[Federal Register Volume 59, Number 192 (Wednesday, October 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24607]
[[Page Unknown]]
[Federal Register: October 5, 1994]
=======================================================================
-----------------------------------------------------------------------
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327
RIN 3064-AB46
Assessments
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Advance Notice of Proposed Rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Board of Directors (Board) of the Federal Deposit
Insurance Corporation (FDIC) is seeking comment on whether the deposit-
insurance assessment base currently provided for in the FDIC's
assessments regulations should be redefined and, if so, how. Because of
recent statutory amendments and other developments affecting insured
depository institutions, the Board believes review of the assessment-
base definition is desirable at this time. The FDIC will carefully
consider comments received in response to this Advance Notice of
Proposed Rulemaking (Notice) in determining whether revision of the
assessment base is warranted. If the Board finds revision to be
warranted, it will propose specific amendments on which public comment
will then be invited.
DATES: Written comments must be received by the FDIC on or before
February 2, 1995.
ADDRESSES: Written comments are to be addressed to the Office of the
Executive Secretary, Federal Deposit Insurance Corporation, 550--17th
Street, NW, Washington, DC 20429. Comments may be hand-delivered to
Room F-400, 1776 F Street, NW, Washington, DC 20429, on business days
between 8:30 a.m. and 5 p.m. (FAX number: (202) 898-3838). Comments
will be available for inspection in room 7118, 550--17th Street, NW,
between 9 a.m. and 4:30 p.m. on business days.
FOR FURTHER INFORMATION CONTACT: William Farrell, Chief, Assessment
Management Section, Division of Finance, (703) 516-5546; Christine
Blair, Financial Economist, Division of Research and Statistics, (202)
898-3936; Martha Coulter, Counsel, Legal Division (202) 898-7348;
Federal Deposit Insurance Corporation, Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
I. Introduction
The insurance premiums paid by an insured depository institution to
the FDIC are calculated by multiplying the institution's assessment
base by its assessment rate. At present, an institution's assessment
base equals its total domestic deposits, as adjusted for certain
elements. 12 CFR 327.4(b).
Prior to January 1, 1994, the assessment base was defined by
section 7(b) of the Federal Deposit Insurance Act (FDI Act), 12 U.S.C.
1817(b). In amending section 7(b) to require the establishment of a
risk-based deposit insurance system, section 302 of the Federal Deposit
Insurance Corporation Improvement Act (FDICIA) (Pub. L. 102-242, 105
Stat. 2236, 2345) removed the statutory assessment-base provisions. As
a result, effective January 1, 1994, the assessment base is now
governed by the FDIC by regulation. At present, the FDIC's assessment-
base regulations continue to be based on the former statutory
provisions.
In light of the recent transition to a risk-based deposit insurance
system, the FDIC believes that it is desirable to review the existing
assessment base. In the Board's view, it is important to determine
whether the existing definition or some alternative definition more
effectively furthers the purposes of the new deposit insurance system.
In addition, a number of other significant developments in the
financial services industry in recent years--including substantially
higher deposit insurance rates and the resulting heightened awareness
of insurance assessments, significant changes in the activities of
insured depository institutions, adjustments in federal failure-
resolution policies, and Congressional adoption of ``depositor
preference'' requirements--also support the desirability of such a
review.
Through this Notice, the FDIC seeks comment from all interested
persons as to whether the assessment base should be redefined and, if
so, how. The FDIC believes that it is important to review the
definition of the assessment base from as many different perspectives
as possible. Accordingly, this Notice poses various specific questions
on which comment is sought. Commenters are requested to identify the
question number to which their respective responses correspond.
Questions need not be repeated, and interested persons are invited to
respond to as many questions as they wish. Further, comment is
requested on issues not specifically addressed in this Notice but which
a prospective commenter considers pertinent to the definition of the
assessment base.
The FDIC will carefully review and consider the comments received
in response to this Notice in determining whether to propose a
regulatory amendment redefining the assessment base. Should the Board
decide that such an amendment is warranted, it will issue a proposal to
adopt specific changes to the assessments regulations and seek public
comment on that proposal.
II. Background
The assessment base has remained substantially unchanged since
1935. Historically, the assessment base for banks and thrift
institutions has been defined, broadly stated, as total domestic
deposits. The existing assessment base, as defined in 12 CFR 327.4(b),
begins with the amount of the ``demand deposits'' and ``time and
savings deposits'' reported by an insured institution in its quarterly
Report of Condition.\1\ From these amounts, the regulations provide for
additions and subtractions.
---------------------------------------------------------------------------
\1\For banks, this report is called the Report of Income and
Condition; for thrift institutions, the Thrift Financial Report; and
for insured branches of foreign banks, the Report of Assets and
Liabilities of U.S. Branches and Agencies of Foreign Banks.
---------------------------------------------------------------------------
Among the additions to ``demand deposits'' and ``time and savings
deposits'' are adjustments for unposted credits. Among the subtractions
are adjustments for unposted debits; pass-through reserve balances; a
16\2/3\ percent ``float'' allowance for demand deposits and a 1 percent
``float'' allowance for time and savings deposits; and the amount of
any liabilities arising from depository institution investment
contracts under section 11(a)(8) of the FDI Act.\2\
---------------------------------------------------------------------------
\2\Subtraction for the last item, or certain so-called ``BIC''
liabilities, was included by an amendment to 12 CFR 327.4(b)
effective July 11, 1994. See 59 FR 29714 (June 9, 1994).
The remaining adjustments provided for in 12 CFR 327.4(b) (such
as additions for demand deposits that represent uninvested trust
funds) are technical in nature and are included to adapt certain
elements of the Reports of Condition for assessment purposes.
---------------------------------------------------------------------------
Until 1993, the premium rate by which an institution's assessment
base was multiplied to determine its assessment payment was the same
for all banks and the same for all thrifts. Beginning in January 1993,
each institution is now assigned an assessment rate based on the risk
that institution poses to its deposit insurance fund.
As assessment rates have risen over the past few years, deposit
insurance premiums have become a significant expense item for insured
depository institutions. The expense factor has resulted in
institutions and their depositors questioning the relevance of the
existing assessment base in the current environment. In addition,
increased rates have caused some institutions to take deliberate steps
to decrease their assessments by temporarily reducing their deposits at
quarter end.
Also in recent years, there have been significant changes in the
activities of insured depository institutions, in terms of reported
assets and liabilities as well as off-balance-sheet operations
(including derivative products such as options, swaps, interest-rate
and foreign-exchange-rate contracts). Such changes, which to some
extent have eroded the historical connection between deposits and
lending, give rise to the question of whether total domestic deposits
continues to be a meaningful definition for the assessment base. Other
relevant developments include adjustments in federal failure-resolution
policies and the adoption of ``depositor preference'' requirements.
This section discusses the applicability of these developments to
the question of whether the assessment base should be redefined. The
areas addressed in this regard are the role of the assessment base in
the risk-related deposit insurance system, the assessment-avoidance
problem, failure- resolution policies, and depositor preference. The
following discussions on these topics identify what the FDIC believes
to be important issues that merit careful consideration in deciding on
an assessment-base definition. Comment is requested with regard to how
the assessment base should be defined in order to address these and
other issues in an appropriate manner.
Before turning to these topics, however, the FDIC wishes to stress
that, in reviewing the definition of the assessment base, it is not the
FDIC's intent to change the total dollar amount of assessments
collected. Instead, the goal is to select an assessment base that best
suits the purposes of federal deposit insurance. To the extent any
decrease or increase in assessment income is warranted, the FDIC
anticipates that it would achieve that decrease or increase by changing
the assessment rates, and not by redefining the assessment base. In
short, the amount of total assessment collections a particular
assessment base definition would yield (assuming no change in the
assessment rates) is not a criterion the FDIC intends to apply in
deciding on an assessment-base definition, since assessment collections
can be fairly readily adjusted by changing assessment rates.
While the FDIC does not intend any redefinition of the assessment
base to have a significant impact on the total amount of assessments
industry-wide, there is a potential for significant change in the
assessments paid on an institution-by-institution basis. Depending on
the type of activities in which a particular institution is engaged,
and the type of products and services it offers, a change in the
assessment base could have a significant effect on the amount of the
assessments it pays.
A. Risk-Based Assessment System
Section 302 of FDICIA amended section 7 of the FDI Act to require
that the FDIC establish a risk-based assessment system. Under the
system mandated by FDICIA, the amount of an institution's assessment is
to be based on the likelihood that its deposit insurance fund will
incur a loss with respect to the institution, the likely amount of any
such loss, and the revenue needs of the insurance funds. Under the
risk-based system adopted by the FDIC pursuant to section 302, the rate
component of the insurance system was changed from a single, flat rate
applicable to all banks and a single, flat rate applicable to all
thrift institutions to a risk-based rate structure.
Having already addressed the rate component of the new risk-based
assessment system in previous rulemaking proceedings, the FDIC is now
turning its attention to the assessment-base component. This Notice
does not revisit the matter of the rate structure.
At present, the assessment-base component of the risk-based system
remains unchanged from the form required by statute for the former
flat-rate insurance system. One issue to be considered in connection
with whether the assessment base should now be changed is how and to
what extent the assessment base should reflect the risk factors
identified in section 7(b) of the FDI Act, as amended by section 302 of
FDICIA.
For example, among the risks identified in section 7(b) are those
attributable to ``different categories and concentrations of
liabilities, both insured and uninsured * * *.'' 12 U.S.C.
1817(b)(1)(C)(i)(II). One area of risk taken into account in the
existing assessment base is that involving deposit liabilities.
Potentially, the assessment base could be modified to take into account
other ``categories'' of liabilities, such as non-deposit, secured
liabilities. This example is discussed more fully in paragraph C of
section IV, below.
B. Assessment Avoidance
Whatever assessment base is applied, the FDIC believes that, in
order to avoid imposing any additional regulatory burden on insured
institutions, it is desirable to continue to collect assessment data
from institutions in their quarterly Reports of Condition. If the
assessment-base definition is changed, the information collected for
assessment purposes by the Reports of Condition might also need to be
changed.
At present, the data collected in these reports reflect amounts
``as of'' the report date. This has caused some institutions
purposefully to reduce their assessment expenses by temporarily
reducing the amount of the deposits held on the report date.
It has been suggested that defining the assessment base in terms of
a daily average over the quarter (that is, total dollars for the
quarter divided by the number of days in the quarter), rather than
actual ``as of'' report-date data, would mitigate this assessment-
avoidance problem. An averaging approach would also help to smooth out
the effects of unusual occurrences such as misdirected wire transfers
and the receipt, on or just before the report date, of abnormally large
deposits to be held only briefly by an institution.
C. Failure-Resolution Policies
In past years, governmental policies for resolving failed or
failing depository institutions frequently provided protection for
liabilities not specifically covered by federal deposit insurance.
First, through the use of all-deposit purchase-and-assumption (P&A)
transactions, all depositors--insured and uninsured alike--often
received full protection for their deposit balances. Unlike a deposit
payoff or an insured-deposit transfer, in which only insured deposits
were covered (and which were used only when there was no acceptable bid
for an all-deposit P&A), the all-deposit P&A allowed for de facto 100-
percent insurance protection. The protection of all depositors in the
resolution of several large bank failures contributed to the perception
that some banks were ``too big to fail'' and thus eligible for de facto
100-percent insurance protection for all deposits, both domestic and
foreign.
While the use of all-deposit P&As and application of the so-called
``too big to fail'' doctrine often resulted in protection for
liabilities beyond the statutory limit for deposit insurance coverage,
in all such cases it did so in satisfaction of a cost test or for clear
policy objectives such as maintaining the stability of, and public
confidence in, the banking system. Specifically, the FDI Act required
that, subject to an ``essentiality'' exception, the resolution of an
institution be no more costly to the FDIC than its liquidation. Hence,
the FDIC could normally effect an all- deposit P&A only if the purchase
premium paid by the acquirer for the transaction offset the additional
cost to the FDIC of protecting uninsured liabilities, in comparison
with the cost of a liquidation. In the handful of ``too big to fail''
cases where this cost test was not met, the FDIC acted under a
statutory exception to the cost test based on the ``essentiality'' of
the failing institution to the marketplace. That exception was used
only in a small minority of the total number of resolutions the FDIC
effected.
Still, the de facto protection of uninsured liabilities fueled the
argument that such protected liabilities should be assessed. Since the
assessment base already consisted (as it still does) generally of total
domestic deposits, the universe of non-assessed liabilities was limited
to foreign deposits and non-deposit liabilities.
Section 141(a) of FDICIA amended section 13(c) of the FDI Act to
impose a revised test for failure resolution. Instead of requiring that
the resolution be no more costly than liquidation, the new test
requires use of the resolution method that is least costly to the
affected deposit insurance fund. Provisions for present-value analyses
and documentation are specified in order to determine the least-costly
resolution method. The FDIC may not protect uninsured deposits unless
it is less costly to provide such protection than not to do so.
Further, the FDIC is prohibited from pursuing any action, directly or
indirectly, that would have the effect of increasing losses to the
insurance fund by protecting foreign deposits (generally meaning
deposits payable only outside the United States). Hence, all-deposit
P&A transactions are still permitted, provided the insurance fund does
not incur any loss with respect to such deposit liabilities in an
amount greater than the loss which would have been incurred with
respect to such liabilities if they had not been assumed by the
acquirer.
The perceived ``too big to fail'' doctrine has been replaced by a
new statutory exception for situations involving ``systemic risk''. In
such cases--as determined by consensus among the FDIC, the Board of
Governors of the Federal Reserve System, and the Secretary of the
Treasury (in consultation with the President)--the FDIC may take action
or provide assistance as necessary to avoid or mitigate the systemic
effects of failure. However, the FDIC is required to recover the losses
incurred under the systemic risk exception through one or more special
assessments on the members of the affected insurance fund. As yet, this
exception has not been used.
The net result going forward is that for any individual resolution,
protection will be provided only for insured deposits unless it is less
costly to protect uninsured deposits as well. In any instance (expected
to be quite rare) in which the ``systemic risk'' exception might be
triggered, the FDIC is required to recover the loss to the applicable
deposit insurance fund by means of a special assessment on the members
of that fund.
It has been argued in the past that the assessment base should be
expanded beyond total domestic deposits in order to conform the base to
the actual protections provided by the FDIC under the failure-
resolution policies. However, many now believe that, given the new
failure-resolution policies, this rationale for expanding the base has
been weakened. (Of course, a shrinking of the assessment base might be
viewed as warranted under the failure-resolution requirements, or an
expansion might be warranted for other reasons.)
D. Depositor Preference
In August 1993, Congress enacted legislation establishing the
priority order for payment on claims against an institution in
receivership. As amended by this legislation, section 11(d)(11) of the
FDI Act now provides for the priority of deposit liabilities of the
institution over other general or senior liabilities. (Subject to the
cross-guarantee provisions of section 5(e) of the FDI Act, claims with
priority over deposit liabilities are secured claims to the extent of
the security, and administrative expenses of the receiver.) This
situation raises the question of whether, or to what extent, the
assessment base should reflect the protection granted by this provision
to uninsured deposits.
III. Analytical Framework
A. Evaluation Criteria
It is the FDIC's intention to apply an assessment base definition
that addresses the requirements of the deposit insurance program over
the long run, rather than one designed only to respond to the current
conditions in the banking industry. To this end, the FDIC has
identified certain characteristics that it believes can be used as
criteria for analyzing and comparing alternative definitions. These
criteria, which address the issues and concerns discussed in the
preceding section, are outlined below. They are applied in the final
section of this Notice as a framework for analyzing various alternative
assessment-base definitions.
In the questions at the end of this section, comment is sought on
the usefulness of these criteria in selecting an assessment-base
definition, as well as on whether additional or alternative criteria
should be applied.
1. Fairness
This criterion refers to the extent to which institutions are
neither systematically favored nor systematically disadvantaged due to
factors such as size and geographic location. Under this concept of
fairness, similar institutions operating under similar circumstances,
and representing similar risks of failure and magnitude of potential
loss to the insurance fund, would generally incur similar insurance
costs.
Fairness may suggest that claims receiving potentially equal
protection in the event of a failure be assessed equally. Similarly,
since there are varying degrees of protection for different categories
of claims, it could be argued that fairness demands higher assessment
payments for greater degrees of protection.
Fairness may also refer to the extent to which abnormal
occurrences, such as the receipt at quarter end of an unusually large
deposit to be held only briefly by the institution, affect the amount
of an institution's assessments. In this regard, fairness may suggest
that the assessment base should be defined in terms of averages, which
would help smooth out the effects of such abnormal occurrences, rather
than on actual ``as-of'' report-date data.
2. Measurability
This criterion refers to the extent to which the components of the
assessment base can feasibly and objectively be calculated with a
minimum degree of uncertainty and disagreement by separate, independent
parties (such as the institution being assessed and the FDIC).
For example, an assessment base that is limited to insured deposits
might raise measurability concerns, since timely and reliable
calculations of only those deposits (or portions of deposits) that
actually would be covered by insurance in the event of a failure might
not be feasible. (To the extent measurability is not an issue, the
recordkeeping necessary to support such a calculation might be.) If
measurability is a problem here, a possible solution might be to
identify a ``proxy'' intended to provide a less precise (but related)
substitute that is more readily available than actual insured deposits.
3. Relation to Risk
This criterion refers to the extent to which the assessment base
reflects the degree of risk posed to the deposit insurance funds. For
example, there is a link between the existing assessment base, which is
based on total domestic deposits, and the magnitude of the loss the
failure of an institution could cause its deposit insurance fund.
On the one hand, private insurance firms often base the amount of
their premiums at least in part on the amount to be paid out under the
policy if the insured event transpires. This practice might suggest an
assessment base consisting of insured deposits only. Such a definition
also would be consistent with the primary purpose of federal deposit
insurance as clarified by FDICIA--to protect insured deposits.
On the other hand, existing public policy provides protection for
liabilities other than insured deposits, through such measures as
depositor preference--which provides some protection to non-insured
domestic deposits--and granting superior status to secured liabilities.
In addition, to the extent that secured claims are elevated to a
position superior to that of insured deposits, the FDIC may be at
greater risk of not recovering the full amount of its payout on insured
deposits. Thus, assessment of liabilities other than insured deposits
is not inherently inconsistent with the concept of defining the
assessment base in terms of the magnitude of the risk posed to the
FDIC.
4. Non-Avoidability
This criterion refers to the extent to which the assessment base
precludes or minimizes transactions or adjustments made solely to avoid
assessments. Under the existing assessment base, which is defined in
terms of deposits held ``as of'' the last day of the quarter, avoidance
activities usually involve the temporary transfer of deposits out of an
institution's deposit base for a brief period extending over quarter
end.
One such example is the movement of deposits into non-deposit
instruments (such as notes or repurchase agreements) within the same
institution just prior to quarter end, solely for the purpose of
reducing the assessment paid by the institution. The transferred funds
are returned to deposit accounts at the beginning of the next quarter,
after the ``as of'' date for determining the institution's assessment
base.
Another example, which involves the transfer of deposits from one
insured institution to another, does not affect the total amount of
assessments collected by the FDIC but rather forces the receiving
institution to pay assessments on deposits that would otherwise have
been included in the transferring institution's assessment base. In
this example, deposits are transferred just prior to quarter end from
one institution to another. The transfer is reversed shortly
thereafter. The result is to disadvantage the (probably unsuspecting)
receiving institution by increasing the deposit base on which its
assessments are calculated.
In both of these examples, the result is an artificial situation
created solely for the purpose of avoiding assessments. Such situations
could be mitigated by the use of ``average'' data in defining the
assessment base.
5. Recordkeeping Burden
This criterion refers to the ease of maintaining and reporting the
data needed for computing an institution's assessment base. It
encompasses the time and effort necessary for any additional
recordkeeping beyond that required of reporting entities for purposes
other than assessments.
The FDIC fully appreciates the need to keep to a minimum any
additional recordkeeping requirements. However, pursuant to section
7(b)(5) of the FDI Act, as amended by FDICIA, each insured depository
institution must maintain all records the FDIC may require for
verifying the correctness of the institution's assessments. Depending
on how the assessment base is defined, additional recordkeeping might
be necessary to allow for the verification of the assessment-related
information reported by an institution.
If, in responding to any portion of this Notice, a comment
recommends a particular recordkeeping requirement, the commenter is
requested to include an estimate of the amount of time it would take a
reporting entity to meet the requirement.
B. Questions for Comment Regarding the Criteria
Response to the following questions is requested:
1. Are the definitions of the aforementioned criteria sufficient in
terms of evaluating the various options for defining the assessment
base? If not, provide suggested definitions.
2. Are there any other criteria that should be considered in
evaluating the various options for defining the assessment base? If so,
identify and define those criteria.
IV. Alternative Assessment-Base Definitions
This section presents several options for defining the assessment
base. It does not attempt to address all possible options, but rather
discusses those the FDIC has identified to date as the primary
alternatives.
Following a discussion of each of these options are several
specific questions pertaining to that option. Response to these
questions is requested from all interested persons.
A. Status Quo
Under this option, the assessment base would remain unchanged, and
it would continue to be defined, broadly stated, as total domestic
deposits. Because there would be no changes, the FDIC's existing
assessment-base regulations would not be amended.
Retaining the existing definition would avoid another regulatory
change for insured depository institutions. The existing definition is
generally well understood and operable, and has relatively few
measurement problems. However, because quarter-end data are used to
calculate the current assessment base, there is a high risk of
assessment avoidance, and the problem of receiving abnormally large
deposits or misdirected wire transfers at quarter end would not be
addressed.
Relative to assessable deposits, there has been recent growth of
other liabilities and off-balance-sheet activities. If this is a long-
term trend, it might not be desirable to link assessments to a base
that may be shrinking in relation to overall banking activity unless
the protection provided in connection with the federal deposit
insurance program is reduced commensurately.
Commenters are requested to provide an evaluation of this option
for defining the assessment base, in terms of the following criteria
discussed in section III of this Notice:
3. Fairness
4. Measurability
5. Relation to Risk
6. Non-Avoidability
7. Recordkeeping Burden
8. Any other criteria suggested by the commenter.
Commenters are also requested to respond to the following specific
questions regarding this option:
9. Should the float deductions be retained at their existing
levels, or should they be modified? (The deduction for adjusted demand
deposits is 16\2/3\ percent and the deduction for adjusted time and
savings deposits is 1 percent.) State the advantages and disadvantages
of the recommended method for addressing the float deduction for the
status quo option.
10. Identify other advantages or disadvantages of this option for
defining the assessment base.
B. Total Unadjusted Domestic Deposits
Under this option, the assessment base would be defined in its
existing form (status quo), except that current assessment base
adjustments would be eliminated. The float deductions, which were
established over 30 years ago, are the most significant adjustments to
the assessment base provided for in the current regulations. Since that
time, there have been dramatic changes in the payments system in the
United States that may have caused the current float deductions to
become obsolete. Therefore, many advocate the elimination of these
float deductions.
The other existing adjustments to the assessment base have a less
dramatic effect on the total assessments paid by institutions. However,
these adjustments complicate the measurability of the assessment base
and increase the reporting and recordkeeping burden.
Commenters are requested to provide an evaluation of this option
for defining the assessment base, in terms of the following criteria
discussed in section III of this Notice:
11. Fairness
12. Measurability
13. Relation to Risk
14. Non-Avoidability
15. Recordkeeping Burden
16. Any other criteria suggested by the commenter.
Commenters are also requested to respond to the following specific
questions regarding this option:
17. Should the existing float deductions be eliminated? State the
advantages and disadvantages of eliminating these adjustments to
deposits.
18. Should other adjustments to deposits that are currently
provided for be eliminated (such as ``BICs'' and pass-through reserve
balances)? State the advantages and disadvantages of eliminating these
adjustments.
19. Identify other advantages or disadvantages of this option for
defining the assessment base.
C. Expanded Base: Non-Deposit Secured Liabilities
Under this option, the assessment base would consist, in general
terms, of total adjusted domestic deposits plus non-deposit secured
liabilities (such as secured notes and other secured borrowings). One
argument given for assessing secured liabilities is that they are
protected before the FDIC in the event of a failure and, accordingly,
increase the risk of loss to the FDIC.
Secured creditors of insured depository institutions are protected
against loss by assets of the institution that are pledged as security
for its debts to those creditors. Because more favorable terms can be
obtained on borrowings by pledging high-quality, marketable assets as
security, there is a tendency for institutions to pledge such assets
for that purpose. If the institution were to fail, these pledged assets
would not be available to reduce the FDIC's losses or to settle the
claims of other unsecured creditors. As more of the institution's
assets are pledged--often, the highest-quality, most marketable
assets--there are fewer assets remaining to satisfy unsecured
obligations, including unsecured deposit and non-deposit liabilities.
The likely effect of a shrinking pool of quality assets on the FDIC
is to increase its failure-resolution costs. FDIC costs could be
increased even further if, as is often the case, the market realizes
beforehand that an institution may be heading toward insolvency.
Uninsured and unsecured creditors typically flee an institution
perceived to be in trouble, leaving the institution more dependent on
secured borrowings for funding, and further depleting the pool of
unpledged assets available for settling claims.
FDICIA allows secured claims to be paid up to the fair market value
of the assets pledged against those claims. 12 U.S.C. 1821(d)(5)(D).
Any remaining portion is to be treated as an unsecured claim. This
marginally reduces the FDIC's exposure by restricting secured
claimholders' recoveries to the market value of the pledged assets, but
by no means eliminates the exposure.
If the assessment base were expanded to include secured
liabilities, a better measure of these liabilities would be necessary.
While rough estimates of secured liabilities are obtainable, an
institution's secured, non-deposit borrowings cannot at present be
readily determined from data available in the institution's Report of
Condition. As a result, if the assessment base were defined to include
non-deposit secured liabilities, additional data (and additional
recordkeeping) would probably be required.
Commenters are requested to provide an evaluation of this option
for defining the assessment base, in terms of the following criteria
discussed in section III of this Notice:
20. Fairness
21. Measurability
22. Relation to Risk
23. Non-Avoidability
24. Recordkeeping Burden
25. Any other criteria suggested by the commenter.
Commenters are also requested to respond to the following specific
question regarding this option:
26. Identify other advantages or disadvantages of this option for
defining the assessment base.
D. Expanded Base: Foreign Deposits
Under this option, the assessment base would equal, in general
terms, total adjusted domestic deposits plus foreign deposits. Despite
the fact that obligations payable only outside the United States and
certain other limited areas (including ``foreign deposits'') are not
covered by federal deposit insurance, they have sometimes been
protected in the past by federal failure-resolution policies. Since
virtually all foreign deposits are held by large banks and since large-
bank failures historically have been handled in a way that protected
most depositors, it has been argued that these deposits should be
assessed. Those who support this argument believe that assessing
foreign deposits would help to equalize a perceived inequality in
treatment between large and small depository institutions.
However, recent changes in the failure-resolution process have
eroded this argument. Under FDICIA, protection of uninsured deposits,
including foreign deposits, is permitted only in cases where a least-
cost determination warrants such protection or where the systemic-risk
exception is triggered. In cases falling within the systemic-risk
exception (which are expected to be quite rare), FDICIA requires
special assessments on the members of the affected insurance fund to
cover the costs of protecting any uninsured deposits. (The statute
requires the special assessment without reference to the fund's
resources; thus, whether or not foreign deposits are included in the
assessment base is totally irrelevant to the applicability of the
special assessment, which is apparently intended to be imposed on all
members of the affected fund.)
Another possible argument for assessing foreign deposits is to
offset any losses resulting from a foreign government's seizure of
failed U.S. institutions' assets located within the jurisdiction of
that foreign government. While the possible seizure of assets by a host
country is a risk that should not be overlooked, neither should it be
exaggerated. In the event of such a failure, it is not clear who would
control the liquidation of foreign-branch assets.
Increased costs associated with assessing foreign deposits could
reduce the ability of U.S. depository institutions to compete in
foreign and international markets and could adversely affect their
ability to promote exports from the United States. There is reason to
believe that assessment of foreign deposits would cause many depository
institutions to convert their foreign offices to subsidiary depository
institutions, thus perhaps substantially reducing the amount of foreign
deposits subject to assessment.
Moreover, many would argue that if foreign deposits are assessed,
they should also be insured. At present, federal statute explicitly
precludes the insurance coverage of foreign deposits. A change in this
situation would require Congressional action and would raise a variety
of issues, including the reaction of foreign governments to U.S.
depository institutions offering insured deposits in competition with
that country's domestic depository institutions.
Commenters are requested to provide an evaluation of this option
for defining the assessment base, in terms of the criteria discussed in
section III of this Notice:
27. Fairness
28. Measurability
29. Relation to Risk
30. Non-Avoidability
31. Recordkeeping Burden
32. Any other criteria suggested by the commenter.
Commenters are also requested to respond to the following specific
question regarding this option:
33. Identify other advantages or disadvantages of this option for
defining the assessment base.
E. Expanded Base: Total Liabilities
Under this option, the assessment base would equal total
liabilities (domestic and foreign).\3\ An argument can be made for an
assessment-base definition that is based on all of an institution's
funding sources (e.g., total liabilities, not including capital) as
opposed to deposits alone. As an institution encounters difficulties, a
``flight to quality'' often occurs, with uninsured depositors and
unsecured creditors leaving the institution. In turn, fewer depositors
and other creditors are actually unprotected, or face losses, at the
time of failure. As a result, as assets are liquidated to fund the
withdrawal of uninsured deposits, this flight to quality reduces the
amount of unpledged assets that are available for settling claims,
which increases the FDIC's resolution costs. This argues for assessing
institutions' liabilities that are protected directly by deposit
insurance (insured deposits), as well as indirectly (uninsured deposits
and secured liabilities), in the event of a failure.
---------------------------------------------------------------------------
\3\To the extent this option includes foreign deposits, the
observations made in the preceding discussion of such deposits also
apply to this option.
---------------------------------------------------------------------------
FDIC experience with depository institution failures supports the
premise that all types of an institution's liabilities are used to fund
the activities that cause depository institution failures and, thereby,
produce losses for the FDIC. Given this situation, it has been
suggested that all of a depository institution's liabilities should be
assessed by the FDIC. This would also remove any artificial incentives
for institutions to favor certain types of liabilities (e.g., non-
deposits) over other types of liabilities (e.g., deposits) for purposes
of assessment avoidance.
Commenters are requested to provide an evaluation of this option
for defining the assessment base, in terms of the following criteria
discussed in section III of this Notice:
34. Fairness
35. Measurability
36. Relation to Risk
37. Non-Avoidability
38. Recordkeeping Burden
39. Any other criteria suggested by the commenter.
Commenters are also requested to respond to the following specific
question regarding this option:
40. Identify any other advantages or disadvantages of this option for
defining the assessment base.
F. Insured Deposits Only
Under this option, the assessment base would equal insured deposits
only. To the extent that protection of obligees in the event of an
institution failure is limited to insured deposits, this definition
would provide a balance between protection and assessment. However, to
the extent non-insurance protection is given to non-insured
liabilities, that balance is undermined.
The potential risk to the FDIC from non-insured liabilities of a
depository institution, such as secured borrowings, would be
disregarded under this option. In addition, other protected
obligations, such as uninsured deposits potentially sheltered by
depositor preference, would not be assessed. With regard to uninsured
deposits, one might argue that the protection they receive is provided
at no cost or risk to the deposit insurance funds, and that such a risk
comes only from insured deposits and secured liabilities. Others might
argue that they all fall within the scope of the protection provided by
the ``federal safety net'' and that such protection should somehow be
taken into account in determining an institution's deposit insurance
premiums.
Whatever the merits of these arguments might be, coming up with a
timely and accurate figure for only that portion of an institution's
deposits that actually would be covered by deposit insurance were the
institution to fail may pose significant reporting problems. For
example, concerns have been expressed regarding the difficulty of
compiling data that accurately distinguish between insured and
uninsured deposits.
At present, the Reports of Condition require data indicating the
total amount of the institution's deposits and its uninsured deposits.
However, the report formula for computing uninsured deposits results in
estimated amounts and may not be sufficiently precise for purposes of
determining an institution's assessment base. Providing an acceptable
level of precision may require an institution to increase its data
collection and analysis efforts, resulting in increased regulatory
burden.
Commenters are requested to provide an evaluation of this option
for defining the assessment base, in terms of the following criteria
discussed in section III of this Notice:
41. Fairness
42. Measurability
43. Relation to Risk
44. Non-Avoidability
45. Recordkeeping Burden
46. Any other criteria suggested by the commenter.
Commenters are also requested to respond to the following specific
questions regarding this option:
47. In order to alleviate any additional reporting burden
associated with reporting precise amounts of insured deposits under
this option, would it be desirable to develop a ``proxy'' for insured
deposits for assessment purposes? If so, what would be an acceptable
method of approximation?
48. Identify other advantages or disadvantages of this option for
defining the assessment base.
G. Assessment Base of Total Assets
Under this option, the assessment base would equal an institution's
total assets. Conceptually, an argument can be made for charging
premiums against those items which pose a risk of loss to the deposit
insurance funds, such as an institution's assets.
An assessment base defined in terms of assets might be more easily
understood and less prone to manipulation for assessment-avoidance
purposes than liability-based measures. Based on Report of Condition
data, it could be easily measured and perhaps more predictable than a
deposit-based definition. It also would insulate the assessment base
from liability-structure decisions of the institution, creating an
assessment base that is neutral with respect to an institution's
liabilities. Because all assets would be included in the base, this
definition also could reduce the risk of assessment avoidance.
While conceptually appealing, this approach would be a substantial
departure from tradition, and there would be no direct relationship
between those items assessed and those items insured.
Commenters are requested to provide an evaluation of this option
for defining the assessment base, in terms of the following criteria
discussed earlier in section III of this Notice:
49. Fairness
50. Measurability
51. Relation to Risk
52. Non-Avoidability
53. Recordkeeping Burden
54. Any other criteria suggested by the commenter.
Commenters are also requested to respond to the following specific
questions regarding this option:
55. As discussed in this section, there can be advantages to an
assessment base founded on assets. However, given that numerically,
total liabilities is equivalent to total assets, net of equity, what
would be the advantages and disadvantages of using total assets, net of
equity, instead of total liabilities, to define the assessment base?
56. Would an assessment base defined in terms of assets be more
reflective of risk to the deposit insurance funds, and, if so, how?
57. Identify other advantages or disadvantages of this option for
defining the assessment base.
V. Miscellaneous Requests for Comment
In addition to the comments requested elsewhere in this Notice,
response to the following questions is invited:
58. Should the assessment base be calculated using daily average
data for the quarter (total dollars for the quarter divided by the
number of days in the quarter), rather than ``as-of'' quarter-end data?
What are the advantages and disadvantages of each of these approaches?
Are there preferable alternative approaches, and if so, what are they
and what are their advantages and disadvantages?
59. If daily averages over the quarter were used, what additional
recordkeeping would be necessary for the institution? (Please describe
and quantify.)
60. To what extent, if any, should off-balance-sheet items be
factored into the assessment base?
61. If the assessment base is redefined, is there a need for a
transition period from application of the existing base to application
of the new base? If so, how should the transition period be implemented
and how long should it be?
62. Should there be an assessment base for large institutions and a
different assessment base for small institutions? If so, what should
the respective assessment bases be? How should ``large institution''
and ``small institution'' be defined for this purpose?
63. What are the implications (if any) of a change in the
assessment base on the ability of insured depository institutions to
innovate and to keep up with changes in the marketplace?
64. Since there are varying degrees of protection for different
types of claims resulting from a depository institution failure, would
``fairness'' require that there be some mechanism in the assessment
system for adjusting assessments to correspond to the degree of
protection provided? If so, what should that mechanism be?
65. Are there other desirable options for defining the assessment
base, including modifications to the options presented in this Notice?
If so, identify and explain the options and describe their advantages
and disadvantages.
66. What would be the impact of a change in the definition of the
assessment base on competition within the United States? Describe the
impact on domestic competition relative to the assessment base options
discussed in section IV and any additional options suggested by the
commenter.
67. What would be the impact of a change in the definition of the
assessment base on global competition, particularly with regard to
foreign deposits? Describe the impact on global competition relative to
the assessment base options discussed in section IV and any additional
options suggested by the commenter.
68. Please provide any other comments regarding the assessment
base.
By order of the Board of Directors.
Dated at Washington, D.C., this 27th day of September, 1994.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Acting Executive Secretary.
[FR Doc. 94-24607 Filed 10-4-94; 8:45 am]
BILLING CODE 6714-01-P
