1. International Conference on Enhancing the Effectiveness of Deposit Insurance Operations Hanoi, Vietnam March 2007 1 Fred Carns Director, International Affairs Federal Deposit Insurance Corporation International Association of Deposit Insurers Asia Regional Committee Meeting and International Conference Macro Policy on Deposit Insurance Operations The Risk Minimizer Model

2. 2 International Conference on Enhancing the Effectiveness of Deposit Insurance Operations Hanoi, Vietnam, March 2007 Macro Policy on Deposit Insurance Operations Program Outline The Risk Minimizer Model Comparison with other deposit insurance approaches Mandates and public policy objectives Roles and responsibilities Powers and authorities FDIC – 75 Years of Challenges and Experience Overview of US Banking and Regulatory Systems Key Challenges to FDIC as Risk Minimizer

3. 3 International Conference on Enhancing the Effectiveness of Deposit Insurance Operations Hanoi, Vietnam, March 2007 Typical Deposit Insurance Arrangements Risk Minimizer Systems: Typically same as Pay Box – Plus, but also responsible for guarding entry into system, supervision, enforcement, prompt corrective actions, and termination of deposit insurance Pay Box systems: typically limited to the role of collecting premiums, managing insurance fund, and reimbursing insured depositors Pay Box-Plus Systems: Typically same as pay box, plus also reduce resolutions costs by risk monitoring, participating in resolutions and receivership activities

4. 4 International Conference on Enhancing the Effectiveness of Deposit Insurance Operations Hanoi, Vietnam, March 2007 Deposit Insurance Agencies Mandates and Powers Mandates and Powers of Deposit Insurance Agencies Total Number of Observations Share (In Percent) 2004 DIAs having broad responsibilities468455 DIAs making the decision to intervene in banks188322 DIAs with supervisory powers168120 Authority to determine premium rates Deposit Insurance Agency407752 Central Bank97712 Authority to act as liquidator and/or receiver286642 Active participation in failure resolution336948 Legal power to revoke deposit insurance Fully on its own308137 After approval/intervention by another agency5816 Right to take legal action against bank officials408448 Source: IMF Working Paper – The Design and Implementation of Deposit Insurance Systems, 2006

5. 5 International Conference on Enhancing the Effectiveness of Deposit Insurance Operations Hanoi, Vietnam, March 2007 Risk Minimizers Pay Box-PlusPay Box Key Similarities and Differences in Typical Deposit Insurance Arrangements

6. 6 International Conference on Enhancing the Effectiveness of Deposit Insurance Operations Hanoi, Vietnam, March 2007 Risk Minimizers Mandates and Public Policy Objectives Public Policy Objectives Protect Insured Depositors Promote Public Confidence in Banking System Contribute to Financial Stability Most Typical Mandates and Public Policy Objectives Other Country-specific Mandates and Public Policy Objectives also Include Promote healthy banking practices Serve as Receiver and Liquidator Minimize Loss Exposure to Deposit Insurer Assist Distressed Banks Supervise and Regulate Banking Sector

7. 7 International Conference on Enhancing the Effectiveness of Deposit Insurance Operations Hanoi, Vietnam, March 2007 Risk Minimizers Powers and Authorities Enter into contracts and establish deposit insurance regulations Make funding decisions and determining funding sources Operational Autonomy Direct, adequate, and timely access to depositor records Direct access to insured institutions’ records and information Accessing Information

8. 8 International Conference on Enhancing the Effectiveness of Deposit Insurance Operations Hanoi, Vietnam, March 2007 Risk Minimizers Powers and Authorities Conduct independent onsite examinations and offsite surveillance Broad powers to enforce compliance and impose sanctions Minimize Risk Determine resolution and receivership strategies Manage claims and optimize recoveries Minimize Losses Take prompt corrective actions and intervene early

9. 9 International Conference on Enhancing the Effectiveness of Deposit Insurance Operations Hanoi, Vietnam, March 2007 Risk Minimizers Roles and Responsibilities Guard entry into deposit insurance system Develop and enforce admission criteria; limit risk-taking, coordinate with licensing authority Fund the deposit insurance system Monitor fund adequacy and liquidity; manage premiums system; establish back-up lines Reimburse depositors Reimburse promptly; communicate clear reimbursement procedures and priority of claims Monitor and manage risk Access to information; regulatory reporting; onsite examinations, offsite surveillance; interagency coordination and information sharing; back-up exam authority Key Roles Key Responsibilities Intervene and act early Prompt corrective action; enforcement, sanctions Handle bank failures Establish broad receivership alternatives; exercise special receivership powers; least-cost requirement

10. 10 International Conference on Enhancing the Effectiveness of Deposit Insurance Operations Hanoi, Vietnam, March 2007 FDIC – Experience and Practical Considerations Overview of U.S. Banking System Key Functions of the FDIC Large, diverse and complex Well Regulated Financially Sound 8,861 insured institutions; US $11.8 Trillion in assets; US $4.2 Trillion in insured deposits; Median bank size US $140 million; largest bank – US $1. Trillion in assets Four Federal and 50 State supervisors ROA: 1.21%; ROE: 11.58%; NIM: 3.20%; Equity/TA: 10.52% Data as of December 31, 2006 Deposit Insurance Bank Supervision Resolutions and Receiverships Deposit insurance reform; revised risk-related premium system; US $50.1 billion in reserves Primary federal supervisor for 5,220 banks; examined every 12 – 18 months; 7,400 risk management and specialty exams conducted in 2006 February 2007 - First bank failure in almost three years; claims modernization project; large bank contingency planning

11. 11 International Conference on Enhancing the Effectiveness of Deposit Insurance Operations Hanoi, Vietnam, March 2007 Practices that minimize losses Special receivership powers granted by US Congress to the FDIC that expedite the liquidation process for banks and thrifts in order to maintain confidence in the nation’s banking system and to maximize the cost-effectiveness of the receivership process to preserve a strong insurance fund. Prompt Corrective Action (PCA) is intended to minimize the cost of resolving bank failures and limit regulatory forbearance by requiring more timely closure of failing institutions and earlier intervention in problem banks. FDIC – Experience and Practical Considerations

12. 12 International Conference on Enhancing the Effectiveness of Deposit Insurance Operations Hanoi, Vietnam, March 2007 Prompt Corrective Action (PCA) PCA requires supervisory intervention at an early stage as indicated by a bank’s capital position. Supervisory actions escalate in proportion to the bank’s risk level. Some of these actions are mandatory, while others are discretionary. A key point is that supervisors are required to intervene while the bank is believed to have positive economic capital, which lessens the cost to the insurer. FDIC – Experience and Practical Considerations Practices that Minimize Losses

13. 13 International Conference on Enhancing the Effectiveness of Deposit Insurance Operations Hanoi, Vietnam, March 2007 Placing Litigation on Hold Because the receiver may need time to assess and evaluate the facts of each case to decide whether and how to proceed, the law permits the receiver to request a court to put on hold, or “stay,” the litigation. That power also extends to litigation filed after the institution’s failure. The receiver must request the stay for it to become effective. The courts, however, cannot decline to issue the stay once the receiver has filed its request. Practices that Minimize Losses Special Receivership Powers Repudiation of Contracts A receiver may repudiate or disaffirm a contract of the depository institution if the receiver (1) deems it burdensome, and (2) finds that repudiation would promote the orderly administration of the receivership estate. FDIC – Experience and Practical Considerations

14. 14 International Conference on Enhancing the Effectiveness of Deposit Insurance Operations Hanoi, Vietnam, March 2007 Special DefensesFederal statutes and court decisions provide certain “special defenses” to the FDIC in its role as receiver to allow for the efficient resolution of a failed institution’s affairs. Improperly documented agreements are not binding on the receiver. Congress prohibits courts from issuing injunctions or similar equitable relief to restrain the receiver from completing its resolution and liquidation activities. Practices that Minimize Losses Special Receivership Powers Avoiding Fraudulent ConveyancesUnder federal banking law, a receiver may avoid a security interest in a property, even if perfected, in which the security interest is taken in contemplation of the institution’s insolvency or with the intent to hinder, delay, or defraud the institution or its creditors. The receiver may avoid any transfers made by obligors within five years of the appointment of the receiver. Those rights are superior to any rights of a trustee or any other party. FDIC – Experience and Practical Considerations

15. 15 International Conference on Enhancing the Effectiveness of Deposit Insurance Operations Hanoi, Vietnam, March 2007 Risk Assessments An interagency effort Division of labor without duplication Examination Sharing Arrangements Critical for deposit insurance pricing FDIC – Experience and Practical Considerations Total Banks and Thrifts8,86111.8 Trillion Total FDIC-Supervised5,2202.2 Trillion Total OCC-Supervised1,7156.8 Trillion Total FRB –Supervised 9021.4 Trillion Total OTS – Supervised 8441.5 Trillion As insurer, FDIC has access to examination records produced by other federal and state banking agencies Examination ratings and capital positions determined by agencies are used to price deposit insurance premiums and gauge adequacy of deposit insurance fund.

16. 16 International Conference on Enhancing the Effectiveness of Deposit Insurance Operations Hanoi, Vietnam, March 2007 Interagency Cooperation, Coordination, Communication FDIC – Experience and Practical Considerations Interagency Training and Policy Development Formal and Informal Interagency Information Sharing Arrangements Interagency macro-risk assessments to identify risks to the deposit insurance fund Large Bank Supervisio n and Dedicated Examiner Programs Coordinati on with functional regulators Coordinated supervision of Foreign Banking Organizations Shared National Credit Program Interagenc y Country Exposure Review Committee Coordination with State Banking Authorities via Conference of State Bank Supervisors Central Data Repository: reduces burden and makes regulatory reporting efficient FDIC Exam Back-Up authority encourages much collaboration Interagency approach to combating money laundering and terrorist financing

17. 17 International Conference on Enhancing the Effectiveness of Deposit Insurance Operations Hanoi, Vietnam, March 2007 Promoting Uniform Standards: The Important Role of The Federal Financial Institutions Examination Council The Federal Financial Institutions Examination Council (FFIEC) comprises Federal and State banking agencies, and credit union regulators. It promotes uniform principles, standards, and reporting:  The Financial Institution Rating System (CAMELS)  Definitions for classifying assets  Financial reports (Call Reports)  Examiner training

18. 18 International Conference on Enhancing the Effectiveness of Deposit Insurance Operations Hanoi, Vietnam, March 2007 Questions?