[Federal Register Volume 61, Number 248 (Tuesday, December 24, 1996)]
[Rules and Regulations]
[Pages 67687-67698]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32113]
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Rules and Regulations
Federal Register
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Federal Register / Vol. 61, No. 248 / Tuesday, December 24, 1996 /
Rules and Regulations
[[Page 67687]]
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 lowering the rates on assessments paid to the
Savings Association Insurance Fund (SAIF), and widening the spread of
the rates, in order to avoid collecting more than needed to maintain
the SAIF's capitalization at 1.25 percent of aggregate insured
deposits, and to improve the effectiveness of the risk-based assessment
system.
The final rule establishes a base assessment schedule for the SAIF
with rates ranging from 4 to 31 basis points, and an adjusted
assessment schedule that reduces these rates by 4 basis points. In
general, effective SAIF rates range from 0 to 27 basis points as of
October 1, 1996. The final rule also prescribes a special interim
schedule of rates ranging from 18 to 27 basis points for SAIF-member
savings associations for just the last quarter of 1996, reflecting the
fact that assessments paid to the Financing Corporation (FICO) are
included in the SAIF rates for these institutions during that interval.
Excess assessments collected under the prior assessment schedule will
be refunded or credited, with interest.
The final rule establishes a procedure for making limited
adjustments to the base assessment rates, both for the SAIF and for the
Bank Insurance Fund (BIF), by rulemaking without notice and comment.
The final rule clarifies and corrects certain provisions without
making substantive changes.
EFFECTIVE DATE: December 11, 1996.
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; James
McFadyen, Senior Financial Analyst, (202) 898-7027; Christine Blair,
Financial Economist, (202) 898-3936, Division of Research and
Statistics; Richard Osterman, Senior Counsel, (202) 898-3523; Jules
Bernard, Counsel, (202) 898-3731, Legal Division, Federal Deposit
Insurance Corporation, Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION:
I. The Final Rule
A. Background
Under the prior assessment schedule, SAIF rates have ranged from 23
basis points for institutions in the best assessment risk
classification to 31 basis points for institutions in the least
favorable one. This schedule has implemented the risk-based assessment
program required by section 7 of the Federal Deposit Insurance (FDI
Act), 12 U.S.C. 1817. The schedule has been designed to increase the
reserve ratio of the SAIF--the ratio of the SAIF's net worth to
aggregate SAIF-insured deposits, see id. 1817(l)(7)--to the designated
reserve ratio (DRR).\1\
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\1\ The DRR is a target ratio that has a fixed value for each
year. The value is either 1.25 percent or such higher percentage as
the Board determines to be justified for that year by circumstances
raising a significant risk of substantial future losses to the Fund.
Id. 1817(b)(2)(A)(iv). The Board has not altered the statutory DRR
for either fund.
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The SAIF has never received the full amount of the revenues that
the SAIF rates have generated, however. The SAIF did not receive any
revenues at all from its creation in 1989 through the end of 1992: all
such revenues were diverted to other needs. Revenues have begun to flow
into the SAIF after January 1, 1993, but still not at the full amounts.
Certain SAIF-assessable institutions--namely, SAIF-member savings
associations--have been required to pay assessments to the FICO in
order to enable the FICO to pay the interest on its bonds. The amounts
that these institutions have paid to the FICO have served to reduce the
amounts that the institutions have paid to the SAIF. At $793 million
per year, the FICO draw has been substantial. It has contributed to the
slow growth in the SAIF reserve ratio, which has only increased from
.28 percent to .47 percent during 1995.
Moreover, the assessment rates for the BIF were much lower than the
comparable rates for the SAIF, because the BIF's reserve ratio had
already reached the DRR. The disparity created incentives for
institutions to move deposits from SAIF-insured status to BIF-insured
status, and raised the question of whether a shrinking SAIF-assessable
deposit base could continue both to service the interest on FICO debt
and to capitalize the SAIF.
In response to these circumstances, Congress adopted the Deposit
Insurance Funds Act of 1996 (Funds Act), Public Law 104-208, sections
2701-2711, 110 Stat. 3009 et seq. (Sept. 30, 1996). The Funds Act
called for the FDIC to impose a one-time special assessment on SAIF-
assessable deposits to raise the SAIF's reserve ratio to the DRR as of
October 1, 1996. Id. section 2702. The FDIC carried out this mandate.
See 61 FR 53834 (Oct. 16, 1996). The Funds Act also ended the link
between the amounts assessed by the FICO and the amounts authorized to
be assessed by the SAIF, effective January 1, 1997.
B. Statutory Framework for Setting Assessment Rates
Section 7(b)(1) of the FDI Act, 12 U.S.C. 1817(b)(1), requires the
Board to establish a risk-based assessment system for all insured
institutions. Id. 1817(b)(1)(A).
The Board must set semiannual assessments for each institution
based on the following factors: (1) The probability that the
institution will cause a loss to the BIF or to the SAIF, (2) the likely
amount of the loss, and (3) the revenue needs of the appropriate fund.
Id. 1817(b)(1)(C).
Section 7(b)(2)(A) sets forth the requirement that the FDIC's
assessments must be designed to maintain each fund's reserve ratio at
the DRR or, if the fund's reserve ratio is below that level, to lift
the ratio to the DRR. Section 7(b)(2)(A)(i) states this requirement as
a mandate to the Board to set assessments that are sufficient to
achieve the appropriate goal. Id. 1817(b)(2)(A)(i). Section
7(b)(2)(A)(iii), as amended by section 2708(b) of the Funds Act, states
this requirement as a limitation on the amounts to be collected: The
Board may not collect more for a fund than is needed to fulfill the
appropriate goal. Id. 1817(b)(2)(A)(iii).
[[Page 67688]]
Whether a fund is capitalized at the DRR or otherwise, the Board
may set higher rates for institutions that exhibit weakness or are not
well capitalized. Id. 1817(b)(2)(A)(v).
In setting semiannual assessments for an insurance fund, the Board
must consider the following factors: (1) The fund's expected operating
expenses; (2) the fund's case resolution expenditures and income; (3)
the effect of assessments on the earnings and capital of fund members;
and (4) any other factors that the Board deems appropriate. Id.
1817(b)(2)(A)(ii).
Through the end of 1996, the FICO draw serves to reduce the amounts
that the FDIC assesses against SAIF-member savings associations. Id.
1441(f)(2) & 1817(b)(2)(D).\2\ Thereafter, the FICO assessments are
independent of and in addition to those of the FDIC. Funds Act section
2703 (a) and (c). But the FICO still must assess institutions in the
same manner as the FDIC does, and the FDIC still must approve the
FICO's assessments. 12 U.S.C. 1441(f)(2).
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\2\ Section 21(f)(2) of the Federal Home Loan Bank Act, 12
U.S.C. 1441(f)(2), provides that amounts assessed by the FICO reduce
the amounts authorized to be assessed by the FDIC for the SAIF.
Section 7(b)(2)(D) of the FDI Act, id. 1817(b)(2)(D), states a
parallel requirement. Section 2703 of the Funds Act repeals both
provisions. Section 2703(a) repeals section 21(f)(2); section
2703(b) repeals section 7(b)(2)(B).
The repeals are not simultaneous--at least, not on their face.
Section 2703(c)(1) sets an effective date for section 2703(a) of
January 1, 1997. Section 2703(c) does not mention section 2703(b).
Accordingly, section 2703(b) is--apparently--effective upon passage
of the Funds Act. If so, section 7(b)(2)(D) has been repealed since
September 30, 1996. A repeal of section 7(b)(2)(D) would have no
practical consequence, as section 21(f)(2) remains in effect through
the end of 1996.
The FDIC takes the view, however, that section 2703(c)(1)
contains a drafting error in this regard. Section 2703(c)(1) says it
applies to section 2703(a) and to section 2703(c)--that is, to
itself. The FDIC considers that the self-reference makes no sense,
and that a reference to subsection (b) was intended. Accordingly,
the FDIC interprets the Funds Act to repeal section 7(b)(2)(D) on
January 1, 1997, in concert with the repeal of the Federal Home Loan
Bank Act's parallel provisions.
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Finally, through the end of 1998, the assessment rate for a SAIF
member may not be less than the assessment rate for a BIF member that
poses a comparable risk to the deposit insurance fund. Id.
1817(b)(2)(E).
C. The Base and Adjusted Assessment Schedules for the SAIF
1. Overview
The SAIF's reserve ratio has been well below the DRR. The SAIF
rates have been designed to increase the SAIF's capitalization to the
DRR. In accordance with the Funds Act, however, the FDIC has
capitalized the SAIF at the DRR as of October 1, 1996. The FDIC is
therefore lowering the SAIF rates as of that date. See id.
1817(b)(2)(A)(iii) and (v).
The FDIC is retaining the 9-cell framework for SAIF assessment
rates, but is replacing the prior set of rates with a new and lower
rate-schedule, entitled the SAIF Base Assessment Schedule. The SAIF
Base Assessment Schedule sets forth a permanent set of rates that will
remain in place until changed through notice-and-comment rulemaking
proceedings. The SAIF Base Assessment Schedule is adopted as of October
1, 1996. The SAIF Base Assessment Schedule is as follows:
SAIF Base Assessment Schedule
------------------------------------------------------------------------
Supervisory subgroup
Capital group -----------------------------
A B C
------------------------------------------------------------------------
1......................................... 4 7 21
2......................................... 7 14 28
3......................................... 14 28 31
------------------------------------------------------------------------
The FDIC is also making an immediate adjustment to the rates set
forth in the SAIF Base Assessment Schedule. The adjustment, like the
SAIF Base Assessment Schedule, is adopted as of October 1, 1996. The
adjusted rates are the ones that are effective.
The adjustment is two-fold:
--The FDIC is making a general adjustment to the SAIF Base Assessment
Schedule that lowers the rates therein by 4 basis points for all
institutions other than SAIF-member savings associations. This
adjustment is temporary, but indefinite: the FDIC expects to review it
every semiannual period, but will not necessarily modify it, nor will
the adjustment automatically terminate on its own.
--The FDIC is making a special adjustment to the SAIF Base Assessment
Schedule that replaces the rates therein with a special interim set of
rates just for SAIF-member savings associations, but only for the
fourth calendar quarter of 1996. Thereafter these institutions pay the
same SAIF rates as the others.
The SAIF Adjusted Assessment Schedule sets forth both sets of
adjusted rates. The rates on the right in each risk classification
category apply to SAIF-member savings associations during the last
calendar quarter of 1996. The rates on the left in each risk
classification category apply to all other SAIF-assessable institutions
during that quarter, and to all SAIF-assessable institutions on and
after January 1, 1997:
SAIF Adjusted Assessment Schedule
------------------------------------------------------------------------
------------------------------------------------------------------------
(5)Supervisory subgroup
-------------------------
Capital group
(1)A
(1)B
(1)C
------------------------------------------------------------------------
1............................................. 0 18 3 21 17 24
2............................................. 3 21 10 24 24 25
3............................................. 10 24 24 25 27 27
------------------------------------------------------------------------
The rates on the left in each risk classification category--those
that represent the SAIF base rates as modified by the 4-basis- point
adjustment--may be amended from time to time within certain limits by
rulemaking without notice-and-comment procedures.
The FDIC has published these rates as a proposed rule, 61 FR 53867
(Oct. 16, 1996), and has received comments from 13 entities and
organizations. Comments have come from three holding-company
organizations (including their affiliates), six savings banks, and four
trade groups. In addition, FDIC staff has conducted a briefing for
members of the Savings Association Insurance Fund Industry Advisory
Committee.
2. The SAIF Base Assessment Schedule
a. The Rate-Spread. Risk-based assessment rates have two purposes:
To reflect the risk posed to each insurance fund by individual
institutions, and to provide institutions with proper incentives to
control risk-taking. The FDIC believes that a 27-basis-point rate-
spread serves these purposes.
The FDIC has considered the comparative merits of a rate-spread of
8 basis points. In December, 1992, when the BIF and SAIF were both
below the DRR, and assessment revenues were designed to build up the
capitalization of both funds, the FDIC proposed to establish risk-based
premium matrices of 23 to 31 basis points for each fund. The Board
asked for comment on whether the proposed assessment rate spread of 8
basis points should be widened. See 57 FR 62502 (Dec. 31, 1992).
Ninety-six commenters addressed this issue; 75 of them favored a wider
rate spread. In the final rule, the Board expressed its conviction that
widening the rate spread was desirable in principle, but chose to
implement the 8-basis point rate spread. The Board expressed concern
that widening the spread while keeping assessment revenue constant
might unduly burden the weaker institutions that would be subject to
greatly increased rates. See 58 FR 34357, 34361 (June 25, 1993).
Bankers, banking scholars and regulators have all criticized the 8-
basis point rate-spread as being unduly
[[Page 67689]]
narrow. There is considerable empirical support for this criticism.
Using a variety of methodologies and different sample periods, the vast
majority of relevant studies of deposit-insurance pricing have produced
results that are consistent with the conclusion that the rate-spread
between healthy and troubled institutions should exceed 8 basis points.
The precise estimates vary; but there is a clear consensus from this
evidence that the rate-spread should be widened.3
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3 The FDIC's research also suggests that a substantially
larger spread is necessary to establish an ``actuarially fair''
assessment rate system. See Gary S. Fissel, ``Risk Measurement,
Actuarially Fair Deposit Insurance Premiums and the FDIC's Risk-
Related Premium System'', FDIC Banking Review 16-27, Table 5, Panel
B (1994).
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There also is a concern that rate differences between adjacent
cells in the current matrix do not provide adequate incentives for
institutions to improve their condition. Larger differences are
consistent with historical variations in failure rates across cells of
the matrix, as seen in the following table:
Table 1.--Historical Thrift Failure Rates by Cell
[1988-1993*]
------------------------------------------------------------------------
Supervisory risk subgroup Not
--------------------------------- rated
Tangible capital category (as of
A B C 12/31/
87)
------------------------------------------------------------------------
1. Well:
Thrifts.................. 1,189.... 172...... 21....... 25
Failures................. 43....... 28....... 9........ 5
Failure rate............. 2.9%..... 16.3%.... 42.9%.... 20.0%
2. Adequate:
Thrifts.................. 215...... 73....... 14....... 1
Failures................. 26....... 20....... 7........ 0
Failure rate............. 12.1%.... 27.4%.... 50.0%.... 0.0%
3. Under:
Thrifts.................. 460...... 389...... 541...... 37
Failures................. 134...... 205...... 447...... 35
Failure rate............. 29.1%.... 52.7%.... 82.6%.... 94.6%
------------------------------------------------------------------------
Average failure rate: 30.6%.
* Percentage of thrifts in cell at year-end 1987 that failed during 1988-
1993. These figures reflect different examination policies and
procedures than exist today. In particular, examinations may have been
relatively infrequent for some institutions during this period.
The precise magnitude of the proper rate differences is open to
debate, given the sensitivity of estimates to small changes in
assumptions and to the selection of the sample periods. But the
evidence indicates that larger rate differences between adjacent cells
of the risk-based assessment matrix are warranted.
Because of concern for the impact of a wider spread on weaker SAIF-
insured institutions, the FDIC has performed analyses on increasing the
spread from 8 to 27 basis points and has found that, apart from
institutions already recognized as likely failures, the wider spread is
expected to have a minimal impact in terms of additional failures. The
FDIC is therefore adopting a 27-basis point spread for members of the
SAIF.
Two trade groups express support for the rate-spread in the SAIF
Base Assessment Schedule, but without providing any extensive analysis.
No commenter opposes it.
b. The Rates. The FDIC recognizes that, in setting deposit
insurance premiums, the risk of adverse events that may occur beyond
the immediate semiannual assessment period must be considered, in order
to spread risk over time and to moderate the cyclical effects of
insurance losses on insured institutions. A strict ``pay-as-you- go''
insurance system--one that attempts only to balance revenue and expense
over the current assessment period--can result in rate volatility that
would adversely impact weak institutions in periods of economic stress,
increasing the risk of loss to the fund. Historical evidence shows that
in peak loss years, pay-as- you-go rates would substantially exceed the
rates required to balance revenues and expenses over the longer term.
The FDIC believes that, for the purpose of estimating future losses
for the thrift industry, the industry's loss experience in the 1980s is
not especially informative. The insurance losses associated with
thrifts far exceeded insurance losses from banks during this period
both in dollars and, to an even greater extent, as a percentage of the
size of the industry. The losses prompted Congress to adopt a number of
legislative reforms that have the effect of placing thrifts in a
regulatory context that resembles that of the banks much more closely.
The FDIC has replaced the Federal Savings and Loan Insurance
Corporation (FSLIC) as insurer for the thrift industry. The Office of
Thrift Supervision, an office within the Department of the Treasury,
has replaced the Federal Home Loan Bank Board as the supervisor for
thrift institutions. Thrifts are now subject to stronger capital
standards, which are set at the same levels as required of banks.
Thrifts, like banks, now pay assessments based on risk. The losses
generated in thrift failures are limited by the same safeguards as
those that apply to bank failures--notably, the early-closure rule of
the prompt corrective action statute, the cross-guarantees among
affiliates, the least-cost resolution requirement, and the depositor-
preference statute. In view of these changes in the regulatory and
insurance environment for thrifts, the failure experience of commercial
banks is likely to be more illuminating for the purpose of estimating
future thrift losses than is the experience of the thrifts themselves.
The FDIC has recently analyzed its historical loss experience with
banks, and has considered the likely effect of recently enacted
statutory provisions that are expected to moderate deposit insurance
losses going forward. The FDIC has concluded that average assessment
rates of 4 to 5 basis points
[[Page 67690]]
are appropriate to achieve a long-run balance between BIF revenues and
expenses. See 60 FR 42680 (Aug. 16, 1995). These rates reflect the
experience of the FDIC during the period from 1950 to 1980. From 1980
through 1994, rates in the range of 10 to 13 basis points would have
been required to balance revenues and expenses: but for banks as well
as thrifts, failures during this period were attributable to
extraordinary conditions brought on by volatile interest rates,
ineffective supervision and real estate values that first soared and
then collapsed. While regulators still may not have the ability to
foresee a real estate collapse or other severe economic adversities,
the statutory and regulatory safeguards now in place are likely to
limit losses to the funds under such extreme conditions. Accordingly,
average assessment rates in the range of 4 to 5 basis points are
thought to be adequate to balance long-range revenues and expenses for
the BIF.
The FDIC considers that this range is an appropriate benchmark for
SAIF rates as well. From 1950 to 1980, the rates paid by FSLIC-insured
thrifts were about twice the effective rate paid by FDIC-insured banks,
reflecting higher annual rates of deposit growth for thrifts and a
somewhat higher loss experience for the FSLIC.4 But differences
between the banking and thrift industries are less significant today
than they were in the period from 1950 to 1980; thrifts generally are
better protected than they were from the effects of interest-rate
swings; regulatory and accounting standards are more exacting; and
deposits have generally declined since 1989. The FDIC recognizes that
structural weaknesses of the SAIF, including a relatively small
membership base and geographic and product concentrations, suggest that
the appropriate SAIF assessment rate to achieve a long-range balance
may be higher than the BIF rate. Lacking a compelling empirical basis
for determining different assessment structures for the two industries,
however, the FDIC currently expects that average assessment rates of 4
to 5 basis points will likely result in a long-range balance of
revenues and expenses for the SAIF as well as for the BIF.
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4 See James R. Barth, John J. Feid, Gabriel Riedel and M.
Hampton Tunis, Alternative Federal Deposit Insurance Schemes, Office
of Policy and Economic Research, Federal Home Loan Bank Board
(January 1989), at 12-20.
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The vast majority of institutions qualify for the highest
assessment risk classification, and pay assessments at the most
favorable rate; conversely, the most favorable rate generates the vast
majority of the revenues that the insurance funds receive. For the
SAIF's average assessment rates to yield 4 to 5 basis points, the most
favorable rate for the SAIF Base Assessment Schedule is set at 4 basis
points; the other rates in the schedule are set in accordance with the
rate-spreads described above.
Until January 1, 1999, SAIF rates may not be lower than the BIF
rates for institutions that pose comparable risks to their funds. 12
U.S.C. 1817(b)(2)(E)(iii). Accordingly, the rates in the SAIF Base
Assessment Schedule are no lower than the permanent (or base) BIF rates
set forth in Rate Schedule 2.5 See id. 327.9(a).
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5 The final rule redesignates Rate Schedule 2 as the BIF
Base Assessment Schedule.
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The SAIF Base Assessment Schedule (see I.C.1. above) applies to all
institutions as of October 1, 1996. As discussed below, however, the
rates set forth in the SAIF Base Assessment Schedule are not the rates
that are actually effective as of that date.
Two trade groups and one savings bank express support for the rates
in the SAIF Base Assessment Schedule. No commenter opposes the rates.
3. The SAIF Adjusted Assessment Schedule
a. The General 4-Basis-Point Adjustment
The Board is making a general adjustment to the rates in the SAIF
Base Assessment Schedule that lowers each such rate by 4 basis points.
The adjusted rates range from 0 to 27 basis points, which yield an
average rate of 0.6 basis points (annualized) and an estimated reserve
ratio of 1.27 percent at midyear 1997, under moderate conditions.6
The adjusted rates are effective as of October 1, 1996, for all
institutions other than SAIF-member savings associations. On January 1,
1997, the adjusted rates are effective for all institutions.
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6 While the appropriate long-term average assessment
rates are 4 to 5 basis points (as discussed above), the analysis
summarized in Table 2 indicates that, under current conditions,
these rates would likely result in a reserve ratio well in excess of
1.25 percent. With no significant receivership activity and a very
liquid fund, investment earnings presently are more than adequate to
maintain the DRR.
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In setting these rates, the FDIC has considered the SAIF's expected
operating expenses and revenues, its case resolution expenditures and
income, and the effect of the new rates on the earnings and capital of
SAIF members. See id. 1817(b)(2)(A)(ii).
Expected operating expenses and revenues of the SAIF. Table 2 shows
the projected SAIF reserve ratio on June 30, 1997, under pessimistic,
optimistic and moderate conditions. The pessimistic conditions combine
relatively high loss provisions, high deposit growth and low investment
earnings; the optimistic conditions combine zero loss provisions,
negative deposit growth and high investment earnings.
Table 2 indicates that, under pessimistic conditions, an assessment
rate range of 4 to 31 basis points falls just short of maintaining the
DRR of 1.25 percent. But under moderate conditions, which can be viewed
as more likely than either the pessimistic or optimistic scenarios,
rates of 0 to 27 basis points result in a SAIF reserve ratio of 1.27
percent:
Table 2.--SAIF Assessment Rates and Reserve Ratio Under Varying
Conditions
------------------------------------------------------------------------
Conditions Pessimistic Optimistic Moderate
------------------------------------------------------------------------
Deposit growth rate (%).............. 4.0 -2.0 2.0
Loss provisions ($M)................. 270 0 50
Investment rate (%).................. 5.2 6.2 5.7
------------------------------------------------------------------------
------------------------------------------------------------------------
Assessment rates (bp) Estimated reserve ratio (%) June
-------------------------------------- 30, 1997
----------------------------------
Range Average Pessimistic Optimistic Moderate
------------------------------------------------------------------------
4 to 31.................... 4.7 1.24 1.36 1.30
2 to 29.................... 2.7 1.23 1.34 1.28
0 to 27.................... 0.7 1.21 1.33 1.27
------------------------------------------------------------------------
Following is a discussion of each of the main variables affecting
the estimated reserve ratio:
Yield on investments: After having been capitalized on October 1,
1996, the SAIF's balance stood at approximately $8.6 billion. The SAIF
is very liquid, not having had any significant receivership activity.
Although FDIC policy limits the proportion of investments with
maturities beyond five years, a fully capitalized SAIF will have
significant investment earnings. Short-term interest rates have been
generally stable in 1996, and the FDIC's recent investment yield of 5.7
percent may be a reasonable approximation for the expected yield
through the first half of 1997. The investment rates utilized in Table
2 range from 5.2 percent to 6.2 percent, or 50 basis points on either
side of the recent experience. Estimated annual operating expenses are
assumed to be $40 million, the same as in 1995.7
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\7\ The FDIC presently is addressing the allocation of operating
expenses between the BIF and the SAIF. A likely outcome is that the
proportion of expenses borne by the SAIF will increase.
---------------------------------------------------------------------------
[[Page 67691]]
Growth of SAIF-insured deposits: For the 12 months ending December
31, 1995, SAIF-insured deposits increased 2.5 percent, reversing a
long-term decline that began with the inception of the SAIF in 1989.
But insured deposit growth slowed in the first six months of 1996 to an
annual rate of 0.3 percent. The FDIC regards an annual growth rate of
2.5 percent as near the high end of the possible range of deposit
growth for the near future. Accordingly, the FDIC's analysis uses a
range of insured deposit growth from -2 percent to 4 percent
(annualized).
Provisions for loss: The FDIC has already established a reserve for
losses within the SAIF, and has accordingly reduced SAIF's reported net
worth by the amount of the reserve.8 This reserve represents the
estimated loss for institutions that, absent some favorable event, are
likely to fail within 18 months. That projection is subject to
considerable uncertainty.
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8 The SAIF loss reserve was $114 million on June 30,
1996.
---------------------------------------------------------------------------
The optimistic scenario assumes the existing reserve is adequate.
Table 2 shows an additional loss provision of zero under this scenario.
The pessimistic scenario has an additional loss provision of $270
million. This scenario represents the long-range failure rate for SAIF-
insured institutions, which is estimated to be 22 basis points per year
of total assets (or slightly more than $2 billion in failed assets per
year). The pessimistic scenario is not a worst-case scenario. But given
the currently favorable economic conditions and the relative health of
the thrift industry, deterioration in the industry would have to be
sudden and sharp for the SAIF to require additional loss reserves at
the long-term rate.
The moderate scenario reflects the fact that the FDIC has
identified a few SAIF members as possible failures by year-end 1997 but
has not yet established loss reserves for them. If loss reserves were
established for these thrifts in 1996, the cost to the SAIF would be
about $50 million.
The SAIF's case resolution expenditures and income. As noted above,
the SAIF has no significant receivership activity. Accordingly, case
resolution expenditures and income are negligible.
SAIF members' earnings and capital. The final rule reduces
assessment rates for all institutions that pay assessments to the SAIF,
and therefore has a beneficial impact on all such institutions'
earnings and capital.
Thrifts had record earnings and a return on assets above one
percent in each of the first two quarters of 1996. Nearly 98 percent of
all SAIF members are well capitalized. The assets of ``problem'' SAIF
members fell to $7 billion as of June 30, down from over $200 billion
at the end of 1991. Only one SAIF member has failed in 1996.
The commercial banking industry, which owns one-fourth of the SAIF
assessment base, is even stronger. Based on net income for the first
half of 1996, the banking industry is expected to have record annual
earnings for the fifth consecutive year.
Three commenters--2 trade groups and a savings bank--express
support for the 4-basis-point adjustment to the rates in the SAIF Base
Assessment Schedule. No commenter opposes the adjusted rates.
b. The Interim Schedule for SAIF-Member Savings Associations
The FDIC is prescribing a special interim rate-schedule for SAIF-
member savings associations for the final quarter of 1996. The interim
schedule generally retains the relationships among the assessment-risk
categories in the prior SAIF assessment schedule, but reduces each rate
in the schedule by 5 basis points. There is one exception: the rate for
institutions in the highest-risk category is only reduced by 4 basis
points, in order to comply with section 7(b)(2)(E) of the FDI Act.
These interim rates do not generate revenue for the SAIF that is in
excess of the amount needed to maintain the SAIF's reserve ratio at the
DRR. Accordingly, the interim rates do not violate the prohibition
stated in section 7(b)(2)(A)(iii) of the FDI Act. Nor are the interim
rates set so high as to impose an unreasonable burden on the SAIF-
member savings associations.
The special interim rate-schedule is needed because SAIF-member
savings associations are subject to a special requirement: they (and
only they) must pay FICO assessments for the final quarter of 1996. 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).9 This special requirement prevents the FDIC from
establishing a single rate-schedule for all SAIF-assessable
institutions. If the SAIF-member savings associations were to pay at
the general rates (as adjusted), the FICO draw would absorb all the
amounts assessed on them, and the SAIF would not be compensated for the
risks they pose. On the other hand, if all institutions were to pay
assessments at the special interim rates, the SAIF would receive
revenues far in excess of the amounts needed to preserve the SAIF's
reserve ratio at the DRR.
---------------------------------------------------------------------------
\9\ A prior version of the Funds Act, which was contained in the
``Balanced Budget Act of 1995'' (H.R. 2491) but vetoed by the
President on December 6, 1995, would have required pro rata sharing
of the FICO payments by savings associations and banks essentially
immediately, as that provision would have been effective January 1,
1996. Later on, however, Congress altered the effective date for the
FICO sharing provision to apply to semiannual periods beginning
after December 31, 1996. By implication, banks do not share in the
FICO assessment payments prior to that date.
---------------------------------------------------------------------------
Eleven commenters--five savings banks, two holding companies, and
all four trade groups--expressly consider the interim schedule. One
trade group endorses it. The other 10 commenters oppose it.
Five savings banks and two trade groups object to the interim
schedule's effects. Four savings banks and both trade groups contend
that the interim schedule is improper because the institutions that are
subject to it must pay different (and higher) rates than other
comparable institutions must pay. Two savings banks assert that, having
paid a special assessment to capitalize the SAIF as of October 1, 1996,
they should not have to sustain the burden of paying a FICO assessment
for the fourth quarter of 1996. While the FDIC recognizes that the
special interim rate-schedule has a disparate impact, the FDIC does not
agree that the interim rate-schedule is therefore discriminatory or
otherwise improper. The disparate impact merely reflects the different
statutory obligations that these institutions have with respect to the
FICO.
In essence, the FDIC's reduced rate-schedules--both for SAIF-member
savings associations and for other institutions--serve to return the
amounts that institutions have paid to the SAIF for the fourth quarter
of 1996. In the case of SAIF-member savings associations, however,
those amounts have been reduced by the FICO draw. The FICO draw is not
subject to refund: accordingly, SAIF-member savings associations
experience less of a reduction in rates than do other institutions.
Seven commenters--three trade organizations, two holding companies
and two savings banks--expressly challenge the FDIC's authority to
adopt the special interim rate-schedule. They contend that, when an
insurance fund's reserve ratio is at the DRR, the FDIC cannot impose
assessments with respect
[[Page 67692]]
to the fund. They recognize, as they must, that any sums assessed by
the FICO against SAIF-member savings associations will serve to reduce
the amounts that the SAIF is authorized to assess against those
institutions during the final quarter of 1996. But they assert that
SAIF is not authorized to impose any assessments for that quarter, and
that accordingly there are no revenues to be directed to the FICO.
The FDIC does not agree. The FDIC considers that section
7(b)(2)(A)(ii)(IV) of the FDI Act, 12 U.S.C. 1817(b)(2)(A)(ii)(IV),
provides ample authority for the special interim rate-schedule. Section
7(b)(2)(A)(ii)(IV) says that, when setting assessments for the purpose
of maintaining a fund's reserve ratio at the DRR, the Board may--
indeed, must--consider ``any other factors'' that it may deem
appropriate. The FICO draw is just such a factor. SAIF-member savings
associations must pay assessments at rates that are high enough to
cover the full amount of the FICO draw: otherwise the rates would not
generate any revenues for the SAIF at all. Moreover, every rate--even
the lowest rate--must be high enough to cover each SAIF-member savings
association's pro-rata share of the FICO draw. Otherwise institutions
in less-favorable risk classifications would bear a disproportionately
large share of the FICO draw. One consequence would be to deform the
structure of the assessment-rate schedule, because the spread between
the most-favorable rate and the other rates would be increased. Another
consequence would be to impose an extra measure of risk on the SAIF,
because the weaker institutions would have to sustain the burden of
paying higher rates. The FDIC considers that these consequences would
adversely affect its risk-based assessment program. More basically, the
FDIC considers that section 7(b)(2)(A)(ii)(IV) gives the FDIC the
necessary authority to consider and deal with these effects in
constructing the SAIF rate-schedule.
The FDIC further considers that the legal interpretation espoused
by the opponents contravenes the clear intent of Congress. The Federal
Home Loan Bank Act makes it clear that the FDIC's assessment procedures
govern the FICO's assessments. Id. 1441(f)(2). Both the Federal Home
Loan Bank Act and the FDI Act also make it clear that the FICO is to
receive (as a general matter) the full amount it needs from the
revenues generated by means of those procedures, while the SAIF is to
receive the residual amount of the revenues after the FICO draw has
been subtracted from them. See id. and 1817(b)(2)(D). The clear
expectation is that the FDIC will assess--and has full authority to
assess--amounts that are sufficient to cover the FICO draw.
By contrast, the interpretation offered by the opponents leads to a
result that is, in the FDIC's view, untenable: namely, that Congress
intended to fund the FICO only intermittently. The FDI Act has, since
1989, instructed the FDIC to set semiannual assessments ``to maintain
the reserve ratio of a fund at the designated reserve ratio''. Under
the opponents' view, that language prevents the FDIC from setting rates
sufficient to cover the FICO draw--and effectively cuts off the FICO's
power to assess SAIF-member savings associations--whenever the SAIF is
capitalized at the DRR. At the same time, however, the SAIF's reserve
ratio can be expected to fluctuate: indeed, Congress has expressly
provided for that possibility. The opponents' view thus implies a stop-
and-go funding plan for the FICO, in which the FICO's access to SAIF
assessments depends on the current status of the SAIF's capitalization.
The FDIC declines to adopt this view.
More generally, the FDIC considers that the Funds Act expresses
Congress' intention to revise the existing relationship between the
FICO and the SAIF, but not until the start of 1997. See Funds Act
section 2703(a). The FDIC considers that Congress has intended to
preserve the existing relationship through the end of 1996.
As a final note, the opponents say their view is not unreasonable
because, if the FICO has no access to assessments paid by SAIF-member
savings associations (or to any other source of funding) during the
final quarter of 1996, the exit fees now held in escrow by the Treasury
Department are available to pay the interest on the FICO's bonds. The
FDIC does not agree that the escrowed funds are available for this
purpose. These funds are to be paid to the FICO only if the Secretary
of the Treasury determines that the FICO has exhausted all other
sources of funding for its interest payments, and orders that the fees
be so paid. Id. 1815(d)(2)(E)(i)(II); see 12 CFR 312.5(d) and 312.8(f).
The Secretary has not made such a determination or issued such an
order.
Moreover, it is apparent that the FICO has no current need for
these funds. The FICO has collected its assessments for the second
semiannual period of 1996, and is entitled to retain them. The SAIF-
rate reductions merely serve the purpose of returning to each
institution the amount that the FDIC has collected from that
institution for the SAIF in excess of the amount needed to maintain the
SAIF at the DRR during the final quarter of 1996, while preserving
appropriate risk-based rates for all such institutions. Seen from this
standpoint, the SAIF-rate reductions have no effect on the FICO
assessments or on the FICO's financial condition.
Conversely, the escrowed exit fees may not be released to the SAIF
until the FDIC and the Secretary of the Treasury determine that it is
not necessary to reserve the funds for the payment of interest on the
FICO bonds. See 12 CFR 312.5(e) and 312.8(g). No such determination has
been made. On the contrary, the FDIC considers that the exit-fee
reserve serves to protect against the possibility of an interim short-
fall during the period in which the FICO's assessment procedures are
converted from those currently in effect to those prescribed for 1997
and thereafter by the Funds Act. Accordingly, the funds in the exit-fee
reserve are required for other purposes: they cannot replace the FICO
assessments due from SAIF-member savings associations for the final
quarter of 1996.
D. The BIF Assessment Schedules
The final rule publishes the rates that currently apply to BIF
members without change, except insofar as changes have been made by the
Funds Act. The final rule does not make any change of substance to the
FDIC's assessment regulation with respect to BIF rates.
1. The BIF Base Assessment Schedule
The FDIC's assessment regulation has presented the base rates for
the BIF-assessable institutions in Rate Schedule 2. The final rule
retains these base rates, and redesignates them as the BIF Base
Assessment Schedule. The BIF Base Assessment Schedule is as follows:
BIF Base Assessment Schedule
------------------------------------------------------------------------
Supervisory subgroup
Capital group -----------------------------
A B C
------------------------------------------------------------------------
1......................................... 4 7 21
2......................................... 7 14 28
3......................................... 14 28 31
------------------------------------------------------------------------
2. The BIF Adjusted Assessment Schedule
In addition, the final rule sets forth the effective BIF rates for
the second semiannual period of 1996 and the first semiannual period of
1997. These rates have been prescribed by the Board in resolutions
dated May 14 and November 26, 1996, which were issued pursuant to the
procedures in effect prior to the adoption of the final rule. See 61 FR
26078 (May 24, 1996) and id. 64609
[[Page 67693]]
(Dec. 6, 1996). The final rule presents the adjusted rates in the BIF
Adjusted Assessment Schedule, as follows:
BIF Adjusted Assessment Schedule
------------------------------------------------------------------------
Supervisory subgroup
Capital group -----------------------------
A B C
------------------------------------------------------------------------
1......................................... 0 3 17
2......................................... 3 10 24
3......................................... 10 24 27
------------------------------------------------------------------------
These adjusted rates will terminate at the end of June, 1997. The
final rule indicates that, upon termination of the adjusted rates, the
rates in the BIF Base Assessment Schedule will apply to BIF members and
other BIF-assessable institutions. The Board may adjust the rates in
the BIF Base Assessment Schedule pursuant to the procedures herein
adopted, however (see I.E. below).
The Funds Act has eliminated the minimum assessment required by
statute. Funds Act section 2708(b). The FDIC's regulations have not
stated that requirement, and the FDIC is not now retaining it.
Accordingly, neither the BIF Base Assessment Schedule nor the adjusted
rate-schedule refers to minimum assessments.
E. Procedure for Adjusting the Base Assessment Schedules
1. In General
Section 327.9(b) sets forth a procedure under which the Board may
increase or decrease the BIF Base Assessment Schedule without engaging
in separate notice-and-comment rulemaking proceedings for each
adjustment. 12 CFR 327.9(b).
The allowable adjustments are subject to strict limits. No
adjustment may, when aggregated with prior adjustments, cause the
adjusted BIF rates to deviate ``over time'' by more than 5 basis points
from those set forth in Rate Schedule 2, which is the permanent or base
rate-schedule for the BIF. An adjustment may not result in a negative
assessment rate. No one adjustment may constitute an increase or
decrease of more than 5 basis points. See id. 327.9(b)(1).
The Board is modifying and clarifying this process somewhat, and
extending it to SAIF rates as well. The final rule does not change the
limits on allowable adjustments, but clarifies the following two
points.
First, the Board may not, without notice-and-comment rulemaking,
establish an adjusted assessment schedule for a fund in which the
adjusted rates differ by more than 5 basis points at any time from the
base assessment schedule for that fund. For example, if the rate for 1A
SAIF members in the SAIF Base Assessment Schedule were 4 basis points,
the adjusted rate for 1A SAIF members may never rise above 9 basis
points without a new notice-and-comment rulemaking proceeding.
Second, the Board may not reduce the rates in either base
assessment schedule any more than those rates have already been
lowered, because in that event the lowest rate in the schedule would be
less than zero. The final rule makes it clear that zero serves as a
lower bound on the most favorable rate, and prevents the other rates
from being adjusted by the full 5 basis points.
2. Procedure
The final rule alters the formal mechanism by which the Board makes
adjustments to the base assessment schedules.
The prior regulation called for the Board to adopt the semiannual
assessment schedule and any adjustment thereto by means of a
resolution, a procedure that does not require public notice or comment.
12 CFR 327.9(b)(3). Under the final rule, the Board adopts the new
assessment schedule pursuant to a rulemaking proceeding, but still
without public notice and comment.
Consistent with the current rule, the final rule provides that an
adjustment to the base assessment schedule may not be applied only to
selected risk classifications, but rather must be applied to each cell
in the schedule uniformly. The differences between the respective cells
in the rate-schedule therefore remain constant. Similarly, adjustments
neither expand nor contract the spread between the lowest- and highest-
risk classifications.
The adjustment for any particular semiannual period is determined
by: (1) The amount of assessment income necessary to maintain the SAIF
reserve ratio at 1.25 percent (taking into account operating expenses
and expected losses and the statutory mandate for the risk-based
assessment system); and (2) the particular risk-based assessment
schedule that would generate that amount considering the risk
composition of the industry at the time. The Board expects to adjust
the assessment schedule every six months by the amount (if any), up to
and including the maximum adjustment of 5 basis points, necessary to
maintain the reserve ratio at the DRR.
Such adjustments will be adopted in a regulation that reflects
consideration of the following statutory factors: (1) Expected
operating expenses; (2) projected losses; (3) the effect on SAIF
members' earnings and capital; and (4) any other factors the Board
determines to be relevant. The regulation will be adopted and announced
at least 15 days prior to the date the invoice is provided for the
first quarter of the semiannual period for which the adjusted rate-
schedule is to take effect.
If the amount of the adjustment under consideration by the FDIC
would result in an adjusted schedule exceeding the 5 basis-point
maximum, then the Board would initiate a notice-and-comment rulemaking
proceeding.
As discussed in more detail in the preamble to the final rule in
which the FDIC established the adjustment procedure for BIF rates, the
FDIC fully recognizes and understands the concern for the possibility
of assessment rate increases without the benefit of full notice-and-
comment rulemaking. See 60 FR 42680, 42739-42740 (Aug. 16, 1995).
Nevertheless, for the reasons given below, the FDIC considers that
notice and public participation with respect to an adjustment would
generally be ``impracticable, unnecessary, or contrary to the public
interest'' within the meaning of 5 U.S.C. 553(b). Furthermore, the FDIC
considers that for the same reasons it has ``good cause'' within the
meaning of id. 553(d) to make any such rule effective immediately, and
not after a 30-day delay.
Section 7(b)(2)(A)(i) of the FDI Act declares that the FDIC ``shall
set rates when necessary, and only to the extent necessary'' to
maintain each fund's reserve ratio at the DRR, or to raise a fund's
reserve ratio to that level (although the Board may set higher rates
for institutions that exhibit weakness or are not well capitalized, see
id. 1817(b)(2)(A)(v)). Section 7(b)(2)(A)(iii) of the FDI Act restates
the substance of this mandate in a different way: the FDIC ``shall not
set assessment rates in excess of the amount needed'' for those
purposes. These twin commands require the FDIC to monitor the size of
each fund, the amount of deposits that each fund insures, and the
relationship between them. Section 7(b)(2)(A) requires the FDIC to set
``semiannual assessments''. Accordingly, the FDIC evaluates the
assessment schedules every six months.
Notice-and-comment rulemaking procedures are ``unnecessary'' as a
general rule because institutions are already on notice with respect to
the benchmark rates that are set forth in the base assessment
schedules, with respect to the need for making semiannual
[[Page 67694]]
adjustments to the rates, and with respect to the maximum amount of any
such adjustments. Moreover, the adjustments are limited: The FDIC may
not change a current assessment schedule by more than 5 basis points,
or deviate from the base assessment schedule by more than 5 basis
points.
Notice-and-comment rulemaking procedures also are generally
``unnecessary'' because they would not generate additional information
that is relevant to the rate-setting process. The institutions already
provide part of the needed information in their quarterly reports of
condition. The remainder of the needed information is data that the
FDIC generates internally: e.g., The current balance and expected
operating expenses of each fund, and each fund's case resolution
expenditures and income.
Finally, notice-and-comment rulemaking procedures are also
generally ``impracticable'' and ``contrary to the public interest'' in
this context because they are not compatible with the need to make
frequent small adjustments to the assessment rates in order to maintain
the funds' reserve ratios at the DRR. The FDIC must use data that is as
current as possible to generate an assessment schedule that complies
with the statutory standards. Notice-and-comment rulemaking procedures
entail considerable delay. Such delay could force the FDIC to use out-
of-date information to compute the amount of revenue needed and to
produce an appropriate assessment schedule. Using out-of-date
information could cause the FDIC to set rates for a fund that were
higher or lower than necessary to achieve the fund's target DRR.
For these reasons, the FDIC has determined that any adjustment to
the base assessment schedule may be adopted as a final rule without
notice and public procedure thereon. Any such final rule will be
adopted at least 15 days before the invoice date for the first payment
of a semiannual period (and 45 days before the collection date for that
payment). The adjusted assessment schedule will be published in the
Federal Register as an appendix to subpart A of part 327.
Two trade groups endorse the adjustment procedure; one of them
specifically supports the 5-basis-point limit on adjustments. No
commenters opposed the procedure.
F. Institutions That ``Exhibit Weaknesses'' or Are ``Not Well
Capitalized''
Although the FDIC may not generally collect assessments in excess
of the amounts necessary to maintain an insurance fund's reserve ratio
at the DRR (or to raise the fund's reserve ratio to the DRR), the FDIC
may continue to collect assessments from institutions ``that exhibit
financial, operational, or compliance weaknesses ranging from
moderately severe to unsatisfactory, or that are not well capitalized
as defined in [FDI Act] section 38''. Id. 1817(b)(2)(A)(v). In setting
adjusted BIF rates for the first semiannual period of 1997, the FDIC
has interpreted this clause in a manner that is consistent with the
existing framework of the risk-based assessment program. 61 FR 64609
(Dec. 6, 1996). The FDIC has now determined to formalize this
interpretation in part 327 of its rules and regulations. No commenters
addressed this aspect of the final rule.
``Financial, operational, or compliance weaknesses''. For
assessment purposes, the FDIC classifies each institution into one of
three supervisory subgroups:
Subgroup A--Financially sound institutions with only a few minor
weaknesses. 12 CFR 327.4(a)(2)(i).
Subgroup B--Institutions that demonstrate weaknesses which, if not
corrected, could result in significant deterioration of the institution
and increased loss to the BIF or SAIF. Id. 327.4(a)(2)(ii).
Subgroup C--Institutions that pose a substantial probability of loss to
the BIF or SAIF unless effective corrective action is taken. Id.
327.4(a)(2)(iii).
When Congress adopted the Funds Act, Congress was aware that the
FDIC already had these standards and definitions in place, and that the
FDIC already used them for the purpose of imposing risk-based
assessments. Moreover, the standards and definitions focus on
institutions' financial and operational activities, and with their
compliance with laws and regulations. The FDIC accordingly believes
that it is reasonable and appropriate--and consistent with the intent
of Congress--to apply these standards and definitions in determining
whether an institution ``exhibit[s] * * * weaknesses ranging from
moderately severe to unsatisfactory'' for assessment purposes.
The FDIC considers that if an institution's weaknesses are so
severe that ``if not corrected, [they] could result in significant
deterioration of the institution and increased loss to the BIF or
SAIF'', the weaknesses may properly be characterized as ``moderately
severe''. The FDIC further considers that if the weaknesses ``pose a
substantial probability of loss to the BIF or SAIF unless effective
corrective action is taken'', they may properly be regarded as
``unsatisfactory''. The FDIC is therefore interpreting section
7(b)(2)(A)(v) to include any institution that is classified in
supervisory subgroup B or C.
``Not well capitalized''. Section 7(b)(2)(A)(v) also authorizes the
FDIC to set higher rates for institutions ``that are not well
capitalized as defined in [FDI Act] section 38''. Section 38 of the FDI
Act, 12 U.S.C. 1831o, defines a ``well capitalized'' institution as one
that ``significantly exceeds the required minimum level for each
relevant capital measure''. 12 U.S.C. 1831o(b)(1)(A).
Section 38 requires each agency to specify the relevant capital
measure at which insured depository institution is well capitalized.
Id. 1831o(c)(2). The FDIC has done so in subpart B of part 325 of its
regulations, 12 CFR part 325 (``Capital Maintenance''). See id.
325.103(b)(1). But subpart B--and therefore its definition of ``well
capitalized''--only applies to state nonmember banks and to insured
state branches of foreign banks for which the FDIC is the appropriate
federal banking agency. Id. 325.101(c).
The FDIC also defines the term ``well capitalized'' in part 327.
See id. 327.4(a)(1)(i). Here the FDIC does so for the broader purpose
of implementing a risk-based assessment system: accordingly, part 327's
definition applies to all insured institutions.
While the two definitions employ the same numerical ratios, part
325's definition also includes an extra criterion: an institution may
not be ``subject to any written agreement, order, capital directive, or
prompt corrective action directive * * * to meet and maintain a
specific capital level for any capital measure''. Id. 325.103(b)(1)(v).
Within the context of the assessment regulation, this kind of
consideration helps to determine an institution's supervisory subgroup,
but not its capital category. Accordingly, the FDIC considers that it
is not appropriate to apply that criterion for the purpose of
determining whether an institution is ``well capitalized'' for
assessment purposes. The FDIC therefore is applying part 327's current
definition of ``well capitalized'' for the purpose of interpreting
section 7(b)(2)(A)(v) of the FDI Act.
G. Transitional Matters
1. Refunds
The FDIC has already collected the second quarterly payments for
the current semiannual period (July-December 1996). These payments were
computed at the rates in effect prior to
[[Page 67695]]
passage of the Funds Act and prior to adoption of the final rule.
Both the SAIF Adjusted Assessment Schedule and the interim rate-
schedule for SAIF-member savings associations are effective as of
October 1, 1996. In addition, Congress has repealed the minimum
assessment rate for all institutions. The final rule therefore provides
for a refund or credit of any excess amounts collected for the BIF or
the SAIF for the final quarter of 1996. Interest will accrue on the
excess amounts as of October 1, 1996.
The excess amounts will be refunded or credited in one or more
installments. The refunds and credits will be made according to the
procedures applicable to regular quarterly payments.
2. Capital Ratios
The FDIC recognizes that payment of the special assessment could
negatively impact the capital ratings of some institutions, affecting
their risk classification under the risk-based assessment system. The
risk classification for the first semiannual assessment period of 1997
is based on an institution's capital as of June 30, 1996, and is
unaffected by payment of the special assessment. But the risk
classification for the second semiannual assessment period of 1997 is
based on an institution's capital as of December 30, 1996, and
therefore reflects payment of the special assessment.
The FDIC has determined that, for purposes of assigning an
institution's risk classification under the risk-based assessment
system for the second semiannual period of calendar year 1997 only, the
FDIC will calculate the institution's capital as if the special
assessment had not been paid, while taking into account other capital
fluctuations. The chief basis for this determination is that the
special assessment is a one-time cost that is extraordinary in
character: It neither derives from nor necessarily implies the presence
of any adverse conditions or any procedural or managerial weaknesses in
the institution. The FDIC has therefore concluded that, taken in
isolation, the effect of the special assessment on an institution does
not automatically represent an increase in the insurance risk that the
institution poses to the SAIF as measured by the institution's capital.
The FDIC recognizes, however, that for some institutions the cost
of the special assessment could have a more lasting effect.
Accordingly, the FDIC is only calculating capital in this manner one
time. All subsequent calculations will reflect all costs incurred by an
institution.
The FDIC wishes to emphasize the point that it is excluding the
special assessment from the capital calculation only for assessment
purposes, and not for supervisory or regulatory purposes. For example,
the exclusion does not come into play for the purpose of determining
the adequacy of an institution's capital under the prompt corrective
action statute, section 38 of the FDI Act, 12 U.S.C. 1831o. Part 325 of
the FDIC's regulations, 12 CFR part 325 (Capital Maintenance),
implements section 38 and sets capital ratios equivalent to those found
in part 327. The ratios computed pursuant to part 325 will not reflect
the exclusion allowed under part 327. If the ratios indicate that
supervisory action may be warranted in a particular case, the FDIC will
inquire further into the condition of the institution, and determine
the supervisory action that is appropriate. Similarly, the exclusion
does not come into play when determining whether an institution is
``well capitalized'' within the meaning of section 29 of the FDI Act,
12 U.S.C. 1831f, which sets minimum capital requirements for
institutions that accept brokered deposits.
Two trade groups express support for the one-time relief in
computing capital ratios. One of the two suggests that the FDIC should
provide relief of this kind during the first semiannual period of 1998
on a case-by-case basis. The FDIC believes that such an extension is
unwarranted, and would be imprudent. If an institution's capital ratios
continued to be impaired for so long an interval, there would be no
basis for allowing such relief, as the institution's financial
condition would present an increased and on-going risk to the SAIF.
3. Deadlines
a. Invoices. The FDIC must generally issue invoices not less than
30 days prior to the collection date. 12 CFR 327.3(c)(1). A shorter
interval is warranted in this case in order to afford time for notice
and comment on the final rule, however. The final rule allows the FDIC
to delay issuing the invoices for the first quarterly payment for the
first semiannual period of 1997, which is the first payment under the
new schedule.
b. Announcement of the Adjusted Rates. The assessment regulation
has provided that, when the Board adopts an adjustment to the base
rates by resolution, the Board must announce the adjustment and the new
rate-schedule at least 15 days before the invoice date for the first
payment of the semiannual period to which the rates will apply. For the
reasons given above with respect to the invoice date, the Board has
determined that it is appropriate to relax this requirement with
respect to the rates for the first semiannual period of 1997.
H. Effective date
The final rule is effective immediately upon adoption. The FDIC
considers that an immediate effective date is both necessary and
appropriate because the FDIC must issue invoices reflecting the new
lower rates, in order that institutions may know the amounts they are
to pay for the first quarter of 1997. By making the rule effective
immediately, the FDIC can issue the invoices as promptly as possible.
I. Technical Adjustments
The final rule updates, clarifies, and corrects various references
in part 327. For example, Sec. 327.4(a) refers to Sec. 327.9(a) and to
Sec. 327.9(c); the final rule replaces the references with a single
reference to Sec. 327.9. Section 327.4(c) speaks of institutions for
which either the FDIC or the Resolution Trust Corporation (RTC) has
been appointed conservator; the final rule eliminates the reference to
the RTC, and speaks instead of institutions for which the FDIC either
has been appointed or serves as conservator. The final rule removes the
definitions for ``adjustment factor'' and ``assessment schedule'',
which are found in Sec. 327.8(i), on the ground they are not needed.
The final rule deletes certain obsolete provisions relating to the BIF
after the BIF achieved its DRR.
II. Paperwork Reduction Act
No collections of information pursuant to section 3504(h) of the
Paperwork Reduction Act of 1980 (44 U.S.C. 3501 et seq.) are contained
in this rule. Consequently, no information has been submitted to the
Office of Management and Budget (OMB) for review.
III. Regulatory Flexibility Analysis
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., does
not apply to the rule. The RFA's definition of the term ``rule''
excludes ``a rule of particular applicability relating to rates'. Id.
601(2). The FDIC considers that the rule is governed by this exclusion.
In addition, the legislative history of the RFA indicates that its
requirements are inappropriate to this proceeding. The RFA focuses on
the ``impact'' that a rule will have on small entities. The legislative
history shows that the ``impact'' at issue is a differential impact--
that is, an impact that places a disproportionate burden on small
businesses:
[[Page 67696]]
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
institutions regardless of size. Rather, it imposes an assessment that
is directly proportional to each institution's size. Nor does the rule
cause an affected institution to incur any ancillary costs of
compliance (such as the need to develop new recordkeeping or reporting
systems, to seek out the expertise of specialized accountants, lawyers,
or managers) that might cause disproportionate harm to small entities.
As a result, the purposes and objectives of the RFA are not affected,
and an initial regulatory flexibility analysis is not required.
IV. Riegle Community Development and Regulatory Improvement Act
Section 302(b) of the Riegle Community Development and Regulatory
Improvement Act of 1994 (Riegle Act) requires that, as a general rule,
new and amended regulations that impose additional reporting,
disclosure, or other new requirements on insured depository
institutions shall take effect on the first day of a calendar quarter.
See 12 U.S.C. 4802(b). This restriction is inapplicable because the
final rule would not impose such additional or new requirements.
Nevertheless, the final rule takes effect on January 1, 1997, in
conformity with the Riegle Act.
V. Congressional Review
As a general matter, when an agency adopts a final rule, the agency
must submit to each House of Congress and to the Comptroller General a
report containing a copy of the rule, a general statement relating to
the rule, and the rule's proposed effective date. 5 U.S.C. 801(a)(1).
The term ``rule'' excludes ``any rule of particular applicability,
including a rule that approves or prescribes for the future rates'',
however. Id. 804(3). The final rule is governed by this exclusion,
because the final rule sets assessment rates and relates to the
computations associated with assessment rates. Accordingly, the
reporting requirement of id. 801(a)(1), and the more general
requirements of id. sections 801-808, do not apply.
List of Subjects in 12 CFR Part 327
Assessments, Bank deposit insurance, Banks, banking, Financing
Corporation, Savings associations.
For the reasons set forth in the preamble, the Board of Directors
of the Federal Deposit Insurance Corporation is amending part 327 of
title 12 of the Code of Federal Regulations 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. Section 327.3 is amended by revising the first sentence of
paragraph (c)(1) to read as follows:
Sec. 327.3 Payment of semiannual assessments.
* * * * *
(c) First-quarterly payment--(1) Invoice. Except in the case of
invoices for the first quarterly payment for the first semiannual
period of 1997, no later than 30 days prior to the payment date
specified in paragraph (c)(2) of this section, the Corporation will
provide to each insured depository institution an invoice showing the
amount of the assessment payment due from the institution for the first
quarter of the upcoming semiannual period, and the computation of that
amount. * * *
* * * * *
3. Section 327.4 is amended by revising the first sentence of
paragraph (a) introductory text, paragraph (a)(1)(i)(A), paragraph
(a)(1)(ii)(A), and paragraph (c) to read as follows:
Sec. 327.4 Annual assessment rate.
(a) Assessment risk classification. For the purpose of determining
the annual assessment rate for insured depository institutions under
Sec. 327.9, each insured depository institution will be assigned an
``assessment risk classification''. * * *
(1) * * *
(i) * * *
(A) Except as provided in paragraph (a)(1)(i)(B) of this section,
this group consists of institutions satisfying each of the following
capital ratio standards: Total risk-based ratio, 10.0 percent or
greater; Tier 1 risk-based ratio, 6.0 percent or greater; and Tier 1
leverage ratio, 5.0 or greater. New insured depository institutions
coming into existence after the report date specified in paragraph
(a)(1) of this section will be included in this group for the first
semiannual period for which they are required to pay assessments. For
the purpose of computing the ratios referred to in this paragraph
(a)(1)(i)(A) for the second semiannual period of 1997, each such ratio
shall be computed for an institution as if the institution had retained
the funds that the institution disbursed in payment of the special
assessment prescribed by Sec. 329.41(a).
* * * * *
(ii) * * *
(A) Except as provided in paragraph (a)(1)(ii)(B) of this section,
this group consists of institutions that do not satisfy the standards
of ``well capitalized'' under this paragraph but which satisfy each of
the following capital ratio standards: Total risk-based ratio, 8.0
percent or greater; Tier 1 risk-based ratio, 4.0 percent or greater;
and Tier 1 leverage ratio, 4.0 percent or greater. For the purpose of
computing the ratios referred to in this paragraph (a)(1)(ii)(A) for
the second semiannual period of 1997, each such ratio shall be computed
for an institution as if the institution had retained the funds that
the institution disbursed in payment of the special assessment
prescribed by Sec. 327.41(a).
* * * * *
(c) Classification for certain types of institutions. The annual
assessment rate applicable to institutions that are bridge banks under
12 U.S.C. 1821(n) and to institutions for which the Corporation has
been appointed or serves as conservator shall in all cases be the rate
applicable to the classification designated as ``2A'' in the
appropriate assessment schedule prescribed pursuant to Sec. 327.9.
* * * * *
Sec. 327.8 [Amended]
4. Section 327.8 is amended by removing and reserving paragraph
(i).
5. Section 327.9 is revised to read as follows:
Sec. 327.9 Assessment schedules.
(a) Base assessment schedules--(1) In general. Subject to
Sec. 327.4(c) and subpart B of this part, the base annual assessment
rate for an insured depository institution shall be the rate prescribed
in the appropriate base assessment schedule set forth in paragraph
(a)(2) of this section applicable to the assessment risk classification
assigned by the Corporation under Sec. 327.4(a) to that institution.
Each base assessment schedule utilizes the group and subgroup
designations specified in Sec. 327.4(a). An institution shall pay
assessments at the rate specified in the appropriate base assessment
schedule except as provided in paragraph (b) of this section.
[[Page 67697]]
(2) Assessment schedules--(i) Base rates for BIF members. The
following base assessment schedule applies with respect to assessments
paid to the BIF by BIF members and by other institutions that are
required to make payments to the BIF pursuant to subpart B of this
part:
BIF Base Assessment Schedule
------------------------------------------------------------------------
Supervisory subgroup
Capital group -----------------------------
A B C
------------------------------------------------------------------------
1......................................... 4 7 21
2......................................... 7 14 28
3......................................... 14 28 31
------------------------------------------------------------------------
(ii) Base rates for SAIF members. The following base assessment
schedule applies with respect to assessments paid to the SAIF by SAIF
members and by other institutions that are required to make payments to
the SAIF pursuant to subpart B of this part:
SAIF Base Assessment Schedule
------------------------------------------------------------------------
Supervisory subgroup
Capital group -----------------------------
A B C
------------------------------------------------------------------------
1......................................... 4 7 21
2......................................... 7 14 28
3......................................... 14 28 31
------------------------------------------------------------------------
(b) Adjusted assessment schedules--(1) In general. Institutions
shall pay semiannual assessments at the rates specified in this
paragraph (b) whenever such rates have been prescribed by the Board.
(2) Adjusted rates for BIF members. (i) The Board has adjusted the
BIF Base Assessment Schedule by reducing each rate therein by 4 basis
points for the second semiannual period of 1996 and for the first
semiannual period of 1997 by resolution of the Board of Directors of
the Corporation. Accordingly, the following adjusted assessment
schedule applies to BIF members for those two semiannual periods:
BIF Adjusted Assessment Schedule
------------------------------------------------------------------------
Supervisory subgroup
Capital group -----------------------------
A B C
------------------------------------------------------------------------
1......................................... 0 3 17
2......................................... 3 10 24
3......................................... 10 24 27
------------------------------------------------------------------------
(ii) The rates set forth in paragraph (b)(2)(i) of this section
shall terminate at the end of the first semiannual period of 1997.
(3) SAIF members--(i) General reduction. Except as provided in
paragraph (b)(3)(ii) of this section, the Board has adjusted the SAIF
Base Assessment Schedule as of October 1, 1996, by reducing the rates
therein by 4 basis points. The adjusted rates are presented to the left
in each risk classification category in the schedule shown in paragraph
(b)(3)(iii) of this section.
(ii) Interim assessment schedule for SAIF-member savings
associations. From October 1, 1996, through December 31, 1996, savings
associations that are members of the SAIF shall pay assessments
according to the schedule in effect for such institutions on September
30, 1996, except that each rate in the schedule other than the rate for
institutions in assessment risk classification 3C shall be reduced by 5
basis points (0.05 percent), and the rate for institutions in
assessment risk classification 3C shall be reduced by 4 basis points
(0.04 percent). No rate prescribed under this paragraph (b)(3)(ii)
shall be applied for the purpose of Sec. 327.32(a)(2)(i). The rates
specified by this paragraph (b)(3)(ii) are presented to the right in
each risk classification category in the schedule shown in paragraph
(b)(3)(iii) of this section.
(iii) Adjusted rates for SAIF members. The following schedule sets
forth to the left in each risk classification category the adjusted
rate schedule that applies to SAIF members generally on and after
October 1, 1996, in accordance with paragraph (b)(3)(i) of this
section, and also sets forth to the right in each risk classification
category the rates that apply to savings associations that are members
of the SAIF from October 1, 1996, through December 31, 1996, in
accordance with paragraph (b)(3)(ii) of this section:
SAIF Adjusted Assessment Schedule
------------------------------------------------------------------------
------------------------------------------------------------------------
(5) Supervisory subgroup
-----------------------
Capital group
(1)A
(1)B
(1)C
------------------------------------------------------------------------
1............................................... 0 18 3 21 17 24
2............................................... 3 21 10 24 24 25
3............................................... 10 24 24 25 27 27
------------------------------------------------------------------------
(c) Rate adjustments; procedures--(1) Semiannual adjustments. The
Board may increase or decrease the BIF Base Assessment Schedule set
forth in paragraph (a)(2)(i) of this section or the SAIF Base
Assessment Schedule set forth in paragraph (a)(2)(ii) of this section
up to a maximum increase of 5 basis points or a fraction thereof or a
maximum decrease of 5 basis points or a fraction thereof (after
aggregating increases and decreases), as the Board deems necessary to
maintain the reserve ratio of an insurance fund at the designated
reserve ratio for that fund. Any such adjustment shall apply uniformly
to each rate in the base assessment schedule. In no case may such
adjustments result in an assessment rate that is mathematically less
than zero or in a rate schedule for an insurance fund that, at any
time, is more than 5 basis points above or below the base assessment
schedule for that fund, nor may any one such adjustment constitute an
increase or decrease of more than 5 basis points. The adjustment for
any semiannual period for a fund shall be determined by:
(i) The amount of assessment revenue necessary to maintain the
reserve ratio at the designated reserve ratio; and
(ii) The assessment schedule that would generate the amount of
revenue in paragraph (c)(1)(i) of this section considering the risk
profile of the institutions required to pay assessments to the fund.
(2) Amount of revenue. In determining the amount of assessment
revenue in paragraph (c)(1)(i) of this section, the Board shall take
into consideration the following:
(i) Expected operating expenses of the insurance fund;
(ii) Case resolution expenditures and income of the insurance fund;
(iii) The effect of assessments on the earnings and capital of the
institutions paying assessments to the insurance fund; and
(iv) Any other factors the Board may deem appropriate.
(3) Adjustment procedure. Any adjustment adopted by the Board
pursuant to this paragraph (c) will be adopted by rulemaking.
Nevertheless, because the Corporation is generally required by statute
to set assessment rates as necessary (and only to the extent necessary)
to maintain or attain the target designated reserve ratio, and because
the Corporation must do so in the face of constantly changing
conditions, and because the purpose of the adjustment procedure is to
permit the Corporation to act expeditiously and frequently to maintain
or attain the designated reserve ratio in an environment of constant
change, but within set parameters not exceeding 5 basis points, without
the delays associated with full notice-and-comment rulemaking, the
Corporation has determined that it is ordinarily impracticable,
unnecessary and not in the public interest to follow the procedure for
notice and public comment in such a rulemaking, and that accordingly
notice and public procedure thereon are not required as provided in
[[Page 67698]]
5 U.S.C. 553(b). For the same reasons, the Corporation has determined
that the requirement of a 30-day delayed effective date is not required
under 5 U.S.C. 553(d). Any adjustment adopted by the Board pursuant to
a rulemaking specified in this paragraph (c) will be reflected in an
adjusted assessment schedule set forth in paragraph (b)(2) or (b)(3) of
this section, as appropriate.
(4) Announcement. Except with respect to assessments for the first
semiannual period of 1997, the Board shall announce the semiannual
assessment schedule and the amount and basis for any adjustment thereto
not later than 15 days before the invoice date specified in
Sec. 327.3(c) for the first quarter of the semiannual period for which
the adjustment shall be effective.
(d) Refunds or credits of certain assessments. If the amount paid
by an institution for the regular semiannual assessment for the second
semiannual period of 1996 exceeds, as a result of the reduction in the
rate schedule for a portion of that semiannual period, the amount due
from the institution for that semiannual period, the Corporation will
refund or credit any such excess payment and will provide interest on
the excess payment in accordance with the provisions of Sec. 327.7.
Notwithstanding Sec. 327.7(a)(3)(ii), such interest will accrue
beginning as of October 1, 1996.
6. A new Sec. 327.10 is added to subpart A to read as follows:
Sec. 327.10 Interpretive rule: section 7(b)(2)(A)(v).
This interpretive rule explains certain phrases used in section
7(b)(2)(A)(v) of the Federal Deposit Insurance Act, 12 U.S.C.
1817(b)(2)(A)(v).
(a) An institution classified in supervisory subgroup B or C
pursuant to Sec. 327.4(a)(2) exhibits ``financial, operational, or
compliance weaknesses ranging from moderately severe to
unsatisfactory'' within the meaning of such section 7(b)(2)(A)(v).
(b) An institution classified in capital group 2 or 3 pursuant to
Sec. 327.4(a)(1) is ``not well capitalized'' within the meaning of such
section 7(b)(2)(A)(v).
By order of the Board of Directors.
Dated at Washington, D.C., this 11th day of December 1996.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Deputy Executive Secretary.
[FR Doc. 96-32113 Filed 12-23-96; 8:45 am]
BILLING CODE 6714-01-P
