[Federal Register Volume 61, Number 236 (Friday, December 6, 1996)]
[Rules and Regulations]
[Pages 64609-64613]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30906]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327
Assessments; Continuation of Adjusted Rate Schedule for BIF-
Assessable Deposits
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Continuation of adjusted rate schedule.
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SUMMARY: On November 26, 1996, the Board of Directors of the FDIC
(Board) adopted a resolution to continue in effect the current downward
adjustment to the assessment rate schedule applicable to deposits
assessable by the Bank Insurance Fund (BIF). The continuation of the
downward adjustment will apply to the semiannual assessment period
beginning January 1, 1997. As a result, the BIF assessment rates will
continue to range from 0 to 27 basis points. The only difference
between the existing adjustment and the continuing adjustment adopted
by the Board is that the continuing schedule will no longer include a
reference to a minimum assessment amount. This change results from
recent legislation that eliminates a statutorily-imposed minimum
assessment amount. With this modification, the adjusted rate schedule
will result in an estimated average annual assessment rate of
approximately 0.17 basis points; the estimated annual revenue produced
by this rate schedule will be $43 million. In connection with the
elimination of the mandatory assessment amount, the Board has also
decided to refund minimum assessment payments made to BIF with respect
to that portion of the current semiannual assessment period remaining
after enactment of the amending legislation.
EFFECTIVE DATE: January 1, 1997, through June 30, 1997.
FOR FURTHER INFORMATION CONTACT: Steven Ledbetter, Chief, Assessment
Evaluation Section, Division of Insurance, (202) 898-8658; James R.
McFadyen, Senior Financial Analyst, Division of Research and
Statistics, (202) 898-7027; Martha Coulter, Counsel, Legal Division,
(202) 898-7348; Federal Deposit Insurance Corporation, 550 17th Street,
N.W., Washington, D.C., 20429.
SUPPLEMENTARY INFORMATION:
I. Introduction
This announcement pertains to deposit insurance assessments to be
paid for the semiannual assessment period beginning January 1, 1997, by
insured depository institutions on deposits assessable by the Bank
Insurance Fund (BIF). Invoices reflecting these assessments will be
sent to BIF member institutions around December 11, 1996.1
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1 Normally, invoices are sent approximately one month prior to
collection date, which would be December 3 for the January 2
collection date. However, in this instance the invoices are being
delayed approximately one week in order to permit the FDIC to
include any reduction in Savings Association Insurance Fund (SAIF)
rates adopted by the Board in early December for the upcoming
semiannual assessment period. The Board has decided to delay all
invoices, not just invoices for SAIF-member institutions, because of
the large number of BIF members with SAIF-assessable deposits and
SAIF members with BIF-assessable deposits. The Board is concerned
that sending bifurcated invoices approximately one week apart would
result in significant confusion and additional burden for such
institutions that can be avoided by a delayed, combined invoice.
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These invoices will also bill for assessments to be paid to the
Financing Corporation (FICO). As a result of recently-enacted
legislation, BIF-assessable deposits are now also subject to assessment
by FICO. As it has in the past, the FDIC will continue to collect FICO
assessments on FICO's behalf.
In providing for the FICO-assessability of BIF-assessable deposits,
section 2703 of the Deposit Insurance Funds Act of 1996 (DIFA) 2
further provided that the assessments imposed by FICO on insured
depository institutions with respect to BIF-assessable deposits will be
at a rate equal to one-fifth the assessment rate applicable to deposits
assessable by the Savings Association Insurance Fund (SAIF). Thus, the
upcoming FDIC assessment invoice is expected to reflect a FICO rate for
BIF-assessable deposits of approximately 1.3 basis points, which is
one-fifth the FICO rate of approximately 6.4 basis points anticipated
for SAIF-assessable deposits.
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2 DIFA is Subtitle G of Title II of Pub. L. 104-208, which
was enacted on September 30, 1996.
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The remainder of this announcement pertains solely to deposit
insurance assessments and does not further address FICO assessments.
II. Continuation of Adjustment to BIF Rate Schedule 2
Section 7(b) of the Federal Deposit Insurance Act, 12 U.S.C.
1817(b), provides that the Board shall set semiannual deposit insurance
assessments for insured depository institutions. On August 8, 1995, the
Board adopted a new assessment rate schedule for deposits subject to
assessment by BIF. 60 FR 42680 (August 16, 1995). The new schedule was
codified as Rate Schedule 2 at 12 CFR 327.9(a). This schedule provided
for an assessment-rate range of 4 to 31 basis points and became
effective retroactively on June 1, 1995, the beginning of the month
following the month in which the BIF reached its designated reserve
ratio (DRR) of 1.25 percent of total estimated insured deposits.
In adopting Rate Schedule 2, the Board also amended the FDIC's
assessment regulations to permit the Board to make limited adjustments
to the schedule without notice-and-comment rulemaking. Any such
adjustments can be made as the Board deems necessary to maintain the
BIF reserve ratio at the DRR and can be accomplished by Board
resolution. Under this provision, codified at 12 CFR 327.9(b), any such
adjustment must not exceed an increase or decrease of 5 basis points
and must be uniform across the rate schedule.
The amount of an adjustment adopted by the Board under 12 CFR
327.9(b) is to be determined by the following considerations: (1) The
amount of assessment revenue necessary to maintain the reserve ratio at
the DRR; and (2) the assessment schedule that would generate such
amount of assessment revenue considering the risk profile of BIF
members. In determining the relevant amount of assessment revenue, the
Board is to consider BIF's expected operating expenses, case resolution
expenditures and income, the effect of assessments on BIF members'
earnings and capital, and any other factors the Board may deem
appropriate.
Having considered all of these factors, the Board decided on
November 14, 1995, to adopt an adjustment factor of 4 basis points for
the semiannual assessment period beginning January 1, 1996, with a
resulting adjusted schedule ranging from 0 to 27 basis points. 60 FR
63400 (December 11, 1995). The Board continued the same adjustment for
the semiannual period beginning July 1, 1996. 61 FR 26078 (May 24,
1996).
Until now, the adjusted schedule has included a reference to a
statutory requirement in section 7(b)(2)(A)(iii) of the Federal Deposit
Insurance Act, 12 U.S.C. 1817(b)(2)(A)(iii), that each insured
depository institution pay a minimum assessment amount of $2,000
annually. However, that requirement
[[Page 64610]]
recently has been eliminated by section 2708 of DIFA, which replaced it
with a new section 7(b)(2)(A)(iii). The new provision requires that,
with respect to institutions posing the least risk to the deposit
insurance fund,3 semiannual assessments not be set to exceed the
amount needed to maintain the reserve ratio of BIF at the designated
reserve ratio, which is currently set at 1.25 percent of total
estimated insured deposits.
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3 New section 7(b)(2)(A)(iii) provides that the FDIC may
set assessments in excess of the amount needed to maintain or
achieve the DRR with respect to insured depository institutions that
exhibit financial, operational, or compliance weaknesses ranging
from moderately severe to unsatisfactory, or are not well
capitalized as that term in defined in section 38 of the Federal
Deposit Insurance Act, 12 U.S.C. 1831o. The Board has determined
that, for purposes of the existing rate structure comprised of the
current nine risk classifications, this language should be read as
permitting the FDIC to set assessments in excess of the amount
needed to maintain or achieve the DRR with respect to institutions
other than those with an assessment risk classification of 1A.
This reading of new section 7(b)(2)(A)(iii) was proposed by the
Board and published for public comment in the pending SAIF- rate
rulemaking proceeding, 61 FR 53867, 53872 (October 16, 1996). The
comment period for that rulemaking has now closed, with no opposing
comments having been received as to this interpretation. A
discussion of the Board's determination to adopt regulations
reflecting this interpretation will be included in the Federal
Register notice announcing the Board's decision regarding SAIF
rates.
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In light of this change, and for the reasons discussed below, the
Board has decided to continue the same adjustments to Rate Schedule 2
for the upcoming semiannual period beginning January 1, 1997, with the
exception that the reference in the adjusted rate schedule to a minimum
assessment amount has been eliminated. The adjusted rate schedule is
set forth below.
BIF Rate Schedule as Adjusted for the First Semiannual Period of 1997
------------------------------------------------------------------------
Supervisory
subgroup
Capital group --------------------
A B C
------------------------------------------------------------------------
1.................................................. 0 3 17
2.................................................. 3 10 24
3.................................................. 10 24 27
------------------------------------------------------------------------
In addition to continuing the adjusted rate schedule, the Board has
also decided to refund to BIF member institutions any minimum
assessment amount they paid to BIF for the September 30, 1996,
quarterly assessment collection. Although the Board believes that it
has the authority to retain these payments and to implement the
elimination of the minimum assessment requirement beginning with the
upcoming semiannual period, it has decided on a different approach.
The Board has decided that the more appropriate action is to refund
that portion of the minimum assessment that corresponds with the
portion of the current semiannual period remaining after the September
30, 1996, enactment of the statute--that is, the quarter beginning
October 1, 1996. The Board believes that this approach promotes the
intent reflected in new section 7(b)(2)(A)(iii) to assess the least
risky institutions no more than necessary to maintain the BIF
designated reserve ratio.
Affected institutions will be contacted with further information
regarding the refund, which is expected to occur by means of an ACH
credit on or about January 2, 1997. The majority of BIF members can
expect to receive a refund of $500 plus interest.
III. Basis for the Adjustment
A. Maintaining at the Designated Reserve Ratio
In adopting a rate adjustment under 12 CFR 327.9(b), as mentioned
above, the Board must consider the following: (1) The amount of
assessment revenue necessary to maintain the reserve ratio at the DRR;
and (2) the assessment schedule that would generate such amount of
assessment revenue considering the risk profile of BIF members.
The BIF reserve ratio stood at 1.30 percent as of June 30, 1996,
the latest date for which complete data are available. The recent
strong performance of the industry and consequent growth of the BIF
reserve ratio, and the outlook for the reserve ratio over the near
term, have persuaded the Board to continue the existing adjusted rate
schedule for the first semiannual period of 1997. Following is an
analysis of the potential effect of changes in the fund balance and the
rate of insured deposit growth on the reserve ratio through June 30,
1997.
1. Fund Balance
The adjusted BIF balance was $25.888 billion on June 30, 1996
(Table 2, see note 4). Changes in the balance are largely determined by
changes in insurance losses and interest income.
Insurance Losses. Insurance losses are comprised of two components:
A contingent liability for future failures and an allowance for losses
on institutions that have already failed. Using current staff estimates
of failed assets through June 30, 1997, and a 20 percent loss rate on
assets, the change in the contingent liability for future failures is
estimated to be between $100 million (lower bound) and $300 million
(upper bound) for the twelve months ending June 30, 1997 4.
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4 In internal discussions, the FDIC staff has recently
projected assets of failed BIF institutions to be between $200-
$1,050 million through the first half of 1997. Table 1 assumes a 20%
loss rate on these assets (staff assumption for institutions with
less than $500 million in assets), rounded to the nearest $100
million, and assumes that all of these losses are in addition to the
amount of the current reserve.
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The estimated recovery value of closed banks was $4.26 billion as
of September 30, 1996. While annual changes in the allowance for losses
as a percentage of the estimated net recovery value of closed banks
have been as high as 13 percent and as low as -16 percent over the last
five years, the change in 1994 was -5.75 percent and +10.2 percent in
1995. Proforma statements for December 31, 1996, project an increase in
the allowance for losses for closed banks of $195 million from June 30,
1996. This is a +5 percent variance for the second semiannual period of
1996, which is consistent with the range of -5 percent to +10 percent
assumed for purposes of this analysis. Table 1 elaborates on these two
components.
Interest Income. Interest income on BIF's investment portfolio
averaged $103 million a month for the first six months of 1996.
Assuming relatively stable interest rates (i.e. between 5.7 percent and
6.2 percent) through the first semiannual period of 1997, interest
income is projected to be between $1.210 billion and $1.316 billion for
the twelve months ending June 30, 1997. Table 2 summarizes the effects
on the fund balance of the lower bound and upper bound ranges assumed
for interest income and insurance losses.
2. Insured Deposits
Recent experience with respect to insured deposit growth has been
mixed. While the total amount of BIF-insured deposits has remained
essentially unchanged since 1991, there has been substantial volatility
historically. Since 1985, annual growth has been as high as 8.7 percent
and annual shrinkage as much as 2 percent (see Figure 1). The recent
trend has been towards growth; over the last two years there have been
only two quarters when insured deposits have shrunk and then only
slightly (.01 percent and .03 percent). It should also be noted that
the amount of BIF-insured deposits reported for the third quarter may
reflect extraordinary growth due to the results of deposit- shifting
strategies implemented by
[[Page 64611]]
SAIF-insured institutions prior to enactment of DIFA. In light of this
evidence and the experience over the last five years, the FDIC believes
that BIF-insured deposits are likely to experience a growth rate in the
range of -2 percent to +5 percent between June 1996 and June 1997.
3. BIF Reserve Ratio
Based on the projected BIF balance and the growth of the insured
deposit base, the FDIC projects that the BIF reserve ratio will be
within the range of 1.25 to 1.38 at June 30, 1997 (Table 3). The lower
bound estimate, which produces a 5 basis point decrease below the June
30, 1996, ratio, reflects an assumed increase in the insured deposit
base (-6 basis points) with a small offset from an increase in the fund
balance (+1 basis point). The large increase in interest income and the
effect on the fund balance were mitigated by increased insurance
losses. The upper bound estimate, which produces an 8 basis point
increase above the June 30, 1996, ratio, reflects an assumed shrinkage
of the insured deposit base (+3 basis points) and a large increase in
the BIF balance (+5 basis points). In this projection, the impact of
the increase in interest income was accentuated by the decrease in
insurance losses.
In light of recent trends and current conditions in the banking
industry, the FDIC's view is that the lower-bound scenario is not
likely to be realized. If this were to occur, however, the current rate
schedule still would be sufficient to maintain the target DRR through
midyear 1997.
B. Other Considerations
1. Risk-Based Assessment System
The adjusted rate schedule retains the current spread of 27 basis
points between the highest- and lowest-rated institutions, as well as
the rate spreads among other cells in the assessment rate matrix. The
Board has previously determined that, relative to the rate spreads in
the assessment rate schedule in effect prior to June 1, 1995--which
ranged from 23 to 31 basis points, with a resulting maximum spread of 8
basis points--the current rate spreads provide greater incentives for
weaker institutions to improve their condition and for all institutions
to avoid excessive risk-taking, consistent with the goals of risk-based
assessments. The current rate spreads also provide greater consistency
with the historical variation in bank failure rates across cells of the
assessment rate matrix.
The continued adjusted rate schedule, which ranges from 0 to 27
basis points, appears in Table 4 along with supplemental data. Table 5
summarizes the distribution of institutions across the risk-based
assessment matrix. Estimated annual assessment revenue from this
schedule is expected to be $43 million, and the average annual
assessment rate is estimated to be 0.17 basis points.
2. Impact on Bank Earnings and Capital
The estimated annual revenue from the existing rate schedule is $43
million. In deciding to continue this schedule, the Board has
considered the impact on bank earnings and capital and found no
unwarranted adverse effects.
3. Long-Term Outlook
In the past, the Board has expressed the view that an important
consideration in setting rates is the long-term revenue needs of BIF.
The Board has previously indicated a belief that a balance should exist
between long-term BIF revenues and long-term BIF expenses (where
expenses include monies needed to prevent dilution due to deposit
growth). In August of 1995, the FDIC determined that an effective
average BIF assessment rate of 4 to 5 basis points would be appropriate
to achieve such a balance. This determination was based on a thorough
historical analysis of FDIC experience and consideration of statutory
changes in the past few years that may moderate deposit insurance
losses going forward. 60 FR 42680 (August 16, 1995).
While the latest available data indicate the continuation of slow
growth rates for BIF-insured deposits and minimal BIF insurance losses,
there is no clear indication that these developments represent long-
term trends. Thus, it could be concluded that an effective average
assessment rate of 4 to 5 basis points is still needed to achieve long-
term balance.
However, under the existing statutory scheme, the current balance
in the BIF also is directly relevant to determining the appropriate
assessment schedule for the first semiannual assessment period of 1997.
Moreover, in light of the favorable current conditions and the outlook
for the next several months, it is anticipated that continuation of the
existing rate structure will provide adequate assessment revenue over
the near term to prevent BIF from falling below a reserve ratio of 1.25
percent.
For the reasons discussed above, the Board has decided to continue
in effect the current adjustment to the BIF assessment rate schedule
with a range of 0 to 27 basis points for the semiannual period
beginning January 1, 1997.
By order of the Board of Directors.
Dated at Washington, D.C., this 26th day of November, 1996.
Federal Deposit Insurance Corporation
Jerry L. Langley,
Executive Secretary.
Table 1.--Changes in Contingent Liabilities and Allowance for Losses \1\
[$ in millions]
------------------------------------------------------------------------
Lower Upper
bound bound
------------------------------------------------------------------------
Contingent Liability for Future Cases \2\........... $100 $300
Allowance for Losses: Closed Banks \3\.............. ($200) $400
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Total Provision for Losses...................... ($100) $700
------------------------------------------------------------------------
\1\ Both projections assume a continuation of current economic
conditions during 1997.
\2\ The June 30, 1996 BIF balance includes a $100 million reserve for
institutions already identified as anticipated failures.
\3\ Assumes a range of -5% to 10% of the net recovery value of closed
banks ($4.26 billion as of 9/30/96).
Table 2.--Fund Balance
[$ in millions]
------------------------------------------------------------------------
Lower Upper
bound bound
------------------------------------------------------------------------
Revenue:
Assessments \1\................................... $43 $43
Interest Income \2\............................... 1,210 1,316
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Total revenue................................... 1,253 1,359
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Expenses & Losses:
Operating Expenses \3\............................ 450 450
Provision for Losses.............................. 700 (100)
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Total Expenses & Losses......................... 1,150 350
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Net Income.......................................... 103 1,009
Fund Balance--6/30/96 \4\........................... 25,888 25,888
Fund Balance--6/30/97............................... 25,991 26,897
------------------------------------------------------------------------
\1\ Assuming the current assessment rate schedule through June 30, 1997,
assessment income is expected to be $43 million for the twelve months
from June 30, 1996 to June 30, 1997.
\2\ Interest rates are 5.7% (lower bound) and 6.2% (upper bound).
\3\ Operating expenses were approximately $38 million a month for the
first six months of 1996. Operating expenses are expected to remain
the same through June 30, 1997. The savings from corporate downsizing
is offset by a higher allocation of overhead expenses to corporate, a
result of fewer receiverships.
\4\ BIF balance increased by $60 million to reflect the fact that two
institutions are no longer likely failures; FDIC expects to reverse
the related reserves in the 4th quarter, 1996.
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[GRAPHIC] [TIFF OMITTED] TR06DE96.000
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Table 3.--Projected BIF Ratios
[$ in millions]
------------------------------------------------------------------------
June 30,
1996
------------------------------------------------------------------------
Adjusted Fund Balance \1\.................................. $25,888
Estimated Insured Deposits \2\............................. 1,986,578
Adjusted BIF Ratio \1\..................................... 1.30
------------------------------------------------------------------------
Lower Upper
bound \3\ bound \4\
June 30, June 30,
1997 1997
------------------------------------------------------------------------
Projected Fund Balance.......................... $25,991 $26,897
Estimated Insured Deposits...................... 2,085,907 1,946,846
Estimated BIF Ratio............................. 1.25 1.38
------------------------------------------------------------------------
\1\ The BIF balance includes the $60 million reserve reversal for two
institutions.
\2\ As a result of the DIFA, the SAIF insured deposits of certain Oakar
institutions have been decreased by $28.2 billion and their BIF
insured deposits have been increased by the same amount. Estimated
insured deposits as of 6/30/96 have thus been adjusted by this amount.
\3\ The lower bound refers to the scenario of lower interest income
(interest rate: 5.7%), higher insurance losses ($700 million) and a
higher insured deposit growth rate (+5%).
\4\ The upper bound refers to the scenario of higher interest income
(interest rate: 6.2%), a reduction in insurance losses (-$100 million)
and a shrinkage of the insured deposit base (-2%).
Table 4.--Assessment Rate Schedule First Semiannual 1997 Assessment
Period BIF-Insured Institutions
------------------------------------------------------------------------
Supervisory risk
subgroups
Capital group --------------------------
Group A Group B Group C
(bp) (bp) (bp)
------------------------------------------------------------------------
Well......................................... 0 3 17
Adequate..................................... 3 10 24
Under........................................ 10 24 27
------------------------------------------------------------------------
Table 5.--BIF Assessment Base Distribution \1\; Deposits as of June 30, 1996 \2\; Supervisory and Capital
Ratings in Effect July 1, 1996
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(5)Supervisory risk subgroups
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Capital group
(1) A
(1) B
(1) C
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Well: (percent) (percent) (percent)
Number................................. 9,538 94.4 368 3.6 59 0.6
Base ($ billion)....................... 2,415.7 96.8 35.9 1.4 3.8 0.2
Adequate:
Number................................. 73 0.7 19 0.2 17 0.2
Base ($ billion)....................... 32.6 1.3 2.4 0.1 1.5 0.1
Under:
Number................................. 6 0.1 1 0.0 18 0.2
Base ($ billion)....................... 0.5 0.0 0.3 0.0 1.7 0.1
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Estimated annual assessment revenue \3\: $43 million.
Assessment Base: $2,494 billion.
Average annual assessment rate (bp) \3\: 0.17 basis points.
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\1\ ``Number'' reflects the number of BIF members and SAIF-member Oakar institutions; ``Base'' reflects the BIF-
assessable deposits of BIF members and SAIF-member Oakar institutions.
\2\ Figures do not reflect the adjusted attributable deposit amount reduction for certain BIF-member Oakars,
effective 9/30/96.
\3\ Assumes a refund of $500 with interest, for BIF 1A institutions and no $1,000 minimum semiannual BIF
assessment in 1997.
[FR Doc. 96-30906 Filed 12-5-96; 8:45 am]
BILLING CODE 6714-01-P
