[Federal Register Volume 61, Number 102 (Friday, May 24, 1996)]
[Rules and Regulations]
[Pages 26078-26082]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12885]
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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 May 14, 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 July 1, 1996. As a result, the BIF assessment rates will
continue to range from 0 to 27 basis points. This rate schedule will
result in an estimated average annual assessment rate of approximately
0.29 basis points; the estimated annual revenue produced by this rate
schedule will be $72 million.
EFFECTIVE DATE: July 1, 1996, through December 31, 1996.
FOR FURTHER INFORMATION CONTACT: Frederick S. Carns, Assistant
Director, Division of Insurance, (202) 898-3930; Christine E. Blair,
Financial Economist, Division of Research and Statistics,
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(202) 898-3936; James R. McFadyen, Senior Financial Analyst, Division
of Research and Statistics, (202) 898-7027; Christopher L. Hencke,
Counsel, Legal Division, (202) 898-8839; Federal Deposit Insurance
Corporation, 550 17th Street, N.W., Washington, D.C., 20429.
SUPPLEMENTARY INFORMATION:
I. Continuation of Adjustment to 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 assessments for
insured depository institutions. On August 8, 1995, the Board adopted a
new assessment rate schedule for deposits subject to assessment by the
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 has now decided to adopt the same
adjustments to Rate Schedule 2 for the upcoming semiannual period from
July 1, 1996 to December 31, 1996. The adjusted rate schedule is set
forth below.
BIF Rate Schedule as Adjusted for the Second Semiannual Period of 1996
------------------------------------------------------------------------
Supervisory subgroup
Capital group --------------------------
A B C
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1............................................ \1\ 0 3 17
2............................................ 3 10 24
3............................................ 10 24 27
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\1\ Subject to a statutory minimum assessment of $1,000 per semiannual
period (which also applies to all other assessment risk
classifications).
The basis for the Board's decision is discussed below.
II. Basis for the Adjustment
A. Maintaining at the Designated Reserve Ratio
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 December 31,
1995, the latest date for which complete data are available. Assuming
that insured deposit growth during the first half of 1996 falls within
the range of 2 percent shrinkage to 6 percent growth annually, and
assuming that insurance losses remain moderate as expected, the BIF
ratio will range from 1.29 to 1.34 percent at midyear 1996 (Table 1).
For the second half of 1996, insurance losses and operating
expenses are expected to total under $350 million, while assessments
plus investment income will exceed $650 million.
Insured deposit growth for 1996 is subject to considerable
uncertainty, as recent experience has been mixed. From 1991 through
early 1995, the growth rate of BIF-insured deposits was essentially
zero but, for the year ending in December 1995, BIF-insured deposits
grew by 3 percent, with much of this growth occurring in the fourth
quarter. In light of the 1995 experience, as well as considerable
volatility in deposit growth experienced during the 1980s, the FDIC
must consider the possibility that BIF-insured deposits could grow at a
6 percent annual rate throughout 1996.
Table 1 indicates the year-end 1996 range for the BIF reserve
ratio, assuming a 6 percent upper bound for annual deposit growth in
1996 and assuming that the values of other variables affecting the
reserve ratio in the second semiannual period will fall within their
historical ranges. While the lower bound on the year-end BIF reserve
ratio is below the 1.25 percent target, this presumes an unexpected
increase in insurance losses/provisions of $600 million. Such an
increase is consistent with the historical experience of the FDIC, but
it must be viewed as a remote possibility in light of the current
economic environment and the near-term outlook.
The stronger possibility is that insured-deposit growth rates could
exceed forecasts based upon historical experience. While the 6 percent
upper bound for deposit growth included in Table 1 is high relative to
the experience of the 1990s, the FDIC cannot rule out such a rate of
growth in response to the dramatic reductions in BIF assessment rates
that were effected in the second half of 1995.
Moreover, given the prospect of a continuing, large premium
differential between the insurance funds, there is a realistic
possibility of substantial deposit migration from the SAIF to the BIF.
Though the law imposes constraints on at least some forms of deposit-
shifting from one fund to another, such constraints may be countered by
adaptations in the marketplace. The relatively low rate of migration to
date is not likely to be indicative of the rate to be expected going
forward, given that many market participants may have delayed any plans
to migrate deposits in anticipation of a legislative solution. In the
absence of a legislative solution to date, the FDIC believes that there
is a realistic possibility of a significant increase in deposit
migration. However, the precise timing and ultimate magnitude of any
increase is uncertain.
For illustration, Table 2 examines the impact on the year-end BIF
reserve ratio of alternative deposit migration rates during the second
semiannual period of 1996. Columns 2 through 4 of the table indicate
the impact of deposit migration rates under three different assumptions
concerning ``normal'' growth of BIF-insured deposits (growth that is
not due to migration) for 1996. For example, the ratios in the third
column are derived under the assumption that normal deposit growth is 2
percent for 1996 (full year); assuming also that no deposit migration
occurs during the year, the
[[Page 26080]]
year-end BIF ratio would be 1.32 percent (the assumed values for all
nondeposit factors affecting the reserve ratio are constant across
columns 2-4). Table 2 indicates that, in general, each 5 percent
increase in the annual rate of migration during the second half of 1996
(to a maximum annual rate of 30 percent) would reduce the year-end 1996
BIF ratio by approximately 1 basis point. If 30 percent annual
migration in the second half of 1996 were to occur along with 6 percent
``normal'' growth of BIF-insured deposits, the BIF ratio at year end
would be 1.23 percent under the assumptions of Table 2.
Given the uncertainties reviewed above, the possibility of a large
increase in BIF-insured deposit growth during 1996 should be considered
seriously. Despite this concern, it is the judgment of the Board that
BIF assessment rates should not be changed at this time; rather,
deposit flows and trends in deposit growth rates should be closely
monitored in preparation for future decisions regarding BIF assessment
rates.
In summary, for the reasons discussed above, the Board believes
that the assessment schedule for the current semiannual period will
generate the revenue necessary to maintain the reserve ratio at the DRR
in the next semiannual period.
B. The Long-Term Outlook
The Board believes that an important consideration in setting rates
is the long-term revenue needs of the BIF. 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 balance. This determination was based on a thorough
historical analysis of FDIC experience and consideration of recently
enacted statutory provisions that may moderate deposit insurance losses
going forward. 60 FR 42680 (August 16, 1995).
The Board has not altered its view that, in setting rates, it
should look beyond the immediate time frame in estimating the revenue
needs of the BIF. Moreover, the Board continues to believe that an
average annual assessment rate of 4 to 5 basis points would be
appropriate to achieve a long-term balance between BIF revenues and
expenses. As discussed in the preceding section, however, the current
balance in the BIF also is directly relevant to determining the
appropriate assessment level. In light of the favorable existing
conditions and outlook for the next several months, it is anticipated
that the current rate structure (with an assessment rate of zero for
the least-risky institutions) will provide adequate assessment revenue
over the near term to maintain the BIF reserve ratio at or above the
target ratio of 1.25 percent.
C. Other Considerations
In continuing the current adjustments to the assessment rate
schedule, the Board has considered the effect on members' earnings and
capital. In light of the fact that these adjustments represent a
reduction in the rates set forth in Rate Schedule 2, the Board does not
believe that the schedule will produce unwarranted adverse effects on
members. Indeed, the rate for many institutions will be zero (with a
minimum semiannual assessment of $1,000 mandated by the Federal Deposit
Insurance Act).
Another consideration is the statutory requirement under the
Federal Deposit Insurance Act for a risk-based assessment system. To be
effective, this system must incorporate a range of rates that provides
an incentive for institutions to control risk-taking behavior while at
the same time covering the long-term costs of the obligations borne by
the deposit insurer. In the judgment of the Board, these goals will be
achieved for the upcoming semiannual period by retaining the current
spread of 27 basis points between the highest- and lowest-rated
institutions.
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 from
July 1, 1996 through December 31, 1996.
By order of the Board of Directors.
Dated at Washington, DC, this 14th day of May, 1996.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Deputy Executive Secretary.
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[FR Doc. 96-12885 Filed 5-23-96; 8:45 am]
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