[Federal Register Volume 61, Number 238 (Tuesday, December 10, 1996)]
[Rules and Regulations]
[Pages 64960-64985]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31207]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327
RIN 3064-AB59
Assessments
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Final rule.
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SUMMARY: The FDIC is amending its assessment regulations by adopting
interpretive rules pertaining to transactions in which an institution
belonging to one insurance fund acquires deposits that are treated as
insured by the other insurance fund (Oakar transactions). The FDIC is
codifying and refining its procedures for determining the amount of the
deposits so acquired and for attributing the deposits to the two
insurance funds. In addition, recent merger and branch-sale cases have
revealed certain weaknesses in the FDIC's procedures for computing the
growth of the amounts so attributed.
[[Page 64961]]
The interpretive rules repair those weaknesses. The FDIC is also
simplifying and clarifying the existing rule by making changes in
nomenclature.
EFFECTIVE DATE: The final rule is effective January 1, 1997.
FOR FURTHER INFORMATION CONTACT: Stephen Ledbetter, Chief, Assessments
Evaluation Section, Division of Insurance, (202) 898-8658; Allan Long,
Assistant Director, Division of Finance, (202) 416-6991; Jules Bernard,
Counsel, Legal Division, (202) 898-3731, Federal Deposit Insurance
Corporation, Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION: This interpretive regulation addresses the
computation of assessments paid by Oakar institutions. An Oakar
institution is one that is a member of one insurance fund (the
institution's primary fund), but holds deposits that are treated as
insured by the other fund (the institution's secondary fund). The
regulation directly affects all Oakar institutions. The regulation also
indirectly affects non-Oakar institutions, because it alters the
business considerations that they must take into account when they
transfer deposits to or from an Oakar institution (or to an institution
that becomes an Oakar institution as a result of the transfer).
I. Background
Section 7(l) of the Federal Deposit Insurance Act (FDI Act), 12
U.S.C. 1817(l), says that upon becoming insured, a depository
institution becomes a member either of the Bank Insurance Fund (BIF) or
of the Savings Association Insurance Fund (SAIF).
Section 5(d)(2) of the FDI Act, id. 1815(d)(2), maintains the
separation between the BIF and the SAIF. Section 5(d)(2) says that no
institution may participate in a ``conversion transaction'' without the
FDIC's prior approval. Id. 1815(d)(2)(A)(i). A ``conversion
transaction'' includes, inter alia, any inter-fund deposit-transfer
transaction: that is, any merger, acquisition, or other transaction in
which a BIF member assumes the obligation to pay deposits owed by a
SAIF member (or conversely). Id. 1815(d)(2)(B) (ii), (iii) and (iv).
Each institution that participates in such a transaction--whether as
the acquiring or resulting institution (buyer) or as the transferring
or merging institution (seller)--must pay an entrance fee to one
insurance fund and an exit fee to the other fund. Id. 1815(d)(2)(F).
The fees are substantial. See 12 CFR part 312.
When an institution acquires deposits pursuant to section 5(d)(2)
and pays the requisite fees, the deposits so assumed become insured by
the buyer's primary fund (primary-fund deposits). Until recently the
SAIF assessment rate has been substantially higher than the BIF
assessment rate. Some institutions that have assumed SAIF-assessable
deposits have found it advantageous to pay the fees and convert the
deposits to BIF-assessable ones.
There is also another avenue open to institutions that would like
to engage in inter-fund deposit-transfer transactions. Section 5(d)(3)
of the FDI Act, id. 1815(d)(3), known as the Oakar Amendment, allows
institutions to participate in such transactions without paying
entrance and exit fees, but only under certain conditions. The most
prominent conditions are these:
--The buyer becomes subject to assessment by the seller's insurance
fund, see id. 1815(d)(3)(B) and (D); and
--The acquired deposits remain insured by the seller's insurance fund,
which is the secondary fund of the buyer (secondary-fund deposits). Id.
1815(d)(3) (B) and (H).
An inter-fund deposit-transfer transaction that proceeds under the
authority of the Oakar amendment is called an Oakar transaction.
The Oakar Amendment introduces the concept of the ``adjusted
attributable deposit amount'' (AADA). An AADA is an artificial
construct: a number, expressed in dollars, that is generated in the
course of an Oakar transaction, and that pertains to the buyer. When an
AADA is first generated, its value is equal to the amount of the
secondary-fund deposits that the buyer has acquired from the seller.
The value remains constant until the end of the semiannual period in
which the transaction occurs.
Thereafter the AADA increases or decreases at the same underlying
rate as the buyer's overall deposit base--that is, at the rate of
growth or shrinkage due to its ordinary business operations, not
counting growth due to the acquisition of deposits from another
institution (e.g., in a merger or a branch purchase). See id.
1815(d)(3)(C).
An Oakar institution's AADA is used for the following purposes:
--Assessments. An Oakar institution pays two assessments: one for
deposit in its secondary fund, and the other for deposit in its primary
fund. The secondary-fund assessment is based on the portion of the
assessment base that is equal to the AADA. The primary-fund assessment
is based on the remaining portion of the assessment base.
--Insurance. The AADA fixes the amount of the institution's deposits
that is to be ``treated as'' insured by an Oakar institution's
secondary fund (secondary-fund deposits). The remaining portion of the
institution's deposits is insured by the primary fund (primary-fund
deposits). If an Oakar institution fails, and the failure causes a loss
to the FDIC, the two insurance funds share the loss in proportion to
the amounts of deposits that they insure.
An Oakar institution's AADA is used prospectively. That is to say,
an Oakar institution's AADA for a current semiannual period is set at
the start of that period, and is used to compute the institution's
assessment for that current semiannual period.\1\
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\1\ Technically, each Oakar transaction generates its own AADA.
Oakar institutions typically participate in several Oakar
transactions. Accordingly, an Oakar institution generally has an
overall or composite AADA that consists of all the individual AADAs
generated in the various Oakar transactions, plus the growth
attributable to each individual AADA. The composite AADA can
generally be treated as a unit, however, because all the constituent
AADAs (except initial AADAs) grow at the same rate.
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II. The Final Rule
The FDIC has issued a proposed rule asking for comment on the
interpretations that are the subject of the final rule. 61 FR 34751
(July 3, 1996). The comment period remained open until September 4,
1996. The FDIC has received 20 comments: 10 from banks; eight from bank
holding companies; and two from trade groups. After the comment period
closed, however, Congress passed and the President signed the Deposit
Insurance Funds Act of 1996 (Funds Act), Pub. L. 104-208, 110 Stat.
3009 et seq. The Funds Act has altered the economic environment for
Oakar institutions, thereby mooting some of the comments.
The Funds Act makes two changes that, taken together, will cause
the FDIC to lower SAIF rates substantially. The Funds Act requires the
FDIC to capitalize the SAIF--that is, to raise the Savings Association
Insurance Fund reserve ratio to the designated reserve ratio (DRR)
\2\--as of October 1, 1996, by imposing a special assessment on all
SAIF-assessable institutions. Funds Act, section 2702(a); see 61 FR
53834 (Oct.
[[Page 64962]]
16, 1996) (imposing the special assessment). When the SAIF is
capitalized at the DRR, the FDIC may not (generally) impose higher SAIF
assessments than necessary to maintain the SAIF's capitalization at
that level. 12 U.S.C. 1817(b)(2)(A)(iii).\3\ In addition, the Funds Act
has separated the assessments imposed by the Financing Corporation
(FICO) from those imposed by the SAIF.\4\ Beginning on January 1, 1997,
the FICO assessments will no longer serve to reduce the amounts that
the FDIC is authorized to assess for the SAIF: accordingly, the SAIF
rates will no longer include the FICO draw.
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\2\ The Savings Association Insurance Fund reserve ratio is the
ratio of the SAIF's net worth to the aggregate amount of deposits
insured by the SAIF. 12 U.S.C. 1817(l)(7). The designated reserve
ratio (DRR) is a target ratio that has a fixed value for each year.
The DRR is currently set by statute at 1.25 percentum; the FDIC may
increase the ratio under certain conditions. Id. 1817(b)(2)(A)(iv).
\3\ If the Savings Association Insurance Fund reserve ratio
falls below the DRR, the FDIC may set rates that increase the
reserve ratio to the DRR. Id. 1817(b)(2)(A)(iii).
\4\ The FDIC must still approve the FICO's assessments, and the
FICO must still impose its assessments ``in the same manner'' as the
FDIC assesses institutions. 12 U.S.C. 1441(f)(2).
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In light of these developments, the FDIC has proposed to lower the
most favorable SAIF rate to zero, and to modify the rest of the SAIF
rate schedule. The proposed SAIF rates are set at the same levels as
the current BIF rates. 61 FR 53867 (October 16, 1996).
These changes would reduce--but not eliminate--the difference
between the rates for BIF-assessable deposits and SAIF-assessable ones.
The Funds Act gives the FICO authority to assess all insured
institutions, and also temporarily requires the FICO to assess SAIF-
assessable deposits at a higher rate than BIFassessable deposits. From
1997 through 1999 (or when the last savings association ceases to
exist, if that happens before the end of 1999), institutions will pay
roughly 6.4 basis points to the FICO on their SAIF-assessable deposits,
and roughly 1.3 basis points to the FICO on their BIF-assessable
deposits. 12 U.S.C. 1441(f)(2)(A); see Funds Act, section 2703(a)(1).
Accordingly, institutions still have some incentive to ``game'' the
assessment rules for the purpose of shifting deposits from SAIF-
assessable status to BIF-assessable status, although the incentive is
much less than before.
The final rule ends some of the anomalies that institutions can use
to engage in ``gaming'' strategies. The final rule also strengthens the
correlation between the assessment that an institution pays to an
insurance fund and the risk that the institution poses to that fund,
and helps preserve the balance in the insurance responsibilities of the
two funds.
A. Attribution of Transferred Deposits
Neither section 5(d)(2) nor the Oakar Amendment explicitly
addresses the case of an Oakar institution that transfers deposits to
another institution. The FDIC has by interpretation developed a
procedure for attributing the transferred deposits to the BIF and the
SAIF. See FDIC Advisory Op. 90-22, 2 FED. DEPOSIT INS. CORP., LAW,
REGULATIONS, RELATED ACTS 4452 (1990) (Rankin letter). The Rankin
letter adopts the principle that an Oakar institution transfers its
primary-fund deposits first, and only begins to transfer its secondary-
fund deposits after its primary-fund deposits have been exhausted.
The FDIC has asked for comment on the relative merits of the Rankin
principle and an alternative approach: treating the transferred
deposits as a blend of primary-fund and secondary-fund deposits. Under
the blended-deposits approach, the FDIC would attribute the transferred
deposits to the insurance funds in the same ratio as the overall
deposits of the transferring Oakar institution (seller) were attributed
immediately prior to the transfer.
The FDIC has received 15 comments that address this issue. Eight
commenters (including one of the trade groups) favor the Rankin
principle over the blended-deposits rule. Three prefer the blended-
deposits rule to the Rankin principle. The remaining four (including
the other trade group) express no preference as between these
alternatives. Several commenters suggest other options (discussed
below).
Having considered the comments, the FDIC has determined that the
Rankin approach is preferable both to the blended-deposits rule and to
the other options suggested by the commenters.
As a preliminary matter, it should be noted that two commenters
aver that there is no statutory foundation for either the Rankin
principle or the blended-deposits approach. The FDIC rejects this
contention. The FDIC considers that it has ample authority to adopt
either one of these deposit-attribution plans, and more generally has
ample authority to prescribe a method for attributing deposits that an
Oakar institution transfers to another institution. The contrary view
would render section 5(d)(2) and the Oakar Amendment meaningless. If
the FDIC had no such power, a BIF-member buyer could acquire deposits
from a SAIF-member seller without paying entrance and exit fees simply
by passing the deposits through an intermediary BIF-member Oakar bank.
The barrier between the insurance funds would effectively disappear.
Moreover, the acquired deposits would be neither SAIF-assessed nor
SAIF-insured: contrary to Congress' intent, the private capital of the
banking system would not help to bolster the SAIF. See 135 Cong. Rec.
H4970 (Aug. 3, 1989) (statement of Rep. Oakar).
The FDIC accepts the proposition that an Oakar institution is a
member of its primary fund only, and is not a member of its secondary
fund even though it holds secondary-fund deposits. The FDIC adopted
this view in the context of the original version of the Oakar
Amendment, which as in effect at the time when the FDIC adopted the
Rankin principle, and which made it abundantly clear that a BIF-member
bank continued to be a BIF member after acquiring deposits from a SAIF
member in an Oakar transaction. The Amendment carefully avoided
characterizing the buyer as a SAIF member. On the contrary, the
Amendment emphasized the point that the buyer was a BIF member that
happened to owe a payment to the SAIF. To be sure, the SAIF was obliged
to insure some of the buyer's deposits--but the Amendment went out of
its way to say that the deposits were only ``treated as'' SAIF insured,
not simply ``insured'' by the SAIF. 12 U.S.C. 1815(d)(3)(B)(iii) (Supp.
I 1989). The FDIC holds this view today. See Treatment of Assessments
Paid by ``Oakar'' Banks and ``Sasser'' Banks on SAIF-Insured Deposits,
General Counsel's Opinion No. 7, 60 FR 7059 (Feb. 6, 1995).
But the FDIC also takes the position that nominal fund membership
is not the touchstone for determining whether a transaction is a
conversion transaction within the meaning of section 5(d)(2), and
accordingly does not determine whether a transaction comes within the
scope of the Oakar Amendment. ``Membership'' is a label that denotes
the formal relationship of an insured institution to the FDIC as
insurer within the context of the two-fund system. Ordinarily--that is,
in the case of non-Oakar institutions--membership correctly signifies
the relationship between an institution and the FDIC. Membership
entails a well-defined set of obligations that the institution and the
FDIC have to each other. A member of a fund must pay assessments to the
FDIC for deposit in that fund. The FDIC must use the resources of that
fund to insure the member's deposits. The assessment that the FDIC
imposes on the member is determined by the strength of the fund
relative to the fund's insurance responsibilities.
But membership does not correctly express the relationship between
Oakar institutions and the FDIC as insurer. Oakar institutions owe
assessments to both funds, and both funds must share
[[Page 64963]]
the loss that the FDIC would suffer if an Oakar institution were to
fail.
The FDIC resolves these conflicting themes by focusing on the
relationship of an Oakar institution to the FDIC--the set of
obligations that the label ``BIF member'' or ``SAIF member'' ordinarily
signifies--and not on nominal fund membership. The FDIC takes the
position that the substance of the relationship, and the effect of a
deposit-transfer on that relationship, is the touchstone for
determining whether the deposit-transfer is a conversion transaction
within the meaning of section 5(d)(2). Put another way, the FDIC
considers that the label ``member'' must be given only that degree of
significance that is appropriate to preserve the integrity of the two-
fund structure.
In proposing the blended-deposits rule, the FDIC has suggested that
institutions might adopt ``gaming'' strategies that use the Rankin
principle to convert SAIF-assessed deposits into BIF-assessed ones. One
commenter, a trade group, urges the FDIC to prevent ``gaming''
strategies, but has not endorsed any particular method of prevention.
Three commenters express doubt that institutions will engage in
``gaming'' strategies. Finally, two commenters say that the FDIC cannot
fairly oppose such strategies if the FDIC is willing to countenance
tandem-banking plans and deposit-migration programs. These two
commenters further urge the FDIC to view such ``gaming'' strategies as
beneficial rather than pernicious, on the ground that the strategies
are equivalent to the options available to non-Oakar thrifts, and that
the strategies therefore place Oakar banks on an equal competitive
footing with other institutions.
The FDIC considers that these comments have all been overtaken by
events. On one hand, notwithstanding the doubts expressed by the
commenters, the FDIC has found that, prior to enactment of the Funds
Act, a number of institutions had begun to pursue ``gaming''
strategies. For example, some holding companies had proposed elaborate
schemes to purge AADAs from their Oakar banks by means of linked
deposit-transfer transactions and deposit-migration programs. But on
the other hand, the Funds Act has considerably reduced the threat posed
by ``gaming'' strategies. Institutions will have much less incentive to
adopt such strategies once the SAIF rates have been reduced to the
level that maintains the SAIF's capitalization at the DRR. In addition,
the Funds Act gives the FDIC and the other federal banking agencies
broad and flexible authority to interdict strategies that facilitate or
encourage the shifting of deposits from SAIF-assessable deposits to
BIF-assessable deposits. Funds Act, section 2703(d).
One reason the FDIC has decided to retain the Rankin principle
rather than shift to the blended-deposits approach is that the Rankin
principle has the virtue of simplicity. Sellers rarely transfer all
their primary-fund deposits. A seller ordinarily has the same AADA
after the transaction as before, and a buyer does not ordinarily become
an Oakar institution. Six commenters agree that simplicity was one
advantage of the Rankin principle.
The Rankin principle also has the virtue of being well established
and well understood. Three commenters agree with this point. Two
commenters take issue with it, however. They point out that the Rankin
principle was first articulated in a staff opinion letter, not in a
rulemaking with public notice and comment, and declare that it is
implausible for the FDIC to assert that the Rankin principle is well
established or well understood in these circumstances.
The FDIC considers that commenters' point is not well taken. The
FDIC issued the Rankin letter more than six years ago, and has applied
its principles on a consistent basis. The FDIC accordingly has had a
consistent, well settled interpretation of section 5(d)(2) and the
Oakar Amendment since 1990; the Rankin letter expresses that
interpretation. Moreover, the FDIC has published the Rankin letter,
thereby providing public notice of the interpretation.
One commenter points out that, under the Rankin principle, SAIF-
insured deposits have a greater propensity to move from SAIF-member
savings associations to BIF-member Oakar banks than the other way
around. The Rankin principle therefore has the effect of reducing the
store of deposits available for assessment by the FICO. The FDIC
considers that the Funds Act has mooted this point, however, as the
FICO now has authority to assess deposits held by BIF members. See 12
U.S.C. 1441(f)(2).
Another commenter objects to the Rankin principle on the ground
that when a BIF-member Oakar bank buys a branch from a SAIF-member
institution, and incurs an obligation to the SAIF as a result, the
Oakar bank cannot escape the obligation merely by selling off the
branch. This commenter--along with several others--also makes the more
general point that the statutory rules for determining the AADA do not
reflect practical business realities. These commenters say the branches
and customers that they have acquired from SAIF-member institutions do
not make a proportionate contribution to the overall growth of their
deposits: as a result, the assessment base for their SAIF assessments
is artificially large.
The FDIC considers, however, that these objections touch upon the
structure and purposes of the Oakar Amendment, rather than upon the
Rankin principle. The Oakar Amendment is specifically designed to avoid
deposit-tracing--that is, keeping track of deposits based on their
origin. An AADA's initial value may be equal to the amount of the
secondary-fund deposits that the buyer acquires from the seller. But
the Oakar Amendment does not connect the AADA to those particular
deposits, or to the customers that hold them, or to the branches in
which the deposits are located. The Oakar Amendment treats an Oakar
institution as a unit. The Amendment uses the institution's overall
rate of growth to compute the institution's AADA, thereby--in effect--
applying that growth equally to the institution's primary-fund and
secondary-fund deposits. In objecting to that effect, the commenters
challenge the basic principles of the Oakar Amendment itself. The
commenters' redress lies with Congress.
The blended-deposits approach, for its part, has certain
attractions. It helps prevent ``gaming''. It also maintains the
relative proportions of the seller's primary-fund deposit-base and the
secondary-fund deposit base, just as those proportions are preserved in
the ordinary course of business. By contrast, as one commenter has
pointed out, the Rankin principle tends to inflate the AADA. When an
institution buys branches from a member of the opposite fund, the buyer
gains secondary-fund deposits and increases its AADA. But when it acts
as the seller, it does not normally lose any secondary-fund deposits,
because it does not normally sell off all its primary-fund deposits:
its AADA remains the same.
At the same time, however, the blended-deposits approach has a
number of disadvantages. As nine commenters point out, the blended-
deposits rule would cause Oakar institutions to proliferate. If a non-
Oakar institution were to acquire deposits from an Oakar institution,
the buyer would necessarily assume secondary-fund deposits, and would
therefore become an Oakar institution in its own right. Six commenters
observe that the blended-deposits rule would generate burdensome
reporting and record-keeping obligations. Six commenters
[[Page 64964]]
(not all the same ones) say further that the blended-deposit approach
would result in higher costs for buyers and lost sales for sellers.
Four commenters indicate that the blended-deposits rule could cause
uncertainty or confusion in determining the assessment costs with
respect to transferred deposits, particularly in light of the uncertain
prospects for future assessment rates. One says the blended-deposits
rule would impede banks in selling off branches in order to rationalize
branch networks or for other corporate purposes.
These comments continue to have force despite the economic and
legal changes made by the Funds Act. Buyers would have to bear the
extra record-keeping and reporting burdens associated with secondary-
fund deposits. Moreover, even though the disparity between BIF rates
and SAIF rates will be reduced, the FICO's rates retain a differential:
institutions will still have to pay higher rates to the FICO on SAIF-
insured deposits than on BIF-insured deposits, at least temporarily.
Id. 1441(d)(2); see Funds Act section 2703(c). The differential
(roughly five basis points) is smaller than the recent differential
between the BIF and SAIF assessment rates, and is short-lived as well.
But so long as it persists, buyers will be less willing to assume
SAIFassessable deposits.
One commenter objects to the blended-deposits rule on the ground
that it would force banks that acquire deposits from an Oakar bank--and
banks that purchase deposits from those subsequent acquirers, and so
on, ad infinitum--to pay SAIF assessments. The commenter says this
result is improper. The commenter asserts that a buyer always loses a
significant portion of the acquired deposits soon after acquiring them,
and that accordingly a third-generation or fourth-generation buyer does
not assume any of the SAIF-insured deposits that changed hands in the
original Oakar transaction. The FDIC does not agree with this point,
however. As discussed above, the FDIC considers that the Oakar
Amendment does not contemplate deposit-tracing. The FDIC further
considers that the Oakar Amendment is designed to preserve precisely
the obligation that the commenter seeks to end: namely, the buyer's
duty to pay SAIF assessments on the SAIF-insured deposits it has
acquired, and to do so an on-going basis, without regard for whether
any particular customers of the buyer have withdrawn their funds after
the Oakar transaction has taken place.
Several commenters offer deposit-attribution rules of their own.
Three commenters propose that the parties to a transaction should be
able to determine the attribution of the transferred deposits by
agreement. One of the commenters says the attribution-by-agreement rule
would minimize the creation of Oakar institutions, would reduce the
incentive to engage in the ``gaming'' strategies that the FDIC had
discussed in the proposed rule, and would not entail any heavier
reporting or record-keeping obligations than the blended-deposits
approach. A second commenter says this proposal would eliminate
uncertainty in pricing deposits and, from the point of view of a BIF-
member Oakar bank acting as the seller, would be fairer and more
flexible than the Rankin principle. The third commenter does not give
its reasons for supporting the proposal.
The FDIC declines to adopt the attribution-by-agreement rule,
however. The FDIC recognizes that its assessment rules and procedures
provide the environment within which parties negotiate transactions,
and that as a matter of course, the parties consider the likely
consequences of their agreements within that environment. But the FDIC
rejects the proposition that parties should be able to determine, by
agreement among themselves, which set of rules the FDIC will apply to
them. The FDIC considers that, as a matter of principle, its
relationship to the institutions that it insures and assesses derives
from its supervisory and rule-making authority, and accordingly is not
a fit subject for private negotiation. The FDIC also notes that, as a
practical matter, parties do not always take the same view of their
agreements after the agreements have been completed.
Another commenter proposes that the buyer's primary fund should
determine which of the seller's deposits are transferred first. Under
the buyer's-fund rule, any deposits transferred by the seller would be
attributed to the buyer's primary fund until the seller has exhausted
its store of such deposits; thereafter, transferred deposits would be
attributed to the buyer's secondary fund. The chief advantages of the
proposal, according to the commenter, are that it offers the simplicity
of the Rankin principle while helping to preserve or increase the
deposit-base subject to assessment by the FICO.
Here again, however, events have overtaken the comment. The FICO
may now assess both BIF and SAIF members. 12 U.S.C. 1441(f)(2). Under
these conditions, the buyer's-fund proposal has no material advantage
over the Rankin principle, while the Rankin principle has the advantage
of being a well-established precept.
B. FDIC Computation of the AADA; Reporting Requirements
In the past, every Oakar institution has prepared an annual growth
worksheet for submission to the FDIC. The worksheet shows the growth or
shrinkage of the institution's AADA during the prior calendar year, and
the computations used to determine that growth or shrinkage. In
addition, each institution that has acquired secondary-fund deposits in
an Oakar transaction (Oakar buyer) has prepared and submitted a
transaction worksheet for each such transaction. The FDIC has supplied
the worksheet, and has also provided the name of the Oakar buyer, the
name of the seller, and the date of the transaction. The Oakar buyer
has provided the volume of the acquired deposits and the AADA so
generated.
As part of the changeover to the quarterly adjustment of AADAs (see
II.C. below), the FDIC is lifting the burden of computing AADA growth
from Oakar institutions entirely. Oakar institutions will no longer
prepare annual growth worksheets or transaction worksheets, and will
not report their AADAs in their quarterly reports of condition.
Instead, each Oakar institution will provide the following three pieces
of information in its quarterly reports of condition:
--total deposits acquired during the quarter;
--secondary-fund deposits acquired in the quarter; and
--total deposits sold in the quarter.\5\
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\5\ The Comptroller of the Currency, the Board of Governors of
the Federal Reserve System, and the FDIC have issued a joint
proposal calling for institutions to report the three items in their
quarterly reports of condition. 61 FR 48687, 48693-48694 (Sept. 16,
1996). The Office of Thrift Supervision has issued a similar
proposal with respect to the institutions it supervises. Id. 53262,
53263 (Oct. 10, 1996). The FDIC expects both proposals to be
adopted. The alternative is for institutions to prepare and transmit
quarterly worksheets with the requisite information directly to the
FDIC.
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The FDIC will use this information to calculate the institution's
AADA, and will show the AADA (and the way it has been computed) in the
institution's quarterly assessment invoices.
The FDIC has received nine comments on this program. Four
(including a trade group) favor it; five (including another trade
group) are opposed. The supporters agree the program would reduce
regulatory burden. The opponents say the program would not lighten the
record-keeping burden of Oakar institutions, and could well increase
that burden, because the institutions would have to verify the accuracy
of the FDIC's figures. One of the opponents--the trade group--says
[[Page 64965]]
further that the program's reporting requirements are burdensome. The
commenter notes that Oakar institutions have not reported their
deposit-sales in the past, and have reported their acquired secondary-
fund deposits and their acquired total deposits annually, not
quarterly.
The FDIC considers that the reporting burden associated with its
program is minimal, however, especially as compared with the burden of
preparing and filing the two worksheets. Indeed, the program may not
constitute a net increase in burden at all in most cases. The items to
be reported are zero in most quarters; and even in other quarters, the
information should be readily available and easy to calculate.
Moreover, Oakar institutions have already been providing two of the
three items in their annual growth worksheets: only the last item is
new.
As an alternative, the FDIC has considered replacing the annual
growth worksheet with a more detailed quarterly worksheet, and
retaining the transaction worksheet. The FDIC has determined that this
approach would impose an additional and unnecessary burden on Oakar
institutions, however. The FDIC has further determined that this
approach could increase the frequency of errors associated with AADA
calculations.
C. Quarterly Treatment of AADAs
The FDIC is adopting the view that an AADA for a semiannual period
may be regarded as having two quarterly components. The increment by
which an AADA grows during a semiannual period is the result of the
growth of each quarterly component. Five commenters (including one
trade group) generally support this interpretation.
Three commenters oppose quarterly determination of AADAs, chiefly
on the ground that this procedure would cause increased recordkeeping
and reporting burdens. The burdens the commenters cite are essentially
the same as those discussed above (see II.B.) with respect to the
FDIC's computation of the AADA. For the reasons presented in that
discussion, the FDIC does not consider that the net increase in
burden--if any--will be material.
1. Quarterly Components
a. In General. The FDIC's assessment regulation speaks of an
institution's AADA ``for any semiannual period''. 12 CFR 327.32(a)(3).
The FDIC has previously interpreted this phrase to mean that an AADA
has a constant value throughout a semiannual period. Recent changes in
the Oakar Amendment give the FDIC room to alter its view.
The constant-value concept derived from the 1989 version of the
Oakar Amendment. See 12 U.S.C. 1815(d)(3) (Supp. I 1989). That version
of the Amendment said that an Oakar bank's AADA measured the portion of
the average assessment base that the SAIF could assess. Id.
1815(d)(3)(B). The FDI Act (as then in effect) defined the average
assessment base as the average of the institution's assessment bases on
the two dates for which the institution was required to file a call
report. Id. 1817(b)(3). As a result, an AADA--even a newly created one,
and even one that was generated in a transaction during the latter
quarter of the prior semiannual period--served to allocate an Oakar
bank's entire assessment base for the entire current semiannual period.
The FDIC issued rules in keeping with this view. 54 FR 51372 (Dec. 15,
1989).\6\
---------------------------------------------------------------------------
\6\ The FDIC revised its collection procedure late in 1994, and
began collecting the semiannual assessment in two quarterly
installments. 59 FR 67153 (Dec. 29, 1994). The new procedure did not
affect the relationship between an Oakar institution's AADA and its
assessment base.
---------------------------------------------------------------------------
Congress has decoupled the AADA from the assessment base as part of
the changeover to a risk-based assessment system. See Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA), Pub. L. 102-
242, section 302 (e) and (g), 105 Stat. 2236, 2349 (Dec. 19, 1991); see
also Defense Production Act Amendments of 1992, Pub L. 102-558, section
303(b)(6)(B), 106 Stat. 4198, 4225 (Oct. 28, 1992); cf. 58 FR 34357
(June 23, 1993). The Oakar Amendment no longer expressly links the AADA
directly to the assessment base. The Amendment now says that the AADA
measures the amount of an Oakar institution's deposits that are to be
treated as secondary-fund deposits. See 12 U.S.C. 1815(d)(3).
Accordingly, the FDIC is no longer compelled to retain the
constant-value view of the AADA. Furthermore, as discussed below, the
FDIC has found that the constant-value concept has certain
disadvantages. The FDIC is therefore re-interpreting the phrase ``for
any semiannual period'' as used in 12 CFR 327.32(a)(3) in the light of
the FDIC's quarterly assessment program. The FDIC is taking the
position that, consistent with this phrase, an Oakar institution's AADA
for a semiannual period is to be determined on a quarter-by-quarter
basis--just as the assessment base for a semiannual period is so
determined--and is to be used to measure the portion of each quarterly
assessment base that is assessed by the institution's secondary fund.
The FDIC is also adopting the view that, if an AADA is generated in a
transaction that occurs during the second calendar quarter of a
semiannual period, the first quarterly component of the AADA for the
current (following) semiannual period is zero; only the second
quarterly component is equal to the volume of the secondary-fund
deposits that the buyer has so acquired.
The FDIC considers that this view of the phrase ``for any
semiannual period'' is appropriate because the phrase is the
counterpart of, and is meant to interpret, the following language in
the Oakar Amendment:
(C) DETERMINATION OF ADJUSTED ATTRIBUTABLE DEPOSIT AMOUNT.--The
adjusted attributable deposit amount which shall be taken into
account for purposes of determining the amount of the assessment
under subparagraph (B) for any semiannual period * * *.
12 U.S.C. 1815(d)(3)(C).
This passage speaks of the assessment--not the AADA--``for any
semiannual period''. Insofar as the AADA is concerned, the statute
merely specifies the semiannual period for which the AADA is to be
computed: the period for which the assessment is due. The FDIC believes
that the phrase ``for any semiannual period'' in its own regulation may
properly be read to have the same meaning.
Moreover, while the Amendment says the AADA must ``be taken into
account'' in determining a semiannual assessment, the Amendment does
not prescribe any particular method for doing so. The FDIC considers
that this language provides enough latitude for the FDIC to apply the
AADA in a manner that is appropriate to the quarterly payment program.
The FDIC's existing regulation is compatible with this
interpretation. The regulation speaks of an assessment base for each
quarter, not of an average of such bases. The regulation further says
that an Oakar institution's AADA fixes a portion of its ``assessment
base''. See 12 CFR 327.32(a)(2) (i) and (ii). Accordingly, the FDIC is
not modifying the text that specifies the method for computing AADAs.
One commenter urges the FDIC to apply the revised interpretation on
a retroactive basis, effective either as of January 1, 1994 (when the
statutory changes took effect) or as of June 1, 1995 (when the BIF was
capitalized, and the most favorable BIF rate dropped substantially). To
apply the revised interpretation retroactively could cause considerable
difficulties for the FDIC, however, and perhaps for some institutions.
The FDIC would have to
[[Page 64966]]
identify every Oakar transaction occurring after the effective date of
the revision, and the amount of the assumed deposits; redetermine every
Oakar institution's initial AADA in such a transaction; recompute the
assessments payable to each insurance fund for every semiannual
assessment; restate the balance of each insurance fund; re-allocate the
insurance funds' earnings and expenses; and redetermine each insurance
fund's reserve ratio. A retroactive revision could even affect the data
used for determining the recent special assessment that recently
capitalized the SAIF. The FDIC has accordingly determined to apply the
revised interpretation only on a prospective basis.
b. Need for Quarterly Components: Appearance of Double-Counting
Under certain conditions, the FDIC's constant-value view of the AADA
appears to be tantamount to double-counting transferred deposits for a
calendar quarter. The appearance of double-counting occurs when an
Oakar institution acquires secondary-fund deposits in the latter half
of a semiannual period--i.e., in the second or fourth calendar quarter.
The seller has the deposits at the end of the first (or third) quarter;
its first payment for the upcoming semiannual period is based on them.
At the same time, the buyer's secondary-fund assessment is
approximately equal to an assessment on the transferred deposits for
both quarters in the semiannual period.
The source of this apparent effect is that, under the FDIC's
constant-value interpretation, an AADA--even a newly generated one--
applies to an Oakar institution's entire assessment base for the entire
semiannual period. The following example illustrates the point: \7\
---------------------------------------------------------------------------
\7\ In order to bring out the relationship between the AADA and
the assessment base more clearly, the table refers to the average
assessment base of an institution. The average assessment base is
derived from the average of the deposits that the institution has
reported in its two reports of condition for the prior semiannual
period. The FDIC has used the average assessment base to compute the
semiannual assessment for most of the time that Oakar institutions
have existed. The FDIC has collected the semiannual assessments in a
single payment.
The FDIC has recently changed its collection procedures,
however. Beginning with the second semiannual period of 1995, the
FDIC collects the semiannual assessment in two installments. The
first installment is computed using the assessment base that derives
from the deposits reported in the institution's first report of
condition for the prior quarter; the second installment is computed
using the assessment base derived from the second such report of
condition. 59 FR 67153 (Dec. 29, 1994).
The new collection procedure does not affect the amount that an
institution owes for a semiannual period. Accordingly, the effect
described in the example remains valid.
\8\ The equivalence is not so close as it appears. For one
thing, an Oakar institution's secondary-fund assessment base is not
a proportional part of the overall base, but rather is equal to the
full value of its AADA. See id. 327.32(a)(2). For another, an
initial AADA remains fixed during the semiannual period in which it
is generated, even though the Oakar institution's total deposits
rise or fall between the time of the transaction and the end of the
period.
----------------------------------------------------------------------------------------------------------------
Seller Industry
(SAIF) Buyer (BIF) total
----------------------------------------------------------------------------------------------------------------
Before the transaction:
Starting assessment bases (ignoring float,
&c.):
SAIF................................... $200 0 $200
BIF.................................... 0 $100 $100
----------------------------------------------------------------
The transaction (May 1):
March call report.......................... $200 $100 $300
Deposits sold.............................. ($100) +$100 (AADA) (\1\)
June call report........................... $100 $200 $300
After the transaction:
Ending assessment bases (ignoring float,
&c.):
SAIF................................... $100 $100 (AADA) $200
BIF.................................... 0 $100 $100
----------------------------------------------------------------
$100 $200 $300
Average assessment bases:
(ignoring float, &c.):
SAIF................................... $150 $100 (AADA) $250
BIF.................................... 0 $50 $50
----------------------------------------------------------------
$150 $150 $300
----------------------------------------------------------------------------------------------------------------
\1\ Neutral.
In this illustration, the buyer is a BIF member with $100 in
deposits, all insured by the BIF. The seller is a SAIF member with $200
in deposits, all insured by the SAIF. The buyer acquires $100 from the
thrift. The transaction takes place in May (the second half of the
first semiannual period).
The transaction generates an AADA for the buyer; the value of the
AADA is $100. The buyer's SAIF assessment is based on that amount (more
exactly, on the portion of its assessment base that is equal to that
amount). But the average of the buyer's SAIF insured deposits for the
prior two quarters is only $50. The buyer's SAIF assessment base--and
its SAIF assessment--is twice as large as it would have been had it
been computed in the ``usual'' way (that is, in the manner that applies
to non-Oakar institutions). The difference is roughly equivalent to
``double counting the acquired deposits'': counting the transferred
$100 in the buyer's deposit-base for both quarters rather than just for
the second one.\8\
The anomaly is most apparent from the standpoint of the industry as
a whole. The aggregate amount of the SAIF-assessable deposits
temporarily balloons to $250, while the aggregate amount of the BIF-
assessable deposits shrinks to $50. But the anomaly only lasts for one
semiannual period. In the following period, the seller's assessment
base is $100 for both quarters, making its average assessment base
$100. The buyer's AADA remains $100. Accordingly, the aggregate amount
of SAIF-assessable deposits retreats to $200 once more; and the
aggregate amount of BIF-assessable deposits is back to the full $100.
Broadening the focus to include both insurance funds also brings
out a more subtle point: the anomaly is not tantamount to double-
counting the
[[Page 64967]]
transferred deposits for a quarter, but rather to re-allocating the
buyer's assessment base from the BIF to the SAIF. The BIF-assessable
portion of the buyer's average assessment base is $50, not $100. The
difference is equivalent to cutting the buyer's BIF assessment base by
$100 for half the semiannual period.
The FDIC's quarterly-payment procedure has brought attention to
these anomalous effects. The quarterly-payment schedule is merely a new
collections schedule, not a new method for determining the amount due.
See 59 FR 67153 (Dec. 29, 1994). Accordingly, under current procedures,
the buyer and the seller in the illustration would pay the amounts
specified therein even under the quarterly-payment schedule.
When an Oakar transaction occurs in the latter half of a semiannual
period, however, the buyer's call report for the prior quarter does not
show an AADA. The buyer's first payment for the current semiannual
period is therefore based on its assessment base for that quarter, not
on its AADA. Moreover, the entire payment is computed using the
assessment rate for the institution's primary fund. The FDIC therefore
adjusts (and usually increases) the amount to be collected in the
second quarterly payment in order to correct these defects.
Interpreting the semiannual AADA to consist of two quarterly
components eliminates this anomaly. Three commenters endorse the
quarterly determination of AADAs for that reason.
2. Quarterly Growth
a. In General. The Oakar Amendment says that the growth rate for an
AADA during a semiannual period is equal to the ``annual rate of growth
of deposits'' of the Oakar institution. The FDIC has previously
interpreted the phrase ``annual rate'' to mean a rate determined over
the interval of a full year. Under the procedures prescribed by the
FDIC, each Oakar institution has computed its ``annual rate of growth''
at the end of each calendar year, and has used this figure to calculate
the AADA for use during the following year.
This procedure has a weakness. An Oakar institution's AADA has
tended to drift out of alignment with its deposit base, because the
AADA remains constant while the deposit base changes. At the end of the
year, when the institution computes its AADA for the next year, the
AADA suddenly--but only temporarily--snaps back into its proper
proportion.
The FDIC does not believe that Congress intended to cause such a
fluctuation in the relation between an institution's AADA and its
deposit base. Moreover, from the FDIC's standpoint as insurer, it is
appropriate to maintain a relatively steady correlation between the
AADA and the total deposit base. The FDIC is therefore revising its
view, and is taking the position that-after the end of the semiannual
period in which an institution's AADA has been established--the AADA
grows and shrinks at the same underlying rate as the institution's
domestic deposit base (that is, excluding acquisitions and deposit
sales), measured contemporaneously on a quarter-by-quarter basis. Over
a full semiannual period, any increase or decrease in the AADA
automatically occurs at a rate equal to the ``rate of growth of
deposits'' during the semiannual period, thereby satisfying the
statutory requirement.
The FDIC considers that the statutory reference to an ``annual
rate'' does not foreclose this approach. In ordinary usage, ``annual
rate'' can refer to a rate that is expressed as an annual rate, even
though the interval during which the rate applies, and over which it is
determined, is a shorter interval such as a semiannual period (e.g., in
the case of six-month time deposits). For example, until recently, the
FDIC's rules regarding the payment of interest on deposits spoke of
``the annual rate of simple interest''--a phrase that pertained to
rates payable on time deposits having maturities as short as seven
days. See 12 CFR 329.3 (1993).
One commenter agrees with the FDIC that the statutory phrase
permits the computation of growth on a quarter-by-quarter basis. No
commenter takes the opposite view.
b. Annual vs. Quarterly Growth Adjustment
An AADA remains fixed until a growth adjustment is applied. Total
deposits fluctuate from day to day in the normal course of business,
however. These fluctuations are reflected entirely in an institution's
primary-fund deposits until the growth adjustment occurs. That
adjustment has hitherto been made on an annual basis: Accordingly, the
relationship between an institution's total deposits on one hand, and
its primary-fund deposits and its AADA on the other, has often varied
significantly. By contrast, the quarterly-adjustment method causes
primary-fund deposits and the AADA vary together with total deposits.
Three commenters cite this result as a reason for supporting the
quarterly determination of AADAs.
Consider an Oakar institution that has total deposits of $15 as of
12/31/93, with an AADA of $6.5. Further assume that the institution's
total deposits grow by $1 every quarter, and that the institution does
not participate in any additional acquisitions or deposit sales. The
following graphs show the effects of making growth adjustments to the
institution's AADA on an annual basis versus a quarterly basis:
BILLING CODE 6714-01-P
[[Page 64968]]
[GRAPHIC] [TIFF OMITTED] TR10DE96.000
[[Page 64969]]
[GRAPHIC] [TIFF OMITTED] TR10DE96.001
[[Page 64970]]
The following graphs express this difference in terms of percents
of total deposits:
[GRAPHIC] [TIFF OMITTED] TR10DE96.002
[[Page 64971]]
[GRAPHIC] [TIFF OMITTED] TR10DE96.003
[[Page 64972]]
In the annual-adjustment method, the AADA becomes a smaller percent
of total deposits as the total grows. In the quarterly-adjustment
method, the AADA and the primary-fund deposits remain constant percents
of total deposits.
c. Rolling One-Year Adjustments vs. Quarterly Adjustments
The FDIC also considered an alternative approach: Using the rate of
growth in the institution's deposit base for the prior four quarters,
measured from the current quarter. This technique would be as
consistent with the letter of the statute as the current method. But
the four-prior-quarters method would retain the lag between the AADA
and the deposit base.
Consider the same Oakar institution with beginning total deposits
of $15 and constant growth of $1 per quarter. The following graphs
illustrate the effects on deposits of using total-deposit growth rates
on two different bases--namely, rolling one-year growth rates, and
quarter-to-quarter growth rates:
[[Page 64973]]
[GRAPHIC] [TIFF OMITTED] TR10DE96.004
[[Page 64974]]
[GRAPHIC] [TIFF OMITTED] TR10DE96.005
[[Page 64975]]
In both cases, the primary-fund deposits and the AADA appear to
vary together with total deposits, but it is difficult to discern their
precise relationship. Graphs of the same effects in terms of percents
of total deposits are more illustrative:
[GRAPHIC] [TIFF OMITTED] TR10DE96.006
[[Page 64976]]
[GRAPHIC] [TIFF OMITTED] TR10DE96.007
BILLING CODE 6714-01-C
[[Page 64977]]
In the percent-of-deposits graphs, the AADA and the primary-fund
deposits are shown to converge when the AADA growth adjustment is based
on rolling one-year growth rates. In this particular example, the
effect occurs because the institution's constant growth of $1 per
quarter results in a steadily decreasing rate of growth of total
deposits. Therefore, a rolling one-year growth rate of those total
deposits at any point in time will be more than the actual rate of
growth over the quarter to which the rolling rate is being applied.
While different growth characteristics for total deposits would yield
different relationships between the AADA and the primary fund over
time, the general point is that the relationships of the AADA and the
primary-fund deposits can vary when the AADA is adjusted, unless the
total-deposit rate of growth used for the adjustment is drawn from the
same period for which the rate is applied to the AADA.
As the latter graph shows, applying the actual quarterly growth
rate for total deposits to the AADA results in stable percents of total
deposits for the AADA and primary fund deposits.
In sum, the FDIC considers that the quarterly approach is
permissible under the statute, and is preferable to any approach that
relies on a yearly interval to determine growth in the AADA.
D. Negative Growth of the AADA
One element of an Oakar institution's AADA for a current semiannual
period is ``the amount by which [the AADA for the preceding semiannual
period]\9\ would have increased during the preceding semiannual period
if such increase occurred at a rate equal to the annual rate of growth
of [the Oakar institution's] deposits''. 12 U.S.C. 1815(d)(3)(C)(iii).
The FDIC is codifying its view that the terms ``growth'' and
``increase'' encompass negative growth (shrinkage). But the FDIC is
changing its interpretation by excluding shrinkage due to deposit
sales.
---------------------------------------------------------------------------
\9\ Theoretically, the growth is not applied directly to the
prior AADA, but rather to an amount that is computed afresh each
time--which amount is the sum of the various elements of the prior
AADA.
---------------------------------------------------------------------------
1. Negative Growth in General
The 1989 version of the Oakar Amendment focused on an Oakar bank's
underlying rate of growth for the purpose of determining the Oakar
bank's AADA. The 1989 version of the Amendment set a minimum growth
rate for an AADA of seven percent. The Amendment then specified that,
if an Oakar bank's deposit base grew at a higher rate, the AADA would
grow at the higher rate too. But the Amendment excluded growth
attributable to mergers, branch purchases, and other acquisitions of
deposits from other BIF members: the deposits so acquired were to be
subtracted from the Oakar bank's total deposits for the purpose of
determining the growth in the Oakar bank's deposit base (and therefore
the rate of growth of the AADA). See 12 U.S.C. 1813(d)(3)(C)(3)(iii)
(Supp. I 1989).
The 1989 version of the Oakar Amendment spoke only of ``growth''
and ``increases'' in the AADA. Id. The statute was internally
consistent in this regard, because AADAs could never decrease.
Congress eliminated the minimum growth rate as of the start of
1992. FDICIA section 501 (a) and (b), 105 Stat. 2389 and 2391. As a
result, the Oakar Amendment now specifies that an Oakar institution's
AADA grows at the same rate as its domestic deposits (excluding
mergers, branch acquisitions, and other acquisitions of deposits). 12
U.S.C. 1813(d)(3)(C).
The modern version of the Oakar Amendment continues to speak only
of ``growth'' and ``increases'', however. Congress has not--at least
not explicitly--modified it to address the case of an institution that
has a shrinking deposit base. Nor has Congress addressed the case of an
institution that transfers deposits in bulk to another insured
institution.
The FDIC regards this omission as a gap in the statute that
requires interpretation. The FDIC does so because, if the statute were
read to allow only increases in AADAs, the statute would generate a
continuing shift in the relative insurance burden toward the SAIF. Most
Oakar institutions--and nearly all large Oakar institutions--are BIF-
member Oakar banks. If an Oakar bank's deposit base were to shrink
through ordinary business operations, but its AADA could not decline in
proportion to that shrinkage, the SAIF's share of the risk presented by
the Oakar bank would increase. But the reverse would not be true: if an
Oakar bank's deposit base increased, its AADA would rise as well, and
the SAIF would continue to bear the same share of the risk. The result
would be a tendency to displace the insurance burden from the BIF to
the SAIF.\10\
---------------------------------------------------------------------------
\10\ A shrinking Oakar thrift would have the opposite effect:
the BIF's exposure would increase, and the SAIF's exposure would
decrease. Oakar thrifts are comparatively rare, however. The net
bias would run against the SAIF.
---------------------------------------------------------------------------
The FDIC further considers that the main themes of the changes that
Congress made to the Oakar Amendment in 1991 are those of
simplification, liberalization, and symmetry. Congress allowed savings
associations to acquire banks, as well as the other way around.
Congress allowed institutions to deal with one another directly,
eliminating the requirement that the institutions must belong to the
same holding company (and the need for approval by an extra federal
supervisor). Congress established a mirrorimage set of rules for
assessing Oakar banks and Oakar thrifts. As noted above, Congress
repealed the seven percentum floor on AADA growth, thereby removing the
most prominent cause of divergence between an Oakar institution's
assessment base and its deposit base. Congress expanded the scope of
the Oakar Amendment and made it congruent with the relevant provisions
of section 5(d)(2). See FDICIA section 501(a), 105 Stat. 2388-91.
In keeping with this view of the 1991 amendments, the FDIC
interprets the growth provisions of the Oakar Amendment symmetrically:
that is, to encompass negative growth rates as well as positive ones.
Nine commenters support this view; none oppose it. Accordingly, the
FDIC is taking the position that an Oakar institution's AADA grows and
shrinks at the same underlying rate of growth as the institution's
domestic deposits.
The FDIC considers that this interpretation is appropriate because
it accords with customary usage in the banking industry, and because it
is consistent with the purposes and the structure of the statute. Under
the FDIC's interpretation, each fund continues to bear a constant share
of the risk posed by the institution, and continues to draw assessments
from a constant proportion of the institution's deposit base.
Moreover, the FDIC's interpretation encourages banks to make the
investment that Congress wished to promote. If ``negative increases''
were disallowed, Oakar banks would see their SAIF assessments (which
currently carry a much higher rate) grow disproportionately when their
deposits shrank through ordinary business operations.
Finally, the interpretation is designed to avoid--and has generally
avoided--the anomaly of an institution having an AADA that is larger
than its total deposit base.
2. Negative Growth due to Deposit-Transfers
The FDIC considers that--consistent with the principle of
separation between the insurance funds embodied in section 5(d)(2)--a
deposit-transfer from
[[Page 64978]]
an Oakar institution to another institution should have no effect on
the industry-wide stock of BIF-insured and SAIF-insured deposits.
The FDIC's procedure for calculating the growth of the AADA has
upset that balance, however. A deposit sale reduces the Oakar bank's
total deposit base by a certain percentage: accordingly, the Oakar
bank's AADA--and therefore its volume of SAIF-insured deposits--has
been reduced by the same percentage. Its BIF-insured deposits have
increased correspondingly. In effect, SAIF deposits have been converted
into BIF deposits, in violation of the moratorium, and without
generating any entrance or exit fees for the insurance funds.\11\
---------------------------------------------------------------------------
\11\ The effect has occurred whenever an Oakar institution
transfers deposits, without regard for whether the transferred
deposits have been primary-fund or secondary-fund deposits. Any
deposit-transfer has shrunk the seller's overall deposit-base, and
has therefore reduced its AADA.
---------------------------------------------------------------------------
The FDIC is curing this defect by excluding deposit sales from the
growth computation. The FDIC continues to believe that the terms
``growth'' and ``increase'' as used in the statute are broad enough to
refer to a negative rate as well as a positive one. But the FDIC does
not consider that it is required to extend these terms beyond
reasonable limits. In particular, the FDIC does not believe that it
must necessarily interpret these terms to include a decrease that is
attributable to a bulk transfer of deposits. The statute itself
excludes the effect of an acquisition or other deposit-assumption from
the computation of growth. The FDIC considers that it has ample
authority to make an equivalent exclusion for deposit sales.
The FDIC believes its interpretation is sound because deposit sales
do not--in and of themselves--represent any change in the industry-wide
deposit base of each fund. It is inappropriate for the FDIC to generate
such a change on its own as a collateral effect of its assessment
procedures. Moreover, the interpretation is in accord with the tenor of
the amendments made by the FDICIA, because it treats deposit sales
symmetrically with deposit-acquisitions.
Two commenters--both trade groups--support the FDIC's position.
Five commenters oppose the deposit-sale exclusion rule. Four of them do
so for the very reason that the FDIC is adopting it: when the Rankin
principle is in force, the deposit-exclusion rule prevents an
institution's store of secondary-fund deposits from shrinking except
insofar as the seller transfers the deposits to the buyer. One
commenter also objects to the deposit-sale exclusion rule on the ground
that the rule treats SAIF-member Oakar institutions (whose AADA
represents BIF-assessable deposits) more favorably than BIF-member
Oakar institutions, based on the higher rates in effect for SAIF-
assessable deposits at the time the comment was filed. The FDIC
considers that the Funds Act has deprived this comment of much of its
force. The SAIF rates are to be reduced significantly. The remaining
differential between the rates on SAIF-assessable and BIF-assessable
deposits is relatively small, and will soon expire.
One commenter, which opposed the deposit-sale exclusion rule if the
FDIC retained the Rankin principle, said further that the FDIC should
not apply the deposit-sale exclusion rule to sales that occur prior to
the effective date of the final rule. The commenter declared that the
FDIC should not expect institutions to make business decisions based
upon proposed rules. As a technical matter, of course, the FDIC is not
adopting the deposit-sale exclusion rule retroactively: rather, the
FDIC is changing the method for computing future assessments, beginning
with the assessment due for the first semiannual period of 1997. At the
same time, the FDIC acknowledges that the change would affect the
business decisions of institutions prior to that time, because
institutions must look ahead to consider the consequences of their
actions. The FDIC considers that institutions have had ample advance
notice of the deposit-sale exclusion rule, however. Moreover, the rule
repairs a significant weakness in the growth calculation. The adverse
effects resulting from that weakness must be eliminated without delay.
The FDIC will therefore apply the deposit-sale exclusion rule when
computing assessments for the first semiannual period of 1997.
E. Value of an Initial AADA
By statute, an Oakar institution's initial AADA is equal to ``the
amount of any deposits acquired by the institution in connection with
the transaction (as determined at the time of such transaction)''. Id.
1815(d)(3)(C). The FDIC has interpreted and explained three aspects of
this phrase.
1. The Nominal-Amount Principle
The FDIC has adopted an interpretive regulation specifying that the
``amount of any deposits acquired'' by the buyer--and therefore the
value of the buyer's initial AADA--is (generally) equal to the full
nominal amount of the deposits that the buyer assumes from the seller.
12 CFR 327.32(a)(3)(4). The FDIC is retaining the substance of this
provision. The final rule continues to emphasize the point that the
amount of the transferred deposits is measured by focusing on the
volume divested by the seller. The FDIC's purpose is to make it clear
that post-transaction events--such as deposit run-off--have no bearing
on the calculation of the buyer's AADA.
Two commenters (including one trade group) support the nominalvalue
principle; two oppose it. The opposing commenters point out that the
FDIC discounts the transferred deposits when it serves as conservator
or receiver for a seller (troubled-seller cases). The FDIC provides the
discount on the ground that the buyer can expect to sustain a
substantial run-off of deposits after the transaction. The opposing
commenters contend that buyers sustain run-off even when the seller is
a healthy institution. The commenters therefore urge the FDIC to
provide for a discount in healthy-seller cases as well as in troubled-
seller ones.\12\
---------------------------------------------------------------------------
\12\ These two commenters further note that they, along with
nine other institutions, have petitioned the FDIC to amend its
regulations to provide for such a discount. The 11 petitioners have
provided data indicating that they have experienced run-off in
healthy-seller cases, although the methods used to identify and
measure run-off varied from institution to institution.
The FDIC has determined that it is appropriate to address the
subject matter of the petition in this rulemaking proceeding
together with other issues related to the computation of the AADA.
For the reasons given herein, the FDIC declines to adopt the
position that the petitioners have proposed.
---------------------------------------------------------------------------
The FDIC does not believe the commenters' point is well taken. As
discussed in more detail at II.E.2. below, the FDIC has established the
discount for troubled-seller cases because, as a historical matter, the
cases have arisen in the context of unusual economic conditions, and
presented special supervisory issues. These special circumstances do
not apply to healthy-seller transactions in the current economic
environment. Buyers and sellers negotiate the terms of their
transactions at arms' length, and take the effects of deposit run-off
into account in arriving at a price. The FDIC does not believe it
necessary or appropriate to contribute the resources of the seller's
insurance fund, in the form of foregone assessments, to assist such
transactions.
The FDIC is retaining the nominal-value principle for two chief
reasons. Most importantly, the principle reflects the manifest intent
of the statute, which specifies that the volume of the acquired
deposits are to be ``determined at the time'' of the transaction.
Second, the principle has the virtues of clarity and precision. Both
the buyer and a seller will know precisely the value of an AADA that is
generated in an Oakar
[[Page 64979]]
transaction. The buyer's expected secondary-fund assessments can be an
important cost for the parties to consider when deciding on an
acceptable price. The FDIC considers that the nominal-value principle
reduces uncertainty on this point.
The final rule updates the regulation in two minor ways. The
regulation has presumed that the buyer will assume all the seller's
deposits, and that all such deposits will be insured by the buyer's
secondary fund. The reason for these presumptions is purely historical.
At the time the regulation was adopted, the Oakar Amendment only spoke
of cases in which the seller merged into or consolidated with the
buyer, or in which the buyer acquired all the seller's assets and
liabilities. See 12 U.S.C. 1815(d)(3)(A) (Supp. I 1989). The Amendment
did not allow for less comprehensive Oakar transactions (e.g., branch
sales). Nor did it contemplate a transaction in which the seller was an
Oakar institution in its own right.
The final rule makes it clear that the nominal-amount principle
applies to all deposit-transfer transactions in which the buyer
acquires secondary-fund deposits. The final rule also specifies that
the AADA is only equal to the nominal amount of the secondary-fund
deposits, not necessarily all the transferred deposits. Each point
represents the current view of the FDIC.
2. Deposits Acquired in Troubled-Seller Cases
As noted above, the FDIC has discounted the nominal amount of the
transferred deposits in troubled-seller cases. The discount is two-
fold:
--Brokered deposits: All brokered deposits have been subtracted from
the nominal volume of the transferred deposits.
--The ``80/80'' principle: Each remaining deposit has been capped at
$80,000. The buyer's AADA has been equal to 80 percent of the aggregate
of the deposits as so capped.
See 12 CFR 327.32(a)(3)(4). The FDIC is ending these discounts for
future transactions, on the ground that they are no longer needed. The
FDIC is making the change effective as of July 1, 1997, in order to
avoid disrupting any negotiations that may currently be under way.
The FDIC adopted the discounts because the funding decisions for
troubled-seller cases--and particularly for troubled-thrift cases--were
subject to constraints and considerations that fell outside the normal
range of factors influencing such decisions in the market place for
healthy institutions. The sellers had often been held in
conservatorship for some time. In order to maintain the assets in such
institutions, the conservator had often found it necessary to obtain
large and other high-yielding deposits. The FDIC determined that, while
any bidder had to evaluate and price all aspects of a transaction, it
would be counterproductive to require bidders to price the
contingencies related to volatile deposits in assisted transactions,
given that these deposits were primarily artifacts of government
conservatorships. Considering the objective of attracting private
capital in order to avoid additional costs to the taxpayer, the FDIC
sought to avoid the potential deterrent effect of including these
artificial elements in the pricing equation.
The FDIC recognized that healthy sellers sometimes relied upon
volatile deposits for funding as well. But the FDIC regarded their
funding decisions as a normal part of a strategy to maximize the
profits of a going concern. The comparable decisions for troubled
sellers were made by managers of government conservatorships that were
subject to funding constraints, relatively inflexible operating rules
(necessary to control a massive government effort to sell failed
thrifts), and other considerations outside the scope of the typical
private transaction.
The FDIC adopted this interpretive rule at a time when troubled and
failed thrifts were prevalent, and the stress on the safety net for
such institutions was relatively severe. The stress has been
considerably relieved, however. The FDIC considers that, under current
conditions, there is no longer any need to maintain a special set of
rules for troubled-seller cases.
Moreover, the FDIC ordinarily must contribute its own resources to
induce buyers to acquire such institutions. Any reduction in future
assessments that the FDIC offers as an incentive merely reduces the
amount of money the FDIC must contribute at the time of the
transaction. The simpler and more straightforward approach is to
reflect all such considerations in the net price that buyers pay for
such institutions at the time of the transaction.
Two commenters, both trade groups, oppose the FDIC's position. One
commenter agrees with the FDIC's reasons for ending the discount, but
suggests that the FDIC should retain it for the purpose of ``giving
prospective bidders the choice of accepting the predetermined deposit
haircut or pricing deposit volatility contingencies''. The other
commenter strongly urges the FDIC to retain the discount, giving the
following reasons: ``deposit runoff remains a factor''; and ``pricing
variations that depend on runoff calculation are uncertain''. The FDIC
does not believe these reasons are persuasive, however. The discount is
not an alternative to estimating the volatility of deposits and
determining an appropriate price for them. The discount is simply a
reduction in the base amount on which future assessments will be
computed. Whatever uncertainties are present will persist, without
regard for whether the base amount retains its full nominal value or is
discounted by a fixed amount.
3. Conduit Deposits
The FDIC staff has taken the position that, when an Oakar
institution assumes secondary-fund deposits from one institution
(original transferor) but promptly re-transfers them to another
institution (re-transferee) under certain conditions, the retransferred
deposits are not counted as ``acquired'' deposits for the purpose of
computing the Oakar institution's AADA. The Oakar institution is
regarded as a mere conduit for the deposits. The deposits themselves
retain their original insurance status after the re-transfer: whatever
their status in the hands of the original transferor, whether BIF-
insured or SAIF-insured, the deposits have that status in the hands of
the ultimate retransferee. The FDIC described this interpretation,
which is the settled view of the FDIC, in the preamble to the proposed
rule, but the proposed rule itself did not set forth a provision making
this point explicit. The final rule contains such a provision.
The FDIC has invoked the conduit principle only in very narrow
circumstances. The FDIC has agreed to exclude the re-transferred
deposits when determining an Oakar institution's AADA only when all of
the following conditions have been met: the Oakar institution has
committed to re-transfer specified branches as a condition of approval
of the transaction; the commitment has been enforceable; and the re-
transfer has been required to occur within six months after
consummation of the initial Oakar transaction. See, e.g., FDIC Advisory
Op. 94-48, 2 FED. DEPOSIT INS. CORP., LAW, REGULATIONS, RELATED ACTS
4901-02 (1994).
The FDIC is codifying and refining the ``conduit'' principle. Under
the final rule, secondary-fund deposits have the status of ``conduit''
deposits in the hands of an Oakar institution only if the Oakar
institution has acquired them in an Oakar transaction, if a federal
[[Page 64980]]
banking supervisory agency or the United States Department of Justice
has explicitly ordered the institution to re-transfer the deposits
within six months after the date of that transaction, if the
institution's obligation to make the re-transfer is enforceable, and if
the re-transfer must be completed in the six-month grace period. If the
conditions are not satisfied, the conduit principle does not come into
play, and the deposits are regarded as having been assumed by the Oakar
institution at the time of the original Oakar transaction. Any
subsequent re-transfer of the deposits would be treated as a separate
transaction, and analyzed independently of the Oakar transaction.
The final rule also clarifies the point that conduit deposits are
used to compute the Oakar institution's AADA on a temporary basis. The
deposits are counted in the ``amount of deposits acquired'' by the
Oakar institution--and therefore in its AADA--during the semiannual
period in which the transaction occurs. The AADA so computed is used to
determine the assessment due for the next semiannual period. If the
institution retains the deposits during part of that following period,
the deposits are again included in the ``amount of deposits
acquired''--and are again part of the institution's AADA--for the
purpose of computing the assessment for the semiannual period after
that. But thereafter the deposits are excluded from the ``amount of
deposits acquired'' by the Oakar institution. In this regard, one
commenter (a trade group) says the deposits should ``be assessed on a
pro rata basis for the time they remain on the institution's books''.
The FDIC declines to adopt this suggestion. The suggestion is a
departure from the FDIC's general method of determining assessments,
which derives an institution's assessment base from the deposits that
the institution holds at the end of each calendar quarter, and which
does not take into account the length of time the institution holds the
deposits.
Two commenters support the conduit rule as proposed by the FDIC.
Three others urge the FDIC to broaden the conduit rule to reach cases
in which the buyer re-transfers the deposits voluntarily. The FDIC
declines to do so, however. One of the primary purposes for the conduit
rule--absent which the FDIC would not have adopted the rule--is to
accommodate the directives of the Department of Justice and the federal
banking agencies. That purpose is not served when the seller does not
act under government compulsion.
One commenter urged the FDIC to extend the conduit rule to cases in
which the buyer does not re-transfer the deposits, but merely divests
itself of them by paying them off. The commenter suggests that deposits
should qualify as conduit deposits if the buyer knows it will re-
transfer the deposits within a very short time after acquiring them,
and if the buyer can identify the deposits with great specificity. The
FDIC declines to adopt this position, however. The FDIC wishes to
confine the conduit rule to circumstances where the actions of the
parties, and the relationships among them, are reasonably well defined.
When the Department of Justice or a federal banking supervisor orders a
buyer to re-transfer deposits to another institution, the FDIC may
safely expect that the link between the buyer and the deposits will be
severed. Moreover, the buyer remains subject to continuing federal
oversight, the focus of which is on the structural and economic changes
that the divestiture has been designed to produce. The result is that
the oversight ensures that the link between the buyer and the deposits
will remain severed. The case is otherwise when a buyer merely pays off
the deposits. When no other institution is involved, the buyer may
easily re-establish its connection with the depositors--and, as a
practical matter, recover the deposits--either directly or indirectly.
Moreover, any continuing federal oversight of the buyer is more likely
to focus on general regulatory objectives, such as the maintenance of
an appropriate capital level, that do not prevent the buyer from re-
establishing its link to the deposits.
F. Transitional Matters
1. Freezing prior AADAs
In theory, an Oakar institution's AADA is computed anew for each
semiannual period. An institution's AADA for a current semiannual
period is equal to the sum of three elements:
Element 1: The volume of secondary-fund deposits that the
institution originally acquired in the Oakar transaction;
Element 2: The aggregate of the growth increments computed
with respect to the semiannual periods prior to the one with respect to
which Element 3 is being determined; and
Element 3: The growth increment with respect to the period
just prior to the current period (i.e., just prior to the period for
which the assessment is due, and for which the AADA is being computed).
Element 3 is computed on a base that equals the sum of elements 1 and
2.
The FDIC has consistently interpreted its existing rules to mean
that, when a growth increment has already been determined with respect
to a semiannual period, the growth increment continues to have the same
value thereafter. See, e.g., FDIC Advisory Op. 9219, 2 FED. DEPOSIT
INS. CORP., LAW, REGULATIONS, RELATED ACTS 4619, 4620-21 (1992). The
net effect has been to ``freeze'' AADAs--and their elements--for prior
semiannual periods. The final rule codifies this principle.
In keeping with this principle, the interpretations set forth in
the final rule apply on a purely prospective basis. They come into play
only for the purpose of computing future AADAs. The final rule's
interpretations do not affect AADAs already computed for prior
semiannual periods, or the assessments that Oakar institutions have
already paid on them. Nor do they affect the prior-period elements of
AADAs that are to be determined for future semiannual periods (except
insofar as the interpretations affect the increment computed with
respect to the second semiannual period of 1996). In short, the final
rule ``leaves prior AADAs alone''.
2. 1st-Half 1997 Assessments: Excluding Deposit Sales From the Growth
Calculation
The FDIC will follow its existing procedures in computing AADAs for
the first semiannual period of 1997, with one exception. An
institution's AADA for the first semiannual period of 1997 will be
based on the growth of the institution's deposits as measured over the
entire calendar year 1996. The AADA so determined will be used to
compute both quarterly payments for the first semiannual period of
1997.
The exception is that, when computing an AADA's increment of growth
with respect to the second semiannual period of 1996, the FDIC will
apply its new limitation on ``negative'' growth: that is, the FDIC will
decline to consider shrinkage attributable to deposit-transfer
transactions that have occurred on and after July 3, 1996 (the date on
which the Federal Register published the proposed rule).
The FDIC acknowledges that this limitation makes a significant
break with the past. The FDIC further recognizes that the limitation
can affect the business considerations that affect deposit-transfer
transactions. The FDIC considers that the industry has had ample notice
of the limitation, however, and that the parties to any such
transaction have been able to factor in any new costs that the
limitation may have produced.
[[Page 64981]]
At the same time, the FDIC agrees that it would be inappropriate to
apply the limitation retroactively to transactions that have been
completed earlier in 1996. The parties to these transactions did not
have notice of the FDIC's proposal. The FDIC will therefore include
shrinkage attributable to a deposit sale that occurred during the first
semiannual period of 1996 when determining the annual growth rate for
an Oakar institution with respect to that semiannual period. The annual
growth rate as so computed will be used in computing the institution's
AADA for the first semiannual period of 1997 and for future periods.
3. 2nd-Half 1997 Assessments: Use of Quarterly AADAs
The FDIC will begin measuring AADAs on a quarterly basis during the
first semiannual period of 1997. The first quarterly AADA component
that the FDIC will identify and measure will be the quarterly component
as of March 31, 1997. That component will reflect the rate of growth of
the institution's deposits during the first calendar quarter of 1997
(January-March). The component so measured will be used to determine
the institution's first quarterly payment for the second semiannual
period in 1997--that is, the June payment.
The second quarterly AADA component that the FDIC will identify and
measure will reflect the rate of growth of the institution's deposits
during the second calendar quarter of 1997 (April-June). The second
component will be used to determine the institution's second quarterly
payment for the second semiannual period in 1997 (the September
payment).
G. Simplification and Clarification of the Regulation
The final rule makes certain changes to the current regulation that
clarify and simplify it without changing its meaning. The FDIC is
making these changes in response to two initiatives. Section 303 of the
Riegle Community Development and Regulatory Improvement Act of 1994,
Pub. L. 103-325, 108 Stat. 2160 (Sept. 23, 1994), requires federal
agencies to streamline and modify their regulations. In addition, the
FDIC has voluntarily committed itself to review its regulations on a 5-
year cycle. See Development and Review of FDIC Rules and Regulations, 2
FED. DEPOSIT INS. CORP., LAW, REGULATIONS, RELATED ACTS 5057 (1984).
The FDIC considers that subpart B of part 327 is a fit candidate for
review under each of these initiatives.
The final rule clarifies subpart B by defining and using the terms
``primary fund'' and ``secondary fund''. An Oakar institution's primary
fund is the fund to which the institution belongs; its secondary fund
is the other insurance fund. Using these terms, the FDIC is simplifying
paragraphs (1) and (2) of Sec. 327.32(a) by eliminating redundant
language; the changes do not alter the meaning of these provisions.
In addition, the FDIC is clarifying Sec. 327.6(a) by changing the
nomenclature used therein. ``Deposit-transfer transaction'' is replaced
by ``terminating transaction''; ``acquiring institution'' is replaced
by ``surviving institution''; and ``transferring institution'' is
replaced by ``terminating institution''. The terms previously used in
Sec. 327.6(a) are also used in other provisions of part 327, where they
have different and less specialized meanings. The change in
nomenclature in Sec. 327.6(a) is intended to avoid any confusion that
the previous terminology might have caused.
III. Effective Date
The final rule is effective on January 1, 1997. Notwithstanding the
fact that the FDIC has asked for comment on the changes made by the
final rule, the final rule is an interpretive rule, and may be made
effective without having been published 30 days prior to its effective
date. 5 U.S.C. 553(d)(2).
Moreover, the FDIC has determined that there is good cause for the
rule to be made effective on January 1, 1997, and not after a 30-day
delay. The 30-day delay is not necessary in the case of provisions that
codify the FDIC's existing interpretations: e.g., those pertaining to
the Rankin doctrine, to the principle of negative growth in general,
the conduit principle, to the nominal-value rule for initial AADAs in
healthy-seller cases, and to the principle that the value of AADAs for
prior semiannual periods will be ``frozen''. The 30-day delay is
likewise not necessary in the case of provisions that, by their terms,
do not affect the assessment for the first semiannual period of 1997:
e.g., those that shift the burden of computing AADAs to the FDIC, those
that interpret the AADA--and the growth thereof--on a quarterly basis,
and those that apply the nominal-value rule to initial AADAs in
troubled-seller cases.
The FDIC has refrained from adopting the final rule earlier,
inasmuch as the rule is predicated in part on certain prior actions of
the Board, notably the reduction of assessment rates for SAIF members.
Nevertheless, the FDIC considers it necessary for certain of the
changes made by the rule to apply with respect to the assessment for
the first semiannual period of 1997, which begins on January 1, 1997--
notably, the exclusion of deposit-sales from the computation of growth
in the AADA. The FDIC has therefore determined that it has good cause
to adopt the final rule with respect to these provisions without the
full 30-day delay.
IV. Request for Public Comment
The FDIC has solicited comment on all aspects of the rule. In
particular, the FDIC has solicited comment on the following points:
attributing deposits that an Oakar institution transfers to another
institution according to principles articulated in the Rankin letter,
or treating the transferred deposits as a blend of deposits insured by
both insurance funds; having the FDIC, rather than individual
institutions, compute AADAs using information provided by the
institutions; interpreting AADAs as consisting of quarterly components,
and computing the growth of AADAs on a quarterly cycle rather than an
annual one; retaining the concept of negative growth for the purpose of
computing AADAs; excluding deposit sales from the computation of
growth; applying the nominal-amount principle for determining initial
AADAs in all cases, including troubled-seller cases; and preserving the
conduit-deposit concept.
In addition, in accordance with section 3506(c)(2)(B) of the
Paperwork Reduction Act, 44 U.S.C. 3506(c)(2)(B), the FDIC has
solicited comment for the following purposes on the collection of
information described herein:
To evaluate whether the collection of information is necessary
for the proper performance of the functions of the FDIC, including
whether the information has practical utility;
To evaluate the accuracy of the FDIC's estimate of the burden
of the collection of information;
To enhance the quality, utility, and clarity of the
information to be collected; and
To minimize the burden of the collection of information on
those who are to respond, including through the use of automated
collection techniques or other forms of information technology.
The FDIC has also solicited comment on all other points raised or
options described herein, and on their merits relative to the rule.
V. Paperwork Reduction Act
Under the FDIC's prior procedures, each Oakar institution was
required to
[[Page 64982]]
compute its AADA at the end of each year, using a worksheet provided by
the FDIC (annual growth worksheet). The annual growth worksheet showed
the computation of the institution's AADA for the first semiannual
period of the current year--that is, the AADA that was used to compute
the assessment due for the first semiannual period of the current
year--which was based on the institution's growth during the prior
year. The institution was required to provide the annual growth
worksheet to the FDIC as a part of the institution's certified
statement.
In addition, whenever an institution was the buyer in an Oakar
transaction, it was required to submit a transaction worksheet showing
the total deposits acquired on the transaction date. If the seller were
an Oakar institution, and if the buyer had acquired the entire
institution, the buyer was also required to report the seller's last
AADA (as shown in the seller's last call report). The buyer was then
required to subtract this number from the total deposits acquired in
order to determine its new AADA.
The final rule changes this procedure for the annual growth
worksheets for the first semiannual period of 1997 (i.e., for the
worksheets that show the growth of deposits during 1996). The change
only affects Oakar institutions that transferred deposits to other
institutions during 1996. Such an institution must report the total
amount of deposits that it transferred in transactions from July 1-
December 31, 1996.
Thereafter the FDIC will compute the AADAs for all Oakar
institutions, using information taken from their quarterly call
reports. Institutions will not have to report additional information in
most cases. An Oakar institution that has neither acquired nor
transferred deposits in the prior quarter will not have to provide any
additional information at all. An Oakar institution that has acquired
deposits will have to provide the same information at the end of the
quarter that it now provides at the end of the year; there will be a
change in the timing, but no change in burden.
Only an Oakar institution that transferred deposits will have to
provide additional information. Sellers will have to report the volume
of deposits transferred and the date of the transaction. This
information is readily available: the extra reporting burden is small.
More to the point, the net effect is to reduce the overall
reporting burden on Oakar institutions. The burden of submitting extra
information in deposit-sale cases is more than offset by the
elimination of the growth worksheet and by the FDIC's assumption of the
burden of computing AADAs.
Accordingly, the FDIC is revising an existing collection of
information. The revision has been reviewed and approved by the Office
of Management and Budget pursuant to the Paperwork Reduction Act of
1980 (44 U.S.C. 3501 et seq.).
The impact of the final rule on paperwork burden is to require a
one-time de minimis report from approximately 100 institutions for the
first semiannual period in 1997, and thereafter to eliminate the annual
growth worksheet for all 900 Oakar institutions, which takes an
estimated two hours to prepare. The effect of this procedure on the
estimated annual reporting burden for this collection of information is
a reduction of 1,800 hours:
Approximate Number of Respondents: 900.
Number of Responses per Respondent: -1.
Total Annual Responses: 900.
Average Time per Response: 2 hours.
Total Average Annual Burden Hours: -1800 hours.
The FDIC expects the Federal Financial Institutions Examination
Council and the Office of Thrift Supervision to require (as needed) the
information in the quarterly reports of condition, starting with the
report for March 31, 1997.
VI. Regulatory Flexibility Analysis
The Regulatory Flexibility Act (5 U.S.C. 601-612) does not apply to
the final rule. Although the FDIC has chosen to publish general notice
of the rule, and to ask for public comment on it, the FDIC was not
obliged to do so, as the rule is interpretive in nature. See id. 553(b)
and 603(a).
Moreover, the FDIC considers that the rule amounts to a net
reduction in burden for all Oakar institutions, as they no longer have
to prepare or file regular annual growth worksheets after the worksheet
with respect to 1996. Instead, a limited number of Oakar institutions
must submit one new piece of information, and only for quarters in
which they have transferred deposits.
In addition, although the Regulatory Flexibility Act requires a
regulatory flexibility analysis when an agency publishes a rule, the
term ``rule'' (as defined in the Regulatory Flexibility Act) excludes
``a rule of particular applicability relating to rates''. Id. 601(2).
The final rule relates to the rates that Oakar institutions must pay,
because it addresses various aspects of the method for determining the
base on which assessments are computed. The Regulatory Flexibility Act
is therefore inapplicable to this aspect of the final rule.
Finally, the legislative history of the Regulatory Flexibility Act
indicates that its requirements are inappropriate to this aspect of the
final rule. The Regulatory Flexibility Act is intended to assure that
agencies' rules do not impose disproportionate burdens on small
businesses:
Uniform regulations applicable to all entities without regard to
size or capability of compliance have often had a disproportionate
adverse effect on small concerns. The bill, therefore, is designed
to encourage agencies to tailor their rules to the size and nature
of those to be regulated whenever this is consistent with the
underlying statute authorizing the rule.
126 Cong. Rec. 21453 (1980) (``Description of Major Issues and
Section-by-Section Analysis of Substitute for S. 299'').
The final rule does not impose a uniform cost or requirement on all
Oakar institutions regardless of size: to the extent that it imposes
any costs at all, the costs have to do with the effects that the rule
has on Oakar institutions' assessments. An institution's assessment is
proportional to its size. Moreover, while the FDIC has authority to
establish a separate risk-based assessment system for large and small
members of each insurance fund, see 12 U.S.C. 1817(b)(1)(D), the FDIC
has not done so. Within the current assessment scheme, the FDIC cannot
``tailor'' assessment rates to reflect the ``size and nature'' of
institutions.
VII. Congressional Review
The FDIC is submitting a report to each House of the Congress and
to the Comptroller General with respect to the final rule in conformity
with the procedures specified in 5 U.S.C. 801. The FDIC is submitting
the report voluntarily and not under compulsion of the statute,
however. The term ``rule''--as that term is used in section 801--
excludes ``any rule of particular applicability, including a rule that
approves or prescribes * * * rates''. Id. 804(3). The FDIC considers
that the final rule is governed by this exclusion, because the final
rule pertains to the computations associated with assessment rates.
Accordingly, the requirements of id. 801-808 do not apply.
In any case, because the final rule is interpretive in character,
notice and comment are not required under the Administrative Procedure
Act. See 5 U.S.C. 553(b). Accordingly, the FDIC has for good cause
found that notice and public procedure thereon are
[[Page 64983]]
``unnecessary'' within the meaning of 5 U.S.C. 808(2). The final rule
will therefore take effect on the date specified herein.
List of Subjects in 12 CFR Part 327
Assessments, Bank deposit insurance, Banks, banking, Financing
Corporation, Reporting and recordkeeping requirements, Savings
associations.
For the reasons set forth in the preamble, the Board of Directors
of the Federal Deposit Insurance Corporation is amending 12 CFR part
327 as follows:
PART 327--ASSESSMENTS
1. The authority citation for part 327 continues to read as
follows:
Authority: 12 U.S.C. 1441, 1441b, 1813, 1815, 1817-1819; Deposit
Insurance Funds Act of 1996, Pub. L. 104-208, 110 Stat. 3009 et seq.
2. In Sec. 327.6 the section heading and paragraph (a) are revised
to read as follows:
Sec. 327.6 Terminating transfers; other terminations of insurance.
(a) Terminating transfer--(1) Assessment base computation. If a
terminating transfer occurs at any time in the second half of a
semiannual period, each surviving institution's assessment base (as
computed pursuant to Sec. 327.5) for the first half of that semiannual
period shall be increased by an amount equal to such institution's pro
rata share of the terminating institution's assessment base for such
first half.
(2) Pro rata share. For purposes of paragraph (a)(1) of this
section, the phrase pro rata share means a fraction the numerator of
which is the deposits assumed by the surviving institution from the
terminating institution during the second half of the semiannual period
during which the terminating transfer occurs, and the denominator of
which is the total deposits of the terminating institution as required
to be reported in the quarterly report of condition for the first half
of that semiannual period.
(3) Other assessment-base adjustments. The Corporation may in its
discretion make such adjustments to the assessment base of an
institution participating in a terminating transfer, or in a related
transaction, as may be necessary properly to reflect the likely amount
of the loss presented by the institution to its insurance fund.
(4) Limitation on aggregate adjustments. The total amount by which
the Corporation may increase the assessment bases of surviving or other
institutions under this paragraph (a) shall not exceed, in the
aggregate, the terminating institution's assessment base as reported in
its quarterly report of condition for the first half of the semiannual
period during which the terminating transfer occurs.
* * * * *
3. Section 327.8 is amended by revising paragraph (h) and adding
paragraphs (j) and (k) to read as follows:
Sec. 327.8 Definitions.
* * * * *
(h) As used in Sec. 327.6(a), the following terms are given the
following meanings:
(1) Surviving institution. The term surviving institution means an
insured depository institution that assumes some or all of the deposits
of another insured depository institution in a terminating transfer.
(2) Terminating institution. The term terminating institution means
an insured depository institution some or all of the deposits of which
are assumed by another insured depository institution in a terminating
transfer.
(3) Terminating transfer. The term terminating transfer means the
assumption by one insured depository institution of another insured
depository institution's liability for deposits, whether by way of
merger, consolidation, or other statutory assumption, or pursuant to
contract, when the terminating institution goes out of business or
transfers all or substantially all its assets and liabilities to other
institutions or otherwise ceases to be obliged to pay subsequent
assessments by or at the end of the semiannual period during which such
assumption of liability for deposits occurs. The term terminating
transfer does not refer to the assumption of liability for deposits
from the estate of a failed institution, or to a transaction in which
the FDIC contributes its own resources in order to induce a surviving
institution to assume liabilities of a terminating institution.
* * * * *
(j) Primary fund. The primary fund of an insured depository
institution is the insurance fund of which the institution is a member.
(k) Secondary fund. The secondary fund of an insured depository
institution is the insurance fund that is not the primary fund of the
institution.
4. Section 327.32 is amended by revising paragraph (a)(1), (a)(2),
and (a)(4) introductory text, and removing paragraph (a)(5), to read as
follows:
Sec. 327.32 Computation and payment of assessment.
(a) Rate of assessment--(1) BIF and SAIF member rates. (i) Except
as provided in paragraph (a)(2) of this section, and consistent with
the provisions of Sec. 327.4, the assessment to be paid by an
institution that is subject to this subpart B shall be computed at the
rate applicable to institutions that are members of the primary fund of
such institution. (ii) Such applicable rate shall be applied to the
institution's assessment base less that portion of the assessment base
which is equal to the institution's adjusted attributable deposit
amount.
(2) Rate applicable to the adjusted attributable deposit amount.
Notwithstanding paragraph (a)(1)(i) of this section, that portion of
the assessment base of any acquiring, assuming, or resulting
institution which is equal to the adjusted attributable deposit amount
of such institution shall:
(i) Be subject to assessment at the assessment rate applicable to
members of the secondary fund of such institution pursuant to subpart A
of this part; and
(ii) Not be taken into account in computing the amount of any
assessment to be allocated to the primary fund of such institution.
* * * * *
(4) Deposits acquired by the institution. As used in paragraph
(a)(3)(i) of this section, the term ``deposits acquired by the
institution'' means all deposits that are held in the institution
acquired by such institution on the date of such transaction; provided,
that if on or before June 30, 1997, the Corporation has been appointed
or serves as conservator or receiver for the acquired institution, such
term:
* * * * *
5. New Secs. 327.33 through 327.37 are added to subpart B to read
as follows:
Sec. 327.33 ``Acquired'' deposits.
This section interprets the phrase ``deposits acquired by the
institution'' as used in Sec. 327.32(a)(3)(i).
(a) In general.--(1) Secondary-fund deposits. The phrase ``deposits
acquired by the institution'' refers to deposits that are insured by
the secondary fund of the acquiring institution, and does not include
deposits that are insured by the acquiring institution's primary fund.
(2) Nominal dollar amount. Except as provided in paragraph (b) of
this section, an acquiring institution is deemed to acquire the entire
nominal dollar amount of any deposits that the transferring institution
holds on the date
[[Page 64984]]
of the transaction and transfers to the acquiring institution.
(b) Conduit deposits.--(1) Defined. As used in this paragraph (b),
the term ``conduit deposits'' refers to deposits that an acquiring
institution has assumed from another institution (original transferor)
in the course of a transaction described in Sec. 327.31(a), and that
are treated as insured by the secondary fund of the acquiring
institution, but which the acquiring institution has been explicitly
and specifically ordered by the Corporation, or by the appropriate
federal banking agency for the institution, or by the Department of
Justice to commit to re-transfer to another insured depository
institution (re-transferee institution) as a condition of approval of
the transaction. The commitment must be enforceable, and the
divestiture must be required to occur and must occur within 6 months
after the date of the initial transaction.
(2) Treatment with respect to acquiring institution. Conduit
deposits are not considered to be acquired by the acquiring institution
within the meaning of Sec. 327.32(a)(3)(i) for the purpose of computing
the acquiring institution's adjusted attributable deposit amount for a
current semiannual period that begins after the end of the semiannual
period following the semiannual period in which the acquiring
institution re-transfers the deposits.
(3) Treatment with respect to re-transferee institution. Conduit
deposits are treated as insured by the same insurance fund after having
been acquired by the re-transferee institution as when held by the
original transferor.
Sec. 327.34 Application of AADAs.
This section interprets the meaning of the phrase ``an insured
depository institution's `adjusted attributable deposit amount' for any
semiannual period'' as used in the introductory text of
Sec. 327.32(a)(3).
(a) In general. The phrase ``for any semiannual period'' refers to
the current semiannual period: that is, the period for which the
assessment is due, and for which an institution's adjusted attributable
deposit amount (AADA) is computed.
(b) Quarterly components of AADAs. An AADA for a current semiannual
period consists of 2 quarterly AADA components. The first quarterly
AADA component for the current period is determined with respect to the
first quarter of the prior semiannual period, and the second quarterly
AADA component for the current period is determined with respect to the
second quarter of the prior period.
(c) Application of AADAs. The value of an AADA that is to be
applied to a quarterly assessment base in accordance with
Sec. 327.32(a)(2) is the value of the quarterly AADA component for the
corresponding quarter.
(d) Initial AADAs. If an AADA for a current semiannual period has
been generated in a transaction that has occurred in the second
calendar quarter of the prior semiannual period, the first quarterly
AADA component for the current period is deemed to have a value of
zero.
(e) Transition rule. Paragraphs (b), (c) and (d) of this section
shall apply to any AADA for any semiannual period beginning on or after
July 1, 1997.
Sec. 327.35 Grandfathered AADA elements.
This section explains the meaning of the phrase ``total of the
amounts determined under paragraph (a)(3)(iii)'' in
Sec. 327.32(a)(3)(ii). The phrase ``total of the amounts determined
under paragraph (a)(3)(iii)'' refers to the aggregate of the increments
of growth determined in accordance with Sec. 327.32(a)(3)(iii). Each
such increment is deemed to be computed in accordance with the
contemporaneous provisions and interpretations of such section.
Accordingly, any increment of growth that is computed with respect to a
semiannual period has the value appropriate to the proper calculation
of the institution's assessment for the semiannual period immediately
following such semiannual period.
Sec. 327.36 Growth computation.
This section interprets various phrases used in the computation of
growth as prescribed in Sec. 327.32(a)(3)(iii).
(a) Annual rate. The annual rate of growth of deposits refers to
the rate, which may be expressed as an annual percentage rate, of
growth of an institution's deposits over any relevant interval. A
relevant interval may be less than a year.
(b) Growth; increase; increases. Except as provided in paragraph
(c) of this section, references to ``growth'', ``increase'', and
``increases'' may generally include negative values as well as positive
ones.
(c) Growth of deposits. ``Growth of deposits'' does not include any
decrease in an institution's deposits representing deposits transferred
to another insured depository institution, if the transfer occurs on or
after July 1, 1996.
(d) Quarterly determination of growth. For the purpose of computing
assessments for semiannual periods beginning on July 1, 1997, and
thereafter, the rate of growth of deposits for a semiannual period, and
the amount by which the sum of the amounts specified in
Sec. 327.32(a)(3)(i) and (ii) would have grown during a semiannual
period, is to be determined by computing such rate of growth and such
sum of amounts for each calendar quarter within the semiannual period.
Sec. 327.37 Attribution of transferred deposits.
This section explains the attribution of deposits to the BIF and
the SAIF when one insured depository institution (acquiring
institution) acquires deposits from another insured depository
institution (transferring institution). For the purpose of determining
whether the assumption of deposits (assumption transaction) constitutes
a transaction undertaken pursuant to section 5(d)(3) of the Federal
Deposit Insurance Act (12 U.S.C. 1815(d)(3)), and for the purpose of
computing the adjusted attributable deposit amounts, if any, of the
acquiring and the transferring institutions after the transaction:
(a) Transferring institution.--(1) Transfer of primary-fund
deposits. To the extent that the aggregate volume of deposits that is
transferred by a transferring institution in a transaction, or in a
related series of transactions, does not exceed the volume of deposits
that is insured by its primary fund (primary-fund deposits) immediately
prior to the transaction (or, in the case of a related series of
transactions, immediately prior to the initial transaction in the
series), the transferred deposits shall be deemed to be insured by the
institution's primary fund. The primary institution's volume of
primary-fund deposits shall be reduced by the aggregate amount so
transferred.
(2) Transfer of secondary-fund deposits. To the extent that the
aggregate volume of deposits that is transferred by the transferring
institution in a transaction, or in a related series of transactions,
exceeds the volume of deposits that is insured by its primary fund
immediately prior to the transaction (or, in the case of a related
series of transactions, immediately prior to the initial transaction in
the series), the following volume of the deposits so transferred shall
be deemed to be insured by the institution's secondary fund (secondary-
fund deposits): the aggregate amount of the transferred deposits minus
that portion thereof that is equal to the institution's primary-fund
deposits. The transferring institution's volume of secondary-fund
deposits shall be reduced by the volume of the secondary-fund deposits
so transferred.
[[Page 64985]]
(b) Acquiring institution. The deposits shall be deemed, upon
assumption by the acquiring institution, to be insured by the same fund
or funds in the same amount or amounts as the deposits were so insured
immediately prior to the transaction.
By order of the Board of Directors.
Dated at Washington, D.C., this 26th day of November 1996.
Federal Deposit Insurance Corporation.
Jerry L. Langley,
Executive Secretary.
[FR Doc. 96-31207 Filed 12-9-96; 8:45 am]
BILLING CODE 6714-01-P
