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entitled 'Federal Deposit Insurance Corporation: Human Capital and Risk 
Assessment Programs Appear Sound, but Evaluations of Their 
Effectiveness Should Be Improved' which was released on February 15, 
2007. 

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Report to Congressional Committees: 

United States Government Accountability Office: 

GAO: 

February 2007: 

Federal Deposit Insurance Corporation: 

Human Capital and Risk Assessment Programs Appear Sound, but 
Evaluations of Their Effectiveness Should Be Improved: 

FDIC Management Issues: 

GAO-07-255: 

GAO Highlights: 

Highlights of GAO-07-255, a report to congressional committees 

Why GAO Did This Study: 

The Federal Deposit Insurance Reform Conforming Amendments Act of 2005 
requires GAO to report on the effectiveness of Federal Deposit 
Insurance Corporation’s (FDIC) organizational structure and internal 
controls. GAO reviewed (1) mechanisms the board of directors uses to 
oversee the agency, (2) FDIC’s human capital strategies and how its 
training initiatives are evaluated, and (3) FDIC’s process for 
monitoring and assessing risks to the banking industry and the deposit 
insurance fund, including its oversight and evaluation. To answer these 
objectives, GAO analyzed FDIC documents, reviewed recommended practices 
and GAO guidance, conducted interviews with FDIC officials and board 
members, and conducted site visits to FDIC regional and field offices 
in three states. 

What GAO Found: 

FDIC’s five-member board of directors is responsible for managing FDIC. 
Information and communication channels have been established to provide 
board members with information on the agency’s operations and to help 
them oversee the agency. The board also has four standing committees 
for key oversight functions. For example, the audit committee primarily 
oversees the agency’s implementation of FDIC Inspector General audit 
recommendations. Finally, because the board cannot oversee all day-to-
day operations, the board delegates certain responsibilities to senior 
management. FDIC has procedures for issuing and revising its 
delegations of authority, which help ensure that the delegations are 
appropriate for its current structure and banking environment. FDIC has 
reviewed specific delegations on occasion at the request of a board 
member, management, and more recently in response to an Inspector 
General report’s recommendation. 

Management of human capital is critical at FDIC because the agency’s 
workload can shift dramatically depending on the financial condition of 
the banking industry. FDIC uses an integrated approach, where senior 
executives come together with division managers, to develop human 
capital initiatives, and the agency has undertaken activities to 
strengthen its human capital framework. FDIC created the Corporate 
Employee Program to develop new employees and provide training in 
multiple disciplines so they are better prepared to serve the needs of 
the agency, particularly when the banking environment changes. Some 
FDIC employees thought the program had merit, but they expressed 
concerns about whether certain aspects of the program could slow down 
the development of expertise in certain areas. FDIC, through its 
Corporate University, evaluates its training programs, and officials 
are developing a scorecard that includes certain output measures 
showing progress of key training initiatives towards its goals. 
Officials told us that they would like to have outcome measures showing 
the effectiveness of their key training initiatives but have faced 
challenges developing them. However, outcome measures could help 
address employee concerns and ensure that the Corporate Employee 
Program achieves the agency’s goals. 

FDIC has an extensive system for assessing and monitoring external 
risks. FDIC’s system includes supervision of individual financial 
institutions and analysis of trends affecting the health of financial 
institutions. FDIC has also developed contingency plans for handling 
the greatest dangers to the deposit insurance fund—particularly the 
failure(s) of large institutions. In addition to risk assessment, a key 
internal control is monitoring risk assessment activities on an ongoing 
basis. FDIC has evaluated several of its risk activities, but most of 
the evaluations we reviewed were not conducted regularly or 
comprehensively. For example, some simulations of its plans for 
handling large bank failures were either out of date or inconsistent 
with FDIC’s guidance. Developing policies and procedures and clearly 
defining how it will monitor and evaluate its risk activities could 
assist FDIC in addressing or preventing weaknesses in its evaluations. 

What GAO Recommends: 

GAO recommends that FDIC (1) develop outcome-based performance measures 
for key human capital initiatives and make available such performance 
results to all employees and (2) develop policies and procedures that 
define how it will systematically and comprehensively evaluate its risk 
assessment activities. 

FDIC generally agreed with the report and the recommendations, and has 
plans underway to improve evaluations of key training programs and risk 
assessment activities. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-255]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Yvonne D. Jones at (202) 
512-2717 or JonesY@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Board Oversight Accomplished through Communication and Information 
Channels, Committees, and Delegations of Authority: 

FDIC's Integrated Approach to Addressing Human Capital Issues Has 
Produced Key Initiatives, but the Agency Has Not Developed Outcome- 
Based Performance Measures: 

FDIC Has an Extensive Risk Assessment System and Contingency Plans for 
Bank Failures, but It Has Not Comprehensively or Routinely Evaluated 
Them: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from the Federal Deposit Insurance Corporation: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Figures: 

Figure 1: FDIC Organizational Chart: 

Figure 2: Number of FDIC Employees, 1991 - 2006: 

Figure 3: FDIC's Human Resources Committee Organizational Chart: 

Figure 4: FDIC's Human Capital Blueprint: 

Figure 5: FDIC's Risk Assessment and Monitoring Process: 

Abbreviations: 

CAMELS: Capital, Asset quality, Management, Earnings, Liquidity, and 
Sensitivity to market risk: 

CFO Act: Chief Financial Officers Act of 1990: 

CHCO: Chief Human Capital Officer: 

COSO: Committee of Sponsoring Organizations of the Treadway Commission: 

CPDF: Central Personnel Data File: 

CU: Corporate University: 

DIR: Division of Insurance and Research: 

DIT: Division of Information and Technology: 

DOA: Division of Administration: 

DOF: Division of Finance: 

DRR: Division of Resolutions and Receiverships: 

DSC: Division of Supervision and Consumer Protection: 

FDIA: Federal Deposit Insurance Act: 

FDIC: Federal Deposit Insurance Corporation: 

HRC: Human Resources Committee: 

MBA: Masters in Business Administration: 

MERIT: Maximum Efficiency, Risk-focused, Institution-Targeted 
examinations: 

NCUA: National Credit Union Administration: 

RTC: Resolution Trust Corporation: 

RAC: Risk Analysis Center: 

Reform Act: Federal Deposit Insurance Reform Act of 2005: 

SCOR: Statistical CAMELS Off-site Rating system: 

United States Government Accountability Office: 

Washington, DC 20548: 

February 15, 2007: 

The Honorable Christopher J. Dodd: 
Chairman: 
The Honorable Richard C. Shelby: 
Ranking Member: 
Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

The Honorable Barney Frank: 
Chairman: 
The Honorable Spencer Bachus: 
Ranking Member: 
Committee on Financial Services: 
House of Representatives: 

In recent years, the U.S. banking industry has become more complex, 
both through an increased diversity and sophistication of products and 
activities as well as through growth in globalization of operations. At 
the same time, industry consolidation has sharply reduced the number of 
institutions and concentrated assets in a small number of large 
financial institutions. Among commercial banks for example, as of 
September 2006, just 1.2 percent of some 7,450 institutions now hold 
76.4 percent of all assets; similarly, 3.9 percent of all thrifts hold 
75.7 percent of all assets. This concentration of assets means an 
increased probability that a single large bank or thrift failure could 
potentially overwhelm the deposit insurance fund. 

Against this backdrop, Congress recently granted the Federal Deposit 
Insurance Corporation (FDIC)--the guarantor of over $4 trillion in 
deposits in the nation's banks and thrift institutions--broad new 
powers for managing its insurance fund. In February 2006, the President 
signed the Federal Deposit Insurance Reform Act of 2005 (Reform 
Act),[Footnote 1] which amended the Federal Deposit Insurance Act 
(FDIA),[Footnote 2] to expand FDIC's authority to price its insurance 
according to the risk a particular institution presents to the fund. 
Today FDIC has a much smaller workforce than it did when it handled the 
banking crisis of the late 1980s and early 1990s. As of June 2006, FDIC 
has reduced its workforce by about 80 percent since 1991. However, FDIC 
has adopted and is implementing strategies to reduce the impact of a 
smaller workforce. Further, the banking industry has been remarkably 
healthy, recording strong earnings and not experiencing a single 
failure between June 2004 and January 2007. However, FDIC must be 
prepared to respond to future situations in which the banking 
environment may be more volatile and uncertain. 

This report responds to the mandate included in the Federal Deposit 
Insurance Reform Conforming Amendments Act of 2005 requiring the 
Comptroller General to report on the effectiveness of FDIC's 
organizational structure and internal controls.[Footnote 3] 
Specifically, this report examines: (1) mechanisms used by the FDIC 
board of directors to oversee and manage the agency; (2) FDIC's human 
capital strategies and how training and development programs are 
evaluated; and (3) FDIC's process for monitoring and assessing risks to 
the industry and the deposit insurance fund and how that process is 
overseen and evaluated. 

To respond to these objectives, we analyzed agency data and documents, 
and identified and reviewed recommended practices on board management 
and oversight, human capital and workforce planning, risk management, 
and internal controls through a review of management literature and our 
guidance.[Footnote 4] We also interviewed members of FDIC's Human 
Resources Committee, senior managers in FDIC's three main business 
lines--the Divisions of Insurance and Research, Resolutions and 
Receiverships, and Supervision and Consumer Protection, and senior 
staff in other FDIC divisions, such as Corporate University and the 
Division of Finance. We also met with senior agency executives--such as 
the Chief Operating Officer, Chief Financial Officer, and Acting 
General Counsel--to obtain their views on board oversight, human 
capital, and risk management issues. To obtain more information on how 
FDIC's board manages and oversees the agency, we conducted interviews 
with members of FDIC's current board of directors, their deputies, and 
the board's Audit Committee members using the same set of questions 
with all interview participants. To obtain independent views from board 
members, we met with each board member separately; each board member's 
deputies or other senior staff also participated in the interviews. We 
also interviewed academicians and industry observers to obtain their 
views on management practices at organizations overseen by boards of 
directors. In addition, we conducted site visits at FDIC regional and 
field offices in three states (California, Georgia, and Texas) to 
obtain more in-depth information on the FDIC board of directors' 
management and oversight responsibilities; issues related to human 
capital, workforce planning, and training and development; FDIC's 
methods for identifying, assessing, and monitoring risk; and FDIC's 
methods of evaluating its progress toward meeting agency goals. At 
these locations, we conducted interviews with division managers, 
division staff, case managers, and financial institution examiners 
using the same set of questions for each interview session. We met with 
field office employee groups separately from regional office managers. 
We conducted our work in the previously mentioned three states and 
Washington, D.C., from May 2006 through January 2007 in accordance with 
generally accepted government auditing standards. Appendix I provides a 
detailed description of our objectives, scope, and methodology. 

Results in Brief: 

FDIC's board of directors uses its diverse perspectives, communication 
with FDIC management, standing committees, and documented delegations 
of authority to assist the board in making informed decisions and 
managing the agency. The composition of FDIC's board of directors 
reflects a range of knowledge and perspectives that contribute to 
discussions and decisions regarding important agency matters. Also, 
FDIC board members told us that ongoing communication with their 
deputies and senior managers within FDIC helps them stay abreast of 
pertinent issues and helps ensure that the board has timely and useful 
information to aid in its decision making. Although board members 
agreed that the board functions best when it has a full complement of 
members, FDIC officials said that occasional board vacancies did not 
affect the board's ability to make decisions and did not negatively 
affect the agency's operations. FDIC's board of directors has also 
established four standing committees to conduct various oversight 
functions that assist it in managing the agency. For example, one of 
the standing committees, the audit committee, reviews certain audit 
reports and ensures that any recommendations are appropriately 
implemented. Although management of FDIC rests with its board of 
directors, the board delegates authority to FDIC divisions or officers 
for certain decisions so that it can focus on policy issues and not be 
overwhelmed with daily operational issues. FDIC has procedures for 
issuing and revising delegations of authority and has reviewed specific 
delegations on various occasions, for example, to clarify language or 
upon request by a board member. These formal procedures for issuing and 
revising delegations and FDIC's various reviews of its delegations of 
authority help ensure that delegations remain appropriate for the 
agency and the banking environment. 

FDIC has taken steps to institutionalize elements of its human capital 
framework and uses an integrated approach to develop its human capital 
strategies, but the agency could improve how it measures the 
effectiveness of significant initiatives, such as developing new 
employees. Interdivisional representation--whereby senior executives 
from major FDIC divisions and managers and staff from support divisions 
collaborate on human capital issues--is a key component of FDIC's human 
capital framework and has resulted in the development of key human 
capital initiatives, such as certifications to enhance employees' 
expertise in certain areas, to address its human capital goals. FDIC 
also developed the Corporate Employee Program to cross train new 
employees in multiple divisions, so they can be reassigned to other 
divisions in the event of an unexpected change in workload priorities. 
FDIC staff in the regional and field offices we visited said the 
program was a good idea, but they had concerns that the cross-training 
aspects would further delay the ability of new employees to contribute 
to mission critical functions. FDIC headquarters officials stated that 
the program is new, but they nonetheless believe the Corporate Employee 
Program helps prepare a more capable workforce. Differences of opinion 
between management and employees on the benefits of a new initiative 
are likely to occur when agencies undergo significant change, which 
underscores the importance of measuring and communicating the benefits 
of new initiatives to employees at all levels. Our work on human 
capital strategic planning states that human capital practices should 
be assessed by how well they help the agency pursue its mission and 
goals. FDIC's Corporate University conducts evaluations of FDIC's 
training and development programs and is implementing a "scorecard" 
that will measure its progress toward meeting the agency's overall 
human capital-related goals. While the scorecard currently includes an 
output performance measure for the Corporate Employee Program, FDIC 
officials said they were hoping to develop outcome-based performance 
measures for the Corporate University scorecard and in particular for 
key human capital initiatives, but they had not yet done so. 

FDIC has an extensive system for assessing external risk, and it has 
developed contingency plans for handling the greatest dangers to the 
deposit insurance fund, but our review of how FDIC evaluates and 
monitors its risk assessment activities identified some weaknesses. To 
assess and monitor risk, FDIC takes a two-fold approach--supervision of 
individual institutions, coupled with research and analysis of trends 
and developments affecting the health of banks and thrifts generally. 
Looking toward any future downturn, FDIC has drawn both broad plans and 
specific strategies for handling a significant increase in troubled or 
failed institutions. The heart of these efforts is a three-part 
strategy relying on: rotating cross-trained employees into priority 
duties as necessary, recalling FDIC retirees for temporary duty, and 
hiring contractors to handle overflow work. A well-designed and 
implemented risk management process should include continuous 
monitoring and evaluation that is woven into ongoing operations. While 
FDIC has evaluated some of its risk assessment plans and programs, most 
of the evaluations we reviewed were not done routinely or 
comprehensively. For example, some of the simulations of bank failures 
were either out of date or did not follow FDIC's guidance on planning 
for bank failures. Furthermore, a good internal control environment 
requires that the agency's organizational structure clearly define key 
areas of authority and responsibility. Our review of FDIC's risk 
management framework found that it does not clearly define how it will 
oversee evaluation and monitoring of its risk activities. Clearly 
defining how it will monitor and evaluate its risk activities could 
assist FDIC in addressing or preventing weaknesses in its evaluations. 

This report includes two recommendations related to human capital and 
risk management for the Chairman of FDIC's board of directors. To 
ensure that FDIC can measure the contribution that its human capital 
initiatives make toward achieving agency goals, we recommend that FDIC 
take steps to identify meaningful, outcome-based performance measures 
to include in the development of its scorecard and communicate 
available performance results to all FDIC employees. At a minimum, 
identifying outcome-based performance measures will ensure that FDIC 
can begin collecting appropriate information that will help in 
determining whether key training and development programs, such as the 
Corporate Employee Program, assist the agency to achieve its mission 
and goals. To strengthen the oversight of its risk management 
framework, we also recommend that FDIC develop policies and procedures 
that clearly define how it will systematically evaluate and monitor its 
risk assessment activities and ensure that required evaluations are 
conducted in a comprehensive and routine fashion. 

We provided a draft of this report to FDIC for review and comment. In a 
letter reprinted in appendix II, FDIC agreed with our recommendations. 
FDIC specifically recognized the importance of developing outcome-based 
performance measures to determine the effectiveness of its key training 
and development programs and stated that it planned to conduct 
evaluations of certain training and development initiatives, including 
the Corporate Employee Program, that will include outcome-based 
measures. FDIC also recognized the benefits of reviewing its risk 
assessment activities to ensure they are comprehensive, appropriate, 
and fully evaluated and stated that it has assembled a committee to 
perform an in-depth review of its current risk assessment activities 
and evaluation procedures. The committee will make recommendations for 
strengthening the agency's risk assessment framework, and FDIC 
executive management will establish a plan for implementing the 
committee's recommendations. FDIC also provided technical comments that 
we incorporated as appropriate. 

Background: 

FDIC's Mission and Structure: 

FDIC was created in 1933 in response to the thousands of bank failures 
that occurred in the 1920s and early 1930s. FDIC's mission is to 
maintain the stability and public confidence in the U.S. financial 
system by insuring depositor accounts in banks and thrifts, examining 
and supervising financial institutions, and managing 
receiverships.[Footnote 5] Currently, FDIC insures individual accounts 
at insured institutions for up to $100,000 per depositor and up to 
$250,000 for certain retirement accounts.[Footnote 6] FDIC says that 
since the start of its insurance coverage in January 1934, depositors 
have not lost any insured funds to a bank failure. Today, FDIC's 
obligations are considerable--as of September 2006, 8,743 insured U.S. 
institutions held $6.47 trillion in domestic deposits, of which an 
estimated 63.2 percent, or $4.09 trillion, were insured. To protect 
depositors, FDIC held insurance reserves of $50 billion, as of 
September 2006. 

FDIC directly supervises about 5,237 banks and thrifts, more than half 
of the institutions in a banking system jointly overseen by four 
federal regulators.[Footnote 7] By assets, however, FDIC-supervised 
institutions account for only 18.1 percent of the industry. Banks and 
thrifts can receive charters from the states or from the federal 
government; state-chartered banks may elect to join the Federal Reserve 
System. FDIC's role as the primary federal regulator is for banks 
chartered by the states that are not members of the Federal Reserve 
System. In addition, FDIC is the back-up supervisor for insured banks 
and thrift institutions that are either state-chartered institutions or 
are under the direct supervision of one of the other federal banking 
regulators. FDIC receives no congressional appropriations; it receives 
funds from premiums that banks and thrift institutions pay for deposit 
insurance coverage and from earnings on investments in U.S. Treasury 
securities. 

FDIC's five board members (known as directors) manage the agency. 
FDIC's chairman manages and directs the daily executive and 
administrative operations of the agency. The chairman also has the 
general powers and duties that the chief executive officer for a 
private corporation usually has, even though FDIC is a federal 
government agency. Executive and senior FDIC staff report to the 
chairman directly or indirectly through the Deputy to the Chairman and 
Chief Operating Officer, or the Deputy to the Chairman and Chief 
Financial Officer; no other board director has similar authority or 
responsibility within the agency. The President appoints three of the 
members, two of whom he designates as the board's chairman and vice 
chairman. The other two members, the Comptroller of the Currency and 
the Director of the Office of Thrift Supervision, serve as ex-officio 
board members.[Footnote 8] The three members directly appointed to 
FDIC's board are often referred to as inside board directors, while the 
other two are referred to as outside board directors. 

FDIC operates principally through three divisions: 

* the Division of Supervision and Consumer Protection, which supervises 
insured institutions and is responsible for promoting compliance with 
consumer protection, fair lending, community reinvestment, civil 
rights, and other laws; 

* the Division of Insurance and Research, which assesses risks to the 
insurance fund, manages FDIC's risk-related premium system, conducts 
banking research, publishes banking data and statistics, analyzes 
policy alternatives, and advises the board of directors and others in 
the agency; and: 

* the Division of Resolutions and Receiverships, which handles closure 
and liquidation of failed institutions. 

Other divisions include the Division of Administration, the Division of 
Finance, the Legal Division, and the Division of Information Technology 
(see fig. 1). FDIC currently employs about 4,500 people throughout 6 
regional offices, 2 area offices, and 85 field offices that are 
geographically dispersed, with centralized operations in Washington, 
D.C. 

Figure 1: FDIC Organizational Chart: 

[See PDF for image] 

Source: FDIC. 

Note: This figure is intended to be a simplified version of FDIC's 
organizational chart. Some offices and positions are intentionally 
excluded. 

[End of figure] 

Changes in the Size of FDIC's Workforce: 

Following the resolution of the banking crisis of the 1980s and early 
1990s, FDIC significantly reduced its workforce--down by about 80 
percent, from a peak of about 23,000 employees in 1991 to about 4,500 
employees as of June 2006.[Footnote 9] This trend is illustrated in 
figure 2. A significant portion of the reductions were staff in FDIC 
absorbed from the former Resolution Trust Corporation (RTC).[Footnote 
10] 

Figure 2: Number of FDIC Employees, 1991 - 2006: 

[See PDF for image] 

Source: FDIC. 

[End of figure] 

FDIC's downsizing generally reduced jobs across the agency, and some 
occupational categories experienced sizeable reductions in staff. For 
example, the attorney workforce decreased by 83 percent, from 1,452 
attorneys in 1992 to 249 attorneys in 2005. The composition of FDIC's 
examination staff also experienced significant change. Although there 
was a 35 percent decrease in the number of examiners (from 3,305 in 
1992 to 2,157 in 2005), the percentage of FDIC's workforce devoted to 
examinations increased, from 15 percent in 1992 to 47 percent for 2005. 
Like other federal banking regulators, FDIC is generally required to 
conduct full-scope, on-site examinations of institutions it directly 
supervises at least annually, although it can extend the interval to 18 
months for certain small institutions.[Footnote 11] 

FDIC's downsizing activities also resulted in a loss of institutional 
knowledge and expertise, and FDIC will have to replace a significant 
percentage of its current, highly experienced executive and management 
staff due to projected retirements over the next 5 years. An estimated 
8 to 16 percent of FDIC's remaining permanent workforce is projected to 
retire over the next 5 years. In some FDIC divisions, projected 
retirements are almost double these percentages. 

Board Oversight Accomplished through Communication and Information 
Channels, Committees, and Delegations of Authority: 

FDIC's board of directors has a mix of knowledge and skills that 
contribute diverse perspectives in the board's decision making, and the 
board relies on communication with deputies and senior management 
within FDIC to provide timely and useful information for effective and 
informed decision making. The board has also established standing 
committees to conduct certain oversight functions, such as monitoring 
the implementation of audit report recommendations, to help manage the 
agency. Further, FDIC's board of directors has the ability to broadly 
delegate its authority to allow the agency to operate 
efficiently.[Footnote 12] These delegations are extensive and have been 
reviewed periodically to ensure they are appropriate for FDIC's current 
size and structure, and the current banking environment. 

A Variety of Perspectives and Interaction with FDIC Management Helps 
Board of Directors Make Informed Decisions: 

The literature we reviewed on best practices for boards of directors 
states that the composition of the board should be tailored to meet the 
needs of the organization, but there should also be a mix of knowledge 
and skills.[Footnote 13] FDIC's board of directors reflects a mix of 
knowledge, perspectives, and political affiliations; for example, 
FDIC's board includes the directors of the Office of the Comptroller of 
the Currency and Office of Thrift Supervision as well as a director 
with experience in state bank supervision. Further, after February 28, 
1993, no more than three of the members of the board of directors could 
be members of the same political party. 

According to FDIC board members, each director provides a different 
perspective that contributes to board diversity. Additionally, 
officials told us that the presence of the outside directors on the 
board helps to represent the views of their respective agencies during 
joint rule making. Senior FDIC officials and board directors agreed 
that the board functions best with a full complement of directors. 
Vacancies on the board could result in the board not benefiting from 
the perspectives of a full complement of directors. Board members told 
us that without a full complement, there would be fewer ideas and 
opinions during board deliberations. For example, one board member 
stated that the possible absence of a member with state bank 
supervisory experience might affect discussions on state banks. 
However, FDIC board members told us that board vacancies would not 
negatively affect the daily operation of the agency. 

According to our standards for internal control, effective 
communications should occur in a broad sense with information flowing 
down, across, and up the organization.[Footnote 14] The literature we 
reviewed related to best practices for boards of directors suggests 
that boards need quality and timely information to help them obtain a 
thorough understanding of important issues. The literature states that 
board members should receive information through formal channels, such 
as management reports and committee meetings, and informal channels, 
such as phone or e-mail discussions.[Footnote 15] FDIC directors told 
us that board members are fully aware of and familiar with operations 
at the agency, frequently communicating and interacting with senior 
management and staff on a broad range of issues. For example, board 
directors told us they have regular meetings with various division 
managers to discuss agency issues. We also observed a November 2006 
board meeting, where it appeared from the board members' few questions 
and supportive comments to the FDIC staff that the board members were 
informed of the staff's recommendations. 

Directors explained that there is a free flow of information between 
directors and FDIC senior management and staff as well as between 
directors and the board chairman. Each director also has a deputy who 
assists him or her in carrying out his or her duties and 
responsibilities. With the assistance of their deputies, outside (ex- 
officio) directors are able to remain engaged in pertinent issues at 
FDIC. The deputies also assist directors in examining diverse policy 
issues of concern to the agency, either initiated by the director, or 
at the request of the chairperson. Also, FDIC management provides the 
bulk of information that directors receive to make decisions. For 
example, FDIC management provides briefings to board directors on 
various issues as well as detailed briefing books in advance of FDIC 
board meetings so that directors may ask questions or request more 
information to prepare to provide input and make decisions at board 
meetings. In one May 2006 board meeting, we observed FDIC staff making 
brief presentations to the board highlighting various trends and 
factors that they considered in developing recommended action or 
inaction for several agenda items. We also reviewed board meeting 
agendas that outlined substantive issues considered by the board of 
directors. In one example, the Director of the Division of Supervision 
and Consumer Protection provided a detailed written overview of a 
notice of proposed rule making informing board members weeks before the 
official board meeting. Further, directors told us that informal 
communication with their deputies, other board members, and senior 
management occurs through phone conversations, e-mail discussions, and 
impromptu meetings. 

Standing Committees Conduct Certain Oversight Functions to Assist the 
Board in Managing FDIC: 

FDIC's board of directors established standing committees to conduct 
certain oversight functions that assist it in managing the agency. The 
board provides authority to these committees to act on certain matters 
or to make recommendations to the board of directors on various matters 
presented to it. Currently, the board has four standing committees: (1) 
Case Review Committee, (2) Supervision Appeals Review Committee, (3) 
Assessment Appeals Committee, and (4) Audit Committee. Each committee 
is governed by formal rules that cover areas such as membership, 
functions and duties, and other process and reporting requirements such 
as frequency and scope of committee meetings and, in some cases, 
submission of activity reports to the board. 

The Case Review Committee is comprised of six members who adopt 
guidelines for taking enforcement actions against individuals, for 
example, to remove an individual from participating in the affairs of 
an insured depository institution. Under authority granted to it by the 
board of directors, this committee also reviews and approves the 
initiation of certain enforcement actions upon determination by a 
designated representative of the Division of Supervision and Consumer 
Protection or upon request by the chair of the committee. The 
Supervision Appeals Review Committee, comprised of four members, 
considers and decides appeals of material supervisory determination 
made by FDIC -supervised institutions; for example, an institution may 
appeal a rating in its report of examination. The Assessment Appeals 
Committee is a six-member committee that considers and decides appeals 
regarding assessments to insured depository institutions. As an 
appellate entity, the committee is responsible for making final 
determinations pursuant to regulations regarding the assessment risk 
classification and the assessment payment calculation of insured 
depository institutions. Last, the Audit Committee is comprised of 
three members who are charged with reviewing reports of completed 
audits and requesting necessary follow-up on the audit recommendations. 
The committee also oversees the agency's financial reporting and 
internal controls, including reviewing and approving plans for 
compliance with the audit and financial reporting provisions applicable 
to government corporations,[Footnote 16] assessing the sufficiency of 
FDIC's internal control structure, and ensuring compliance with 
applicable laws, regulations, and internal and external audit 
recommendations, all for the purpose of rendering advice to the 
chairman of the board of directors. 

The literature we reviewed on recommended practices for boards of 
directors of publicly traded corporations states that audit committees 
play a critical role in the board oversight process.[Footnote 17] In 
most publicly traded corporations, the primary role of an audit 
committee of its board of directors is oversight of the preparation and 
filing of financial statements with the appropriate regulators and 
exchanges.[Footnote 18] However FDIC's board directors and officials 
told us that FDIC's Audit Committee does not serve the same function as 
an audit committee of a private sector corporation. FDIC's Audit 
Committee is an advisory body that, in practice, conducts a more 
limited scope of duties than what is authorized in its formal rules. 
Further, as stated above, FDIC is subject to certain audit and 
financial reporting provisions.[Footnote 19] FDIC's board has 
established the position of chief financial officer as FDIC's chief 
financial, accounting and budget officer. Although FDIC is not subject 
to title II of the Chief Financial Officers Act of 1990 (CFO Act), 
which requires 24 executive agencies to appoint chief financial 
officers, FDIC's chief financial officer's duties include implementing 
programs consistent with the CFO Act.[Footnote 20] Thus, FDIC's Audit 
Committee's responsibilities do not include oversight of the 
preparation and filing of financial statements and other activities 
generally conducted by private sector audit committees. Instead, FDIC's 
Audit Committee's primary responsibility is ensuring that the 
recommendations of FDIC's Inspector General are appropriately 
implemented.[Footnote 21] 

Also, section 301 of the Sarbanes Oxley Act requires audit committees 
of publicly traded corporations to be composed entirely of independent 
members.[Footnote 22] Although FDIC is not bound by these requirements, 
according to FDIC officials, Audit Committee members are considered 
independent of FDIC management because they do not have direct 
responsibility over any FDIC division or office. However, in one 
instance, FDIC revised the composition of the Audit Committee because 
there was a perception of impairment to independence. FDIC's Chief 
Financial Officer was a member of the Audit Committee because this 
official was also a deputy to the chairman and therefore eligible for 
the senior employee position on the Audit Committee. However, FDIC 
thought it was inappropriate to have the Chief Financial Officer serve 
on the Audit Committee because certain Audit Committee functions-- 
reviewing materials related to FDIC's finances, for example--may have 
had the potential to conflict with the professional interests of the 
Chief Financial Officer. FDIC officials stated that interactions 
between FDIC's Inspector General and the Audit Committee also help 
mitigate concerns about impairments to independence and conflicts of 
interest.[Footnote 23] For example, officials from FDIC's Office of the 
Inspector General can attend Audit Committee meetings. Audit Committee 
members noted that they valued the insights provided by officials from 
the Office of the Inspector General because they have an opportunity to 
weigh in on instances where the Audit Committee may not be able to 
sufficiently distance itself in order to provide objective oversight. 

Formal Procedures and Periodic Reviews Help Ensure Appropriate 
Delegations of Authority: 

FDIC's board of directors delegates much of the agency's operational 
responsibilities to various committees and offices within FDIC. These 
delegations allow the board to concentrate on policy matters as opposed 
to daily agency operations. FDIC's current delegations of authority 
were influenced by prior events that necessitated broad delegations. 
According to an FDIC official, very few activities were initially 
delegated to FDIC staff. However, during the banking crisis of the 
1980s and early 1990s when FDIC resolved many institutions, there were 
significant transfers of authority from the board to divisional 
personnel. During that period, FDIC had over 20,000 employees and the 
need for sweeping delegations was appropriate for the size of the 
agency and the industry's conditions. The board was overwhelmed with 
making decisions stemming from the agency's increased workload and 
decided to delegate many routine matters to FDIC staff. However, there 
are some activities that the board cannot delegate. For example, only 
the board can decide to deny an application for deposit insurance, 
terminate deposit insurance, or take enforcement actions using the 
board's backup authority. 

According to our Standards for Internal Control in the Federal 
Government, conscientious management and effective internal controls 
are affected by the way in which the agency delegates authority and 
responsibility throughout the organization.[Footnote 24] An agency's 
delegations should cover authority and responsibility for operating 
activities, reporting relationships, and authorization protocols. Once 
the board has a full understanding of an issue, it may allow others to 
make decisions concerning that issue through delegations. FDIC 
officials explained that delegations of authority are documented, and 
there are associated reporting requirements. Further, FDIC has 
procedures for issuing, reviewing, and amending delegations of 
authority within FDIC divisions and offices. Once delegations of 
authority have been issued by the board, officials who are recipients 
of those delegations are to observe an FDIC directive in properly 
redelegating their authority.[Footnote 25] The February 2004 directive 
to all FDIC divisions and offices formalizes policies and procedures 
for issuing delegations of authority throughout the agency and applies 
to all delegations issued by the board as well as redelegations and 
subdelegations to FDIC managers, supervisors, and other staff. 

According to the directive, the headquarters division or office issuing 
a delegation of authority is to prepare its delegations, including any 
revisions, in coordination with FDIC's Legal Division and submit the 
delegations to FDIC's executive secretary. Further, according to the 
directive, the divisions are to review delegations at least once a year 
for accuracy. After each review, the Executive Secretary Section of 
FDIC's Legal Division is to review submitted delegations for 
completeness and compile any revisions to the delegations. The 
Executive Secretary Section should also track board and other FDIC 
management activity, for example corporate reorganizations and title 
changes, to ensure that the delegations of authority fully reflect 
these changes. We reviewed FDIC documents that track delegations of 
authority related to the processing of financial institution 
applications, for example, applications to engage in real estate 
investment activities. The document indicates changes in or 
clarifications of delegations of authority from existing delegation 
guidance. 

Furthermore, the Executive Secretary Section is to regularly monitor, 
issue periodic notices, and follow up, if necessary, with senior-level 
officials to ensure that all divisions and offices comply with 
established procedures and deadlines for FDIC headquarters delegations 
of authority. FDIC officials told us that the annual reviews required 
by the directive are undertaken to assess the technical conformity and 
consistency of delegations. Although the directive only requires an 
annual review, FDIC officials stated that in practice, the Executive 
Secretary Section works with FDIC's divisions and offices on a 
continuous basis to ensure delegations are complete, consistent, and 
comply with standard procedures. The officials added that divisions 
appreciate having a standard format for issuing and documenting 
delegations. 

In addition to the periodic reviews required by the directive, FDIC has 
broadly reviewed its delegations of authority on other occasions. One 
broad review of its delegations occurred during 1995 to 1997, after the 
banking crisis and the merger with the Resolution Trust Corporation, 
which resulted in a significant reduction in staff. A corporate 
delegation task force was assembled to review existing delegations, 
comment on them, and make recommendations on how they could be 
improved. The scope of the review was intended to encompass all aspects 
of FDIC's delegations, from those governing internal management and 
administration to those governing how FDIC accomplished its mission. An 
FDIC official noted that it was vital that the agency have logical, 
well-reasoned delegations of authority and that they be kept current, 
which underlined the basis of the task force's work. FDIC's Office of 
the Executive Secretary (currently the Executive Secretary Section) 
coordinated the review of delegations by the board of directors and the 
development of recommendations for changes that would reduce processing 
time, empower employees, and promote accountability. FDIC also 
completed a broad review of its delegations in 2002. At the time, FDIC 
rescinded a series of delegations that were previously codified in the 
Code of Federal Regulations in favor of adopting a board resolution 
that contained a master set of delegations. This format made modifying 
the delegations more efficient. During the consolidation process, FDIC 
made several changes to certain delegations, for example, delegations 
related to FDIC's receivership activities were amended to streamline 
the process for approving receivership-related actions. 

There were also occasions that necessitated the reexamination of 
specific delegations. According to a senior FDIC official, any board 
member has the right to request a review of any delegated authority. 
The officials stated that it is not uncommon for a newly appointed 
chairman to review existing delegations of authority to ensure they are 
aligned with his or her vision and management style. In one recent 
instance, delegations related to the processing of industrial loan 
corporation applications were rescinded and a 6 month moratorium 
implemented to allow the agency, upon the request of the current 
chairman, the opportunity to examine developments related to these 
specialized institutions.[Footnote 26] Further, the official stated 
that FDIC divisions and offices can request a review of their 
delegations of authority. As noted earlier, technical changes to the 
delegations covered by the directive, such as position titles and 
division names, are typically handled between the Executive Secretary 
Section and the divisions. However, officials explained that the board 
would be informed of more substantive issues that would require a board 
vote. In most instances, the request for a review is related to a 
delegation that is outdated or needs clarification. The board reviews 
the request and any relevant information and votes to amend or rescind 
delegations. 

Although FDIC has a process for making substantive changes to 
delegations, instances may arise that prompt the need for specific 
reviews of delegations that are perceived as vague or ambiguous. For 
example, a 2006 FDIC Inspector General's report found a lack of clarity 
as to whether the board could delegate the calculation of the reserve 
ratio to FDIC officials.[Footnote 27] According to the report, the 
nature, timing, and application of a new method for estimating certain 
insured deposits could have had a significant impact on the deposit 
insurance fund's reserve ratios. The report concluded that the 
delegations to the Director of the Division of Insurance and Research 
established an expectation that the Director should communicate and 
advise the board on financial matters of importance to the agency and 
the banking industry. However, the report found that communication 
between the FDIC board and deputies on the issue of estimated insurance 
deposit allocations was limited, and FDIC staff should have more fully 
involved the board in the decision of whether and how to apply a new 
method for estimating certain insured deposits. The report recommended 
a review of the agency's existing bylaws, specifically, the powers and 
duties delegated to the Chief Financial Officer and to the Directors of 
the Division of Finance and the Division of Insurance and Research, to 
ensure that those delegations reflect the board's intent and 
expectation for the deposit insurance fund reserve ratio and assessment 
determination process. The report recommended that FDIC review its 
delegations related to the assessment determination process to 
determine whether the delegations needed to be clarified or modified. 
In response to the Inspector General's recommendations, FDIC is 
currently reviewing specific delegations of authority. As of December 
2006, a senior FDIC official was in the process of preparing a proposal 
to present to the Audit Committee outlining the details of the review. 

FDIC's Integrated Approach to Addressing Human Capital Issues Has 
Produced Key Initiatives, but the Agency Has Not Developed Outcome- 
Based Performance Measures: 

FDIC has strengthened its human capital framework and uses an 
integrated approach to align its human capital strategies with its 
mission and goals. For example, interdivisional decision making, where 
senior executives come together with division managers and staff from 
mission support divisions, is a key component of FDIC's human capital 
strategy for ensuring functional alignment of its mission critical 
work. Using this integrated approach, FDIC created the Corporate 
Employee Program to provide a flexible workforce and to train new 
employees in multiple FDIC divisions. However, the program's effects on 
mission critical functions are unknown and contributions to specific 
job tasks may take a number of years to realize. FDIC's Corporate 
University, the agency's training and development division, evaluates 
all of its training programs--including the Corporate Employee Program-
-and is currently implementing a scorecard to measure its progress 
toward meeting its human capital goals. The scorecard currently 
includes an output performance measure for the Corporate Employee 
Program; however, FDIC has not developed outcome-based performance 
measures that will assist it in determining whether its key training 
and development programs are effective. Without such measures, FDIC 
will not be able to determine how effective its training and 
development initiatives are in assisting the agency to achieve its 
mission and human capital goals. 

FDIC Has Taken a Number of Actions to Strengthen Its Human Capital 
Framework and Align Its Human Capital Strategies with Its Mission and 
Goals: 

Effective management of human capital, where the workload can shift 
dramatically depending on conditions in the economy and the banking 
industry, is critical at FDIC. Therefore, FDIC has taken a number of 
steps to strengthen and institutionalize certain elements of its human 
capital framework. FDIC established a Human Resources Committee to help 
the agency integrate human capital approaches into its overall mission 
planning efforts. It also established the Corporate University, an 
employee training and development division that aligns agency needs 
with learning and development. Finally, in response to an FDIC 
Inspector General report, the agency developed a human capital 
blueprint that describes the key elements of its human capital 
framework. 

Human Resources Committee: 

FDIC established its Human Resources Committee in 2001 to integrate 
strategic human capital management into the agency's planning and 
decision making processes. The committee, consisting of members from 
several divisions across the agency, focuses on developing and 
evaluating human capital strategies with agencywide impact. The 
committee also coordinates FDIC's human capital planning process. In 
June 2004, FDIC approved a formal charter for the committee to ensure 
that future leaders and stakeholders continue the committee's work. The 
committee's charter describes its purpose, functions, responsibilities, 
and composition. FDIC's Chief Human Capital Officer serves as chair of 
the Human Resources Committee. FDIC appointed the Chief Human Capital 
Officer (CHCO) to align the agency's human capital policies and 
programs to the agency's mission, goals, and outcomes. 

Because FDIC's Human Resources Committee brings together executives in 
the major divisions and personnel in support divisions, it is able to 
develop approaches for accomplishing the agency's mission and goals. 
Our prior work on strategic human capital planning has shown that 
effective organizations integrate human capital approaches into their 
efforts for accomplishing their missions and goals. Such integration 
allows an agency to ensure that its core processes efficiently and 
effectively support its mission.[Footnote 28] In April 2003, we 
reported that establishing entities, such as human capital councils 
like FDIC's Human Resources Committee, was a key action agencies could 
take to integrate human capital approaches with strategies for 
achieving their missions.[Footnote 29] Comprised of senior agency 
officials, including both program leaders and human capital leaders, 
these human capital councils meet regularly to review the progress of 
their agency's integration efforts and to make certain that the human 
capital strategies are visible, viable, and remain relevant. 
Additionally, the groups help the agencies monitor whether differences 
in human capital approaches throughout the agencies are well 
considered, effectively contribute to outcomes, and are equitable in 
their implementation. In this regard, FDIC's Human Resources Committee 
(HRC) brings together the support functions of FDIC's Division of 
Administration (DOA), Division of Finance (DOF), Legal Division, 
Division of Information and Technology (DIT), and Corporate University 
(CU) with executives from the major line divisions--Division of 
Supervision and Consumer Protection (DSC), Division of Insurance and 
Research (DIR), and Division of Resolutions and Receiverships (DRR). 
See figure 3. 

Figure 3: FDIC's Human Resources Committee Organizational Chart: 

[See PDF for image] 

Source: OIG and FDIC. 

[End of figure] 

The committee members stated that having representatives from various 
divisions within the agency allows them to integrate all views into the 
decision-making process. The committee meets weekly, typically for 2 or 
3 hours and works to facilitate communication and consensus throughout 
FDIC on human capital issues. The committee also advises senior 
leadership on significant human resources issues. Human Resources 
Committee members told us that they review policy recommendations and 
share information with their respective division directors. Further, 
committee members stated that division managers are able to bring the 
concerns of their subordinate staff to the committee, and managers are 
able to notify their subordinate staff of human capital initiatives 
that may address their concerns. For example, staff members are able to 
communicate training needs to the Human Resources Committee through 
their division managers. The division representatives on the Human 
Resources Committee are able to communicate information to the managers 
about future training programs that would meet staff needs. According 
to committee members, this helps facilitate the flow of information to 
and from division managers and subordinate staff. 

Corporate University: 

Another step FDIC took to strengthen its human capital framework was 
establishing its Corporate University in 2003. Corporate University 
supports the agency's mission and goals by training and developing FDIC 
employees. Corporate University provides training and development 
opportunities for FDIC executives, managers, supervisors, and employees 
in order to help them enhance their job performance. Before 
establishing Corporate University, FDIC focused and confined training 
within divisions; the agency gave relatively little attention to 
building a corporate culture or making employees aware of activities 
outside their own divisions. However, since establishing Corporate 
University, FDIC's efforts have been lauded for reflecting best 
practices in aligning training functions with the agency's mission and 
goals. In 2005, FDIC's Corporate University received an excellence 
award from the Corporate University XChange for its organizational 
structure and alignment within the agency.[Footnote 30] The Corporate 
University XChange cited features of FDIC's Corporate University that 
made it appropriately aligned within the agency, such as the existence 
of a Governing Board that includes division managers and having deans 
and chairs from the divisions serve on a rotational basis. 

FDIC's Corporate University works with the Human Resources Committee, 
the Corporate University's Governing Board, and deans to design 
curriculum and implement training programs. The structure of Corporate 
University is intended to support a balance between the agency's goals 
and the needs of the individual divisions. FDIC's Chief Operating 
Officer, Chief Financial Officer, and division Directors work with the 
Chief Learning Officer to deliver training and development programs. 
Corporate University also has structures in place to facilitate the 
exchange of information related to the training needs of the Division 
of Supervision and Consumer Protection.[Footnote 31] Two committees-- 
the Curriculum Oversight Group and the Training Oversight Committee-- 
assist Corporate University in identifying training and development 
needs. The Curriculum Oversight Group consists of midlevel supervisors 
who meet with Corporate University staff to map out training needs and 
curriculum changes that require focused strategies. The Training 
Oversight Committee consists of senior managers who provide information 
on skills needed within the Division of Supervision and Consumer 
Protection. 

Human Capital Blueprint: 

Last, in response to a 2004 FDIC Inspector General audit report, the 
agency established an integrated human capital blueprint in December 
2004.[Footnote 32] The report recommended that FDIC develop a coherent 
human capital blueprint that comprehensively describes the agency's 
human capital framework and establishes a process for agency leaders to 
monitor the alignment and success of human capital initiatives. The 
report noted that such a blueprint would be beneficial because it 
would, among other things, promote an agencywide understanding of the 
human capital program. According to FDIC officials, the blueprint 
describes the key elements of FDIC's human capital framework and 
recognizes the collective responsibility of various FDIC divisions and 
offices in the success of its strategic human capital initiatives. 
Figure 4 illustrates FDIC's human capital blueprint. 

Figure 4: FDIC's Human Capital Blueprint: 

[See PDF for image] 

Source: FDIC. 

Note: According to FDIC, although the blueprint depicts boundaries 
between certain elements of the framework, it is not meant to imply 
that one process ends before another begins. In instances where 
overlaps and interactions between elements of the framework or between 
FDIC divisions are intrinsic to the process, the activity is shown as 
straddling two groups of elements. For example, "program and policy 
development" straddles the boundary between FDIC's Human Resources 
Committee and two divisions within the agency. 

[End of figure] 

Our previous work on strategic human capital planning suggests that 
human capital professionals and line managers should share 
accountability for integrating human capital strategies into the 
planning and decision-making processes. Our work further states that 
successful organizations have human capital professionals work with 
agency leaders and managers to develop strategic and programmatic plans 
to accomplish agency goals.[Footnote 33] This process results in agency 
and human capital leaders sharing accountability for successfully 
integrating strategic human capital approaches into the planning and 
decision making of the agency. FDIC's human capital blueprint includes 
processes for agency leaders to participate in the alignment of the 
agency's human capital initiatives relative to its goals. The blueprint 
considers how major environmental factors, such as the economy and the 
banking industry, impact the agency's mission and goals. FDIC considers 
these external factors when it conducts assessments of workload and 
skill requirements. These assessments ultimately guide the FDIC's Human 
Resources Branch, the Human Resources Committee, and Corporate 
University in developing and implementing initiatives to address human 
capital needs. 

FDIC Created the Corporate Employee Program to Provide a Capable and 
Flexible Workforce, but Its Effects on Mission Critical Functions Are 
Unknown: 

A key part of FDIC's human capital strategy is the Corporate Employee 
Program, which cross trains employees in multiple FDIC divisions with 
the objective of training them to respond rapidly to shifting 
priorities and changes in workload. According to FDIC officials, the 
Corporate Employee Program reflects a more collaborative approach to 
meeting mission critical functions. Launched in June 2005, the 
Corporate Employee Program provides opportunities for employees at all 
levels to identify, develop, and apply various skills through training 
opportunities and work assignments. According to FDIC memoranda 
describing the program, the increased speed at which changes can occur 
in individual insured institutions and the entire financial industry, 
and hence the speed at which FDIC's workload can change, requires FDIC 
to ensure that it can respond effectively and quickly. The memoranda 
further state that cross-training programs and cross-divisional 
mobility will provide FDIC employees with broader career experiences 
and enhanced job satisfaction while allowing FDIC to have more than 
enough people within the organization who have the essential training 
and experience that FDIC may need to respond to significant events. The 
goals of the Corporate Employee Program are to: 

* provide employees with skills needed to address significant spikes in 
workloads that may temporarily require shifting resources among FDIC's 
three main divisions, 

* promote a corporate perspective and a corporate approach to problem 
solving, 

* facilitate communication and the transfer of knowledge across all 
FDIC divisions, and: 

* foster greater career opportunity and job satisfaction. 

In March 2005, FDIC began pursuing three initial strategies for 
implementing the Corporate Employee Program: a crossover program, 
voluntary rotational assignments, and new hiring. The voluntary 
crossover program, intended to integrate key skill sets across business 
lines, allows FDIC staff in the Division of Resolutions and 
Receiverships to apply for in-service training in the Division of 
Supervision and Consumer Protection which will require that they obtain 
commissioned examiner status within a specific time frame.[Footnote 34] 
The voluntary rotational assignments provide current examiners in the 
Division of Supervision and Consumer Protection an opportunity to 
fulfill a more well-defined role in providing support to the Division 
of Resolutions and Receiverships. To fulfill this role, a number of 
examiners receive training and practical experience in resolutions and 
receivership functions. In the event of a significant increase in 
resolutions workload, the Division of Resolutions and Receiverships has 
first priority to call on these specialists when needed. FDIC has also 
developed criteria for hiring and training new employees in certain 
divisions. The divisions hire new employees to pursue commissioned 
examiner status in either risk management or compliance.[Footnote 35] 
While pursuing the commissioned examiner status, new employees 
simultaneously receive training in resolution and receivership 
functions and an enhanced orientation on the broad scope of FDIC's 
operations.[Footnote 36] Those who successfully complete the program 
are eligible to compete for available permanent positions in FDIC's 
three major career tracks--risk management examiners, compliance 
examiners, and resolutions and receiverships specialists. 

FDIC employees whom we spoke with told us that they believe the 
Corporate Employee Program holds great potential. For example, regional 
and field office staff told us that the program provides new employees 
with a better understanding of how the various FDIC divisions work 
together and an overview of each division's role within the agency. 
Regional and field office employees also stated that the program will 
make FDIC a better agency because the program helps to create a well- 
rounded and resourceful workforce that can be called upon to assist in 
the event of a banking crisis. 

However, FDIC staff in the regional and field offices we visited 
expressed a variety of concerns about the way the Corporate Employee 
Program operates. For example, we were told that contributions from 
graduates of the Corporate Employee Program may take a number of years 
to realize. Regional and field staff explained that the commissioning 
process for examiners takes 4 years to complete. Therefore, the 
earliest successful Corporate Employee Program graduates could 
contribute to bank examinations would be 4 years from the time they 
began the program. For example, in one field office an employee 
explained that examiners cannot certify an institution's examination 
report until after they have received their commissions. Therefore, 
current Corporate Employee Program participants are unable to reduce 
the workload of the commissioned examiners until then. However, 
according to FDIC officials in headquarters, examiners hired into the 
Corporate Employee Program can contribute immediately and continuously 
to the completion of certain aspects of a bank examination during their 
training and development program, which culminates in attaining a 
"commissioned" status. FDIC headquarters officials also stated that 
while the expected commissioning time frame is approximately 4 years, 
they believe they are preparing a more capable future workforce. They 
explained that the Corporate Employee Program adds approximately 6 to 9 
months to the commissioning process, while simultaneously accelerating 
new employees' understanding of FDIC's division functions and how they 
are interrelated. 

Regional and field staff we spoke with also stated that reduced 
staffing levels place greater strain on existing staff to train new 
employees in certain divisions, which is further amplified by their 
concerns about the nature and timing of the rotational aspect of the 
program. Although regional and field office staff thought rotations 
were beneficial, they expressed concern that new employees do not spend 
enough time in each division to fully grasp how to perform certain job 
duties. Also, cross-divisional rotations during the first year can 
hinder the program, according to regional and field office staff. 
Specifically, regional and field staff stated they have had to re-train 
new employees because they had forgotten certain skills by the time 
they were permanently placed in a specific area after their rotations 
were complete. Further, regional office employees suggested that the 
rotation in the Division of Resolutions and Receiverships be shortened 
in order for the agency to be more proactive in addressing any increase 
in troubled or failed banks. They stated that new employees would 
benefit more from gaining experience in ongoing supervisory activities 
so they are able to detect problems in banks, as opposed to being 
trained on resolving banks. Further, regional office staff indicated 
that the agency was giving a priority to placing new employees in the 
examiner commissioning tracks because that was where the agency had 
focused its hiring efforts; therefore, a lengthy rotation in the 
Division of Resolutions and Receiverships could be counterproductive, 
especially given the reduced staff available for training new 
employees. Officials in one regional office we visited stated that new 
employees rotating through the Division of Resolutions and 
Receiverships are not receiving detailed training because the agency's 
greatest need is currently for examiners. Further, in the event of an 
increase in troubled or failed banks, the Division of Resolutions and 
Receiverships would be more likely to pull more experienced employees 
from other divisions, not new employees. 

FDIC headquarters officials stated they have always relied on seasoned 
examiners to provide on-the-job training and guidance to new examiners. 
The on-the-job training represents a critical component of the 
commissioning process and is considered a program strength. The 
officials added that on-the-job training continues under the Corporate 
Employee Program, but does not represent a significant increase in 
training burden as compared to the former examiner training practices. 
Further, FDIC headquarters officials stated that the first year 
rotations in the Corporate Employee Program were intended to create 
baseline functionality, awareness, and understanding of the three 
primary divisions, so when the employees in training subsequently 
pursue a commissioning path, they have the benefit of broad agency 
perspective and understand how the work of each division benefits the 
work of the others. As such, according to headquarters officials, the 
timing of the rotational assignments is aligned with the program's 
desired outcome and intent. 

Last, regional and field office staff explained that the agency was not 
training new employees in every aspect of the examination process due 
to FDIC's risk-based approach to examinations. As a result, they may 
not be able to identify potential problems in areas not covered by the 
risk-based approach. For example, we interviewed examiners in one 
region that has experienced significant growth in the number of 
financial institutions it oversees. FDIC employees in that region told 
us they expect the number of new bank examinations, which require full 
scoping, to rise over the next year, and new employees will not know 
how to conduct a full scope examination because they are being trained 
on the risk-based approach. In another office, examiners stated that 
new employees are typically trained in examination procedures using 
banks that are well-capitalized and well-managed. Therefore, FDIC may 
not be preparing those employees to handle rare problems that could 
potentially occur in banks. FDIC officials in headquarters disagreed 
that new employees receive less training than the previous examiner 
processes offered. The officials stated that the use of risk-based 
examination scoping processes constitute "full-scope" examinations and 
that examination procedures have not changed, nor have they been 
eliminated from examiner training programs. 

The Corporate Employee Program represents a significant change in the 
way FDIC conducts its workforce planning for the future. Our work on 
organizational transformations identified key practices that can serve 
as a basis for subsequent consideration as federal agencies seek to 
transform their cultures.[Footnote 37] One practice is to communicate 
shared expectations and report related progress, which would allow for 
communication to build trust and help ensure all employees receive a 
consistent message. Organizations undergoing significant change have 
found that communicating information early and often helps build an 
understanding of the purpose of planned changes. Also, messages to 
employees that are consistent in tone and content can alleviate 
uncertainties generated during times of large-scale change management 
initiatives. FDIC created brochures, provided briefings, and issued 
memoranda to communicate the structure and intended goals of the 
Corporate Employee Program. During our site visits, senior managers in 
one regional office stated that the development of the Corporate 
Employee Program was a combined effort of groups and individuals in 
field offices, regional offices and in headquarters. Also, some 
regional and field office employees stated they had opportunities to 
ask questions about the program as it was being developed, provided 
input into the development of the Corporate Employee Program or were 
kept abreast of developments in the program by their managers. However, 
other employees we met with stated they did not have an opportunity to 
provide input into the development of the Corporate Employee Program. 

The Corporate Employee Program has only recently been implemented, and 
differing opinions on the nature, intent, or benefits of such a new 
initiative may be anticipated. It is also important to note that FDIC 
has not had an opportunity to fully determine the potential benefits or 
shortfalls of the Corporate Employee Program due to the newness of the 
program and the relatively strong health of the banking industry. Thus, 
it is especially important that FDIC take steps to assess the benefits 
of the program and share available results with all FDIC employees. Our 
prior work on organizational transformations states that sharing 
performance information can help employees understand what the 
organization is trying to accomplish and how it is progressing in that 
direction and increase employees' understanding and acceptance of 
organizational goals and objectives. 

FDIC Has Additional Human Capital Initiatives to Address Leadership 
Development and Professional Competence: 

As noted earlier, FDIC officials estimate that 8 to 16 percent of the 
agency's remaining permanent workforce will retire over the next 5 
years. Many of the agency's most experienced and most senior employees 
are included in the projection, and their retirements will further 
exacerbate the loss of institutional knowledge that occurred during the 
more than 10 years of agency downsizing. In order to address this and 
other issues related to leadership development and improving 
professional competence, FDIC is developing several new human capital 
initiatives. In October 2006, the Corporate University Governing Board 
granted approval for Corporate University to proceed with the design 
and piloting of the Corporate Executive Development Program. FDIC 
officials are designing the program to address human capital issues 
related to succession planning. The purpose of the program is to 
prepare high-potential employees for executive-level responsibilities. 
Certain senior level employees and managers will be eligible to 
participate in the executive development program. Candidates will 
participate in an 18-month program consisting of experiential and 
academic learning (including a 12-month detail outside of the 
candidate's current division), and a 2-or 3-month detail tailored to 
the candidate's developmental needs. Candidates who successfully 
complete the program are eligible for noncompetitive promotion into 
executive manager positions at FDIC; however, there are no guarantees 
for placement. 

FDIC has also developed the following human capital initiatives to help 
employees develop expertise and improve professional competence: 

* Professional Learning Accounts: The Corporate University Governing 
Board approved Professional Learning Accounts for implementation in 
2007. These accounts are a specified annual amount of money (up to 
$2,500) and hours (up to 48 hours) that employees at all career levels 
within the agency manage with their supervisors for use toward the 
employee's learning and development goals. Employees can use account 
funds for any training and development opportunity that is considered 
related to the work and mission of FDIC, regardless of the employee's 
current occupation. The accounts are voluntary and temporary, 
permanent, full, and part time employees are eligible.[Footnote 38] 
Employees eligible for account funds must first complete a career 
development plan, which an employee's supervisor must approve. 

* Internal Certifications: FDIC offers additional certifications 
through the Corporate Employee Program as well as a commissioning track 
in the Division of Resolutions and Receiverships. FDIC's new 
certificate programs are intended to give employees at all career 
levels an opportunity to expand their knowledge and skills in areas 
critical to FDIC's mission while simultaneously helping to make FDIC 
more responsive to changes in the financial services industry. To 
receive a certificate, employees must complete a development program, 
have a supervisor attest to their skill readiness, and qualify on a 
knowledge assessment in the form of a computerized test or a 
performance assessment. FDIC expects the FDIC certificate to benefit 
FDIC employees in a number of ways, including broadened agency 
perspective, increased marketability, career mobility, personal 
development, and continuous learning. As of October 2006, FDIC had 
introduced two certificate programs, and Corporate University was 
working to identify and obtain evaluation data for these programs to 
measure their effectiveness.[Footnote 39] FDIC is also working to 
develop a commissioning track for resolutions and receiverships 
specialists. It is expected that in the future, new employees will be 
selected into either the examiner commissioning track or the 
resolutions and receiverships commissioning track. 

* External Certifications: Corporate University has also sponsored 
opportunities targeted for midlevel career staff to receive external 
certifications in areas that align with FDIC's business needs. In 2005, 
Corporate University offered two external certifications to select 
employees. As of November 2006, Corporate University sponsorship 
included four more external certifications, and Corporate University 
planned to continue to work with FDIC's divisions to sponsor other 
external certifications, as appropriate.[Footnote 40] 

* MBA Program: During 2005, Corporate University sponsored (on a pilot 
basis) a limited number of employees to pursue the Masters in Business 
Administration, or MBA, at the University of Massachusetts at Amherst. 
According to FDIC officials, the MBA program enhances the technical and 
leadership skills of FDIC employees. At the time of our review, FDIC 
had 10 employees enrolled in the first year of the program. 

Corporate University Evaluates All Training Programs, but It Has Not 
Fully Developed Outcome-Based Performance Measures to Determine 
Effectiveness: 

Corporate University officials stated that they evaluate all of their 
training programs to determine how effective they are at providing the 
skills and expertise needed to improve job performance. However, 
certain training courses receive a more in-depth evaluation than 
others, depending on the significance of the training program. In March 
2004, we published A Guide for Assessing Strategic Training and 
Development Efforts in the Federal Government, which emphasizes the 
importance of agencies' being able to evaluate their training programs 
and demonstrate how the training efforts help develop employees and 
improve the agencies' performance.[Footnote 41] One commonly accepted 
training evaluation model consists of five levels of 
assessment.[Footnote 42] The first level measures the participants' 
reaction to and satisfaction with the training program. The second 
level measures the extent to which learning has occurred because of the 
training effort. The third level measures the application of the 
learning to the work environment through changes in behavior that 
trainees exhibit on the job. The fourth level measures the impact of 
the training program on the agency's organizational results. Finally, 
the fifth level--often referred to as return on investment--compares 
the benefits (quantified in dollars) to the costs of the training 
program. 

According to Corporate University officials, all training programs 
receive a level one evaluation, which are the typical evaluations 
performed at the end of a course. Where appropriate, Corporate 
University conducts level two evaluations, which are similar to a final 
exam and provide a measure of how much trainees learned during the 
training program. More significant training programs, like the 
Corporate Employee Program, receive level three evaluations, where, 
according to Corporate University officials, employees demonstrate 
their learning on the job. For example, after every rotation or job 
assignment during the first year of the Corporate Employee Program, the 
employee's supervisor prepares a report on how well the employee 
performed certain job tasks. Corporate University officials noted that 
they are planning to conduct what they consider level four evaluations 
of the Corporate Employee Program, where they will compare the skill 
level and performance of graduates of the Corporate Employee Program to 
those who completed the previous commissioning process. According to 
Corporate University officials, this might help them determine whether 
the Corporate Employee Program produces employees with at least the 
same level of knowledge, skill, and ability as those employees who were 
trained and commissioned prior to the implementation of the Corporate 
Employee Program. 

Our prior work on evaluating training programs states that assessing 
training and development efforts should consider feedback from 
customers, such as whether employee behaviors or agency processes 
effectively met their needs and expectations.[Footnote 43] Corporate 
University officials noted that they also obtain feedback on training 
courses to ensure they remain relevant, the emphasis remains 
appropriate to the job duties, and information being provided meets 
staff's needs. Based on feedback, Corporate University may make changes 
to the delivery of the course or the tools used in the course. 
Corporate University officials stated they made significant changes to 
the Corporate Employee Program based on feedback from the new employees 
and their supervisors. For example, Corporate University made 
improvements to certain training materials and revised certain required 
benchmarks to make them more robust and complete. 

According to our guide, not all training and development programs 
require, or are suitable for, higher levels of evaluation. It can be 
difficult to conduct higher levels of evaluation because of the 
difficulty and costs associated with data collection and the complexity 
in directly linking training and development programs to improved 
individual and organizational performance.[Footnote 44] Corporate 
University officials noted that they try to focus higher levels of 
evaluation on the most significant training programs that address key 
organizational objectives, involve change management, and are costly to 
the organization. For example, Corporate University is planning to 
conduct level four evaluations of the Corporate Employee Program 
because it is significant, costly, and highly visible. Officials added 
that resources are the biggest obstacle to conducting higher levels of 
evaluation. For example, it takes time to complete surveys and 
questionnaires and obtain productivity data. Officials told us that 
conducting these activities interrupts core mission work, so Corporate 
University conducts higher levels of evaluation in a more targeted 
fashion. 

Corporate University is currently developing a scorecard to measure its 
progress in meeting its human capital goals, but it has not fully 
developed outcome-based performance measures to determine the 
effectiveness of its training programs.[Footnote 45] Performance 
measures may address the type or level of program activities conducted 
(process), the direct products and services delivered by a program 
(outputs), or the results of those products and services (outcomes). 
Corporate University's scorecard development began in early spring 
2005, when an FDIC management analyst briefed Corporate University on 
the scorecard concept and began developing a strategy for the 
development of the scorecard. By fall 2005, Corporate University had 
developed a draft scorecard and presented it to staff; Corporate 
University began piloting the draft scorecard in 2006. Corporate 
University's draft scorecard includes indicators that measure customer 
perspective (e.g., percent of target Corporate Employee Program 
certificates awarded); internal perspective (e.g., percent of clients 
satisfied on post-project surveys); Corporate University operating 
attributes (e.g., percent of projects on schedule or completed on 
time); and financial perspective (e.g., percent of resources invested 
in high-priority areas). 

While Corporate University conducts evaluations to learn the benefits 
of its training programs and how to improve them, our prior work on 
performance measurement and evaluation shows that evaluations typically 
examine a broader range of information than is feasible to monitor on 
an ongoing basis.[Footnote 46] Though evaluations may present this 
challenge, FDIC can monitor outcome-based performance measures on an 
ongoing basis to help focus on whether a program has achieved its 
objectives. Both evaluations and performance measurements aim to 
support resource allocation and other decisions to improve 
effectiveness; however, performance measurement, because of its ongoing 
nature, can serve as an early warning system to FDIC management and can 
be used as a vehicle for improving accountability. 

Our prior work on strategic workforce planning states high performing 
organizations recognize the importance of measuring how outcomes of 
human capital strategies help the organization accomplish its 
mission.[Footnote 47] Performance measures, appropriately designed, can 
be used to gauge two types of success: (1) progress toward reaching 
human capital goals and (2) the contribution of human capital 
activities toward achieving programmatic goals. Periodic measurement of 
an agency's progress toward human capital goals and the extent that 
human capital activities contributed to achieving programmatic goals 
provides information for effective oversight by identifying performance 
shortfalls and appropriate corrective actions. Further, evaluating the 
contribution of human capital activities toward achieving an agency's 
goals may determine that its human capital efforts neither 
significantly helped nor hindered the agency from achieving its 
programmatic goals. These results could lead the agency to revise its 
human capital goals to better reflect their relationship to 
programmatic goals, redesign programmatic strategies, and possibly 
shift resources among human capital initiatives. However, our previous 
work showed that developing meaningful outcome-oriented performance 
goals and collecting performance data to measure achievement of these 
goals is a major challenge for many federal agencies. 

Corporate University officials acknowledged challenges associated with 
developing outcome-based performance measures. An official noted that 
it was difficult to develop measures that are meaningful to the agency. 
For example, the official noted that maintaining alignment of training 
and development with the agency's goals is important, but it was 
difficult to develop a measure for organizational alignment. Therefore, 
to gauge organizational alignment, Corporate University uses the number 
of senior level meetings to determine workforce and skill needs as a 
measure. Officials also noted that several outcome measures carry over 
into the divisions and that it is difficult to determine how Corporate 
University's training programs impact other divisional scorecards. 
However, Corporate University officials want to obtain outcome-based 
performance measures and stated that they would continue to refine and 
improve their scorecard as they gain more experience. While the draft 
scorecard currently includes an output performance measure for the 
Corporate Employee Program, it does not yet include outcome-based 
performance measures. Absent the use of outcome-based performance 
measures, especially for key initiatives like the Corporate Employee 
Program, FDIC will not know whether its programs are effective at 
achieving its mission and its human capital goals. Further, not having 
these measures could limit FDIC's ability to determine whether to 
modify or eliminate ineffective training programs. 

FDIC Has an Extensive Risk Assessment System and Contingency Plans for 
Bank Failures, but It Has Not Comprehensively or Routinely Evaluated 
Them: 

FDIC, as a supervisor of banks and thrifts that evaluates safety and 
soundness, as well as the insurer of deposits, has risk assessment and 
monitoring at the core of its mission. To manage risk, FDIC uses 
information from front-line supervision of individual institutions and 
a range of activities examining trends and economic forces affecting 
the health of banks and thrifts generally. Following industry 
consolidation in recent years, failure of large institutions presents 
the most significant threat to FDIC's deposit insurance fund, due to 
the asset size of the institution and the complexity of its activities. 
Thus, if losses grew high enough, the insurance fund could be 
exhausted. FDIC has both broad plans and specific strategies for 
handling troubled institutions, and FDIC has evaluated a wide variety 
of its risk activities. But some of FDIC's evaluations were not done 
regularly or comprehensively. Defining clear responsibility for 
monitoring and evaluation of its risk activities could assist FDIC in 
addressing or preventing weaknesses in its evaluations. 

To Assess and Monitor Risk, FDIC Combines Supervision of Individual 
Institutions with Analysis of Trends Affecting Banks and Thrifts: 

Our generally accepted standards for internal control identifies risk 
assessment as one of five key standards that both define the minimum 
level of quality acceptable for internal control in government as well 
as provide the basis against which an organization's internal controls 
are evaluated.[Footnote 48] Proper internal control should, among other 
things, provide for an assessment of risk an agency faces from external 
sources. FDIC takes a dual approach to assessing and monitoring risk. 
FDIC's front-line for risk assessment is supervision of individual 
institutions, where it is the primary federal regulator of thousands of 
banks and thrifts. It is also the backup regulator for thousands of 
other institutions directly supervised by one of the other three 
federal regulatory agencies for banks and thrifts. In addition to its 
supervision of individual institutions, FDIC also conducts broad 
monitoring and analysis of risks and trends in the banking industry as 
a whole. 

Individual Institution Examinations are FDIC's Front Line for Risk 
Assessment: 

At the individual institution level, FDIC's main risk assessment 
activity is the safety-and-soundness examination process, agency 
officials told us.[Footnote 49] Like other federal banking regulators, 
FDIC must generally conduct a full-scope, on-site examination for each 
institution it regulates at least once every 12 months, although the 
agency can extend the interval to 18 months for certain small 
institutions.[Footnote 50] For institutions that require additional 
attention, FDIC may supplement regularly scheduled examinations with 
more frequent examinations or visitations.[Footnote 51] 

Recognizing that a bank or thrift's condition can change between on- 
site examinations, FDIC officials told us the agency created eight risk 
measurement models to monitor risk from off-site, which often use 
financial information reported by the institution. The agency's major 
off-site monitoring tool is the Statistical CAMELS Off-site Rating 
system (SCOR), which helps FDIC identify institutions that have 
experienced significant financial deterioration.[Footnote 52] The SCOR 
off-site monitoring system attempts to identify institutions that 
received a rating of 1 (no cause for supervisory concern) or 2 
(concerns are minimal) on their last examination--the top two grades 
available on the five-point CAMELS scale--but whose financial 
deterioration may cause a rating of 3 or worse (cause for supervisory 
concern and requires increased supervision to remedy deficiencies) at 
the next examination.[Footnote 53] The significance of the 3 rating is 
that once a banking regulator rates an institution as 3 or worse, FDIC 
monitors it more closely. The SCOR system uses a statistical model that 
compares examination ratings with financial ratios of a year earlier 
and attempts to forecast future ratings.[Footnote 54] As discussed 
later in this report, evaluations of the SCOR system determined that 
the system is informative, but does not always produce accurate 
results. 

Owing to the potential for larger losses to the insurance fund, FDIC 
officials told us the agency also puts special emphasis on monitoring 
the nation's largest financial institutions, based on asset size. For 
example, FDIC's Large Insured Depository Institution program gives 
heightened scrutiny to institutions with assets of $10 billion or more. 
For those with $25 billion in assets or more, managers submit quarterly 
assessments.[Footnote 55] For those with $50 billion or more in assets, 
FDIC also requires risk assessment plans that address risk the 
institution presents from the perspectives of supervision, insurance, 
and resolution. Further, FDIC maintains examiners on-site at the six 
largest institutions. While FDIC is not the primary regulator of these 
institutions, it is nevertheless responsible for insuring them. For the 
largest institutions for which FDIC is the primary regulator, the 
agency uses what it calls a continuous supervision process for 
examinations, which provides ongoing examination and surveillance of 
institutions with assets greater than $10 billion. Four institutions 
are now receiving such scrutiny. 

Additionally, FDIC has in recent years made significant changes to its 
examination process. It has adopted the MERIT program (Maximum 
Efficiency, Risk-focused, Institution Targeted examinations), which 
seeks to tailor examinations to risks presented by individual 
institutions. Under this approach, safer institutions should receive 
less attention, while riskier institutions should receive more 
regulatory scrutiny. FDIC officials stated that the MERIT program is 
more efficient, allowing examiners to spend less time on-site at well- 
rated institutions, while providing an opportunity to redirect 
examination resources to institutions posing higher risks. For example, 
if an institution maintains what examiners decide is an effective asset 
review program, the examiners will significantly reduce the time spent 
reviewing individual credits. Today, banks or thrifts that meet certain 
criteria are eligible for the MERIT program.[Footnote 56] 

Broad Assessment and Monitoring is the Second Part of FDIC's Risk 
Strategy: 

In addition to its oversight of individual institutions, FDIC conducts 
a wide range of other activities to monitor and assess risk at a 
broader level, from a regional perspective on up to a national view 
(fig. 5). 

Figure 5: FDIC's Risk Assessment and Monitoring Process: 

[See PDF for image] 

Sources: GAO analysis; Art Explosion (map). 

[End of figure] 

Regional Risk Committees: 

In 2003, FDIC formed Regional Risk Committees in each of FDIC's six 
regional offices. The Regional Risk Committees review and evaluate 
regional economic and banking trends and risks and determine whether 
the agency should take any action in response.[Footnote 57] Comprised 
of senior regional executives plus relevant staff members, the 
committees meet semi-annually, and consider a wide range of risk 
factors--such as economic conditions and trends, credit risk, market 
risk and operational risk--as a prelude to identifying a level of 
concern, a level of exposure, and supervisory strategy. Strategy 
options include such tools as publishing research or circulating 
relevant information to the banking community, making the risk factor a 
priority in on-site examinations, or highlighting the factor for off- 
site monitoring activities. In FDIC's San Francisco Regional Office, we 
observed a meeting of the western region's Regional Risk Committee. 
These FDIC regional officials had compiled detailed research on a 
comprehensive range of potential risk factors that could affect the 
health of the region's banks and thrifts. The FDIC regional risk 
committees prepare reports of their results and distribute them to the 
National Risk Committee. 

National Risk Committee: 

The National Risk Committee, comprised of senior FDIC officials, meets 
on a monthly basis to identify and evaluate the most significant 
external business risks facing FDIC and the banking industry, according 
to FDIC officials.[Footnote 58] For example, recent committee work has 
focused on the effect of recent hurricanes on Gulf Coast institutions, 
the trend in number of problem institutions, and bank and thrift 
vulnerability to rising interest rates. Where necessary, the committee 
develops a coordinated response to these risks, including strategies 
for both FDIC-supervised and -insured institutions. Among other things, 
the National Risk Committee receives the Regional Risk Committee 
reports filed from across the country. 

Risk Analysis Center: 

The Risk Analysis Center (RAC) is an interdivisional forum for 
discussing significant, cross-divisional, risk-related issues. FDIC 
officials use the Risk Analysis Center as a vehicle to bring together 
managers from across major FDIC divisions, in an effort to coordinate 
and provide relevant information to FDIC decision-makers. The Risk 
Analysis Center provides reports and analyses to the National Risk 
Committee. The National Risk Committee and regional risk committees 
also contribute ideas to the Risk Analysis Center on issues for 
discussion. Recent examples of the center's work include response to 
Hurricane Katrina, when the center's management committee met to 
discuss deployment of FDIC offices and personnel to the relief effort, 
and work following the August 2003 blackout in the Northeast and 
Midwest, when officials assembled shortly after the power failure in 
order to discuss its possible impact on the banking system.[Footnote 
59] One key product of the Risk Analysis Center is the "RAC Dashboard"-
-a group of graphically displayed statistics that identify key banking 
and economic trends. For example, the center's national dashboard 
features trend lines charting economic conditions, large bank risk, 
credit risk, market risk, supervisory risk, and financial strength. 
FDIC officials told us these indicators allow comparison of current 
conditions to historical extremes and have the ability to identify 
areas where risks may be increasing. A Risk Analysis Center web site 
has a variety of risk-related information, including FDIC publications 
and presentations available for supervisors, field examiners, and 
others. The site offers guidance on topics such as concentration in 
real estate lending, interest rate risk management, and best practices 
for maintaining operations during natural disasters. 

Division of Insurance and Research: 

FDIC's Division of Insurance and Research also plays a significant role 
in FDIC's risk activities. The division has a leading role in preparing 
a key set of reports delivered to FDIC's board of directors twice each 
year. The board uses these reports as a basis for setting the deposit 
insurance fund's premium schedule; thus, the reports undergird FDIC's 
basic mission of protecting insured deposits. One of these reports, 
known as the "Risk Case," summarizes national economic conditions and 
banking industry trends, plus discusses emerging risks in banking. The 
second of the two reports, known as the "Rate Case," recommends a 
premium schedule based on an analysis including likely losses to the 
fund from failures of individual institutions; expenses of resolving 
failed institutions; insurance fund operating expenses; growth of 
insured deposits; investment income; and the effect of premiums on the 
earnings and capital of insured institutions. The division also 
conducts pertinent research on specific topics or more general issues. 
For example, FDIC officials told us that when interest rates recently 
started upward, the division evaluated what the effect might be 
nationally, then conducted stress tests on certain institutions to see 
how the increase might affect them. More broadly, the division has 
compiled a history of the banking crisis of the 1980s and early 
1990s.[Footnote 60] In the last 2 years, FDIC has tried to enhance its 
research capability, through its Center for Financial Research. 
Officials told us they want stronger ties to academia, and believe 
better research leads to better policy. 

Financial Risk Committee: 

On a quarterly basis, FDIC's Financial Risk Committee recommends an 
amount for the deposit insurance fund's contingent loss reserve--the 
estimated probable losses attributable to failure of insured 
institutions in the coming 12 months. Because the size of the reserve 
reflects beliefs about risk facing the insurance fund, the committee's 
recommendations are an important part of the risk function. The 
Financial Risk Committee consists of senior representatives from major 
FDIC divisions.[Footnote 61] In addition to internal deliberations, 
FDIC staff members also meet with other banking regulators to discuss 
problem institutions for which a reserve may be necessary. 

Various parts of the FDIC organization also work together to carry out 
their risk assessment and monitoring functions. For example, the 
National Risk Committee recently directed the Risk Analysis Center to 
investigate possible risks associated with collateralized debt 
obligations.[Footnote 62] The Chicago Regional Office Regional Risk 
Committee produced a presentation for the National Risk Committee on 
housing and banking conditions in southeast Michigan, where business 
difficulties of the U.S. automobile industry have hurt the local 
economy and with it, the fortunes of local financial institutions. 
Similarly, an examiner with commercial real estate experience recently 
visited the Florida panhandle and nearby Alabama, reviewing bank files 
and visiting larger condominium developments. The examiner's findings 
were presented at the Risk Analysis Center to representatives from 
FDIC's main divisions--the Divisions of Insurance and Research, 
Supervision and Consumer Protection, and Resolutions and Receiverships. 
There, officials judged the information important enough to send up to 
the National Risk Committee. Division managers in the Risk Analysis 
Center also discuss the Risk Case before it is presented to the 
National Risk Committee. Meanwhile, the Division of Insurance and 
Research has managers in regional offices, where they monitor 
conditions locally and consult with examiners in the Division of 
Supervision and Consumer Protection who are working in individual 
institutions. Information these managers gather is sent to the Risk 
Analysis Center and the National Risk Committee. 

Notwithstanding its own activities, FDIC officials told us that 
cooperation with other federal banking regulators is an important part 
of their risk management efforts as well. Toward that end, the agency 
engages in a number of activities with the other regulators. One 
program is the Shared National Credit Program. Established in 1977, the 
program is a cooperative effort among four federal banking regulators 
to perform a uniform credit analysis of loans of at least $20 million 
that three or more supervised financial institutions share. With $1.9 
trillion in credit commitments to more than 4,800 borrowers, these 
loans have the potential for significant impact on the banking system 
and the national economy. The program's 2006 annual report showed that 
as the volume of syndicated credits has risen rapidly, the percentage 
of commitments adversely rated has held steady and remains well below a 
recent peak in 2002 to 2003. In addition to the Shared National Credit 
Program, FDIC is involved in other interagency risk management 
activities, such as: 

* FDIC participates in the Federal Financial Institutions Examination 
Council with the other federal banking regulatory agencies. This 
program prescribes uniform examination standards and makes 
recommendations to promote uniformity in financial institution 
supervision. 

* FDIC exchanges examination reports with the other federal banking 
regulators and state banking authorities. 

* FDIC officials told us that they regularly attend interagency 
meetings, both formal and informal, at the field, regional, and 
headquarters office levels, on topics ranging from institution-specific 
to industrywide issues. For example, FDIC consults with staff from the 
other agencies in preparing the Risk Case report described earlier. 

* The agencies jointly issue examination and industry guidance on risk- 
related topics. Recent work includes guidance on nontraditional 
mortgage risks, to clarify how institutions can offer nontraditional 
mortgage products in a safe and sound manner, and developing guidance 
on risks of concentration in commercial real estate lending. 

* FDIC told us that they frequently invite officials from the other 
banking agencies to participate in Risk Analysis Center presentations 
on a variety of issues. 

Because FDIC insures many institutions for which it is not the primary 
federal regulator, information-sharing among federal banking regulators 
is a concern to FDIC. FDIC officials told us that working relationships 
with the other regulators are good and better than ever before. In 
2002, the agencies reached an information-sharing agreement, which 
provides FDIC information and access to selected large institutions and 
others presenting a heightened risk to the deposit insurance fund. Two 
important drivers of this cooperative effort are to avoid sending 
potentially mixed signals to the regulated entities and the public 
about regulators' supervisory activities and to reinforce that it is 
critical for FDIC, as the potential receiver for failed institutions, 
to understand well what is happening in non-FDIC regulated 
institutions, especially large ones. While this agreement represents a 
positive step, a senior FDIC official told us that the current 
information-sharing provisions are not adequate. As institutions grow 
more complex, it becomes harder, without more complete information on 
their activities, for FDIC to properly price insurance coverage as well 
as to work out assets during resolution, according to the official. One 
way FDIC is currently seeking to address such issues is through an 
advanced notice of proposed rulemaking in which FDIC sought comments on 
options to modernize its deposit insurance determination process by 
requiring the largest banks and thrifts to modify their deposit account 
systems to speed depositors' access to funds in the event of a 
failure.[Footnote 63] Today, institutions do not track the insurance 
status of their depositors, the agency says, yet if there is a failure, 
FDIC must make deposit insurance coverage determinations. Industry 
consolidation, and the emergence of larger, more complex institutions 
with millions of deposit accounts raise concerns about current methods 
for handling failures, according to FDIC. 

FDIC officials also told us they coordinate internationally with 
entities to share information on issues relevant to financial 
institutions, regulatory agencies, and insurers of financial 
institutions in the U.S. and abroad. For example, the officials 
participate on the Basel Committee, a forum for regular cooperation on 
banking supervisory matters. The Basel Committee is composed of senior 
officials responsible for banking supervision or financial stability 
issues from 13 countries including Belgium, Italy, Japan, and the 
United Kingdom. In particular, FDIC officials stated they participate 
three times per year in meetings of the Accord Implementation Group, a 
subgroup of the Basel Committee. 

FDIC Has Broad Plans and Specific Strategies for Handling an Increase 
in Troubled or Failed Institutions: 

To address the possibility of a large-scale bank failure, FDIC has 
developed broad plans and specific strategies. According to FDIC 
officials, the biggest dangers to the deposit insurance fund are large- 
scale bank failures. The FDIC Inspector General has warned that the 
banking industry's significant increase in consolidation could result 
in large losses to the deposit insurance fund if a so-called megabank 
failed.[Footnote 64] FDIC officials told us credit risk continues to be 
the most important factor that could cause large banks, or a large 
number of banks, to fail. A sudden failure would most likely stem from 
rapid, widespread loss of confidence in an institution, which would 
generate a liquidity crisis.[Footnote 65] 

FDIC's Resolutions Policy Committee is responsible for developing plans 
to handle potential or actual failure of the largest insured 
institutions. The committee, comprised of senior FDIC officials from 
across the agency, has developed a 12-part plan for dealing with such 
difficulties.[Footnote 66] In handling a failed institution, FDIC's 
primary objective is to protect insured depositors. Generally, FDIC 
seeks to minimize the overall cost to the insurance fund. The agency 
also seeks to prevent uninsured depositors, creditors, and shareholders 
from receiving more than their legally entitled amounts.[Footnote 67] 
Overall, FDIC attempts to minimize the time an institution is under 
government control, while maximizing returns to creditors. In general, 
according to the plan, the resolution strategy for a large bank failure 
will depend on facts of the particular situation, such as 
characteristics of the bank, the nature and extent of the problem 
causing the failure, the condition of the industry and relevant 
financial markets, and the cost to the insurance fund. For a resolution 
that does not pose a systemic risk--that is, larger repercussions for 
the industry or national economy--FDIC will most likely choose between 
paying off insured deposits or establishing a bridge bank. A bridge 
bank is a new, temporary bank chartered to carry on the business of a 
failed institution until a permanent solution can be implemented. 
Bridge banks preserve the value of the institution until a final 
resolution can be accomplished. A key aim following failure is to 
preserve the value of an institution and business continuity through a 
bridge bank can be important for maintaining value and hence, a 
marketable franchise. 

In addition to the work of the agencywide Resolutions Policy Committee, 
FDIC's Division of Resolutions and Receiverships--the unit most 
directly responsible for handling failures--has created a detailed 
blueprint for managing failure of a large institution.[Footnote 68] The 
blueprint includes strategies for establishing a bridge bank, which 
FDIC officials stated that in most cases was the least costly and most 
effective option for handling a sudden large bank failure. The plan 
seeks to minimize failure costs, contain the risk of troubles spreading 
beyond a failed bank or thrift, ensure prompt access to depositor 
funds, and preserve the FDIC insurance fund in the face of losses that 
could exhaust it. Some of these objectives, according to the plan, will 
conflict; most notably, tension between the least-cost approach and the 
potential systemic risk implications of a large-scale failure.[Footnote 
69] The least-cost approach adheres to a principle of not providing 
FDIC insurance to uninsured depositors and also focuses on maintaining 
the franchise of the failed institution, because the value of the 
failed bank's franchise will mitigate the overall failure cost. Most, 
but not all, large banks will have a valuable franchise at the point of 
failure, according to FDIC officials.[Footnote 70] The agency says it 
is doubtful FDIC will have the opportunity to find an acquirer for a 
troubled large bank prior to failure. FDIC cites several reasons for 
this. Failure or near-failure of a large bank could happen very quickly 
with relatively little prior warning; as a result, there could be very 
limited opportunity to gather and analyze information about an 
institution's operations prior to failure. Also, extensive negotiations 
with potential acquirers would be required, and it is likely such 
activity would become publicly known, which could spark a liquidity 
crisis. 

As discussed earlier, FDIC has sharply reduced its workforce, which 
today is down 80 percent since its peak in the early 1990s during the 
banking crisis. FDIC headquarters officials maintain that the smaller 
staff has not hurt the agency's ability to monitor and assess risk-- 
because as FDIC has shrunk, so too has the number of institutions 
through industry consolidation. The officials do acknowledge that 
industry troubles could require additional resources. As a result, FDIC 
has created a three-part strategy for dealing with an increase in 
troubled or failed institutions: 

* developing workforce flexibility, such as that provided by the 
Corporate Employee Program, where both newer and more experienced 
employees previously cross-trained in several areas of FDIC resolutions 
and receiverships operations would be temporarily reassigned from other 
divisions to handle failure and resolution duties; 

* recalling FDIC retirees for temporary duty;[Footnote 71] and: 

* hiring contractors for temporary duty.[Footnote 72] 

Overall, FDIC officials told us they do not believe there is any 
scenario for banking troubles that the agency would be unable to 
handle. But they acknowledge there could be two significant issues: if 
losses grew large enough, the insurance fund could be exhausted, 
requiring the Treasury Department to issue debt; and if sufficiently 
large institutions failed, there could be so many deposit claims that 
payoffs would be delayed. However, the agency's goal is to manage any 
institution failure to avoid these events. 

FDIC Reviews Some of Its Risk Assessment Activities, but Some 
Evaluations Were Incomplete and Responsibility for Overseeing 
Evaluations Is Unclear: 

FDIC officials told us that evaluation and monitoring of its risk 
assessment activities are critical parts of the agency's mission and 
that such activities are ingrained in the organization. In addition to 
identifying risk assessment as a key internal control, our internal 
control standards also detail how an effective internal control system 
should include continuous monitoring and evaluation as an integral part 
of the agency's operations. This monitoring includes regular management 
and supervisory activities, comparisons, and reconciliations, among 
other activities. An example of continuous monitoring is FDIC's 
"continuous supervision" process for large institutions, as described 
earlier. FDIC officials also told us that they rely on us and the FDIC 
Inspector General to conduct such reviews, and our internal control 
standards acknowledge that evaluations may be performed by the 
Inspector General or an external auditor. However, the standards also 
say that organizations should themselves undertake internal evaluations 
that form "a series of actions and activities that occur throughout an 
entity's operations and on an ongoing basis." 

Our review of the evaluations and monitoring that FDIC provided to us 
indicates that FDIC has not comprehensively evaluated the full range of 
its risk activities in a routine way that is part of ongoing agency 
operations. When we reviewed several evaluations that FDIC provided, we 
found that though FDIC has evaluated or is in the process of evaluating 
a wide variety of risk activities, some of the evaluations appeared to 
be incomplete or were not conducted on a regular basis. The following 
examples illustrate these weaknesses: 

* When we asked FDIC officials for any evaluation of a recent, key 
change in risk management strategy--specifically, FDIC's adoption of 
risk-focused supervisory examinations under the MERIT program discussed 
earlier--officials cited two reports by the Inspector General's office. 
These reports were mostly favorable, although they reviewed only 
portions of the MERIT program, not its overall scope.[Footnote 73] 
However, MERIT is a program that FDIC itself should comprehensively 
review because of the program's relative newness and its core role in 
identifying areas of risk. Also, some examiners to whom we spoke in 
FDIC field offices voiced concerns that the streamlined examinations 
under the MERIT program may fail to detect significant problems. Though 
FDIC officials in headquarters thought this concern may have been 
exaggerated, regular reporting of evaluations and monitoring could 
address these concerns.[Footnote 74] Recently, FDIC's Regional Office 
in Atlanta completed a draft report on the MERIT examination approach, 
which recommended further study of MERIT as part of a broader review of 
examination programs. 

* When we asked for evaluations of FDIC's eight off-site monitoring 
systems discussed earlier, FDIC provided documentation showing one-time 
evaluations of the accuracy of two off-site monitoring systems. One of 
these evaluations reviewed the Statistical CAMELS Off-site Rating 
(SCOR) system, which, as noted earlier, is the agency's major off-site 
monitoring tool and is used to identify institutions that have 
experienced significant financial deterioration. In the evaluation of 
the SCOR system--completed in 2003--FDIC found it performed 
poorly.[Footnote 75] Such a finding and FDIC's limited evaluation of 
its other off-site monitoring systems underscores the need for more 
regular reviews. FDIC officials stated they were reviewing and seeking 
to improve the agency's off-site monitoring systems. The plan for this 
effort, however, shows a considerable amount of work yet to be done 
with no scheduled completion date. 

* FDIC has conducted simulations designed to test its plans for 
addressing a key risk--increase in troubled and failed large 
institutions. In some cases, we found these simulations to have well- 
conceived elements that examined important changes FDIC has made in 
recent years, but in other cases we determined that the simulations 
were not comprehensive in following FDIC's own guidance on planning for 
large bank failures. For example, in 2002 FDIC conducted a simulation 
of the hypothetical failure of a regional bank with $60 billion in 
assets. However, the Division of Resolutions and Receiverships did not 
develop its current large-bank failure plan until 2004. The 2002 
simulation, which was FDIC's largest failure test by asset size, 
excluded consideration of systemic risk, which the 2004 plan emphasizes 
as a key issue. Thus the 2002 simulation did not test the current plan, 
nor did it include the type of risk FDIC identifies as significant. 
FDIC officials told us they did not intend to include systemic risk in 
this exercise. However, the guidance on planning for large bank 
failures underscores the importance of systemic risk, stating that "the 
collapse of a large bank could have profound implications for other 
insured depository institutions and/or elements of the economy." Thus, 
this exercise--FDIC's largest big bank failure scenario to date-- 
excluded systemic risk. Additionally, a 2004 simulation of a $30 
billion regional bank was to highlight risks in operating a bridge 
bank--a bank established to temporarily take over operations of a 
failed institution. But the simulation did not include an investigation 
into major decisions on how to establish the bridge bank and thus did 
not fully reflect processes that FDIC's guidance says are critical to 
the successful opening and operation of a bridge bank.[Footnote 76] 
Finally, a test addressing workforce flexibility provided 3 months' 
advance notice of the hypothetical closing of this large bank, while 
FDIC guidance says the agency should plan for failure with little or no 
warning. FDIC has acknowledged the value of regular testing, but 
officials from FDIC's Division of Resolutions and Receiverships told us 
that they were stretched for resources and that simulations and tests, 
which take time and resources, would have to be set aside if there were 
an increase in troubled bank activity. 

* Other evaluations that FDIC provided appeared to be comprehensive 
reviews of the specific risk activity and led to some changes, but 
these reviews did not appear to be done on a regular basis. For 
example, in 2006, a team of executives from FDIC's major divisions 
reviewed the effectiveness of the Regional Risk Committees. 
Recommendations included better reporting and wider consideration of 
risk and use of video teleconferences to discuss relevant issues before 
and after Regional Risk Committee meetings. An FDIC directive, issued 
in the summer of 2006, implemented these recommendations. A team of 
FDIC officials in the agency's Senior Executive Leadership Program also 
recently evaluated the workings of a committee that runs the Risk 
Analysis Center. The evaluation included recommendations on changes in 
the center's mission, structure, the way it communicates with FDIC 
employees, and the design of its internal Web site. FDIC officials 
stated that the most notable change to emerge from the process was to 
establish a three-person standing committee to coordinate the Risk 
Analysis Center, replacing what had been a group with rotating 
membership. However, officials also told us there were no formal 
efforts to evaluate the center's effectiveness. Some risk activities 
appear to be regularly evaluated in a broader review of FDIC operations 
conducted by the Division of Supervision and Consumer Protection but 
are not intended to comprehensively review the effectiveness of the 
risk activities. The division conducts a review of its operations of 
each of its six regional offices every 2 years. Based on documents 
provided by FDIC, we found that these reviews include reviews of the 
safety-and-soundness examinations FDIC performs as the primary federal 
regulator of designated banks and thrifts; enforcement actions taken to 
maintain institutions' financial health; off-site reviews of 
institutions' health; and operation of FDIC's large institution 
oversight program. These reviews, however, vary by office and cover 
only selected areas of the activities. The reviews also tend to 
emphasize compliance with policies and procedures, rather than 
effectiveness of the risk activities. 

Although FDIC conducts some evaluations of its risk assessment 
activities, our work indicates that FDIC's risk assessment framework 
does not clearly define how it will ensure that the evaluations of risk-
related activities are thorough and conducted on a regular basis. FDIC 
maintains an Office of Enterprise Risk Management, but the office's 
activities are more internally focused and generally do not involve 
external risk assessment activities of FDIC's major operating 
divisions. FDIC officials told us that the agency's chief operating 
officer is ultimately in charge of the risk assessment process. At the 
same time, FDIC officials told us the agency's three main divisions-- 
Supervision and Consumer Protection, Resolutions and Receiverships, and 
Insurance and Research--share external risk responsibilities through an 
interwoven structure of committees and management-directed activities. 
This unclear line of responsibility could be contributing to the 
weaknesses we identified in some of FDIC's evaluations of its risk 
activities. 

Our internal control standards state that an effective and positive 
internal control environment requires an agency's organizational 
structure to clearly define key areas of authority and responsibility 
and establish appropriate lines of reporting. Further, in implementing 
control standards, management is responsible for developing the 
detailed policies, procedures, and practices to fit the agency's 
operations and to ensure that the policies, procedures, and practices 
become an integral part of operations. According to insurance industry 
officials we spoke with, there are a variety of approaches to assigning 
responsibility for overseeing risk assessment activities. Some 
organizations have a Chief Risk Officer or a committee of senior-level 
officials while others delegate specific responsibilities to an 
existing office or officials. FDIC would be more likely to address or 
prevent some of the weaknesses we identified by designating official(s) 
or an office or establishing procedures, to ensure that evaluation and 
monitoring of risk activities are conducted regularly and 
comprehensively. For example, such an office or process could address 
employee concerns about MERIT by ensuring there are regular reviews and 
also identify and address potential resource constraints that can limit 
the number and breadth of large-bank failure simulations. By not 
clearly providing for oversight of monitoring and evaluating risk- 
related activities, FDIC is vulnerable to the risk of gaps or 
inefficiencies in its risk assessment process and will not know whether 
all parts of its risk management framework are effective. 

Conclusions: 

Our limited observations of the interactions between FDIC's board of 
directors, their deputies, and senior management within the agency 
suggests that FDIC's board of directors is engaged in the agency's 
operations and effectively uses the information provided to the 
directors to assist in its oversight of the agency. The board has also 
established a clear and transparent relationship between the board of 
directors and the organization's management by delegating a wide range 
of activities to FDIC divisions. These delegations have been broadly 
reviewed on certain occasions and limited changes have been made to 
delegations granted by the board, both through a formal process and 
upon request by board members or FDIC divisions. These review processes 
help ensure that FDIC's delegations are appropriate and that FDIC 
employees are not making decisions that should be made by the board or 
more senior officials. 

FDIC has undertaken a number of activities to strengthen its human 
capital framework and also evaluates many of its human capital 
strategies. Specifically, FDIC's Corporate University is implementing a 
scorecard to monitor progress of training and development initiatives 
toward meeting agency goals. Although this effort is commendable, the 
scorecard does not yet include fully developed, outcome-based 
performance measures that would help determine the effectiveness of 
FDIC's training and development initiatives at achieving the agency's 
human capital goals. Though developing outcome-based performance 
measures is difficult, they are nevertheless important for ensuring 
that FDIC has information to determine whether to modify or redesign 
existing training programs or eliminate ineffective programs. At a 
minimum, identifying outcome-based performance measures will ensure 
that FDIC can begin collecting appropriate information that will help 
in determining how key initiatives--such as the Corporate Employee 
Program, a relatively new program designed to train and develop FDIC's 
future workforce--contribute to the agency's mission and goals. 
Evaluating and measuring the effectiveness of the Corporate Employee 
Program is especially important given the differences in opinion we 
observed between regional and headquarters officials on the relative 
merits of the program. Such differences reinforce the need for 
conducting evaluations of the effectiveness of key human capital 
initiatives, developing performance measures to determine whether the 
initiatives assist in achieving the agency's mission and human capital- 
related goals, and communicating the results to employees at all levels 
within the agency. 

FDIC has developed an extensive system for managing risk and has 
developed structures and processes to ensure that the various parts of 
the agency are working together to address key risks facing the agency. 
However, our review identified some weaknesses in FDIC's evaluations 
and monitoring of its risk assessment activities. Though FDIC has 
conducted reviews of many parts of its risk assessment activities, it 
has not developed a process for more routine evaluations and 
assessments, and its risk management structure does not clearly define 
how monitoring and evaluation of risk assessment activities are 
overseen. Clearly defining how the agency will monitor and evaluate its 
risk activities could assist FDIC in addressing or preventing 
weaknesses in its evaluations. 

Recommendations for Executive Action: 

Based on our review of human capital and risk assessment programs at 
FDIC, we are making the following two recommendations to the Chairman 
of FDIC: 

* To ensure that it can measure the contribution that key human capital 
initiatives make toward achieving agency goals, FDIC should take steps 
to identify meaningful, outcome-based performance measures to include 
in its training and development scorecard and communicate available 
performance results to all FDIC employees. 

* To strengthen the oversight of its risk assessment activities, FDIC 
should develop policies and procedures clearly defining how it will 
systematically evaluate and monitor its risk assessment activities and 
ensure that required evaluations are conducted in a comprehensive and 
routine fashion. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to FDIC for review and comment. In 
written comments (see app. II), FDIC generally agreed with the report 
and the recommendations. FDIC stated it was committed to building and 
maintaining a knowledgeable and flexible workforce and is in the 
process of developing a comprehensive set of outcome-based performance 
measures to assist in determining the effectiveness of key training and 
development programs. FDIC also described its plans to conduct 
extensive evaluations of two of its human capital initiatives, the 
Corporate Employee Program and Professional Learning Accounts. These 
evaluations are intended to utilize outcome-based performance measures 
in order to provide FDIC with information on the extent to which the 
programs' goals are achieved. FDIC also agreed that the agency would 
benefit from a review of its risk management activities to ensure they 
are comprehensive, appropriate to the agency's mission, and fully 
evaluated. Accordingly, the agency has assembled a committee to perform 
an in-depth review of its current risk assessment activities and 
evaluation procedures. The committee will make recommendations for 
strengthening the agency's risk assessment framework and FDIC executive 
management will establish a plan for implementing the committee's 
recommendations. FDIC also provided technical comments that we 
incorporated as appropriate. 

We are sending copies of this report to the Chairman of the Federal 
Deposit Insurance Corporation, interested congressional committees, and 
other interested parties. We will also make copies available to others 
upon request. In addition, the report will be available at no charge on 
the GAO Web site at [Hyperlink, http://www.gao.gov]. 

If you or your staff have any questions concerning this report, please 
contact me at (202) 512-2717 or at jonesy@gao.gov. Contact points for 
our Office of Congressional Relations and Public Affairs may be found 
on the last page of this report. Key contributors to this report are 
listed in appendix III. 

Signed by: 

Yvonne D. Jones: 
Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

This report responds to a mandate included in the Federal Deposit 
Insurance Reform Conforming Amendments Act of 2005 requiring the 
Comptroller General to report on the appropriateness of FDIC's 
organizational structure. Specifically, this report focuses on three 
areas that influence the effectiveness of FDIC's organizational 
structure and reflect key internal controls: (1) mechanisms used by the 
FDIC board of directors to oversee and manage the agency; (2) FDIC's 
human capital strategies and how training and development programs are 
evaluated; and (3) FDIC's process for monitoring and assessing risks to 
the industry and the deposit insurance fund and how that process is 
overseen and evaluated. 

To describe how FDIC's board of directors oversees and manages the 
agency, we reviewed FDIC's enabling legislation, bylaws, and other 
governance documents to understand the legal authority, oversight 
responsibilities, and structure of FDIC and its board of directors and 
standing committees. We also reviewed our reports and literature on 
characteristics of boards of directors to identify management issues 
and common practices among boards of directors. We met with 
knowledgeable academicians and researchers to gain a better 
understanding of management practices at organizations overseen by 
boards of directors. To obtain more information on how FDIC's board 
manages and oversees the agency, we conducted interviews with members 
of FDIC's current board of directors and the board's Audit Committee 
members. We developed a standardized interview guide, and used the same 
set of questions for each interview session.[Footnote 77] To obtain 
independent views from board members, we met with each board member 
separately; each board member's deputies or other senior staff also 
participated in the interviews. We also attended two FDIC board 
meetings and held additional interviews with former FDIC officials to 
gain a broader understanding of governance at FDIC. To gain a better 
understanding of one mechanism for managing the agency, delegations of 
authority, we interviewed officials in FDIC's Legal Division and 
reviewed FDIC's master set of delegations to FDIC divisions and 
officers as well as a directive describing the process for issuing 
delegations. We also consulted our Standards for Internal Control in 
the Federal Government to determine how delegations of authority affect 
an agency's internal control environment.[Footnote 78] 

To describe FDIC's human capital strategies, we gathered and analyzed 
information from a variety of sources. We reviewed our guidance and 
reports on federal agencies' workforce planning and human capital 
management efforts to identify recommended strategic workforce planning 
principles for high performing organizations. We reviewed relevant work 
of FDIC's Office of the Inspector General and obtained documentation of 
certain findings from previous Inspector General reports related to 
FDIC's human capital strategic planning. We interviewed FDIC officials 
on the Human Resources Committee, senior managers in various FDIC 
divisions, and officials in Corporate University to obtain information 
on how critical skill needs and skill gaps are addressed and how FDIC 
develops and implements human capital initiatives, including training 
and development programs. We also obtained and reviewed documentation 
of FDIC's human capital goals and how FDIC's primary divisions track 
their progress toward meeting those goals. To determine how FDIC 
evaluates its training and development programs, we interviewed 
Corporate University officials and obtained relevant documentation. We 
also consulted our report, Human Capital: A Guide for Assessing 
Strategic Training and Development Efforts in the Federal Government, 
to obtain information and criteria on evaluating training 
programs.[Footnote 79] 

To examine the extent to which FDIC monitors, assesses, and plans for 
risks facing banks and thrifts, the industry as a whole, and the 
deposit insurance fund, we interviewed FDIC officials in divisions 
directly responsible for risk-related activities, such the Divisions of 
Supervision and Consumer Protection and Resolutions and Receiverships. 
We obtained and reviewed written and testimonial information on FDIC's 
risk management activities, plans for addressing the biggest dangers to 
the industry and insurance fund, and FDIC's methods for evaluating its 
risk management activities. We examined research reports and papers 
describing the implications of financial institution failures, 
documentation of the agency's examination procedures, and various 
documents related to the work of FDIC's Risk Analysis Center, National 
Risk Committee, and Resolutions Policy Committee. We also attended a 
presentation of the Risk Analysis Center to understand its role and 
function as part of FDIC's risk management activities and observed a 
meeting of one of FDIC's six Regional Risk Committees. In addition, we 
examined our own guidance, including our Standards for Internal Control 
in the Federal Government, to determine how risk monitoring and 
assessment activities help provide effective internal 
controls.[Footnote 80] 

Finally, to address all three objectives in this report, we conducted 
site visits to FDIC regional and field offices in three states 
(California, Georgia, and Texas). The purpose of the site visits was to 
obtain more in-depth information on the FDIC board of directors' 
management and oversight responsibilities; issues related to human 
capital, workforce planning, and training and development; FDIC's 
methods for identifying, assessing, and monitoring risk; and FDIC's 
methods of evaluating its progress toward meeting agency goals. In each 
state, we conducted interviews with senior managers from FDIC's three 
main divisions and the Human Resources Branch; analysts and economists 
in the Division of Insurance and Research; case managers in the 
Division of Supervision and Consumer Protection; and financial 
institution examiners in the Division of Supervision and Consumer 
Protection. [Footnote 81] Additionally, in Dallas, Texas, we 
interviewed staff within FDIC's Division of Resolutions and 
Receiverships because the Dallas office is where resolutions and 
receiverships activities are centered. We developed a standardized 
interview guide for each group of employees we interviewed, and used 
the same set of questions for each interview session.[Footnote 82] To 
encourage open communication, we met with each group of employees 
separately, and except in one instance, subordinate employees were 
interviewed separately from their managers.[Footnote 83] We 
judgmentally selected the states based on the following 
characteristics: staffing levels in each regional and field office; the 
number and size of FDIC-supervised institutions located in a particular 
region; regional and field office structure; geographic dispersion; 
recommendations of officials from FDIC's Office of Inspector General; 
and proximity of the field office to the regional office coupled with 
time and travel resources. 

To assess the reliability of the employment data presented and 
discussed in the background section of this report, we (1) reviewed 
existing information about the data and the system that produced them 
and (2) interviewed agency officials knowledgeable about the data. For 
FDIC data on overall employment from 1991-2006, we performed some basic 
reasonableness checks of the data against data from the Office of 
Personnel Management's Central Personnel Data File (CPDF).[Footnote 84] 
When we found discrepancies, such as considerable differences between 
data from the two sources, we brought them to the agency's attention 
and worked with a data analyst at FDIC to understand the discrepancies 
before conducting our analyses. For employment trends by occupation, 
FDIC was unable to provide accurate data for years prior to 2001 due to 
the integration of several legacy systems and databases. Therefore, we 
used data from the CPDF to approximate employment data by occupation. 
Although FDIC officials noted certain limitations of the CPDF data, 
they stated that the data were accurate within a sufficient margin of 
error for reporting of governmentwide workforce demographics and 
trends. After reviewing possible limitations in FDIC's overall 
employment data and CPDF data by occupation, we determined that all 
data provided were sufficiently reliable for the purposes of this 
report. 

We conducted our work in California, Georgia, Texas, and Washington, 
D.C., from May 2006 through January 2007 in accordance with generally 
accepted government auditing standards. 

[End of section] 

Appendix II: Comments from the Federal Deposit Insurance Corporation: 

Federal Deposit Insurance Corporation, Washington, DC 20429: 
Sheila C. Bair: 
Chairman: 

January 22, 2007: 

Ms. Yvonne Jones: 
Director: 
U.S. Government Accountability Office: 
Financial Markets and Community Investment: 
441 G Street, N.W. 
Washington, DC 20548: 

Dear Ms. Jones, 

Thank you for the opportunity to comment on the U.S. Government 
Accountability Office's (GAO) draft audit report entitled, Federal 
Deposit Insurance Corporation. Human Capital and Risk Assessment 
Programs Appear Sound, but Evaluations of Their Effectiveness Should Be 
Improved, GAO-07-255. The Federal Deposit Insurance Reform Conforming 
Act of 2005 required GAO to conduct a comprehensive review of the 
FDIC's organization structure and internal controls, and we would like 
to recognize the professionalism of the review team and the significant 
amount of research and analysis performed over the past several months. 

We are appreciative of the GAO's acknowledgement of the FDIC's: 1) 
strong corporate governance processes; 2) extensive systems for 
assessing external risk, and the corporate structure and processes that 
we have established to ensure that the appropriate parts of the agency 
are working in unison to address the key risks facing the agency; and 
3) extensive initiatives to strengthen our human capital framework and 
evaluate our human capital strategies. 

The FDIC generally agrees with the report content and the two 
recommendations, as discussed below: 

Recommendation #1: To ensure that it can measure the contribution that 
key human capital initiatives make toward achieving agency goals, FDIC 
should take steps to identify meaningful, outcome-based performance 
measures to include in its training and development scorecard, and 
communicate available performance results to all FDIC employees. 

FDIC is committed to building and maintaining a knowledgeable, flexible 
workforce. The FDIC is in the process of developing a comprehensive set 
of outcome-based performance measures that will assist us in 
determining whether key training and development programs are 
effective. Corporate University already uses some of those measures, 
both in its scorecard and in other program monitoring vehicles. 

For selected initiatives like the Corporate Employee Program (CEP) and 
the Professional Learning Account (PLA), Corporate University plans to 
conduct extensive multi-year evaluations that will provide FDIC with 
information about the extent to which the goals of the program are 
achieved. Corporate University's planned evaluation of the CEP consists 
of two parts. The first two years of the evaluation will be largely 
formative, with the primary goal to determine if program adjustments 
are needed in the rotational year. Outcome-based performance measures 
for this initial period will focus on the effectiveness of the training 
experience, such as the adequacy of the benchmarks selected and how 
well prepared participants are for their required schools. The second 
part of the evaluation will track participants' career progression as 
they complete program requirements in the 3-4 years following the 
rotational year. For this phase, we will utilize performance indicators 
such as the frequency and amounts of awards and promotions and will 
also track participants' progress toward attaining a commission (for 
example, how quickly participants progress through required milestone 
events required for commissioning). Similarly, Corporate University 
will evaluate the extent to which the PLA meets its stated objectives 
over its two-year trial period. For instance, to measure attainment of 
the objective to promote supervisor-employee collaboration about 
employees' learning and development, we will collect information on the 
number of employees who create Career Development Plans. 

Recommendation #2: To strengthen the oversight of its risk assessment 
activities, FDIC should develop policies and procedures clearly 
defining how it will systemically, evaluate and monitor its risk 
assessment activities and ensure that required evaluations are 
conducted in a comprehensive and routine fashion. 

We agree that it would be beneficial to review our risk assessment 
activities to ensure they are comprehensive, appropriate to our 
mission, and fully evaluated. As noted in the GAO draft report, a 
review of FDIC off-site monitoring systems has been completed, and work 
continues to implement needed changes. 

Beginning in January 2007, an interdivisional committee will perform an 
in-depth review of current risk assessment activities and evaluation 
procedures. By September 30, 2007, the committee will make 
recommendations to FDIC executive management as to how we might 
strengthen the risk assessment framework. At that time, management will 
establish a reasonable timeline to implement any required changes. 

Thank you again for the opportunity to comment on the draft report. 

Sincerely, 

Sincerely, 

Sheila C. Bair: 
Chairman: 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Yvonne D. Jones (202) 512-2717 or jonesy@gao.gov: 

Staff Acknowledgments: 

In addition to the individual named above, Kay Kuhlman, Assistant 
Director; Kenrick Isaac, Jamila Jones, Alison Martin, David Pittman, 
Omyra Ramsingh, and Christopher Schmitt made key contributions to this 
report. 

FOOTNOTES 

[1] Pub. L. No. 109-171, Title II, Subtitle B, 120 Stat. 4, 9-21 
(2006). 

[2] Act of September 21, 1950, ch. 967, 64 Stat. 881 (codified, as 
amended, in various sections of Title 12 of the United States Code). 

[3] Pub. L. No. 109-173, § 6, 119 Stat. 3601, 3607 (2006). The Federal 
Deposit Insurance Reform Conforming Amendments Act of 2005, which was 
signed into law on February 15, 2006, contains necessary technical and 
conforming changes to implement deposit insurance reform, as well as a 
number of study and survey requirements. 

[4] Some of our key guidance includes GAO, A Model of Strategic Human 
Capital Management, GAO-02-373SP (Washington, D.C.: March 2002); GAO, 
Human Capital: A Guide for Assessing Strategic Training and Development 
Efforts in the Federal Government, GAO-04-546G (Washington, D.C.: March 
2004); and GAO, Standards for Internal Control in the Federal 
Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). 

[5] FDIC insures only deposits and certain retirement accounts at banks 
and thrifts. 12 U.S.C. § 1821. FDIC does not insure securities, mutual 
funds, or similar types of investments that banks and thrifts may 
offer. 

[6] See FDIA § 11 (codified as amended at 12 U.S.C. § 1821). Section 
2103 of the Reform Act amended section 11 to authorize FDIC and the 
National Credit Union Administration (NCUA), beginning in 2010 and 
every 5 years thereafter, to jointly consider adjustments to the 
insurance coverage limits and share insurance coverage limits based on 
the rate of inflation. NCUA is the federal agency that charters and 
supervises federal credit unions and insures savings (termed member 
shares) in federal and most state-chartered credit unions through the 
National Credit Union Share Insurance Fund. Share insurance is similar 
to the deposit insurance protection offered by FDIC. 

[7] In addition to FDIC, the other three federal banking regulators 
are: the Board of Governors of the Federal Reserve System, the Office 
of the Comptroller of the Currency, and the Office of Thrift 
Supervision. For the purposes of this report, the term "banking system" 
excludes credit unions. 

[8] These outside directors are also appointed by the President, but in 
their capacities as the Comptroller of the Currency and Director of the 
Office of Thrift Supervision, not in their capacities as FDIC board 
members. 

[9] For background on the crisis, see Federal Deposit Insurance 
Corporation, History of the Eighties--Lessons for the Future, a 1997 
study prepared by FDIC's (former) Division of Research and Statistics, 
available at http://www.fdic.gov/bank/historical/history/index.html 
(accessed Dec. 21, 2006). The study analyzes the economic, financial, 
legislative, and regulatory causes leading to the extraordinary number 
of failures seen in the 1980s and early 1990s. It also evaluates 
responses to the crisis, and assesses implications for deposit 
insurance and bank supervision in the future. 

[10] The Resolution Trust Corporation (RTC) was created in 1989 upon 
the enactment of the Financial Institutions Reform Recovery and 
Enforcement Act to manage and dispose of the assets of insolvent 
thrifts. See Pub. L. No. 101-73, §501, 103 Stat. 183, 363-93 (1989). 
The Resolution Trust Corporation Completion Act, Pub. L. No. 103-204, 
107 Stat. 2369 (1993) terminated RTC, effective 1995, and transferred 
operations to FDIC. In all, the RTC resolved 747 failed thrifts and 
disposed of more than $450 billion in failed thrift assets. For 
details, see Davison, L., "The Resolution Trust Corporation and 
Congress, 1989-1993," FDIC Banking Review, volume 18, number 2, 2006, 
available at 
http://www.fdic.gov/bank/analytical/banking/2006sep/article2/article2.pd
f (accessed Dec. 21, 2006). 

[11] See 12 U.S.C. § 1820 (d). 

[12] Although FDIC has broad delegation authority, there are some 
duties that the board is prohibited from delegating to staff. See, 
e.g., 12 U.S.C. § 1815 (a) (determination to deny deposit insurance); 
12 U.S.C. § 1818 (a)(9) (decision to terminate an institution's deposit 
insurance); 12 U.S.C. § 1818 (t)(2) and (3) (exercise of back-up 
enforcement authority); 12 U.S.C. § 1821 (c)(9) (decision to act as 
sole receiver or conservator); 12 U.S.C. § 1823 (c)(4)(G) (emergency 
actions taken to mitigate systemic effects of a bank failure); 12 
U.S.C. § 1823 (f)(2) (decision to override a state's objection to the 
sale of assets of a failed institution to an out-of-state institution). 

[13] The Conference Board, Corporate Governance Handbook 2005: 
Developments in Best Practices, Compliance, and Legal Standards (New 
York, N.Y.: 2005). 

[14] GAO, Standards for Internal Control in the Federal Government, 
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). 

[15] The Conference Board, Corporate Governance Handbook 2005: 
Developments in Best Practices, Compliance, and Legal Standards (New 
York, N.Y.: 2005). 

[16] See 31 U.S.C. §§ 9105-9106. Sections 305 and 306 of the Chief 
Financial Officers Act of 1990, Pub. L. No. 101-576, 104 Stat. 2838, 
2853-54, amended 31 U.S.C. §§ 9105 and 9106 generally by, among other 
things, providing for audits of government corporations by the 
Inspector General of the corporation, an independent auditor, or head 
of the corporation, according to accepted government auditing 
standards; requiring reports to congressional committees; and 
authorizing audits, and reviews of audits, by the Comptroller General. 
Prior to the amendments audits of government corporations were required 
to be conducted by the Comptroller General at least once every three 
years. 

[17] The Conference Board, Corporate Governance Handbook 2005: 
Developments in Best Practices, Compliance, and Legal Standards (New 
York, N.Y.: 2005). 

[18] Further, recent changes in federal law and stock exchange listing 
standards have increased the number and scope of the responsibilities 
of audit committees of publicly traded corporations. See generally, the 
Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, title III, 101 Stat. 
745, 775-785 (codified, as amended, in various sections of Title 15 of 
the U.S. Code). 

[19] Codified at 31 U.S.C. §§ 9105-9106. 

[20] Title II of the CFO Act is codified, as amended, at 31 U.S.C. §§ 
503, 504, 901 - 903 and 3515. 

[21] As required by the Inspector General Act, the FDIC has an Office 
of Inspector General, which is authorized to conduct and supervise 
audits and investigations relating to FDIC's programs and operations. 
See Pub. L. No. 95-452, 92 Stat. 1101 (1978) (codified as amended at 5 
U.S.C. App. 3). Among other things, the purpose of the Inspector 
General Act was to create within designated federal agencies a means 
for independent units to inform the head of the agency about problems 
or deficiencies relating to agency programs and operations and the 
necessity for corrective action. The FDIC Inspector General reports 
directly to the Chairman or, if delegated by the Chairman, the Vice 
Chairman. 

[22] Sarbanes-Oxley changed the role and authority of audit committees 
of corporations subject to the federal securities laws. Under Section 
301 of the Sarbanes-Oxley Act (codified at 15 U.S.C. 78j-1), audit 
committees, among other things, must be composed entirely of 
independent directors, meaning that a director "may not, other than in 
his or her capacity as a member of the audit committee, the board of 
directors, or any other board committee (i) accept any consulting, 
advisory, or other compensatory fee from the issuer; or (ii) be an 
affiliated person of the issuer or any subsidiary thereof." 

[23] The statutory duties and authorities of FDIC's Inspector General 
are set forth in the Inspector General Act, Pub. L. No. 95-452, 92 
Stat. 1101 (1978) (codified as amended at 5 U.S.C. App. 3). 

[24] GAO/AIMD-00-21.3.1. 

[25] FDIC Circular 1151.2 (Feb. 5, 2004). 

[26] Industrial loan corporations are state-chartered financial 
institutions that emerged in the twentieth century to provide consumer 
credit to low and moderate income workers who were generally unable to 
obtain consumer loans from commercial banks. Over the past 10 years, 
these institutions have experienced significant asset growth, and these 
small niche lenders have evolved into a diverse industry. According to 
FDIC officials, as these institutions grew in number and size, FDIC's 
board of directors decided it wanted to review applications pertaining 
to the processing of industrial loan corporations so that it would be 
more familiar with their activities and be involved in related policy 
decisions. 

[27] Federal Deposit Insurance Corporation, Office of Inspector 
General, FDIC Reserve Ratio and Assessment Determinations (Washington, 
D.C.: April 2006). 

[28] GAO, A Model of Strategic Human Capital Management, GAO-02-373SP 
(Washington, D.C.: March 2002). 

[29] GAO, Human Capital: Selected Agency Actions to Integrate Human 
Capital Approaches to Attain Mission Results, GAO-03-446 (Washington, 
D.C.: April 2003). 

[30] Corporate University XChange is an educational research and 
consulting firm that assists organizations in optimizing their 
education and training resources. The panel that judges the 
applications for the award include past award winners and other 
representatives of academia, government agencies, and for-profit 
education organizations. 

[31] FDIC's Division of Supervision and Consumer Protection is 
Corporate University's largest client. According to a 2005 FDIC 
Inspector General audit report, the division accounted for more than 50 
percent of FDIC's staff and training dollars. 

[32] Federal Deposit Insurance Corporation, Office of the Inspector 
General, The FDIC's Strategic Alignment of Human Capital (Washington, 
D.C.: January 2004). 

[33] GAO-02-373SP. See also GAO, Human Capital: A Self-Assessment 
Checklist for Agency Leaders, GAO/OCG-00-14G (Washington, D.C.: 
September 2000). 

[34] A commissioned examiner is an individual designated to conduct 
financial institution examinations or inspections on behalf of FDIC. 

[35] Risk management examiners primarily focus on assessing the 
financial condition of an institution. Compliance examiners assess the 
institution's practices against applicable laws. FDIC uses the terms 
"risk management examiners" and "safety and soundness examiners" 
interchangeably. For the purpose of this report, we use the term "risk 
management examiners" when referring to this type of examiner, unless 
otherwise noted. 

[36] After successful completion of one of the two initial examiner 
commissioning programs, new employees are eligible to pursue the other 
examiner commission. 

[37] GAO, Results-Oriented Cultures: Implementation Steps to Assist 
Mergers and Organizational Transformations, GAO-03-669 (Washington, 
D.C.: July 2003). 

[38] Temporary employees with less than 6 months remaining in their 
appointments, employees pursuing a commission, and student interns are 
not eligible for Professional Learning Accounts. 

[39] At the time of our review, FDIC's Corporate University was 
piloting two certificate programs in the areas of: (1) Risk Management-
-Bank Secrecy Act and Anti-Money Laundering and (2) Resolutions and 
Receiverships--Claims. 

[40] The Certified Anti-Money Laundering Specialist and Certified 
Information Systems Auditor external certifications were offered in 
2005. As of November 2006, Corporate University's external 
certification sponsorship also included: (1) Chartered Financial 
Analyst, (2) Certified Regulatory Compliance Manager, (3) Financial 
Risk Manager, and (4) Certified Fraud Examiner. 

[41] GAO, Human Capital: A Guide for Assessing Strategic Training and 
Development Efforts in the Federal Government, GAO-04-546G (Washington, 
D.C.: March 2004). 

[42] Donald L. Kirkpatrick (author of Evaluating Training Programs: The 
Four Levels) conceived a commonly recognized four-level model for 
evaluating training and development efforts. The fourth level is 
sometimes split into two levels with the fifth level representing a 
comparison of costs and benefits quantified in dollars. 

[43] GAO-04-546G. 

[44] GAO-04-546G. 

[45] The scorecard concept employs a simple grading system common in 
many businesses: green for success, yellow for mixed results, and red 
for unsatisfactory. Scorecards track how well divisions and offices are 
executing their respective goals and objectives. 

[46] GAO, Performance Measurement and Evaluation: Definitions and 
Relationships, GAO-05-739SP (Washington, D.C.: May 2005). 

[47] GAO, Human Capital: Key Principles for Effective Strategic 
Workforce Planning, GAO-04-39 (Washington, D.C.: December 2003). 

[48] GAO/AIMD-00-21.3.1. The Committee of Sponsoring Organizations of 
the Treadway Commission (COSO) has also published similar guidance on 
internal control standards. See Committee of Sponsoring Organizations 
of the Treadway Commission, Enterprise Risk Management--Integrated 
Framework (September 2004). COSO is a voluntary private sector 
organization whose purpose is to help businesses and other entities 
assess and enhance their internal control systems. COSO includes 
representatives from the Institute of Internal Auditors, American 
Accounting Association, American Institute of Certified Public 
Accountants, Financial Executives International, and Institute of 
Management Accountants. 

[49] In this process, FDIC examiners conduct on-site evaluations of an 
institution's activities in the key areas assessed by the banking 
regulators' CAMELS rating system--capital, asset quality, management, 
earnings, liquidity, and sensitivity to market risk. FDIC conducts 
these examinations through its Division of Supervision and Consumer 
Protection. 

[50] See 12 U.S.C. § 1820 (d). The 18-month rule generally applies to 
well-capitalized, well-managed community institutions that are not 
subject to enforcement actions or any change in control during the 12- 
month period in which a full-scope, on-site examination would be 
required. Until recently, the provision applied to institutions with 
less than $250 million in assets. Section 605 of the Financial Services 
Regulatory Relief Act of 2006, Pub. L. No. 109-351, 120 Stat. 1966, 
1981 (2006), raised the asset threshold to include institutions with 
total assets of less than $500 million. Required examinations may also 
be conducted on an alternating basis with state banking regulators. 

[51] In 2005, FDIC says it conducted 2,399 legally required safety and 
soundness examinations. For a complete description of FDIC's 
examination policies, see DSC Risk Management Manual of Examination 
Policies, available at 
http://www.fdic.gov/regulations/safety/manual/index_pdf.html (accessed 
Jan. 8, 2007). 

[52] For details of the SCOR system, see Collier, et al., "The SCOR 
System of Off-Site Monitoring: Its Objectives, Functioning, and 
Performance," FDIC Banking Review, volume 15, number 3, 2003. 

[53] The CAMELS score is a numerical rating assigned to reflect an 
assessment of the overall financial condition of an institution. The 
score takes on integer values ranging from 1 (best) to 5 (worst). 
CAMELS ratings are based on examiners' assessments of six factors: 
capital, asset quality, management, earnings, liquidity, and 
sensitivity to market risk. 

[54] Financial ratios are statistical measures of an institution's 
condition or performance, focusing on such areas as earnings, level of 
capital, quality of loans and many other areas. 

[55] Case managers oversee the work product of field examiners, 
monitoring such things as consistency of product, preparation of off- 
site materials, and preparation of permanent records. 

[56] To be eligible, an institution must be judged well-capitalized and 
well-managed, have loan grading systems, and have total assets of $1 
billion or less. 

[57] Regional Risk Committee members are: the Division of Supervision 
and Consumer Protection (DSC) regional director, who serves as chair; 
DSC deputy regional directors for risk management and compliance; DSC 
area directors for risk management; Division of Insurance and Research 
regional managers; and the Division of Resolutions and Receiverships 
regional resolutions and closing manager. The regional counsel attends 
as a non-voting legal advisor. Regional staff, field staff, staff from 
other agencies, and staff from other divisions and offices also attend 
as necessary. 

[58] National Risk Committee members are: the chief operating officer, 
who serves as chair; the directors of the Divisions of Supervision and 
Consumer Protection, Insurance and Research, and Resolutions and 
Receiverships; the chief financial officer; the special advisor to the 
chairman; and the general counsel, who is an advisory member. 

[59] FDIC officials concluded the power failure would have little 
impact on the banking system. 

[60] Federal Deposit Insurance Corporation, History of the Eighties-- 
Lessons for the Future, a 1997 study prepared by FDIC's (former) 
Division of Research and Statistics, which is available at 
http://www.fdic.gov/bank/historical/history/index.html (accessed Dec. 
21, 2006). 

[61] The Financial Risk Committee is chaired by the associate director 
of the financial risk management branch of the Division of Insurance 
and Research (DIR), and has as its members: from DIR, the deputy 
director for financial risk management and research, the associate 
director for financial risk management, and the associate director for 
research; from the Division of Finance, the deputy director for 
accounting and reporting; from the Division of Resolutions and 
Receiverships, the deputy director for franchise and asset marketing, 
and the assistant director for marketing; and from the Division of 
Supervision and Consumer Protection, the deputy director for risk 
management, and the associate director for supervision and 
applications. 

[62] A collateralized debt obligation is an asset-backed security whose 
underlying collateral is typically a portfolio of bonds or bank loans. 
In a January 2006 report to the National Risk Committee, the Risk 
Analysis Center warned of a heightened risk of bond defaults. 

[63] See Large-Bank Deposit Insurance Determination Modernization 
Proposal, 71 Fed. Reg. 74857 (2006) (advance notice of proposed 
rulemaking); Large-Bank Deposit Insurance Determination Modernization 
Proposal, 70 Fed. Reg. 73652 (2006) (advance notice of proposed 
rulemaking). 

[64] Federal Deposit Insurance Corporation, Office of Inspector 
General, Follow-up Audit of the FDIC's Use of Special Examination 
Authority and DOS's Efforts to Monitor Large Bank Insurance Risks 
(Washington, D.C.: February 2002). 

[65] A liquidity crisis is the inability to obtain funds at a 
reasonable price, within a reasonable time period, to meet obligations 
as they become due. According to section 6.1 of FDIC's Risk Management 
Manual of Examination Policies, "because liquidity is critical to the 
ongoing viability of any bank, liquidity management is among the most 
important activities that a bank conducts." 

[66] Resolutions Policy Committee members are: the chief operating 
officer, who serves as chair; the chief financial officer; the 
directors of the Divisions of Supervision and Consumer Protection, 
Insurance and Research, and Resolutions and Receiverships; and the 
general counsel. 

[67] FDIC refers to this process as "preserving market discipline." 

[68] The formal name of the plan is: "Management of Large Financial 
Institution Failure Strategy and Action Plan." 

[69] Ordinarily, FDIC must pursue the least costly strategy for 
resolution, but the agency is freed of this obligation if it is 
determined that systemic risk is present. A systemic risk determination 
is considered when the least costly resolution strategy "would have 
serious adverse effects on economic conditions or financial stability," 
and an alternative resolution "would avoid or mitigate such adverse 
effects." A systemic risk determination is made by the Secretary of the 
Treasury, in consultation with the President, upon the recommendation 
of two-thirds votes of the FDIC Board of Directors and the Board of 
Governors of the Federal Reserve System. (Federal Deposit Insurance 
Act, § 13 (c)(4)(G)(i) (codified as amended at 12 U.S.C. § 1823 
(c)(4)(G)(i)). 

[70] An exception, according to FDIC, would be specialty banks with no 
core deposit franchise, such as credit card institutions. 

[71] To facilitate this, FDIC received approval from the federal Office 
of Personnel Management in October 2005 for "waiver of dual 
compensation"--that is, so that it can hire retirees without the 
retirees having pension payments reduced as a result. FDIC officials 
said no program details have yet been implemented, including: number of 
participants, required skills, methods for recall and deployment, 
management responsibility, and plans to evaluate program effectiveness. 

[72] Specifically, FDIC told us it has taken steps to have contingency 
contracts in place for, among other things, call center services; asset 
valuation and management; marketing and sale of loans; residential, 
commercial and industrial loan servicing; investigation; and credit 
card securitization. 

[73] One report examined the Division of Supervision and Consumer 
Protection's process for determining eligibility for the MERIT 
program's streamlined safety and soundness examinations. See Federal 
Deposit Insurance Corporation, Office of the Inspector General, Maximum 
Efficiency, Risk-focused, Institution Targeted (MERIT) Eligibility 
Process (Washington, D.C.: July 2005). It found the screening process 
for determining MERIT program eligibility to be adequate. The other 
report addressed evaluation of MERIT procedures on the extent to which 
an institution's loan portfolio is reviewed during an examination. See 
Federal Deposit Insurance Corporation, Office of the Inspector General, 
DSC's Process for Tracking and Evaluating the Impact of the MERIT 
Guidelines (Washington, D.C.: March 2005). The Inspector General said 
the division could benefit from monitoring that evaluates, from a risk 
perspective, a reduced level of loan review that results from the MERIT 
process. Such monitoring--either at the institutional level, or the 
regional or national level--would assist the division in determining 
whether recommended loan review ranges under the MERIT program are 
commensurate with risk found in various types of loan portfolios in low-
risk institutions. 

[74] FDIC officials said that according to FDIC guidance, examiners 
can--and do--remove an institution from MERIT procedures, and instead 
conduct a fuller, non-MERIT examination if there are concerns about an 
institution eligible for consideration under the MERIT approach. 

[75] A paper in the FDIC Banking Review (Vol. 15, No. 3, 2003) stated: 
"Clearly, the accuracy of the model has declined substantially, and 
performance has been especially weak since 1993." Since 1993, the 
system had identified only 16 percent of banks that subsequently were 
downgraded in their supervisory ratings, FDIC researchers said. While 
"not extremely accurate," they said, the system nevertheless "is 
informative." 

[76] For example, the process of separating insured deposits from 
uninsured deposits, according to FDIC guidance, is potentially the most 
challenging aspect of establishing a bridge bank, and treatment of 
deposits before the bridge bank opening would have a broad effect on 
its operation. 

[77] We made minor revisions, such as wording clarifications, to the 
interview guide after the first interview and used the revised 
interview guide during subsequent interviews. 

[78] GAO/AIMD-00-21.3.1. 

[79] GAO-04-546G. 

[80] GAO/AIMD-00-21.3.1. 

[81] In the Dallas, Texas regional office, we only interviewed managers 
in the Division of Resolutions and Receiverships when we met with 
senior management. Also, we did not interview staff in the Division of 
Insurance and Research. 

[82] We made minor revisions, such as wording clarifications, to the 
interview guides after the first site visit and used the revised 
interview guides during subsequent site visits. 

[83] In the one instance noted above, responses obtained from interview 
participants were largely similar to those obtained at other interviews 
during the site visits. 

[84] The Central Personnel Data File is an automated information system 
containing individual records for most federal civilian employees. The 
system's primary objective is to provide a readily accessible database 
for meeting the workforce information needs of the White House, the 
Congress, the Office of Personnel Management, other federal agencies, 
and the public. 

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