[Federal Register Volume 61, Number 129 (Wednesday, July 3, 1996)]
[Proposed Rules]
[Pages 34751-34767]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16349]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327
RIN 3064-AB59
Assessments
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Proposed Rule.
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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is proposing
to amend its assessment regulations by adopting interpretive rules
regarding certain provisions therein that pertain to so-called Oakar
institutions: institutions that belong to one insurance fund (primary
fund) but hold deposits that are treated as insured by the other
insurance fund (secondary fund). Recent merger transactions and branch-
sale cases have revealed weaknesses in the FDIC's procedures for
attributing deposits to the two insurance funds and for computing the
growth of the amounts so attributed. The interpretive rules would
repair those weaknesses.
In addition, the FDIC is proposing to simplify and clarify the
existing rule by making changes in nomenclature.
DATES: Comments must be received by the FDIC on or before September 3,
1996.
ADDRESSES: Send comments to the Office of the Executive Secretary,
Federal Deposit Insurance Corporation, 550 17th Street, N.W.,
Washington, D.C. 20429. Comments may be hand- delivered to Room F-400,
1776 F Street, N.W., Washington, D.C., on business days between 8:30
a.m. and 5:00 p.m. (FAX number: 202/898-3838. Internet address:
comments@fdic.gov). Comments will be available for inspection in the
FDIC Public Information Center, Room 100, 801 17th Street, N.W.,
Washington, D.C. between 9:00 a.m. and 4:30 p.m. on business days.
FOR FURTHER INFORMATION CONTACT: Allan K. Long, Assistant Director,
Division of Finance, (703) 516-5559; Stephen Ledbetter, Chief,
Assessments Evaluation Section, Division of Insurance (202) 898-8658;
Jules Bernard, Counsel, Legal Division, (202) 898-3731, Federal Deposit
Insurance Corporation, Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION: This proposed interpretive regulation would
alter the method for determining the assessments that Oakar
institutions pay to the two insurance funds. Accordingly, the proposed
regulation would directly affect all Oakar institutions. The proposed
regulation would also indirectly affect non-Oakar institutions,
however, by altering the business considerations that non-Oakar
institutions must take into account when they transfer deposits to or
from an Oakar institution (including an institution that becomes an
Oakar institution as a result of the transfer).
I. Background
Section 5(d)(2) of the FDI Act, 12 U.S.C. 1815(d)(2), places a
moratorium on inter-fund deposit-transfer transactions: mergers,
acquisitions, and other transactions in which an institution that is a
member of one insurance fund (primary fund) assumes the obligation to
pay deposits owed by an institution that is a member of the other
insurance fund (secondary fund). The moratorium is to remain in place
until the reserve ratio of the Savings Association Insurance Fund
(SAIF) reaches the level prescribed by statute. Id. 1815(d)(2)(A)(ii);
see id. 1817(b)(2)(A)(iv) (setting the target ratio at 1.25 percentum).
The next paragraph of section 5(d)--section 5(d)(3) of the FDI
Act--is known as the Oakar Amendment. See Financial Institutions
Reform, Recovery and Enforcement Act of 1989 (FIRREA), Pub. L. 101-73
section 206(a)(7), 103 Stat. 183, 199-201 (Aug. 9, 1989); 12 U.S.C.
1815(d)(3). The Amendment permits certain deposit-transfer transactions
that would otherwise be prohibited by section 5(d)(2) (Oakar
transactions).
The Oakar Amendment introduces the concept of the ``adjusted
attributable deposit amount'' (AADA). An AADA is an artificial
construct: a number, expressed in dollars, that is generated in the
course of an Oakar transaction, and that pertains to the buyer. The
initial value of a buyer's AADA is equal to the amount of the
secondary-fund deposits that the buyer acquires from the seller. The
Oakar Amendment specifies that the AADA then increases at the same
underlying rate as the buyer's overall deposit base--that is, at the
rate of growth due to the buyer's ordinary business operations, not
counting growth due to the acquisition of deposits from another
institution (e.g., in a merger or a branch purchase). Id.
1815(d)(3)(C)(iii). The FDIC has adopted the view that ``growth'' and
``increases'' can refer to ``negative growth'' under the FDIC's
interpretation of the Amendment, an AADA decreases when the
institution's deposit base shrinks.
An AADA is used for the following purposes:
--Assessments. An Oakar institution pays two assessments to the FDIC--
one for deposit in the institution's secondary fund, and the other for
deposit in its primary fund. The secondary-fund assessment is based on
the portion of the institution's assessment base that is equal to its
AADA. The primary-fund assessment is based on the remaining portion of
the assessment base.
--Insurance. The AADA measures the volume of deposits that are
``treated as'' insured by the institution's secondary fund. The
remaining deposits are insured by the primary fund. If an Oakar
institution fails, and the failure causes a loss to the FDIC, the two
insurance funds share the loss in proportion to the amounts of deposits
that they insure.
For assessment purposes, the AADA is applied prospectively, as is
the assessment base. An Oakar institution has an AADA for a current
semiannual period, which is used to determine the institution's
assessment for that period.1 The current-period AADA is calculated
using deposit-growth and other information from the prior period.
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\1\ Technically, each Oakar transaction generates its own AADA.
Oakar institutions typically participate in several Oakar
transactions. Accordingly, and Oakar institution generally has an
overall or composite AADA that consists of all the individual AADAs
generated in the various Oakar transactions, plus the growth
attributable to each individual AADA. The composite AADA can
generally be treated as a unit as a practical matter, because all
the constituent AADAs (except initial AADAs) grow at the same rate.
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II. The proposed rule
A. Attribution of transferred deposits
1. The FDIC's Current Interpretation: The ``Rankin'' Rule
The FDIC has developed a methodology for attributing deposits to
the Bank Insurance Fund (BIF) on one hand and to the SAIF on the other
when the seller is an Oakar institution. See FDIC Advisory Op. 90-22, 2
FED. DEPOSIT INS. CORP., LAW, REGULATIONS, RELATED ACTS 4452 (1990)
(Rankin letter). The Rankin letter adopts the following rule: an Oakar
institution transfers its primary-fund deposits first, and only begins
to
[[Page 34752]]
transfer its secondary-fund deposits after its primary-fund deposits
have been exhausted.
The chief virtue of this approach is that of simplicity. Sellers
rarely transfer all their primary-fund deposits. A seller ordinarily
has the same AADA after the transaction as before, and a buyer does not
ordinarily become an Oakar institution. The Rankin letter's approach
also has the virtue of being a well- established and well-understood
interpretation.
Nevertheless, the Rankin letter's approach has certain weaknesses.
For example, if a seller transfers a large enough volume of deposits,
the seller becomes insured and assessed entirely by its secondary
fund--even though it remains a member of its primary fund in name, and
even though its business has not changed in character.
The Rankin letter's approach may also lend itself to ``gaming'' by
Oakar institutions. Oakar banks--and their owners--have an incentive to
eliminate their AADAs, because the SAIF assessment rates are currently
much higher than the BIF rates. If an Oakar bank belonged to a holding
company system, the holding company could purge the AADA from the
system as a whole by having the Oakar bank transfer all its BIF-insured
deposits to an affiliate, and then allowing the remnant of the Oakar
bank to wither away.
2. ``Blended'' deposits
An alternative approach would be to adopt the view that an Oakar
institution transfers a blend of deposits to the assuming institution.
The transferred deposits would be attributed to the two insurance funds
in the same ratio as the Oakar institution's overall deposits were so
attributed immediately prior to the transfer. This ``blended deposits''
approach would have the virtue of maintaining the relative proportions
of the seller's primary-fund deposit-base and the secondary-fund
deposit base, just as they are preserved in the ordinary course of
business.
As a general rule, the ratio would be fixed at the start of the
quarter in which the transfer takes place. If the institution were to
acquire deposits after the start of the quarter but prior to the
transfer, the acquired deposits would be added to the institution's
store of primary-fund and secondary-fund deposits as appropriate, and
the resulting amounts would be used to determine the ratio.
This procedure would be designed to exclude intra-quarter growth
from the calculation of the ratio. The FDIC considers that it would be
desirable to do so for two main reasons: it would keep the methodology
simple; and (in the ordinary case) it would make use of numbers that
are readily available to the parties.
At the same time, the ``blended deposits'' approach would create a
new Oakar institution each time a non-Oakar institution acquired
deposits from an Oakar institution. Accordingly, this approach would
generally subject buyers to more complex reporting and tracking
requirements. This approach would also require more disclosure on the
part of sellers, because buyers would have to be made aware that they
were acquiring high-cost SAIF deposits. But the ``blended deposits''
approach could remove some uncertainty because the buyer would know
that it was acquiring such deposits whenever the seller was an Oakar
institution.
In cases where the seller has acquired deposits prior to the sale
but during the same semiannual period as the sale, the blended-deposit
approach could be more complex. The acquisition of deposits would
change the seller's AADA-to-deposits ratio, which would need to be
calculated and made available in conjunction with the sale. At first,
the FDIC considered that this problem could be addressed by using the
ratio at the beginning of the quarter for all transactions during that
quarter. But the FDIC later came to the view that this technique could
open up the blended-deposit approach to gaming strategies that
institutions could use to decrease their AADAs.
Finally, under the blended-deposit approach, Oakar banks--which are
BIF members--could find it difficult (or expensive) to transfer
deposits to other institutions, due to market uncertainty regarding the
prospect of a special assessment to capitalize SAIF and the alternative
prospect of a continued premium differential between BIF and SAIF.
Any change to a blended-deposit approach would only apply to
transfers that take place on and after January 1, 1997. Accordingly,
the change would not affect any assessments that Oakar institutions
have paid in prior years. Nor would it affect the business aspects of
transactions that have already occurred, or that may occur during the
remainder of 1996.
B. FDIC Computation of the AADA; Reporting Requirements
The FDIC currently requires all institutions that assume secondary-
fund deposits in an Oakar transaction to submit an Oakar transaction
worksheet for the transaction. The FDIC provides the worksheet. The
FDIC provides the name of the buyer and the seller, and the
consummation date of the transaction. The buyer provides the total
deposits acquired, and the value of the AADA thereby generated. In
addition, Oakar institutions must complete a growth adjustment
worksheet to re-calculate their AADA as of December 31 of each year.
Finally, Oakar banks report the value of their AADA, on a quarterly
basis, in their quarterly reports of condition (call reports).
To implement the proposal to adjust AADAs on a quarterly basis, and
to ensure compliance with the statutory requirement that an AADA does
not grow during the semiannual period in which it is acquired, see 12
U.S.C. 1815(d)(3)(C)(iii), the FDIC initially considered replacing the
current annual growth adjustment worksheet with a slightly more
detailed quarterly worksheet. The FDIC was concerned that this approach
might impose a burden on Oakar institutions, however. The FDIC was
further concerned that this approach could result in an increase in the
frequency of errors associated with these calculations. Accordingly,
the FDIC now believes it might be more appropriate to relieve Oakar
institutions of this burden by assuming the responsibility for
calculating each Oakar institution's AADA, and eliminating the growth
adjustment worksheet entirely. The FDIC would calculate the AADA as
part of the current quarterly payment process. The calculation, with
supporting documentation, would accompany each institution's quarterly
assessment invoice.
If the FDIC assumes the responsibility for calculating the AADA,
Oakar institutions would no longer have to report their AADAs in their
call reports. But they would have to report three items on a quarterly
basis. Oakar institutions already report two of the items as part of
their annual growth adjustment worksheets: total deposits acquired in
the quarter, and secondary-fund deposits acquired in the quarter. Oakar
institutions would therefore have to supply one other item: total
deposits sold in the quarter.
These items will be zero in most quarters. Even in quarters in
which some transactions have occurred, the FDIC considers that the
items should be readily available and easy to calculate.
While for operational purposes, the FDIC would prefer to add these
three items to the call report, an alternative approach would be simply
to replace the current growth adjustment worksheet with a very simple
quarterly worksheet essentially consisting only of these items. The
FDIC expects this specific issue to be addressed in a Request for
Comment on Call Report
[[Page 34753]]
Revisions for 1997 currently expected to be issued jointly by the three
banking agencies in July.
In addition, if the FDIC adopts the blended-deposit approach for
attributing transferred deposits, the FDIC would need an additional
quarterly worksheet from Oakar institutions in order to calculate AADAs
accurately. The additional worksheet would report the date and amount
of deposits involved in each transaction in which the Oakar institution
transferred deposits to another institution during the quarter. This
information is not currently collected.
C. Treatment of AADAs on a Quarterly Basis
The FDIC is proposing to adopt the view that--under its existing
regulation--an AADA for a semiannual period may be considered to have
two quarterly components. The increment by which an AADA grows during a
semiannual period may be considered to be the result of the growth of
each quarterly component.
1. Quarterly Components
a. Propriety of quarterly components. The FDIC's assessment
regulation speaks of an institution's AADA ``for any semiannual
period''. 12 CFR 327.32(a)(3). The FDIC currently interprets this
phrase to mean that an AADA has a constant value throughout a
semiannual period. The FDIC has taken this view largely for historical
reasons. Recent changes in the Oakar Amendment give the FDIC room to
alter its view.
The FDIC's ``constant value'' view derives from the 1989 version of
the Oakar Amendment. See 12 U.S.C. 1815(d)(3) (Supp. I 1989). That
version of the Amendment said that an Oakar bank's AADA measured the
``portion of the average assessment base'' that the SAIF could assess.
Id. 1815(d)(3)(B). The FDI Act (as then in effect) defined the
``average assessment base'' as the average of the institution's
assessment bases on the two dates for which the institution was
required to file a call report. Id. 1817(b)(3). As a result, an AADA--
even a newly created one, and even one that was generated in a
transaction during the latter quarter of the prior semiannual period--
served to allocate an Oakar bank's entire assessment base for the
entire current semiannual period. The FDIC issued rules in keeping with
this view. 54 FR 51372 (Dec. 15, 1989).
Congress decoupled the AADA from the assessment base at the
beginning of 1994, as part of the FDIC's changeover to a risk-based
assessment system. See Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), Pub. L. 102-242, section 302(e) &
(g), 105 Stat. 2236, 2349 (Dec. 19, 1991); see also Defense Production
Act Amendments of 1992, Pub L. 102-558, section 303(b)(6)(B), 106 Stat.
4198, 4225 (Oct. 28, 1992) (amending the FDICIA in relevant part); cf.
58 FR 34357 (June 23, 1993). The Oakar Amendment no longer links the
AADA directly to the assessment base. The Amendment merely declares,
``[T]hat portion of the deposits of [an Oakar institution] for any
semiannual period which is equal to [the Oakar institution's AADA] * *
* shall be treated as deposits which are insured by [the Oakar
institution's secondary fund]''. See 12 U.S.C. 1815(d)(3).
The FDIC has not changed its rules for assessing Oakar
institutions, and has continued to interpret the rules in the same
manner as before. Accordingly, the ``constant value'' concept of the
AADA has continued to be the view of the FDIC.
But the FDIC is no longer compelled to retain this view.
Furthermore, as discussed below, the FDIC has found that this approach
has certain disadvantages. The FDIC is therefore proposing to re-
interpret the phrase ``for any semiannual period'' as it appears in
Sec. 327.32(a)(3) in the light of the FDIC's quarterly assessment
program. The FDIC would take the position that an Oakar institution's
AADA for a semiannual period may be determined on a quarter-by-quarter
basis--just as the assessment base for a semiannual period is so
determined--and may be used to measure the portion of each quarterly
assessment base that is to be assessed by the institution's secondary
fund. The FDIC would also take the view that, if an AADA is generated
in a transaction that takes place during the second calendar quarter of
a semiannual period, the first quarterly component of the AADA for the
current (following) semiannual period is zero; only the second
quarterly component is equal to the volume of the secondary-fund
deposits that the buyer so acquired.
The FDIC considers that this view of the phrase ``for any
semiannual period'' is appropriate because the phrase is the
counterpart of, and is meant to interpret, the following language in
the Oakar Amendment:
(C) DETERMINATION OF ADJUSTED ATTRIBUTABLE DEPOSIT AMOUNT.--The
adjusted attributable deposit amount which shall be taken into
account for purposes of determining the amount of the assessment
under subparagraph (B) for any semiannual period * * *
12 U.S.C. 1815(d)(3)(C).
This passage speaks of the assessment--not the AADA--``for any
semiannual period''. Insofar as the AADA is concerned, the statutory
language merely specifies the semiannual period for which the AADA is
to be computed: the period for which the assessment is due. The FDIC
believes that the phrase ``for a semiannual period'' may properly be
read to have the same meaning.
Moreover, while the Amendment says the AADA must ``be taken into
account'' in determining a semiannual assessment, the Amendment does
not prescribe any particular method for doing so. The FDIC considers
that this language provides enough latitude for the FDIC to apply the
AADA in a manner that is appropriate to the quarterly payment program.
The FDIC's existing regulation is compatible with this
interpretation. The regulation speaks of an assessment base for each
quarter, not of an average of such bases. The regulation further says
that an Oakar institution's AADA fixes a portion of its ``assessment
base''. See 12 CFR 327.32(a)(2) (i) & (ii). Accordingly, the FDIC is
not proposing to modify the text that specifies the method for
computing AADAs.
b. Need for the re-interpretation. Under certain conditions, the
FDIC's ``constant value'' view of the AADA appears to be tantamount to
double-counting transferred deposits for a calendar quarter.
The appearance of ``double-counting'' occurs when an Oakar
institution acquires secondary-fund deposits in the latter half of a
semiannual period--i.e., in the second or fourth calendar quarter. The
seller has the deposits at the end of the first (or third) quarter; its
first payment for the upcoming semiannual period is based on them. At
the same time, the buyer's secondary-fund assessment is approximately
equal to an assessment on the transferred deposits for both quarters in
the semiannual period.2
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\2\ The correlation is not so close as it first appears. Various
factors distort the relation between an Oakar institution's deposit
base on one hand and its primary-fund and secondary-fund assessment
bases on the other.
The chief factor is the so-called float deduction, which is
equal to the sum of one-sixth of an institution's demand deposits
plus one percentum of its time and savings deposits. See 12 CFR
327.5(a)(2). An Oakar institution's secondary-fund assessment base
is equal to the full value of its AADA, however. See id.
327.32(a)(2). The impact of the float deduction falls entirely on
the primary-fund assessment base.
Accordingly, neither the primary-fund assessment base nor the
secondary-fund assessment base is directly proportional to the
institutional's total deposits. Nor does the split between the
institutions two assessment base match the split between the
institution's primary-fund and secondary-fund deposits.
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[[Page 34754]]
The source of this apparent effect is that, under the FDIC's
current interpretation of its rule, an AADA--even a newly generated
one--applies to an Oakar institution's entire assessment base for the
entire semiannual period. The following example illustrates the point.
The example focuses on the average assessment base, in order to show
the relationship between the AADA and the assessment base up to the
time the FDIC adopted the quarterly-payment procedure:
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Seller
(SAIF) Buyer (BIF) Industry total
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Before the transaction:
Starting assessment bases (ignoring
float, &c.):
SAIF........................... $200 $0 $200.
BIF............................ 0 100 100.
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200 100 300.
The transaction:
March call report...................... 200 100 300.
Deposits sold.......................... (100) +100 (AADA) Neutral.
June call report....................... 100 200 300.
After the transaction:
Ending assessment bases (ignoring
float, &c.):
SAIF........................... 100 100 (AADA) 200.
BIF............................ 0 100 100.
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100 200 300.
Average assessment bases:
(Ignoring float, &c.):
SAIF........................... 150 100 (AADA) 250.
BIF............................ 0 50 50.
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150 150 300.
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The SAIF-assessable portion of the buyer's average assessment base
is $100. If the SAIF-assessable portion were based directly on the
average of the buyer's SAIF-insured deposits for the prior two
quarters--rather than on the buyer's AADA--that portion would only be
$50. The difference is equivalent to attributing the transferred $100
to the buyer for an extra one-half of the semiannual period: by
implication, for the first (or third) quarter as well as for the second
(or fourth) quarter.
The anomaly is most apparent from the standpoint of the industry as
a whole. The aggregate amount of the SAIF-assessable deposits
temporarily balloons to $250, while the aggregate amount of the BIF-
assessable deposits shrinks to $50. The anomaly only lasts for one
semiannual period, however. In the following period, the seller's
assessment base is $100 for both quarters, making its average
assessment base $100. The buyer's AADA remains $100. Accordingly, the
aggregate amount of SAIF-assessable deposits retreats to $200 once
more; and the aggregate amount of BIF-assessable deposits is back to
the full $100.
Broadening the focus to include both funds also brings out a more
subtle point: the anomaly is not tantamount to double-counting the
transferred deposits for a quarter, but rather to re-allocating the
buyer's assessment base from the BIF to the SAIF. The BIF-assessable
portion of the buyer's average assessment base is $50, not $100. The
difference is equivalent to cutting the buyer's BIF assessment base by
$100 for half the semiannual period.
The FDIC's quarterly-payment procedure has brought attention to
these anomalous effects. The quarterly-payment schedule is merely a new
collections schedule, not a new method for determining the amount due.
See 59 FR 67153 (Dec. 29, 1994). Accordingly, under current procedures,
the buyer and the seller in the illustration would pay the amounts
specified therein even under the quarterly-payment schedule.
When an Oakar transaction occurs in the latter half of a semiannual
period, however, the buyer's call report for the prior quarter does not
show an AADA. The buyer's first payment for the current semiannual
period is therefore based on its assessment base for that quarter, not
on its AADA. Moreover, the entire payment is computed using the
assessment rate for the institution's primary fund. The FDIC therefore
adjusts (and usually increases) the amount to be collected in the
second quarterly payment in order to correct these defects.
Interpreting the semiannual AADA to consist of two quarterly
components would eliminate this anomaly.
2. Quarterly Growth
The Oakar Amendment says that the growth rate for an AADA during a
semiannual period is equal to the ``annual rate of growth of deposits''
of the Oakar institution. The FDIC currently interprets the phrase
``annual rate'' to mean a rate determined over the interval of a full
year. An Oakar institution computes its ``annual rate of growth'' at
the end of each calendar year, and uses this figure to calculate the
AADA for use during the following year.
This procedure has a weakness. An Oakar institution's AADA tends to
drift out of alignment with the deposit base, because the AADA remains
constant while the deposit base changes. At the end of the year, when
the institution computes its AADA for the next year, the AADA
suddenly--but only temporarily--snaps back into its proper proportion.
The FDIC does not believe that Congress intended to cause such a
fluctuation in the relation between an institution's AADA and its
deposit base.
[[Page 34755]]
Moreover, from the FDIC's standpoint as insurer, it would be
appropriate to maintain a relatively steady correlation between the
AADA and the total deposit base. The FDIC is therefore proposing to
revise its view, and take the position that--after the end of the
semiannual period in which an institution's AADA has been established--
the AADA grows and shrinks at the same basic rate as the institution's
domestic deposit base (that is, excluding acquisitions and deposit
sales), measured contemporaneously on a quarter-by-quarter basis. Over
a full semiannual period, any increase or decrease in the AADA would
automatically occur at a rate equal to the ``rate of growth of
deposits'' during the semiannual period, thereby satisfying the
statutory requirement.
The FDIC considers that the statutory reference to an ``annual
rate'' does not foreclose this approach. In ordinary usage, ``annual
rate'' can refer to a rate that is expressed as an annual rate, even
though the interval during which the rate applies, and over which it is
determined, is a shorter interval such as a semiannual period (e.g., in
the case of six-month time deposits). For example, until recently, the
FDIC's rules regarding the payment of interest on deposits spoke of
``the annual rate of simple interest''--a phrase that pertained to
rates payable on time deposits having maturities as short as seven
days. See 12 CFR 329.3 (1993).
Comparison of Annual and Quarterly AADA Growth Adjustment Methods
Consider an Oakar institution that has total deposits of $15 as of
12/31/93, with an AADA of $6.5. Further assume that the institution's
total deposits grow by $1 every quarter, and that it does not
participate in any additional acquisitions or deposit sales. The
following graphs show the effects of making growth adjustments to its
AADA on an annual basis versus a quarterly basis.
BILLING CODE 6714-01-P
[[Page 34756]]
[GRAPHIC] [TIFF OMITTED] TP03JY96.004
[GRAPHIC] [TIFF OMITTED] TP03JY96.005
Since an AADA remains constant until a growth adjustment is
applied, any change in total deposits is reflected in the institution's
primary-fund deposits in the annual-adjustment method, while primary-
fund deposits and the AADA vary together with total deposits in the
quarterly-adjustment method.
The following graphs express this difference in terms of percents
of total deposits.
[[Page 34757]]
[GRAPHIC] [TIFF OMITTED] TP03JY96.006
[GRAPHIC] [TIFF OMITTED] TP03JY96.007
In the annual-adjustment method, the AADA becomes a smaller percent
of total deposits as the total grows. In the quarterly-adjustment
method, the AADA and the primary-fund deposits remain constant percents
of total deposits.
The FDIC considered an alternative approach: using the rate of
growth in the institution's deposit base for the prior four quarters,
measured from the current quarter. This technique would be as
consistent with the letter of the statute as the current method. But
the four-prior-quarters method would preserve the lag between the AADA
and the deposit base.
Comparison of Quarterly AADA Adjustments Using Different Growth Rate
Bases
Consider the same Oakar institution with beginning total deposits
of $15 and constant growth of $1 per quarter. The following graphs
illustrate the effects on deposits of using total-deposit growth rates
on two different bases: rolling one-year growth rates, and quarter-to-
quarter growth rates.
[[Page 34758]]
[GRAPHIC] [TIFF OMITTED] TP03JY96.008
[GRAPHIC] [TIFF OMITTED] TP03JY96.009
In both cases, the primary-fund deposits and the AADA appear to
vary together with total deposits, but it is difficult to discern their
precise relationship. Graphs of the same effects in terms of percents
of total deposits are more illustrative:
[[Page 34759]]
[GRAPHIC] [TIFF OMITTED] TP03JY96.010
[GRAPHIC] [TIFF OMITTED] TP03JY96.011
BILLING CODE 6714-01-C
[[Page 34760]]
In the percent-of-deposits graphs, the AADA and the primary-fund
deposits are shown to converge when the AADA growth adjustment is based
on rolling one-year growth rates. In this particular example, the
effect occurs because the institution's constant growth of $1 per
quarter results in a steadily decreasing rate of growth of total
deposits. Therefore, a rolling one-year growth rate of those total
deposits at any point in time will be more than the actual rate of
growth over the quarter to which the rolling rate is being applied.
While different growth characteristics for total deposits would yield
different relationships between the AADA and the primary fund over
time, the general point is that the relationships of the AADA and the
primary-fund deposits can vary when the AADA is adjusted, unless the
total-deposit rate of growth used for the adjustment is drawn from the
same period for which the rate is applied to the AADA.
As shown in the right-hand graph, applying the actual quarterly
growth rate for total deposits to the AADA results in stable percents
of total deposits for the AADA and primary fund deposits.
In sum, the FDIC considers that the quarterly approach is
permissible under the statute, and is preferable to any approach that
relies on a yearly interval to determine growth in the AADA.
D. Negative Growth of the AADA
One element of an Oakar institution's AADA for a current semiannual
period is ``the amount by which [the AADA for the preceding semiannual
period] 3 would have increased during the preceding semiannual
period if such increase occurred at a rate equal to the annual rate of
growth of [the Oakar institution's] deposits''. 12 U.S.C.
1815(d)(3)(C)(iii). The FDIC is proposing to codify its view that the
terms ``growth'' and ``increase'' encompass negative growth
(shrinkage). But the FDIC is proposing to change its interpretation by
excluding shrinkage due to deposit sales.
---------------------------------------------------------------------------
\3\ Theoretically, the growth rate is not applied directly to
the prior AADA, but rather to an amount that is computed afresh each
time--which amount is the sum of the various elements of the prior
AADA.
---------------------------------------------------------------------------
1. Negative Growth in General
The 1989 version of the Oakar Amendment focused on an Oakar bank's
underlying rate of growth for the purpose of determining the Oakar
bank's AADA. The 1989 version of the Amendment set a minimum growth
rate for an AADA of 7 percent. The Amendment then specified that, if an
Oakar bank's deposit base grew at a higher rate, the AADA would grow at
the higher rate too. But the Amendment excluded growth attributable to
mergers, branch purchases, and other acquisitions of deposits from
other BIF members: the deposits so acquired were to be subtracted from
the Oakar bank's total deposits for the purpose of determining the
growth in the Oakar bank's deposit base (and therefore the rate of
growth of the AADA). See 12 U.S.C. 1813(d)(3)(C)(3)(iii) (Supp. I
1989).
The 1989 version of the Oakar Amendment spoke only of ``growth''
and ``increases'' in the AADA. Id. The statute was internally
consistent in this regard, because AADAs could never decrease.
Congress eliminated the minimum growth rate as of the start of
1992. FDICIA section 501 (a) & (b), 105 Stat. 2389 & 2391. As a result,
the Oakar Amendment now specifies that an Oakar institution's AADA
grows at the same rate as its domestic deposits (excluding mergers,
branch acquisitions, and other acquisitions of deposits). 12 U.S.C.
1813(d)(3)(C).
The modern version of the Oakar Amendment continues to speak only
of ``growth'' and ``increases,'' however. Congress has not--at least
not explicitly--modified it to address the case of an institution that
has a shrinking deposit base. Nor has Congress addressed the case of an
institution that transfers deposits in bulk to another insured
institution.
The FDIC regards this omission as a gap in the statute that
requires interpretation. The FDIC does so because, if the statute were
read to allow only increases in AADAs, the statute would generate a
continuing shift in the relative insurance burden toward the SAIF. Most
Oakar institutions--and nearly all large Oakar institutions--are BIF-
member Oakar banks. If an Oakar bank's deposit base were to shrink
through ordinary business operations, but its AADA could not decline in
proportion to that shrinkage, the SAIF's share of the risk presented by
the Oakar bank would increase. But the reverse would not be true: if an
Oakar bank's deposit base increased, its AADA would rise as well, and
the SAIF would continue to bear the same share of the risk. The result
would be a tendency to displace the insurance burden from the BIF to
the SAIF.4
---------------------------------------------------------------------------
\4\ A shrinking Oakar thrift would have the opposite effect: The
BIF's exposure would increase, and the SAIF's exposure would
decrease. The Oakar thrifts are comparatively rare, however. The net
bias would run against the SAIF.
---------------------------------------------------------------------------
The FDIC further considers that the main themes of the changes that
Congress made to the Oakar Amendment in 1991 are those of
simplification, liberalization, and symmetry. Congress allowed savings
associations to acquire banks, as well as the other way around.
Congress allowed institutions to deal with one another directly,
eliminating the requirement that the institutions must belong to the
same holding company (and the need for approval by an extra federal
supervisor). Congress established a mirror-image set of rules for
assessing Oakar banks and Oakar thrifts. As noted above, Congress
repealed the 7 percentum floor on AADA growth, thereby eliminating the
most prominent cause of divergence between an Oakar institution's
assessment base and its deposit base. Congress expanded the scope of
the Oakar Amendment and made it congruent with the relevant provisions
of section 5(d)(2). See FDICIA section 501(a), 105 Stat. 2388-91 (Dec.
19, 1991).
In keeping with this view of the 1991 amendments, the FDIC
interprets the growth provisions of the Oakar Amendment symmetrically:
that is, to encompass negative growth rates as well as positive ones.
The FDIC takes the position that an Oakar institution's AADA grows and
shrinks at the same underlying rate of growth as the institution's
domestic deposits.
The FDIC considers that this interpretation is appropriate because
it accords with customary usage in the banking industry, and because it
is consistent with the purposes and the structure of the statute. Under
the FDIC's interpretation, each fund continues to bear a constant share
of the risk posed by the institution, and continues to draw assessments
from a constant proportion of the institution's deposit base.
Moreover, the FDIC's interpretation encourages banks to make the
investment that Congress wished to promote. If ``negative increases''
were disallowed, Oakar banks would see their SAIF assessments (which
currently carry a much higher rate) grow disproportionately when their
deposits shrank through ordinary business operations.
Finally, the interpretation is designed to avoid--and has generally
avoided--the anomaly of an institution having an AADA that is larger
than its total deposit base.
2. Negative Growth Due to Deposit-Transfers
As noted above, for the purpose of analyzing deposit sales, the
FDIC
[[Page 34761]]
follows the deposit-attribution principles set forth in the Rankin
letter: the Oakar institution transfers its primary-fund deposits until
they have been exhausted, and only then transfers its secondary-fund
deposits. The FDIC further considers that--consistent with the
moratorium imposed by section 5(d)(2)--the deposits continue to have
the same status for insurance purposes after the deposit sale as
before. The industry-wide stock of BIF-insured and SAIF-insured
deposits should remain the same.
The FDIC's procedure for calculating the growth of the AADA upsets
that balance, however. The deposit sale reduces the Oakar bank's total
deposit base by a certain percentage: accordingly, the Oakar bank's
AADA--and therefore its volume of SAIF-insured deposits--is reduced by
the same percentage. Its BIF-insured deposits increase correspondingly.
In effect, SAIF deposits are converted into BIF deposits, in violation
of the moratorium.
This effect occurs without regard for whether the transferred
deposits are primary-fund or secondary-fund deposits. Even when a BIF-
member Oakar bank transfers deposits to another BIF-member bank--a
transfer that, under the Rankin letter, would only involve BIF-insured
deposits--the deposit sale serves to shrink the transferring bank's
AADA.
The FDIC is proposing to cure this defect by excluding deposit
sales from the growth computation. The FDIC continues to believe that
the terms ``growth'' and ``increase'' as used in the statute are broad
enough to refer to a negative rate as well as a positive one. But the
FDIC does not consider that it is required to extend these terms beyond
reasonable limits. In particular, the FDIC does not believe that it
must necessarily interpret these terms to include a decrease that is
attributable to a bulk transfer of deposits. The statute itself
excludes the effect of an acquisition or other deposit-assumption from
the computation of growth. The FDIC considers that it has ample
authority to make an equivalent exclusion for deposit sales.
The FDIC believes its proposed interpretation is sound because
deposit sales do not--in and of themselves--represent any change in the
industry-wide deposit base of each fund. It is inappropriate for the
FDIC to generate such a change on its own as a collateral effect of its
assessment procedures. Moreover, the proposed interpretation is in
accord with the tenor of the amendments made by the FDICIA, because it
treats deposit sales symmetrically with deposit-acquisitions.
E. Value of an Initial AADA
The Oakar Amendment says that an Oakar institution's initial AADA
is equal to ``the amount of any deposits acquired by the institution in
connection with the transaction (as determined at the time of such
transaction)''. Id. 1815(d)(3)(C). The FDIC has by regulation
interpreted the phrase ``deposits acquired by the institution''. 12 CFR
327.32(a)(4). The regulation distinguishes between cases in which a
buyer assumes deposits from a healthy seller (healthy-seller cases),
and cases in which the FDIC is serving as conservator or receiver for
the seller at the time of the transaction (troubled-seller
cases).5
---------------------------------------------------------------------------
\5\ The regulation also refers to the Resolution Trust
Corporation (RTC). The reference is obsolete, as the RTC no longer
exists.
---------------------------------------------------------------------------
The FDIC proposes to retain but refine its interpretation with
respect to healthy-seller cases. The FDIC also proposes to codify its
``conduit'' rule for certain deposits that a buyer promptly retransfers
to a third party. The FDIC proposes to eliminate the special provisions
for troubled-seller cases.
1. The ``Nominal Amount'' Rule
The general rule is that a buyer's initial AADA equals the full
nominal amount of the assumed deposits. 12 CFR 327.32(a)(3)(4).
The FDIC is proposing to retain the substance of this provision.
The proposed rule would continue to emphasize the point that the amount
of the transferred deposits is to be measured by focusing on the volume
divested by the seller. The purpose of the rule is to make it clear
that post-transaction events--such as deposit run-off--have no bearing
on the calculation of the buyer's AADA.
The FDIC considers that the nominal-value rule is appropriate for
two chief reasons. Most importantly, it reflects the manifest intent of
the statute, which says that the volume of the acquired deposits are to
be ``determined at the time'' of the transaction. Second, the nominal-
value rule has the virtues of clarity and precision. A buyer and a
seller will both know precisely the value of an AADA that is generated
in an Oakar transaction. The buyer's expected secondary-fund
assessments can be an important cost for the parties to consider when
deciding on an acceptable price. The FDIC considers that the nominal-
value rule reduces uncertainty on this point.
The proposed rule would update this aspect of the regulation in two
minor ways. The existing rule is somewhat obsolete: it presumes that
the buyer assumes all the seller's deposits, and that all such deposits
are insured by the buyer's secondary fund. The reason for these
presumptions is purely historical. At the time the regulation was
adopted, the Oakar Amendment only spoke of cases in which the seller
merged into or consolidated with the buyer, or in which the buyer
acquired all the seller's assets and liabilities. See 12 U.S.C.
1815(d)(3)(A) (Supp. I 1989). The Amendment did not allow for less
comprehensive Oakar transactions (e.g., branch sales). Nor did it
contemplate a transaction in which the seller was an Oakar institution
in its own right.
The proposed rule would make it clear that the nominal-amount rule
applies to all Oakar transactions. The proposed rule would also specify
that the AADA is only equal to the nominal amount of the transferred
deposits that are insured by the secondary fund of the buyer, not
necessarily all the transferred deposits. Both these points represent
the current view of the FDIC.
2. Deposits Acquired From Troubled Institutions
The FDIC's current regulation provides various discounts that serve
to reduce the buyer's AADA when the seller is in conservatorship or
receivership at the time of the sale. See 12 CFR 327.32(a)(3)(4). The
FDIC is proposing to eliminate the discounts, on the ground that they
are no longer needed.
In adopting the rule, the FDIC observed that the deposits that a
buyer assumes from a troubled seller are quite volatile: the buyer
generally loses a certain percentage of the deposits almost
immediately. The FDIC characterized the lost deposits as ``phantom
deposits'', and said it would make no sense to require the bank to
continue to pay assessments on them. The FDIC further said that such a
requirement would impair its ability to transfer the business of such
thrifts to healthy enterprises, to the detriment of the communities the
thrifts were serving. See 54 FR at 51373. The FDIC accordingly adopted
an interpretive rule stating that the nominal amount of the deposits
transferred in such cases were to be discounted for the purpose of
computing the AADA generated in the transaction, as follows:
--Brokered deposits: All brokered deposits are subtracted from the
nominal volume of the transferred deposits.
--The ``80/80'' rule: Each remaining deposit is capped at $80,000. The
[[Page 34762]]
AADA is equal to 80% of the aggregate of the deposits as so capped.
The FDIC explained that these discounts reflected its actual
experience--that is, its experience with arranging purchase-and-
assumption transactions for institutions in receivership. Id. But the
discounts were not intended to represent the actual run-off that an
individual Oakar institution would sustain in a particular case.
Rather, they were an approximation or estimate of the run-off that
Oakar institutions ordinarily sustain in troubled-seller cases.
As an historical matter, the FDIC determined that it was
appropriate to provide the discounts because the funding decisions for
troubled thrift institutions were subject to constraints and
considerations that fell outside the normal range of factors
influencing such decisions in the market place for healthy thrifts. The
sellers had often been held in conservatorship for some time. In order
to maintain the assets in such institutions, it often was necessary for
the conservator to obtain large and other high-yielding deposits for
funding purposes. Both the size of the discounts, and the fact that the
discounts were restricted to troubled-seller cases, were known publicly
in 1989 and were relevant to every potential buyer's decision to
acquire and price a thrift institution.
Although healthy sellers in unassisted transactions also sometimes
relied upon volatile deposits for funding, these funding decisions were
part of a strategy to maximize the profits of a going concern, and the
management of the purchasing institutions were accountable to
shareholders. The comparable decisions for troubled sellers in assisted
transactions were made by managers of government conservatorships that
were subject to funding constraints, relatively inflexible operating
rules (necessary to control a massive government effort to sell failed
thrifts), and other considerations outside the scope of the typical
private transaction.
While the FDIC recognized that it was incumbent upon any would-be
buyer to evaluate and price all aspects of a transaction, the FDIC
determined that it would be counterproductive to require bidders to
price the contingencies related to volatile deposits in assisted
transactions, given that these deposits primarily were artifacts of
government conservatorships. Considering the objective of attracting
private capital in order to avoid additional costs to the taxpayer, the
FDIC sought to avoid the potential deterrent effect of including these
artificial elements in the pricing equation. In order to reflect the
volatile deposits acquired in assisted transactions, the FDIC
determined to provide the above-described discounts.
The FDIC adopted this interpretive rule at a time when troubled and
failed thrifts were prevalent, and the stress on the safety net for
such institutions was relatively severe. The stress has been
considerably relieved, however. The FDIC considers that, under current
conditions, there is no longer any need to maintain a special set of
rules for troubled-seller cases.
Moreover, the discounts are, at bottom, simply another factor that
helps to determine the price that a buyer will pay for a troubled
institution. The FDIC ordinarily must contribute its own resources to
induce buyers to acquire such institutions. Any reduction in future
assessments that the FDIC offers as an incentive merely reduces the
amount of money the FDIC must contribute at the time of the
transaction. The simpler and more straightforward approach is to
reflect all such considerations in the net price that buyers pay for
such institutions at the time of the transaction.
3. Conduit Deposits
The FDIC staff has taken the position that, under certain
circumstances, when an Oakar institution re-transfers some of the
secondary-fund deposits it has assumed in the course of an Oakar
transaction, the re-transferred deposits will not be counted as
``acquired'' deposits for purposes of computing the Oakar institution's
AADA. The Oakar institution is regarded as a mere conduit for the re-
transferred deposits. The deposits themselves retain their original
status as BIF-insured or SAIF-insured after the re-transfer: whatever
their status in the hands of the original transferor, the deposits have
that status in the hands of the ultimate transferee.
The FDIC has applied its ``conduit'' principle only in very narrow
circumstances. The FDIC has done so only when the Oakar institution has
been required to commit to re-transfer specified branches as a
condition of approval of the acquisition of the seller; the commitment
has been enforceable; and the re-transfer has been required to occur
within six months after consummation of the initial Oakar transaction.
See, e.g., FDIC Advisory Op. 94-48, 2 FED. DEPOSIT INS. CORP., LAW,
REGULATIONS, RELATED ACTS 4901-02 (1994).
The FDIC is proposing to codify and refine this view. As codified,
secondary-fund deposits would have the status of ``conduit'' deposits
in the hands of an Oakar institution only if a Federal banking
supervisory agency or the United States Department of Justice
explicitly ordered the Oakar institution to re-transfer the deposits
within six months, if the institution's obligation to make the re-
transfer was enforceable, and if the re-transfer had to be completed in
the six-month grace period.
Conduit deposits would be included in the Oakar institution's AADA
only on a temporary basis: for one semiannual period, or in some cases
two periods, but no more. The deposits would be counted in the ``amount
of deposits acquired'' by the Oakar institution--and therefore in its
AADA--during the semiannual period in which the transaction occurs. The
AADA so computed would be used to determine the assessment due for the
following semiannual period. In addition, if the Oakar institution
retained the deposits during part of that following period, the
deposits would again be included in the ``amount of deposits
acquired''--and would again be part of the institution's AADA--for the
purpose of computing the assessment for the semiannual period after
that. But thereafter the deposits would be excluded from the ``amount
of deposits acquired'' by the Oakar institution.
If the conditions were not satisfied, the conduit principle would
not come into play, and the deposits would be regarded as having been
assumed by the Oakar institution at the time of the original Oakar
transaction. Any subsequent transfer of the deposits would be treated
as a separate transaction, and analyzed independently of the Oakar
transaction.
The FDIC is currently considering alternative methodologies for
attributing any deposits that an Oakar institution might transfer to
another institution. The conduit principle's economic impact is
somewhat greater in the context of one such methodology than in that of
the other.
The FDIC currently takes the view that, when an Oakar institution
transfers deposits to another institution, the seller transfers its
primary-fund deposits until they have been exhausted, and only then
transfers its secondary-fund deposits. A BIF-member Oakar bank has a
comparatively strong incentive to invoke the conduit principle under
this methodology. If an Oakar bank can succeed in characterizing re-
transferred deposits as conduit deposits, the bank will escape the full
impact of the SAIF assessment on those deposits, which is comparatively
high at the present time.
The FDIC is also considering a ``blended'' approach, however. Under
[[Page 34763]]
this methodology, whenever an Oakar institution transferred any
deposits to another institution, the transferred deposits would be
regarded as consisting of a blend of primary-fund and secondary-fund
deposits. The ratio of the blend would be the same as that of the
institution as a whole. This methodology would reduce the incentive for
Oakar banks to invoke the conduit principle to some extent,
particularly in the case of Oakar banks having large AADAs. An Oakar
bank's AADA would shrink as a result of any transfer of deposits, even
one that did not involve conduit deposits. The comparative benefit of
invoking the conduit rule would be correspondingly reduced.
F. Transitional Considerations
1. Freezing Prior AADAs
In theory, an Oakar institution's AADA is computed anew for each
semiannual period. An AADA for a current semiannual period is equal to
the sum of three elements:
--Element 1: The volume of secondary-fund deposits that the institution
originally acquired in the Oakar transaction;
--Element 2: The aggregate of the growth increments for all semiannual
periods prior to the one for which Element 3 is being determined; and
--Element 3: The growth increment for the period just prior to the
current period (i.e., just prior to the one for which the assessment is
due). Element 3 is calculated on a base that equals the sum of elements
1 and 2.
The FDIC has consistently interpreted its existing rules to mean
that, when a growth increment has already been determined for an AADA
for a semiannual period, the growth increment continues to have the
same value thereafter. See, e.g., FDIC Advisory Op. 92- 19, 2 FED.
DEPOSIT INS. CORP., LAW, REGULATIONS, RELATED ACTS 4619, 4620-21
(1992). The net effect has been to ``freeze'' AADAs-- and their
elements--for prior semiannual periods. The proposed rule would codify
this principle.
Accordingly, the new interpretations set forth in the proposed rule
would apply on a purely prospective basis. They would come into play
only for the purpose of computing future elements of future AADAs. The
new interpretations would not affect AADAs already computed for prior
semiannual periods (or the assessments that Oakar institutions have
already paid on them). Nor would they affect the prior-period elements
of AADAs that are to be determined for future semiannual periods. In
short, the proposed rule would ``leave prior AADAs alone''.
2. 1st-Half 1997 Assessments: Excluding Deposit Sales From the Growth
Calculation
The FDIC proposes to follow its existing procedures in computing
AADAs for the first semiannual period of 1997, with one exception. In
particular, an institution's AADA for the first semiannual period of
1997 would be based on the growth of the institution's deposits as
measured over the entire calendar year 1996. The AADA so determined
would be used to compute both quarterly payments for the first
semiannual period of 1997.
The exception is that, when computing the growth rate for deposits
during the second semiannual period of 1996, the FDIC would apply its
new interpretation of ``negative'' growth, and would decline to
consider shrinkage attributable to transactions that occurred during
July-December 1996.
The FDIC acknowledges that its proposed new interpretation would
make a significant break with the past. The FDIC further recognizes
that the new interpretation could affect the business considerations
that the parties must evaluate when they enter into deposit-transfer
transactions. The FDIC considers that the industry has ample notice of
the proposed exclusion, however, and that the parties to any such
transaction can factor in any costs that the exclusion might produce.
At the same time, the FDIC agrees that it would be inappropriate to
apply its new interpretation retroactively to transactions that have
been completed earlier in 1996. The parties to these transactions did
not have notice of the FDIC's proposal. The FDIC would therefore
include shrinkage attributable to deposit sales that occurred during
the first semiannual period of 1996 when determining the annual growth
rate to be used in computing Oakar institutions' AADAs for the first
semiannual period of 1997.
3. 2nd-Half 1997 Assessments: Use of Quarterly AADAs
The FDIC proposes to begin measuring AADAs on a quarterly basis
during the first semiannual period of 1997. The first payment that
would be computed using a quarterly component of an AADA would be the
initial payment for the next semiannual period--the payment due at the
end of June.
The first time the FDIC would identify and measure a quarterly
component of a semiannual AADA would be as of March 31, 1997. The
quarterly component with respect to that date would reflect the basic
rate of growth of the institution's deposits during the first calendar
quarter of 1997 (January-March). The quarterly AADA component so
measured would be used to determine the institution's first quarterly
payment for the second semiannual period in 1997 (the June payment).
The second quarterly AADA component would reflect the basic rate of
growth of the institution's deposits during the second calendar quarter
of 1997 (April-June). The quarterly AADA component so measured would be
used to determine the institution's second quarterly payment for the
second semiannual period in 1997 (the September payment).
G. Simplification and Clarification of the Regulation
In some respects, the proposed rule would simplify and clarify the
current regulation without changing its meaning. The FDIC is doing so
in response to two initiatives. Section 303 of the Riegle Community
Development and Regulatory Improvement Act of 1994, Pub. L. 103-325,
108 Stat. 2160 (Sept. 23, 1994), requires federal agencies to
streamline and modify their regulations. In addition, the FDIC has
voluntarily committed itself to review its regulations on a 5-year
cycle. See Development and Review of FDIC Rules and Regulations, 2 FED.
DEPOSIT INS. CORP., LAW, REGULATIONS, RELATED ACTS 5057 (1984). The
FDIC considers that subpart B of part 327 is a fit candidate for review
under each of these initiatives.
The proposed rule would clarify subpart B by defining and using the
terms ``primary fund'' and ``secondary fund''. An Oakar institution's
primary fund would be the fund to which it belongs; it would be the
other insurance fund. Using these terms, the FDIC is proposing to
simplify paragraphs (1) and (2) of Sec. 327.32(a) by eliminating
redundant language; the changes would not alter the meaning of these
provisions.
In addition, the FDIC would clarify Sec. 327.6(a) by changing the
nomenclature used therein. ``Deposit-transfer transaction'' would be
replaced by ``terminating transaction;'' ``acquiring institution''
would be replaced by ``surviving institution;'' and ``transferring
institution'' would be replaced by ``terminating institution''. The
terms now found in Sec. 327.6(a) are also used in other provisions of
part 327, where they have different and less specialized meaning. The
change in nomenclature in Sec. 327.6(a) is intended
[[Page 34764]]
to avoid any confusion that the current terminology might cause.
III. Proposed Effective Date
Section 302(b) of the Riegle Community Development and Regulatory
Improvement Act of 1994, Pub. L. 103-325, 108 Stat. 2160, 2214-15
(1994), requires that new and amended regulations imposing additional
reporting, disclosure, or other new requirements on insured depository
institutions must generally take effect on the first day of a calendar
quarter. In keeping with this requirement, the FDIC is proposing that
the rule, if adopted, would take effect on January 1, 1997.
IV. Request for Public Comment
The FDIC hereby solicits comment on all aspects of the proposed
rule. In particular, the FDIC solicits comment on the following points:
attributing deposits that an Oakar institution transfers to another
institution according to principles articulated in the Rankin letter,
or treating the transferred deposits as a blend of deposits insured by
both funds; having the FDIC, rather than individual institutions,
compute AADAs using information provided by the institutions;
interpreting AADAs as consisting of quarterly components, and computing
the growth of AADAs on a quarterly cycle rather than an annual one;
retaining the concept of negative growth for the purpose of computing
AADAs; excluding deposit sales from the computation of growth; applying
the nominal-amount principle for determining initial AADAs in all
cases, including troubled-seller cases; and preserving the conduit-
deposit concept.
In addition, in accordance with section 3506(c)(2)(B) of the
Paperwork Reduction Act, 44 U.S.C. 3506(c)(2)(B), the FDIC solicits
comment for the following purposes on the collection of information
proposed herein:
--to evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the FDIC,
including whether the information has practical utility;
--to evaluate the accuracy of the FDIC's estimate of the burden of the
proposed collection of information;
--to enhance the quality, utility, and clarity of the information to be
collected; and
--to minimize the burden of the collection of information on those who
are to respond, including through the use of automated collection
techniques or other forms of information technology.
The FDIC also solicits comment on all other points raised or
options described herein, and on their merits relative to the proposed
rule.
V. Paperwork Reduction Act
Under the FDIC's existing procedures, each Oakar institution must
compute its AADA at the end of each year, using a worksheet provided by
the FDIC (annual growth worksheet). The annual growth worksheet shows
the computation of the institution's AADA for the first semiannual
period of the current year--that is, the AADA that is used to compute
the assessment due for the first semiannual period of the current
year--which is based on the institution's growth during the prior year.
The institution must provide the annual growth worksheet to the FDIC as
a part of the institution's certified statement.
In addition, whenever an institution is the buyer in an Oakar
transaction, it must submit a transaction worksheet showing the total
deposits acquired on the transaction date. If the seller is an Oakar
institution, and if the buyer acquires the entire institution, the
buyer must also report the seller's last AADA (as shown in the seller's
last call report). The buyer must then subtract this number from the
total deposits acquired in order to determine its new AADA.
The proposed rule would change this procedure for the annual growth
worksheets for the first semiannual period of 1997 (i.e., for the
worksheets that show the growth of deposits during 1996). The change
would only affect Oakar institutions that transferred deposits to other
institutions during 1996. Such an institution would have to report the
total amount of deposits that it transferred in transactions from July
1-December 31, 1996.
Thereafter the FDIC would compute the AADAs for all Oakar
institutions, using information taken from their quarterly call
reports. Institutions would not have to report additional information
in most cases. An Oakar institution that neither acquired nor
transferred deposits in the prior quarter would not have to provide any
additional information at all. An Oakar institution that acquired
deposits would have to provide the same information at the end of the
quarter that it now provides at the end of the year; there would be a
change in the timing, but no change in burden.
Only an Oakar institution that transferred deposits would have to
provide additional information. The items of information needed, and
the number of institutions affected, would depend on the deposit-
attribution methodology chosen by the FDIC. Under the Rankin letter's
approach, the FDIC presently anticipates that approximately 100
institutions per year would report deposit sales. Sellers would have to
report the volume of deposits they transferred in the transaction.
Under the ``blended deposits'' approach, the FDIC estimates that
approximately 250 Oakar institutions per year would report deposit
sales. Sellers would have to report both the volume of deposits
transferred, and the date of the transaction. In either case, the
information would be readily available: the extra reporting burden
would be small.
The FDIC expects that the net effect would be to reduce the overall
reporting burden on Oakar institutions. The burden of submitting extra
information in deposit-sale cases would be more than offset by the
elimination of the growth worksheet and by the FDIC's assumption of the
burden of computing AADAs.
Accordingly, the FDIC is proposing to revise an existing collection
of information. The revision has been submitted to the Office of
Management and Budget for review and approval pursuant to the Paperwork
Reduction Act of 1980 (44 U.S.C. 3501 et seq.). Comments on the
accuracy of the burden estimate, and suggestions for reducing the
burden, should be addressed to the Office of Management and Budget,
Paperwork Reduction Project (3064-0057), Washington, D.C. 20503, with
copies of such comments sent to Steven F. Hanft, Assistant Executive
Secretary (Administration), Federal Deposit Insurance Corporation, Room
F-400, 550 17th St., N.W., Washington, D.C. 20429. The impact of this
proposal on paperwork burden would be to require a one-time de minimis
report from approximately 100 Oakar institutions for the first
semiannual period in 1997, and thereafter to eliminate the annual
growth worksheet for all 900 Oakar institutions, which takes an
estimated two hours to prepare. The FDIC would then compute each Oakar
institution's AADA from the deposit data in the institution's quarterly
call report. The effect of this proposal on the estimated annual
reporting burden for this collection of information is a reduction of
1,800 hours:
Approximate Number of Respondents: 900.
Number of Responses per Respondent: -1.
Total Annual Responses: 900.
Average Time per Response: 2 hours.
Total Average Annual Burden Hours: -1800 hours.
[[Page 34765]]
The FDIC expects the Federal Financial Institutions Examination
Council to require (as needed) the information in the quarterly call
reports, starting with the report for March 31, 1997. If the Council
does recommend these changes, they will be submitted to the Office of
Management and Budget for review and approval as part of the call
report submission.
VI. Regulatory Flexibility Analysis
The Regulatory Flexibility Act (5 U.S.C. 601-612) does not apply to
the proposed rule. Although the FDIC has chosen to publish general
notice of the proposed rule, and to ask for public comment on it, the
FDIC is not obliged to do so, as the proposed rule is interpretive in
nature. See id. 553(b) and 603(a).
Moreover, the FDIC considers that the proposed rule would amount to
a net reduction in burden for all Oakar institutions, as they would no
longer have to prepare or file regular annual growth worksheets after
the worksheet with respect to 1996. Instead, a limited number of Oakar
institutions would have to submit one new piece of information, and
would have to do so only for quarters in which they transferred
deposits.
In addition, although the Regulatory Flexibility Act requires a
regulatory flexibility analysis when an agency publishes a rule, the
term ``rule'' (as defined in the Regulatory Flexibility Act) excludes
``a rule of particular applicability relating to rates''. Id. 601(2).
The proposed rule relates to the rates that Oakar institutions must
pay, because it addresses various aspects of the method for determining
the base on which assessments are computed. The Regulatory Flexibility
Act is therefore inapplicable to this aspect of the proposed rule.
Finally, the legislative history of the Regulatory Flexibility Act
indicates that its requirements are inappropriate to this aspect of the
proposed rule. The Regulatory Flexibility Act is intended to assure
that agencies' rules do not impose disproportionate burdens on small
businesses:
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 proposed rule would not impose a uniform cost or requirement on
all Oakar institutions regardless of size: to the extent that it
imposes any costs at all, the costs have to do with the effects that
the proposed rule would have on Oakar institutions' assessments.
Assessments are proportional to an institution's size. Moreover, while
the FDIC has authority to establish a separate risk-based assessment
system for large and small members of each insurance fund, see 12
U.S.C. 1817(b)(1)(D), the FDIC has not done so. Within the current
assessment scheme, the FDIC cannot ``tailor'' assessment rates to
reflect the ``size and nature'' of institutions.
List of Subjects in 12 CFR Part 327
Assessments, Bank deposit insurance, Banks, banking, Financing
Corporation, Reporting and recordkeeping requirements, Savings
associations.
For the reasons set forth in the preamble, the Board of Directors
of the Federal Deposit Insurance Corporation proposes to amend 12 CFR
part 327 as follows:
PART 327--ASSESSMENTS
1-2. The authority citation for part 327 is revised to read as
follows:
Authority: 12 U.S.C. 1441, 1441b, 1815, 1817-1819.
3. In Sec. 327.6 the section heading and paragraph (a) are revised
to read as follows:
Sec. 327.6 Terminating transfers; other terminations of insurance.
(a) Terminating transfer--(1) Assessment base computation. If a
terminating transfer occurs at any time in the second half of a
semiannual period, each surviving institution's assessment base (as
computed pursuant to Sec. 327.5) for the first half of that semiannual
period shall be increased by an amount equal to such institution's pro
rata share of the terminating institution's assessment base for such
first half.
(2) Pro rata share. For purposes of paragraph (a)(1) of this
section, the phrase ``pro rata share'' means a fraction the numerator
of which is the deposits assumed by the surviving institution from the
terminating institution during the second half of the semiannual period
during which the terminating transfer occurs, and the denominator of
which is the total deposits of the terminating institution as required
to be reported in the quarterly report of condition for the first half
of that semiannual period.
(3) Other assessment-base adjustments. The Corporation may in its
discretion make such adjustments to the assessment base of an
institution participating in a terminating transfer, or in a related
transaction, as may be necessary properly to reflect the likely amount
of the loss presented by the institution to its insurance fund.
(4) Limitation on aggregate adjustments. The total amount by which
the Corporation may increase the assessment bases of surviving or other
institutions under this paragraph (a) shall not exceed, in the
aggregate, the terminating institution's assessment base as reported in
its quarterly report of condition for the first half of the semiannual
period during which the terminating transfer occurs.
* * * * *
4. Section 327.8 is amended by revising paragraph (h) and adding
paragraphs (j) and (k) to read as follows:
Sec. 327.8 Definitions.
* * * * *
(h) As used in Sec. 327.6(a), the following terms are given the
following meanings:
(1) Surviving institution. The term surviving institution means an
insured depository institution that assumes some or all of the deposits
of another insured depository institution in a terminating transfer.
(2) Terminating institution. The term terminating institution means
an insured depository institution some or all of the deposits of which
are assumed by another insured depository institution in a terminating
transfer.
(3) Terminating transfer. The term terminating transfer means the
assumption by one insured depository institution of another insured
depository institution's liability for deposits, whether by way of
merger, consolidation, or other statutory assumption, or pursuant to
contract, when the terminating institution goes out of business or
transfers all or substantially all its assets and liabilities to other
institutions or otherwise ceases to be obliged to pay subsequent
assessments by or at the end of the semiannual period during which such
assumption of liability for deposits occurs. The term terminating
transfer does not refer to the assumption of liability for deposits
from the estate of a failed institution, or to a transaction in which
the FDIC contributes its own resources in order to induce a surviving
institution to assume liabilities of a terminating institution.
* * * * *
(j) Primary fund. The primary fund of an insured depository
institution is the
[[Page 34766]]
insurance fund of which the institution is a member.
(k) Secondary fund. The secondary fund of an insured depository
institution is the insurance fund that is not the primary fund of the
institution.
5. In Sec. 327.32, paragraph (a) is amended by revising paragraphs
(a)(1) and (a)(2), and by removing paragraphs (a)(4) and (a)(5), to
read as follows:
Sec. 327.32 Computation and payment of assessment.
(a) Rate of assessment--(1) BIF and SAIF member rates. (i) Except
as provided in paragraph (a)(2) of this section, and consistent with
the provisions of Sec. 327.4, the assessment to be paid by an
institution that is subject to this subpart B shall be computed at the
rate applicable to institutions that are members of the primary fund of
such institution.
(ii) Such applicable rate shall be applied to the institution's
assessment base less that portion of the assessment base which is equal
to the institution's adjusted attributable deposit amount.
(2) Rate applicable to the adjusted attributable deposit amount.
Notwithstanding paragraph (a)(1)(i) of this section, that portion of
the assessment base of any acquiring, assuming, or resulting
institution which is equal to the adjusted attributable deposit amount
of such institution shall:
(i) Be subject to assessment at the assessment rate applicable to
members of the secondary fund of such institution pursuant to subpart A
of this part; and
(ii) Not be taken into account in computing the amount of any
assessment to be allocated to the primary fund of such institution.
* * * * *
6. New Secs. 327.33 through 327.36 are added to read as follows:
Sec. 327.33 ``Acquired'' deposits.
This section interprets the phrase ``deposits acquired by the
institution'' as used in Sec. 327.32(a)(3)(i).
(a) In general. (1) Secondary-fund deposits. The phrase ``deposits
acquired by the institution'' refers to deposits that are insured by
the secondary fund of the acquiring institution, and does not include
deposits that are insured by the acquiring institution's primary fund.
(2) Nominal dollar amount. Except as provided in paragraph (b) of
this section, an acquiring institution is deemed to acquire the entire
nominal dollar amount of any deposits that the transferring institution
holds on the date of the transaction and transfers to the acquiring
institution.
(b) Conduit deposits--(1) Defined. As used in this paragraph (b),
the term ``conduit deposits'' refers to deposits that an acquiring
institution has assumed from another institution in the course of a
transaction described in Sec. 327.31(a), and that are treated as
insured by the secondary fund of the acquiring institution, but which
the acquiring institution has been explicitly and specifically ordered
by the Corporation, or by the appropriate federal banking agency for
the institution, or by the Department of Justice to commit to re-
transfer to another insured depository institution as a condition of
approval of the transaction. The commitment must be enforceable, and
the divestiture must be required to occur and must occur within 6
months after the date of the initial transaction.
(2) Exclusion from AADA computation. Conduit deposits are not
considered to be acquired by the acquiring institution within the
meaning of Sec. 327.32(a)(3)(i) for the purpose of computing the
acquiring institution's adjusted attributable deposit amount for a
current semiannual period that begins after the end of the semiannual
period following the semiannual period in which the acquiring
institution re-transfers the deposits.
Sec. 327.34 Application of AADAs.
This section interprets the meaning of the phrase ``an insured
depository institution's `adjusted attributable deposit amount' for any
semiannual period'' as used in the opening clause of Sec. 327.32(a)(3).
(a) In general. The phrase ``for any semiannual period'' refers to
the current semiannual period: that is, the period for which the
assessment is due, and for which an institution's adjusted attributable
deposit amount (AADA) is computed.
(b) Quarterly components of AADAs. An AADA for a current semiannual
period consists of two quarterly AADA components. The first quarterly
AADA component for the current period is determined with respect to the
first quarter of the prior semiannual period, and the second quarterly
AADA component for the current period is determined with respect to the
second quarter of the prior period.
(c) Application of AADAs. The value of an AADA that is to be
applied to a quarterly assessment base in accordance with
Sec. 327.32(a)(2) is the value of the quarterly AADA component for the
corresponding quarter.
(d) Initial AADAs. If an AADA for a current semiannual period has
been generated in a transaction that has occurred in the second
calendar quarter of the prior semiannual period, the first quarterly
AADA component for the current period is deemed to have a value of
zero.
(e) Transition rule. Paragraphs (b), (c) and (d) of this section
shall apply to any AADA for any semiannual period beginning on or after
July 1, 1997.
Sec. 327.35 Grandfathered AADA elements.
This section explains the meaning of the phrase ``total of the
amounts determined under paragraph (a)(3)(iii)'' in
Sec. 327.32(a)(3)(ii). The phrase ``total of the amounts determined
under paragraph (a)(3)(iii)'' refers to the aggregate of the increments
of growth determined in accordance with Sec. 327.32(a)(3)(iii). Each
such increment is deemed to be computed in accordance with the
contemporaneous provisions and interpretations of such section.
Accordingly, any increment of growth that is computed with respect to a
semiannual period has the value appropriate to the proper calculation
of the institution's assessment for the semiannual period immediately
following such semiannual period.
Sec. 327.36 Growth computation.
This section interprets various phrases used in the computation of
growth as prescribed in Sec. 327.32(a)(3)(iii).
(a) Annual rate. The annual rate of growth of deposits refers to
the rate, which may be expressed as an annual percentage rate, of
growth of an institution's deposits over any relevant interval. A
relevant interval may be less than a year.
(b) Growth; increase; increases. Except as provided in paragraph
(c) of this section, references to ``growth,'' ``increase,'' and
``increases'' may generally include negative values as well as positive
ones.
(c) Growth of deposits. ``Growth of deposits'' does not include any
decrease in an institution's deposits representing deposits transferred
to another insured depository institution, if the transfer occurs on or
after July 1, 1996.
(d) Quarterly determination of growth. For the purpose of computing
assessments for semiannual periods beginning on July 1, 1997, and
thereafter, the rate of growth of deposits for a semiannual period, and
the amount by which the sum of the amounts specified in
Sec. 327.32(a)(3) (i) and (ii) would have grown during a semiannual
period, is to be determined by computing such rate of growth and such
sum of amounts for each calendar quarter within the semiannual period.
7. Section 327.37 is added to read as follows:
[[Page 34767]]
ALTERNATIVE ONE
Sec. 327.37 Attribution of transferred deposits.
This section explains the attribution of deposits to the BIF and
the SAIF when one insured depository institution (acquiring
institution) acquires deposits from another insured depository
institution (transferring institution). For the purpose of determining
whether the assumption of deposits (assumption transaction) constitutes
a transaction undertaken pursuant to section 5(d)(3) of the Federal
Deposit Insurance Act, and for the purpose of computing the adjusted
attributable deposit amounts, if any, of the acquiring and the
transferring institutions after the transaction:
(a) Transferring institution--(1) Transfer of primary-fund
deposits. To the extent that the aggregate volume of deposits that is
transferred by a transferring institution in a transaction, or in a
related series of transactions, does not exceed the volume of deposits
that is insured by its primary fund (primary-fund deposits) immediately
prior to the transaction (or, in the case of a related series of
transactions, immediately prior to the initial transaction in the
series), the transferred deposits shall be deemed to be insured by the
institution's primary fund. The primary institution's volume of
primary-fund deposits shall be reduced by the aggregate amount so
transferred.
(2) Transfer of secondary-fund deposits. To the extent that the
aggregate volume of deposits that is transferred by the transferring
institution in a transaction, or in a related series of transactions,
exceeds the volume of deposits that is insured by its primary fund
immediately prior to the transaction (or, in the case of a related
series of transactions, immediately prior to the initial transaction in
the series), the following volume of the deposits so transferred shall
be deemed to be insured by the institution's secondary fund (secondary-
fund deposits): the aggregate amount of the transferred deposits minus
that portion thereof that is equal to the institution's primary-fund
deposits. The transferring institution's volume of secondary-fund
deposits shall be reduced by the volume of the secondary-fund deposits
so transferred.
(b) Acquiring institution. The deposits shall be deemed, upon
assumption by the acquiring institution, to be insured by the same fund
or funds in the same amount or amounts as the deposits were so insured
immediately prior to the transaction.
ALTERNATIVE TWO
Sec. 327.37 Attribution of transferred deposits.
This section explains the attribution of deposits to the BIF and
the SAIF when one insured depository institution (acquiring
institution) assumes the deposits from another insured depository
institution (transferring institution). On and after January 1, 1997,
for the purpose of determining whether the assumption of deposits
constitutes a transaction undertaken pursuant to section 5(d)(3) of the
Federal Deposit Insurance Act, and for the purpose of computing the
adjusted attributable deposit amounts, if any, of the acquiring and the
transferring institutions after the transaction:
(a) Attribution of the deposits as to the transferring institution.
The deposits shall be attributed to the primary and secondary funds of
the transferring institution in the same ratio as the transferring
institution's total deposits were so attributed immediately prior to
the deposit-transfer transaction. The transferring institution's stock
of BIF-insured deposits and of SAIF-insured deposits shall each be
reduced in the appropriate amounts.
(b) Attribution of deposits as to the acquiring institution. Upon
assumption by the acquiring institution, the deposits shall be
attributed to the same insurance funds in the same amounts as the
deposits were so attributed immediately prior to the transaction. The
acquiring institution's stock of BIF-insured deposits and of SAIF-
insured deposits shall each be increased in the appropriate amounts.
(c) Ratio fixed at start of quarter. For the purpose of determining
the ratio specified in paragraph (a) of this paragraph for any
transaction:
(1) In general. The ratio shall be determined at the beginning of
the quarter in which the transaction occurs. Except as provided in
paragraph (c)(2) of this section, the ratio shall not be affected by
changes in the transferring institution's deposit base.
(2) Prior acquisitions by a transferring institution. If the
transferring institution acquires deposits after the start of the
quarter but prior to the transaction, the deposits so acquired shall be
added to the transferring institution's deposit base, and shall be
attributed to the transferring institution's primary and secondary
funds in accordance with this section.
By order of the Board of Directors.
Dated at Washington, DC, this 17th day of June 1996.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Deputy Executive Secretary.
[FR Doc. 96-16349 Filed 7-2-96; 8:45 am]
BILLING CODE 6714-01-P
