WASHINGTON — At the peak of the housing boom, it would have been hard to imagine a year with nearly 100 bank failures.
Harder still to fathom is that such a failure toll would actually be considered a relatively light load for the Federal Deposit Insurance Corp.
Yet, after the 92 collapses in the past year, the FDIC is not the same agency it was in 2009 or 2010. Then, when banks were failing at a feverish pace, a primary concern was how busy the agency would be every Friday.
More failures are expected next year, but the crisis-response role is shrinking, allowing the FDIC to focus more on longer-term policy goals. Still, that does not mean the agency intends to slack off.
"I don't think we're in a position to relax," Martin Gruenberg, the FDIC's acting chairman now awaiting confirmation for the permanent job, said in an interview. "We're still dealing with a very challenging environment with large numbers of problem banks, and although failing banks are declining significantly, we're still anticipating in the coming year a significant number."
But the FDIC is undeniably in transition, increasingly shifting more of its resources toward preventing the next crisis. It is eliminating 500 failure-related positions next year, helping reduce the agency's budget by 15%, but it is adding positions dedicated to helping the FDIC implement all of its responsibilities under the Dodd-Frank Act.
"The FDIC is moving away from the liquidation and resolution process because the industry is becoming a little healthier," but "they view their recent experience partly as a lesson that they should have a bigger role on the front end," said Dwight Smith, a partner at Morrison & Foerster.
Even further in the future, observers said, the challenge for the FDIC and other banking regulators is following a path from crisis to recovery that does not involve resting too much on laurels.
"They will have to think about how to staff going forward to make sure that they can react to the next crisis," said Robert Russell, who was a senior official at the FDIC in years following the savings and loan crisis and is now an attorney at Smith Dollar PC in Northern California.
Russell said that when he was at the agency, "We thought a lot about the 'firehouse concept' so we would be ready to respond to a crisis should one emerge. In good times, we had to make sure there was a core group that could react in case of an emergency."
The year's 92 FDIC takeovers were a 41% drop from 2010, the peak year for failures stemming from the 2008 crisis. And though failures in all of the past four years — a period that has seen 414 seizures — have typically involved small institutions, only one failure in 2011 involved an institution with assets of more than $2 billion. (The $2.7 billion-asset Superior Bank in Birmingham, Ala., failed on April 15.)
That is a far cry from just a couple of years ago, when half a dozen banks could be closed on a single night.
"It used to be that every Saturday morning I could read a little box in The New York Times that would tell me how many banks had gotten closed at 5 p.m. Friday," said Lawrence White, an economics professor at New York University. "The New York Times seems to have lost interest."
By handling the recent failure wave with the addition of nonpermanent contract employees — who can easily be let go with lessening demand — the FDIC is thought to have avoided the serious morale issues that hurt the agency in its last major downsizing following the savings and loan crisis.
Then, the agency was forced to part with a good chunk of its permanent workers, fueling waves of anger and resentment among many employees who continued to work there.
But a continued slowdown in failures has given way to a new type of workload. In 2011 the agency largely completed required rulemakings under Dodd-Frank to establish a new facility for seizing failed systemically important nonbanks, as well as a joint regulation with the Federal Reserve Board requiring new standards for large institutions to submit internal resolution plans. Those plans, known as living wills, will start arriving for review by the two agencies in July.
The FDIC is also expected to be a key player in pending Dodd-Frank rulemakings during 2012, including restrictions on banks' proprietary trading activities and a rule laying out how lenders must retain part of the credit risk for loans they securitize.
For the time being the job of continuing to implement Dodd-Frank mitigates the risk of complacency sinking in at the FDIC — and other regulators — as conditions in the industry improve, White said.
"Immediately, they have all of the instructions and powers of Dodd-Frank that expands their authority and gives them resolution powers over almost everything that moves," he said. "That's going to keep them busy. The risk really is after about five years, lessons get forgotten."
Officials and outside observers say the book on the 2008-9 crisis has not been fully written. Hundreds of institutions are still teetering on the edge.
"We still have over 800 institutions on the problem-bank list. While we're seeing a reduction in bank failures, and we're able to reduce budget and staffing because of that, I think the demands on supervision are still going to be significant," Gruenberg said.
"This is still a demanding environment, so our folks are going to have plenty of motivation and challenges ahead," he continued. "I don't think we're yet at the point where we're dealing with a question of, 'Are we in a normal environment?' … Over the coming year, we will still be dealing with a very challenging environment."
From failures of past years, the FDIC in 2012 will also be focused on continuing legal disputes with former managers of failed banks, as well as its exposure not only to failed-bank assets it kept in receivership but also to its end of the hundreds of deals it reached with failed-bank buyers to share losses on assets that were kept in the private sector.
"They're looking to manage the risk of the receiverships they're administering, including the loss-share programs," said Chip MacDonald, a partner at Jones Day in Atlanta. "They're going to pay very close attention to what the loss-share partners are doing with the loss-share assets, in terms of how they're administering them and what their recoveries are and what their claims experience has been, as well as the quality of their reporting."
MacDonald said that with assets slow to appreciate, the FDIC may consider buying out the partners' share of some loss-sharing agreements to minimize risk from further losses.
"They have the right to examine and inspect and evaluate the performance of their loss-share partners, and they may actually buy back some of the loss-sharing to reduce the tail risk on some deals," he said.
"Some of the loss-share deals only last five years," MacDonald said. "We're at the end of three years now. The [appreciation] has probably been slower than everyone hoped for."
But beyond failures, Gruenberg has voiced a strong interest in having the agency focus on policy issues not necessarily related to a crisis.
Two priorities he has highlighted since stepping in for former Chairman Sheila Bair, who left the agency in July after a five-year term, have been steps to make the regulatory process smoother for community banks and exploring ways to serve the underbanked.
"The FDIC is the lead federal regulator of a majority of community banks, and we think we have a particular responsibility to focus on that issue and try to think through the challenges facing community banks in the United States, and what the future holds," Gruenberg said.
