jurisdiction: US

text: b"April 2006\nReport No. 06-013\n\n\nFDIC Reserve Ratio and Assessment\nDeterminations\n\n\n\n\n AUDIT REPORT\n\x0c Report No. 06-013\n April 2006\n FDIC Reserve Ratio and Assessment Determinations\n\n Results of Audit\n\n Although the FDIC accurately calculated fund reserve ratios and assessments due from financial\n institutions, the Corporation did not periodically validate key assumptions used to allocate estimated\n insured deposits at Oakar institutions to BIF and SAIF. In particular, the FDIC historically assumed\nBackground and Purpose that 100 percent of Oakar secondary fund deposits were insured. Over time, that assumption became\n less representative of actual transactions.\nof Audit\n After conducting a study (Study) and considering various options, the FDIC devised a new method\nHistorically, the FDIC maintained for allocating Oakar estimated insured deposits that the Corporation determined was more\nthe Bank Insurance Fund (BIF) representative of actual transactions. DIR conducted an analysis of how estimated insured deposits\nand the Savings Association would have been allocated had the new method been in effect since the beginning of 1997. DIR\nInsurance Fund (SAIF) by concluded that by September 2004, the new method would have resulted in just over $96 billion more\nassessing institutions a semiannual in estimated insured deposits allocated to BIF and correspondingly fewer estimated insured deposits\npremium based on the institution\xe2\x80\x99s allocated to SAIF compared to the existing allocation method. In February 2005, FDIC formally\ninsured deposit amount and the adopted the new method and elected to apply the new method prospectively without reallocating\ndegree of risk that the institution estimated insured deposits between the funds.\nposed to its respective insurance\nfund. The nature, timing, and application of the new method could have had a significant impact on the\n reserve ratios, and we concluded that the FDIC should have more fully: (1) informed the Board of\nThe Federal Deposit Insurance the Study results and various alternatives considered and (2) involved the Board in the decision on\nAct (Act) required the FDIC whether, and how, to change the allocation method, including how to address the cumulative net\nBoard of Directors (Board) to set effect (estimated at $96 billion) of not applying the new, more representative, allocation method\nassessments only to the extent earlier. FDIC officials involved in the Study indicated they operated under Board delegations of\nnecessary to maintain the authority in adopting the new method and that they had briefed the FDIC Chairman and deputies to\ninsurance funds at the designated the Board members before publicly announcing the change.\nreserve ratio (DRR) of\n1.25 percent of estimated insured We recalculated BIF and SAIF reserve ratios and concluded that the more representative method, had\ndeposits. it been in effect at the time, would have caused the BIF to drop below the 1.25 percent DRR for a\n 6-quarter period, starting in late 2001 and again in 2005. The Act generally required the Board to\nThe Act also required the Board to take action to return the reserve ratio to 1.25 percent within 1 year.\nmaintain the BIF and SAIF\nindependently of each other which OIG Analysis of BIF Reserve Ratio\npresented a challenge for the 1.40%\n\nFDIC in allocating estimated\n 1.35%\ninsured deposit amounts for Oakar\ninstitutions. Oakar institutions 1.30%\n Reserve Ratio\n\n\n\n\nresulted from a transaction in\nwhich a member of one insurance 1.25%\n\nfund acquired a member (or\n 1.20%\ndeposits) from the other fund,\nknown as the secondary fund. 1.15%\nMost Oakar institutions resulted\nfrom BIF members acquiring 1.10%\n Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05\nSAIF deposits or institutions.\n OIG Recalculation of Reserve Ratio Using DIR Simulation of New Method\nThe objective of our audit was to Reported Reserve Ratio\ndetermine whether: (1) the\nDivision of Insurance and In February 2006, the Congress passed The Federal Deposit Insurance Reform Act of 2005, which\nResearch (DIR) accurately requires merging the BIF and SAIF insurance funds and eliminates the need for the FDIC to allocate\ndetermines the funds\xe2\x80\x99 reserve Oakar deposits between BIF and the SAIF.\nratios and (2) DOF has adequate\ncontrols in place to ensure that the Recommendations and Management Response\nFDIC accurately calculates,\ncollects, and processes We recommended that the FDIC (1) periodically validate key assumptions, estimates, or other\nassessments of financial components that factor into the calculation of the reserve ratio; (2) review and clarify Board\ninstitutions. delegations of authority related to the assessments determination process; and (3) evaluate procedures\n and practices for keeping Board members informed of Corporation matters and activities. FDIC\nTo view the full report, go to management concurred with the findings and recommendations, and plans to submit to the Board\nwww.fdicig.gov/2006reports.asp proposed revisions to policies, procedures, and delegations of authority by September 30, 2006.\n\x0c TABLE OF CONTENTS\nBACKGROUND 1\nRESULTS OF AUDIT 3\nFINDINGS AND RECOMMENDATIONS 4\nCALCULATION OF RESERVE RATIO AND ASSESSMENT\nDETERMINATIONS 4\n Calculation and Reporting of Reserve Ratio 4\n Calculation and Collection of Assessments 5\n\nTHE FDIC\xe2\x80\x99S PROCESS FOR ESTIMATING INSURED DEPOSITS 6\n\n Oakar Institutions 6\n Adjusted Attributable Deposit Amount 6\n Estimated Insured Deposits 7\n FDIC Efforts to Address Estimated Insured Oakar Deposit Differences 8\n Impact of New Allocation Method on Fund Reserve Ratios 10\n DIR Process for Periodically Reviewing Key Assumptions and Estimates 12\n Recommendation 13\n Corporation Comments and OIG Evaluation 13\n\nBOARD MEMBER INVOLVEMENT IN, AND REPORTING OF, THE OAKAR\nESTIMATED INSURED DEPOSIT ALLOCATION ISSUE 14\n\n FDIC Board of Directors 15\n Delegations of Authority 15\n FDIC Efforts to Communicate Issues to the Board 17\n Communication of the Change in Methodology to the Industry and Public 20\n Recommendations 21\n Corporation Comments and OIG Evaluation 22\n\nAPPENDIX I: OBJECTIVE, SCOPE, AND METHODOLOGY 23\nAPPENDIX II: CORPORATION COMMENTS 25\nAPPENDIX III: MANAGEMENT RESPONSE TO RECOMMENDATIONS 33\n\nTABLES\nTable 1: Reserve Ratio Determination and Assessment Rate Processes 2\nTable 2: Selected Information About BIF and SAIF 3\nTable 3: Insured Deposit Estimates for a Hypothetical Oakar Institution 8\nTable 4: DOF-Identified Differences in Oakar Insured Deposit Estimates 8\nTable 5: Examples of Items Discussed in the November 15, 2004 18\n BIF and SAIF Rate Cases\n\nFIGURES\nFigure 1: DIR Analysis of Applying the New Method Historically 10\nFigure 2: OIG Analysis of Reserve Ratios 11\n\x0cACRONYMS LIST\n\nAADA Adjusted Attributable Deposit Amount\nAIMS II Assessment Information Management System\nAMS Assessment Management Section\nBIF Bank Insurance Fund\nCFO Chief Financial Officer\nCFR Code of Federal Regulations\nCOO Chief Operating Officer\nDIR Division of Insurance and Research\nDOF Division of Finance\nDRR Designated Reserve Ratio\nFDI Act Federal Deposit Insurance Act\nFDICIA Federal Deposit Insurance Corporation Improvement Act\nFIRREA Financial Institutions Reform, Recovery, and Enforcement Act\nGAO Government Accountability Office\nMOU Memorandum of Understanding\nOIG Office of Inspector General\nOTS Office of Thrift Supervision\nRIS Research Information System\nSAIF Savings Association Insurance Fund\n\x0cFederal Deposit Insurance Corporation Office of Audits\n3501 Fairfax Drive, Arlington, VA 22226 Office of Inspector General\n\n\nDATE: April 17, 2006\n\nMEMORANDUM TO: Arthur J. Murton, Director\n Division of Insurance and Research\n\n Fred Selby, Director\n Division of Finance\n\n Barbara A. Ryan\n Acting Deputy to the Acting Chairman\n\n\n\nFROM: Russell A. Rau [Electronically produced version; original signed by Russell A. Rau]\n Assistant Inspector General for Audits\n\nSUBJECT: FDIC Reserve Ratio and Assessment Determinations\n (Report No. 06-013)\n\n\nThis report presents the results of our audit of the FDIC\xe2\x80\x99s reserve ratio and assessment\ndetermination processes. The objective of this audit was to determine whether: (1) the Division\nof Insurance and Research (DIR) accurately determines the funds\xe2\x80\x99 reserve ratios and (2) the\nDivision of Finance (DOF) has adequate controls in place to ensure that the FDIC accurately\ncalculates, collects, and processes assessments of financial institutions. During our review, we\nexpanded our objective to include evaluating the FDIC\xe2\x80\x99s communication of information relevant\nto the reserve ratios to the FDIC Board of Directors (Board). Appendix I contains additional\ndetails on our objective, scope, and methodology.\n\nBACKGROUND\nHistorically, the FDIC maintained the Bank Insurance Fund (BIF) and the Savings Association\nInsurance Fund (SAIF) by assessing depository institutions a semiannual premium based on the\ninstitution\xe2\x80\x99s total domestic deposits, with certain adjustments, and the degree of risk that the\ninstitution posed to its respective insurance fund. Section 302(a) of the FDIC Improvement Act\nof 1991 (FDICIA) required the FDIC\xe2\x80\x99s Board of Directors (Board) to establish a risk-based\nassessment system. In September 1992, the Board amended its regulations on assessments to\ntransition from a uniform rate to a risk-based insurance assessment system.1\n\nThe Federal Deposit Insurance Act (FDI Act) also required the Board to set assessments only to\nthe extent necessary to maintain the insurance funds at the designated reserve ratio (DRR) of\n1.25 percent of estimated insured deposits. The term \xe2\x80\x9creserve ratio\xe2\x80\x9d was defined for each\ndeposit insurance fund as the ratio of the fund\xe2\x80\x99s net worth to the value of the aggregate estimated\n1\n Part 327 of the FDIC Rules and Regulations established the current risk-based assessment system.\n\x0cdeposits insured by that fund. In setting the assessments, the Board considered expected\noperating expenses, case resolution expenses and income, the effect of assessments on member\nearnings and capital, and other factors the Board deemed appropriate. The Board set assessments\nhigher for institutions that exhibited financial, operational, or compliance weaknesses ranging\nfrom moderately severe to unsatisfactory or were not well capitalized. The FDIC calculated the\nreserve ratio and set assessments separately for each deposit insurance fund.\n\nDIR\xe2\x80\x99s Financial Risk Management Branch is responsible for assessing the adequacy of the\ndeposit insurance funds and implementing an effective and fair risk-based premium system.\nDOF\xe2\x80\x99s Assessment Management Section (AMS) handles the assessment billing and collection\nfunction. AMS is responsible for establishing policy-related issues and assessing and invoicing\nFDIC member institutions on a quarterly cycle for FDIC risk-based assessment premiums.\nTable 1 presents information about the reserve ratio determination and assessment rate processes.\n\nTable: 1: Reserve Ratio Determination and Assessment Rate Processes\n Process Reserve Ratio Assessment Rates\n Responsible Office Calculated by DIR. Determined by the FDIC Board of Directors.\n\n Implemented by DOF.\n\n Relevant Information DIR\xe2\x80\x99s Research Information System AIMS II is used to determine assessment\n Systems and Reporting (RIS) is used to house data. Some amount and to invoice financial institutions\n Methods data obtained from the Assessment for assessments.\n Information Management System\n (AIMS II). Assessment rates are reported in the Federal\n Register.\n Reserve ratios are reported in the\n Quarterly Banking Profile.\n\n Basis for Calculation Based on estimated insured deposits. Based on total domestic deposits with certain\n adjustments.\n\n Purpose of Process Used to assess sufficiency of Used to capitalize the insurance funds.\n insurance funds and to \xe2\x80\x9ctrigger\xe2\x80\x9d\n assessments.\n\nSource: OIG Review of DIR and DOF information.\n\nThe Act also required the Board to maintain the BIF and SAIF independently of each other,\nwhich presented a challenge for the FDIC in allocating estimated insured deposit amounts for\nOakar institutions.2 Oakar institutions resulted from transactions in which a member of one\ninsurance fund acquired a member (or deposits) from the other fund, known as the secondary\nfund. Most Oakar institutions resulted from BIF members acquiring SAIF deposits or\ninstitutions. Table 2 presents information about the deposit insurance funds and Oakar members.\n\n\n\n\n2\n Named after former Representative Mary Rose Oakar, who sponsored the Oakar Amendment to the FDI Act.\n\n\n\n 2\n\x0cTable 2: Selected Information About BIF and SAIF (Dollars in Millions)\n 3rd Quarter 2005 4th Quarter 2004\nBIF\nTotal BIF Members 7,748 7,839\n BIF-Member Oakar Institutions 758 773\n Other BIF Members 6,990 7,066\nTotal Assets $9,206,648 $8,743,794\nTotal Deposits $6,072,380 $5,773,607\nAnnual Assessments $52 $95\nSAIF\nTotal SAIF Members 1,106 1,136\n SAIF-Member Oakar Institutions 146 149\n Other SAIF Members 960 987\nTotal Assets $1,493,376 $1,360,829\nTotal Deposits $896,294 $810,588\nAnnual Assessments $8 $9\nSource: FDIC\xe2\x80\x99s Quarterly Banking Profile, and Semiannual Rate Cases.\n\nIn February 2006, Congress passed The Federal Deposit Insurance Reform Act of 2005, which\nrequires merging the BIF and SAIF insurance funds into a single Deposit Insurance Fund. The\nFDIC merged the funds at the end of March 2006. Accordingly, implementation of the\nlegislation eliminated the need for the FDIC to allocate Oakar deposits between BIF and SAIF.\n\nRESULTS OF AUDIT\nThe FDIC could improve internal controls over the reserve ratio and assessment determination\nprocesses. Although the FDIC accurately calculated fund reserve ratios and assessments due\nfrom financial institutions, a key underlying assumption supporting the reserve ratio calculations\nbecame outdated and was not representative of actual transactions. We concluded that the\nCorporation could improve its processes for estimating insured deposits and for communicating\nto the Board information relevant to assessment determinations and other corporate matters and\nactivities.\n\nThe FDIC did not periodically validate key assumptions used to allocate estimated insured\ndeposits at Oakar institutions to BIF and SAIF. In particular, the FDIC historically assumed that\n100 percent of Oakar secondary fund deposits were insured. Over time, that assumption became\nless representative of actual transactions.\n\nIn October 2004, the FDIC established an interdivisional group to study the Corporation\xe2\x80\x99s\nmethodology for estimating and allocating insured deposits (Study). After considering various\noptions, the FDIC devised a new method for allocating Oakar estimated insured deposits that the\nFDIC determined was more representative of actual transactions. DIR conducted an analysis\nsimulating how estimated insured deposits would have been allocated had the new method been\nin effect since the beginning of 1997. DIR concluded that by September 2004, the new method\nwould have resulted in just over $96 billion more in estimated insured deposits allocated to BIF\nand correspondingly fewer estimated insured deposits allocated to SAIF compared to the existing\nallocation method. Further, we recalculated BIF and SAIF reserve ratios using DIR\xe2\x80\x99s analysis\nand concluded that reallocating estimated deposits insured by the funds to reflect the new method\n\n\n\n 3\n\x0cwould have caused BIF to drop below the 1.25 percent DRR for a 6-quarter period starting in late\n2001 and again in 2005. The Act generally required the Board to take action to return the\nreserve ratio to 1.25 percent within 1 year.\n\nIn February 2005, the FDIC formally adopted the new method and elected to apply the new\nmethod prospectively and not reallocate estimated deposits between BIF and SAIF. Because the\nnature, timing, and application of the new method could have had a significant impact on the\nreserve ratios, we concluded that the FDIC should have more fully: (1) informed the Board of\nthe Study results and various alternatives that were considered and (2) involved the Board in the\ndecision on whether, and how, to change the allocation method, including how to address the\ncumulative effect (estimated at $96 billion) of not applying the new, more representative\nallocation method earlier. For example, the Study results were not discussed in the 2005 BIF or\nSAIF semiannual assessment rate cases presented to the Board. FDIC officials involved in the\nStudy indicated they had operated under Board delegations of authority in adopting the new\nmethod and that they had briefed the FDIC Chairman and deputies to the Board members before\npublicly announcing the change.\n\nIn addition to mandating the merger of the BIF and SAIF insurance funds, the recently enacted\ndeposit insurance reform legislation also replaced the 1.25 DRR with a 1.15-to-1.5-percent\nrange, which allows the Board more discretion in setting the DRR. This further supports our\nconclusion that the FDIC should improve controls over the assessments process by periodically\nvalidating assumptions and estimates and clarifying Board delegations of authority related to the\nassessments determination process. In addition, FDIC management and the Board should jointly\nreview, and improve as appropriate, the Corporation\xe2\x80\x99s procedures and practices for keeping the\nBoard members informed of corporate activities and operations.\n\n\nFINDINGS AND RECOMMENDATIONS\n\nCALCULATION OF RESERVE RATIO AND ASSESSMENT DETERMINATIONS\n\nThe FDIC accurately calculated the BIF and SAIF reserve ratios and accurately calculated and\ncollected assessments due from financial institutions. However, as discussed later in this report,\nthe internal controls over the reserve ratio and assessment determination processes need to be\nstrengthened. Specifically, the FDIC\xe2\x80\x99s assumption used to allocate estimated insured deposits\nbecame outdated over time and less representative of actual Oakar institutions.\n\nCalculation and Reporting of Reserve Ratio\n\nThe FDI Act required the FDIC to estimate insured deposits in setting assessments for each\ninsurance fund and defined the DRR of each deposit insurance fund to be 1.25 percent of\nestimated insured deposits. Estimating insured deposits involves taking a snapshot of the\ndepository institutions\xe2\x80\x99 reported deposit holdings and estimating what portion of the deposits are\ninsured. The FDIC was required to conduct this estimate to satisfy its obligation of maintaining\nthe DRR at 1.25 percent of estimated insured deposits.\n\n\n\n\n 4\n\x0cDIR was responsible for calculating the reserve ratios for the BIF and SAIF insurance funds.\nDIR calculated the reserve ratios by dividing the BIF and SAIF fund balance by the estimated\ndeposits insured by each fund. To determine the reserve ratio, the FDIC first calculated the\namount of estimated insured deposits. To calculate estimated insured deposits, the FDIC\nobtained deposit information from financial institutions\xe2\x80\x99 Call Reports and Thrift Financial\nReports and deducted estimated uninsured deposits from total deposits. The estimated insured\ndeposits amount was the denominator in the reserve ratio calculation.\n\nAs a part of this audit, we recalculated the reserve ratio for the quarterly periods January 1997\nthrough June 2005 based on the assumptions used by the FDIC in determining estimated insured\ndeposits. We determined that the FDIC correctly calculated the BIF and SAIF reserve ratios\nbased on those assumptions. Additionally, we verified that the FDIC accurately reported the\nreserve ratios calculated in this manner in the Quarterly Banking Profile. However, as discussed\nlater, those assumptions became less representative of actual Oakar transactions.\n\nCalculation and Collection of Assessments\n\nThe FDIC\xe2\x80\x99s risk-based assessment regulations are set forth in Part 327 of the FDIC Rules and\nRegulations. The Board delegated authority to the Director, DOF, to administer regulations for\nthe Corporation that governed the payment of assessments by insured depository institutions in\naccordance with the provisions of the FDI Act. DOF\xe2\x80\x99s AMS handles the assessment billing and\ncollection function. Additionally, AMS is responsible for establishing FDIC policy related to\nassessments and assessing and invoicing FDIC member institutions on a quarterly cycle for\nFDIC risk-based assessment premiums.\n\nAMS maintains and uses AIMS II to calculate and collect FDIC-insured institutions\xe2\x80\x99 assessments\non a quarterly basis. AIMS II has the capability to gather deposit and other data needed to\ncalculate assessments. During the billing and collection process, AMS makes any necessary\nadjustments/amendments to financial institution demographic and financial data. AMS also\nproduces and reviews assessment invoices and makes those invoices available to financial\ninstitutions through FDICconnect at least 15 days prior to the payment due date.3 Additionally,\nAMS staff produce Automated Clearing House files; monitor financial institution changes (e.g.,\nnew institutions, terminated institutions, mergers, branch sales); and produce management\nreports.\n\nTo verify that the FDIC had adequate controls to ensure that assessments were properly\ncalculated and collected, we selected a random sample of invoices from 43 of the 602 institutions\nthat had paid assessments for the quarter ending December 31, 2004. Our audit tests included\ntests of controls to ensure that the assessment base amounts used for billing financial institutions\nagreed with Call Report and Thrift Financial Report data. In addition, we recalculated invoice\ntotals to ensure that DOF accurately calculated assessment amounts. Further, we verified that the\nFDIC made assessment invoices available to financial institutions through FDICconnect at least\n15 days prior to payment due dates and collected assessments accurately and in a timely manner.\nWe identified no discrepancies during our audit testing.\n3\n FDICconnect is the Internet channel that FDIC insured institutions use to conduct business and exchange\ninformation with the FDIC. FDICconnect is a secure e-business transaction site.\n\n\n\n 5\n\x0cTHE FDIC\xe2\x80\x99S PROCESS FOR ESTIMATING INSURED DEPOSITS\n\nThe FDIC could improve its process for estimating insured deposits. We found that the FDIC\ndid not periodically validate assumptions used in estimating insured deposits for the purpose of\ncalculating the reserve ratios. In particular, the FDIC historically assumed that 100 percent of\nOakar secondary fund deposits were insured. Because the FDIC did not have a procedure or\nprocess for periodically validating the assumption, the Corporation was not aware for an\nextended period of time that the assumption became less representative of actual transactions. In\nearly 2005, the FDIC adopted a new method for allocating Oakar estimated insured deposits that\nthe FDIC determined was more representative of actual transactions. An FDIC analysis showed\nthat had the new, more representative, methodology been implemented at the beginning of 1997,\n$96 billion more in estimated insured deposits would have been allocated to BIF and\ncorrespondingly fewer estimated insured deposits would have been allocated to SAIF compared\nto the existing allocation method.\n\nOakar Institutions\n\nOakar institutions resulted from transactions in which a member of one insurance fund acquired\na member (or some deposits) of the other fund. The resulting Oakar institution\xe2\x80\x99s \xe2\x80\x9csecondary\xe2\x80\x9d\nfund referred to the fund that insured the acquired institution. Most such acquired deposits,\nreferred to as Oakar deposits, were SAIF deposits held by BIF members. Oakar deposits dated to\nthe 1989 savings and loan clean-up legislation4 wherein the Congress sought to prevent future\nthrift failures from burdening taxpayers by ensuring that the newly created SAIF would have a\nviable assessment base. While encouraging banks to buy troubled thrifts, the Congress provided\nthat SAIF would assess some of the bank\xe2\x80\x99s deposits after the acquisition. The amount assessed\nby SAIF would be derived from the acquired thrift\xe2\x80\x99s deposits.\n\nOakar institutions were required to include, in their Call Reports, insured deposit information\nresulting from transactions involving Oakar institutions during the period in which the\ntransaction occurred. However, Oakar institutions were not required to maintain or report\nseparate accounting or allocation of deposits between BIF and SAIF during subsequent periods.\nThus, to calculate quarterly reserve ratios, the FDIC had to allocate the estimated insured\ndeposits of Oakar institutions between BIF and SAIF.\n\nAdjusted Attributable Deposit Amount\n\nThe Oakar Amendment to the FDI Act introduced the concept of the Adjusted Attributable\nDeposit Amount (AADA). An AADA was an artificial construct: a number, expressed in\ndollars, that was generated in the course of an Oakar transaction and that pertained to the buyer.\nThe AADA\xe2\x80\x99s initial value was equal to the actual amount of the secondary fund deposits that the\nbuyer acquired from the seller. Thereafter, the AADA increased or decreased at the same\nunderlying rate as the buyer's overall deposit base, that is, at the rate of growth or shrinkage due\nto its ordinary business operations, not counting growth due to the acquisition of deposits from\nanother institution (e.g., in a merger or a branch purchase). The FDIC used an Oakar institution's\nAADA for the following purposes.\n\n4\n Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).\n\n\n\n 6\n\x0c\xe2\x80\xa2 Assessments: An Oakar institution paid two assessments: one for deposits in its secondary\n fund and the other for deposits in its primary fund. The secondary fund assessment was\n based on the portion of the assessment base that was equal to the AADA. The primary fund\n assessment was based on the remaining portion of the assessment base.\n\n\xe2\x80\xa2 Insurance: The AADA fixed the amount of the institution's deposits to be treated as insured\n by an Oakar institution's secondary fund. The remaining portion of the institution's deposits\n was insured by the primary fund. If an Oakar institution failed and the failure caused a loss\n to the FDIC, the two insurance funds shared the loss in proportion to the amounts of deposits\n that they insured.\n\nEstimated Insured Deposits\n\nDIR also used the AADA to allocate estimated insured Oakar deposits between BIF and SAIF\nfor the purpose of calculating the reserve ratios. The denominator in the reserve ratio was\nlargely based on the financial institutions\xe2\x80\x99 estimated insured deposit amounts. The FDI Act did\nnot specifically define \xe2\x80\x9cestimated insured deposits.\xe2\x80\x9d However, since 1989, DIR assumed, for the\npurpose of determining the reserve ratios, that 100 percent of the AADA (also known as\nsecondary fund deposits or Oakar deposits) was insured. According to DIR, for several years\nafter FIRREA, this assumption appeared to closely mirror reality. Most of the Oakar deposits\ncreated in the early- and mid-1990s were SAIF deposits acquired by BIF members that were, on\naverage, almost fully insured.\n\nTo maintain the secondary fund\xe2\x80\x99s share of an Oakar institution\xe2\x80\x99s total deposits (and thus its\nassessment base), the FDIC increased the Oakar deposit amount by the institution\xe2\x80\x99s total deposit\ngrowth rate (excluding acquisitions). Because all Oakar deposits were assumed to be insured,\nthe secondary fund\xe2\x80\x99s estimated insured deposits also increased at the total deposit growth rate.\nAccording to DIR, in the early- to mid-1990s, industry-insured deposit growth was, on average,\nclose to total deposit growth. Thus, the secondary fund\xe2\x80\x99s proportion of a typical Oakar\ninstitution\xe2\x80\x99s estimated insured deposits changed very little during those years.\n\nDuring 2004, DOF identified financial trends in SAIF that were inconsistent with SAIF reserve\nratio trends. DOF determined that from 1998 through 2004, SAIF experienced favorable\nportfolio investment returns, few institution failures, proportionally smaller losses on failures\nthan BIF, and low expenses but a declining reserve ratio.\n\nOne factor that DOF identified as possibly influencing these SAIF trends was the FDIC\xe2\x80\x99s\nhistorical assumption that 100 percent of all secondary fund deposits were insured. To quantify\nthe potential impact of this factor, DOF prepared a comparative analysis of the estimated insured\ndeposit amounts allocated to BIF and SAIF for each Oakar institution using: (1) the existing\nmethod, and (2) the assessment base allocation method, which allocated an Oakar institution\xe2\x80\x99s\ntotal estimated insured deposits on a pro rata basis to the primary and secondary funds. Table 3\nshows how insured deposits estimates would have differed between the two approaches for a\nhypothetical Oakar institution.\n\n\n\n\n 7\n\x0cTable 3: Insured Deposit Estimates for a Hypothetical Oakar Institution (in millions)\n Institution\xe2\x80\x99s Percentage of Secondary Secondary\nMethodology for Estimating Oakar Total Insured Deposits Fund Fund Estimated\nInsured Deposits Deposits for the Total Deposits Insured\n Institution (AADA) Deposits\n\nUsing the existing method that assumed\n $2,000,000 80% $500,000 $500,000\n100% of the secondary fund was insured.\nUsing the assessment base allocation\nmethod that allocated total estimated\n $2,000,000 80% $500,000 $400,000\ninsured deposits to the primary and ($500,000 x .80)\nsecondary funds on a pro rata basis.\nSource: OIG Analysis.\n\nDOF calculated the net difference between the two methods for all Oakar institutions for the\nJune 2004 quarterly reporting period and identified a net difference of $142 billion in the\nallocation of estimated deposits insured by BIF and SAIF. DOF concluded that the assessment\nbase allocation method would have allocated $142 billion more to BIF and correspondingly less\nto SAIF. Most of the difference was attributable to approximately 40 BIF Oakar institutions with\nSAIF (secondary fund) deposits. DOF performed similar analyses for several other quarterly\nreporting dates. Table 4 presents information from DOF\xe2\x80\x99s analysis.\n\nTable 4: DOF-Identified Differences in Oakar Insured Deposit Estimates (in billions)\n Total Deposits SAIF Estimated Insured Deposits\n (Estimated As reported in the Based on the\nReporting Date Percentage Quarterly Banking Assessment Base Difference\n Insured) Profile(a) Allocation Method(b)\nAs of 12/31/1996(c) $1,782.2 (75%) $338.7 $300.1 $38.6\nAs of 6/30/2004 $3,727.3 (60%) $679.4 $537.6 $141.8\nSource: DOF Analysis.\na\n Based on the premise that 100 percent of secondary deposits were insured.\nb\n Based on the premise that secondary deposits were insured up to the percentage of total insured deposits.\nc\n DIR\xe2\x80\x99s simulation analysis (see page 9) applied the new method starting in 1997. Table 4 presents information as\nof December 31, 1996 and June 30, 2004 to allow for a more comparative analysis between the assessment base\nallocation method and DIR\xe2\x80\x99s simulation analysis of the new method for allocating estimated insured deposits.\n\nFDIC Efforts to Address Estimated Insured Oakar Deposit Differences\n\nIn October 2004, the FDIC established an interdivisional group to study the FDIC\xe2\x80\x99s methodology\nfor estimating and allocating insured deposits (Study). The Study Group was tasked with:\n\n\xe2\x80\xa2 evaluating all of the options for allocating the insured portion of the AADA in Oakar\n institutions for the purposes of estimating BIF- and SAIF-insured deposits and for allocating\n costs in the event of a failure of an Oakar institution;\n\xe2\x80\xa2 evaluating the merits of using total deposits in the denominator of the fund reserve ratio\n calculations instead of insured deposits; and\n\xe2\x80\xa2 making significant progress on the Study by February 2005 to ensure that the Chairman,\n Chief Operating Officer (COO), and Chief Financial Officer (CFO) could reference the\n\n\n\n 8\n\x0c Study in the annual management representations that they jointly made to the Government\n Accountability Office (GAO) as part of the FDIC\xe2\x80\x99s financial statement audit.\n\nFurther, the CFO defined a project structure, milestones for project completion, and a Project\nSteering Committee composed of senior FDIC executive managers to oversee the project.\n\nAfter the Study Group considered several alternatives for addressing the Oakar allocation issue,\nthe Study Group issued an internal study report, Allocating Estimated Insured Deposits of Oakar\nInstitutions Between the Insurance Funds (Oakar Study Report),5 which concluded that\nunanticipated deposit trends at Oakar institutions made it appropriate to consider revising the\nestimated insured deposit allocation method for the reserve ratios.\n\nThe Oakar Study Report concluded that, over time, Oakar institutions began relying more\nheavily on uninsured deposit financing, and Oakar institutions\xe2\x80\x99 total deposits (which included\ninsured and uninsured deposits) grew at a greater rate than estimated insured deposits.\nSpecifically, the Oakar Study Report stated that from 2000 through 2004, estimated insured\ndeposits at the 10 largest BIF-member Oakar institutions declined from 70 percent to 59 percent,\nand from the end of 1996 through 2003, BIF members\xe2\x80\x99 total deposits grew at a compound annual\nrate of 6.2 percent compared to only 3.8 percent growth for estimated insured deposits. These\nuninsured deposit trends were not consistent with FDIC\xe2\x80\x99s assumption that 100 percent of Oakar\ndeposits were insured.\n\nThe Oakar Study Report recommended a new method for allocating estimated insured deposits at\nOakar institutions that the Study Group determined was more representative of actual Oakar\ninsured deposit trends. The FDIC elected to apply the new method prospectively beginning in\nthe fourth quarter 2004. The new method differed from the existing method as follows.\n\n\xe2\x80\xa2 For future Oakar transactions, the insured share of Oakar deposits would correspond to the\n acquired institution\xe2\x80\x99s ratio of insured-to-total deposits.6\n\xe2\x80\xa2 For existing and new Oakar institutions, the estimated insured growth rate of Oakar deposits\n would grow at the institution\xe2\x80\x99s estimated insured deposit growth rate.\n\xe2\x80\xa2 Prospective application of the new method meant that, for existing Oakar institutions, at the\n start date of implementation (i.e., the start of the last quarter of 2004), insured Oakar deposits\n would equal total Oakar deposits.\n\nThe Oakar Study Report also included an analysis simulating how estimated insured deposits\nwould have been allocated had the new method been in effect since the beginning of 1997. The\nOakar Study concluded that by September 2004, the new method would have resulted in just\nover $90 billion more in estimated insured deposits allocated to BIF and correspondingly fewer\nestimated insured deposits allocated to SAIF compared to the existing method. The Oakar Study\nReport concluded that much of the difference appeared to have been concentrated in the past 2 to\n3 years when total deposit growth was noticeably higher than insured deposit growth.\n\n5\n The FDIC issued draft versions of the Oakar Study Report in November 2004 and January and February 2005.\nThe FDIC issued a final version of the Oakar Study Report on March 3, 2005.\n6\n When the acquired institution was already an Oakar bank, the percentage was based on the acquired institution\xe2\x80\x99s\nratio of insured to total deposits applicable to the acquirer\xe2\x80\x99s secondary fund.\n\n\n\n 9\n\x0cDIR and Legal Division representatives indicated that the CFO; COO; General Counsel; and\nDirector, DIR, briefed the FDIC Chairman on the Oakar estimated insured deposit allocation\nissue, the results of the Study, and the proposed new method for allocating estimated insured\ndeposits. DIR and Legal Division representatives also indicated that they briefed some\ninformation to the deputies to the FDIC Board members before publicly announcing the change\nin methodology. In February 2005, the FDIC formally adopted the new method. The FDIC\nincluded a disclosure discussing the change in methodology in the fourth quarter 2004, Quarterly\nBanking Profile, which was issued in late February 2005. Finally, the CFO briefed GAO on the\nOakar issue in April 2005 and provided GAO a copy of the Oakar Study. We discuss the FDIC\xe2\x80\x99s\nefforts to communicate the Oakar estimated insured deposit allocation issue later in this report.\n\nImpact of New Allocation Method on Fund Reserve Ratios\n\nWe concluded that the nature, timing, and application of the new, more representative method\ncould have had a significant impact on the reserve ratios. At our request, in August 2005, DIR\nrecalculated its simulation analysis on a quarter-by-quarter basis. DIR also revised its analysis to\nconform with another DIR change in assumptions regarding branch purchases7 and to reflect\nother technical changes to be consistent with the new method. These changes increased the\ncumulative net effect of not applying the new, more representative method between 1997 and\n2004 from $90 billion to $96 billion. Figure 1 below presents the results of DIR\xe2\x80\x99s revised\nanalysis by semiannual period.\n\nFigure 1: DIR Analysis of Applying the New Method Historically\n NET INCREASE IN ESTIMATED BIF-INSURED (AND DECREASE IN ESTIMATED SAIF-INSURED) DEPOSITS\n IF CURRENT OAKAR INSURED DEPOSIT ALLOCATION METHOD HAD BEEN IN EFFECT BEGINNING IN 1997\n\n 120\n\n\n\n 100\n 96\n 95\n 88\n 80 76 82\n $ Billions 75\n 68\n 60 59\n 54\n 50\n 44\n 40 38\n 37\n 28 33\n 35\n 22 26 27\n 23 21 25\n 20 19 19\n 16 18\n 12\n 0 7 10\n 4\n 0\n Mar-97 Sep-97 Mar-98 Sep-98 Mar-99 Sep-99 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04\n\n Date\n\nSource: DIR.\n\n\n7\n The original simulation analysis assumed that deposits from branch purchases were 100-percent insured. Because\na small amount of branch deposits could have been uninsured, DIR added an assumption to the new method that\ndeposits in acquired branches were 90-percent insured. DIR recalculated the analysis to reflect this change.\n\n\n\n 10\n\x0cWe recalculated BIF and SAIF reserve ratios using DIR\xe2\x80\x99s simulation analysis and concluded that\nthe new more representative method would have caused the BIF to drop below the 1.25 percent\nDRR for a 6-quarter period starting in late 2001 and again in 2005. This was significant because\nthe FDI Act generally required the Board to take action to return the reserve ratio to 1.25 percent\nwithin 1 year. We also determined that the new method would have increased the SAIF reserve\nratio to as high as 1.53 percent in September 2003. Figure 2 presents our analysis of BIF and\nSAIF reserve ratios.\n\nFigure 2: OIG Analysis of Reserve Ratios\n 1.55%\n\n 1.50%\n\n 1.45%\n Reserve Ratio\n\n\n\n\n 1.40%\n\n 1.35%\n\n 1.30%\n\n 1.25%\n\n 1.20%\n\n 1.15%\n Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05\n\n OIG Recalculation of BIF Reserve Ratio Using DIR Simulation of New Method\n Reported BIF Reserve Ratio\n Reported SAIF Reserve Ratio\n OIG Recalculation of SAIF Reserve Ratio Using DIR Simulation of New Method\nSource: OIG Analysis of reserve ratio information and simulation analysis from DIR.\nNote: For presentation purposes, Figure 2 presents SAIF and BIF reserve ratios for the period June 2001 through\nDecember 2005. However, we analyzed the simulation analysis impact on the reserve ratios for the period 1997 through\nJune 2005. We determined that neither the reported reserve ratios nor the OIG recalculation of the reserve ratios dropped\nbelow the 1.25 percent DRR during the period 1997 through June 2001.\n\nThe outdated assumption may have also affected the allocation of FDIC administrative expenses\nbetween the two funds.8 We did not attempt to quantify these amounts. However, it appears that\napplication of the outdated assumption did not have an impact on the following processes or\nfactors.\n\n\xe2\x80\xa2 Actual Assessments Due From Oakar Institutions: Actual assessments due were based on\n total domestic deposits. Thus, the Oakar estimated insured deposit allocation issue would\n not have affected an Oakar institution\xe2\x80\x99s assessment base, which the FDIC used to determine\n the assessment amount.\n\n\n8\n The FDI Act required the FDIC to allocate personnel, administrative, or other overhead expenses of the\nCorporation to BIF and SAIF. Some of those expenses were allocated based on estimated insured deposits.\n\n\n\n 11\n\x0c\xe2\x80\xa2 Allocation of Losses in the Event of an Oakar Failure: In the event of an institution failure,\n FDIC based liquidation of the failed institution on actual insured deposits. BIF and SAIF\n then shared any loss in proportion to assessable deposit shares (or the assessment base, which\n was based on total deposits). Again, the Oakar estimated insured deposit allocation issue\n would not have had an impact on the allocation of losses from an institution failure.\n\n\xe2\x80\xa2 Credits or Dividends Due to SAIF Members: In certain cases, some financial institutions\n could be due credits or dividends for prior period assessments paid to an insurance fund.\n According to DIR and the Legal Division, no \xe2\x80\x9c1-A\xe2\x80\x9d Category SAIF members9 had paid\n assessments to SAIF since 1997, thus no credits related to that period would have been due to\n SAIF institutions. Moreover, SAIF, unlike BIF, did not have a ceiling on the reserve ratio\n that could trigger credits or dividends to members.\n\nWe concluded that, while the new, more representative method will stem the growth of the\ndisparity between the existing and new methods for allocating Oakar estimated insured deposits,\nprospective application of the new method will not resolve the cumulative effect ($96 billion) of\nnot applying the new method earlier. In February 2006, Congress passed deposit insurance\nreform measures that included merging the BIF and SAIF insurance funds and eliminated the\nneed for the FDIC to allocate Oakar estimated insured deposits between the funds.\n\nDIR Process for Periodically Reviewing Key Assumptions and Estimates\n\nIn August 2004, DIR, DOF, and the Division of Information Technology, signed a memorandum\nof understanding (MOU), Allocating Estimated Insured Deposits between BIF and SAIF\nAccording to the AADA held by Oakar Institutions. The three divisions agreed to work more\nclosely each quarter in order to ensure a more reliable process and data integrity in allocating\nestimated insured deposits and producing the FDIC\xe2\x80\x99s calculations of BIF and SAIF reserve\nratios. DIR and DOF also agreed to continue to examine the methods by which insured,\ndomestic, and assessable deposits were calculated to ensure that these methods were applied\nconsistently. We agree that the MOU should enhance cooperation between DIR and DOF and\nwill help to ensure reliable data for the reserve ratio calculation.\n\nHowever, we concluded that DIR could benefit from a more formal process (1) for periodically\nreviewing key assumptions and estimates related to the insurance funds and reserve ratio\ncalculations, particularly assumptions related to estimated insured deposits, and (2) for\ndocumenting the results of such reviews, including the alternatives considered, the impact of\nalternatives on the insurance funds and reserve ratios, and the basis for decisions made to change\nassumptions or estimates. Without a periodic process that is clearly documented, DIR may not\nbe able to make timely adjustments or revisions to assumptions and estimates, and the basis for\nDIR\xe2\x80\x99s decisions may not be transparent.\n\n\n\n\n9\n Capital Group \xe2\x80\x9c1\xe2\x80\x9d and Supervisory Subgroup \xe2\x80\x9cA\xe2\x80\x9d was the lowest-risk category in the FDIC\xe2\x80\x99s risk-based premium\nsystem and included institutions considered well capitalized with a composite rating of 1 or 2.\n\n\n\n 12\n\x0cRecommendation\n\nWe recommend that the Director, DIR:\n\n(1) Establish policies and procedures for periodically validating key assumptions, estimates, or other\n components that factor into the calculation of the reserve ratio(s). Such procedures should\n address:\n\n \xe2\x80\xa2 a recommended schedule for validating key assumptions and estimates,\n \xe2\x80\xa2 discussion of disposition of alternatives considered but not accepted,\n \xe2\x80\xa2 documentation requirements to support decisions to change key assumptions or estimates,\n \xe2\x80\xa2 reporting the results of the validation process.\n\nCorporation Comments and OIG Evaluation\n\nThe Director, DIR, provided a written response, dated April 13, 2006, for recommendation 1.\nThe response is presented in its entirety in Appendix II. The Director, DIR, concurred with the\nrecommendation and agreed to develop policies and procedures that will require DIR managers\nto periodically identify, validate, and approve key assumptions and estimates that support the\ncalculation of the reserve ratio. The policies and procedures will require analysis of industry-\nwide issues and trends that could affect current or future estimates, as well as other factors such\nas economic trends, changes in institution accounting practices, etc. The policies and procedures\nwill also focus on issues that affect the integrity of the application data that support reserve ratio\ncalculations. For example, DIR will periodically validate the integrity of bank data systems, and\ndiscuss and approve the process and assumptions used to generate the data.\n\nThe policies and procedures will also include a schedule of periodic meetings to discuss\nconcerns. Managers and staff will adequately document material discussions, decisions, testing,\nand validation results, including but not limited to, discussions of alternatives considered but not\naccepted, decisions to accept or change key assumptions and estimates, and the communication\nof recommendations and decisions to appropriate DIR management.\n\nThe Director, DIR, agreed to draft and submit policies and procedures to the Board for review by\nSeptember 30, 2006. DIR\xe2\x80\x99s planned actions are responsive to the recommendation, and we\nconsider recommendation 1 resolved. However, the recommendation will remain open until we\nhave determined that agreed-to corrective actions have been completed and are effective.\n\nIn its response, DIR noted that there is no single correct method to estimate and allocate insured\ndeposits and there is no scientific way to determine at what precise point in time an existing\nmethod becomes insufficiently representative so as to require a change. We acknowledge that\nthere is no single correct method for estimating and allocating insured deposits. Estimates are\nexpected to be reasonable and involve objective and subjective judgment. As recommended, a\nperiodic validation of key assumptions and estimates should help to ensure that the Corporation\xe2\x80\x99s\nmethod remains sufficiently representative and reasonable.\n\nDIR also contended that previous changes in methodology impacting estimated insured deposits\nhave been adopted prospectively and not applied retroactively to earlier periods, and that they\n\n\n\n 13\n\x0cwere therefore following precedent. DIR offered two examples wherein changes in estimating\nmethodologies were not applied retroactively. First, it should be noted that we did not suggest\nretroactive application. Rather, we stated that the decision on whether, and how, to address the\ncumulative net effect (estimated at $96 billion) of applying an updated methodology only\nprospectively, and not restating deposit funds to reflect the new method, was one on which the\nBoard should have had more information and involvement.\n\nIn addition, in both cited cases, the Corporation elected to apply the new methodologies to all\ndeposits at the date the methodologies were changed, which had an immediate effect on\nestimated insured deposit amounts, in one case for $47 billion and in another case for $56 billion.\nConversely, in this case, FDIC elected to apply the new methodology only to newly generated\nOakar deposits and growth occurring in the last quarter of 2004 (i.e., prospective application),\nrather than to all existing Oakar deposits. Thus, application of the new Oakar methodology did\nnot resolve most of the $96 billion cumulative effect of not applying the new, more\nrepresentative, allocation method earlier. Nevertheless, we are not concluding on whether the\nFDIC selected the correct methodology for estimating insured deposits or whether the FDIC\nproperly applied the change in methodology. As discussed in the next section of this report, in\nour view, selection and application of the current methodology was a matter warranting\ndeliberation by the Board based on timely, accurate, and complete information.\n\nFinally, DIR states that even were the FDIC to retroactively apply the revised methodology, it\ncould not legally impose assessments on banks for prior periods. As noted above, we did not\nsuggest retroactive application of the methodology. We also did not suggest that the FDIC\nimpose any assessments, and therefore did not evaluate related legal authorities.\n\n\nBOARD MEMBER INVOLVEMENT IN, AND REPORTING OF, THE OAKAR\nESTIMATED INSURED DEPOSIT ALLOCATION ISSUE\n\nThe FDIC could have done more to inform its Board of Directors of the Oakar estimated insured\ndeposit allocation issue. FDIC Legal Division representatives indicated that FDIC officers\noperated under appropriate delegations of authority in adopting the new method and that they\nhad briefed the FDIC Chairman on the issue. We concluded that the FDIC should review its\ndelegations of authority related to the assessments determination process to determine whether\nthe delegations need to be clarified or modified. Study Group representatives also stated that\nthey had provided a briefing on the Oakar issue to the deputies to the Board members (Deputies),\nbut this briefing did not clearly discuss the Study results, various alternatives considered, or the\ndollar and reserve ratio impact of the allocation methods being considered. Moreover, the timing\nof the briefing did not provide sufficient opportunity for Board members to evaluate the Oakar\nissue or raise questions before the change was publicly announced. Steps should be taken to\nclarify Board expectations regarding the types of issues that should be provided to the Board for\nreview and approval and to ensure that existing mechanisms for providing the Board current,\naccurate, and complete information\xe2\x80\x94such as the Deputies\xe2\x80\x99 briefings\xe2\x80\x94are adequate. Such\nactions should help to ensure that Board members are informed of, and have an opportunity to be\ninvolved in, matters that could impact their constituent financial institutions.\n\n\n\n\n 14\n\x0cFDIC Board of Directors\n\nThe FDIC is managed by a five-person Board of Directors whose members include the\nComptroller of the Currency (Comptroller) and the Director of the Office of Thrift Supervision\n(OTS). The Board has all of the powers specifically granted by the provisions of the FDI Act.\nWith respect to assessments, the FDI Act required the Board to set semiannual assessments for\ninsured depository institutions when necessary, and only to the extent necessary, to maintain the\nreserve ratio of each deposit insurance fund at the DRR or to increase the reserve ratio to the\nDRR if the reserve ratio was less than the DRR.10 The FDI Act required the Board to review and\nweigh the following factors when setting assessments:\n\n \xe2\x80\xa2 expected operating expenses;\n \xe2\x80\xa2 case resolution expenditures and income;\n \xe2\x80\xa2 the effect of assessments on fund members\xe2\x80\x99 earnings and capital; and\n \xe2\x80\xa2 any other factors that the Board may deem appropriate.\n\nFinally, the FDI Act also required the Board to set semiannual assessments for members of each\ndeposit insurance fund independently from semiannual assessments for members of any other\ndeposit insurance fund and to set the DRR of each deposit insurance fund independently from the\nDRR of any other deposit insurance fund.\n\nDelegations of Authority\n\nThe FDI Act does not address whether the Board may delegate its rate-setting authority to FDIC\nofficials. Further, the FDI Act does not address how estimates or assumptions impacting the\nreserve ratio should be treated. We confirmed with the Legal Division that the Board\xe2\x80\x99s\nratemaking authority had not been delegated to FDIC officers. However, Legal Division\nrepresentatives asserted that the Board had delegated authority for implementing the assessment\nfunction to FDIC officers. Therefore, the FDIC General Counsel had concluded that these\nofficers could act within their delegated authority to adopt a revised methodology for estimating\nOakar insured deposits and decide how to apply that methodology, for example, prospectively\nwithout reallocating BIF or SAIF estimated insured deposit amounts.\n\nSection 5 of the Bylaws of the Federal Deposit Insurance Corporation (Bylaws) addresses the\npowers of the Board and states that the management of the Corporation shall be vested in the\nBoard, which shall have all powers specifically granted by the provisions of the FDI Act and\nother laws of the United States. Section 5 also states that, within limitations of the law, the\nBoard may delegate any of its specific or incidental powers to any standing or special committee\nof the Corporation or to any officer or agent of the Corporation.\n\nFDIC Legal Division representatives identified two areas of the Bylaws that it asserted provided\nFDIC officers with the authority to adopt and implement the revised estimation methodology.\nArticle VI of the Bylaws identifies the following specific powers and duties:\n\n\n10\n 12 United States Code Part 1817(b)(2)(A).\n\n\n\n 15\n\x0c The Deputy to the Chairperson and Chief Financial Officer shall implement programs consistent\n with the Chief Financial Officers Act of 1990, including establishing and maintaining sound\n financial management systems, accounting systems, corporate budgeting procedures, and cash\n management systems\xe2\x80\xa6 .\n\n The Director of the Division of Finance shall\xe2\x80\xa6receive, deposit, disburse, manage, safely keep,\n and account for all funds of the Corporation, including those funds payable to it in connection\n with its functions assigned to the Director of the Division of Resolutions and Receiverships;\n maintain all accounting records of the Corporation; prepare financial statements and reports\n therefrom; and administer regulations of the Corporation governing the payment of assessments\n by insured depository institutions in accordance with the provisions of the Federal Deposit\n Insurance Act.\n\nAs stated, the CFO\xe2\x80\x99s delegations focus on establishing and maintaining financial systems and\nprocesses, while the Director, DOF\xe2\x80\x99s, delegations focus on administering assessment payment\nregulations. The Board did not delegate assessment determination or rate-setting authority to\nFDIC officers. Moreover, the delegations do not specifically address how changes in\nassumptions or estimates that could have a significant effect on the reserve ratios, and in turn, the\nneed for assessments, should be handled or communicated. We concluded that an independent\nreview of the delegations should be conducted to ensure that they clearly define the Board\xe2\x80\x99s\nintentions in this regard. To facilitate this independent review, we consider the deputies to the\nBoard members to be in the best position to make recommendations to the Board on this matter,\nin consultation with the FDIC\xe2\x80\x99s Legal Division.\n\nWe also noted that the Bylaws include the following delegations to the Director, DIR:\n\n The Director of the Division of Insurance and Research shall be responsible\xe2\x80\xa6for identifying and\n assessing existing and emerging risks to the deposit insurance funds; provide advice and\n assistance to the Board of Directors and the Corporation\xe2\x80\x99s various organizational units on\n economic and financial matters of importance to the Corporation and to the depository\n institutions industry; conduct basic research on current and emerging major problems in areas of\n specific interest to the Corporation; analyze policy alternatives and make recommendations\n thereon; monitor current economic and financial developments, problems, and issues\xe2\x80\xa6 .\n\nIn our opinion, the delegations to the Director, DIR, establish an expectation that the Director\nshould communicate and advise the Board on financial matters of importance to the Corporation\nand the banking industry. The role of the Director, DIR, should be considered in the overall\nreview of delegations.\n\nFinally, Legal Division representatives noted that several years ago, the Board established a\nMaster Resolution11 to ensure that significant or potentially controversial issues reached the\nBoard\xe2\x80\x99s attention. Specifically, the Master Resolution stated that \xe2\x80\x9c\xe2\x80\xa6the Board hereby reserves\nto itself consideration of matters which would establish or change existing Corporation policy,\ncould attract unusual attention or publicity, or would involve an issue of first impression.\xe2\x80\x9d The\nBoard rescinded the Master Resolution in June 2002 because it was \xe2\x80\x9coverly subjective, vague,\nand unwieldy and therefore incapable of proper interpretation\xe2\x80\xa6\xe2\x80\x9d Legal Division representatives\n\n11\n Seal No. 062525, dated May 27, 1997.\n\n\n\n 16\n\x0ccontended that the Board\xe2\x80\x99s rescission of this resolution signified that the Board trusted FDIC\nofficers to use discretion in determining what matters should be presented to the Board. As\ndiscussed later, we are recommending that steps be taken to clarify Board expectations regarding\nthe types of issues that should be provided to the Board for review and approval.\n\nFDIC Efforts to Communicate Issues to the Board\n\nThe Study Group representatives noted that during the initial stages of the Study, the FDIC\nGeneral Counsel advised that the authority to make the change in methodology was clearly\nvested in the FDIC CFO under Board-approved delegations of authority. Nevertheless, these\nrepresentatives indicated that the CFO; COO; General Counsel; and Director, DIR, briefed the\nChairman on numerous occasions about the Study\xe2\x80\x99s status and the Study Group\xe2\x80\x99s\nrecommendations for adopting a revised methodology, including whether it should be adopted\nretroactively or prospectively and the implications thereof. The representatives noted that the\nChairman chose to dispose of the Oakar issue at the staff level, but gave his assent to staff to\nbrief the deputies to the other Board members as a courtesy.\n\nWe concluded that internal discussion among senior FDIC officials involved in the Oakar\nestimated insured deposit allocation issue was adequate; however, communications of the issue\nwith the FDIC Board and Deputies were limited. Following passage of the Sarbanes-Oxley Act\nof 2002, the Board issued the Pocket Guide for Directors to provide directors of financial\ninstitutions practical guidance in meeting their duties and responsibilities. The guide discusses\nthe need for a strong and independent board of directors at financial institutions. Excerpts from\nthe guide follow.\n\n\xe2\x80\xa2 Maintain independence: Effective corporate governance requires a high level of cooperation\n between an institution\xe2\x80\x99s board and its management. Nevertheless, a director\xe2\x80\x99s duty to oversee the\n conduct of the institution\xe2\x80\x99s business necessitates that each director exercise independent judgment in\n evaluating management\xe2\x80\x99s actions and competence.\n\n\xe2\x80\xa2 Keep informed: Directors must keep themselves informed of the activities and condition of their\n institution and of the environment in which it operates. They should attend board and assigned\n committee meetings regularly, and should be careful to review closely all meeting materials, auditor\xe2\x80\x99s\n findings and recommendations, and supervisory communications ... Directors should work with\n management to develop a program to keep members informed. Periodic briefings by management,\n counsel, auditors or other consultants are helpful\xe2\x80\xa6 .\n\n\xe2\x80\xa2 Monitor implementation: The board\xe2\x80\x99s policies should establish mechanisms for providing the\n board the information needed to monitor the institution\xe2\x80\x99s operations. In most cases, these\n mechanisms will include management reports to the board. These reports should be carefully framed\n to present information in a form meaningful to the board. \xe2\x80\xa6 Reports should be provided far enough\n in advance of board meetings to allow for meaningful review. Management should be asked to\n respond to any questions raised by the reports.\n\nThese guidelines are equally applicable to the relationship between FDIC management and the\nFDIC Board. We identified two opportunities wherein the Corporation could have better\ncommunicated the Oakar issue to the Board.\n\n\n\n\n 17\n\x0cSemiannual Rate Cases: The Director, DIR, presents a semiannual written case to the Board\nthat recommends maintaining or changing the fund assessment rate schedule for the ensuing\n6-month period. We reviewed the 2005 BIF and SAIF Semiannual Rate Cases that had been\npresented in November 2004 and May 2005 and determined that the Oakar issue and revised\nestimation methodology were not discussed in the case memoranda. We also confirmed with\nDIR representatives that the Oakar issue and revised estimation methodology had not been\ndiscussed at the Board meetings approving the BIF and SAIF rate cases. These cases routinely\ndiscuss a range of estimates for income and expense items that affect BIF and SAIF balances.\nTable 5 presents excerpts of items discussed in the November 15, 2004 rate cases.\n\nTable 5: Examples of Items Discussed in the November 15, 2004 BIF and SAIF\nRate Cases (in millions)\nItems Discussed in the Rate Case BIF SAIF\nProjected Income From Assessments for the Semiannual Period $84 $7\nInterest Income $1,626 $537\nProjected FDIC Operating Expenses Allocated to the Funds ($848) ($136)\nProvision for Losses (related to failures, litigation, and other contingent losses) ($19) ($56)\nUnrealized Gain (Loss) on Available for Sale Securities ($295) ($93)\nComprehensive Income (Loss) $548 $259\nSource: OIG Review of 2005 BIF and SAIF Rate Cases.\n\nAt the time of this rate case, the projected BIF and SAIF reserve ratios stood at 1.31 percent and\n1.34 percent, respectively. A shift of $96 billion in estimated insured deposits from SAIF to BIF\nwould have decreased the BIF reserve ratio by 5 basis points12 to 1.26 percent and increased the\nSAIF reserve ratio by 15 basis points to 1.49 percent. The largest income and expense item\n(interest income) discussed in the rate case had the effect of increasing the BIF and SAIF reserve\nratios by 6 basis points for each fund. Thus, in our view, the Oakar issue could potentially have\nhad a greater impact on the reserve ratios than most of the other income and expense items that\nhad been discussed in the rate cases. Further, given the timing of the November 2004 rate case,\nwe believe that it would have been appropriate for the Study Group to brief the Board about the\nongoing Study and alternatives being considered for addressing the Oakar estimated insured\ndeposit issue.\n\nThe Study Group representatives indicated that the Oakar issue was not included in the\nMay 2005 rate cases because the FDIC considered the Oakar issue to be a settled, fully-briefed,\nand agreed-upon change and noted:\n\n\xe2\x80\xa2 There was no controversy with respect to the change internally\xe2\x80\x94including with the Board,\n whose Deputies had been briefed (discussed below).\n\n\xe2\x80\xa2 The FDIC had already publicly disclosed the new methodology for calculating estimated\n insured deposits in March 2005 with the publication of the fourth quarter 2004 Quarterly\n Banking Profile.\n\n\n12\n A basis point is one-hundredth of a percentage point.\n\n\n\n 18\n\x0c\xe2\x80\xa2 The prospective adoption of the change as of the fourth quarter of 2004 meant that it had an\n immaterial effect on the estimated insured deposit amounts presented in the two 2005\n semiannual rate cases.\n\nFebruary 2005 Deputies\xe2\x80\x99 Briefing: Although the revised methodology was not included in a\nformal board case, FDIC officials had communicated some information about the Oakar\nestimated insured deposit issue to Board member representatives. Specifically, on\nFebruary 23, 2005, representatives from DIR and the Legal Division provided a briefing on the\nOakar issue to the Deputies for the FDIC Vice Chairman, OTS Director, and the Comptroller of\nthe Currency.13 The Deputy for the FDIC Director was unable to attend the briefing. This\nbriefing is significant because it occurred 1 day before the revised methodology was publicly\nannounced in the Quarterly Banking Profile.\n\nWe interviewed DIR and Legal representatives and Deputies who attended the briefing to\nunderstand the nature and content of the briefing and whether the briefing sufficiently\ncommunicated the dollar impact of the Oakar issue and the potential impact on the reserve ratios.\nA DIR representative who presented the briefing provided a 2-page briefing document that the\nDIR representative believed had been provided to the Deputies to explain the Oakar issue. This\nbriefing document did not contain any discussion of the dollar or reserve ratio impact. Further,\nother meeting attendees had differing recollections regarding the issues discussed at the briefing\nand whether the dollar value of the DIR simulation analysis had been discussed.\n\nDuring our audit, senior FDIC officials involved in the Oakar issue contended that the Bylaws\nrequire that if at least two Board members specifically request that a matter that can be decided\nat the FDIC staff and/or Chairman level be referred to the Board, then the matter is placed before\nthe Board for a final determination. This process is referred to as the \xe2\x80\x9ctwo-member rule.\xe2\x80\x9d Those\nFDIC officials noted that the February 2005 Deputies\xe2\x80\x99 briefing provided the Deputies an\nopportunity to invoke the \xe2\x80\x9ctwo-member rule,\xe2\x80\x9d but at the conclusion of the briefing, there were no\nunresolved questions, and none of the Deputies requested to have the matter sent forward to the\nBoard for a vote. However, we noted that the FDIC officials\xe2\x80\x99 contention did not reflect input\nfrom the FDIC Acting Chairman or the other Board members.\n\nIn addition, we noted that the Bylaws state that:\n\n Special meetings of the Board of Directors may be called by the Chairperson or, upon the written\n request of any two members of the Board of Directors, by the Executive Secretary. Reasonable\n notice of any such special meeting shall be given to all members of the Board of Directors who\n can be contacted after a reasonable effort and in sufficient time to permit their attendance or\n participation.\n\nBy its terms, this provision references only the calling of a special meeting of the Board, not the\nbroader interpretation suggested above. Regardless, in our view, the timing of the Deputies\xe2\x80\x99\n\n\n13\n The composition of the Board has since changed. For example, the FDIC Chairman and Comptroller of the\nCurrency have left the FDIC and OCC. The former FDIC Vice Chairman is now the Director of OTS. The current\nActing Chairman joined the FDIC as Vice Chairman in August 2005.\n\n\n\n 19\n\x0cbriefing and limited nature of the information provided to the Deputies made exercising the\n\xe2\x80\x9ctwo-member rule\xe2\x80\x9d concerning calling special meetings impractical.\n\nWe concluded that the FDIC needs to ensure that it has adequate mechanisms in place for\nproviding the Board timely, accurate, and complete information about corporate matters and\nactivities. With recent departures at the Board and FDIC senior management level, it is an\nopportune time to revisit processes and mechanisms for keeping Board members informed,\nincluding the Deputies\xe2\x80\x99 briefings and the \xe2\x80\x9ctwo-member rule.\xe2\x80\x9d\n\nCommunication of the Change in Methodology to the Industry and Public\n\nThe FDIC could have done more to publicly communicate the Oakar issue and change in\nestimating methodology to the banking industry and the public. The FDIC publicly announced\nthe change in methodology in the Quarterly Banking Profile. However, the announcement did\nnot clearly describe the reasons for the change, disparity between the old and new allocation\nmethods, or the Corporation\xe2\x80\x99s rationale for not addressing the cumulative effect of the prior\nallocation method. As a result, the FDIC\xe2\x80\x99s actions lacked transparency. The Oakar change in\nmethodology announcement was also inconsistent with other public communications involving\nestimated insured deposits.\n\nOn February 24, 2005, the day following the Deputies\xe2\x80\x99 briefing, the FDIC published the\nQuarterly Banking Profile and included the following language in a footnote to communicate the\nOakar revised estimation methodology:\n\n BIF-member institutions may acquire SAIF-insured deposits, resulting in institutions with some\n deposits covered by both insurance funds. Also, SAIF members may acquire BIF-insured\n deposits. Therefore, the BIF-member and the SAIF-member tables each include deposits from\n both insurance funds. Prior to the fourth quarter of 2004, all SAIF deposits held by BIF-member\n institutions and all BIF deposits held by SAIF members (Adjusted Attributable Deposit Amounts,\n or AADAs) were treated as fully insured. Beginning in the fourth quarter of 2004, the insured\n portions of newly acquired AADAs are based on the estimated insured share of deposits at the\n acquired institution.\n\nThe language does not provide sufficient detail about the reasons for the change in methodology\nor the financial impact of the change in estimates on the deposit insurance funds or reserve\nratios. Further, the Quarterly Banking Profile notification was not consistent with the FDIC\xe2\x80\x99s\npast practices for communicating changes in estimates or restatements of reserve ratio amounts.\n\n\xe2\x80\xa2 In August 2002, the FDIC issued a press release, FDIC Reports Second Quarter 2002\n Financial Results for Bank and Thrift Insurance Funds. The press release noted that the BIF\n reserve ratio fell from 1.26 percent at December 31, 2001 to 1.24 percent at March 31, 2002\n as a result of an increase in estimated insured deposits of $75 billion, or 3.1 percent of the\n total estimated insured BIF deposits. The press release attributed the increase in estimated\n insured deposits primarily to a reporting change in quarterly Call Reports that provide the\n source data for estimating insured deposits. This reporting change required banks to report\n the amount of uninsured deposits so that a better estimate of insured deposits could be\n calculated.\n\n\n\n 20\n\x0c\xe2\x80\xa2 In July 2004, the FDIC issued a press release, FDIC Revises March 31, 2004, Reserve Ratios\n for Deposit Insurance Funds. The press release announced revisions to the March 2004\n reserve ratios as a result of an FDIC error in allocating estimated deposits between BIF and\n SAIF. Specifically, the FDIC reported that it had overstated BIF-estimated insured deposits\n by $20.5 billion and correspondingly understated SAIF estimated insured deposits. The press\n release indicated that the FDIC properly reallocated the amounts insured by each fund. The\n press release included information on the revised estimated insured deposit amounts and the\n impact of the reallocation on the BIF and SAIF reserve ratios. The press release also stated\n that the revisions would not trigger adjustments to premiums previously paid by insured\n institutions and that the FDIC would review its processes and make appropriate changes.\n\nBoth of these press releases involved issues of a lesser magnitude than the Oakar estimated\ninsured deposit issue. For example, the August 2002 press release involved an increase in BIF-\nestimated insured deposits of 3.1 percent. The Oakar issue involved a potential increase in\nBIF-estimated insured deposits of 3.7 percent and a corresponding potential decrease in\nSAIF-estimated insured deposits of 10.2 percent. The July 2004 BIF overstatement was\n$20.5 billion as opposed to the Oakar SAIF potential decrease of $96 billion. In our view, the\ntwo press releases establish a threshold for materiality and an example of the type of information\nand how that information should be communicated to the public. Although we are not making a\nrecommendation, the FDIC should consider our conclusions regarding this aspect of the FDIC\xe2\x80\x99s\nhandling of the Oakar issue as the Corporation addresses the findings and recommendations\ncontained in this report.\n\nRecommendations\n\nWe recommend that the Acting Deputy to the Acting Chairman, in coordination with the\ndeputies to the other Board members:\n\n(2) Review the existing Corporate Bylaws, specifically, the powers and duties delegated to the\n CFO and the Directors, DOF and DIR, to ensure that those delegations reflect the Board\n members\xe2\x80\x99 intent and expectations with regard to the deposit insurance fund reserve ratio and\n assessment determination processes, and make recommendations deemed appropriate to the\n Board.\n\n(3) Work with FDIC management to evaluate procedures and practices for keeping Board\n members informed of Corporation matters and activities, and make recommendations\n deemed appropriate to the Board. Consideration should be given to:\n\n \xe2\x80\xa2 the FDIC Board members\xe2\x80\x99 expectations regarding communication and coordination with\n FDIC management, including the types of issues suitable for Board review and approval;\n and\n\n \xe2\x80\xa2 the adequacy of existing mechanisms for providing the board current, accurate and\n complete information needed to monitor FDIC operations, such as the Deputies briefings\n and other informational reports and briefings.\n\n\n\n\n 21\n\x0cCorporation Comments and OIG Evaluation\n\nThe Acting Deputy to the Acting Chairman provided a written response dated April 10, 2006, for\nrecommendations 2 and 3. The response is presented in its entirety in Appendix II. The Acting\nDeputy concurred with both recommendations and agreed to form a working committee\ncomposed of deputies to the Board members and FDIC representatives to:\n\n\xe2\x80\xa2 review the existing Bylaws, including a review of the powers and duties delegated to FDIC\n senior officials to ensure that those delegations reflect the Board members\xe2\x80\x99 intent and\n expectations with regard to the deposit insurance fund reserve ratio and assessment\n determination processes and make recommendations concerning delegations of authority\n deemed appropriate to the Board, and\n\n\xe2\x80\xa2 work with FDIC management to evaluate procedures and practices for keeping Board\n members informed of Corporation matters and activities and communicating matters of\n importance to the public. The working committee will prepare recommendations to the\n Board, giving consideration to Board members\xe2\x80\x99 expectations regarding communication and\n coordination with FDIC management, including the types of issues suitable for Board review\n and approval, and the adequacy of existing mechanisms for providing the Board current,\n accurate and complete information needed to monitor FDIC operations, such as the Deputies\n briefings and other informational reports and briefings.\n\nThe Acting Deputy\xe2\x80\x99s response anticipated that the working committee would draft and submit its\nrecommendations to the Board for review by September 30, 2006.\n\nFDIC\xe2\x80\x99s planned actions are responsive to the recommendations, and we consider\nrecommendations 2 and 3 resolved. However, these recommendations will remain open until we\nhave determined that agreed-to corrective actions have been completed and are effective.\nAppendix III presents a summary of the DIR Director\xe2\x80\x99s and the Acting Deputy to the Acting\nChairman\xe2\x80\x99s responses to our recommendations.\n\n\n\n\n 22\n\x0c APPENDIX I\n\n\n\n OBJECTIVE, SCOPE AND METHODOLOGY\n\nThe objective of our audit was to determine whether: (1) DIR accurately determines the funds\xe2\x80\x99\nreserve ratios and (2) DOF has adequate controls in place to ensure that the FDIC accurately\ncalculates, collects, and processes assessments of financial institutions. During our review, we\nexpanded our objective to include the FDIC\xe2\x80\x99s communication of information relevant to the\nreserve ratios to the FDIC Board. We conducted our audit from March 2005 through December\n2005 in accordance with generally accepted government auditing standards.\n\nTo determine whether the FDIC accurately determines the funds\xe2\x80\x99 reserve ratios, we conducted\ninterviews with DOF and DIR officials and performed the following procedures:\n\n\xe2\x80\xa2 Reviewed applicable policies, procedures, and internal divisional practices relevant to reserve\n ratio calculations.\n\xe2\x80\xa2 Reviewed FDIC legal opinions related to reserve ratio determinations.\n\xe2\x80\xa2 Reviewed the applicable FDI Act requirements.\n\xe2\x80\xa2 Recalculated the reserve ratios for BIF and SAIF for the period January 1997 through June\n 2005 using published FDIC and GAO data to verify the mathematical accuracy of\n computations and use of correct data by the FDIC.\n\xe2\x80\xa2 Examined reserve ratio trends and position in relation to the statutorily prescribed\n 1.25 percent DRR.\n\nTo determine the accuracy of assessment calculations, we selected a random sample of\n43 invoices from the 602 institutions that had paid assessments for the quarter ending\nDecember 31, 2004,14 as recorded in AIMS II. We performed the following audit tests.\n\n\xe2\x80\xa2 Obtained sampled institutions\xe2\x80\x99 Call Data from DIR.\n\xe2\x80\xa2 Verified that DOF properly retrieved assessment base amounts in accordance with\n Section 327.5 of the FDIC Rules and Regulations.\n\xe2\x80\xa2 Recalculated assessment amounts using the appropriate basis-point percentage and verified\n assessment-base amounts.\n\xe2\x80\xa2 Verified timeliness of assessment collections through interviews with DOF\xe2\x80\x99s AMS and Cash\n Management Section and review of relevant documentation.\n\xe2\x80\xa2 Verified assessment invoice availability to assessed institutions in accordance with the DOF\n 2005 performance goal of making invoices available through FDICconnect at least 15 days\n prior to the payment due date.\n\nInternal Controls\n\nWe examined and assessed the five components of internal control: control environment, control\nactivities, risk assessment, information and communication, and monitoring. We assessed\ninternal control through reviews of organization charts, relevant policies and procedures,\ninterviews with DIR and DOF officials to understand control points in the reserve ratio and\n\n14\n According to FDIC, as of December 31, 2004, 93 percent of BIF and SAIF institutions were classified as \xe2\x80\x9c1-A\xe2\x80\x9d\n(i.e., well-capitalized and financially sound) and were assigned an assessment rate of \xe2\x80\x9czero.\xe2\x80\x9d\n\n\n\n 23\n\x0c APPENDIX I\n\n\n\nassessment determination processes, and internal studies of those processes. As discussed\nthroughout our report, we identified control weaknesses in the reserve ratio and assessment\ndetermination processes and made recommendations accordingly.\n\nCompliance with Laws and Regulations\n\nWe concluded that the FDIC complied with laws and regulations related to the reserve ratio and\nassessment determination processes. We reviewed applicable laws and regulations and\ncompared those laws and regulations with our understanding of the FDIC\xe2\x80\x99s assessment activities.\nWe identified no variances from governing laws or regulations.\n\nWe did not identify any fraudulent or illegal activities related to the assessment activities during\nthe scope of our audit. We verified that no allegations of fraud or illegal acts had been brought\nto the attention of the Office of Investigations, within the FDIC Office of Inspector General.\n\nPerformance Measures\n\nWe reviewed the FDIC\xe2\x80\x99s performance measures under the Government Performance and Results\nAct, the Corporate Performance Objectives (CPO), and the FDIC\xe2\x80\x99s annual performance plan\n(APP). We determined that the 2005 CPOs and APP did not include initiatives related to the\nFDIC\xe2\x80\x99s computation of the funds\xe2\x80\x99 reserve ratios or the determination and collection of\nassessments from insured institutions. The 2005 CPOs also included a strategic objective to\nenact and implement deposit insurance reform legislation. We noted in our report that the\nlegislation was enacted in February 2006.\n\nReliance on Computer-based Data\n\nAs part of our audit objective, we assessed the reliability of the data in AIMS II. Specifically,\nwe compared data in AIMS II to data retrieved from external sources for the FDIC\xe2\x80\x99s assessment\nbilling activities, including institutional Call Report data and assessment rates determined by\nFDIC Board actions. We also interviewed DOF officials who are knowledgeable about the data\nand who regularly use the data for evaluation and analysis. We examined the data files for\nerrors, missed values, and dates outside of expected time frames. We corroborated a statistically\nrandom sample of data to source documents. We determined that the data were sufficiently\nreliable for the purposes of this assignment and for supporting our audit conclusions.\n\nOther OIG Audits\n\nThis audit is one of three audits being performed as part of an overall review of the FDIC\xe2\x80\x99s\nRisk-Related Premium System process. The other audits were: Controls Over the Risk-Related\nPremium System (Report No. 05-037, dated September 23, 2005) and Consideration of Safety\nand Soundness Examination Results and Other Relevant Information in the FDIC\xe2\x80\x99s Risk-Related\nPremium System (Report No. 06-008, dated February 17, 2006).\n\n\n\n\n 24\n\x0cAppendix II\n\x0c APPENDIX II\n\n\n\n\n26\n\x0c APPENDIX II\n\n\n\n\n27\n\x0c APPENDIX II\n\n\n\n\n28\n\x0c APPENDIX II\n\n\n\n\n29\n\x0c APPENDIX II\n\n\n\n\n30\n\x0cAppendix II\n\x0c APPENDIX II\n\n\n\n\n32\n\x0c APPENDIX III\n\n\n\n\n MANAGEMENT RESPONSE TO RECOMMENDATIONS\n\n This table presents the management response on the recommendations in our report and the status of the recommendations as of the date of\n report issuance.\n\n\n Rec. Expected Monetary Resolved:a Open or\n Number Corrective Action: Taken or Planned/Status Completion Date Benefits Yes or No Closedb\n DIR will develop policies and procedures that will:\n 1 September 30, 2006 $0 Yes Open\n \xe2\x80\xa2 require DIR managers to periodically identify, validate, and\n approve key assumptions and estimates that support the\n calculation of the reserve ratio, including issues that affect\n the integrity of the application data that support reserve\n ratio calculations;\n \xe2\x80\xa2 include a schedule of periodic meetings to discuss\n concerns;\n33\n\n\n\n\n \xe2\x80\xa2 require that managers and staff adequately document\n material discussions, decisions, and testing including\n alternatives considered but not accepted; and\n \xe2\x80\xa2 address the communication of recommendations and\n decisions to appropriate DIR management.\n FDIC will form a working committee composed of deputies to\n 2 the Board members and FDIC representatives to review the September 30, 2006 $0 Yes Open\n existing Bylaws, including a review of the powers and duties\n delegated to FDIC senior officials to ensure that those\n delegations reflect the Board members\xe2\x80\x99 intent and expectations\n with regard to the deposit insurance fund reserve ratio and\n assessment determination processes and make\n recommendations concerning delegations of authority deemed\n appropriate to the Board.\n\x0c APPENDIX III\n\n\n\n Rec. Expected Monetary Resolved:a Open or\n Number Corrective Action: Taken or Planned/Status Completion Date Benefits Yes or No Closedb\n The working committee will work with FDIC management to\n 3 evaluate procedures and practices for keeping Board members September 30, 2006 $0 Yes Open\n informed of Corporation matters and activities and\n communicating matters of importance to the public. The\n working committee will prepare recommendations to the\n Board, giving consideration to Board members\xe2\x80\x99 expectations\n regarding communication and coordination with FDIC\n management, including the types of issues suitable for Board\n review and approval, and the adequacy of existing mechanisms\n for providing the Board current, accurate and complete\n information needed to monitor FDIC operations, such as the\n Deputies briefings and other informational reports and\n briefings.\n\n a\n Resolved: (1) Management concurs with the recommendation, and the planned corrective action is consistent with the recommendation.\n (2) Management does not concur with the recommendation, but planned alternative action is acceptable to the OIG.\n (3) Management agrees to the OIG monetary benefits, or a different amount, or no ($0) amount. Monetary benefits are considered resolved as long\n34\n\n\n\n\n as management provides an amount.\n b\n Once the OIG determines that the agreed-upon corrective actions have been completed and are effective, the recommendation can be closed.\n\x0c"