Fred Carns Director, International Affairs Federal Deposit Insurance Corporation

1. International Association of Deposit InsurersAsia Regional Committee Meeting and International ConferenceMacro Policy on Deposit Insurance OperationsThe Risk Minimizer Model Fred CarnsDirector, International AffairsFederal Deposit Insurance Corporation International Conference on Enhancing the Effectiveness of Deposit Insurance Operations Hanoi, Vietnam March 2007

2. 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 Macro Policy on Deposit Insurance Operations ProgramOutline International Conference on Enhancing the Effectiveness of Deposit Insurance OperationsHanoi, Vietnam, March 2007

3. Typical Deposit Insurance Arrangements Pay Box-Plus Systems:Typically same as pay box, plus also reduce resolutions costs by risk monitoring, participating in resolutions and receivership activities International Conference on Enhancing the Effectiveness of Deposit Insurance OperationsHanoi, Vietnam, March 2007

4. Deposit Insurance Agencies Mandates and Powers Source: IMF Working Paper – The Design and Implementation of Deposit Insurance Systems, 2006 International Conference on Enhancing the Effectiveness of Deposit Insurance OperationsHanoi, Vietnam, March 2007

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

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

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

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

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

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

11. FDIC – Experience and Practical Considerations Practices that minimize losses 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. 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. International Conference on Enhancing the Effectiveness of Deposit Insurance OperationsHanoi, Vietnam, March 2007

12. FDIC – Experience and Practical Considerations Practices that Minimize Losses 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. International Conference on Enhancing the Effectiveness of Deposit Insurance OperationsHanoi, Vietnam, March 2007

13. Practices that Minimize Losses Special Receivership Powers FDIC – Experience and Practical Considerations 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. 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. International Conference on Enhancing the Effectiveness of Deposit Insurance OperationsHanoi, Vietnam, March 2007

14. Practices that Minimize Losses Special Receivership Powers FDIC – Experience and Practical Considerations Special Defenses Federal 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. 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. International Conference on Enhancing the Effectiveness of Deposit Insurance OperationsHanoi, Vietnam, March 2007

15. FDIC – Experience and Practical Considerations Risk Assessments An interagency effort Total Banks and Thrifts 8,861 11.8 Trillion Total FDIC-Supervised 5,220 2.2 Trillion Total OCC-Supervised 1,715 6.8 Trillion Total FRB –Supervised 902 1.4 Trillion Total OTS – Supervised 844 1.5 Trillion Division of labor without duplication Examination Sharing Arrangements As insurer, FDIC has access to examination records produced by other federal and state banking agencies • Critical for deposit insurance pricing Examination ratings and capital positions determined by agencies are used to price deposit insurance premiums and gauge adequacy of deposit insurance fund. International Conference on Enhancing the Effectiveness of Deposit Insurance OperationsHanoi, Vietnam, March 2007

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

17. Promoting Uniform Standards: The Important Role ofThe 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 International Conference on Enhancing the Effectiveness of Deposit Insurance OperationsHanoi, Vietnam, March 2007

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