human capital framework and uses an  integrated approach to align its human capital strategies with its mission  and goals. For example, interdivisional decision making, where senior  executives come together with division managers and staff from mission  support divisions, is a key component of FDIC’s human capital strategy for  ensuring functional alignment of its mission critical work. Using this  integrated approach, FDIC created the Corporate Employee Program to  provide a flexible workforce and to train new employees in multiple FDIC  divisions. However, the program’s effects on mission critical functions are  unknown and contributions to specific job tasks may take a number of  years to realize. FDIC’s Corporate University, the agency’s training and  development division, evaluates all of its training programs—including the  Corporate Employee Program—and is currently implementing a scorecard  to measure its progress toward meeting its human capital goals. The  scorecard currently includes an output performance measure for the  Corporate Employee Program; however, FDIC has not developed  outcome-based performance measures that will assist it in determining  whether its key training and development programs are effective. Without  such measures, FDIC will not be able to determine how effective its  training and development initiatives are in assisting the agency to achieve  its mission and human capital goals.
subsections: section_title: FDIC Has Taken a Number of Actions to Strengthen Its Human Capital Framework and Align Its Human Capital Strategies with Its Mission and Goals
paragraphs: Effective management of human capital, where the workload can shift  dramatically depending on conditions in the economy and the banking  industry, is critical at FDIC. Therefore, FDIC has taken a number of steps  to strengthen and institutionalize certain elements of its human capital  framework. FDIC established a Human Resources Committee to help the  agency integrate human capital approaches into its overall mission  planning efforts. It also established the Corporate University, an employee  training and development division that aligns agency needs with learning  and development. Finally, in response to an FDIC Inspector General  report, the agency developed a human capital blueprint that describes the  key elements of its human capital framework.
subsections: section_title: Human Resources Committee
paragraphs: FDIC established its Human Resources Committee in 2001 to integrate  strategic human capital management into the agency’s planning and  decision making processes. The committee, consisting of members from  several divisions across the agency, focuses on developing and evaluating  human capital strategies with agencywide impact. The committee also  coordinates FDIC’s human capital planning process. In June 2004, FDIC  approved a formal charter for the committee to ensure that future leaders  and stakeholders continue the committee’s work. The committee’s charter  describes its purpose, functions, responsibilities, and composition. FDIC’s  Chief Human Capital Officer serves as chair of the Human Resources  Committee. FDIC appointed the Chief Human Capital Officer (CHCO) to  align the agency’s human capital policies and programs to the agency’s  mission, goals, and outcomes.
Because FDIC’s Human Resources Committee brings together executives  in the major divisions and personnel in support divisions, it is able to  develop approaches for accomplishing the agency’s mission and goals. Our  prior work on strategic human capital planning has shown that effective  organizations integrate human capital approaches into their efforts for  accomplishing their missions and goals. Such integration allows an agency  to ensure that its core processes efficiently and effectively support its  mission. In April 2003, we reported that establishing entities, such as  human capital councils like FDIC’s Human Resources Committee, was a  key action agencies could take to integrate human capital approaches with  strategies for achieving their missions. Comprised of senior agency  officials, including both program leaders and human capital leaders, these  human capital councils meet regularly to review the progress of their  agency’s integration efforts and to make certain that the human capital  strategies are visible, viable, and remain relevant. Additionally, the groups  help the agencies monitor whether differences in human capital  approaches throughout the agencies are well considered, effectively  contribute to outcomes, and are equitable in their implementation. In this  regard, FDIC’s Human Resources Committee (HRC) brings together the  support functions of FDIC’s Division of Administration (DOA), Division of  Finance (DOF), Legal Division, Division of Information and Technology  (DIT), and Corporate University (CU) with executives from the major line  divisions—Division of Supervision and Consumer Protection (DSC),  Division of Insurance and Research (DIR), and Division of Resolutions and  Receiverships (DRR). See figure 3.
The committee members stated that having representatives from various  divisions within the agency allows them to integrate all views into the  decision-making process. The committee meets weekly, typically for 2 or 3  hours and works to facilitate communication and consensus throughout  FDIC on human capital issues. The committee also advises senior  leadership on significant human resources issues. Human Resources  Committee members told us that they review policy recommendations and  share information with their respective division directors. Further,  committee members stated that division managers are able to bring the  concerns of their subordinate staff to the committee, and managers are  able to notify their subordinate staff of human capital initiatives that may  address their concerns. For example, staff members are able to  communicate training needs to the Human Resources Committee through  their division managers. The division representatives on the Human  Resources Committee are able to communicate information to the  managers about future training programs that would meet staff needs.  According to committee members, this helps facilitate the flow of  information to and from division managers and subordinate staff.
section_title: Corporate University
paragraphs: Another step FDIC took to strengthen its human capital framework was  establishing its Corporate University in 2003. Corporate University  supports the agency’s mission and goals by training and developing FDIC  employees. Corporate University provides training and development  opportunities for FDIC executives, managers, supervisors, and employees  in order to help them enhance their job performance. Before establishing  Corporate University, FDIC focused and confined training within  divisions; the agency gave relatively little attention to building a corporate  culture or making employees aware of activities outside their own  divisions. However, since establishing Corporate University, FDIC’s efforts  have been lauded for reflecting best practices in aligning training functions  with the agency’s mission and goals. In 2005, FDIC’s Corporate University  received an excellence award from the Corporate University XChange for  its organizational structure and alignment within the agency. The  Corporate University XChange cited features of FDIC’s Corporate  University that made it appropriately aligned within the agency, such as  the existence of a Governing Board that includes division managers and  having deans and chairs from the divisions serve on a rotational basis.
FDIC’s Corporate University works with the Human Resources  Committee, the Corporate University’s Governing Board, and deans to  design curriculum and implement training programs. The structure of  Corporate University is intended to support a balance between the  agency’s goals and the needs of the individual divisions. FDIC’s Chief  Operating Officer, Chief Financial Officer, and division Directors work  with the Chief Learning Officer to deliver training and development  programs. Corporate University also has structures in place to facilitate  the exchange of information related to the training needs of the Division of  Supervision and Consumer Protection. Two committees—the Curriculum  Oversight Group and the Training Oversight Committee—assist Corporate  University in identifying training and development needs. The Curriculum  Oversight Group consists of midlevel supervisors who meet with  Corporate University staff to map out training needs and curriculum  changes that require focused strategies. The Training Oversight Committee  consists of senior managers who provide information on skills needed  within the Division of Supervision and Consumer Protection.
section_title: Human Capital Blueprint
paragraphs: Last, in response to a 2004 FDIC Inspector General audit report, the  agency established an integrated human capital blueprint in December  2004. The report recommended that FDIC develop a coherent human  capital blueprint that comprehensively describes the agency’s human  capital framework and establishes a process for agency leaders to monitor  the alignment and success of human capital initiatives. The report noted  that such a blueprint would be beneficial because it would, among other  things, promote an agencywide understanding of the human capital  program. According to FDIC officials, the blueprint describes the key  elements of FDIC’s human capital framework and recognizes the  collective responsibility of various FDIC divisions and offices in the  success of its strategic human capital initiatives. Figure 4 illustrates  FDIC’s human capital blueprint.
Our previous work on strategic human capital planning suggests that  human capital professionals and line managers should share  accountability for integrating human capital strategies into the planning  and decision-making processes. Our work further states that successful  organizations have human capital professionals work with agency leaders  and managers to develop strategic and programmatic plans to accomplish  agency goals. This process results in agency and human capital leaders  sharing accountability for successfully integrating strategic human capital  approaches into the planning and decision making of the agency. FDIC’s  human capital blueprint includes processes for agency leaders to  participate in the alignment of the agency’s human capital initiatives  relative to its goals. The blueprint considers how major environmental  factors, such as the economy and the banking industry, impact the  agency’s mission and goals. FDIC considers these external factors when it  conducts assessments of workload and skill requirements. These  assessments ultimately guide the FDIC’s Human Resources Branch, the  Human Resources Committee, and Corporate University in developing and  implementing initiatives to address human capital needs.
section_title: FDIC Created the Corporate Employee Program to Provide a Capable and Flexible Workforce, but Its Effects on Mission Critical Functions Are Unknown
paragraphs: A key part of FDIC’s human capital strategy is the Corporate Employee  Program, which cross trains employees in multiple FDIC divisions with the  objective of training them to respond rapidly to shifting priorities and  changes in workload. According to FDIC officials, the Corporate  Employee Program reflects a more collaborative approach to meeting  mission critical functions. Launched in June 2005, the Corporate Employee  Program provides opportunities for employees at all levels to identify,  develop, and apply various skills through training opportunities and work  assignments. According to FDIC memoranda describing the program, the  increased speed at which changes can occur in individual insured  institutions and the entire financial industry, and hence the speed at which  FDIC’s workload can change, requires FDIC to ensure that it can respond  effectively and quickly. The memoranda further state that cross-training  programs and cross-divisional mobility will provide FDIC employees with  broader career experiences and enhanced job satisfaction while allowing  FDIC to have more than enough people within the organization who have  the essential training and experience that FDIC may need to respond to  significant events. The goals of the Corporate Employee Program are to:    provide employees with skills needed to address significant spikes in  workloads that may temporarily require shifting resources among FDIC’s  three main divisions,   promote a corporate perspective and a corporate approach to problem  facilitate communication and the transfer of knowledge across all FDIC  divisions, and foster greater career opportunity and job satisfaction.
In March 2005, FDIC began pursuing three initial strategies for  implementing the Corporate Employee Program: a crossover program,  voluntary rotational assignments, and new hiring. The voluntary crossover  program, intended to integrate key skill sets across business lines, allows  FDIC staff in the Division of Resolutions and Receiverships to apply for in- service training in the Division of Supervision and Consumer Protection  which will require that they obtain commissioned examiner status within a  specific time frame. The voluntary rotational assignments provide current  examiners in the Division of Supervision and Consumer Protection an  opportunity to fulfill a more well-defined role in providing support to the  Division of Resolutions and Receiverships. To fulfill this role, a number of  examiners receive training and practical experience in resolutions and  receivership functions. In the event of a significant increase in resolutions  workload, the Division of Resolutions and Receiverships has first priority  to call on these specialists when needed. FDIC has also developed criteria  for hiring and training new employees in certain divisions. The divisions  hire new employees to pursue commissioned examiner status in either risk  management or compliance. While pursuing the commissioned examiner  status, new employees simultaneously receive training in resolution and  receivership functions and an enhanced orientation on the broad scope of  FDIC’s operations. Those who successfully complete the program are  eligible to compete for available permanent positions in FDIC’s three  major career tracks—risk management examiners, compliance examiners,  and resolutions and receiverships specialists.
FDIC employees whom we spoke with told us that they believe the  Corporate Employee Program holds great potential. For example, regional  and field office staff told us that the program provides new employees  with a better understanding of how the various FDIC divisions work  together and an overview of each division’s role within the agency.  Regional and field office employees also stated that the program will make  FDIC a better agency because the program helps to create a well-rounded  and resourceful workforce that can be called upon to assist in the event of  a banking crisis.
However, FDIC staff in the regional and field offices we visited expressed  a variety of concerns about the way the Corporate Employee Program  operates. For example, we were told that contributions from graduates of  the Corporate Employee Program may take a number of years to realize.  Regional and field staff explained that the commissioning process for  examiners takes 4 years to complete. Therefore, the earliest successful  Corporate Employee Program graduates could contribute to bank  examinations would be 4 years from the time they began the program. For  example, in one field office an employee explained that examiners cannot  certify an institution’s examination report until after they have received  their commissions. Therefore, current Corporate Employee Program  participants are unable to reduce the workload of the commissioned  examiners until then. However, according to FDIC officials in  headquarters, examiners hired into the Corporate Employee Program can  contribute immediately and continuously to the completion of certain  aspects of a bank examination during their training and development  program, which culminates in attaining a “commissioned” status. FDIC  headquarters officials also stated that while the expected commissioning  time frame is approximately 4 years, they believe they are preparing a  more capable future workforce. They explained that the Corporate  Employee Program adds approximately 6 to 9 months to the  commissioning process, while simultaneously accelerating new  employees’ understanding of FDIC’s division functions and how they are  interrelated.
Regional and field staff we spoke with also stated that reduced staffing  levels place greater strain on existing staff to train new employees in  certain divisions, which is further amplified by their concerns about the  nature and timing of the rotational aspect of the program. Although  regional and field office staff thought rotations were beneficial, they  expressed concern that new employees do not spend enough time in each  division to fully grasp how to perform certain job duties. Also, cross- divisional rotations during the first year can hinder the program, according  to regional and field office staff. Specifically, regional and field staff stated  they have had to re-train new employees because they had forgotten  certain skills by the time they were permanently placed in a specific area  after their rotations were complete. Further, regional office employees  suggested that the rotation in the Division of Resolutions and  Receiverships be shortened in order for the agency to be more proactive in  addressing any increase in troubled or failed banks. They stated that new  employees would benefit more from gaining experience in ongoing  supervisory activities so they are able to detect problems in banks, as  opposed to being trained on resolving banks. Further, regional office staff  indicated that the agency was giving a priority to placing new employees  in the examiner commissioning tracks because that was where the agency  had focused its hiring efforts; therefore, a lengthy rotation in the Division  of Resolutions and Receiverships could be counterproductive, especially  given the reduced staff available for training new employees. Officials in  one regional office we visited stated that new employees rotating through  the Division of Resolutions and Receiverships are not receiving detailed  training because the agency’s greatest need is currently for examiners.  Further, in the event of an increase in troubled or failed banks, the  Division of Resolutions and Receiverships would be more likely to pull  more experienced employees from other divisions, not new employees.
FDIC headquarters officials stated they have always relied on seasoned  examiners to provide on-the-job training and guidance to new examiners.  The on-the-job training represents a critical component of the  commissioning process and is considered a program strength. The officials  added that on-the-job training continues under the Corporate Employee  Program, but does not represent a significant increase in training burden  as compared to the former examiner training practices. Further, FDIC  headquarters officials stated that the first year rotations in the Corporate  Employee Program were intended to create baseline functionality,  awareness, and understanding of the three primary divisions, so when the  employees in training subsequently pursue a commissioning path, they  have the benefit of broad agency perspective and understand how the  work of each division benefits the work of the others. As such, according  to headquarters officials, the timing of the rotational assignments is  aligned with the program’s desired outcome and intent.
Last, regional and field office staff explained that the agency was not  training new employees in every aspect of the examination process due to  FDIC’s risk-based approach to examinations. As a result, they may not be  able to identify potential problems in areas not covered by the risk-based  approach. For example, we interviewed examiners in one region that has  experienced significant growth in the number of financial institutions it  oversees. FDIC employees in that region told us they expect the number of  new bank examinations, which require full scoping, to rise over the next  year, and new employees will not know how to conduct a full scope  examination because they are being trained on the risk-based approach. In  another office, examiners stated that new employees are typically trained  in examination procedures using banks that are well-capitalized and well- managed. Therefore, FDIC may not be preparing those employees to  handle rare problems that could potentially occur in banks. FDIC officials  in headquarters disagreed that new employees receive less training than  the previous examiner processes offered. The officials stated that the use  of risk-based examination scoping processes constitute “full-scope”  examinations and that examination procedures have not changed, nor  have they been eliminated from examiner training programs.
The Corporate Employee Program represents a significant change in the  way FDIC conducts its workforce planning for the future. Our work on  organizational transformations identified key practices that can serve as a  basis for subsequent consideration as federal agencies seek to transform  their cultures. One practice is to communicate shared expectations and  report related progress, which would allow for communication to build  trust and help ensure all employees receive a consistent message.  Organizations undergoing significant change have found that  communicating information early and often helps build an understanding  of the purpose of planned changes. Also, messages to employees that are  consistent in tone and content can alleviate uncertainties generated during  times of large-scale change management initiatives. FDIC created  brochures, provided briefings, and issued memoranda to communicate the  structure and intended goals of the Corporate Employee Program. During  our site visits, senior managers in one regional office stated that the  development of the Corporate Employee Program was a combined effort  of groups and individuals in field offices, regional offices and in  headquarters. Also, some regional and field office employees stated they  had opportunities to ask questions about the program as it was being  developed, provided input into the development of the Corporate  Employee Program or were kept abreast of developments in the program  by their managers. However, other employees we met with stated they did  not have an opportunity to provide input into the development of the  Corporate Employee Program.
The Corporate Employee Program has only recently been implemented,  and differing opinions on the nature, intent, or benefits of such a new  initiative may be anticipated. It is also important to note that FDIC has not  had an opportunity to fully determine the potential benefits or shortfalls of  the Corporate Employee Program due to the newness of the program and  the relatively strong health of the banking industry. Thus, it is especially  important that FDIC take steps to assess the benefits of the program and  share available results with all FDIC employees. Our prior work on  organizational transformations states that sharing performance  information can help employees understand what the organization is  trying to accomplish and how it is progressing in that direction and  increase employees’ understanding and acceptance of organizational goals  and objectives.
section_title: FDIC Has Additional Human Capital Initiatives to Address Leadership Development and Professional Competence
paragraphs: As noted earlier, FDIC officials estimate that 8 to 16 percent of the  agency’s remaining permanent workforce will retire over the next 5 years.  Many of the agency’s most experienced and most senior employees are  included in the projection, and their retirements will further exacerbate  the loss of institutional knowledge that occurred during the more than 10  years of agency downsizing. In order to address this and other issues  related to leadership development and improving professional  competence, FDIC is developing several new human capital initiatives. In  October 2006, the Corporate University Governing Board granted approval  for Corporate University to proceed with the design and piloting of the  Corporate Executive Development Program. FDIC officials are designing  the program to address human capital issues related to succession  planning. The purpose of the program is to prepare high-potential  employees for executive-level responsibilities. Certain senior level  employees and managers will be eligible to participate in the executive  development program. Candidates will participate in an 18-month program  consisting of experiential and academic learning (including a 12-month  detail outside of the candidate’s current division), and a 2- or 3-month  detail tailored to the candidate’s developmental needs. Candidates who  successfully complete the program are eligible for noncompetitive  promotion into executive manager positions at FDIC; however, there are  no guarantees for placement.
FDIC has also developed the following human capital initiatives to help  employees develop expertise and improve professional competence:    Professional Learning Accounts: The Corporate University Governing  Board approved Professional Learning Accounts for implementation in  2007. These accounts are a specified annual amount of money (up to  $2,500) and hours (up to 48 hours) that employees at all career levels  within the agency manage with their supervisors for use toward the  employee’s learning and development goals. Employees can use account  funds for any training and development opportunity that is considered  related to the work and mission of FDIC, regardless of the employee’s  current occupation. The accounts are voluntary and temporary,  permanent, full, and part time employees are eligible. Employees eligible  for account funds must first complete a career development plan, which  an employee’s supervisor must approve.
Internal Certifications: FDIC offers additional certifications through the  Corporate Employee Program as well as a commissioning track in the  Division of Resolutions and Receiverships. FDIC’s new certificate  programs are intended to give employees at all career levels an  opportunity to expand their knowledge and skills in areas critical to  FDIC’s mission while simultaneously helping to make FDIC more  responsive to changes in the financial services industry. To receive a  certificate, employees must complete a development program, have a  supervisor attest to their skill readiness, and qualify on a knowledge  assessment in the form of a computerized test or a performance  assessment. FDIC expects the FDIC certificate to benefit FDIC employees  in a number of ways, including broadened agency perspective, increased  marketability, career mobility, personal development, and continuous  learning. As of October 2006, FDIC had introduced two certificate  programs, and Corporate University was working to identify and obtain  evaluation data for these programs to measure their effectiveness. FDIC  is also working to develop a commissioning track for resolutions and  receiverships specialists. It is expected that in the future, new employees  will be selected into either the examiner commissioning track or the  resolutions and receiverships commissioning track.
External Certifications: Corporate University has also sponsored  opportunities targeted for midlevel career staff to receive external  certifications in areas that align with FDIC’s business needs. In 2005,  Corporate University offered two external certifications to select  employees. As of November 2006, Corporate University sponsorship  included four more external certifications, and Corporate University  planned to continue to work with FDIC’s divisions to sponsor other  external certifications, as appropriate.
MBA Program: During 2005, Corporate University sponsored (on a pilot  basis) a limited number of employees to pursue the Masters in Business  Administration, or MBA, at the University of Massachusetts at Amherst.  According to FDIC officials, the MBA program enhances the technical and  leadership skills of FDIC employees. At the time of our review, FDIC had  10 employees enrolled in the first year of the program.
section_title: Corporate University Evaluates All Training Programs, but It Has Not Fully Developed Outcome- Based Performance Measures to Determine Effectiveness
paragraphs: Corporate University officials stated that they evaluate all of their training  programs to determine how effective they are at providing the skills and  expertise needed to improve job performance. However, certain training  courses receive a more in-depth evaluation than others, depending on the  significance of the training program. In March 2004, we published A Guide  for Assessing Strategic Training and Development Efforts in the Federal  Government, which emphasizes the importance of agencies’ being able to  evaluate their training programs and demonstrate how the training efforts  help develop employees and improve the agencies’ performance. One  commonly accepted training evaluation model consists of five levels of  assessment. The first level measures the participants’ reaction to and  satisfaction with the training program. The second level measures the  extent to which learning has occurred because of the training effort. The  third level measures the application of the learning to the work  environment through changes in behavior that trainees exhibit on the job.  The fourth level measures the impact of the training program on the  agency’s organizational results. Finally, the fifth level—often referred to as  return on investment—compares the benefits (quantified in dollars) to the  costs of the training program.
According to Corporate University officials, all training programs receive a  level one evaluation, which are the typical evaluations performed at the  end of a course. Where appropriate, Corporate University conducts level  two evaluations, which are similar to a final exam and provide a measure  of how much trainees learned during the training program. More  significant training programs, like the Corporate Employee Program,  receive level three evaluations, where, according to Corporate University  officials, employees demonstrate their learning on the job. For example,  after every rotation or job assignment during the first year of the  Corporate Employee Program, the employee’s supervisor prepares a  report on how well the employee performed certain job tasks. Corporate  University officials noted that they are planning to conduct what they  consider level four evaluations of the Corporate Employee Program,  where they will compare the skill level and performance of graduates of  the Corporate Employee Program to those who completed the previous  commissioning process. According to Corporate University officials, this  might help them determine whether the Corporate Employee Program  produces employees with at least the same level of knowledge, skill, and  ability as those employees who were trained and commissioned prior to  the implementation of the Corporate Employee Program.
Our prior work on evaluating training programs states that assessing  training and development efforts should consider feedback from  customers, such as whether employee behaviors or agency processes  effectively met their needs and expectations. Corporate University  officials noted that they also obtain feedback on training courses to ensure  they remain relevant, the emphasis remains appropriate to the job duties,  and information being provided meets staff’s needs. Based on feedback,  Corporate University may make changes to the delivery of the course or  the tools used in the course. Corporate University officials stated they  made significant changes to the Corporate Employee Program based on  feedback from the new employees and their supervisors. For example,  Corporate University made improvements to certain training materials and  revised certain required benchmarks to make them more robust and  complete.
According to our guide, not all training and development programs  require, or are suitable for, higher levels of evaluation. It can be difficult to  conduct higher levels of evaluation because of the difficulty and costs  associated with data collection and the complexity in directly linking  training and development programs to improved individual and  organizational performance. Corporate University officials noted that  they try to focus higher levels of evaluation on the most significant training  programs that address key organizational objectives, involve change  management, and are costly to the organization. For example, Corporate  University is planning to conduct level four evaluations of the Corporate  Employee Program because it is significant, costly, and highly visible.  Officials added that resources are the biggest obstacle to conducting  higher levels of evaluation. For example, it takes time to complete surveys  and questionnaires and obtain productivity data. Officials told us that  conducting these activities interrupts core mission work, so Corporate  University conducts higher levels of evaluation in a more targeted fashion.
Corporate University is currently developing a scorecard to measure its  progress in meeting its human capital goals, but it has not fully developed  outcome-based performance measures to determine the effectiveness of  its training programs. Performance measures may address the type or  level of program activities conducted (process), the direct products and  services delivered by a program (outputs), or the results of those products  and services (outcomes). Corporate University’s scorecard development  began in early spring 2005, when an FDIC management analyst briefed  Corporate University on the scorecard concept and began developing a  strategy for the development of the scorecard. By fall 2005, Corporate  University had developed a draft scorecard and presented it to staff;  Corporate University began piloting the draft scorecard in 2006. Corporate  University’s draft scorecard includes indicators that measure customer  perspective (e.g., percent of target Corporate Employee Program  certificates awarded); internal perspective (e.g., percent of clients satisfied  on post-project surveys); Corporate University operating attributes (e.g.,  percent of projects on schedule or completed on time); and financial  perspective (e.g., percent of resources invested in high-priority areas).
While Corporate University conducts evaluations to learn the benefits of  its training programs and how to improve them, our prior work on  performance measurement and evaluation shows that evaluations typically  examine a broader range of information than is feasible to monitor on an  ongoing basis. Though evaluations may present this challenge, FDIC can  monitor outcome-based performance measures on an ongoing basis to  help focus on whether a program has achieved its objectives. Both  evaluations and performance measurements aim to support resource  allocation and other decisions to improve effectiveness; however,  performance measurement, because of its ongoing nature, can serve as an  early warning system to FDIC management and can be used as a vehicle  for improving accountability.
Our prior work on strategic workforce planning states high performing  organizations recognize the importance of measuring how outcomes of  human capital strategies help the organization accomplish its mission.  Performance measures, appropriately designed, can be used to gauge two  types of success: (1) progress toward reaching human capital goals and (2)  the contribution of human capital activities toward achieving  programmatic goals. Periodic measurement of an agency’s progress  toward human capital goals and the extent that human capital activities  contributed to achieving programmatic goals provides information for  effective oversight by identifying performance shortfalls and appropriate  corrective actions. Further, evaluating the contribution of human capital  activities toward achieving an agency’s goals may determine that its  human capital efforts neither significantly helped nor hindered the agency  from achieving its programmatic goals. These results could lead the  agency to revise its human capital goals to better reflect their relationship  to programmatic goals, redesign programmatic strategies, and possibly  shift resources among human capital initiatives. However, our previous  work showed that developing meaningful outcome-oriented performance  goals and collecting performance data to measure achievement of these  goals is a major challenge for many federal agencies.
Corporate University officials acknowledged challenges associated with  developing outcome-based performance measures. An official noted that it  was difficult to develop measures that are meaningful to the agency. For  example, the official noted that maintaining alignment of training and  development with the agency’s goals is important, but it was difficult to  develop a measure for organizational alignment. Therefore, to gauge  organizational alignment, Corporate University uses the number of senior  level meetings to determine workforce and skill needs as a measure.  Officials also noted that several outcome measures carry over into the  divisions and that it is difficult to determine how Corporate University’s  training programs impact other divisional scorecards. However, Corporate  University officials want to obtain outcome-based performance measures  and stated that they would continue to refine and improve their scorecard  as they gain more experience. While the draft scorecard currently includes  an output performance measure for the Corporate Employee Program, it  does not yet include outcome-based performance measures. Absent the  use of outcome-based performance measures, especially for key initiatives  like the Corporate Employee Program, FDIC will not know whether its  programs are effective at achieving its mission and its human capital goals.  Further, not having these measures could limit FDIC’s ability to determine  whether to modify or eliminate ineffective training programs.
section_title: FDIC Has an Extensive Risk Assessment System and Contingency Plans for Bank Failures, but It Has Not Comprehensively or Routinely Evaluated Them
paragraphs: FDIC, as a supervisor of banks and thrifts that evaluates safety and  soundness, as well as the insurer of deposits, has risk assessment and  monitoring at the core of its mission. To manage risk, FDIC uses  information from front-line supervision of individual institutions and a  range of activities examining trends and economic forces affecting the  health of banks and thrifts generally. Following industry consolidation in  recent years, failure of large institutions presents the most significant  threat to FDIC’s deposit insurance fund, due to the asset size of the  institution and the complexity of its activities. Thus, if losses grew high  enough, the insurance fund could be exhausted. FDIC has both broad  plans and specific strategies for handling troubled institutions, and FDIC  has evaluated a wide variety of its risk activities. But some of FDIC’s  evaluations were not done regularly or comprehensively. Defining clear  responsibility for monitoring and evaluation of its risk activities could  assist FDIC in addressing or preventing weaknesses in its evaluations.
subsections: section_title: To Assess and Monitor Risk, FDIC Combines Supervision of Individual Institutions with Analysis of Trends Affecting Banks and Thrifts
paragraphs: Our generally accepted standards for internal control identifies risk  assessment as one of five key standards that both define the minimum  level of quality acceptable for internal control in government as well as  provide the basis against which an organization’s internal controls are  evaluated. Proper internal control should, among other things, provide  for an assessment of risk an agency faces from external sources. FDIC  takes a dual approach to assessing and monitoring risk. FDIC’s front-line  for risk assessment is supervision of individual institutions, where it is the  primary federal regulator of thousands of banks and thrifts. It is also the  backup regulator for thousands of other institutions directly supervised by  one of the other three federal regulatory agencies for banks and thrifts. In  addition to its supervision of individual institutions, FDIC also conducts  broad monitoring and analysis of risks and trends in the banking industry  as a whole.
subsections: section_title: Individual Institution Examinations are FDIC’s Front Line for Risk Assessment
paragraphs: At the individual institution level, FDIC’s main risk assessment activity is  the safety-and-soundness examination process, agency officials told us.  Like other federal banking regulators, FDIC must generally conduct a full- scope, on-site examination for each institution it regulates at least once  every 12 months, although the agency can extend the interval to 18 months  for certain small institutions. For institutions that require additional  attention, FDIC may supplement regularly scheduled examinations with  more frequent examinations or visitations.
Recognizing that a bank or thrift’s condition can change between on-site  examinations, FDIC officials told us the agency created eight risk  measurement models to monitor risk from off-site, which often use  financial information reported by the institution. The agency’s major off- site monitoring tool is the Statistical CAMELS Off-site Rating system  (SCOR), which helps FDIC identify institutions that have experienced  significant financial deterioration. The SCOR off-site monitoring system  attempts to identify institutions that received a rating of 1 (no cause for  supervisory concern) or 2 (concerns are minimal) on their last  examination—the top two grades available on the five-point CAMELS  scale—but whose financial deterioration may cause a rating of 3 or worse  (cause for supervisory concern and requires increased supervision to  remedy deficiencies) at the next examination. The significance of the 3  rating is that once a banking regulator rates an institution as 3 or worse,  FDIC monitors it more closely. The SCOR system uses a statistical model  that compares examination ratings with financial ratios of a year earlier  and attempts to forecast future ratings. As discussed later in this report,  evaluations of the SCOR system determined that the system is informative,  but does not always produce accurate results.
Owing to the potential for larger losses to the insurance fund, FDIC  officials told us the agency also puts special emphasis on monitoring the  nation’s largest financial institutions, based on asset size. For example,  FDIC’s Large Insured Depository Institution program gives heightened  scrutiny to institutions with assets of $10 billion or more. For those with  $25 billion in assets or more, managers submit quarterly assessments. For  those with $50 billion or more in assets, FDIC also requires risk  assessment plans that address risk the institution presents from the  perspectives of supervision, insurance, and resolution. Further, FDIC  maintains examiners on-site at the six largest institutions. While FDIC is  not the primary regulator of these institutions, it is nevertheless  responsible for insuring them. For the largest institutions for which FDIC  is the primary regulator, the agency uses what it calls a continuous  supervision process for examinations, which provides ongoing  examination and surveillance of institutions with assets greater than $10  billion. Four institutions are now receiving such scrutiny.
Additionally, FDIC has in recent years made significant changes to its  examination process. It has adopted the MERIT program (Maximum  Efficiency, Risk-focused, Institution Targeted examinations), which seeks  to tailor examinations to risks presented by individual institutions. Under  this approach, safer institutions should receive less attention, while riskier  institutions should receive more regulatory scrutiny. FDIC officials stated  that the MERIT program is more efficient, allowing examiners to spend  less time on-site at well-rated institutions, while providing an opportunity  to redirect examination resources to institutions posing higher risks. For  example, if an institution maintains what examiners decide is an effective  asset review program, the examiners will significantly reduce the time  spent reviewing individual credits. Today, banks or thrifts that meet  certain criteria are eligible for the MERIT program.
section_title: Broad Assessment and Monitoring is the Second Part of FDIC’s Risk Strategy
paragraphs: In addition to its oversight of individual institutions, FDIC conducts a wide  range of other activities to monitor and assess risk at a broader level, from  a regional perspective on up to a national view (fig. 5).
In 2003, FDIC formed Regional Risk Committees in each of FDIC’s six  regional offices. The Regional Risk Committees review and evaluate  regional economic and banking trends and risks and determine whether  the agency should take any action in response. Comprised of senior  regional executives plus relevant staff members, the committees meet  semi-annually, and consider a wide range of risk factors— such as  economic conditions and trends, credit risk, market risk and operational  risk—as a prelude to identifying a level of concern, a level of exposure,  and supervisory strategy. Strategy options include such tools as publishing  research or circulating relevant information to the banking community,  making the risk factor a priority in on-site examinations, or highlighting  the factor for off-site monitoring activities. In FDIC’s San Francisco  Regional Office, we observed a meeting of the western region’s Regional  Risk Committee. These FDIC regional officials had compiled detailed  research on a comprehensive range of potential risk factors that could  affect the health of the region’s banks and thrifts. The FDIC regional risk  committees prepare reports of their results and distribute them to the  National Risk Committee.
The National Risk Committee, comprised of senior FDIC officials, meets  on a monthly basis to identify and evaluate the most significant external  business risks facing FDIC and the banking industry, according to FDIC  officials. For example, recent committee work has focused on the effect  of recent hurricanes on Gulf Coast institutions, the trend in number of  problem institutions, and bank and thrift vulnerability to rising interest  rates. Where necessary, the committee develops a coordinated response to  these risks, including strategies for both FDIC-supervised and -insured  institutions. Among other things, the National Risk Committee receives the  Regional Risk Committee reports filed from across the country.
The Risk Analysis Center (RAC) is an interdivisional forum for discussing  significant, cross-divisional, risk-related issues. FDIC officials use the Risk  Analysis Center as a vehicle to bring together managers from across major  FDIC divisions, in an effort to coordinate and provide relevant information  to FDIC decision-makers. The Risk Analysis Center provides reports and  analyses to the National Risk Committee. The National Risk Committee  and regional risk committees also contribute ideas to the Risk Analysis  Center on issues for discussion. Recent examples of the center’s work  include response to Hurricane Katrina, when the center’s management  committee met to discuss deployment of FDIC offices and personnel to  the relief effort, and work following the August 2003 blackout in the  Northeast and Midwest, when officials assembled shortly after the power  failure in order to discuss its possible impact on the banking system. One  key product of the Risk Analysis Center is the “RAC Dashboard”— a group  of graphically displayed statistics that identify key banking and economic  trends. For example, the center’s national dashboard features trend lines  charting economic conditions, large bank risk, credit risk, market risk,  supervisory risk, and financial strength. FDIC officials told us these  indicators allow comparison of current conditions to historical extremes  and have the ability to identify areas where risks may be increasing. A Risk  Analysis Center web site has a variety of risk-related information,  including FDIC publications and presentations available for supervisors,  field examiners, and others. The site offers guidance on topics such as  concentration in real estate lending, interest rate risk management, and  best practices for maintaining operations during natural disasters.
Division of Insurance and Research  FDIC’s Division of Insurance and Research also plays a significant role in  FDIC’s risk activities. The division has a leading role in preparing a key set  of reports delivered to FDIC’s board of directors twice each year. The  board uses these reports as a basis for setting the deposit insurance fund’s  premium schedule; thus, the reports undergird FDIC’s basic mission of  protecting insured deposits. One of these reports, known as the “Risk  Case,” summarizes national economic conditions and banking industry  trends, plus discusses emerging risks in banking. The second of the two  reports, known as the “Rate Case,” recommends a premium schedule  based on an analysis including likely losses to the fund from failures of  individual institutions; expenses of resolving failed institutions; insurance  fund operating expenses; growth of insured deposits; investment income;  and the effect of premiums on the earnings and capital of insured  institutions. The division also conducts pertinent research on specific  topics or more general issues. For example, FDIC officials told us that  when interest rates recently started upward, the division evaluated what  the effect might be nationally, then conducted stress tests on certain  institutions to see how the increase might affect them. More broadly, the  division has compiled a history of the banking crisis of the 1980s and early  1990s. In the last 2 years, FDIC has tried to enhance its research  capability, through its Center for Financial Research. Officials told us they  want stronger ties to academia, and believe better research leads to better  policy.
On a quarterly basis, FDIC’s Financial Risk Committee recommends an  amount for the deposit insurance fund’s contingent loss reserve—the  estimated probable losses attributable to failure of insured institutions in  the coming 12 months. Because the size of the reserve reflects beliefs  about risk facing the insurance fund, the committee’s recommendations  are an important part of the risk function. The Financial Risk Committee  consists of senior representatives from major FDIC divisions. In addition  to internal deliberations, FDIC staff members also meet with other  banking regulators to discuss problem institutions for which a reserve may  be necessary.
Various parts of the FDIC organization also work together to carry out  their risk assessment and monitoring functions. For example, the National  Risk Committee recently directed the Risk Analysis Center to investigate  possible risks associated with collateralized debt obligations. The  Chicago Regional Office Regional Risk Committee produced a  presentation for the National Risk Committee on housing and banking  conditions in southeast Michigan, where business difficulties of the U.S.  automobile industry have hurt the local economy and with it, the fortunes  of local financial institutions. Similarly, an examiner with commercial real  estate experience recently visited the Florida panhandle and nearby  Alabama, reviewing bank files and visiting larger condominium  developments. The examiner’s findings were presented at the Risk  Analysis Center to representatives from FDIC’s main divisions—the  Divisions of Insurance and Research, Supervision and Consumer  Protection, and Resolutions and Receiverships. There, officials judged the  information important enough to send up to the National Risk Committee.  Division managers in the Risk Analysis Center also discuss the Risk Case  before it is presented to the National Risk Committee. Meanwhile, the  Division of Insurance and Research has managers in regional offices,  where they monitor conditions locally and consult with examiners in the  Division of Supervision and Consumer Protection who are working in  individual institutions. Information these managers gather is sent to the  Risk Analysis Center and the National Risk Committee.
Notwithstanding its own activities, FDIC officials told us that cooperation  with other federal banking regulators is an important part of their risk  management efforts as well. Toward that end, the agency engages in a  number of activities with the other regulators. One program is the Shared  National Credit Program. Established in 1977, the program is a cooperative  effort among four federal banking regulators to perform a uniform credit  analysis of loans of at least $20 million that three or more supervised  financial institutions share. With $1.9 trillion in credit commitments to  more than 4,800 borrowers, these loans have the potential for significant  impact on the banking system and the national economy. The program’s  2006 annual report showed that as the volume of syndicated credits has  risen rapidly, the percentage of commitments adversely rated has held  steady and remains well below a recent peak in 2002 to 2003. In addition to  the Shared National Credit Program, FDIC is involved in other interagency  risk management activities, such as:    FDIC participates in the Federal Financial Institutions Examination  Council with the other federal banking regulatory agencies. This program  prescribes uniform examination standards and makes recommendations  to promote uniformity in financial institution supervision.
FDIC exchanges examination reports with the other federal banking  regulators and state banking authorities.
FDIC officials told us that they regularly attend interagency meetings, both  formal and informal, at the field, regional, and headquarters office levels,  on topics ranging from institution-specific to industrywide issues. For  example, FDIC consults with staff from the other agencies in preparing the  Risk Case report described earlier.
The agencies jointly issue examination and industry guidance on risk- related topics. Recent work includes guidance on nontraditional mortgage  risks, to clarify how institutions can offer nontraditional mortgage  products in a safe and sound manner, and developing guidance on risks of  concentration in commercial real estate lending.
FDIC told us that they frequently invite officials from the other banking  agencies to participate in Risk Analysis Center presentations on a variety  of issues.
Because FDIC insures many institutions for which it is not the primary  federal regulator, information-sharing among federal banking regulators is  a concern to FDIC. FDIC officials told us that working relationships with  the other regulators are good and better than ever before. In 2002, the  agencies reached an information-sharing agreement, which provides FDIC  information and access to selected large institutions and others presenting  a heightened risk to the deposit insurance fund. Two important drivers of  this cooperative effort are to avoid sending potentially mixed signals to the  regulated entities and the public about regulators’ supervisory activities  and to reinforce that it is critical for FDIC, as the potential receiver for  failed institutions, to understand well what is happening in non-FDIC  regulated institutions, especially large ones. While this agreement  represents a positive step, a senior FDIC official told us that the current  information-sharing provisions are not adequate. As institutions grow  more complex, it becomes harder, without more complete information on  their activities, for FDIC to properly price insurance coverage as well as to  work out assets during resolution, according to the official. One way FDIC  is currently seeking to address such issues is through an advanced notice  of proposed rulemaking in which FDIC sought comments on options to  modernize its deposit insurance determination process by requiring the  largest banks and thrifts to modify their deposit account systems to speed  depositors’ access to funds in the event of a failure. Today, institutions do  not track the insurance status of their depositors, the agency says, yet if  there is a failure, FDIC must make deposit insurance coverage  determinations. Industry consolidation, and the emergence of larger, more  complex institutions with millions of deposit accounts raise concerns  about current methods for handling failures, according to FDIC.
FDIC officials also told us they coordinate internationally with entities to  share information on issues relevant to financial institutions, regulatory  agencies, and insurers of financial institutions in the U.S. and abroad. For  example, the officials participate on the Basel Committee, a forum for  regular cooperation on banking supervisory matters. The Basel Committee  is composed of senior officials responsible for banking supervision or  financial stability issues from 13 countries including Belgium, Italy, Japan,  and the United Kingdom. In particular, FDIC officials stated they  participate three times per year in meetings of the Accord Implementation  Group, a subgroup of the Basel Committee.
section_title: FDIC Has Broad Plans and Specific Strategies for Handling an Increase in Troubled or Failed Institutions
paragraphs: To address the possibility of a large-scale bank failure, FDIC has  developed broad plans and specific strategies. According to FDIC officials,  the biggest dangers to the deposit insurance fund are large-scale bank  failures. The FDIC Inspector General has warned that the banking  industry’s significant increase in consolidation could result in large losses  to the deposit insurance fund if a so-called megabank failed. FDIC  officials told us credit risk continues to be the most important factor that  could cause large banks, or a large number of banks, to fail. A sudden  failure would most likely stem from rapid, widespread loss of confidence  in an institution, which would generate a liquidity crisis.
FDIC’s Resolutions Policy Committee is responsible for developing plans  to handle potential or actual failure of the largest insured institutions. The  committee, comprised of senior FDIC officials from across the agency, has  developed a 12-part plan for dealing with such difficulties. In handling a  failed institution, FDIC’s primary objective is to protect insured  depositors. Generally, FDIC seeks to minimize the overall cost to the  insurance fund. The agency also seeks to prevent uninsured depositors,  creditors, and shareholders from receiving more than their legally entitled  amounts. Overall, FDIC attempts to minimize the time an institution is  under government control, while maximizing returns to creditors. In  general, according to the plan, the resolution strategy for a large bank  failure will depend on facts of the particular situation, such as  characteristics of the bank, the nature and extent of the problem causing  the failure, the condition of the industry and relevant financial markets,  and the cost to the insurance fund. For a resolution that does not pose a  systemic risk—that is, larger repercussions for the industry or national  economy—FDIC will most likely choose between paying off insured  deposits or establishing a bridge bank. A bridge bank is a new, temporary  bank chartered to carry on the business of a failed institution until a  permanent solution can be implemented. Bridge banks preserve the value  of the institution until a final resolution can be accomplished. A key aim  following failure is to preserve the value of an institution and business  continuity through a bridge bank can be important for maintaining value  and hence, a marketable franchise.
In addition to the work of the agencywide Resolutions Policy Committee,  FDIC’s Division of Resolutions and Receiverships—the unit most directly  responsible for handling failures—has created a detailed blueprint for  managing failure of a large institution. The blueprint includes strategies  for establishing a bridge bank, which FDIC officials stated that in most  cases was the least costly and most effective option for handling a sudden  large bank failure. The plan seeks to minimize failure costs, contain the  risk of troubles spreading beyond a failed bank or thrift, ensure prompt  access to depositor funds, and preserve the FDIC insurance fund in the  face of losses that could exhaust it. Some of these objectives, according to  the plan, will conflict; most notably, tension between the least-cost  approach and the potential systemic risk implications of a large-scale  failure. The least-cost approach adheres to a principle of not providing  FDIC insurance to uninsured depositors and also focuses on maintaining  the franchise of the failed institution, because the value of the failed  bank’s franchise will mitigate the overall failure cost. Most, but not all,  large banks will have a valuable franchise at the point of failure, according  to FDIC officials. The agency says it is doubtful FDIC will have the  opportunity to find an acquirer for a troubled large bank prior to failure.  FDIC cites several reasons for this. Failure or near-failure of a large bank  could happen very quickly with relatively little prior warning; as a result,  there could be very limited opportunity to gather and analyze information  about an institution’s operations prior to failure. Also, extensive  negotiations with potential acquirers would be required, and it is likely  such activity would become publicly known, which could spark a liquidity  crisis.
As discussed earlier, FDIC has sharply reduced its workforce, which today  is down 80 percent since its peak in the early 1990s during the banking  crisis. FDIC headquarters officials maintain that the smaller staff has not  hurt the agency’s ability to monitor and assess risk—because as FDIC has  shrunk, so too has the number of institutions through industry  consolidation. The officials do acknowledge that industry troubles could  require additional resources. As a result, FDIC has created a three-part  strategy for dealing with an increase in troubled or failed institutions:    developing workforce flexibility, such as that provided by the Corporate  Employee Program, where both newer and more experienced employees  previously cross-trained in several areas of FDIC resolutions and  receiverships operations would be temporarily reassigned from other  divisions to handle failure and resolution duties;  recalling FDIC retirees for temporary duty; and   hiring contractors for temporary duty.
Overall, FDIC officials told us they do not believe there is any scenario for  banking troubles that the agency would be unable to handle. But they  acknowledge there could be two significant issues: if losses grew large  enough, the insurance fund could be exhausted, requiring the Treasury  Department to issue debt; and if sufficiently large institutions failed, there  could be so many deposit claims that payoffs would be delayed. However,  the agency’s goal is to manage any institution failure to avoid these events.
section_title: FDIC Reviews Some of Its Risk Assessment Activities, but Some Evaluations Were Incomplete and Responsibility for Overseeing Evaluations Is Unclear
paragraphs: FDIC officials told us that evaluation and monitoring of its risk assessment  activities are critical parts of the agency’s mission and that such activities  are ingrained in the organization. In addition to identifying risk assessment  as a key internal control, our internal control standards also detail how an  effective internal control system should include continuous monitoring  and evaluation as an integral part of the agency’s operations. This  monitoring includes regular management and supervisory activities,  comparisons, and reconciliations, among other activities. An example of  continuous monitoring is FDIC’s “continuous supervision” process for  large institutions, as described earlier. FDIC officials also told us that they  rely on us and the FDIC Inspector General to conduct such reviews, and  our internal control standards acknowledge that evaluations may be  performed by the Inspector General or an external auditor. However, the  standards also say that organizations should themselves undertake  internal evaluations that form “a series of actions and activities that occur  throughout an entity’s operations and on an ongoing basis.”
Our review of the evaluations and monitoring that FDIC provided to us  indicates that FDIC has not comprehensively evaluated the full range of its  risk activities in a routine way that is part of ongoing agency operations.  When we reviewed several evaluations that FDIC provided, we found that  though FDIC has evaluated or is in the process of evaluating a wide variety  of risk activities, some of the evaluations appeared to be incomplete or  were not conducted on a regular basis. The following examples illustrate  these weaknesses:    When we asked FDIC officials for any evaluation of a recent, key change  in risk management strategy—specifically, FDIC’s adoption of risk-focused  supervisory examinations under the MERIT program discussed earlier— officials cited two reports by the Inspector General’s office. These reports  were mostly favorable, although they reviewed only portions of the MERIT   program, not its overall scope. However, MERIT is a program that FDIC  itself should comprehensively review because of the program’s relative  newness and its core role in identifying areas of risk. Also, some  examiners to whom we spoke in FDIC field offices voiced concerns that  the streamlined examinations under the MERIT program may fail to detect  significant problems. Though FDIC officials in headquarters thought this  concern may have been exaggerated, regular reporting of evaluations and  monitoring could address these concerns. Recently, FDIC’s Regional  Office in Atlanta completed a draft report on the MERIT examination  approach, which recommended further study of MERIT as part of a  broader review of examination programs.
When we asked for evaluations of FDIC’s eight off-site monitoring systems  discussed earlier, FDIC provided documentation showing one-time  evaluations of the accuracy of two off-site monitoring systems. One of  these evaluations reviewed the Statistical CAMELS Off-site Rating (SCOR)  system, which, as noted earlier, is the agency’s major off-site monitoring  tool and is used to identify institutions that have experienced significant  financial deterioration. In the evaluation of the SCOR system—completed  in 2003—FDIC found it performed poorly. Such a finding and FDIC’s  limited evaluation of its other off-site monitoring systems underscores the  need for more regular reviews. FDIC officials stated they were reviewing  and seeking to improve the agency’s off-site monitoring systems. The plan  for this effort, however, shows a considerable amount of work yet to be  done with no scheduled completion date.
FDIC has conducted simulations designed to test its plans for addressing a  key risk—increase in troubled and failed large institutions. In some cases,  we found these simulations to have well-conceived elements that  examined important changes FDIC has made in recent years, but in other  cases we determined that the simulations were not comprehensive in  following FDIC’s own guidance on planning for large bank failures. For  example, in 2002 FDIC conducted a simulation of the hypothetical failure  of a regional bank with $60 billion in assets. However, the Division of  Resolutions and Receiverships did not develop its current large-bank  failure plan until 2004. The 2002 simulation, which was FDIC’s largest  failure test by asset size, excluded consideration of systemic risk, which  the 2004 plan emphasizes as a key issue. Thus the 2002 simulation did not  test the current plan, nor did it include the type of risk FDIC identifies as  significant. FDIC officials told us they did not intend to include systemic  risk in this exercise. However, the guidance on planning for large bank  failures underscores the importance of systemic risk, stating that “the  collapse of a large bank could have profound implications for other  insured depository institutions and/or elements of the economy.” Thus,  this exercise—FDIC’s largest big bank failure scenario to date—excluded  systemic risk. Additionally, a 2004 simulation of a $30 billion regional bank  was to highlight risks in operating a bridge bank—a bank established to  temporarily take over operations of a failed institution. But the simulation  did not include an investigation into major decisions on how to establish  the bridge bank and thus did not fully reflect processes that FDIC’s  guidance says are critical to the successful opening and operation of a  bridge bank. Finally, a test addressing workforce flexibility provided 3  months’ advance notice of the hypothetical closing of this large bank,  while FDIC guidance says the agency should plan for failure with little or  no warning. FDIC has acknowledged the value of regular testing, but  officials from FDIC’s Division of Resolutions and Receiverships told us  that they were stretched  for resources and that simulations and tests, which take time and  resources, would have to be set aside if there were an increase in troubled  bank activity.
Other evaluations that FDIC provided appeared to be comprehensive  reviews of the specific risk activity and led to some changes, but these  reviews did not appear to be done on a regular basis. For example, in 2006,  a team of executives from FDIC’s major divisions reviewed the  effectiveness of the Regional Risk Committees. Recommendations  included better reporting and wider consideration of risk and use of video  teleconferences to discuss relevant issues before and after Regional Risk  Committee meetings. An FDIC directive, issued in the summer of 2006,  implemented these recommendations. A team of FDIC officials in the  agency’s Senior Executive Leadership Program also recently evaluated the  workings of a committee that runs the Risk Analysis Center. The  evaluation included recommendations on changes in the center’s mission,  structure, the way it communicates with FDIC employees, and the design  of its internal Web site. FDIC officials stated that the most notable change  to emerge from the process was to establish a three-person standing  committee to coordinate the Risk Analysis Center, replacing what had  been a group with rotating membership. However, officials also told us  there were no formal efforts to evaluate the center’s effectiveness.  Some risk activities appear to be regularly evaluated in a broader review  of FDIC operations conducted by the Division of Supervision and  Consumer Protection but are not intended to comprehensively review the  effectiveness of the risk activities. The division conducts a review of its  operations of each of its six regional offices every 2 years. Based on  documents provided by FDIC, we found that these reviews include  reviews of the safety-and-soundness examinations FDIC performs as the  primary federal regulator of designated banks and thrifts; enforcement  actions taken to maintain institutions’ financial health; off-site reviews of  institutions’ health; and operation of FDIC’s large institution oversight  program. These reviews, however, vary by office and cover only selected  areas of the activities. The reviews also tend to emphasize compliance  with policies and procedures, rather than effectiveness of the risk  activities.
Although FDIC conducts some evaluations of its risk assessment activities,  our work indicates that FDIC’s risk assessment framework does not  clearly define how it will ensure that the evaluations of risk-related  activities are thorough and conducted on a regular basis. FDIC maintains  an Office of Enterprise Risk Management, but the office’s activities are  more internally focused and generally do not involve external risk  assessment activities of FDIC’s major operating divisions. FDIC officials  told us that the agency’s chief operating officer is ultimately in charge of  the risk assessment process. At the same time, FDIC officials told us the  agency’s three main divisions—Supervision and Consumer Protection,  Resolutions and Receiverships, and Insurance and Research—share  external risk responsibilities through an interwoven structure of  committees and management-directed activities. This unclear line of  responsibility could be contributing to the weaknesses we identified in  some of FDIC’s evaluations of its risk activities.
Our internal control standards state that an effective and positive internal  control environment requires an agency’s organizational structure to  clearly define key areas of authority and responsibility and establish  appropriate lines of reporting. Further, in implementing control standards,  management is responsible for developing the detailed policies,  procedures, and practices to fit the agency’s operations and to ensure that  the policies, procedures, and practices become an integral part of  operations. According to insurance industry officials we spoke with, there  are a variety of approaches to assigning responsibility for overseeing risk  assessment activities. Some organizations have a Chief Risk Officer or a  committee of senior-level officials while others delegate specific  responsibilities to an existing office or officials. FDIC would be more  likely to address or prevent some of the weaknesses we identified by  designating official(s) or an office or establishing procedures, to ensure  that evaluation and monitoring of risk activities are conducted regularly  and comprehensively. For example, such an office or process could  address employee concerns about MERIT by ensuring there are regular  reviews and also identify and address potential resource constraints that  can limit the number and breadth of large-bank failure simulations. By not  clearly providing for oversight of monitoring and evaluating risk-related  activities, FDIC is vulnerable to the risk of gaps or inefficiencies in its risk  assessment process and will not know whether all parts of its risk  management framework are effective.
section_title: Conclusions
paragraphs: Our limited observations of the interactions between FDIC’s board of  directors, their deputies, and senior management within the agency  suggests that FDIC’s board of directors is engaged in the agency’s  operations and effectively uses the information provided to the directors  to assist in its oversight of the agency. The board has also established a  clear and transparent relationship between the board of directors and the  organization’s management by delegating a wide range of activities to  FDIC divisions. These delegations have been broadly reviewed on certain  occasions and limited changes have been made to delegations granted by  the board, both through a formal process and upon request by board  members or FDIC divisions. These review processes help ensure that  FDIC’s delegations are appropriate and that FDIC employees are not  making decisions that should be made by the board or more senior  officials.
FDIC has undertaken a number of activities to strengthen its human  capital framework and also evaluates many of its human capital strategies.  Specifically, FDIC’s Corporate University is implementing a scorecard to  monitor progress of training and development initiatives toward meeting  agency goals. Although this effort is commendable, the scorecard does not  yet include fully developed, outcome-based performance measures that  would help determine the effectiveness of FDIC’s training and  development initiatives at achieving the agency’s human capital goals.  Though developing outcome-based performance measures is difficult, they  are nevertheless important for ensuring that FDIC has information to  determine whether to modify or redesign existing training programs or  eliminate ineffective programs. At a minimum, identifying outcome-based  performance measures will ensure that FDIC can begin collecting  appropriate information that will help in determining how key initiatives— such as the Corporate Employee Program, a relatively new program  designed to train and develop FDIC’s future workforce—contribute to the  agency’s mission and goals. Evaluating and measuring the effectiveness of  the Corporate Employee Program is especially important given the  differences in opinion we observed between regional and headquarters  officials on the relative merits of the program. Such differences reinforce  the need for conducting evaluations of the effectiveness of key human  capital initiatives, developing performance measures to determine whether  the initiatives assist in achieving the agency’s mission and human capital- related goals, and communicating the results to employees at all levels  within the agency.
FDIC has developed an extensive system for managing risk and has  developed structures and processes to ensure that the various parts of the  agency are working together to address key risks facing the agency.  However, our review identified some weaknesses in FDIC’s evaluations  and monitoring of its risk assessment activities. Though FDIC has  conducted reviews of many parts of its risk assessment activities, it has  not developed a process for more routine evaluations and assessments,  and its risk management structure does not clearly define how monitoring  and evaluation of risk assessment activities are overseen. Clearly defining  how the agency will monitor and evaluate its risk activities could assist  FDIC in addressing or preventing weaknesses in its evaluations.
section_title: Recommendations for Executive Action
paragraphs: Based on our review of human capital and risk assessment programs at  FDIC, we are making the following two recommendations to the Chairman  of FDIC:    To ensure that it can measure the contribution that key human capital  initiatives make toward achieving agency goals, FDIC should take steps to  identify meaningful, outcome-based performance measures to include in  its training and development scorecard and communicate available  performance results to all FDIC employees.
To strengthen the oversight of its risk assessment activities, FDIC should  develop policies and procedures clearly defining how it will systematically  evaluate and monitor its risk assessment activities and ensure that  required evaluations are conducted in a comprehensive and routine  fashion.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to FDIC for review and comment. In  written comments (see app. II), FDIC generally agreed with the report and  the recommendations. FDIC stated it was committed to building and  maintaining a knowledgeable and flexible workforce and is in the process  of developing a comprehensive set of outcome-based performance  measures to assist in determining the effectiveness of key training and  development programs. FDIC also described its plans to conduct extensive  evaluations of two of its human capital initiatives, the Corporate Employee  Program and Professional Learning Accounts. These evaluations are  intended to utilize outcome-based performance measures in order to  provide FDIC with information on the extent to which the programs’ goals  are achieved. FDIC also agreed that the agency would benefit from a  review of its risk management activities to ensure they are comprehensive,  appropriate to the agency’s mission, and fully evaluated. Accordingly, the  agency has assembled a committee to perform an in-depth review of its  current risk assessment activities and evaluation procedures. The  committee will make recommendations for strengthening the agency’s risk  assessment framework and FDIC executive management will establish a  plan for implementing the committee’s recommendations. FDIC also  provided technical comments that we incorporated as appropriate.
We are sending copies of this report to the Chairman of the Federal  Deposit Insurance Corporation, interested congressional committees, and  other interested parties. We will also make copies available to others upon  request. In addition, the report will be available at no charge on the GAO  Web site at http://www.gao.gov.
If you or your staff have any questions concerning this report, please  contact me at (202) 512-2717 or at jonesy@gao.gov. Contact points for our  Office of Congressional Relations and Public Affairs may be found on the  last page of this report. Key contributors to this report are listed in  appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report responds to a mandate included in the Federal Deposit  Insurance Reform Conforming Amendments Act of 2005 requiring the  Comptroller General to report on the appropriateness of FDIC’s  organizational structure. Specifically, this report focuses on three areas  that influence the effectiveness of FDIC’s organizational structure and  reflect key internal controls: (1) mechanisms used by the FDIC board of  directors to oversee and manage the agency; (2) FDIC’s human capital  strategies and how training and development programs are evaluated; and  (3) FDIC’s process for monitoring and assessing risks to the industry and  the deposit insurance fund and how that process is overseen and  evaluated.
To describe how FDIC’s board of directors oversees and manages the  agency, we reviewed FDIC’s enabling legislation, bylaws, and other  governance documents to understand the legal authority, oversight  responsibilities, and structure of FDIC and its board of directors and  standing committees. We also reviewed our reports and literature on  characteristics of boards of directors to identify management issues and  common practices among boards of directors. We met with  knowledgeable academicians and researchers to gain a better  understanding of management practices at organizations overseen by  boards of directors. To obtain more information on how FDIC’s board  manages and oversees the agency, we conducted interviews with members  of FDIC’s current board of directors and the board’s Audit Committee  members. We developed a standardized interview guide, and used the  same set of questions for each interview session. To obtain independent  views from board members, we met with each board member separately;  each board member’s deputies or other senior staff also participated in the  interviews. We also attended two FDIC board meetings and held additional  interviews with former FDIC officials to gain a broader understanding of  governance at FDIC. To gain a better understanding of one mechanism for  managing the agency, delegations of authority, we interviewed officials in  FDIC’s Legal Division and reviewed FDIC’s master set of delegations to  FDIC divisions and officers as well as a directive describing the process  for issuing delegations. We also consulted our Standards for Internal  Control in the Federal Government to determine how delegations of  authority affect an agency’s internal control environment.
To describe FDIC’s human capital strategies, we gathered and analyzed  information from a variety of sources. We reviewed our guidance and  reports on federal agencies’ workforce planning and human capital  management efforts to identify recommended strategic workforce  planning principles for high performing organizations. We reviewed  relevant work of FDIC’s Office of the Inspector General and obtained  documentation of certain findings from previous Inspector General  reports related to FDIC’s human capital strategic planning. We interviewed  FDIC officials on the Human Resources Committee, senior managers in  various FDIC divisions, and officials in Corporate University to obtain  information on how critical skill needs and skill gaps are addressed and  how FDIC develops and implements human capital initiatives, including  training and development programs. We also obtained and reviewed  documentation of FDIC’s human capital goals and how FDIC’s primary  divisions track their progress toward meeting those goals. To determine  how FDIC evaluates its training and development programs, we  interviewed Corporate University officials and obtained relevant  documentation. We also consulted our report, Human Capital: A Guide  for Assessing Strategic Training and Development Efforts in the Federal  Government, to obtain information and criteria on evaluating training  programs.
To examine the extent to which FDIC monitors, assesses, and plans for  risks facing banks and thrifts, the industry as a whole, and the deposit  insurance fund, we interviewed FDIC officials in divisions directly  responsible for risk-related activities, such the Divisions of Supervision  and Consumer Protection and Resolutions and Receiverships. We obtained  and reviewed written and testimonial information on FDIC’s risk  management activities, plans for addressing the biggest dangers to the  industry and insurance fund, and FDIC’s methods for evaluating its risk  management activities. We examined research reports and papers  describing the implications of financial institution failures, documentation  of the agency’s examination procedures, and various documents related to  the work of FDIC’s Risk Analysis Center, National Risk Committee, and  Resolutions Policy Committee. We also attended a presentation of the Risk  Analysis Center to understand its role and function as part of FDIC’s risk  management activities and observed a meeting of one of FDIC’s six  Regional Risk Committees. In addition, we examined our own guidance,  including our Standards for Internal Control in the Federal Government,  to determine how risk monitoring and assessment activities help provide  effective internal controls.
Finally, to address all three objectives in this report, we conducted site  visits to FDIC regional and field offices in three states (California, Georgia,  and Texas). The purpose of the site visits was to obtain more in-depth  information on the FDIC board of directors’ management and oversight  responsibilities; issues related to human capital, workforce planning, and  training and development; FDIC’s methods for identifying, assessing, and  monitoring risk; and FDIC’s methods of evaluating its progress toward  meeting agency goals. In each state, we conducted interviews with senior  managers from FDIC’s three main divisions and the Human Resources  Branch; analysts and economists in the Division of Insurance and  Research; case managers in the Division of Supervision and Consumer  Protection; and financial institution examiners in the Division of  Supervision and Consumer Protection.  Additionally, in Dallas, Texas, we  interviewed staff within FDIC’s Division of Resolutions and Receiverships  because the Dallas office is where resolutions and receiverships activities  are centered. We developed a standardized interview guide for each group  of employees we interviewed, and used the same set of questions for each  interview session. To encourage open communication, we met with each  group of employees separately, and except in one instance, subordinate  employees were interviewed separately from their managers. We  judgmentally selected the states based on the following characteristics:  staffing levels in each regional and field office; the number and size of  FDIC-supervised institutions located in a particular region; regional and  field office structure; geographic dispersion; recommendations of officials  from FDIC’s Office of Inspector General; and proximity of the field office  to the regional office coupled with time and travel resources.
To assess the reliability of the employment data presented and discussed  in the background section of this report, we (1) reviewed existing  information about the data and the system that produced them and (2)  interviewed agency officials knowledgeable about the data. For FDIC data  on overall employment from 1991-2006, we performed some basic  reasonableness checks of the data against data from the Office of  Personnel Management’s Central Personnel Data File (CPDF). When we  found discrepancies, such as considerable differences between data from  the two sources, we brought them to the agency’s attention and worked  with a data analyst at FDIC to understand the discrepancies before  conducting our analyses. For employment trends by occupation, FDIC was  unable to provide accurate data for years prior to 2001 due to the  integration of several legacy systems and databases. Therefore, we used  data from the CPDF to approximate employment data by occupation.  Although FDIC officials noted certain limitations of the CPDF data, they  stated that the data were accurate within a sufficient margin of error for  reporting of governmentwide workforce demographics and trends. After  reviewing possible limitations in FDIC’s overall employment data and  CPDF data by occupation, we determined that all data provided were  sufficiently reliable for the purposes of this report.
We conducted our work in California, Georgia, Texas, and Washington,  D.C., from May 2006 through January 2007 in accordance with generally  accepted government auditing standards.
section_title: Appendix II: Comments from the Federal Deposit Insurance Corporation
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Kay Kuhlman, Assistant  Director; Kenrick Isaac, Jamila Jones, Alison Martin, David Pittman, Omyra  Ramsingh, and Christopher Schmitt made key contributions to this report.