Federal Deposit Insurance Corporation
Division of Resolution and Receiverships
Washington, D.C. 20429-9990

DATE: September 21, 2004

MEMORANDUM TO: Stephen M. Beard, Deputy Assistant Inspector General for Audits

FROM: Michael J. Zamorski [Electronically produced version; original signed by Michael J. Zamorski], Director, Division of Supervision and Consumer Protection

SUBJECT: Review of DSC's Regional Office Structure Draft Report, Assignment Number 2004-016

Thank you for the opportunity to respond to your draft audit report about DSC's regional office structure. In general, we agree with your recommendation for an independent analysis of DSC's regional structure. In fact, we have continuously been reviewing our structure and staffing levels. We believe an independent analysis is premature and offer the following comments:

Regional Office Structure Changes

We disagree with your statement on page 3 of the report that "the DSC has not made a significant change to its regional office structure since 1987, even though the industry it supervises and DSC's supervisory approach have experienced significant changes." We would argue that we have made several changes in response to industry transformation, namely:

• We instituted the Case Manager system in 1997 in response to the increasing complexity of DSC's supervised institutions.
• Similarly, in response to the increased complexity in the areas of IT, Capital Markets, Accounting, Trust and Special Activities including Fraud and Bank Secrecy Act, we designated specialists with expertise in these areas.
• In 2001, we designated the former regions of Memphis and Boston as area offices of Dallas and New York respectively.

More Delegations to the Field Offices

While we agree with your general comments that we have been delegating more processes and responsibilities to the field offices, we do not agree that the relationship manager (RM) program, if implemented, would result in even more work delegated to the field offices. The RM program's primary impact, as piloted, will be on the examination cycle (an open-examination cycle rather than a point in time examination) and provides examiners more flexibility in carrying out the FDIC's supervisory responsibilities. If implemented, the RM program would not materially impact delegated activities.

Other Regulatory Agency Regional Changes

The report seems to focus on the regional office structure changes at both the OCC and the OTS, each having reduced their number of regional offices from six to four in 2002 and 2003, respectively. For comparison purposes, as of March 31, 2004, there were 1,969 national banks and 1,404 thrifts. Assuming no banks or thrifts are supervised out of the Washington offices (which is not a correct assumption), each OCC District office is responsible for an average of 500 banks and each OTS region is responsible for an average of 400 thrifts. Each FDIC regional office, on the other hand, is responsible for an average of 900 FDIC-supervised institutions and nearly 600 additional insured institutions. Due to the nature of our backup insurance role and our relationship with state agencies, we feel FDIC needs to be structured to meet its responsibilities, rather than to parallel the structure of other agencies.

Workload Implications from MERIT examinations

Staffing comparisons associated with the decline in the number of institutions and the transfer of MERIT banks to the field should reflect the report review, report processing and the branch application workload associated with "small" I - and 2-rated banks is relatively light. On the other hand, the more complex and problem institutions assigned to Case Managers require a much more time consuming depth analysis. Therefore, it is not a simple transfer of the number of institutions from the regional offices to field offices that would equate to staffing requirements, but rather the complexity and interrelationships that the regional office staff deal with that requires significantly more hours and expertise.

Similarly, the analysis of the number of Assistant Regional Directors should not be simplistically equated to the number of banks under their immediate supervision. Again, size and complexity of the workload need to factor into the equation. In addition to bank-specific workload, there are other duties the ARDs perform such as special projects, outreach meetings, Directors' Colleges, and many other functions.

Industry Assets

The chart below includes changes in the total number of banks by region and total assets associated with those banks.

FDIC Insured Institutions

The growth in industry assets increases the level of risk to the insurance fund. Consequently, any review of regional operations and efficiencies should give consideration to the value added by regional office staff expertise (i.e. monitoring and offsite reviews) that mitigate potential risk.

In addition, there has been an increase in the number and asset size of specialty institutions, such as credit card banks. Recently, the FDIC has been closely monitoring the activities of these institutions given the spike in consumer debt levels and payment delinquencies. We have previously indicated to the Office of Inspector General, we are also allocating more resources to the analysis of limited-charted institutions (i.e. Industrial Loan Companies) in cooperation with state regulatory authorities.

Given the contraction in the industry and the trends toward fewer, but more complex institutions, regional operations need to monitor these institutions closely. Also, regional staff provides a level of expertise and knowledge that is needed to better supervise and regulate these institutions.

Problem Institutions

The OIG report observes that the number of problem banks has declined since 1987; however, the complexity of the industry has increased significantly, making a comparison of the current industry to that of 1987 difficult.

Our analysis of the more complex industry from 1998 to 2003 reflects the number of problem institutions and associated assets are increasing. The more complex nature of the problem institutions currently requires regional staff expertise for the ongoing monitoring of these institutions.

All 4, 5- Rated Insured Institutions

As stated previously, we are positioning our workforce to reflect the complexity and trends in the financial services sector and have recently implemented a plan to downsize through attrition and hiring restrictions. DSC continues to regularly review projected workload assumptions and address any resulting imbalances and continues to analyze staffing requirements and necessary skill sets. We appreciate your recommendation of an independent study of our regional office structure, but we have made the decision that such a study is not advisable at this time. Therefore, as an alternative action, we will continue, as part of our ongoing reassessment efforts, to evaluate our regional structure as part of our normal annual workforce planning and budgeting efforts.

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