The subject final report is provided for your information and use. Please refer to the Executive Summary, included in the report, for the overall audit results. Our evaluation of your response has been incorporated into the body of the report. The recommendations are resolved but will remain open until we have determined that agreed-to corrective action has been completed and is responsive.

If you have questions concerning the report, please contact me at (703) 562-6350 or Mark F. Mulholland, Deputy Assistant Inspector General for Audits, at (703) 562-6316. We appreciate the courtesies extended to the audit staff.

Attachment

cc: James H. Angel, Jr., OERM

FDIC’s Brokered Deposit Waiver Application Process

Background

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• A brokered deposit (BD) is any deposit that is obtained, directly or indirectly, from or through a deposit broker. Deposit brokers have traditionally provided intermediary services matching yield-focused investors with financial institutions offering potentially higher-yielding FDIC-insured deposits than would be available in the investor’s local market.
• FDIC-insured financial institutions have used BDs since the early 1950s as a wholesale funding source to support asset growth. Rates paid by institutions on BDs are often higher than those paid in local markets but can be lower than the cost of unsecured wholesale market funding due to FDIC insurance coverage eliminating credit risk. Thus, BDs can offer institutions an attractive source of liquidity.
• Core deposits are typically lower-cost funding sources than BDs. In addition, the cost of core deposits often lags behind other funding sources during periods of rising interest rates. Further, core deposits tend to be stable over time because customers making these deposits typically have borrowing and other relationships with the institution. Conversely, customers making non-core deposits, including BDs, are generally focused on rates and may not have any other relationship with the institution. Thus, BDs can be a more volatile, higher-cost source of funding than core deposits and can present increased asset quality, liquidity, earnings, and interest rate risk.
• When properly managed, BDs offer institutions a number of important benefits. For example, BDs allow institutions ready access to funding in national markets when deposit growth in the local market lags planned asset growth or otherwise limits investment opportunities. However, BDs can facilitate faster asset growth than can be prudently managed by the institution. In addition, the higher cost of BDs can result in the institution pursuing higher returns on assets. Together, these factors can increase risk related to asset quality.

Background

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• BDs are receiving considerable attention because of recent bank failures involving excessive reliance on such deposits to support rapid loan growth. As previously discussed, BDs can introduce asset quality, earnings, liquidity, and interest rate risk in insured depository institutions. Moreover, BD levels are a factor in determining deposit insurance assessment rates for certain institutions pursuant to changes in the FDIC regulation regarding the risk based assessment system, effective April 1, 2009.
• As depicted in Figure 1, BDs grew from approximately $120 billion to approximately $765 billion from December 31, 1999 to December 31, 2008.

Background

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Background

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Background

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Audit Objective

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• The audit objective was to assess the FDIC’s BD waiver application process for FDIC-insured financial institutions.
• To evaluate the BD waiver application review process, we reviewed a non-statistical sample of 19 of the 70 BD waiver applications submitted from January 1, 2008 through August 15, 2008. As part of our review, we used information in DSC’s Virtual Supervisory Information on the Net Application Tracking System (ViSION AT), which is the official system of record for all applications submitted to the FDIC.
• The scope of this audit did not include assessing the merits of the FDIC’s decisions to grant waivers or the extent to which the FDIC ensured that institutions complied with the terms of BD waivers.
• We conducted this performance audit in accordance with generally accepted government auditing standards. Appendix 1 of this report discusses our audit objective, scope, and methodology in detail.

Audit Results

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Brokered Deposit Waiver Application Process

• The FDIC has established a process to review BD waiver applications submitted by FDIC-insured financial institutions that is generally consistent with the FDIC Rules and Regulations. Nevertheless, opportunities exist to strengthen controls and ensure that the application review process is as efficient as possible.
• The BD waiver application process includes:
  • monitoring when institutions are required to submit a request for a waiver;
  • submitting a letter application by the institution;
  • reviewing applications at the RO level, that is, by DSC Case Managers, in conjunction with RO management;
  • conducting a “parallel” review by the Risk Management and Applications Section in Washington, D.C. (WO);
  • approving application waiver requests in writing; and
  • monitoring specific conditions tied to the BD waiver.

Audit Results

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DSC RO Case Managers review and evaluate BD waiver applications filed by institutions within their caseload. to determine whether the application should be approved. RO management reviews and approves (if appropriate) the Case Manager’s recommendation. Figure 2 illustrates the key aspects of the BD waiver application review process. DSC’s Case Manager Procedures Manual defines the Case Manager’s responsibilities for reviewing and processing waiver applications as: Ensuring that BD waiver applications contain the eight components defined by the FDIC Rules and Regulations section 303.243(c) (see page 10). Notifying eligible institutions in writing that an application is removed from expedited processing and the basis for that decision, when required (see page 5). [ D ]

Audit Results

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Audit Results

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Audit Results

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Regional Office Review We analyzed a non-statistical sample of 19 BD waiver applications filed with the FDIC during the period January 1, 2008 through August 15, 2008 and found that the ROs generally processed the waiver applications in accordance with established procedures, including applicable timeframes. However, we determined that controls could be strengthened in two process areas as noted in Table 2. Of the 19 BD waiver applications sampled, 8 were withdrawn or returned because the institution either did not substantially complete the application or did not agree with the conditions imposed for the waiver approval. The 11 remaining applications were approved by the FDIC.

Table 2: OIG Sample Results Key Process Step Audit Conclusion The Case Manager completed the required data fields in ViSION AT. X See page 16 for details. The Case Manager consulted with the primary federal regulator The Case Manager completed the SOIs. The Case Manager prepared the approval letter. X See page 13 for details. The application was processed within applicable timeframes for expedited or standard processing. (Applications in the sample were processed in 32 days on average.) Source: OIG analysis of SOIs, BD waiver application packages, and data in ViSION AT for the applications sampled. For the sampled item, the process was generally followed. Any exceptions noted were considered to be insignificant and/or were adequately explained by the RO. X Controls in this area could be strengthened.

Audit Results

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Audit Results

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• Three approval letters did not include the non-standard conditions listed in the Case Manager Procedures Manual. RO officials stated that the non-standard conditions were inadvertently omitted from two of the approval letters, but RO staff had discussed the non-standard conditions with the two institutions. RO officials advised us that they had determined that the non-standard conditions were not appropriate for the circumstances involving the remaining approval letter.
• Ensuring that applicable conditions for approvals are clearly stated in approval letters will help facilitate compliance with established controls in the BD waiver process.

Audit Results

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Audit Results

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Audit Results

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Washington Office Review

• Because of heightened concerns about the increased use of BDs as a source of funding, the WO initiated a “parallel” review of BD waiver applications in the first quarter of 2008. WO officials explained that the review process was instituted to provide a secondary-level review and to facilitate reporting to senior FDIC management officials, including the Chairman, on BD waiver applications. After the WO review process was instituted, DSC decided to temporarily discontinue expedited BD waiver application processing of BD waiver applications.
• The FDIC Rules and Regulations require that, if a filing by an eligible depository institution is removed from the expedited process, the FDIC will promptly provide the applicant with a written explanation. Only two of the 19 applications we sampled were eligible for expedited processing. One application was reviewed before DSC’s decision to remove applications from expedited processing and was approved under the 21-day expedited processing timeframe. With respect to the other application, the FDIC did not provide the institution with a written notification. However, RO officials told us that the institution had been informed of the change in the FDIC’s processes for processing BD waiver applications, and we noted reference to those discussions in the correspondence we reviewed.
• The FDIC did not publicly announce its decision to temporarily discontinue expedited processing of brokered deposit waiver applications. Such an announcement would have added transparency to the process, particularly in light of potential public expectation, grounded in the FDIC’s regulations, that BD waiver applications submitted by eligible depository institutions would receive expedited processing.
• The WO uses ViSION AT data to monitor and report on the status of BD waiver applications that institutions have submitted and ROs have accepted.

Audit Results

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• The WO begins its review of a BD waiver application upon receipt of a RO summary of a BD waiver application request. Review examiners in the WO are responsible for providing an analysis of the information provided by the RO and recommending whether the WO should concur with the RO’s determination to grant a waiver. The completed analysis is routed through the appropriate Section Chief to the Associate Director, Risk Management Examinations Branch, or to the Senior Deputy Director, Supervisory Examinations, who notifies the RO of the WO’s concurrence.
• Procedures for the WO review process were communicated to the ROs orally through routine discussions. The WO process was also reiterated in June 2008 during a Risk Analysis Center presentation entitled, BDs: Issues, Risks, and Policies. However, DSC has not yet established formal written procedures for the WO review process. Consequently, the ROs are preparing and submitting a variety of documents to the WO. The results of our sample of submitted documents are shown in Table 3, which follows.

Audit Results

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Application Included in OIG Sample a	Type of Document
	Bank Application	SOI	RO Summary	Approval Letter	Email Summary
1
2
3
4
5
6
7		b
8
9

• While the ROs provided information to the WO for their review and concurrence of BD waiver applications, the information was not consistent among the ROs. For example, some ROs prepared separate summaries for the WO, while others submitted the completed SOIs.
• Written procedures that define the information needed for the WO review (and when such information should be submitted) would help ensure that established policies and procedures are followed and promote a consistent, repeatable, and disciplined process. Such procedures would also allow the WO to more easily assess its process and create efficiencies, if needed, in the future, given the expected increase in the volume of activity.

Audit Results

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• We also noted that financial institutions submitted only 2 of the 19 BD waiver applications in our sample through FDICconnect. FDICconnect is the secure Internet channel for FDIC-insured institutions to conduct business and exchange information with the FDIC.
• FDICconnect has been available to financial institutions for BD waiver applications since June 28, 2005. The FDIC issued a Financial Institution Letter, dated July 1, 2005, encouraging institutions that had not yet registered for FDICconnect to do so as soon as possible so that they could benefit from the opportunities the system provides.
• Further encouraging financial institutions to submit BD waiver applications through FDICconnect could increase the efficiency of the application process. The BD waiver application page in FDICconnect explains the legal requirements for requesting a waiver, defines the term brokered deposit, and requires the user to input the institution’s capital category at the time of submission. Additionally, the required fields in FDICconnect address the information institutions must submit to apply for a waiver (see page 10).
• The use of FDICconnect would allow information in the application to be automatically uploaded to ViSION AT after the waiver application is accepted by the RO. The actual application and information about the number and nature of BD waiver applications pending would then be immediately available to the WO for purposes of initiating its review and management reports on BD waiver applications prepared for senior FDIC officials, including the Chairman.

Recommendations

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1. Clarify DSC’s policies and procedures related to BD waiver applications to:
   • Address the written acknowledgment requirement in FDIC Rules and Regulations Part 303 related to applications filed by eligible institutions, including the timeframes and contents of the written acknowledgement.
   • Advise the ROs about conditions to be included in an approval letter, or develop a standard template for approval letters to help promote compliance with established procedures.
2. Establish formal written BD waiver application review procedures for the WO review process to ensure consistency and adherence to the process and for future assessment of the process. Consideration should be given to:
   • formally defining specific data to be recorded in ViSION AT,
   • defining the documents and their contents, for example, a preliminary summary or the completed SOI, that the ROs should submit to the WO and when that submission should occur.
3. Determine whether it would be appropriate to make a public announcement regarding the decision to temporarily suspend expedited processing for eligible depository institutions.
4. Further encourage financial institutions to use FDICconnect to submit BD waiver applications to enhance efficiency in the BD waiver application process.

Corporation Comments and OIG Evaluation

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On May 21, 2009, the Director, DSC, provided a written response to the draft of this report. Management’s response is presented in its entirety in Appendix 3. Management agreed with our findings and recommendations.

• In response to recommendation 1, DSC agreed to issue a Regional Director Memorandum clarifying the procedures on the acknowledgement provision in the FDIC Rules and Regulations and the conditions to be included in a BD waiver approval letter.
• In response to recommendation 2, DSC agreed to provide formal procedures for the WO review of BD waiver applications that reinforce the requirements in the Case Manager Procedures Manual.
• In response to recommendation 3, DSC agreed to determine the most effective means for notifying insured depository institutions of the Corporation’s decision to temporarily suspend the expedited processing for BD waiver Applications.
• In response to recommendation 4, DSC agreed to continue to encourage insured financial institutions to use FDICconnect to submit BD waiver applications. On June 2, 2009, a DSC official clarified management’s written response to this recommendation. The official indicated that DSC plans to include in its notification letters to institutions (regarding capital levels as discussed on page 15) standard language that encourages the use of FDICconnect when filing BD waiver applications.

A summary of management’s response to each of the report’s recommendations is in Appendix 4. DSC’s planned actions are responsive to our recommendations. The recommendations are resolved but will remain open until we determine that the agreed-to corrective actions have been completed and are responsive.

Objective

The objective of this audit was to assess the FDIC’s BD waiver application process for FDIC-insured financial institutions. We conducted this performance audit from August 2008 through April 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Scope and Methodology

To address the audit’s objective, we:

• Reviewed relevant laws, rules, regulations, policies, procedures, guidance, and other controls pertaining to the BD waiver process.
• Interviewed FDIC officials in Washington, D.C., and RO officials in Atlanta, Georgia; Dallas, Texas; Chicago, Illinois; Kansas City, Kansas; Memphis, Tennessee; New York City, New York; and San Francisco, California.

We focused our analysis on a non-statistical sample1 of FDIC-supervised financial institutions that submitted one or more applications for BD waivers during the period January 1, 2008 through August 15, 2008. Table 4 summarizes the universe of BD waiver applications received by the FDIC based on ViSION AT data, adjusted for applications entered in error, and the number of BD waivers we sampled.

We evaluated whether each sampled BD waiver application had been processed consistent with the FDIC Rules and Regulations and DSC’s procedures. As part of our analysis, we determined whether:

• all eight elements required for the application were reviewed;
• contact was made with other regulators, if applicable, to obtain their views on the waiver applications;2
• the SOIs were complete;
• ViSION AT comments were complete;
• waiver approval letters were complete;
• applications were submitted to the WO for review and concurrence;
• the WO provided feedback to the RO after the review; and
• sampled applications were included on the Chairman’s weekly BD waiver report.

Internal Control

To assess the relevant control activities, we identified the processes related to the BD waiver application process. These controls included policies and procedures contained in the Case Managers Procedures Manual.

Reliance on Computer-processed Information

For purposes of the audit, we did not rely on computer-processed information to support our significant findings, conclusions, and recommendations. Our assessment centered on evaluating both the RO and WO review process. We did, however, rely on information in ViSION AT in order to identify the universe of applications submitted during the period January 1, 2008 through August 15, 2008.

Performance Measurement

We reviewed annual performance plans and FDIC strategic plans to identify goals, objectives, and results and determine whether the Corporation has (1) established quantifiable performance measures and (2) developed and analyzed data to assess program, project, or function performance related to its efforts to identify risk in those institutions involved in BD waiver applications.

We determined that the FDIC’s 2005-2010 Strategic Plan, 2008 Annual Performance Plan, 2008 Corporate Performance Objectives, and 2007 Annual Report had no specific information related to our objective.

Compliance With Laws and Regulations

We reviewed applicable laws and regulations related to the FDIC’s BD waiver application process. We found no instances where the FDIC was not in compliance with applicable laws and regulations. However, as mentioned in the report, we identified certain procedures that should be revised so as to clarify the intent of Part 303 of FDIC Rules and Regulations regarding acknowledgement of applications for eligible depository institutions.

We assessed the risk of fraud and abuse related to the audit objective in the course of evaluating audit evidence.

APPENDIX 2

CORPORATION COMMENTS

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APPENDIX 3

MANAGEMENT RESPONSE TO RECOMMENDATIONS

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APPENDIX 4

ACRONYMS USED IN THE REPORT

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