Detailed Information on the
The Deposit Insurance Fund Assessment

Measure: Maintain the DIF's actual reserve ratio at or above the designated reserve ratio, which currently equals 1.25%.

Explanation:The actual reserve ratio is the ratio of insurance fund assets to the value of insured deposits. This ratio measures the DIF's ability to pay depositors for insured losses. Based on historical experience, in November 2006 the FDIC Board determined that a target ratio of 1.25% provided adequate protection for the DIF. This target ratio, referred to as the "designated reserve ratio," was officially adopted as the annual target for 2007 and 2008.

Measure: Number of business days after the failure of an insured depository institution that depositors have access to insured funds, either through transfer of deposits to the successor insured depository institution, or a direct payout to the insured depositors.

Explanation:The goal is one business day if the failure is on a Friday and two business days for any other day of the week. This measure determines the efficacy of FDIC's resolution and receivership functions and helps to ensure that the transition is seamless following a failure and that depositors are able to have access to their funds with minimal disruption.

Measure: No depositor loses money held in an FDIC-insured deposit, subject to the relevant coverage limits.

Explanation:

Measure: Meets goals for internal efficiency performance measures, as verified.

Explanation:

Measure: Meets goals for internal output performance measures, as verified.

Explanation:

Is the program purpose clear?

Explanation: The purpose of the Deposit Insurance Fund (DIF) is to protect insured depositors at banks and thrifts from losses. Deposit insurance is a fundamental part of the FDIC's commitment to maintain stability and public confidence in the U.S. financial system.

Evidence: FDIC Strategic Plan 2005-2010: pages 2 and 7.

Does the program address a specific and existing problem, interest, or need?

Explanation: While depository institutions play an important role in the economy by safeguarding savings and distributing credit, these institutions can be vulnerable to illiquidity and insolvency due to the nature of their deposit and loan portfolios. Historical precedent has shown that a high-profile failure at one institution has the potential to lead to a system-wide collapse of confidence in the banking system. Congress created FDIC after the 1933 banking crisis to maintain stability and confidence in the nation's banking system. The Federal deposit insurance program provides insurance (currently up to $100,000 per depositor and $250,000 for certain retirement accounts) "backed by the full faith and credit of the U.S. Government." This acts as a stabilizing element in the event of financial uncertainty, and continues to be relevant today given that depository institutions insured by the FDIC hold over $4.2 trillion in insured deposits (Approximately equal to 1/3rd of U.S. GDP) and are an integral part of the U.S. economy.

Evidence: IMF - Deposit Insurance: A Survey of Best Practices, April 1999, WP/99/54, page 4; FDIC Strategic Plan 2005-2010: page 3; Quarterly Banking Profile -3rd Quarter 2007: TABLE I-B, Insurance Fund Balances and Selected Indicators.

Is the program designed so that it is not redundant or duplicative of any other Federal, state, local or private effort?

Explanation: While the FDIC is the only insurer of bank and thrift institutions, depositors also have the option of holding their deposits in a credit union insured by the National Credit Union Administration's (NCUA) Share Insurance Fund, or in certain States credit unions may be insured by a private insurer, American Share Insurance (ASI). However, neither NCUA nor ASI have anything near to the scope of institutional coverage or the share of insured assets that FDIC is responsible for insuring ($4.15 trillion in insured assets vs. $0.52 trillion). Although deposit insurance for banks and thrifts is separated from credit union insurance by federal law, from the depositor's perspective the coverage is essentially identical. Private deposit insurance exists in certain other countries (for example in Germany, Italy, France and several Baltic countries), and some economists have argued in favor of similar private insurance programs in the U.S. Some major economies (Germany in particular) even have multiple private deposit insurers, which overlap with each other and provide a degree of competition. However, as affirmed by former Federal Reserve Chairman Greenspan in a 2003 testimony before Congress, there is no real equal to the FDIC in terms of providing insurance for the broad-based US financial system. FDIC's dominant position in the market and backing by the full faith and credit of the U.S. Government allows the FDIC to cover "tail" risks (low probability, high loss events) at premiums that are lower than any state-based or private competitor would be able to compete against.

Evidence: NCUA Annual Report 2006; European Commission, Review of Directive 94/19/EC on Deposit Guarantee Schemes, February 2007; Testimony of Chairman Alan Greenspan: "Deposit Insurance" Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, February 26, 2003, http://www.federalreserve.gov/boarddocs/testimony/2003/20030226/default.htm.

Is the program design free of major flaws that would limit the program's effectiveness or efficiency?

Explanation: The Federal Deposit Insurance Reform Act of 2005 (Reform Act) addressed many of the most serious weaknesses in the previous system of deposit insurance. For example, from 1996 until the passage of the Reform Act, 92 percent of insured institutions were exempt from paying insurance premiums and approximately 900 newly chartered institutions never paid into the system. In addition, the old premium system was countercyclical in that banks were required to pay higher premiums during a crisis when they were least able to contribute. Furthermore, the reform consolidated the FDIC's two insurance major insurance funds into one, and allowed for risk-based pricing of insurance, two of the problems with the previous system. Under new authority provided by the passage of the Deposit Insurance Reform Act, the FDIC now has the flexibility to charge all institutions premiums and allow the insurance fund's ratio of available funds to insured deposits, the designated reserve ratio (DRR), to fluctuate between 1.15 and 1.50 percent. Pursuant to this new authority, the FDIC Board has decided to maintain a target DRR of 1.25 percent for 2007 and 2008. Under the Deposit Insurance Reform Act of 2005, the FDIC's Bank Insurance Fund (BIF) and its Savings Association Insurance Fund (SAIF) were merged into the new Deposit Insurance Fund on March 31, 2006. At the end of September 2007, the DIF reserve ratio stood at 1.22 percent - $1.2 billion below the level that would meet the target reserve ratio. In order to return the balance of the fund to the target reserve ratio of 1.25 percent, in November 2006 the FDIC Board voted to establish a new set of premiums for the industry to recapitalize the DIF. The new premiums range from 5 basis points (five cents per $100 of assessable deposits) up to as high as 43 basis points based on the assessed risk of an institution. The first premiums under the new system were paid in June 2007. The Deposit Insurance Reform Act of 2005 provided depository institutions that had paid deposit insurance premiums prior to 1996 (the last year the FDIC collected premiums) with $4.7 billion in credits toward premiums, most of which will likely be used by the end of 2008. The fact that the FDIC now has the ability to collect these premiums proactively when the banking sector is enjoying a period of strong earnings rather than being forced to wait until there is a problem is a significant improvement. In addition, the ability of the FDIC to impose premiums based on an assessment of the risk of an institution is also a significantly better structure for the program. The FDIC's new institutional structure for the DIF is also highlighted when compared to many of the deposit insurance programs available in the European Union. A number of European systems are designed to collect funds from insured institutions only during or after those funds are needed to resolve a failed institution, while in FDIC's case the funds are collected prior to any event and held in reserve in the DIF for rapid deployment in the case of a failure. Also, a number of European funds do not have risk-based pricing mechanisms, (although this is seen as a best practice) and so the FDIC is ahead of the curve on that front as well. In terms of the integration of supervisory and insurance functions, there has been some discussion in the academic literature about the potential for conflicts of interest by integrating the insurance function and the supervisory function in the same entity. These papers have postulated that combining these two functions could lead to incentives for examinations to be more lenient in order to protect the insurance funds from taking expenses for potential losses. Although this was one of the causes of the S&L crisis in the late 1980s, there has been no evidence that this has occurred in the case of FDIC since the enactment of deposit insurance reform.

Evidence: The FDIC's equity ratio is also higher than the majority of European systems, at 1.25 percent versus an EU-wide average of 0.7 percent. FDIC Annual Report 2006 pp. 12-14; FDIC Roundtable on Insurance Reform, Kenneth H. Thomas, University of Pennsylvania, http://www.fdic.gov/deposit/insurance/initiative/thomaswharton.pdf; Keeping the Promise: Recommendations for Deposit Insurance Reform Federal Deposit Insurance Corporation April 2001, http://www.fdic.gov/deposit/insurance/initiative/direcommendations.PDF; Federal Deposit Insurance Reform Act, http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_public_laws&docid=f:publ171.109.pdf. European Commission, Review of Directive 94/19/EC on Deposit Guarantee Schemes, February 2007; Itegration of supervision and insurance functions: Edward J. Kane, "How Incentive-Incompatible Deposit Insurance Funds Fail" NBER Working Paper #2836, Feb 1989 http://www.nber.org/papers/w2836.pdf; Glenn Hoggarth, Patricia Jackson and Erlend Nier , "Banking crises and the design of safety nets" Journal of Banking & Finance, Volume 29, Issue 1, January 2005, Pages 143-159; Asli Demirg????-Kunt, and Enrica Detragiache "Does deposit insurance increase banking system stability? An empirical investigation" Journal of Monetary Economics, Volume 49, Issue 7, October 2002, Pages 1373-1406; Armen Hovakimian, Edward Kane, and Luc Laeven, " How Country and Safety-Net Characteristics Affect Bank Risk-Shifting" Journal of Financial Services Research, Volume 23, No. 3, June 2003, Pages 177-204

Is the program design effectively targeted so that resources will address the program's purpose directly and will reach intended beneficiaries?

Explanation: FDIC depository insurance is funded through interest income on fund assets, risk-based premiums paid by insured institutions, and asset recovery from failed institutions. These charges ensure that banks, the banking system, and depositors pay the cost of insurance instead of taxpayers. Risk-based premiums require that those banks that pose the most risk to the system pay a higher premium than less risky institutions. As mentioned above, the 2005 Reform Act provided FDIC with the flexibility it needs to price insurance according to risk and to compensate older institutions that have subsidized insurance for newly chartered institutions. The FDIC has determined to price risk according to a formula based upon the assessed risk of an institution (represented by the risk rating bestowed by its Federal supervisor, as well as external debt ratings in the case of larger banks). The formula also allows FDIC to charge differing rates to institutions based upon their size, and therefore their potential impact on the fund. This will allow more equitable funding for the program. In addition, the FDIC's Division of Resolutions and Receiverships has well-developed plans in place to ensure that in the event of a bank failure, the FDIC will be able to step in and either establish a "bridge bank" or provide funding from the insurance funds to ensure that covered depositors are able to have access to their funds within a very short timeframe (usually within 2 business days). As of this writing there have been eleven bank failures in the past three years with total assets of $38.679 billion, including the second largest failure by assets ever (IndyMac with $32.010 billion in total assets). Conditions in the banking industry continue to be much more uncertain in recent months, as the impact of falling housing prices impacts other parts of the economy. As recent reports by the Government Accountability Office have highlighted, even the failure of a relatively mid-size bank of $50 billion in assets or so has the potential to place a significant strain on the FDIC's resources, and the increasing consolidation of the banking industry has meant that there are fewer institutions to cover but that the average institution is much larger than in previous years.

Evidence: FDIC Annual Report 2006 pp. 12-14, 30-31, and 63-77; FDIC Annual Performance Plan pp. 9-11 FDIC Options Paper August 2005, Sec. 1 - The need for reform, http://www.fdic.gov/deposit/insurance/initiative/OptionPaper.html#INTRODUCTION. FDIC - Final Rule on Risk-Based Assessments, Oct 31, 2006 GAO FDIC: Human Capital and Risk Assessment Programs Appear Sound, but Evaluations of their Effectiveness Should Be Improved, Feb 2007 GAO-07-255 GAO Deposit Insurance: Assessment of Regulators' Use of Prompt Corrective Action Provisions and FDIC's New Deposit Insurance System, Feb 2007 GAO-07-242

Does the program have a limited number of specific long-term performance measures that focus on outcomes and meaningfully reflect the purpose of the program?

Explanation: The DIF's long-term strategic goal is to ensure that "insured depositors are protected from loss without recourse to taxpayer funding." There are a number of "strategic objectives" that directly support this long-term goal. These strategic objectives are: 1) ensure the deposit insurance funds and system remain viable; 2) promptly identify and respond to potential risks to the insurance funds; and 3) ensure customers of failed depository institutions have timely access to insured funds and financial services. These objectives do tie directly to the purpose of the FDIC's insurance program, and as constructed they do focus on outcomes. However, they are not defined in a way which can be easily quantified or benchmarked over time. To achieve its strategic planning objectives, the FDIC does have a number of annual performance goals identified in its annual performance plan. Although the vast majority of these measures are output-based versus outcome-based, under its deposit insurance program the FDIC does have two performance goals which fit the PART criteria of quantifiable results that directly support the purpose and objectives of the insurance program. Under its objective to maintain the viability of the FDIC deposit insurance fund, the FDIC Board sets a target "designated reserve ratio" (the ratio of available funds to insured deposits) of 1.25 percent. The Board established the 1.25 percent ratio based on analysis of the past performance of the FDIC's insurance funds and the level of capitalization necessary to cover potential bank failures. The 1.25 percent target falls within Federal Deposit Insurance Reform Act of 2005 statutes, which mandated a designated reserve ratio between 1.15 percent and 1.5 percent. The second annual performance goal measures how long it takes the FDIC to provide depositors access to their insured funds following the failure and closure of a depository institution. This measure is discussed further in the section on annual performance goals. Although these measures are defined by FDIC as "annual goals" they could also be seen as more long-term measures. Since the reserve ratio is integral to the solvency of the deposit insurance funds, the continued maintenance of this goal is necessary to the long-term viability of the deposit insurance program and trends in the measure can help illuminate potential problems. However, FDIC does not track an indicator of the efficiency of DIF operations in its official performance goals. For example, FDIC reports on the overall overhead costs of the Corporation relative to the deposits it insures, but that measure includes all FDIC programs including the (very substantial) supervision costs that FDIC undertakes. The Corporation does not set an explicit goal to improve efficiency in the administrative costs of the insurance program relative to its assets.

Evidence: FDIC 2006 Annual Report: page 30-35. The FDIC three strategic objectives related to insurance and the associated targets and results are discussed at length in FDIC's 2007 Annual Performance Plan, pages 6 through 21.

Does the program have ambitious targets and timeframes for its long-term measures?

Explanation: DIC has quantifiable targets for two of its three longer-term strategic objectives for deposit insurance. The first target is to maintain the DIF's actual reserve ratio at or above the current designated reserve ratio of 1.25 percent. This designated reserve ratio falls within the statutory reserve ratio range of 1.15 percent to 1.5 percent. As mentioned above, this performance goal is closely linked to the long-term viability of the deposit insurance program. The statutory range represents over a quarter of the existing balance of the deposit insurance fund, which provides flexibility to the Board. In this case the FDIC Board sets a specific annual goal, while the explicit long-term goal is set by statute. By and large, the other measures in FDIC's performance plan are set on an annual basis, although they are expected to meet certain benchmarks over the course of several years. The second target, related to the efficiency of resolutions and the FDIC's ability to provide depositors prompt access to their insured savings in the event of a failure is discussed in question 2.3.

Evidence: 2007 Annual Performance Plan p 6-21

Does the program have a limited number of specific annual performance measures that can demonstrate progress toward achieving the program's long-term goals?

Explanation: FDIC's 2007 Annual Performance Plan identifies the following annual performance goals, which support the FDIC's long-term strategic goal: 1) respond promptly to all financial institution closings and emerging issues; 2) identify and address risks to the insurance funds; 3) disseminate data and analyses on issues and risks affecting the financial services industry to bankers, supervisors, the public and other stakeholders; 4) maintain and improve the deposit insurance system; and 5) provide educational information to insured depository institutions and their customers to help them understand the rules for determining the amount of insurance coverage on deposit accounts. These performance goals are then broken down further into quantitative and qualitative measures such as the reserve ratio, the time it takes FDIC to return insured deposits after a failure, and the program's success at implementing deposit insurance reform legislation. As discussed above, maintaining an actual reserve ratio equal to or greater than the designated reserve ratio ensures that the DIF has enough assets to fund insurance losses in event of bank failures. In the early 1990s, FDIC was actually insolvent due to a large number of failures. Likewise, consumers' confidence in the depository system is directly related to the FDIC's efficiency at returning deposits. The FDIC tracks the number of days necessary to provide insured depositors with access to their funds following the failure of an insured depository institution. The FDIC has a policy of ensuring funds are available within 2 business days after an institution is closed, and one business day if the closure happens at the end of a week (i.e., funds available on Monday after a Friday closure). For the past few years FDIC has met this goal, though in most of 2004, and all of 2005 and 2006 there were no failures of depository institutions, the longest such period in the 73-year history of the FDIC. In the three failures which occurred during 2007, this goal was again achieved. During 2006, FDIC set out several goals for itself regarding the timely implementation of reform legislation. FDIC met all of its goals in issuing draft regulations for comment during 2006 and finalizing regulations to implement the new deposit insurance system by January 1, 2007. One area where FDIC could improve its performance reporting would be to develop an efficiency measure as part of its long-term strategy and Annual Performance Budget. The measure should capture the cost of insurance relative to insured deposits. Currently the FDIC reports efficiency as a function of its total expenditures against the assets it oversees, rather than on a program-by-program basis. In contrast, the NCUA Share Insurance Fund tracks the costs of its insurance program against the assets in the Share Insurance Fund. A similar measure for FDIC would help to compare the efficiency of the U.S. government's two insurance programs on a consistent basis.

Evidence: In addition to the performance measures mentioned above, FDIC's 2008 Annual Performance Plan will include an additional outcome measure reflecting the goal that no depositor should lose money held in an FDIC-insured deposit. SOURCES: FDIC 2008 Annual Performance Plan; FDIC Annual Performance Plan 2007 pp 6-21; FDIC Annual Report 2006, pages 39-44. NCUA Annual Report 2006

Does the program have baselines and ambitious targets for its annual measures?

Explanation: The 2007 Annual Performance Plan outlines a number of qualitative and quantitative targets that are linked to each of the annual performance goals. For the two targets which meet PART criteria, there are well-established baselines which are ambitious and reflect the objectives of the program. The FDIC has committed itself to maintaining the reserve ratio of the DIF at or above 1.25 percent, and to provide depositors with access to their insured deposits within 2 business days. Neither of these objectives is easy, and indeed the FDIC has weathered some criticism for its plans to impose insurance premiums to maintain the reserve ratio. For most of the other annual goals, the baselines are less well-defined. Many of the FDIC's goals are output-based, and as such the Corporation seems to measure the amount of work it completes rather than how effective that work has been. The Annual Report details FDIC's success in reaching its established goals, but not all of these goals are specific and quantifiable. For example, one annual target for the DIF calls on FDIC to "assess insurance risks in 100% of insured institutions and develop appropriate strategies." A specific and quantifiable measure might be the level of capital adequacy in insured depository institutions, a measure that has a direct impact on the potential risk to the deposit insurance funds.

Evidence: DIC 2007 Annual Performance Plan, pp 6-21. 2006 Annual Report, pages 39-44. Examples of targets outlined in the performance plan are: 1) maintain the insurance fund's DRR 1.15 and 1.50 percent of estimated insured deposits 2) implement deposit insurance reform legislation in accordance with statutorily prescribed time frames 3) depositors have access to insured funds within 1-2 business days after a bank failure.

Do all partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) commit to and work toward the annual and/or long-term goals of the program?

Explanation: FDIC does not have specific partners in managing its deposit insurance function; however, various State and Federal regulators do help the FDIC maintain safety and soundness in the financial system and thereby indirectly help maintain the soundness of the Federal deposit insurance system.

Evidence: 2007 Annual Performance Plan, FDIC Strategic Plan

Are independent evaluations of sufficient scope and quality conducted on a regular basis or as needed to support program improvements and evaluate effectiveness and relevance to the problem, interest, or need?

Explanation: The IG conducts numerous audits and evaluations of the FDIC's programs throughout the year. The GAO also audits FDIC's financial statements and internal control practices on a yearly basis. Because the DIF is an integral part of the banking industry and economy, there are numerous academic studies covering all aspects of deposit insurance. The Reform Act of 2005 resulted in major changes to the FDIC deposit insurance system. The GAO and IG were tasked with conducting a number of studies to evaluate the implementation of the new regulations related to deposit insurance reform. These follow-on reports have now been completed, including reports on FDIC's new deposit insurance system and risk assessment programs. Overall, FDIC fared well in these assessments, although they did contain some suggestions regarding more "stress testing" of the insurance funds and ways in which FDIC could work to improve its employee development programs. FDIC staff have been working to implement the recommendations of these reports.

Evidence: GAO-06-146 Financial Audit: Federal Deposit Insurance Corporation Funds 2005 and 2004; OIG 06-013 FDIC Reserve Ratio and Assessment Determinations; OIG 06-008 Consideration of Safety and Soundness Examination Results and Other Relevant Information in the FDIC's Risk-Related Premium System; An Annotated Bibliography, http://www.fdic.gov/deposit/deposits/international/bibliography/index.html. OIG 07-002 Evaluation ofthe FDIC's Use of Performance Measures, May 2007, http://www.fdicig.gov.reports07/07-002E.pdf GAO FDIC: Human Capital and Risk Assessment Programs Appear Sound, but Evaluations of their Effectiveness Should Be Improved, Feb 2007 GAO-07-255 GAO Deposit Insurance: Assessment of Regulators' Use of Prompt Corrective Action Provisions and FDIC's New Deposit Insurance System, Feb 2007 GAO-07-242 Garcia, Gillian Glenys, "Deposit Insurance: A Survey of Actual and Best Practices" (April 1999). IMF Working Paper No. 99/54 Available at SSRN: http://ssrn.com/abstract=880581 - "Is Fairly Priced Deposit Insurance Possible?" Yuk-Shee Chan; Stuart I. Greenbaum; Anjan V. Thakor The Journal of Finance, Vol. 47, No. 1. (Mar., 1992), pp. 227-245. "Do Depositors Punish Banks for Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises" Authors: Martinez Peria, Maria Soledad1; Schmukler, Sergio L.1 Source: The Journal of Finance, Volume 56, Number 3, June 2001 , pp. 1029-1051(23)

Are Budget requests explicitly tied to accomplishment of the annual and long-term performance goals, and are the resource needs presented in a complete and transparent manner in the program's budget?

Explanation: The Corporation is accountable to its Board for its annual budget, and therefore the Corporation's budget is closely tied to the priorities of the Board and (by extension) the accomplishment of FDIC's strategic goals. As evidenced by the most recent (2008) Corporate Budget, budget requests are justified according to the assessed needs of the Corporation in fulfilling its responsibility to conduct robust examinations of its supervised institutions and working to improve consumer protection and regulatory compliance within the industry. There is also evidence that the FDIC's budget process has become more results-driven in recent years. A 2005 report by the IG concluded that, "The FDIC has made progress in integrating budget and performance goal information. For example, in developing the 2005 corporate operating budget, the FDIC used a more integrated planning and budgeting process that was an improvement over the 2001 CPC wherein the staffing, budgeting, and planning processes overlapped and were not as well integrated."

Evidence: 2007 Annual Performance Plan; 2007 Q3 CFO Report to the Board; 2008 FDIC Annual Budget; FDIC IG Follow-up Evaluation of the FDIC's Corporate Planning Cycle, page 20, http://fdicig.gov/reports05/05-032.pdf.

Has the program taken meaningful steps to correct its strategic planning deficiencies?

Explanation: FDIC is focused on maintaining the strength of the deposit insurance system, and by extension the system of Federally-insured financial institutions. FDIC management has identified two key areas of emphasis in this effort: the consolidation of the industry (i.e. larger institutions), and increased complexity of those institutions' operations. The Corporation has begun to take steps to address these issues, including devoting additional resources to large bank oversight, and investment in human capital to improve the Corporation's risk management assessment and capabilities. In terms of the FDIC's external reporting, in accordance with the requirements of GPRA the FDIC reviews and updates its Strategic Plan at least every three years, publishes an Annual Performance Plan, and conducts program evaluations to assess whether programs are achieving their stated purposes. In addition, the Annual Report contains a section detailing whether FDIC achieved its annual performance goals in accordance with its indicators and targets. However, there remain areas for improvement: with two notable exceptions as noted above (the DRR and time to return deposits), the specific targets and indicators included in the Performance Plan are often either not quantifiable or are output rather than outcome-based. In addition, in contrast to the NCUA (and as discussed above) the Corporation does not currently report efficiency measures specific to the insurance program.

Evidence: FDIC Strategic Plan 2005-2010; FDIC 2005 Annual Report, page 29; IG Evaluation of the FDIC's Use of Performance Measures, May 2007, http://www.fdicig.gov/reports07/07-002E.pdf

Does the agency regularly collect timely and credible performance information, including information from key program partners, and use it to manage the program and improve performance?

Explanation: FDIC is the primary supervisor for approximately 5,200 of the 8,500 insured institutions. However, the vast majority of assets in depository institutions are concentrated in institutions regulated by the other Federal regulators. Therefore, the DIF's safety and soundness depends heavily on the examinations conducted by FDIC's partners: the Federal Reserve Board (FRB), the Office of Thrift Supervision (OTS), the Office of the Comptroller of the Currency (OCC), and state regulators. The regulatory agencies conduct safety and soundness examinations of all insured institutions every 12-18 months. In addition, all insured national and state commercial banks and state-chartered savings banks submit quarterly Reports of Condition and Income (Call Reports) that detail the financial condition of each institution. Similarly, all thrift institutions are required to submit a Thrift Financial Report (TFR) on a quarterly basis. FDIC uses information from examinations and call reports to assess overall industry health and to identify problem institutions. FDIC staff use a number of tools to assess potential risk in insured depository institutions. The FDIC has a centralized Risk Analysis Center which pools resources between different divisions within FDIC to monitor and analyze potential risks to the Deposit Insurance Fund and assess overall safety and soundness of FDIC-insured institutions. FDIC staff use a number of monitoring programs to analyze call report data and compare those results with the ratings of annual on-site exams, to try to discern the financial condition of insured institutions and highlight discrepancies for further review. In addition, the FDIC conducts an annual assessment of its projections for anticipated losses in comparison with actual observed losses to determine if they are modeling risk correctly.

Evidence: FDIC Strategic Plan 2005-2010; FDIC Risk Management Manual of Examination Policies, http://www.fdic.gov/regulations/safety/manual/section1-1.html#rationale; Call/CTR Reports: http://www2.fdic.gov/Call_TFR_Rpts/inform.asp.; 2007 Annual Performance Report pp 12-15

Are Federal managers and program partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) held accountable for cost, schedule and performance results?

Explanation: A recent IG evaluation of the FDIC's use of performance measures asserts that manager performance evaluations and compensation are tied to the fulfillment of internal corporate performance objectives. FDIC is developing internal scorecards for its insurance and resolution programs which will track the performance of individual offices in much the same manner as the scorecard system used by the FDIC's supervision program. Managers' performance will be monitored via this system, and they will be held accountable for the results observed in the office(s) they oversee.

Evidence: IG Evaluation of the FDIC's Use of Performance Measures, May 2007, http://www.fdicig.gov/reports07/07-002E.pdf

Are funds (Federal and partners') obligated in a timely manner, spent for the intended purpose and accurately reported?

Explanation: The DIF is a non-appropriated program that is funded by income earned on the insurance fund and premiums paid by insured institutions. The GAO's most recent financial audit gave FDIC's deposit insurance funds (the audit was conducted over a period that included the merger of the funds) an unqualified opinion. Financial management practices related to reporting and internal controls were satisfactory, and there were no reportable conditions or material weaknesses discovered. The audit and a follow-up GAO report did identify a few issues related to internal controls which FDIC management has quickly worked to address.

Evidence: GAO-07-371 Financial Audit: Federal Deposit Insurance Corporation Funds 2006 and 2005, February 2007; GAO-07-947R Management Report: Opportunities for Improvements in FDIC's Internal Controls and Accounting Procedures, June 2007; FDIC 2006 Annual Report, pages 30-35, 63-77.

Does the program have procedures (e.g. competitive sourcing/cost comparisons, IT improvements, appropriate incentives) to measure and achieve efficiencies and cost effectiveness in program execution?

Explanation: The Annual Report discusses the steps that FDIC is taking to reduce costs through improved financial management, human capital management, and IT systems. In particular, the Corporation has implemented a new cost-accounting system, the New Financial Environment, that allows FDIC management up-to-the-minute information on spending in any program, office or activity, sortable by a wide range of criteria. This system, in combination with the use of internal scorecards for the insurance and resolution programs allow FDIC to manage its resources with even greater efficiency and cost effectiveness. Though this internal information is not publicly available, FDIC shared this information with OMB for verification purposes.

Evidence: FDIC 2006 Annual Report, pages 10-11, 26-28, and 32-35. http://www.fdic.gov/about/strategic/report/2006annualreport/index_pdf.html

Does the program collaborate and coordinate effectively with related programs?

Explanation: Through the Government Performance and Results Act Financial Institutions Regulatory Working Group, FDIC cooperates with OTS, OCC, FRB, OFHEO, and NCUA to identify the general goals and objectives that cross between organizations and their programs, as well as other GPRA requirements. Through the Federal Financial Institutions Examination Council, the FDIC works with the other financial regulators to ensure the safety and soundness of the U.S. financial system. In addition, the FDIC works quite closely with state regulators to oversee state-chartered insured depository institutions. The FDIC IG has conducted periodic reviews of FDIC's cooperation with state regulatory authorities and has found that in general the cooperation between FDIC and state authorities has been effective, although the FDIC IG has made some suggestions (which FDIC is working to implement) on how FDIC-State cooperation could be improved, including how FDIC could help ensure that state examinations are conducted under similar risk-based criteria, and could help ensure the quality of state-conducted examinations. In addition, the FDIC works closely with the other regulators in compiling and analyzing the data used in its monitoring program for large institutions. This cooperation helps the FDIC staff keep abreast of issues with individual institutions across the system, and allows the Corporation to identify potential problems and work proactively with the primary regulator and the institution to resolve these issues before they become more serious.

Evidence: FDIC 2007 Annual Performance Plan, pages 67-70. FDIC IG Audit Report - FDIC's Reliance on State Safety and Soundness Examinations, March 26, 2004 Report No 04-013

Does the program use strong financial management practices?

Explanation: FDIC's insurance funds earned an unqualified opinion on the GAO's most recent Financial Audit. Financial management practices related to reporting and internal controls were satisfactory- the GAO audit found no material weaknesses or significant deficiencies. However, the audit and a follow-up GAO report did identify a few issues related to internal controls which FDIC management has quickly worked to address. The FDIC is restricted by statute to invest the assets of the deposit insurance fund solely in various types of U.S. government securities, and FDIC IG evaluations of FDIC's investment practices have revealed no significant problems. The GAO is in the process of several reviews on the FDIC's internal management and they have not reported any material weaknesses in the area of financial management. In addition, the FDIC has recently completed implementation of an integrated cost-accounting system, the New Financial Environment, which allows Corporation management almost real-time information about current spending, compiled and delivered according to whatever criteria desired. This new system should help the Corporation continue to improve its financial management capability.

Evidence: GAO-07-371 Financial Audit: Federal Deposit Insurance Corporation Funds 2006 and 2005, February 2007; GAO-07-947R Management Report: Opportunities for Improvements in FDIC's Internal Controls and Accounting Procedures, June 2007; FDIC IG Report 05-025 The FDIC's Investment Policies; FDIC Annual Report 2006 pages 10-11, 28

Has the program taken meaningful steps to address its management deficiencies?

Explanation: The FDIC's management has focused their attention on two areas which pose the greatest challenge for the deposit insurance program - the consolidation of the banking industry, and the associated complexity in financial markets and institutions. The increasing consolidation of the industry has meant that a few large institutions hold disproportionately large amounts of insured deposits, and the failure of one of these major institutions could put a very significant strain on the deposit insurance funds. The consolidation and complexity of the industry has progressed to the point where even the failure of a relatively "mid-sized" institution of $60 billion to $100 billion in assets could cause a significant strain to the FDIC's capabilities to insure and resolve the institution's outstanding obligations. Combined with the fact that many of the largest institutions have another Federal regulator as their primary supervisor, this presents a significant challenge for FDIC management. The FDIC is taking a number of steps to ensure it meets its mandate as an effective insurer. First, the Corporation is working to formalize its role as the backup Federal regulator for all insured depository institutions through cooperative agreements with the other regulators and greater involvement in on-site examinations. Second, the FDIC is building an integrated data collection and reporting system on all large institutions, called the Large Insured Depository Institutions (LIDI) program. This program is creating a centralized clearinghouse for information on all US institutions with over $10 billion in consolidated assets (currently about 120 institutions nationwide). The system combines supervisory reports, call report data, insurance pricing information and market data into one standard template for analysis and review by FDIC's case managers and program partners. FDIC case managers track developments at each of these institutions closely, and are using this information to develop a "warning system" that consolidates and analyzes information from a wide range of sources in order to better understand the current situation of many of the US' largest insured institutions. Third, the Corporation has been building its supervisory resources devoted to large bank oversight, including the Dedicated Examiner program of staff posted on-site at the six largest institutions as well as expanding sections of each of its divisions - supervision, insurance and resolutions - dedicated to large bank issues. Furthermore, as the financial industry has grown and become much more complex in recent years, the FDIC has worked to develop a core group of staff with significant expertise in capital markets and quantitative finance. FDIC has offered special training programs, worked to increase the number of staff certified as capital markets subject matter experts, and recruited staff with specialized knowledge to improve its risk modeling and assessment capabilities. Though this effort is still ongoing, the Corporation is working hard to improve its human capital and IT systems to effectively oversee the industry, especially given the transition to the new Basel II capital requirements for banking organizations. FDIC has also worked to upgrade its modeling of the potential risks to the deposit insurance fund, updating its credit risk models and related estimation procedures for major economic and industry-specific variables. Overall, the FDIC has taken a number of steps to prepare for the challenges it faces. Although a number of challenges remain, including managing the demographic transition as a core group of staff becomes eligible to retire, FDIC has been quite proactive in addressing issues that it has identified, as well as those identified by independent observers such as the IG and GAO.

Evidence: In addition to the steps outlined above, the FDIC has established an interdivisional Resolution Policy Committee to develop contingency plans and coordinate "stress tests" of the FDIC's ability to handle of range of potential failure scenarios. The role of this group is to think through and plan out many of the details of how the FDIC might manage the receivership of a major financial institution, so that the Corporation and its staff will have pre-developed and previously rehearsed "game plans" to draw upon in the case of a significant failure. Toward this end, through its Corporate Employee Program the FDIC is developing a "reserve" of staff with knowledge of several key skill sets so that in case of an immediate need (e.g. for receivership staff, or additional examination resources) Corporation management will be able to draw upon trained staff from other divisions within the FDIC to help manage its workload. SOURCES: FDIC Strategic Plan 2005-2010; 2008 FDIC Corporate Budget, December 2007; FDIC Risk Management Manual of Examination Policies, http://www.fdic.gov/regulations/safety/manual/section1-1.html#rationale; FDIC IG, 07-002 Evaluation of the FDIC's Use of Performance Measures, May 2007; http://www.fdicig.gov/reports07/07-002E.pdf; GAO FDIC: Human Capital and Risk Assessment Programs Appear Sound, but Evaluations of their Effectiveness Should Be Improved, Feb 2007; GAO-07-255 GAO Deposit Insurance: Assessment of Regulators' Use of Prompt Corrective Action Provisions and FDIC's New Deposit Insurance System, Feb 2007.

Has the program demonstrated adequate progress in achieving its long-term performance goals?

Explanation: The FDIC has been successful in recent years in meeting one of its long-term outcome goals, ensuring that insured depositors are protected from loss without recourse to taxpayer funding. From mid-2004 through 2006, there were no failures of FDIC-insured institutions, and for a significant stretch going back at least 15 years (after the resolution of the banking crisis of the late 1980s and early 1990s) there has been no need for any taxpayer intervention in the federal deposit insurance programs. This continued despite an uptick in failures (to three institutions of $2.3 billion in assets) observed during 2007. Unfortunately, because the FDIC does not report publicly on many specific, quantifiable measures based on outcomes, it is difficult to determine whether they have been successful in all aspects of their mission. The FDIC has not reached its 1.25 percent target for its reserve ratio, its other long-term performance goal, in the past couple of years. This is due in part to the restraints imposed by deposit insurance reform, which restricted collection of insurance premiums to replenish the fund by providing $4.7 billion in credits to institutions who had paid premiums prior to 1997. The FDIC has therefore not had the opportunity to collect premiums to return the reserve ratio to their intended target, and they are taking significant action now to correct this imbalance. The FDIC Board has set a target of 1.25 percent for the end of 2009, but given recent bank failures is unlikely to reach this goal for the foreseeable future.

Evidence: FDIC 2007 Performance Plan: pages 6-21.

Does the program (including program partners) achieve its annual performance goals?

Explanation: Regarding the FDIC's annual outcome measure, time to return deposits, the lack of resolution activity has been a very positive development, but it has meant the program was not really tested for several years. During recent bank failures observed in 2007 and 2008 FDIC was able to meet its goal and hopefully they will continue to do so, though as banks become larger and more complex managing a rapid turnaround becomes a much larger undertaking.

Evidence: FDIC 2006 Annual Report: pages 37-59. 2007 3rd Quarter Quarterly Banking Profile; FDIC 2007 Annual Performance Plan pp 6-21

Does the program demonstrate improved efficiencies or cost effectiveness in achieving program goals each year?

Explanation: The FDIC does not release public information on efficiency measures for its insurance program, which would allow for comparison with the National Credit Union Share Insurance Fund or deposit insurance programs in other developed economies. However, the FDIC overall has gone through approximately a decade of staff reductions following the resolution of the savings & loan and banking crises of the late 1980s and early 1990s. This reduction in staff has occurred against a backdrop of increasing workload in recent years, and as the Corporation faces a wave of expected retirements in the years leading up to 2012, FDIC management have begun to increase staff and budget in recent years in order to respond to issues in the banking sector and to the demographic shift in Corporation staff. The FDIC has internal cost accounting systems and scorecards to monitor efficiency and cost effectiveness as verified by OMB, which should help management through this transition.

Evidence: 2007 Annual Performance Plan, pages 6-21; 2006 Annual Report, pages 33-35; IG Evaluation of the FDIC's Use of Performance Measures, May 2007, http://www.fdicig.gov/reports07/07-002E.pdf

Does the performance of this program compare favorably to other programs, including government, private, etc., with similar purpose and goals?

Explanation: The DIF compares favorably with several European deposit insurance systems. For example, after deposit insurance reform the DIF is funded through risk-based premiums on all insured institutions. Several European systems (including that of the UK) are set up as "ex-post" systems where the central bank or other regulatory authorities hold rights to demand money from the financial system in order to resolve a potential bank failure. However, these systems do not have a "reserve fund" that is quickly available and built up over time, and the tendency of these ex-post systems to exacerbate economic difficulty means that the FDIC has a superior structure. Several European systems that do collect premiums ex-ante do not charge those premiums on the basis of risk, and so the DIF is preferable in that regard. Finally, the DIF's equity ratio is generally higher, at about 1.2 -1.25 compared to the EU average of 0.7. The DIF is comparable to the National Credit Union Administration's (NCUA) share insurance fund (NCUSIF). Although FDIC, with over $4 trillion in insured deposits versus $0.52 trillion for NCUA, works on a larger scale and is more vital to the nation's economic health. There is one private provider of depository insurance and that company only insures credit union assets. Like NCUSIF, the DIF is funded by contributions from insured institutions and in recent history, taxpayer funds have not been used to compensate depositors. DIF maintains an equity ratio on par with NCUSIF, and although the DIF's reserve ratio has slipped in recent months after the enactment of deposit insurance reform, the FDIC has taken several concrete steps to rectify this situation. The FDIC tends to employ more advanced techniques for modeling banking risk as well as the fund's viability than the NCUA, but it is still unclear whether these techniques are sufficient to ensure the viability of the fund given the size of the FDIC's insured deposits, the consolidation and complexity of the industry and the importance of the DIF's insured institutions to the efficient functioning of the U.S. economy.

Evidence: FDIC 2006 Annual Report; European Commission, Review of Directive 94/19/EC on Deposit Guarantee Schemes, February 2007; PART Assessment of NCUSIF, 2006

Do independent evaluations of sufficient scope and quality indicate that the program is effective and achieving results?

Explanation: Given the importance of the DIF to the nation's economic stability and the health of the banking sector, the DIF is evaluated frequently by the GAO, IG, and academia. The GAO and FDIC IG studies have found that the FDIC's insurance programs are largely effective, and each assessment has provided a few recommendations on potential improvements. The FDIC has mostly implemented these recommendations, although addressing certain issues (such as preparing for resolutions of larger and more complex institutions, or assessing systemic risk) are long-term undertakings. Academic studies provide conflicting opinions regarding the need for publicly provided deposit insurance and FDIC's effect on the economy. The European Commission decided in early 2007 that a mixed public/private deposit insurance system works quite well, as long as there are certain basic requirements set out to undergird that system, such as the minimum level of deposit insurance coverage.

Evidence: FDIC 2005 Annual Report, page 103; GAO-05-281, Feb. 2005; Deposit Insurance: An Annotated Bibliography, http://www.fdic.gov/deposit/deposits/international/bibliography/index.html; Reform of Deposit Insurance, http://www.fdic.gov/deposit/insurance/initiative/index.html. European Commission, Review of Directive 94/19/EC on Deposit Guarantee Schemes, February 2007