[Federal Register Volume 60, Number 237 (Monday, December 11, 1995)]
[Rules and Regulations]
[Pages 63400-63405]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28719]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327
Assessments; Adjustment of Assessment Rate Schedule for BIF-
Assessable Deposits
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Adjustment of assessment rate schedule.
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SUMMARY: On November 14, 1995, the Board of Directors of the FDIC
adopted a resolution to reduce to a range of 0 to 27 basis points the
assessment rates applicable to deposits assessable by the Bank
Insurance Fund for the semiannual assessment period beginning January
1, 1996. The reduction represents a downward adjustment of 4 basis
points from the BIF assessment rate schedule currently in effect for
the second semiannual assessment period of 1995.
EFFECTIVE DATE: January 1, 1996, through June 30, 1996.
FOR FURTHER INFORMATION CONTACT: Frederick S. Carns, Chief, Financial
Markets Section, Division of Research and Statistics, (202) 898-3930;
Christine Blair, Financial Economist, Division of Research and
Statistics, (202) 898-3936; Claude A. Rollin, Senior Counsel, Legal
Division, (202) 898-3985; Martha L. Coulter, Counsel, Legal Division,
(202) 898-7348; Federal Deposit Insurance Corporation, 550-17th Street
NW., Washington, D. C., 20429.
SUPPLEMENTARY INFORMATION:
I. Adjustment of Existing BIF Assessment Rate Schedule
On August 8, 1995, the Board of Directors of the FDIC (Board)
adopted a new assessment rate schedule for
[[Page 63401]]
deposits subject to assessment by the Bank Insurance Fund (BIF). 60 FR
42680 (August 16, 1995). The new schedule (codified as Rate Schedule 2
at 12 C.F.R. 327.9(a)) provided for an assessment-rate range of 4 to 31
basis points and became effective retroactively on June 1, 1995, the
beginning of the month following the month in which the BIF reached its
designated reserve ratio (DRR) of 1.25 percent of total estimated
insured deposits.
In adopting that rate schedule, the Board took into account the
factors required by the assessment provisions of section 7(b) of the
Federal Deposit Insurance Act (FDI Act), 12 U.S.C. 1817(b). Those
factors include the requirement for a risk-based assessment system that
is based on the risk of loss posed to BIF by each BIF-insured
institution, taking into account different categories and
concentrations of assets and liabilities and other relevant factors;
the likely amount of any such loss; and BIF's revenue needs. (Section
7(b)(1)). They also include the requirement that rates be set to reach
or maintain the DRR, taking into account BIF's expected operating
expenses, case resolution expenditures and income, the effect of
assessments on members' earnings and capital, and any other factors the
Board may deem appropriate. (Section 7(b)(2)).
At the same time the Board adopted the current rate schedule, it
also amended the FDIC's assessment regulations to permit the Board to
make limited adjustments to the schedule without notice-and-comment
rulemaking. Any such adjustments can be made as the Board deems
necessary to maintain the BIF reserve ratio at the DRR and can be
accomplished by Board resolution. Under this provision, codified at 12
CFR 327.9(b), any such adjustment must not exceed an increase or
decrease of 5 basis points and must be uniform across the rate
schedule.
The amount of an adjustment adopted by the Board under 12 C.F.R.
327.9(b) is to be determined by the following considerations: (1) the
amount of assessment revenue necessary to maintain the reserve ratio at
the DRR; and (2) the assessment schedule that would generate such
amount of assessment revenue considering the risk profile of BIF
members. In determining the relevant amount of assessment revenue, the
Board is to consider BIF's expected operating expenses, case resolution
expenditures and income, the effect of assessments on BIF members'
earnings and capital, and any other factors the Board may deem
appropriate.
Having considered all of these factors, the Board has decided to
adopt an adjustment factor of 4 basis points for the semiannual
assessment period beginning January 1, 1996, with a resulting adjusted
schedule as follows:
BIF Rate Schedule as Adjusted for the First Semiannual Period of 1996
------------------------------------------------------------------------
Supervisory subgroup
Capital group -----------------------------
A B C
------------------------------------------------------------------------
1......................................... \1\ 0 3 17
2......................................... 3 10 24
3......................................... 10 24 27
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\1\ Subject to a statutory minimum assessment of $1,000 per semiannual
period (which also applies to all other assessment risk
classifications).
The basis for the Board's decision is discussed below.
II. Basis for the Adjustment
A. Maintaining at the Designated Reserve Ratio
On June 30, 1995, the BIF reserve ratio stood at nearly 1.29
percent, and all indications are that it continued to grow during the
third quarter of 1995. If the rates in effect for the current
semiannual assessment period were to continue in effect, it is likely
that, absent large increases in insurance losses and deposit growth,
the reserve ratio would continue to grow during the first half of 1996.
BIF operating expenses and insurance losses have been lower than
anticipated and are projected to remain low in the near term due to the
strong economy and high capital levels in the banking industry. Even
taking into account the possibility of large increases in insurance
losses and deposit growth that currently appear highly unlikely, it is
still probable that the reserve ratio would remain at or above the
target reserve ratio of 1.25 percent in the near term. Accordingly, the
Board has determined that a reduction in the BIF assessment rate
schedule is necessary to comply with the statutory requirements for
setting assessment rates, including the requirement that the FDIC
maintain the reserve ratio at the target DRR.
B. Determination of the Adjustment Factor
1. Amount of Assessment Revenue Needed
The FDIC determined in August that an effective average BIF
assessment rate at the low end of a range beginning at around 4.5 basis
points was appropriate to achieve a long-term balance of BIF revenues
and expenses (where expenses include monies needed to prevent dilution
due to deposit growth). This determination was based on a thorough
historical analysis of FDIC experience and consideration of recently
enacted statutory provisions that may moderate deposit insurance losses
going forward.
The Board has not altered its view that, in setting rates, it
should look beyond the immediate time frame in estimating the revenue
needs of the fund. However, under the law, the current balance in the
BIF also is directly relevant to determining the appropriate assessment
level for the first semiannual period of 1996. In light of the
favorable existing conditions and outlook for the next several months,
it is anticipated that even an adjustment sufficient to reduce the rate
for the least-risky institutions essentially to zero for the next
assessment period would still provide assessment revenue in an amount
that is expected to maintain the BIF reserve ratio at or above the
target ratio of 1.25 percent in the near term.
In deciding upon a rate schedule for the second semiannual
assessment period of 1995, the Board considered high-growth and low-
growth scenarios for the BIF balance and the anticipated reserve ratio
at year end. Current information suggests that the BIF balance and
reserve ratio at year end will correspond more closely to the high-than
the low-growth scenario, as indicated below.
The BIF reserve ratio stood at nearly 1.29 percent as of June 30,
1995, the latest date for which complete data are available. Assuming
annualized insured deposit growth of between 0 and 2 percent during the
third quarter, the BIF reserve ratio may have achieved 1.30 to 1.31
percent as of September 30, 1995.1 All indications are that the
reserve ratio will continue to rise for the remainder of 1995.
\1\ The BIF reserve ratio as of September 30, 1995, cannot be
determined precisely until Call Report data showing BIF-assessable
deposits for that date are processed and analyzed. This process is
expected to be completed by mid-December 1995.
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Insurance losses and operating expenses for the second half of 1995
are expected to total under $400 million, while assessments plus
investment income will exceed $1 billion for this period. Insured
deposit growth for the second half of 1995 likely will be moderate; the
annualized growth rate was 1.5 percent for the year ending on June 30,
and preliminary estimates suggest that deposit growth will be near zero
or possibly negative for the third quarter. Table 1 indicates that the
reserve ratio is likely to reach 1.31 to 1.34 percent by year-end 1995,
reflecting a range of insured deposit growth from +2 to -2 percent
annually for the second half of the year.
[[Page 63402]]
With a forecast horizon exceeding six months, large unexpected
changes in the reserve ratio are possible, given the historical
volatility in deposit growth and insurance losses. However, the outlook
for the first semiannual assessment period of 1996 is for continued
growth in BIF and its reserve ratio. Little change is expected in the
pace of insurance losses or operating expenses, with the result that
investment income is expected to be sufficient to fund BIF expenditures
through June 30.
Table 1 indicates that, under the current assessment schedule, the
BIF reserve ratio would exceed 1.25 percent as of June 30, 1996, even
assuming a severe negative growth scenario for the reserve ratio. For
example, the reserve ratio at June 30 likely would be at least 1.28
percent even if losses plus new provisions for future losses total $600
million for the first half of 1996 and insured deposits grow at an
annual rate of 6 percent from mid-year 1995 through mid-year 1996.
Table 1 indicates that under these same extreme assumptions, an
assessment rate schedule of 0 to 27 basis points annually (4 basis
points lower for all risk categories than the existing schedule) likely
would maintain the reserve ratio at 1.25 percent through June 30.
In short, the FDIC's best estimate is that the BIF reserve ratio is
highly likely to remain well above 1.25 percent for the first
semiannual period of 1996 even if assessment revenue is minimal. Given
these circumstances, it is the Board's view that assessment rates
should be reduced by a substantial amount. The data reviewed above
support a reduction in BIF assessment rates to the lowest levels that
are consistent with an effective risk-based assessment system.
Finally, the Board notes that this reduction of BIF assessment
rates is likely to have a positive impact on earnings and capital of
insured institutions having deposits assessable by BIF.
2. Maintaining a Risk-Based Assessment System.
The FDI Act requires a risk-based assessment system. In adopting
the current rate schedule, the Board explained its view that, to be
effective, the risk-based assessment system must incorporate a range of
rates that provides an incentive for institutions to control risk-
taking behavior while at the same time covering the long-term costs of
the obligations borne by the deposit insurer. 60 FR 42683 (August 16,
1995). The Board's decision to adopt a 4-point adjustment to the
current rate schedule, thereby retaining rate differentials among the
various assessment-risk classifications, continues to reflect this
view.
It should be noted that, under existing statutory provisions, BIF
members are subject to a minimum assessment of $1,000 for each
semiannual period. (FDI Act section 7(b)(2)(iii)). Under this
requirement, even those institutions posing the least risk of loss to
BIF are statutorily required to pay semiannual assessments of at least
that amount.
In light of its decision to reduce to zero the explicit assessment
rate for those institutions in the most favorable assessment risk
classification, the Board recognizes two concerns associated with the
statutory minimum assessment: (1) the absence of an explicit assessment
rate combined with a minimum semiannual assessment of only $1,000
suggests that the risk posed to the insurance fund by such institutions
is insignificant, but FDIC experience suggests otherwise; and (2) the
marginal cost of deposit insurance for such institutions is zero (that
is, insurance is provided on new deposits at zero additional cost).
The first concern arises because, historically, a significant
percentage of failed institutions might have qualified for the most
favorable assessment risk classification two or three years prior to
failure. Figure 1 shows that, of the insured institutions that failed
in the period beginning with 1980 and extending through 1994, nearly 35
percent were rated CAMEL 1 or 2 as of two years prior to failure, and
approximately 55 percent were rated CAMEL 1 or 2 as of three years
prior to failure. Moreover, of the BIF members that failed from the
beginning of 1987 through 1994, 80 percent were well capitalized as of
three years prior to failure (see Figure 2).
An argument for imposing only the minimum assessment on the least-
risky institutions is that the reserve ratio is intended to provide for
insurance losses arising from these types of failures; because BIF has
been recapitalized through assessments, the protection received during
periods when only the minimum assessment is paid may be viewed as
``prepaid insurance.''
An alternative view supports an explicit, risk-based assessment
rate for even the least-risky institutions as an important element of a
risk-based assessment system. However, as the Board noted in adopting
the existing BIF assessment rate schedule in August, the FDIC is
required by statute both to have a risk-based assessment system and to
maintain the reserve ratio at the target DRR. The Board cannot ignore
one in favor of the other but must, instead, balance the two in an
appropriate manner. The Board believes that the 4-point adjustment
strikes such a balance.
Regarding the second concern noted above, among the implications of
a zero marginal cost for deposit insurance is that the best-rated new
institutions would receive insurance protection essentially premium-
free without having contributed to the existing reserve ratio. The FDIC
is analyzing this issue to determine whether new institutions should
receive special assessment treatment for a period of time after they
initially become insured. Without any operational track record and with
no previous contribution to BIF, there is a question as to whether an
essentially zero marginal rate is justified.
Another implication of a zero marginal assessment is that the
largest institutions in the best category would pay the same dollar
amount for deposit insurance as the smallest institutions. For example,
an institution with $10 billion in BIF-assessable deposits would pay
the same amount ($1,000 per semiannual period) as an institution with
$10 million in BIF-assessable deposits.
The Board does not minimize the foregoing concerns. Rather, given
current industry conditions, the financial health of the BIF, low
projected losses, and the statutory requirement to maintain the BIF
reserve ratio at the target DRR, it is the judgment of the Board that
the institutions posing the lowest risk to BIF should be assessed only
the statutory minimum assessment. In particular, this decision does not
reflect a judgment that such institutions pose a near-zero risk to BIF
but instead a recognition that the existing BIF balance, in excess of
$25 billion, represents the significant prepayment BIF-assessable
institutions have made for deposit insurance.
III. Board Resolution
The Resolution by which the Board adopted the adjustment to the
current rate schedule is set out below.
Resolution
Whereas, section 7(b) of the Federal Deposit Insurance Act (``FDI
Act'') requires the Board of Directors (``Board'') of the Federal
Deposit Insurance Corporation (``FDIC'') to establish by regulation a
risk-based assessment system; and
Whereas, section 7(b) of the FDI Act requires that when the reserve
ratio of the Bank Insurance Fund (``BIF'') reaches the designated
reserve ratio (``DRR'') of 1.25 percent of estimated insured deposits,
the Board shall set semiannual assessments for BIF
[[Page 63403]]
members to maintain the reserve ratio at the DRR; and
Whereas, section 7(b) further requires that, in setting BIF
semiannual assessments, the Board consider the following factors: (1)
expected operating expenses; (2) case resolution expenditures and
income; (3) the effect of assessments on members' earnings and capital;
and (4) any other factors the Board may deem appropriate; and
Whereas, Part 327 of the FDIC's rules and regulations, 12 CFR Part
327, entitled ``Assessments,'' prescribes the rules governing the
assessment of institutions insured by the FDIC; and
Whereas, on August 8, 1995, the Board adopted, by regulation, a
rate schedule for deposits assessable by BIF of 4 to 31 basis points,
set forth as Rate Schedule 2 at section 327.9(a) of the FDIC's rules
and regulations, to become effective at the beginning of the month
after BIF reached the DRR; and
Whereas, said rate schedule became effective on June 1, 1995, and
continues in effect for the second semiannual assessment period of
1995; and
Whereas, section 327.9(b) of the FDIC's rules and regulations, also
adopted by the Board on August 8, 1995, permits the Board, by
resolution, to adjust said rate schedule upward or downward by a
maximum of 5 basis points, as the Board deems necessary to maintain the
reserve ratio at the DRR; and
Whereas, section 327.9(b) requires that any such adjustment shall
be determined by (1) the amount of assessment revenue necessary to
maintain the BIF reserve ratio at the DRR, and (2) the assessment
schedule that would generate that amount of revenue considering the
risk profile of BIF members; and
Whereas, in determining that amount of revenue, the Board is
required to take into consideration (1) expected BIF operating
expenses, (2) case resolution expenditures and income, (3) the effect
of assessments on BIF members' earnings and capital, and (4) any other
factors the Board may deem appropriate; and
Whereas, the BIF's operating expenses and insurance losses have
been lower than anticipated and are projected to remain low in the near
term due to the strong economy and high capital levels in the banking
industry; and
Whereas, the BIF reserve ratio currently exceeds the target DRR
and, absent unexpectedly large insurance losses or deposit growth, is
expected to remain above the DRR for the first semiannual period of
1996 and beyond if the current rate schedule remains in effect without
adjustment; and
Whereas, reducing BIF assessment rates is likely to have a
favorable impact on earnings and capital of insured institutions having
deposits insured by the BIF; and
Whereas, the Board has therefore determined that a downward
adjustment to the current rate schedule is necessary to comply with the
statutory requirements for setting assessments, including the
requirement that the FDIC maintain the BIF reserve ratio at the DRR;
and
Whereas, in determining the amount of the downward adjustment, the
Board has considered the factors specified in section 327.9(b), as
reflected in the attached Federal Register notice document.
Now, therefore, be it resolved, that the Board does hereby adjust,
for the semiannual period beginning January 1, 1996, through June 30,
1996, BIF rate schedule based on Rate Schedule 2 at section 327.9(a) of
the FDIC's rules and regulations by a reduction of 4 basis points to be
applied uniformly across the schedule to each assessment risk
classification represented in the schedule.
Be it further resolved, that the Board hereby directs the Executive
Secretary, or his designee, to cause the aforementioned Federal
Register notice document to be published in the Federal Register in a
form and manner satisfactory to the Executive Secretary, or his
designee, and the General Counsel, or his designee.
By order of the Board of Directors.
Dated at Washington, D.C., this 14th day of November, 1995.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Deputy Executive Secretary.
Table 1.--BIF Assessment Rates Factors To Be Considered First Semiannual
Assessment Period, 1996
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Current rate Adjusted rate
schedule of 4 to 31 schedule of 0 to 27
basis points basis points
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BIF Ratio at December 31, 1.31 to 1.34........ 1.31 to 1.34.
1995 \1\ (Percent).
Expected Income ($Millions). 1,171............... 677.
Assessment Income 546................. 52.
($Millions).
Interest Income 625................. 620.
($Millions).
Expected Insurance Losses -100 to +600........ -100 to +600.
and Change in Provisions
for Future Losses
($Millions) \2\.
Expected Operating Expenses 215................. 215.
($Millions).
Estimated BIF-Insured 1,877 to 2,032...... 1,877 to 2,032.
Deposits at June 30 \3\
($Billions).
BIF Ratio at June 30, 1996 1.28 to 1.40........ 1.25 to 1.37.
\4\ (Percent).
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\1\ Range reflects annual insured growth rate of +2 percent versus-2
percent for second half of 1995.
\2\ Range based on FDIC experience, as reviewed in Federal Register
notice of August 16, 1995, 60 FR 42680.
\3\ Lower bound assumes annual growth of insured deposits of -2 percent
for second half of 1995 and first half of 1996. Upper bound assumes
annual growth of 6 percent for these same four quarters. Range based
on quarterly volatility evidence from 1984:Q2 to 1995:Q1.
\4\Reflects ranges for all preceding items in Table 1.
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[FR Doc. 95-28719 Filed 12-8-95; 8:45 am]
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