FDICís Dedicated Examiner Program for Large Insured Depository Institutions

September 2007
Report No. AUD-07-011

FDIC OIG, Office of Audits

Background and Purpose of Audit


The FDIC is responsible for maintaining stability and public confidence in the nationís financial system by examining and supervising financial institutions, insuring deposits, and resolving failed financial institutions and managing receiverships. As of March 31, 2007, the FDIC insured 8,650 depository institutions and was the federal banking agency (FBA) for 5,216 of those institutions, which included state-chartered banks that are not members of the Federal Reserve System, generally known as state non-member banks; state-chartered savings institutions; and state-licensed insured branches of foreign banks.

The FDICís Division of Supervision and Consumer Protection (DSC) is responsible for the FDICís Large Insured Depository Institutions (LIDI) Program, which consists of financial institutions with consolidated banking assets that exceed $10 billion. There are 119 insured institutions covered by the LIDI Program, 25 of which are FDIC supervised. The 119 institutions had total assets exceeding $9 trillion and total deposits of $5.6 trillion, which is comprised of both insured and uninsured deposits. To assist the FDIC in assessing the risks associated with the largest institutions in the LIDI program that are not FDIC-supervised, the FDIC and the other FBAs established the Dedicated Examiner (DE) Program in 2002. Currently, the DE Program includes six LIDIs supervised by either the Office of the Comptroller of the Currency (OCC) or the Office of Thrift Supervision (OTS) as shown in the table.

The objective of the audit was to determine whether the DE Program is contributing to the FDICís efforts to assess and quantify the risks posed by the largest institutions to the Deposit Insurance Fund (DIF).

FDIC, Federal Deposit Insurance Corporation


Results of Audit


The FDICís DE Program is contributing to the FDICís efforts to assess and quantify the risks to the DIF posed by the largest banks. More specifically, the DE Program has been successful in providing the FDIC with supervisory information related to the operations at the six largest insured institutions and risks associated with those institutions. The DE Program has provided the FDIC with information related to those institutionsí organizational and legal structures; international activities; business segments; insured deposits; various types of risks, including credit, market, and interest rate; and supervisory actions and strategiesóall of which are important in assessing and mitigating risk to the DIF. FDIC officials indicated that the DE Program has been an effective mechanism through which supervisory, insurance, and resolution-related information is obtained.

Further, the DEs have complied with DSC guidance on reporting information relative to DE Program institutions and have established effective working relationships with the institutions and their respective FBAsóOCC and OTS officialsóas well as FDIC officials in the Division of Insurance and Research and Division of Resolutions and Receiverships. These officials generally agreed that the program is useful and working as intended. As of March 31, 2007, the DE Program banks held assets totaling about $4.7 trillion and domestic deposits totaling about $3.0 trillion.

Financial Institutions Included in the FDICís DE Program
DE Program Financial Institution Total Assets ($ in millions) Total Domestic Deposits
($ in millions)
FBA
JPMorgan Chase Bank $1,224,104 $644,313 OCC
Bank of America $1,204,472 $760,832 OCC
Citibank $1,076,949 $690,805 OCC
Wachovia Bank $518,753 $346,971 OCC
Wells Fargo Bank $396,847 $313,353 OCC
Washington Mutual Bank $318,295 $213,337 OTS
Totals $4,739,420 $2,969,611
Source: The FDICís Institution Directory.

The increasing complexity of the industry and the growing concentration of risk to the DIF in the largest banking organizations are expected to become more pronounced over time and to present greater risk management challenges to the FDIC. The FDICís DE Program is a significant resource for the FDIC, and the DEs have provided information that has enhanced the FDICís efforts to identify, monitor, and assess risks for large, complex banks that are not supervised by the FDIC.

Recommendations and Management Response

The report does not contain recommendations. However, the FDIC provided a response stating, in part, that the LIDI and DE Programs are effective tools in understanding and assessing risk to the DIF and that the FDIC will continue to assess means for improving the efficiency and overall effectiveness of these programs.


TABLE OF CONTENTS

BACKGROUND
RESULTS OF AUDIT

DE Program Contributions to the FDICís Efforts to Assess and Quantify Risks

Analytical Reports and Information

Conclusion

CORPORATION COMMENTS
APPENDIX I: OBJECTIVE, SCOPE, AND METHODOLOGY
APPENDIX II: PROVISIONS OF THE 2002 INTERAGENCY AGREEMENT RELATED TO LARGE INSTITUTIONS
APPENDIX III: CORPORATION COMMENTS
TABLES

Table 1: FDIC-Insured Depository Institutions and Large Bank Programs

Table 2: Financial Institutions Included in the FDICís DE Program

Table 3: Analysis of Large Insured Depository Institutions

Table 4: DE Compliance with DSC Guidance

Table 5: Synopsis of Prior Coverage

ACRONYMS
CM Case Manager
DE Dedicated Examiner
DIF Deposit Insurance Fund
DIR Division of Insurance and Research
DRR Division of Resolutions and Receiverships
DSC Division of Supervision and Consumer Protection
FBA Federal Banking Agency
FRB Board of Governors of the Federal Reserve System
GAO Government Accountability Office
LIDI Large Insured Depository Institution
NRC National Risk Committee
OCC Office of the Comptroller of the Currency
OIG Office of Inspector General
OTS Office of Thrift Supervision
RAC Risk Analysis Center
RD Regional Director
RO Regional Office
U.S.C. United States Code


FDIC, Federal Deposit Insurance Corporation, Office of Inspector General,Office of Auidts, 3501 Fairfax Drive, Arlington, VA 22226-3500
DATE: September 13, 2007
 
MEMORANDUM TO:Sandra L. Thompson, Director
Division of Supervision and Consumer Protection
 
FROM:Russell A. Rau [Electronically produced version; original signed by Russell A. Rau]
Assistant Inspector General for Audits
 
SUBJECT:FDICís Dedicated Examiner Program for Large Insured Depository Institutions
(Report No. AUD-07-011)
 

This report presents the results of the subject FDIC Office of Inspector General (OIG) audit. The FDICís Division of Supervision and Consumer Protection (DSC) is responsible for the FDICís Large Insured Depository Institutions (LIDI)1 Program, which has the primary objective to assess and quantify the risks posed by large institutions (those with consolidated banking assets exceeding $10 billion) from a deposit insurerís perspective. To assist the FDIC in assessing the risks associated with the largest institutions in the LIDI Program, the FDIC and the other federal banking agencies (FBA) established the Dedicated Examiner (DE) Program in 2002. That program currently includes five financial institutions supervised by the Office of the Comptroller of the Currency (OCC) and one supervised by the Office of Thrift Supervision (OTS). The DE Program was established to obtain real-time access to information about the risks and trends in the largest insured institutions that are not supervised by the FDIC.

Table 1 shows the financial institutions insured by the FDIC and how they relate to the FDICís insurance and supervisory responsibilities and its large bank programs.

Table 1: FDIC-Insured Depository Institutions and Large Bank Programs
Number of Institutions Total Assets
($ in millions)
Total Deposits*
($ in millions)
Total FDIC Insured 8,650 $12,149,058 $8,009,738
Total FDIC Supervised 5,216 $2,239,837 $1,676,420
LIDI FDIC Insured 119 $9,072,444 $5,665,043
LIDI FDIC Supervised 25 $668,479 $465,834
DE FDIC Insured 6 $4,739,420 $2,969,611

Source: OIG review of FDIC Institution Directory data and the FDICís Statistics At a Glance, as of March 31, 2007.
* Total deposits depicted include FDIC-insured and uninsured amounts.

The objective of the audit was to determine whether the DE Program is contributing to the FDICís efforts to assess and quantify the risks posed by the largest institutions to the Deposit Insurance Fund (DIF). We conducted this performance audit in accordance with generally accepted government auditing standards. Appendix I of this report discusses our audit objective, scope, and methodology in detail.

BACKGROUND

The FDIC is responsible for maintaining stability and public confidence in the nationís financial system by examining and supervising financial institutions, insuring deposits, and resolving failed financial institutions and managing receiverships. These responsibilities are shared among the FDICís three major business linesóDSC, the Division of Insurance and Research (DIR), and the Division of Resolutions and Receiverships (DRR). Generally, DSC is responsible for the safety and soundness of FDIC-supervised insured depository institutions, protecting consumersí rights, and promoting community investment initiatives by the institutions. DSC is also responsible for operating a number of supervisory and risk assessment programs to evaluate risks presented by large, complex banks as discussed later in this report. DIR is responsible for providing the public with a sound deposit insurance system by (1) providing comprehensive statistical information on banking; (2) identifying and analyzing emerging risks; (3) conducting research that supports sound deposit insurance, banking policy, improved risk assessment, and consumer protection; and (4) assessing the adequacy of the DIF and implementing an effective and fair risk-based premium system. Finally, the resolutions and receivership management functions of DRR ensure that recovery to creditors of receiverships is achieved in the least costly manner for all failed insured depository institutions.

Monitoring of Large Insured Depository Institutions

Given the growing concentration of the FDICís financial risk in a smaller number of institutions, DSCís supervisory and analysis processes have expanded for large banks, particularly through its Large Bank Supervision Branch. DSCís large-bank supervision activities can be categorized into three general areas: (1) direct supervision and risk assessment of state nonmember banks; (2) monitoring and risk assessment of national, state member, and thrift institutions; and (3) policy development. DSCís Large Bank Supervision Branch coordinates the DE Program, LIDI Program, and Large State Nonmember Bank Supervisory Program.2 In addition, the Large Bank Supervision Branch reviews and aggregates data on large banks to identify trends and emerging risks and communicates these trends and risks to the FDICís Board of Directors and senior management, the other FBAs, and DSC staff. At large institutions where the FDIC is not the primary FBA, DSC case managers (CM)3 and DEs are the primary points of contact with the FBAs to assist the FDIC in monitoring risks.

Large Insured Depository Institutions Program. Assessment of the FDICís insurance risk at large institutions, and the large bank sector as a whole, is the cornerstone of the FDICís large bank supervision activities. The primary objective of the LIDI Program is to assess and quantify the risks posed by large institutions from a deposit insurerís perspective. The risk assessment process, which provides a framework for coverage of each large institution, is based on a combination of information obtained from the institution and the associated FBA, supervisory activities, market data, and publicly-available information.

Dedicated Examiner Program. On January 29, 2002, the FDIC implemented an interagency agreement entitled, Coordination of Expanded Supervisory Information Sharing and Special Examinations, with the FBAs. The agreementís stated objectives are to:

establish fundamental expectations for enhanced coordination and cooperation of supervisory efforts by the federal banking agencies (FBA) to ensure that the FDIC is able to fulfill its responsibilities to protect the DIF in the most efficient and least burdensome manner possible;
confirm the FBAsí understanding regarding examinations, reports, meetings, examination personnel, and other supervisory information the FDIC will have access to related to FDIC responsibilities; and
confirm the FBAsí understanding of the general circumstances under which the FDIC will conduct Special Examinations4 of insured financial institutions.

The interagency agreement (1) established parameters regarding the FDICís participation in examination activities for deposit insurance purposes, (2) permitted the FDIC to establish onsite examiners at the eight largest financial institution holding companies that are not supervised by the FDIC, and (3) allowed the FDIC to establish the DE Program. Due to two mergers that occurred in 2004, there are now six LIDIs in the DE Program (see Table 2).

Table 2: Financial Institutions Included in the FDICís DE Program
DE Program Financial Institution Total Assets
as of March 2007
($ in millions)
Total Domestic Deposits
as of March 2007
($ in millions)
FBA
JPMorgan Chase Bank $1,224,104 $644,313 OCC
Bank of America $1,204,472 $760,832 OCC
Citibank $1,076,949 $690,805 OCC
Wachovia Bank $518,753 $346,971 OCC
Wells Fargo Bank $396,847 $313,353 OCC
Washington Mutual Bank $318,295 $213,337 OTS
Totals $4,739,420 $2,969,611
Source: The FDICís Institution Directory.

Under the terms of the interagency agreement, the FDIC will rely on the results of work conducted by the FBAs in assessing the condition of DE Program institutions. The agreement also covers other areas, including:

  • FDIC participation in Special Examinations of financial institutions that present heightened risk to the DIF (institutions that are undercapitalized or receive a composite rating5 of 3, 4, or 5) and
  • information sharing between the FDIC and the three other FBAs, including access to supervisory personnel and information, risk assessments, supervisory plans, reports of examination, and other documents related to selected LIDIs.

Under the program, a DE is assigned to each of the six largest LIDIs to serve as the FDICís central point of contact for supervisory, insurance, and resolutions matters and overall risk assessment. The DEs work within the FBAsí existing supervisory programs to avoid, to the fullest extent possible, any increase in regulatory burden or duplication of effort to assist the FDIC in protecting the DIF. Additionally, the DEs work closely with DSCís Large Bank Supervision Branch to assess ongoing risk posed by the institutions.

Appendix II of this report provides additional details on the interagency agreementís provisions that relate to large institutions and the DE Program.

Risks Associated with the Largest Financial Institutions

Analyses of emerging risks and trends in the financial industry or economy identified through the DE Program and other large bank supervisory programs are reviewed by the FDICís Risk Analysis Center (RAC)6 and the FDIC Board of Directors as part of the semiannual risk case presentation and are incorporated into numerous FDIC publications and written reports. The insurance risk exposure associated with large, complex financial institutions to the FDIC and the DIF is significant, considering that as of March 31, 2007, the total insured and uninsured deposits of the six DE Program financial institutions totaled about $3.0 trillion and the balance of the DIF totaled $50.7 billion. In addition, according to the FDICís 2007 Annual Performance Plan, the six DE Program institutions account for about 45 percent of the banking industryís total assets.

Notably, the FDIC is not the FBA for most of the large, complex institutions it insures and does not supervise any of the DE Program banks. However, the FDIC is responsible for insuring those institutions and would be responsible for resolving the failure of a DE Program bank. As shown in Table 3, as of March 31, 2007, 119 LIDIs held assets totaling about $9 trillion. Of those 119 institutions, only 25 institutions, with assets totaling about $668 billion and deposits totaling about $466 billion, were supervised by the FDIC.

Table 3: Analysis of Large Insured Depository Institutions
Financial
Institution FBA
Number of Supervised
Institutions
Total Assets
as of March 2007
($ in millions)
Total Deposits
($ in millions)
FDIC 25 $668,480 $465,835
FRB 21 $1,040,465 $717,704
OTS 28 $1,173,907 $687,866
OCC 45 $6,189,592 $3,793,638
Totals 119 $9,072,444 $5,665,043

Source: The FDICís Institution Directory.

RESULTS OF AUDIT

The FDICís DE Program is contributing to the FDICís efforts to assess and quantify the risks to the DIF posed by the largest banks. More specifically, the DE program has been successful in providing the FDIC with supervisory information related to the operations at the six largest insured institutions and mitigating risks associated with those institutions. The DE Program has provided the FDIC with information related to those institutionsí organizational and legal structures; international activities; business segments; insured deposits; various types of risks, including credit, market, and interest rate; and supervisory actions and strategiesóall of which are important for assessing risk to the DIF. FDIC officials indicated that the DE Program has been an effective mechanism through which supervisory, insurance, and resolution-related information is obtained.

Further, the DEs have complied with DSC guidance on reporting information relative to DE Program institutions and have established effective working relationships with the institutions and their respective FBAsóOCC and OTS officialsóas well as bank management and FDIC officials in DSC, DIR, and DRR. These officials generally agreed that the program is useful and working as intended.

DE Program Contributions to the FDICís Efforts to Assess and Quantify Risks

The DE Program serves as a means for the FDIC to obtain information on issues that could significantly impact large, complex institutions and increase risks to the DIF. In addition, the DE Program provides (1) information on the supervisory processes at the largest, complex financial institutions that the FDIC does not supervise and (2) the full-time focus of one FDIC examiner for each institution in the program.

The DEs use supervisory information, internal institution information, and external sources to evaluate risks and assign an offsite rating7 and overall risk profile indicator8 for each of the six banking organizations in the program. The DEs collaborate with each institutionís FBA and other FDIC offices to evaluate the condition of large banks and to identify systemic risks. More specifically, the DEs:

  • participate in FBA-targeted reviews9 and examination activities;
  • access selected financial institution systems for data analysis with FBA and bank management knowledge and approval;
  • attend certain financial institution management meetings that include, but are not limited to, audit, asset quality, economic capital, Basel II,10 operational risks, and credit card operations and bank board of directors and executive management meetings;
  • respond to specific requests from FDIC headquarters and regional offices, for example requests for information related to hedge funds, and collateralized debt obligations; and
  • report to DSC headquarters and regional offices on significant events, issues, and challenges related to the DE institutions, and submit information on the risk profiles for the institutions.

Potentially heightened insurance risks identified through the DE and other large bank supervision programs are reported to FDIC senior executives, who determine an appropriate course of action.

Additionally, the FDIC has issued the following DE Program guidelines. The related DE responsibilities are listed in Table 4:

  • Regional Directors (RD) Memorandum, Dedicated Examiner Program Guidelines, May 2, 2003;
  • RD Memorandum, Large Insured Depository Institutions (LIDI) Process Redesign, January 20, 2004; and
  • RD Memorandum, Large Insured Depository Institution Risk Monitoring Program, February 2, 2006.

We interviewed the DEs and reviewed reports and information (described later in this report) that the DEs provided to DSC management regarding their respective financial institutions. As shown in Table 4, we determined that the DEs are complying with DSC guidance to provide specific risk-related information to FDIC management.

Table 4: DE Compliance with DSC Guidance
Dedicated Examiner Responsibilities Complied
The indicates that the DEs complied with DSC guidance.
Develop and submit various written analytical reports:
  • Quarterly Executive Summary Report
  • checkmark
  • Annual Business Profile
  • checkmark
  • Annual Risk Assessment Plan
  • checkmark
  • Ad Hoc Reports
  • checkmark
    Provide periodic presentations for the RAC checkmark
    Attend quarterly formal meetings at FDIC headquarters checkmark
    Use FDIC corporate specialists such as credit specialists, capital market specialists, Basel representatives, and statisticians to assist with targeted examinations or special projects checkmark
    Store documents related to the DE Program banks on DSCís Large Bank secure Website checkmark
    Communicate with FBA and financial institution personnel checkmark
    Develop and submit an FDIC Risk Assessment Plan to the regional office for approval (for companies with total assets exceeding $50 billion, or those that intend to opt-in for Basel II) checkmark
    Establish regular communication with FBA examination staff checkmark
    Assess legal entity information to ensure the FDIC's mission critical information needs are met in the areas of insured deposit information and resolutions-related information checkmark
    Work with the FBAs to: .
    • identify FBA reports and institution-generated reports that will be useful in the analysis of key risk areas;
    checkmark
    • identify selected supervisory activities that are mutually beneficial to participate in and that will increase the DEsí understanding of issues relevant to FDIC risk assessment needs;
    checkmark
    • gain an understanding of their assessment of the institution's Basel II qualification and ongoing validation efforts and supervisory procedures designated to evaluate related systems and processes; and
    checkmark
    • make Basel II data available for the purpose of comparing risk estimates with those of other institutions to measure consistency and identify outliers and other risk trends posed by the institution.
    checkmark
    Source: OIG review of DSC guidance and DE analytical reports.

    Analytical Reports and Information

    As shown in Table 4 earlier, the DEs develop and submit various written analytical reports to FDIC management. The DEs submit standard reports to DSC to assist in identifying, monitoring, and assessing the overall risk associated with the DE Program banks. For example, in addition to providing an overall offsite rating and risk rating, the DEsí Quarterly Executive Summary Report provides information on a DE Program bank that includes, but is not limited to, the following.

    Examples of Information Included in DE Quarterly Executive
    Summary Reports
    Corporate overview Market agency ratings
    Risk profile Enforcement actions
    Supervisory program Earnings
    Economic capital Credit, market, and interest rate risk
    Implementation of Basel II Derivatives
    Source: DE Program Quarterly Executive Summary Report

    Annual business profiles prepared by the DEs provide additional information on DE Program banks, such as information on business segments; legal entities and subsidiaries; significant events, such as acquisitions and mergers, strategies, and business plans; and an overview of the bankís management.

    The FDICís Annual Risk Assessment Plan for each DE Program financial institution outlines information, including, but not limited to:

    • assessment of safety and soundness issues;
    • bank managementís view of the institutionís associated risk;
    • FBA and, if applicable, Board of Governors of the Federal Reserve System (FRB) supervisory coverage;
    • risk to the DIF and risk-related premium analysis;
    • insured deposit growth projection;
    • resolutions considerations;
    • determination of deposit insurance issues;
    • marketability of assets;
    • assessment of legal entities;
    • Basel II implementation;
    • international exposures; and
    • DE activities.

    The DEs also submit various ad hoc reports to assist DSC in assessing risks posed by the DE Program banks. Those reports have included information related, but not limited to, nontraditional mortgages, collaterized debt obligations, and hedge funds.

    Further, the DEs present information at Large Bank Supervision Branch meetings, RAC presentations, National and Regional Risk Committee meetings, and briefings to the FDIC Chairman and Vice Chairman. The reports DEs provide assist DSC in evaluating the unique risks that are posed by the six largest insured institutions and provide ongoing information and expanded analyses of emerging risk issues associated with the DE banks as they arise. We reviewed the most recent standardized reports prepared by the six DEs and attended one DEís presentation to the RAC and determined that the DEs complied with appropriate DSC guidance on DE responsibilities in this area.

    In addition to obtaining supervisory information, the DEs obtain information from the FBAs that can assist DIR and DRR in identifying and monitoring insurance and resolution issues. To illustrate, the DEs regularly provide information to DIR to assist with deposit insurance pricing and to DRR on deposit growth forecasts. Further, DRR regional managers meet with DEs to discuss resolution considerations. In addition, DEs have included resolution considerations in their presentations and standard reports. Such considerations relate to insured deposit determination issues, diverse and liquid assets, complex information technology operations, non-bank affiliate businesses, and the number of countries with which the bank has international business. DRR is in the process of providing additional guidance to DSC and the DEs on the type of information it needs for resolution preparedness purposes.

    Conclusion

    The increasing complexity of the industry and the growing concentration of risk to the DIF in the largest banking organizations are expected to become more pronounced over time and to present greater risk management challenges to the FDIC. These changes in the banking industry will have significant operational implications for the FDICís three major business lines and pose increased risk to the DIF because of the potential for significant losses that may result from the failure of a single large institution. In response to these challenges, the FDIC has been augmenting its supervisory and surveillance efforts to manage insurance risk. The FDICís DE Program is a significant resource for the FDIC, and the DEs have provided information that has enhanced the FDICís efforts to identify, monitor, and assess risks for large, complex banks, which are not supervised by the FDIC. The DE Program has been an effective mechanism through which supervisory, insurance, and resolution-related information is obtained.

    CORPORATION COMMENTS

    The Director, DSC, provided a written response to a draft of this report on September 6, 2007. DSCís response is presented in its entirety in Appendix III of this report. The Director stated that access to insured depository institution data is critical to the FDICís mission and that the LIDI and DE Programs are effective tools in better understanding and assessing risk. The Director also stated that the division will continue to assess means for improving the efficiency and overall effectiveness of these programs.

    APPENDIX I

    OBJECTIVE, SCOPE, AND METHODOLOGY

    Objective

    The objective of this audit was to determine whether the FDICís DE Program is contributing to the FDICís efforts to assess and quantify the risks posed by the largest institutions to the DIF. We conducted this performance audit from November 2006 through July 2007 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective.

    Scope and Methodology

    To achieve our audit objective, we:

    • Obtained an understanding of (1) the DE Program and its relation to other FDIC branches and programs such as the LIDI program and (2) the FDICís and DEsí relationship and coordination with FBAs for financial institutions in the DE program.
    • Obtained an understanding of guidance related to the DE Program including: (1) Interagency Agreement, Coordination of Expanded Supervisory Information Sharing and Special Examinations, March 28, 2002; (2) DSC RD Memorandum, Dedicated Examiner Program Guidelines, May 2, 2003; RD Memorandum, Large Insured Depository Institutions (LIDI) Process Redesign, January 20, 2004; RD Memorandum Large Insured Depository Institution Risk Monitoring Program, February 2, 2006, and other examiner guidance; (3) FDIC Case Managers Procedures Manual; and (4) FDI Act authorities and applicable regulations.
    • Interviewed DSC officials in Washington, D.C., and selected regional/field offices and the six DEs assigned to the six financial institutions in the DE Program.
    • Interviewed (1) DIR personnel to determine whether the division is obtaining information from DSC to assess the risk to the insurance fund and determine appropriate insurance assessments; (2) DRR personnel to determine whether the division is obtaining information from DSC to plan for a possible large bank failure; and (3) FBA officials in Washington, D.C., and examination staff for the DE Program banks.
    • Reviewed analytical and summary reports prepared by DEs, DE work papers, and other pertinent documentation.
    • Coordinated with the FDIC Office of the Ombudsman.

    Internal Controls

    We evaluated the effectiveness of controls in place for the DE Program. These controls included the policies and procedures for complying with the 2002 Interagency Agreement and other guidance that the FDIC has issued to DEs.

    Reliance on Computer-based Data

    We did not rely on computer-based data to answer the audit objective. Therefore, we did not test or validate the accuracy of computer-based data that the FDIC maintained on financial institutions included in the DE Program.

    Compliance With Laws and Regulations

    We concluded that there are no specific laws or regulations that mandate a DE or LIDI program. Each of the programs falls under the general authority to conduct examinations under Sections 9 and 10(b) of the Federal Deposit Insurance Act.11 Further, we concluded that although the interagency statement of policy on examination coordination applies to the DE Program, as outlined in the March 2002 examination guidance, that statement of policy does not have a specific legal requirement but, rather, is based on interagency coordination.

    Government Performance and Results Act

    Based on our review of the FDICís 2007 Annual Performance Plan, the 2007 Corporate Performance Objectives, the 2005-2010 Strategic Plan, and DSC divisional goals and objectives, we concluded that the FDIC has established performance measures that relate to large insured depository institutions, in general, and to the DE Program, in particular. Those performance measures include coordination with DIR and DRR and with FBAs regarding assessing risk to the DIF for LIDI and DE banks. Specifically, the FDIC has established goals to:

    • Enhance the effectiveness of the FDICís current risk management and compliance supervisory programs.
    • Restructure the existing LIDI analysis program to enhance the usefulness of the supervisory, insurance pricing, and resolution information it produces.
    • Identify and address risks to the DIF by assessing the insurance risks in 100 percent of insured depository institutions and adopt appropriate strategies.
    • Enhance the FDICís ability to insure, supervise, and resolve large and/or complex insured institutions.
    • Develop and conduct simulation testing of resolution templates for complex business lines or strategies that would be encountered in a large institution failure. Begin development of institution-specific resolution plans based on those templates for the LIDIs.
    • Publish a Notice of Proposed Rulemaking by December 31, 2007, to enhance the FDICís ability to make deposit claims determinations in conjunction with the resolution of a large bank failure.
    • Ensure, on an ongoing basis, that the FDIC has the necessary skills in its workforce to effectively address current and emerging safety and soundness and compliance risks.
    • Develop a process for risk-scoping institutions with total assets greater than $10 billion that is based upon supervisory, insurance, and resolution needs. Use this process as a basis for assigning responsibilities among examiners, CMs, examination specialists, and DEs.
    • Identify proposed supervisory criteria to determine when the LIDIs require a DE, and secure OCC agreement on these criteria.

    Fraud and Illegal Acts

    The nature of the audit objective did not require that we assess the possibility for fraud and illegal acts. However, throughout the audit, we were alert to the possibility of fraud and illegal acts, no instances came to our attention.

    Prior Coverage

    The FDIC OIG and the Government Accountability Office (GAO) have issued audit reports that relate to the assessment of risk in large insured depository institutions. Table 5 provides a synopsis of the prior FDIC and GAO audit coverage of the assessment of risk in large financial institutions.

    Table 5: Synopsis of Prior Coverage
    Follow-up Audit of the FDICís Use of Special Examination Authority and DOSís Efforts to Monitor Large Bank Insurance Risks, Report No. 02-004, dated February 20, 2002.
    Objective To assess the progress that the FDIC made since the issuance of the OIGís previous memorandum on special examination authority and to make recommendations that might improve the Corporationís effectiveness in working with the other federal regulators.
    Results The FDIC had not always been able to promptly secure permission to participate in examinations of banks supervised by the OCC and OTS. The audit identified three situations in which regulators turned down FDIC requests to participate in scheduled safety and soundness examinations. The OIG recommended that the Director, Division of Supervision (now DSC), (1) pursue an amendment to Section 10(b)(3) of the FDI Act (12 U.S.C. section 1820(b)(3)) to vest special examination authority with the FDIC Chairman, in consultation with the appropriate primary federal regulator; (2) seek a revised Board delegation that vests special examination authority with the FDIC Chairman, in consultation with the appropriate primary federal regulator, as an interim measure, pending a legislative amendment; and (3) work to develop agreements with the other bank regulatory agencies to provide the FDIC with the timely information and access to megabanks necessary to carry out the Corporationís responsibilities as the insurer.
    Risk-Focused Bank ExaminationsóRegulators of Large Banking Organizations Face Challenges, GAO/GGD-00-48, dated January 24, 2000.
    Objective The GAO studied the risk-focused approaches used by the FRB and OCC. The objectives were to (1) describe the general characteristics of the regulatorsí risk-focused approach to examinations of large, complex banks, explaining how they differ from past examination practices; (2) compare the implementation of the FRBís and OCCís risk-focused examination approaches; and (3) identify the challenges faced by both agencies as they continued to implement their examination programs for large, complex banks.
    Results The GAO concluded that regulators face a number of challenges as they continue to implement their examination programs for large, complex banks. One key challenge, inherent in the design of the risk-based program, is how to identify the aspects of bank operations where examinersí attention should be concentrated. A second challenge is maintaining an awareness of industry-wide risk in an institution-specific examination program. Another is ensuring that examinersí risk assessments are not overly influenced by the bankís risk-management systems on which they must rely. Finally, both the FRB and OCC recognize that maintaining sufficient staffing numbers and expertise to examine increasingly large, complex banks continues to be a major challenge.
    Financial Market Regulation: Agencies Engaged in Consolidated Supervision Can Strengthen Performance Measurement and Collaboration, GAO-07-154, dated March 15, 2007.
    Objective The GAO reviewed the consolidated supervision programs at the FRB, OTS, and Securities and Exchange Commission to (1) describe policies and approaches that U.S. consolidated supervisors use to oversee large and small holding companies; (2) review the management of the consolidated supervision programs, including use of program objectives and performance measures; and (3) evaluate how well consolidated supervisors are collaborating with other supervisors and each other in their activities. In conducting this study, GAO reviewed agency policy documents and supervisory reports and interviewed agency and financial institution officials.
    Results The GAO recommended that the three agencies direct their staffs to develop a set of clear and consistent objectives and related performance measures specific to consolidated supervision and collaborate more systematically with each other and with other supervisors. The agencies generally agreed with these recommendations.
    Source: FDIC OIG and GAO reports related to the assessment of risk in large insured depository institutions and consolidated supervision.


    APPENDIX II

    PROVISIONS OF THE 2002 INTERAGENCY AGREEMENT
    RELATED TO LARGE INSTITUTIONS

    On March 28, 2002, the FDIC issued an RD Memorandum entitled, Coordination of Expanded Supervisory Information Sharing and Special Examinations, which outlines the parameters for interagency coordination related to large insured institutions, including the DE Program banks. The interagency agreement contains the following provisions related to large insured institutions, in general, and DE Program banks, in particular.

  • On an ongoing basis, the OCC, FRB, and OTS will provide the FDIC with access to supervisory personnel and information, including risk assessments, supervisory plans, reports of examination and other documents related to LIDIs. Similarly, the FDIC will provide access to the same types of supervisory information, if any, to the OCC, FRB and OTS.
  • On at least a quarterly basis, representatives of the OCC, FRB, and OTS will meet with representatives of the FDIC to discuss the risk profile, current condition, and status of identified supervisory matters requiring attention of all LIDIs.
  • In addition, the FDIC will establish a dedicated examiner program with respect to the eight largest banking organizations (collectively as ďLargest Banks,Ē individually as an ďAssigned InstitutionĒ). The DE Program will work within existing supervisory programs of the appropriate Agencies so as to avoid, to the fullest extent possible, any increase in regulatory burden or duplication of effort.
  • The person designated as dedicated examiner will be the FDICís primary point of contact with Agency supervisory personnel as it relates to the supervision of the Assigned Institution. Agency supervisory personnel are expected to keep the dedicated examiner informed of all material developments in the supervision of the Assigned Institution and will invite the dedicated examiner to observe and participate in certain examination activities to ensure the FDIC has an understanding of the supervisory issues and risk management structure of the Assigned Institution.
  • The FDIC will fully participate in the review and assessment of the risk of the credits within the Shared National Credit Program in LIDIs and other depository institutions.
  • When the Agencies agree that participation by the FDIC is appropriate to evaluate the risk of a particular banking activity to the deposit insurance funds, the FDIC dedicated examiner and other staff, as appropriate, should participate with the appropriate Federal banking agency in selected supervisory reviews of that activity, including meetings with bank management relating to those reviews. In the event Agenciesí staff cannot agree, the respective Agenciesí representatives to the FFIEC Supervision Task Force will determine whether FDIC participation is appropriate. In the event the two representatives cannot agree, the Chairman of the FDIC and the principal of the relevant Agency (or the Governor that is a member of the FFIEC in the case of the FRB) will resolve the dispute.



  • APPENDIX III

    CORPORATION COMMENTS

    FDIC, Federal Desposit Insurance, 550 17th Street, NW, Washington D.C., 20429, Division of Supervision and Consumer Protection.

    DATE: September 6, 2007
     
    MEMORANDUM TO:Russell A. Rau
    Assistant Inspector General for Audits
     
    FROM:Sandra L. Thompson [Electronically produced version; original signed by Deputy Director John M. Lane]
    Director
     
    SUBJECT:Response to Draft Report Entitled: FDICís Dedicated Examiner Program for Large Insured Depository Institutions (2007-004)
     

    The FDIC Division of Supervision and Consumer Protection (DSC) is pleased that you found our Dedicated Examiner Program and Large Insured Depository Institution Program to be successful in assessing risk to the Deposit Insurance Fund. Access to insured depository institution data is critical to the FDICís mission, and we are believe these Programs have proven to be an effective tool in better understanding and assessing risk, particularly with regard to institutions that are not directly supervised by the FDIC. We will continue to assess means for improving the efficiency and overall effectiveness of these Programs going forward.
























    Footnotes
    1 Although LIDI companies are primarily organized as holding companies, the LIDI program also includes unit banks and thrifts that meet the size thresholds and includes FDIC-supervised and non-FDIC supervised financial institutions.

    2 The 25 institutions included in this program represent all of the LIDIs that are directly supervised by the FDIC.

    3 CM responsibilities include, but are not limited to:
    • serving as the primary point of contact for banks assigned to a DSC regional office,
    • providing input and guidance to regional office management regarding supervisory plans for those banks,
    • completing all reporting requirements for LIDIs assigned to the regional office,
    • reviewing and processing applications, and
    • managing issues for DE Program institutions other than those related to risk to the DIF.
    DEs do not perform typical CM responsibilities, including those associated with the review and processing of applications for deposit insurance and reports of examination or drafting routine correspondence.

    4 The FDIC is authorized under 12 United States Code (U.S.C.) ß1820(b)(3) to conduct ďSpecial ExaminationsĒ of insured depository institutions that represent a heightened risk to the DIF when the FDIC Board of Directors deems such an examination necessary to determine the condition of the insured depository institutions for insurance purposes.

    5 Each financial institution is assigned a composite rating based on these component factors: the adequacy of Capital, the quality of Assets, the capability of Management, the quality and level of Earnings, the adequacy of Liquidity, and the Sensitivity to market risk (CAMELS). Composite ratings are assigned based on a 1 to 5 numerical scale where a 1 indicates the highest rating, while a 5 indicates the highest degree of supervisory concern.

    6 The RAC was established in 2003 to provide information about current and emerging risk issues and to coordinate the FDICís risk management activities from DSC, DIR, and DRR. The RAC is staffed with employees on detail from DSC, DIR, and DRR and uses an interdivisional approach to monitor and analyze risks to the DIF and to the banking system. The RAC is directed by the National Risk Committee (NRC), which was also established in 2003. The NRC consists of senior FDIC managers and is chaired by the FDICís Deputy to the Chairman and Chief Operating Officer.

    7 On a quarterly basis, the DEs analyze the DE Program banksí risks to the DIF and assign a rating to each bank in the DE Program based on information obtained from the FBA, the financial institution, and publicly-available data. FDIC offsite ratings are based on the DEís review of fundamental areas, including the consolidated financial condition and trends and the assessment of the banking companyís risk management. The offsite ratings are assigned on a scale from ďAĒ to ďEĒ, with ďAĒ indicating a low level of concern regarding risk to the DIF and ďEĒ indicating a serious concern regarding risk to the DIF. The risks are based on probable characteristics that may apply to the institutions.

    8 The overall risk profile indicator (a risk rating) is assigned to DE Program banks to characterize the expected change in the banking companyís aggregate risk profile over the next 12 months. The risk profile is described as increasing, stable, or decreasing and characterizes expected risk movement rather than anticipated changes in the offsite rating.

    9 The FBAs develop annual supervisory strategies for their DE Program institutions, outlining the supervisory focus for the institution, including areas of bank operations that the FBA will target for review and examine during the year. Areas of bank operations may include, but are not limited to, allowance for loan and lease losses, Bank Secrecy Act/Anti-Money Laundering compliance, Basel II implementation, credit derivatives, credit risk ratings, hedge funds, and shared national credits.

    10 The objective of Basel II, International Convergence of Capital Measurement and Capital Standards: A Revised Framework, is to more closely align regulatory capital with risk in large or multinational banks. U.S. regulators expect that about 11 banking organizations, which account for about 50 percent of U.S. banking assets, will be required to implement Basel II.

    11 Section 9 is codified to 12 United States Code (U.S.C.) ß1819(a) and Section 10 is codified to 12 U.S.C. ß1820(b). Notes to the Federal Deposit Insurance Improvement Act require improved examinations (12 U.S.C. 3355), but there is no specific requirement for the LIDI or DE Programs.
    Last updated 9/27/2007