[Federal Register Volume 61, Number 129 (Wednesday, July 3, 1996)]
[Notices]
[Pages 34814-34817]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16904]
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FEDERAL DEPOSIT INSURANCE CORPORATION
Statement of Policy on Assistance to Operating Insured Depository
Institutions
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Policy statement; Notice of opportunity for comment.
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SUMMARY: The statement of policy would revise the FDIC's Statement of
Policy on Assistance to Operating Insured Depository Institutions,
which was published in the Federal Register on December 18, 1992 (the
1992 Policy Statement) (see, 57 FR 60203 (December 18, 1992)). As
required by section 303(a) of the Riegle Community Development and
Regulatory Improvement Act of 1994 (the RCDRIA), the FDIC is conducting
a systematic review of its regulations and statements of policy to
identify and revise regulations and statements of policy that might be
inefficient, cause unnecessary burden, or contain outmoded,
duplicative, or inconsistent provisions (see, 60 FR 62345 (December 6,
1995)). The FDIC has reviewed the 1992 Policy Statement and has
concluded that it should be revised. This revised statement of policy
would replace the 1992 Policy Statement.
The statement of policy would (i) reflect the statutory ``sunset''
of the Resolution Trust Corporation on December 31, 1995, by deleting
references to the Resolution Trust Corporation's statutory authority;
(ii) incorporate the requirements of section 11 of the Resolution Trust
Corporation Completion Act, P.L. 103-204, section 11 (1993), which
revised section 11(a)(4) of the Federal Deposit Insurance Act, as
amended (the FDI Act), 12 U.S.C. 1821(a)(4), to prohibit, with certain
exceptions, the use of funds from the Bank Insurance Fund or the
Savings Association Insurance Fund to benefit shareholders of a failed
or failing insured depository institution; thus, the statement of
policy would impact the treatment of shareholders with regard to FDIC
assistance under section 13(c) of the FDI Act to an operating insured
depository institution prior to the appointment of a conservator or
receiver for that institution; (iii) provide that any depository
institution subsidiary of a holding company may be included when
considering what entities may contribute resources in connection with a
proposal for FDIC assistance; and (iv) generally streamline the
retained provisions of the 1992 Policy Statement, in pertinent part by
removing certain detailed discussions of section 13(k)(5) of the FDI
Act and various provisions added to the FDI Act by the Federal Deposit
Insurance Corporation Improvement Act of 1991.
DATES: Written comments must be received on or before August 2, 1996.
ADDRESSES: Written comments should be addressed to the Office of the
Executive Secretary, FDIC, 550 17th Street, N.W., Washington, D.C.
20429.
[[Page 34815]]
Comments may be hand delivered to Room F-402, 1776 F Street, N.W.,
Washington, D.C. 20439, on business days between 8:30 a.m. and 5:00
p.m. Comments may be sent through facsimile to: (202) 898-3838 or by
the Internet to: comments@fdic.gov. Comments will be available for
inspection at 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: Gail L. Patelunas, Acting Director,
Division of Resolutions, (202) 898-6779; Sean C. Forbush, Resolutions
Specialist, Division of Resolutions, (202) 898-8506; Barbara I. Taft,
Assistant General Counsel, Legal Division, (202) 736-0183; Michael B.
Phillips, Counsel, Legal Division, (202) 736-0186, Federal Deposit
Insurance Corporation, 550 17th Street, N.W., Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The statement of policy does not require any collections of
paperwork pursuant to section 3504(h) of the Paperwork Reduction Act,
44 U.S.C. 3501 et seq. Accordingly, no information has been submitted
to the Office of Management and Budget for review.
Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, 5
U.S.C. 601 et seq., it is certified that the statement of policy will
not have a significant economic impact on a substantial number of small
entities. In addition, the statement of policy will not impose
regulatory compliance requirements on depository institutions of any
size.
The text of the statement of policy follows:
FDIC Statement Of Policy on Assistance to Operating Insured Depository
Institutions
I. Introduction
A. General Statutory Requirements
Section 13(c) of the Federal Deposit Insurance Act, as amended (the
FDI Act), authorizes the Federal Deposit Insurance Corporation (the
FDIC) to provide assistance to operating insured institutions (open
assistance) (1) to prevent the ``default'' of insured institutions or
to assist acquisitions of insured institutions that are ``in danger of
default,'' 1 or (2) if severe financial conditions exist that
threaten the stability of a significant number of insured institutions
or of insured institutions possessing significant financial resources,
to lessen the risk to the FDIC posed by such insured institutions under
such threat of instability.
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\1\ The terms ``default'' and ``in danger of default'' are
defined in section 3(x) of the FDI Act, 12 U.S.C. 1813(x).
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In order for the FDIC to provide assistance to an operating insured
institution, the FDIC must determine that the assistance meets the
least-cost test set forth in section 13(c) of the FDI Act. That section
provides that the assistance (1) must be necessary to meet the
obligation of the FDIC to provide insurance coverage for the insured
deposits in such institution, and (2) must be the least costly to the
deposit insurance fund of all possible methods for meeting that
obligation.2
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\2\ See section 13(c)(4)(A)(ii) of the FDI Act, 12 U.S.C.
1823(c)(4)(A)(ii).
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The FDIC has the authority to provide to an operating insured
institution assistance that does not meet the least-cost test only if
the Secretary of the Treasury (in consultation with the President and
upon the written recommendations of two-thirds of the Board of
Directors of the FDIC and two-thirds of the Board of Governors of the
Federal Reserve System) determines that the FDIC's compliance with the
least-cost test would have adverse effects on economic conditions or
financial stability and the assistance to the operating insured
institution would avoid or mitigate such adverse effects (the
``Systemic Risk Exception'').3
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\3\ See section 13(c)(4)(G) of the FDI Act, 12 U.S.C.
1823(c)(4)(G).
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The FDIC may consider providing financial assistance under section
13(c) to an operating insured institution before the appointment of a
conservator or receiver only if the FDIC determines that (1) grounds
for the appointment of a conservator or receiver exist or likely will
exist in the future unless the institution's capital levels are
increased,4 and (2) it is unlikely that the institution can meet
all currently applicable capital standards without assistance.5 In
addition, before the FDIC may provide assistance to an operating
insured institution, (1) the appropriate Federal banking agency 6
and the FDIC must determine that, for such period of time as the agency
or the FDIC considers to be relevant, the institution's management has
been competent and has complied with applicable laws, rules, and
supervisory directives and orders,7 and (2) the FDIC must
determine that the institution's management did not engage in any
insider dealing, speculative practice, or other abusive activity.8
Any determination made by the FDIC to provide assistance to an
operating insured institution under section 13(c) must be made in
writing and published in the Federal Register.9
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\4\ See section 13(c)(8)(A)(i)(I) of the FDI Act, 12 U.S.C.
1823(c)(8)(A)(i)(I).
\5\ See section 13(c)(8)(A)(i)(II) of the FDI Act, 12 U.S.C.
1823(c)(8)(A)(i)(II).
\6\ ``Appropriate Federal banking agency'' is defined at 12
U.S.C. 1813(q), in part, to mean: (1) the Comptroller of the
Currency, in the case of a national bank; (2) the Board of Governors
of the Federal Reserve System, in the case of a state member insured
bank; (3) the FDIC, in the case of a state nonmember insured bank;
and (4) the Director of the Office of Thrift Supervision, in the
case of any savings association.
\7\ See section 13(c)(8)(A)(ii)(I) of the FDI Act, 12 U.S.C.
1823(c)(8)(A)(ii)(I).
\8\ See section 13(c)(8)(A)(ii)(II) of the FDI Act, 12 U.S.C.
1823(c)(8)(A)(ii)(II).
\9\ See section 13(c)(8)(B) of the FDI Act, 12 U.S.C.
1823(c)(8)(B).
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SAIF-insured institutions submitting proposals for assistance under
section 13(k)(5) of the FDI Act also must meet the criteria contained
in that statutory provision.10
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\10\ Assistance proposals with respect to SAIF-insured
institutions under section 13(k)(5) that do not meet all nine of the
criteria in that statutory provision may be submitted to the FDIC
for consideration under section 13(c) of the FDI Act. Section
13(k)(5) applies only to SAIF-insured institutions located in
``economically depressed regions,'' and only if those institutions
have certain types of problems pre-dating the enactment of the
Financial Institutions Reform, Recovery, and Enforcement Act of
1989. The nine criteria for proposals submitted under section
13(k)(5) of the FDI Act are listed in subsections (k)(5)(A)(i) (I)-
(III) and (A)(ii) (I)-(VI) of section 13 of the FDI Act, 12 U.S.C.
1823(k)(5)(A)(i) (I)-(III) and (A)(ii) (I)-(VI).
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B. Timing Considerations
As section 13(c)(4) of the FDI Act requires the FDIC to select the
resolution alternative that involves the least cost to the relevant
deposit insurance fund, any open assistance proposal must be evaluated
on a competitive basis with other available resolution alternatives.
Because of the cost savings inherent in FDIC-assisted transactions
involving the appointment of a receiver for an institution, it may be
difficult for an open assistance proposal to be more cost effective
than an available closed institution resolution.11 Therefore, an
open assistance proposal, to be acceptable, generally must be submitted
substantially before grounds exist for the appointment of a receiver
for the institution. Moreover, because of the complexity of many
transactional
[[Page 34816]]
structures involving open assistance, the time required to negotiate
terms acceptable to all parties and to obtain necessary regulatory and
shareholder approvals, and the ``prompt corrective action'' mandates of
Section 38 of the FDI Act,12 the FDIC encourages submission of
proposals for open assistance well before grounds exist for the
institution's closure. In general, this timing consideration will
require the board of directors of the insured institution to make the
difficult business judgment that the institution is likely to fail and
that the balance of their responsibilities, including those to
depositors as well as shareholders, compels the board to seek FDIC
assistance, and to make that judgment before it is certain that the
institution will fail.
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\11\ Among the cost advantages favoring a resolution transaction
following the appointment of a receiver for an institution are the
effect of the receivership on the contingent liabilities of the
failed institution, the potential for uninsured depositors and other
unsecured creditors to share in the loss incurred on the institution
and the ability of the FDIC as receiver to repudiate burdensome
contracts.
\12\ See section 38(h)(3) of the FDI Act, 12 U.S.C. 1831o(h)(3).
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II. Treatment of Shareholders Under Section 11(a)(4) of the FDI Act
Section 11(a)(4) of the FDI Act states, in pertinent part:
Notwithstanding any provision of law other than section 13(c)(4)(G)
[of the FDI Act], the Bank Insurance Fund and the Savings Association
Insurance Fund shall not be used in any manner to benefit any
shareholder of--
(i) Any insured depository institution for which the [FDIC] or the
[RTC] has been appointed conservator or receiver, in connection with
any type of resolution by the [FDIC] or the [RTC];
(ii) Any other insured depository institution in default or in
danger of default, in connection with any type of resolution by the
[FDIC] or the [RTC]; or
(iii) Any insured depository institution, in connection with the
provision of assistance under this section or section 13 with respect
to such institution, except that this clause shall not prohibit any
assistance to any insured depository institution that is not in
default, or that is not in danger of default, that is acquiring (as
defined in section 13(f)(8)(B) [of the FDI Act]) another insured
depository institution.13
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\13\ See 12 U.S.C. 1821(a)(4).
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As the scope of the language of section 11(a)(4) and related
legislative history with respect to the limitation on the use of the
relevant deposit insurance fund for assistance under section 13(c) of
the FDI Act is not clearly delineated,14 the FDIC will determine,
on a case-by-case basis, the application of section 11(a)(4) to any
proposal for assistance.
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\14\ See the Report of the House Committee on Banking, Finance
and Urban Affairs, H.R. Rep. No. 103, 103d Cong., 1st Sess., Part 1,
at 32 (1993) and the Conference Report accompanying the RTC
Completion Act, H.R. Rep. No. 380, 103d Cong., 1st Sess. at 55
(1993).
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III. Criteria for the FDIC's Consideration of Proposals for Assistance
to an Operating Insured Institution
A proposal for assistance to an operating insured institution will
be evaluated pursuant to the following criteria:
A. Prerequisites for Open Assistance
Criterion 1. The FDIC must determine that grounds for the
appointment of a conservator or receiver exist or likely will exist in
the future unless the insured institution's capital levels are
increased.15
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\15\ This criterion is mandatory. See section 13(c)(8)(A) of the
FDI Act, 12 U.S.C. 1823(c)(8)(A).
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Criterion 2. The FDIC must determine that it is unlikely that the
insured institution can meet all currently applicable capital standards
without assistance.16
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\16\ This criterion is mandatory. See section 13(c)(8)(A) of the
FDI Act, 12 U.S.C. 1823(c)(8)(A).
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B. Financial Criteria for Open Assistance
Criterion 3. The cost of the proposal for open assistance to the
FDIC must be determined to be the least-costly alternative
available.17 In order to ensure that the proposal is the least
costly alternative, the FDIC will, in many cases, also seek proposals
for resolving the insured institution on a closed basis.
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\17\ This criterion is mandatory unless the Secretary of the
Treasury makes a systemic risk determination. See section 13(c)(4)
(A) and (G) of the FDI Act, 12 U.S.C. 1823(c)(4) (A) and (G).
Resolution alternatives must be evaluated on a present-value basis,
using a realistic discount rate. See section 13(c)(4)(B) of the FDI
Act, 12 U.S.C. 1823(c)(4)(B). This cost determination is premised on
evaluating all possible resolution alternatives and must be made as
of the date the FDIC determines to provide section 13(c) assistance.
See section 13(c)(4)(C) of the FDI Act, 12 U.S.C. 1823(c)(4)(C). In
calculating the cost of such assistance, the FDIC must treat any tax
revenues that the U.S. Treasury would forego as a result of an
assistance transaction, to the extent they are reasonably
determinable, as revenues foregone by the applicable deposit
insurance fund.
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Criterion 4. The proposal must provide for sufficient tangible
capitalization, including capital infusions from outside private
investment sources, to meet the regulatory capital standards of the
appropriate Federal banking agency.18
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\18\ The regulatory capital requirements of the respective
Federal banking agencies are stated in: (1) For the Office of the
Comptroller of the Currency, 12 CFR Part 3; (2) for the Board of
Governors of the Federal Reserve System, 12 CFR Part 225; (3) for
the FDIC, 12 CFR Part 325; and (4) for the Office of Thrift
Supervision, 12 CFR Part 567.
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Criterion 5. The amount of the assistance and the new capital
injected from outside sources must provide for a reasonable assurance
of the future viability of the insured institution.19
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\19\ Viability may be demonstrated by pro forma projections
based on reasonable assumptions regarding the use of the assistance,
earnings, reserve levels, asset quality trends, anticipated
dividends, and capital levels and needs. The viability projections
will be reviewed closely by the FDIC for the reasonableness of
assumptions. In addition, under normal circumstances, enough new
capital should come from outside private sources to represent a vote
of confidence in the viability of the assisted institution. By
contrast, as an example, a de minimus investment which gave the
investor an option on the whole institution would not represent a
market validation of the assurance of viability.
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Criterion 6. Applicants must establish quantitative limits on all
financial items in the proposal. For example, if applicants request
indemnification from the FDIC for certain contingent liabilities, the
proposal must include ceilings on the FDIC's financial exposure.
C. Competition
Criterion 7. The FDIC will consider the proposal within a
competitive context which provides for the solicitation by the FDIC of
interest from qualified entities.20
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\ 20\ The FDIC has determined that under 12 U.S.C. 1823(c)(4),
in order to demonstrate that the least costly resolution was
selected, an assistance transaction generally cannot be the result
of a single party negotiation, but rather must be the result of a
competitive process.
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D. FDIC Financial Contribution and Repayment and Repayment
Criterion 8. The FDIC will consider, on a case-by-case basis,
whether the proposal shall provide the FDIC with an equity or other
financial interest in the resulting institution.21
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\ 21\ Under 12 U.S.C. 1823(c)(5), the FDIC is prohibited from
purchasing the voting or common stock of an insured institution.
However, this restriction does not preclude the acceptance by the
FDIC of non-voting preferred stock, warrants, or other forms of
equity or equity-equivalent arrangements.
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Criterion 9. It is preferable that the proposal for FDIC assistance
provide for repayment of such assistance in whole or in part.
E. Impact on Shareholders and Creditors
Criterion 10. Unless the Systemic Risk Exception in section
13(c)(4)(G) of the FDI Act is applicable, FDIC assistance may not be
used in any manner to benefit any preexisting shareholder of the
insured institution, as determined by the FDIC on a case-by-case basis.
In any event, any remaining ownership interest of such shareholders
shall be subordinate to the FDIC's right to receive reimbursement for
any
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assistance provided. Preexisting debtholders of the insured institution
shall make substantial concessions.
F. Due Diligence
Criterion 11. Applicants must consent to unrestricted on-site due
diligence reviews by the FDIC (or its agents) and FDIC-monitored, on-
site due diligence reviews by all potential qualified acquirers as
determined by the FDIC (after consultation with the appropriate Federal
banking agency).
G. Acquisition Within a Holding Company Structure
Criterion 12. The proposal must ensure that the assistance will
benefit the insured institution and the FDIC and not be diverted to
other purposes. If the insured institution is a subsidiary of a holding
company, the proposal should be structured so that FDIC assistance is
not provided to the holding company, except where compelling reasons
require it, and then only when the holding company acts as a conduit to
immediately provide the entire amount of assistance to the insured
institution.22
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\22\ See section 13(c)(3) of the FDI Act, 12 U.S.C. 1823(c)(3).
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Criterion 13. If the insured institution is a subsidiary of a
holding company, the proposal should be structured so that available
resources from the holding company and its other depository institution
subsidiaries and/or nondepository subsidiaries are used to make a
significant contribution toward minimizing the financial exposure of
the FDIC.
H. Assets
Criterion 14. The FDIC may consider, in appropriate circumstances,
the acquisition of, or loss-sharing, gain-sharing and other incentive
arrangements with respect to, distressed assets.
I. Supervisory Concerns With Respect to Management
Criterion 15. The appropriate Federal banking agency and the FDIC
must determine that, during such period of time preceding the date of
such determination as the agency or the FDIC considers to be relevant,
management of the insured institution was competent and complied with
applicable laws, rules, and supervisory directives and orders. In no
event will such determination, for assistance transaction purposes,
estop or impair the FDIC or the appropriate Federal banking agency from
pursuing any enforcement, civil or criminal remedies or redress against
any person.23
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\23\ This criterion is mandatory. See section 13(c)(8)(A) of the
FDI Act, 12 U.S.C. 1823(c)(8)(A). The FDIC interprets section
13(c)(8)(A)(ii) of the FDI Act that the management critrion applies
to the management of the resulting institution, including any
management retained from the predecessor institution, but not
including predecessor management that is not retained. This
interpretation is based on the relevant statutory provisions and
their legislative history and reconciles the management criteria of
section 13(c)(8)(A)(ii) with the statutory mandate of minimizing the
cost of resolutions and with Congress' desire to encourage early
resolutions.
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Criterion 16. The FDIC must determine that the management of the
resulting institution did not engage in any insider dealing,
speculative practice, or other abusive activity.24
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\24\ This criterion is mandatory. See section 13(c)(8)(A) of the
FDI Act, 12 U.S.C. 1823(c)(8)(A).
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Criterion 17. The proposal must provide for adequate managerial
resources. Continued service of any directors or senior ranking
officers who served in a policy-making role at the insured institution,
as may be determined by the FDIC, will be subject to approval by the
FDIC.
Criterion 18. Any renegotiation or termination of management
contracts is to be completed prior to the granting of assistance.
Further, the FDIC may review and object to any or all parts of any
compensation arrangements (including termination clauses) covering
these individuals during the period assistance is outstanding.25
In general, the failure to terminate a particular management contract
prior to the granting of assistance will not stop the FDIC or the
appropriate Federal banking agency from subsequently pursuing any
enforcement, civil, or criminal remedies or redress against any person
by reason of such contract, unless there is a written statement
explicitly waiving such rights that is signed by an authorized official
of the FDIC and the appropriate Federal banking agency. Notwithstanding
the foregoing, any such waiver must take into consideration the
requirements of 12 CFR part 359.
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\25\ In addition, under section 18(k)(1) of the FDI Act, the
FDIC may ``prohibit or limit, by regulation or order, any golden
parachute payment or indemnification payment.'' See 12 U.S.C.
1828(k)(1). The terms ``golden parachute payment'' and
``indemnification payment'' are defined in 12 U.S.C. 1828(k)(4) and
(5)(A), respectively. See also the FDIC's regulations at 12 CFR part
359, which implement section 18(k)(1).
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J. Fee Arrangements
Criterion 19. All fee arrangements with attorneys, investment
bankers, accountants, consultants, and other advisors and agents
incident to an open assistance proposal must be disclosed to the FDIC
and will be evaluated in determining the cost of the assistance.
Excessive fees must be avoided.
IV. Other Information
Any proposal requesting assistance to prevent the closing of an
insured institution should be addressed to the appropriate FDIC
regional offices of the Division of Supervision and the Division of
Resolutions and should provide the amount, terms, and conditions of the
assistance requested, as well as the details of the financial support
to be provided. This information must be presented in sufficient detail
to permit the FDIC to estimate the maximum cost that will be incurred
as a result of the proposal and to determine the extent to which the
proposal satisfies the criteria of this policy statement.
The proposal must include, with respect to the management
determinations set forth in Criteria 15, 16, 17 and 18 in Part III,
information about proposed management of the insured institution or the
resulting institution, as applicable. Specifically, the proposal must
identify all individuals who would exercise significant influence over,
or participate in, major policy-making decisions of the insured
institution or the resulting institution, without regard to title,
salary or compensation. This list would include, without limitation,
all directors, the chief executive officer, chief managing official (in
an insured state branch of a foreign bank), chief operating officer,
chief financial officer, chief lending officer and chief investment
officer.
Copies of the proposal also should be provided to (1) the Director
of the Division of Supervision, FDIC, 550 17th Street, N.W.,
Washington, D.C. 20429, (2) the Director of the Division of
Resolutions, FDIC, 550 17th Street, N.W., Washington, D.C. 20429, (3)
the insured institution's chartering authority, and, (4) if approvals
under the Bank Holding Company Act are required, the appropriate
Federal Reserve Bank.
By Order of the Board of Directors. Dated at Washington, D.C.,
this 17th day of June, 1996.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Deputy Executive Secretary.
[FR Doc. 96-16904 Filed 7-2-96; 8:45 am]
BILLING CODE 6714-01-P
