Appendix

• Program Resource Requirements
• The FDIC's Planning Process
• Program Evaluation
• Interagency Relationships
• External Factors

The FDIC's Planning Process
The FDIC has a long-range strategic plan that identifies strategic goals and objectives for its three major programs: Insurance, Supervision and Receivership Management. The plan is reviewed and updated every three years. The Corporation also develops Annual Performance Plans that identify annual goals, indicators and targets for each strategic objective.

In developing its Strategic and Annual Performance Plans, the FDIC uses an integrated planning process in which guidance and direction are provided by senior management and plans and budgets are developed with input from program personnel. Business requirements, industry information, human capital, technology and financial data are considered in preparing annual performance plans and budgets. Factors influencing the FDIC’s plans include changes in the financial services industry, program evaluations and other management studies and prior period performance.

The FDIC’s strategic goals and objectives and its annual performance goals, indicators and targets are communicated to its employees via the FDIC’s internal website and through internal communication mechanisms, such as newsletters and staff meetings. The Corporation also establishes on an annual basis additional “stretch” objectives that further challenge FDIC employees to pursue strategic initiatives and results. FDIC pay and award/recognition programs are structured to reward employee contributions to the achievement of the Corporation’s annual objectives.

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Program Evaluation
Program evaluations are important tools and potentially critical sources of information for ensuring that goals are reasonable, strategies for achieving goals are effective, and corrective actions are taken, as necessary, in program operations. Evaluations are also a mechanism to determine whether a program has clearly defined goals and well-developed measures of program outcomes. Results of program evaluations are included in the FDIC Annual Report and are used to revise future annual performance plans and division- and office-level operating plans. Program evaluation results are also used as input to the strategic and annual performance plans submitted to Congress.

The FDIC’s Office of Enterprise Risk Management (OERM) has primary responsibility for the Corporations program evaluation function. It carries out this role in several ways:

• It performs studies and evaluations of selected programs, making recommendations to improve their operational effectiveness and monitoring the implementation of accepted recommendations.

• It reviews the results of program studies and evaluations undertaken by other independent organizations, such as the GAO and the FDIC Office of the Inspector General (OIG), to identify key recommendations to improve the operational effectiveness of these programs and monitor the implementation of accepted recommendations.

• It reviews the results of program studies and evaluation studies undertaken by independent internal review units within selected FDIC divisions to identify key recommendations to improve the operational effectiveness of these programs and monitor the implementation of accepted recommendations. In some cases, it may also partner with such units to conduct joint program evaluations.

Program evaluations conducted by OERM are often interdivisional, collaborative efforts involving management and staff from the affected program(s) in order to ensure that the study and resulting recommendations reflect a full understanding of the program being evaluated.

Program evaluation activities in 2008 will focus on key corporate issues, including addressing privacy issues, shared folder access and security, and asset management. Of particular importance in 2008 is work on the upgrade of FDIC’s New Financial Environment, an integrated, state-of-the-art financial management system.

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Interagency Relationships

The FDIC has very productive working relationships with agencies at the state, federal and international levels. It leverages those relationships to achieve the goals outlined in this plan and to promote confidence in the U.S. banking system. Listed below are examples of the many important relationships that the FDIC has built with other agencies, seeking to promote strength, stability and confidence in the financial services industry.

Other Financial Institution Regulatory Agencies
The FDIC works closely with other federal financial institution regulators—principally the Board of Governors of the Federal Reserve System (FRB), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS)—to address issues and programs that transcend the jurisdiction of each agency. Regulations are in many cases interagency efforts, and the majority of supervisory policies are written on an interagency basis. Examples include policies addressing subprime lending, capital adequacy, fraud information-sharing and off-site monitoring systems. In addition, the Comptroller of the Currency and the OTS Director are members of the FDIC Board of Directors, which facilitates crosscutting policy development and regulatory practices among the FDIC, the OCC and the OTS.

The FDIC, the FRB, the OCC and the OTS also work closely with the National Credit Union Administration (NCUA), which supervises and insures credit unions; the Conference of State Bank Supervisors (CSBS), which represents the state regulatory authorities; and individual state regulatory agencies.

The Federal Financial Institutions Examination Council
The Federal Financial Institutions Examination Council (FFIEC) is a formal interagency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. The member agencies of the FFIEC are the FDIC, FRB, OTS, OCC and National Credit Union Administration (NCUA). As the result of legislation in 2006, the Chair of the FFIEC State Liaison Committee now serves as a sixth member of the FFIEC. The State Liaison Committee is composed of five representatives of state supervisory agencies. To foster interagency cooperation, the FFIEC has established interagency task forces on consumer compliance, examiner education, information sharing, regulatory reports, surveillance systems and supervision. The FFIEC has statutory responsibilities to facilitate public access to data that depository institutions must disclose under the Home Mortgage Disclosure Act of 1975 (HMDA) and the aggregation of annual HMDA data for each metropolitan statistical area. The FFIEC publishes handbooks, catalogues and databases that provide uniform guidance and information to promote a consistent examination process among the agencies.

State Banking Departments
The FDIC works closely with state banking departments as well as the Conference of State Bank Supervisors to provide greater efficiencies in examining financial institutions and promote a uniform approach to the examination process. In most states, alternating examination programs reduce the number of examinations at financial institutions, thereby reducing regulatory burden. Joint examinations at larger financial institutions also maximize state and FDIC resources when examining large, complex and problem FDIC-supervised financial institutions.

Dedicated Examiner Program
The FDIC has six “dedicated examiners” assigned to the six largest insured financial organizations. Dedicated examiners work closely with the organizations’ primary federal regulator and use supervisory information, internal organization information, and external sources of information to evaluate risks and assign an FDIC risk rating for each of these six organizations.

Basel Committee on Banking Supervision
The FDIC participates on the Basel Committee on Banking Supervision, a forum for international cooperation on matters relating to financial institution supervision, and on numerous subcommittees of the Committee. The Basel Committee on Banking Supervision aims to improve the consistency of capital regulations internationally, make regulatory capital more risk sensitive and promote enhanced risk-management practices among large internationally active banking organizations. The Basel II Capital Accord is an effort by international banking supervisors to update the original international bank capital accord (Basel I), which has been in effect since 1988.

The FDIC has also established working relationships with international regulatory authorities to ensure effective supervision of domestic insured institutions that are wholly owned by foreign entities, which includes coordination of efforts to implement the Basel II Capital Accord.

BCBS - International Liaison Group
In addition to the FDIC’s membership on the Basel Committee for Banking Supervision (BCBS), the FDIC is a member of a BCBS subcommittee called the International Liaison Group (ILG). The ILG provides a forum for deepening engagement and cooperation with supervisors from around the world on a broad range of issues involving banking and supervision. In addition to the United States, the ILG has senior representatives from seven other member countries including France, Germany, Italy, Japan, the Netherlands, Spain, and the United Kingdom.

Interagency Country Exposure Risk Committee
The Interagency Country Exposure Review Committee (ICERC) was established by the FDIC, the FRB and the OCC to ensure consistent treatment of the transfer risk associated with banks’ foreign exposures to both public and private sector entities. The ICERC assesses the degree of transfer risk inherent in cross-border and cross-currency exposures of U.S. banks, assigns ratings based on its risk assessment and publishes annual reports of these risks by country.

International Association of Deposit Insurers
The FDIC plays a leadership role in the International Association of Deposit Insurers (IADI) and participates in associated activities. IADI contributes to the stability of the financial system by promoting international cooperation in the field of deposit insurance. Through IADI, the FDIC focuses its efforts to build strong bilateral and multilateral relationships with foreign regulators and insurers, U.S. government entities and international organizations. The FDIC also provides technical assistance and conducts outreach activities with foreign entities to help in the development and maintenance of sound banking and deposit insurance systems. The FDIC’s Vice Chairman currently serves as President of IADI.

European Forum of Deposit Insurers
The FDIC shares mutual interests with the European Forum of Deposit Insurers (EFDI) and supports the organization’s mission to contribute to the stability of financial systems by promoting European cooperation in the field of deposit insurance. As such, the FDIC contributes its expertise and experience in supervision and deposit insurance and openly shares this expertise through discussions and exchanges on issues that are of mutual interest and concern (e.g., cross-boarder issues, bilateral and multilateral relations and financial customers’ protections).

Association of Supervisors of Banks of the Americas
The FDIC, as Director of the North American Group, exercises a leadership role in the Association of Supervisors of Banks of the Americas (ASBA) and actively participates in the organization’s activities. ASBA develops, disseminates and promotes sound banking supervisory practices throughout the Americas in line with international standards. The FDIC supports the organization’s mission and activities by actively contributing to ASBA’s research and guidance initiatives and its education and training services.

Shared National Credit Program
The FDIC participates with the other federal financial institution regulatory agencies in the Shared National Credit Program, an interagency effort to perform a uniform credit review of financial institution loans that exceed $20 million and are shared by three or more financial institutions. The results of these reviews are used to identify trends in industry sectors and banks’ credit risk management practices. These trends are typically published in September of each year to aid the industry in understanding economic and credit risk-management trends.

Joint Agency Task Force on Discrimination in Lending
The FDIC participates on the Joint Agency Task Force on Discrimination in Lending with all five of the federal financial institution regulators (FDIC, FRB, OCC, OTS and NCUA) along with the U.S. Department of Housing and Urban Development, the Office of Federal Housing Enterprise Oversight, the U.S. Department of Justice (DOJ), the Federal Housing Finance Board and the Federal Trade Commission. The agencies exchange information about fair lending issues, examination and investigation techniques, and interpretations of the statute and regulations and case precedents.

European Forum of Deposit Insurers
The FDIC shares mutual interests with the European Forum of Deposit Insurers (EFDI) and supports the organization’s mission to contribute to the stability of financial systems by promoting European cooperation in the field of deposit insurance. As such, the FDIC contributes its expertise and experience in supervision and deposit insurance and openly shares this expertise through discussions and exchanges on issues that are of mutual interest and concern (e.g., cross-boarder issues, bilateral and multilateral relations and financial customers’ protections).

Bank Secrecy Act, Anti-Money Laundering, Counter-Financing of Terrorism, and Anti-Fraud Working Groups
The FDIC works with the Department of Homeland Security and the Office of Cyberspace Security through the Finance and Banking Information Infrastructure Committee (FBIIC) to improve the reliability and security of the financial industry’s infrastructure. Other members of FBIIC include the Commodity Futures Trading Commission, FRB, NCUA, OCC, OTS, the Securities and Exchange Commission, the U.S. Department of the Treasury and the National Association of Insurance Commissioners.

The FDIC participates in several other interagency groups, described below, to assist in efforts to combat fraud and money laundering and to implement the USA PATRIOT Act:

• The Bank Secrecy Act Advisory Group: a public/private partnership of agencies and organizations that meet to discuss strategies and industry efforts to address money laundering controls.
• The National Secrecy Act Advisory Group: a public/private partnership of agencies and organizations that meet to discuss strategies and industry efforts to curb money laundering.
• FFIEC BSA/AML Working Group: composed of the federal banking agencies, FinCEN and the CSBS, to enhance coordination of BSA/AML training and awareness and to improve communication between the agencies. The BSA/AML working group builds on existing efforts and works to strengthen the activities that are already being pursued by other formal and information interagency groups providing oversight of various BSA/AML-related matters.
• The National Bank Fraud Working Group: sponsored by the Department of Justice (DOJ).
• The Check Fraud Working Group (a subcommittee of the National Bank Fraud Working Group): federal banking agencies, DOJ, Federal Bureau of Investigation (FBI), FinCEN, Internal Revenue Service, Bureau of Public Debt and U.S. Postal Service, which is co-chaired by the FDIC and the FBI.
• The Cyber Fraud Working Group (a subcommittee of the National Bank Fraud Working Group): composed of the federal banking agencies, DOJ, FBI, FinCEN, Internal Revenue Service, and Bureau of Public Debt.
• The National Money Laundering Strategy Steering Committee: chaired by DOJ and the Treasury Department.
• Terrorist Finance Working Group: sponsored by the State Department to assist in the AML training effort internationally and assist in the assessment of foreign countries’ financial structures for potential money laundering and terrorist financing vulnerabilities.
• Other working groups: sponsored by Treasury to develop USA PATRIOT Act rules, interpretive guidance and other relevant BSA materials that are applicable to insured financial institutions.

Money Services Business Working Group
The FDIC is working with FinCEN, the Money Transmitters Regulators Association, the CSBS and the Internal Revenue Service to address the discontinuance of banking services to money services businesses (MSBs). The group submitted a survey to all states and U.S. territories to better understand state licensing and AML requirements.

Financial Literacy and Education Commission
The FDIC is a member of the Financial Literacy and Education Commission (FLEC), as mandated by the Fair and Accurate Credit Transactions (FACT) Act of 2003 established. The FDIC actively supports the FLECs efforts to improve financial literacy in America by assigning experienced staff to work in the Office of Financial Education, providing leadership in the development and maintenance of the My Money hotline and toolkits and participating in on-going meetings that address issues affecting the promotion of financial literacy and education.

Alliance for Economic Inclusion
The FDIC established and leads the Alliance for Economic Inclusion (AEI), a national initiative to bring all unbanked and underserved populations into the financial mainstream. The AEI is comprised of broad-based coalitions of financial institutions, community-based organizations and other partners in nine markets across the country. The coalitions work to increase banking services for underserved consumers in low and moderate income neighborhoods, minority and immigrant communities, and rural areas. These expanded services include savings accounts, affordable remittance products, targeted financial education programs, short-term loans, alternative delivery channels and other asset-building programs.

Government Performance and Results Act Financial Institutions Regulatory Working Group
In support of the Government Performance and Results Act (GPRA), the interagency Financial Institutions Regulatory Working Group, comprising all five federal financial institution regulators (OTS, FRB, OCC, NCUA and FDIC), was formed in October 1997. The Office of Federal Housing Enterprise Oversight, which supervises Freddie Mac and Fannie Mae, and the Treasury Department also participate. This group works to identify the general goals and objectives that cross these organizations and their programs and activities, as well as other general GPRA requirements.

Federal Trade Commission, National Association of Insurance Commissioners and the Securities and Exchange Commission
In 1999, the Gramm-Leach-Bliley Act permitted insured financial institutions to expand the products they offer to include insurance and securities. Included in this Act are increased security requirements and disclosures to protect consumer privacy. The FDIC and other FFIEC agencies coordinate with the Federal Trade Commission, National Association Insurance Commissioners and SEC to develop industry research and guidelines relating to these products.

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External Factors: The Economy and Its Impact on the Banking Industry and the FDIC
Economic conditions at the national, regional and local levels affect banking strategies and the industry’s overall performance. Economic conditions also affect the performance of individual businesses, which has a significant effect on loan growth and credit exposure for the banking industry. Overall business conditions and macroeconomic policies are key determinants of inflation, domestic interest rates, and the exchange value of the dollar and equity market valuations, which in turn influences lending, funding and off-balance sheet activities of insured depository institutions.

Economic factors also directly influence the financial performance of FDIC-insured institutions. Adverse economic conditions, such as a national or regional economic downturn, may raise the risk profile of the banking industry or select groups of insured institutions. An economic downturn may accelerate statutory examination frequencies and may even increase the incidence of failures, resolution costs and the pace at which the FDIC markets assets and terminates receiverships. Adverse economic scenarios also may divert FDIC staff from other activities to address these or other operational concerns.

The U.S. economy shows signs of weakness in 2008.
The housing market began to show signs of weakness more than a year ago. Declining residential construction activity has reduced annualized economic growth by about one percentage point each quarter since the middle of 2006. Although the economy thus far has been able to weather the weakness in regional housing markets, concerns about the economy have intensified with the onset of financial market uncertainty related to mortgage-loan securitizations.

Since mid-2007, the rating agencies have downgraded many issues of residential mortgage-backed securities (MBS) and collateralized debt obligations backed by subprime mortgages. This has led to increased uncertainty and decreased liquidity in the financial markets, and has seriously disrupted the availability of mortgage and other types of credit. In response, the Federal Reserve’s Federal Open Market Committee (FOMC) lowered the federal funds rate by a full percentage point from 5.25 percent to 4.25 percent during 2007 and lowered the discount rate from 6.25 percent to 4.75 percent. The FOMC also provided additional liquidity to financial markets through open-market operations and new lending programs. Although the Treasury yield curve generally has resumed its normal upward-sloping shape, the target federal funds rate remained above yields of almost all longer-term maturities at year-end 2007.

In general, corporate balance sheets were strong in 2007. However, consumer spending appears vulnerable. The 2007 holiday shopping season was widely reported to be the weakest in five years, and inflation-adjusted retail sales actually declined in December from a year earlier. High food and energy prices have reduced disposable income, and both core and headline inflation have been at or above the top of the Federal Reserve’s unofficial comfort zone lately. Moreover, many consumers have had to turn to high-interest revolving debt because their ability to refinance their homes has diminished sharply.

After years of increasing current account deficits, international trade is once again contributing to U.S. economic growth. The weak dollar makes American exports more competitive abroad and foreign imports less competitive here. Expected strong growth in emerging economies, especially in Asia, also should result in increased demand for U.S. goods and services.

Banking industry performance has been hampered by the economic slowdown after years of record profits.
Earnings in the third quarter of 2007 fell 24.7 percent from the year earlier, to $28.7 billion, which was the lowest level for industry earnings since the fourth quarter of 2002 (fourth quarter 2007 industry results have not yet been published). The industry’s return on assets (ROA) in the third quarter of 2007 was 0.92 percent, the lowest ROA since the fourth quarter of 1992. The decline in earnings was mostly attributable to an increase in loan-loss provisions related to mortgages and a decline in trading revenues. Almost half of all institutions (49 percent) reported lower quarterly earnings compared to the third quarter 2006, although just ten institutions accounted for more than half of the decline in industry earnings. Several of the ten institutions have announced that they will report additional losses in the fourth quarter of 2007 due to their exposures to mortgages, leveraged loans, and structured finance products.

Non-current loans and leases increased by $16.0 billion from a year earlier. More than half of the increase consisted of residential real estate loans. Increases in non-current loans also occurred in real estate construction and development loans (up $3.6 billion, or 45.5 percent), real estate loans secured by non-farm nonresidential properties (up $918 million, or 15.4 percent), and commercial and industrial (C&I) loans (up $833 million, or 10.4 percent).

Loan-loss provisions in the third quarter of 2007 totaled $16.6 billion, more than double the $7.5 billion insured institutions set aside for credit losses in third quarter 2006 and the industry’s largest quarterly loan-loss provision since the second quarter of 1987. Total net charge-offs were up $3.6 billion (49.9 percent) from a year ago. The largest increases occurred in C&I loans, consumer loans (other than credit cards), and residential mortgage loans.

Although loan-loss reserves increased at a rapid pace, they were outpaced by the increase in non-current loans. This led to a decline in the industry’s “coverage ratio” during the quarter from $1.21 to $1.05 in reserves for every dollar of non-current loans—the lowest level for the coverage ratio since third quarter 1993.

However, the banking industry faces these challenges after several years of record profits and historically strong capital levels. More than 99 percent of all FDIC-insured institutions are well capitalized according to the regulatory capital definition for Prompt Corrective Action.

One bright spot for the industry in the third quarter of 2007 was an increase in net interest income. A sustained inverted-to-flat yield curve environment had placed downward pressure on net interest margins (NIMs) at FDIC-insured institutions for more than a year. By the end of 2007, short-term interest rates had again fallen below long-term rates. However, many smaller institutions are still struggling to increase their NIMs, which form a greater percentage of their revenue than for large institutions. Banks and thrifts with assets less than $100 million reported lower profitability than the overall industry. The third quarter 2007 ROA reported by these institutions, 0.80 percent, decreased from 1.02 percent in the third quarter of 2006 primarily because of narrowing NIMs and higher overhead expenses. These institutions represent 41 percent of FDIC-insured institutions but less than 2 percent of total industry assets.

As of December 31, 2007, there were 76⁴ institutions on the Problem Institution List with a combined $22.2 billion in assets. Both the number and assets of problem institutions remained low by historical standards, but the number of problem institutions had increased for four consecutive quarters. If non-current loans and net charge-offs on loans continue to increase as earnings performance declines, the number of problem institutions may increase further.

The FDIC Deposit Insurance Fund is well placed to deal with potential difficulties in the industry in 2008. At the end of third quarter 2007, the DIF stood at $51.8 billion for a reserve ratio of 1.22. This, together with the capital most FDIC-insured institutions accumulated during the middle of the decade, combine to provide confidence to insured depositors.

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⁴ As published in the December 2007 FDIC Quarterly Banking Profile.