[Federal Register Volume 60, Number 237 (Monday, December 11, 1995)]
[Rules and Regulations]
[Pages 63405-63411]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28720]
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[[Page 63406]]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327
Assessments; Retention of Existent Assessment Rate Schedule for
SAIF-Member Institutions
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Confirmation of assessment rate.
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SUMMARY: On November 14, 1995, the Board of Directors of the FDIC
(Board) adopted a resolution to retain the existing assessment rate
schedule applicable to members of the Savings Association Insurance
Fund (SAIF) for the first semiannual assessment period of 1996. As a
result of this action, the SAIF assessment rate to be paid by
depository institutions whose deposits are subject to assessment by the
SAIF will continue to range from 23 cents per $100 of assessable
deposits to 31 cents per $100 of assessable deposits, depending on risk
classification.
EFFECTIVE DATE: January 1, 1996, through June 30, 1996.
FOR FURTHER INFORMATION CONTACT: James R. McFadyen, Senior Financial
Analyst, Division of Research and Statistics, (202) 898-7027; Claude A.
Rollin, Senior Counsel, Legal Division, (202) 898-3985; or Valerie Jean
Best, Counsel, Legal Division, (202) 898-3812; Federal Deposit
Insurance Corporation, Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION:
I. Summary
Based upon the results of its semiannual review of the
capitalization of the SAIF and of the SAIF assessment rates, the Board
has determined to retain the existing assessment rate schedule
applicable to SAIF-member institutions for the first semiannual
assessment period of 1996 so that capitalization of the SAIF is
accomplished as soon as possible. As a result of this action, the SAIF
assessment rate to be paid by institutions whose deposits are subject
to assessment by the SAIF will continue to range from 23 cents per $100
of assessable deposits to 31 cents per $100 of assessable deposits,
depending on risk classification.
Despite the general good health of the thrift industry, the SAIF is
not in good condition and it remains significantly undercapitalized. On
June 30, 1995, the SAIF had a balance of $2.6 billion, or about 37
cents in reserves for every $100 in insured deposits. An additional
$6.3 billion would have been required on that date to fully capitalize
the SAIF to its designated reserve ratio (DRR) of 1.25 percent of
estimated insured deposits. As of September 30, 1995, the SAIF balance
had grown to $3.1 billion, although the reserve ratio for that date
cannot be determined until insured deposits as of September 30 become
available in December. At the current pace, and under reasonably
optimistic assumptions, the SAIF would not reach the statutorily
mandated DRR until at least the year 2002. The failure of a single
large SAIF-insured institution or several sizeable institutions or an
economic downturn leading to higher than anticipated losses could
render the fund insolvent. While the FDIC is not currently predicting
such thrift failures, they are possible.
The main source of income for the SAIF is assessments. A sizable
portion of the SAIF's ongoing assessments (up to $793 million annually)
is diverted to meet interest payments on obligations of the Financing
Corporation (FICO). Reducing assessment rates to the lowest minimum
average rate permitted by law--18 basis points--is presently projected
to delay SAIF capitalization until 2005, and it would cause a FICO
shortfall as early as 1996. Moreover, there will still be a significant
differential between assessment rates of the Bank Insurance Fund (BIF)
and the SAIF even if the Board reduces the SAIF assessments to the
minimum average allowed by statute.
II. Statutory Provisions Governing SAIF Assessment Rates
A. Section 7 of the Federal Deposit Insurance Act
Section 7(b) of the Federal Deposit Insurance Act (FDI Act) governs
the Board's authority for setting assessments for SAIF members. 12
U.S.C. 1817(b). Section 7(b)(1) (A) and (C) require that the FDIC
maintain a risk-based assessment system, setting assessments based on
(1) the probable risk to the fund posed by each insured depository
institution taking into account different categories and concentrations
of assets and liabilities and any other relevant factors; (2) the
likely amount of any such loss; and (3) the revenue needs of the fund.
Section 7(b)(2)(A)(iii) further directs the Board to impose a minimum
assessment on each institution not less than $1,000 semiannually. The
Board must set semiannual assessments and the DRR for each deposit
insurance fund independently. FDI Act section 7(b)(2)(B).
The Board must set semiannual assessments for SAIF members to
maintain the reserve ratio at the DRR or, if the reserve ratio is less
than the DRR, to increase the reserve ratio to the DRR. FDI Act section
7(b)(2)(A)(i). The reserve ratio is the dollar amount of the fund
balance divided by estimated SAIF-insured deposits. The DRR for the
SAIF is currently 1.25 percent of estimated insured deposits, the
minimum level permitted by the FDI Act. In setting SAIF assessments to
achieve and maintain the DRR, the Board must consider the SAIF's
expected operating expenses, case resolution expenditures and income,
the effect of assessments on members' earnings and capital, and any
other factors that the Board may deem appropriate. FDI Act section
7(b)(2)(D).
Before January 1, 1998, if the SAIF remains below the DRR, the
total amount raised by semiannual assessments on SAIF members may not
be less than the amount that would have been raised if section 7(b) as
in effect on July 15, 1991 remained in effect. See FDI Act section
7(b)(2) (E) and (F). The minimum rate required by section 7(b) as then
in effect was 0.18 percent.
Beginning January 1, 1998, all minimum assessment provisions
applicable to BIF members also apply to SAIF members. Under these
provisions, if the SAIF remains below the DRR, the total amount raised
by semiannual assessments on SAIF members may not be less than the
amount that would have been raised by an assessment rate of 0.23
percent. See FDI Act section 7(b)(2)(E).
The Board thus has the legal authority to reduce SAIF assessment
rates to a minimum average of 18 basis points until January 1, 1998.
Beginning January 1, 1998, however, the minimum average rate must be 23
basis points until SAIF achieves its DRR of 1.25 percent.
In setting semiannual assessments for members of the SAIF,
beginning January 1, 1998, if the reserve ratio of the SAIF is less
than the DRR, the Board must set semiannual assessments either, (a) at
rates sufficient to increase the reserve ratio to the DRR within 1 year
after setting the rates, or (b) in accordance with a schedule for
recapitalization, adopted by regulation, that specifies target reserve
ratios at semiannual intervals culminating in a reserve ratio that is
equal to the DRR not later than 15 years after implementation of the
schedule. FDI Act section 7(b)(3). Section 8(h) of the Resolution Trust
Corporation Completion Act (RTCCA), Pub. L. No. 103-204, 107 Stat.2369,
2388, amended section 7(b)(3) to allow the Board, by regulation, to
amend the SAIF capitalization schedule to extend the date by which the
SAIF must be capitalized beyond the 15-year time limit to a date which
the Board determines will, over time, maximize the amount of semiannual
assessments received by the SAIF, net of insurance
[[Page 63407]]
losses incurred. FDI Act section 7(b)(3)(C).
Amounts assessed by the FICO against SAIF members must be
subtracted from the amounts authorized to be assessed by the Board. FDI
Act section 7(b)(2)(D).
In order to achieve SAIF capitalization, the Board adopted a risk-
related assessment matrix in September 1992 (see Table 1) which has
remained unchanged.
Table 1.--SAIF-Member Assessment Rate Schedule for the Second Semiannual
Assessment Period of 1995
[Basis points]
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Supervisory subgroup
Capital group --------------------------
A B C
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Well capitalized............................. 23 26 29
Adequately capitalized....................... 26 29 30
Undercapitalized............................. 29 30 31
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B. Statutory Provisions Governing FICO Assessments
FICO was originated by section 302 of the Competitive Equality
Banking Act of 1987 (CEBA), Pub. L. No. 100-86, 101 Stat. 552, 585,
which added section 21 to the Federal Home Loan Bank Act (FHLB Act).\1\
FICO's assessment authority derives from section 21(f) of the FHLB Act,
12 U.S.C. 1441(f). As amended by section 512 of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA),
Pub. L. No. 101-73, 103 Stat. 183, 406, section 21(f) requires that
FICO obtain funding for ``anticipated interest payments, issuance
costs, and custodial fees'' on FICO obligations from the following
sources, in descending priority order: (1) FICO assessments previously
imposed on savings associations under pre-FIRREA funding provisions;
(2) ``with the approval'' of the FDIC Board, assessments against SAIF
member institutions; and (3) FSLIC Resolution Fund (FRF) receivership
proceeds not needed for the Resolution Funding Corporation (REFCORP)
Principal Fund.
\1\ Title III of CEBA, entitled the Federal Savings and Loan
Insurance Corporation Recapitalization Act of 1987, directed the
Federal Home Loan Bank Board to charter FICO for the purpose of
financing the recapitalization of the FSLIC by purchasing FSLIC
securities (and, subsequently, securities issued by the FSLIC
Resolution Fund as successor to FSLIC).
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Under section 21(f)(2), FICO assessments against SAIF members are
to be made in the same manner as FDIC insurance assessments under
section 7 of the FDI Act. The amount of the FICO assessment--together
with any amount assessed by REFCORP under section 21B of the FHLB Act--
must not exceed the insurance assessment amount authorized by section
7.2 Section 21(f)(2) further provides that FICO ``shall have first
priority to make the assessment,'' and that the amount of the insurance
assessment under section 7 is to be reduced by the amount of the FICO
assessment. One important effect of the FICO assessment is to
exacerbate any premium differential that may exist between BIF and SAIF
assessment rates.
\2\ The REFCORP Principal Fund is now fully funded and,
accordingly, REFCORP's assessment authority has effectively
terminated.
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III. Problems Confronting the SAIF
A. Background: SAIF Assessment Rates
In deciding against changes in the SAIF assessment rate, the Board
has considered the SAIF's expected operating expenses, case resolution
expenditures and income under a range of scenarios. The Board also has
considered the effect of an increase in the assessment rate on SAIF
members' earnings and capital. When first adopted, the assessment rate
schedule yielded a weighted average rate of 25.9 basis points. With
subsequent improvements in the industry and the migration of
institutions to lower rates within the assessment matrix, the average
rate has declined to 23.7 basis points (based on risk-based assessment
categories as of July 1, 1995 and the assessment base as of June 30,
1995--see Table 2).
Table 2.--SAIF Assessment Base Distribution Supervisory and Capital Ratings in Effect July 1, 1995 Deposits as
of June 30, 1995
[In billions]
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(5)Supervisory subgroup
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Capital group
(1)A
(1)B
(1)C
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Well capitalized............ Number....... 1,529 86.1% 137 7.7% 24 1.4%
Base......... $611.1 83.6 $58.4 8.0 $17.0 2.3
Adequately capitalized...... Number....... 22 1.2 30 1.7 26 1.5
Base......... $16.6 2.3 $18.3 2.5 $6.8 0.9
Under-capitalized........... Number....... 0 0.0 0 0.0 7 0.4
Base......... $0.2 0.0 $0.0 0.0 $2.1 0.3
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``Number'' reflects the number of SAIF members; ``Base'' reflects the SAIF-assessable deposits of SAIF members
and of BIF-member Oakar banks.
The primary source of funds for the SAIF is assessment revenue from
SAIF-member institutions. Since the creation of the fund and through
the end of 1992, however, all assessments from SAIF-member institutions
were diverted to other needs as required by FIRREA.3 Only
assessment revenue generated from BIF-member institutions that acquired
SAIF-insured deposits under section 5(d)(3) of the FDI Act (12 U.S.C.
1815(d)(3)) (so-called ``Oakar'' banks) was deposited in the SAIF
throughout this period.
\3\ From 1989 through 1992, more than 90 percent of SAIF
assessment revenue went to the FRF, the REFCORP and the FICO.
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B. The SAIF is Significantly Undercapitalized
SAIF-member assessment revenue began flowing into the SAIF on
January 1, 1993. However, the FICO has a priority claim on SAIF-member
assessments in order to service FICO bond obligations. Under existing
statutory provisions, FICO has assessment authority through 2019, the
maturity year of its last bond issuance. At a maximum of $793 million
per year, the FICO draw is substantial, and is expected to represent 45
percent of estimated assessment revenue for 1995,
[[Page 63408]]
or 11 basis points of the average assessment rate of 23.7 basis
points.4 The SAIF had a balance of $3.1 billion (unaudited) on
September 30, 1995. With primary responsibility for resolving failed
thrift institutions residing with the Resolution Trust Corporation
(RTC) until June 30, 1995, there were few demands on the SAIF. The SAIF
assumed resolution responsibility for failed thrifts from the RTC on
July 1, 1995.
\4\ The FICO has an annual call on up to the first $793 million
in SAIF assessments until the year 2017, with decreasing calls for
two additional years thereafter. With interest credited for early
payment, the actual annual draw is expected to approximate $780
million.
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In addition to assessment revenue and investment income, there are
other potential sources of funds for the SAIF as follows. First, the
FDIC has a $30 billion line of credit available from the Department of
the Treasury (Treasury) for deposit insurance purposes, on which no
draws have been made to date. FDI Act section 14(a). The SAIF would be
required to repay any amounts borrowed from the Treasury with revenues
from deposit insurance premiums. As a condition of borrowing, the FDIC
would be required to provide the Treasury with a repayment schedule
demonstrating that future premium revenue would be adequate to repay
any amount borrowed plus interest. FDI Act section 14(c).
Next, the RTCCA authorized the appropriation of up to $8 billion in
Treasury funds to pay for losses incurred by the SAIF during fiscal
years 1994 through 1998, to the extent of the availability of
appropriated funds. In addition, at any time before the end of the 2-
year period beginning on the date of the termination of the RTC, the
Treasury is to provide out of funds appropriated to the RTC but not
expended, such amounts as are needed by the SAIF and are not needed by
the RTC. To obtain funds from either of these sources, however, certain
certifications must be made to the Congress by the Chairman of the
FDIC. FDI Act sections 11(a)(6)(D), (E) and (J). Among these, the
Chairman must certify that the Board has determined that:
(1) SAIF members are unable to pay additional semiannual
assessments at the rates required to cover losses and to meet the
repayment schedule for any amount borrowed from the Treasury for
insurance purposes under the FDIC's line of credit without adversely
affecting the SAIF members' ability to raise capital or to maintain
the assessment base; and
(2) An increase in assessment rates for SAIF members to cover
losses or meet any repayment schedule could reasonably be expected
to result in greater losses to the Government.
It may require extremely grave conditions in the thrift industry in
order for the FDIC to certify that raising SAIF assessments would
result in increased losses to the Government. Moreover, these funds
cannot be used to capitalize the fund, that is, to provide an insurance
reserve, which was the original purpose of requiring a 1.25 reserve
ratio.
The RTC's resolution activities and the thrift industry's
substantial reduction of troubled assets in recent years have resulted
in a relatively sound industry as the SAIF assumed resolution
responsibility. However, with a balance of $3.1 billion, the SAIF does
not have a large cushion with which to absorb the costs of thrift
failures. The FDIC has significantly reduced its projections of failed-
thrift assets for the next two years, but the failure of a single large
institution or several sizeable institutions or an economic downturn
leading to higher than anticipated losses could render the fund
insolvent. The FDIC's loss projections for the SAIF are discussed in
more detail below.
C. Condition and Performance of SAIF-Member Institutions 5
\5\ Excluding one self-liquidating savings institution and RTC
conservatorships. The final RTC conservatorship was resolved during
the second quarter, prior to June 30.
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SAIF members earned $1.4 billion in the second quarter of 1995,
compared to $1.2 billion in the first quarter. Average returns on
assets (0.73 percent) and equity (9.23 percent) both increased from
first-quarter levels, but SAIF members' average returns remain well
below those of BIF members (1.14 percent ROA and 14.25 percent ROE).
Despite a slight rise in loss provisions (up 1 percent), asset quality
remains strong. Noncurrent loans and foreclosed real estate both
declined from first-quarter levels, reducing the ratio of troubled
assets to total assets from 1.18 percent to 1.12 percent. Reserve
coverage of noncurrent loans improved slightly, from 84 cents for each
dollar of noncurrent loans to 85 cents, and the equity-to-assets ratio
also rose, from 7.88 percent on March 31 to 8.02 percent on June 30.
SAIF members were slightly less reliant on deposits, which comprised
77.9 percent of their liabilities on June 30, down from 78.2 percent in
the first quarter.
As of June 30, 1995, there were 1,774 members of the SAIF,
including 1,696 savings institutions and 78 commercial banks. On this
date, there were 54 SAIF-member ``problem'' institutions with total
assets of $30 billion, compared to 73 institutions with $59 billion a
year earlier. Two SAIF-member thrifts, with total assets of $456
million, failed during the first half of 1995. No SAIF members have
failed since July 1, when the SAIF assumed resolution responsibility
from the RTC.
A discussion of the improving condition of the SAIF-member thrift
industry must be tempered by the higher risks the SAIF faces relative
to the BIF. The SAIF has fewer members among which to spread risk and
also has greater risks from geographic and product concentrations. The
eight largest holders of SAIF-insured deposits, with a combined 18.5
percent of such deposits, all operate predominantly in California. By
contrast, the eight largest holders of BIF-insured deposits operate in
five different states and hold 10 percent of all BIF-insured deposits.
The assets of SAIF members are heavily concentrated in residential real
estate, largely due to statutory requirements that must be met to
realize certain income tax benefits. While these investments entail
relatively little credit risk, SAIF members generally are more exposed
to interest-rate risk than BIF members.
D. Impact of a Premium Differential
The BIF achieved its statutorily required minimum reserve ratio of
1.25 percent during the second quarter of 1995, enabling the Board to
lower BIF assessment rates. On August 8, 1995, the Board adopted an
assessment rate schedule for the BIF ranging from 4 to 31 basis points,
compared to a range of 23 to 31 basis points under the earlier BIF
schedule and the current SAIF schedule. The Board has decided to
decrease BIF rates further, to a range of 0 to 27 basis points, based
on the continuing strength of the commercial banking industry and low
near-term loss expectations. A notice concerning the BIF assessment
rate schedule is published elsewhere in this Federal Register.
Under the current BIF and SAIF assessment rate schedules, average
SAIF rates are 23 basis points higher than average BIF rates. It is
likely that for the next seven years SAIF rates will remain
significantly higher than BIF rates, until the SAIF is capitalized.
After capitalization, SAIF rates will continue to be at least 11 basis
points higher until the FICO bonds mature in 2017 to 2019, assuming the
Board sets SAIF assessment rates to cover FICO's needs. If BIF members
pass along most of their assessment savings to their customers, SAIF
members may be forced to pay more for deposits or charge less for
[[Page 63409]]
loans to remain competitive. For SAIF members, this could result in
reduced earnings and an impaired ability to raise funds in the capital
markets. An analysis of a five-year time span suggests that any
increase in failures attributable solely to an average 23-basis point
differential is likely to be sufficiently small as to be manageable by
the SAIF under current interest-rate and asset-quality conditions. The
analysis also indicates that under harsher than assumed interest-rate
and asset-quality conditions, these economic factors would have a
significantly greater effect on SAIF-member failure rates than would a
23-basis point premium differential by itself. Among the weakest SAIF
members, the differential could be as high as 31 basis points, possibly
resulting in competitive pressures that cause additional failures.
However, analysis showed that, apart from institutions that have
already been identified by the FDIC's supervisory staff as likely
failures, the wider spread is likely to have a minimal impact in terms
of additional failures.
Nevertheless, the Board recognizes that a premium differential
between BIF- and SAIF-insured institutions is likely to increase
competitive pressures on thrifts and impede their ability to generate
capital both internally and externally.6 The Board recognizes that
an ongoing premium disparity of 23 basis points provides powerful
incentives to reduce SAIF-assessable deposits. This could be readily
accomplished in a number of ways, with implications both for the
ability of SAIF members to fund FICO interest payments, discussed in
the following section, and for the structural soundness of the SAIF. A
sharp decline in membership and the assessment base would also render
the SAIF less effective as a loss-spreading mechanism for insurance
purposes by exacerbating the concentration risks the fund already
faces.
\6\ See The Condition of the BIF and the SAIF and Related
Issues, Testimony of Ricki Helfer, Chairman, FDIC, before the
Subcommittee on Financial Institutions and Consumer Credit,
Committee on Banking and Financial Services, U.S. House of
Representatives, Attachment C entitled ``Analysis of Issues
Confronting the Savings Association Insurance Fund,'' March 23,
1995.
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E. The Ability of the SAIF to Fund FICO
Under law, SAIF assessments paid by BIF-member Oakar banks are
deposited in the SAIF and are not subject to FICO draws.7 Further,
SAIF assessments paid by any former savings association that (i) Has
converted from a savings association charter to a bank charter, and
(ii) remains a SAIF member in accordance with section 5(d)(2)(G) of the
FDI Act (12 U.S.C. 1815(d)(2)(G)) (a so-called ``Sasser'' bank), are
likewise not subject to assessment by FICO.8 On June 30, 1995,
BIF-member Oakar banks held 27.8 percent of the SAIF assessment base,
and SAIF-member Sasser banks held an additional 7.5 percent (see Table
3).
\7\ See Notice of FDIC General Counsel's Opinion No. 7, 60 FR
7055 (Feb. 6, 1995).
\8\ Id.
Table 3.--Percentage Distribution of the SAIF Assessment Base
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Not available to FICO
Available -----------------------------------------------
to FICO Oakar Sasser Subtotal Total
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12/89............................................... 99.8 0.2 0.0 0.2 100.0
12/90............................................... 95.8 3.9 0.3 4.2 100.0
12/91............................................... 89.9 8.7 1.5 10.1 100.0
12/92............................................... 85.9 10.3 3.8 14.1 100.0
12/93............................................... 74.7 19.4 5.9 25.3 100.0
12/94............................................... 67.3 25.4 7.3 32.7 100.0
6/95................................................ 64.7 27.8 7.5 35.3 100.0
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While the pace of Oakar acquisitions slowed as RTC resolution
activity wound down, Oakar acquisitions may continue and become an even
greater proportion of the SAIF assessment base.9 This has the
potential result of the SAIF having insufficient assessments to cover
the FICO obligation at current assessment levels. The rate of Sasser
conversions is difficult to predict and is partially dependent on state
laws, but any future conversions would also decrease the proportion of
SAIF assessment revenues available to FICO.
\9\ SAIF-assessable deposits held by BIF-member Oakar banks will
continue to grow at the same rate as the Oakar bank's overall
deposit base. Under section 5(d)(3) of the FDI Act, as amended by
the Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA), such deposits are adjusted annually by the acquiring
institution's overall deposit growth rate (excluding the effects of
mergers or acquisitions).
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In addition to the growth of the Oakar/Sasser portion of the SAIF
assessment base, the ability of the SAIF to fund FICO interest payments
will be adversely affected by the premium differential. Despite the
current moratorium on the transfer of deposits between funds, many
alternatives are available to SAIF-insured institutions seeking to
reduce their SAIF-assessable deposits.10 These institutions could
decrease their SAIF assessments by shifting their funding to nondeposit
liabilities, such as Federal Home Loan Bank advances and reverse
repurchase agreements; by securitizing assets; or by changing business
strategies, such as choosing to become a mortgage bank. Lastly, SAIF-
insured institutions and their parent companies could structure
affiliate relationships that facilitate the ``migration'' of deposits
from a SAIF-insured institution to a BIF-insured affiliate. At least a
dozen large organizations have already filed applications seeking to
establish affiliate relationships for this apparent purpose. Moreover,
more than 100 bank and thrift holding companies with both BIF- and
SAIF-member affiliates already have the means in place.
\10\ The Condition of the SAIF and Related Issues, Testimony of
Ricki Helfer, Chairman, FDIC, before the Committee on Banking,
Housing, and Urban Affairs, U.S. Senate, Attachment A entitled ``The
Immediacy of the Savings Association Insurance Fund Problem,'' July
28, 1995. The Condition of the SAIF and Related Issues, Testimony of
Ricki Helfer, Chairman, FDIC, before the Subcommittee on Financial
Institutions and Consumer Credit, Committee on Banking and Financial
Services, U.S. House of Representatives, Attachment A entitled ``The
Immediacy of the Savings Association Insurance Fund Problem,''
August 2, 1995.
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These strategies to reduce reliance on SAIF-insured deposits could
rapidly deplete the SAIF assessment base to the point where the
assessment base is not large enough to generate sufficient revenue to
cover the FICO obligation. This would occur with a 20 percent reduction
in the current SAIF assessment base, and it is not unreasonable to
expect a decline of that magnitude.
[[Page 63410]]
With two insurance funds providing essentially the same product at
significantly different prices, it must be expected that purchasers
will seek the lower price. Attempts to control this behavior through
legislation or regulation are likely to be ineffective and may only
result in companies finding less efficient means. A legislated reversal
of the Oakar/Sasser exemption would only defer a FICO shortfall because
the existence of a significant, prolonged premium differential is
likely to result in continued erosion of the SAIF assessment base.
F. Failed-Asset Estimates for the SAIF
Among the factors that affect the ability of the SAIF to capitalize
and to meet the FICO assessment are the number of thrift failures and
the dollar amount of failed assets going forward.
Estimates of failed-institution assets are made by the FDIC's
interdivisional Bank and Thrift Failure Working Group. In September
1995, the Working Group estimated failed thrift assets of $50 million
for the fourth quarter of 1995, $1 billion for 1996 and $4.5 billion
for the first nine months of 1997. For loss projections beyond
September 1997, the assumed failed-asset rate for the SAIF was 22 basis
points, or about $2 billion per year.
In the FDIC's projections, banks and thrifts were assumed to face
similar longer-run loss experience. The BIF's historical average
failed-asset rate from 1974 to 1994 was about 45 basis points. However,
a lower failure rate than the recent historical experience of the BIF
was assumed because the thrift industry is relatively sound following
the RTC's removal of failing institutions from the system, and the
health and performance of the remaining SAIF members has improved
markedly. As of June 30, 1995, 86 percent of all SAIF-member
institutions were in the best risk classification of the FDIC's risk-
related premium matrix.
One of the purposes of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) was to minimize losses to the
insurance funds. FDICIA increased regulatory oversight and emphasized
capital. Specifically, FDICIA requires the closing of failing
institutions prior to the full depletion of their capital, limits
riskier activities by institutions that are less than adequately
capitalized, and establishes audit standards and statutory time frames
for examinations. The law also requires the implementation of risk-
related assessments, which have provided effective incentives for
institutions to achieve and maintain the highest capital and
supervisory standards. In light of these provisions, the high levels of
thrift failures and insurance losses experienced over the past decade
must be tempered when considering the industry's near-term future
performance.
G. Projections for the SAIF
The FDIC currently projects that, under reasonably optimistic
assumptions, the SAIF is not likely to reach the statutorily mandated
DRR of 1.25 percent until 2002. Also, projections indicate the fund
will not encounter problems meeting the FICO obligation through 2004.
It is important to note that the baseline assumptions underlying
these projections foresee shrinkage in the non-Oakar portion of the
SAIF assessment base of 2 percent per year. If thrifts react
aggressively to the premium differential and reduce their SAIF-
assessable deposits, as discussed in Section IV.E, substantially
greater shrinkage may occur. Under higher rates of shrinkage, the SAIF
is likely to capitalize prior to 2002 because a lower level of insured
deposits would require a smaller fund to meet the DRR; however, FICO
interest payments could be jeopardized within a year or two.
As stated earlier, the Board has the authority to reduce SAIF
assessment rates to a minimum average of 18 basis points until January
1, 1998, at which time the average rate would rise to 23 basis points
until capitalization occurs. Projections made under this scenario (and
using the other baseline assumptions) indicate that the SAIF would
capitalize in 2005, or three years later than under the existing rate
schedule. Perhaps more importantly, reduction of the SAIF assessment
rate to 18 basis points is expected to cause a FICO shortfall in 1996.
IV. Suggested Legislative Initiatives
Congress is considering a number of legislative proposals to
resolve the difficulties facing the SAIF. Most of these proposals are
intended to bring about the capitalization of the SAIF early in 1996
and expand the assessment base for the FICO obligation. Pending
enactment of a comprehensive, legislative resolution to the
difficulties facing the SAIF, however, the FDIC must comply with
current statutory mandates.
As discussed above, the law provides that if the reserve ratio is
less than the DRR, the Board must set semiannual assessments for SAIF
members to increase the reserve ratio to the DRR. FDI Act section
7(b)(2)(A)(i). In setting SAIF assessments to achieve and maintain the
current DRR of 1.25 percent, the Board must consider the SAIF's
expected operating expenses, case resolution expenditures and income,
the effect of assessments on members' earnings and capital, and any
other factors that the Board may deem appropriate. FDI Act section
7(b)(2)(D). Given the uncertainty underlying the current legislative
process and the range of possible solutions, it would be inappropriate
to base the assessment rate for the first semiannual period of 1996 on
what Congress may or may not do. Should legislation affecting the SAIF
finally be enacted, the FDIC will promptly consider its impact and take
any action deemed necessary or appropriate regarding assessment rates
in accordance with the new legislative mandates.
V. Board Resolution
For the reasons outlined above, the Board has adopted a Resolution
to retain the existing assessment rate schedule applicable to SAIF-
member institutions for the first semiannual assessment period of 1996.
The text of the Resolution 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 the Board to set
semiannual assessments for Savings Association Insurance Fund
(``SAIF'') members to maintain the reserve ratio of SAIF at the
designated reserve ratio (``DRR'') or, if the reserve ratio is less
than the DRR, to increase the reserve ratio to the DRR; and
Whereas, the DRR for the SAIF is currently 1.25 percent of
estimated insured deposits, the minimum level permitted by the FDI Act;
and
Whereas, section 7(b) further requires that, in setting SAIF
assessments to achieve and maintain the reserve ratio of SAIF at the
DRR, 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, the Board has considered the factors specified in the FDI
Act, as reflected in the attached Federal Register notice document; and
Whereas, Part 327 of the rules and regulations of the FDIC, 12
C.F.R. Part 327, entitled ``Assessments,'' prescribes
[[Page 63411]]
the rules governing the assessment of institutions insured by the FDIC;
and
Whereas, paragraph 327.9(c)(1) of title 12 of the C.F.R. prescribes
the assessment rate schedule applicable to members insured by the SAIF;
and
Whereas, based upon its semiannual review of the SAIF
capitalization schedule and assessment rates for SAIF-insured
institutions, the Board finds that it is appropriate to retain the
existing assessment rate schedule applicable to members of the SAIF
with the result that the SAIF assessment rates to be paid by depository
institutions whose deposits are subject to assessment by the SAIF will
continue to range from 23 cents per $100 of assessable deposits to 31
cents per $100 of assessable deposits, depending on risk
classification.
Now, therefore, be it resolved, that the existing assessment rate
schedule applicable to members of the SAIF shall be retained for the
first semiannual assessment period of 1996 from January 1, 1996,
through June 30, 1996.
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 the 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.
[FR Doc. 95-28720 Filed 12-8-95; 8:45 am]
BILLING CODE 6714-01-P
