[Federal Register Volume 75, Number 243 (Monday, December 20, 2010)]
[Rules and Regulations]
[Pages 79286-79293]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-31829]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

RIN 3064-AD69


Designated Reserve Ratio

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

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SUMMARY: To implement a comprehensive, long-range management plan for 
the Deposit Insurance Fund (DIF or fund), the FDIC is amending its 
regulations to set the designated reserve ratio (DRR) at 2 percent.

DATED: Effective Date: January 1, 2011.

FOR FURTHER INFORMATION CONTACT: Munsell St. Clair, Chief, Banking and 
Regulatory Policy Section, (202) 898-8967, Christopher Bellotto, 
Counsel, (202) 898-3801, 550 17th Street, NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Background

A. Governing Statutes

    The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank), which was enacted on July 21, 2010, gave the FDIC much 
greater discretion to manage the DIF, including where to set the DRR. 
Among other things, Dodd-Frank: (1) Raises the minimum DRR, which the 
FDIC is required to set each year, to 1.35 percent (from the former 
minimum of 1.15 percent) and removes the upper limit on the DRR (which 
was formerly capped at 1.5 percent) and consequently on the size of the 
fund; \1\ (2) requires that the fund reserve ratio reach 1.35 percent 
by September 30, 2020 (rather than 1.15 percent by the end of 2016, as 
formerly required); \2\ (3) requires that, in setting assessments, the 
FDIC ``offset the effect of [requiring that the reserve ratio reach 
1.35 percent by September 30, 2020 rather than 1.15 percent by the end 
of 2016] on insured depository institutions with total consolidated 
assets of less than $10,000,000,000''; \3\ (4) eliminates the 
requirement that the FDIC provide dividends from the fund when the 
reserve ratio is between 1.35 percent and 1.5 percent; \4\ and (5) 
continues the FDIC's authority to declare dividends when the reserve 
ratio at the end of a

[[Page 79287]]

calendar year is at least 1.5 percent, but grants the FDIC sole 
discretion in determining whether to suspend or limit the declaration 
or payment of dividends.\5\
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    \1\ Public Law 111-203, sec. 334(a), 124 Stat. 1376, 1539 (to be 
codified at 12 U.S.C. 1817(b)(3)(B)).
    \2\ Public Law 111-203, sec. 334(d), 124 Stat. 1376, 1539 (to be 
codified at 12 U.S.C. 1817(nt)).
    \3\ Public Law 111-203, sec. 334(e), 124 Stat. 1376, 1539 (to be 
codified at 12 U.S.C. 1817(nt)).
    \4\ Public Law 111-203, sec. 332(d), 124 Stat. 1376, 1539 (to be 
codified at 12 U.S.C. 1817(e)).
    \5\ Public Law 111-203, sec. 332, 124 Stat. 1376, 1539 (to be 
codified at 12 U.S.C. 1817(e)(2)(B)).
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    The Federal Deposit Insurance Act (FDI Act) continues to require 
that the FDIC's Board of Directors consider the appropriate level for 
the DRR annually and, if changing the DRR, engage in notice-and-comment 
rulemaking before the beginning of the calendar year.\6\
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    \6\ In setting the DRR for any year, the FDIC must consider the 
following factors:
    (1) The risk of losses to the DIF in the current and future 
years, including historic experience and potential and estimated 
losses from insured depository institutions.
    (2) Economic conditions generally affecting insured depository 
institutions so as to allow the DRR to increase during more 
favorable economic conditions and to decrease during less favorable 
economic conditions, notwithstanding the increased risks of loss 
that may exist during such less favorable conditions, as the Board 
determines to be appropriate.
    (3) That sharp swings in assessment rates for insured depository 
institutions should be prevented.
    (4) Other factors as the FDIC's Board may deem appropriate, 
consistent with the requirements of the Reform Act. 12 U.S.C. 
1817(b)(3)(B).
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B. Notice of Proposed Rulemaking on Assessment Dividends, Assessment 
Rates and the Designated Reserve Ratio

    In October 2010, the FDIC adopted a Notice of Proposed Rulemaking 
on Assessment Dividends, Assessment Rates and the Designated Reserve 
Ratio setting out a comprehensive, long-range management plan for the 
DIF that was designed to: (1) Reduce the pro-cyclicality in the 
existing risk-based assessment system by allowing moderate, steady 
assessment rates throughout economic and credit cycles; and (2) 
maintain a positive fund balance even during a banking crisis by 
setting an appropriate target fund size and a strategy for assessment 
rates and dividends (the October NPR).\7\
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    \7\ 75 FR 66262 (Oct. 27, 2010). Pursuant to the comprehensive 
plan, the FDIC also adopted a new Restoration Plan to ensure that 
the DIF reserve ratio reaches 1.35 percent by September 30, 2020, as 
required by Dodd-Frank. 75 FR 66293 (Oct. 27, 2010).
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    During an economic and banking downturn, insured institutions can 
least afford to pay high deposit insurance assessment rates. Moreover, 
high assessment rates during a downturn reduce the amount that banks 
can lend when the economy most needs new lending. For these reasons, it 
is important to reduce pro-cyclicality in the assessment system and 
allow moderate, steady assessment rates throughout economic and credit 
cycles. At a September 24, 2010 roundtable organized by the FDIC, bank 
executives and industry trade group representatives uniformly favored 
steady, predictable assessments and found high assessment rates during 
crises objectionable.\8\
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    \8\ The proceedings of the roundtable can be viewed in their 
entirety at: http://www.vodium.com/MediapodLibrary/index.asp?library=pn100472_fdic_RoundTable.
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    It is also important that the fund not decline to a level that 
could risk undermining public confidence in Federal deposit insurance. 
Furthermore, although the FDIC has significant authority to borrow from 
the Treasury to cover losses when the fund balance approaches zero, the 
FDIC views the Treasury line of credit as available to cover unforeseen 
losses, not as a source of financing projected losses.
    Setting the DRR at 2 percent is an integral part of the FDIC's 
comprehensive, long-range management plan for the DIF. A fund that is 
sufficiently large is a necessary precondition to maintaining a 
positive fund balance during a banking crisis and allowing for long-
term, steady assessment rates.
    In developing the long-range management plan, the FDIC analyzed 
historical fund losses and used simulated income data from 1950 to the 
present to determine how high the reserve ratio would have had to be 
before the onset of the two banking crises that occurred during this 
period to maintain a positive fund balance and stable assessment rates. 
The analysis, which was detailed in the October NPR, concluded that 
moderate, long-term average industry assessment rates, combined with an 
appropriate dividend or assessment rate reduction policy, would have 
been sufficient to prevent the fund from becoming negative during the 
crises. The FDIC also found that the fund reserve ratio would have had 
to exceed 2 percent before the onset of the crises to achieve these 
results.\9\
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    \9\ The historical analysis contained in the October NPR is 
constructively included.
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    Based on this analysis and the statutory factors that the FDIC must 
consider when setting the DRR, the FDIC proposed setting the DRR at 2 
percent. The FDIC noted that it views the proposed 2 percent DRR as 
both a long-term goal and the minimum level needed to withstand a 
future crisis of the magnitude of past crises. Because analysis shows 
that a reserve ratio higher than 2 percent increases the chance that 
the fund will remain positive during such a crisis, the FDIC does not 
view the 2 percent DRR as a cap on the size of the fund.
    In the October NPR, pursuant to its analysis and its statutory 
authority to set risk-based assessments, the FDIC also proposed 
assessment rate schedules. The FDIC proposed that a moderate assessment 
rate schedule based on the long-term average rate needed to maintain a 
positive fund balance take effect when the fund reserve ratio exceeds 
1.15 percent.\10\ This schedule would be lower than the current 
schedule. In addition, to increase the probability that the fund 
reserve ratio will reach a level sufficient to withstand a future 
crisis, the FDIC, based on its authority to suspend or limit dividends, 
proposed suspending dividends when the fund reserve ratio exceeds 1.5 
percent.\11\ In lieu of dividends, and pursuant to its authority to set 
risk-based assessments, the FDIC proposed to adopt progressively lower 
assessment rate schedules when the reserve ratio exceeds 2 percent and 
2.5 percent. These lower assessment rate schedules would serve much the 
same function as dividends, but would provide more stable and 
predictable assessment rates.
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    \10\ Under section 7 of the FDI Act, the FDIC has authority to 
set assessments in such amounts as it determines to be necessary or 
appropriate. In setting assessments, the FDIC must consider certain 
enumerated factors, including the operating expenses of the DIF, the 
estimated case resolution expenses and income of the DIF, and the 
projected effects of assessments on the capital and earnings of 
insured depository institutions.
    \11\ 12 U.S.C. 1817(e)(2), as amended by sec. 332 of the Dodd-
Frank Act.
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C. Notice of Proposed Rulemaking on the Assessment Base, Assessment 
Rate Adjustments and Assessment Rates

    In a notice of proposed rulemaking adopted by the FDIC on November 
9, 2010 (the Assessment Base NPR), the FDIC proposed to amend the 
definition of an institution's deposit insurance assessment base 
consistent with Dodd-Frank, modify the unsecured debt adjustment and 
the brokered deposit adjustment in light of the changes to the 
assessment base, add an adjustment for long-term debt held by an 
insured depository institution where the debt is issued by another 
insured depository institution, and eliminate the secured liability 
adjustment. The Assessment Base NPR also proposed revisions to the 
deposit insurance assessment rate schedules, including the rate 
schedules proposed in the October NPR, in light of the changes to the 
assessment base.

D. Update of Historical Analysis of Loss, Income and Reserve Ratios

    The analysis set out in the October NPR sought to determine what 
assessment rates would have been needed to maintain a positive fund

[[Page 79288]]

balance during the last two crises. This analysis used an assessment 
base derived from domestic deposits to calculate the assessment income. 
Dodd-Frank, however, required the FDIC to change the assessment base to 
average consolidated total assets minus average tangible equity. The 
FDIC therefore has undertaken additional analysis to determine how the 
results of the original analysis would change had the new assessment 
base been in place from 1950 to 2010. Due to the larger assessment base 
resulting from Dodd-Frank, the constant nominal assessment rate 
required to maintain a positive fund balance from 1950 to 2010 is 5.29 
basis points (compared with 8.47 basis points using a domestic-deposit-
related assessment base). (See Chart 1.)
    The assessment base resulting from Dodd-Frank, had it been applied 
to prior years, would have been larger than the domestic-deposit-
related assessment base, and the rates of growth of the two assessment 
bases would have differed both over time and from each other. At any 
given time, therefore, applying a constant nominal rate of 8.47 basis 
points to the domestic-deposit-related assessment base would not 
necessarily yield exactly the same revenue as applying 5.29 basis 
points to the Dodd-Frank assessment base.
    Despite these differences, the new analysis applying a 5.29 basis 
point assessment rate to the Dodd-Frank assessment base results in peak 
reserve ratios prior to the two crises similar to those seen when 
applying an 8.47 basis point assessment rate to a domestic- deposit-
related assessment base.\12\ (See Chart 2.) Both analyses show that the 
fund reserve ratio would have needed to be approximately 2 percent or 
more before the onset of the crises to maintain both a positive fund 
balance and stable assessment rates, assuming, in lieu of dividends, 
that the long-term industry average nominal assessment rate would be 
reduced by 25 percent when the reserve ratio reached 2 percent, and by 
50 percent when the reserve ratio reached 2.5 percent.\13\ Eliminating 
dividends and reducing rates successfully limits rate volatility 
whichever assessment base is used.
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    \12\ Using the domestic-deposit-related assessment base, reserve 
ratios would have peaked at 2.31 percent and 2.01 percent before the 
two crises. (See Chart G in the October NPR.) Using the Dodd-Frank 
assessment base, reserve ratios would have peaked at 2.27 percent 
and 1.95 percent before the two crises.
    \13\ Dodd-Frank provides that the assessment base be changed to 
average consolidated total assets minus average tangible equity. See 
Public Law 111-203, sec. 331. For this simulation, from 1990 to 
2010, the assessment base equals year-end total industry assets 
minus Tier 1 capital. For earlier years (before the Tier 1 capital 
measure existed) it equals year-end total industry assets minus 
total equity. Other than as noted, the methodology used in the 
additional analysis was the same as that used in the October NPR.
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[GRAPHIC] [TIFF OMITTED] TR20DE10.001

BILLING CODE C

II. Comments Received

    The FDIC sought comments on every aspect of the proposed rule. The 
FDIC received 4 comments related to setting the DRR, which are 
discussed in section IV below.

III. The Final Rule

A. Scope

    The FDIC is finalizing only the portion of the October NPR related 
to setting the DRR. The FDIC will consider including the remaining 
subject matter of the October NPR in a future final rule.

B. DRR

    As discussed above, Dodd-Frank eliminates the previous requirement 
to set the DRR within a range of 1.15 percent to 1.50 percent, directs 
the FDIC to set the DRR at a minimum of 1.35 percent (or the comparable 
percentage of the assessment base as amended by Dodd-Frank) and 
eliminates the maximum limitation on the DRR.\14\ Dodd-Frank retains 
the requirement that the FDIC designate and publish a DRR before the 
beginning of each calendar year.\15\
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    \14\ Public Law 111-203, sec. 334(a), 124 Stat. 1376, 1539 (to 
be codified at 12 U.S.C. 1817(b)(3)(B)).
    \15\ 12 U.S.C. 1817(b)(3)(A).
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    Also, as discussed above, Dodd-Frank retains the requirement that 
the FDIC set and publish a DRR annually.\16\ The FDIC must set the DRR 
in accordance with its analysis of the following statutory factors: 
Risk of losses to the DIF; economic conditions generally affecting 
insured depository institutions; preventing sharp swings in assessment 
rates; and any other factors that the FDIC may determine to be 
appropriate and consistent with these factors.\17\ The analysis that 
follows considers each statutory factor, including one ``other 
factor'': Maintaining the DIF at a level that can withstand substantial 
losses, consistent with the FDIC's comprehensive, long-term fund 
management plan.
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    \16\ 12 U.S.C. 1817(b)(3).
    \17\ The statutory factors that the FDIC must consider are set 
out in a footnote above. The FDIC considered these factors when it 
approved the October NPR. While the analysis of the factors has been 
updated, the FDIC's conclusion remains the same.
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    Based upon the following analysis of the statutory factors that the 
FDIC must consider when setting the DRR, the historical analysis 
contained in the October NPR, and the updated analysis described above, 
the FDIC has concluded that the DRR should be set at 2 percent.\18\ As 
the updated historical analysis above demonstrates, the recommended DRR 
is the minimum reserve ratio needed to withstand a future banking 
crisis. A 2 percent reserve ratio prior to past crises would

[[Page 79290]]

barely have prevented the fund from becoming negative while maintaining 
steady assessment rates. A larger fund would have allowed the FDIC to 
have maintained a positive balance and the fund would have remained 
positive even had losses been higher. Consequently, the FDIC views the 
2 percent DRR as a long-range, minimum target.
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    \18\ The 2 percent DRR is expressed as a percentage of estimated 
insured deposits. Dodd-Frank requires the FDIC to also make 
available the DRR using the new assessment base definition. The FDIC 
does not have all the information necessary to calculate the new 
assessment base; however, the FDIC estimates that as of September 
30, 2010, a DRR of 2 percent of estimated insured deposits would 
have been approximately equivalent to a DRR of 0.9 percent of the 
new assessment base.
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Analysis of Statutory Factors
Risk of Losses to the DIF
    During 2009 and 2010, losses to the DIF have been high. As of 
September 30, 2010, both the fund balance and the reserve ratio 
continue to be negative after reserving for probable losses from 
anticipated bank failures. During the current downturn, the fund 
balance has fallen below zero for the second time in the history of the 
FDIC.\19\ The FDIC projects that, over the period 2010 through 2014, 
the fund could incur approximately $50 billion in failure-resolution 
costs. The FDIC projects that most of these costs will occur in 2010 
and 2011.
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    \19\ The FDIC first reported a negative fund balance in the 
early 1990s during the last banking crisis.
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    In the FDIC's view, the high losses experienced by the DIF during 
the crisis of the 1980s and early 1990s and during the current economic 
crisis (and the potential for high risk of loss to the DIF over the 
course of future economic cycles) suggest that the FDIC should, as a 
long-range, minimum goal and in conjunction with the proposed dividend 
and assessment rate policy, set a DRR at a level that would have 
maintained a zero or greater fund balance during both crises so that 
the DIF will be better able to handle losses during periods of severe 
industry stress.
Economic Conditions Affecting FDIC-Insured Institutions
    Concerns of a double-dip recession have receded and the U.S. 
economic recovery remains on track. Consensus forecasts call for the 
economy to expand by about 2.0 percent in the second half of 2010 and 
2.5 percent in 2011. Consumer spending is growing gradually, but 
remains constrained by high unemployment and modest income growth. 
Business spending on equipment and software is rising, and corporate 
profits are near pre-recession levels.
    The economic recovery is still exposed to downside risks--such as 
high unemployment and weak real estate markets--that create a 
challenging operating environment for insured depository institutions. 
The housing sector showed signs of stabilization after the expiration 
of Federal tax credits, but recent concerns over banks' foreclosure 
processes have introduced a new obstacle to the housing market 
recovery. Commercial real estate loan portfolios remain under pressure 
as unemployment dampens business and consumer demand. Even as credit 
markets have begun to recover amid low interest rates, bank lending 
activity remains constrained by weak loan demand and banks' reduced 
tolerance for risk. Industry-wide, loans outstanding fell slightly in 
the third quarter.
    As of September 30, there were 860 insured depository institutions 
on the problem list, representing 11 percent of all insured depository 
institutions. Through November 26, 149 insured depository institutions 
have failed this year, exceeding the 140 failures that occurred in 
2009; however, the total assets of failed institutions remain well 
below last year's total.
    Consistent with the economic recovery, the financial performance of 
insured depository institutions has shown recent signs of improvement. 
The industry reported three straight profitable quarters in 2010. The 
industry's aggregate net income was $14.5 billion in third quarter 
2010, up dramatically from just $2.0 billion a year ago. More than 80 
percent of insured depository institutions were profitable in the 
quarter, and almost two-thirds reported year-over-year earnings growth. 
While insured depository institutions continue to experience 
significant credit distress, loan losses and delinquencies may have 
peaked.
    Although these short-term economic conditions can inform the FDIC's 
decision on the DRR, they become less relevant in setting the DRR when, 
as now, the DIF is negative. In this context, the FDIC believes that 
the DRR should be viewed in a longer-term perspective. Twice within the 
past 30 years, serious economic dislocations have resulted in a 
significant deterioration in the condition of many insured depository 
institutions and in a consequent large number of insured depository 
institution failures at high costs to the DIF. In the FDIC's view, the 
DRR should, therefore, be viewed as a minimum goal needed to achieve a 
reserve ratio that can withstand these periodic economic downturns and 
their attendant insured depository institution failures. Taking these 
longer-term economic realities into account, a prudent and consistent 
policy would set the DRR at a minimum of 2 percent, since that is the 
lowest level that would have prevented a negative fund balance at any 
time since 1950.
Preventing Sharp Swings in Assessment Rates
    Current law directs the FDIC to consider preventing sharp swings in 
assessment rates for insured depository institutions. Setting the DRR 
at 2 percent as a minimum goal rather than a final target would signal 
that the FDIC plans for the DIF to grow in good times so that funds are 
available to handle multiple bank failures in bad times. This plan 
would help prevent sharp fluctuations in deposit insurance premiums 
over the course of the business cycle. In particular, it would help 
reduce the risk of large rate increases during crises, when insured 
depository institutions can least afford an increase.
Maintaining the DIF at a Level That Can Withstand Substantial Losses
    The FDIC has considered one additional factor when setting the DRR: 
Viewing the DRR as a minimum goal that will allow the fund to grow 
sufficiently large in good times that the likelihood of the DIF 
remaining positive during bad times increases, consistent with the 
FDIC's comprehensive, long-term fund management plan. Having adequate 
funds available when entering a financial crisis should reduce the 
likelihood that the FDIC would need to increase assessment rates, levy 
special assessments on the industry or borrow from the U.S. Treasury.
Balancing the Statutory Factors
    In the FDIC's view, the best way to balance all of the statutory 
factors (including the ``other factor'' identified above of maintaining 
the DIF at a level that can withstand the substantial losses associated 
with a financial crisis) is to set the DRR at 2 percent.

IV. Summary of Comments

    The FDIC requested comments on all aspects of the proposed rule. 
This section discusses comments related to setting the DRR, including 
the historical analysis of losses. Comments on other subjects of the 
October NPR will be considered in the context of formulating a final 
rule on those subjects.
    One trade group specifically endorsed setting the DRR at 2 percent. 
It stated that it agreed with the FDIC's goal of seeking to maintain a 
positive fund balance during an economic downturn. The trade group 
further stated that the FDIC's proposal ``would reduce the pro-
cyclicality in the existing system and achieve moderate, steady 
assessment rates through economic and credit

[[Page 79291]]

cycles while also maintaining a positive DIF balance during an economic 
downturn or even a banking crisis.''
    Three other trade groups, however, suggested that a DRR of 2 
percent would be excessive. Two trade groups focused on recent changes 
in law, including the reforms contained in Dodd-Frank, which, they 
argued, lower the probability of an institution's failure and the 
FDIC's loss given failure.\20\ The commenters argued that Dodd-Frank 
and Basel III make the likelihood of another crisis small and should 
allow the FDIC to weather another economic downturn with less funding. 
Therefore, the commenters argued, the potential exists for the FDIC to 
collect a large reserve that would grow without limit and remain in the 
DIF for an extended period of time. The commenters argued that these 
funds would best be used in the banking system where they could be lent 
to help fuel the economy.
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    \20\ One commenter suggested setting the DRR at 1.5 percent at 
most, and that the FDIC determine whether any additional increases 
beyond that point are necessary based on a contemporaneous 
evaluation of the facts and circumstances.
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    The FDIC believes the proposed DRR complements Dodd-Frank and Basel 
III; all three make the financial sector more resilient, reduce the 
likelihood of future crises or their systemic damage should they occur, 
and make financial regulation more counter-cyclical. While the FDIC 
hopes that these reforms will make financial crises less likely and the 
FDIC's losses smaller, it would be imprudent for the FDIC to assume 
that banking crises are a thing of the past. The current crisis 
occurred despite extensive legislative changes to the banking and 
regulatory system that were made in response to the crisis of the late 
1980s and early 1990s. The FDIC's analysis shows that the reserve ratio 
would need to be at least 2 percent to survive a crisis similar to the 
last two crises. Given the FDIC's goal of avoiding pro-cyclical 
assessments, the FDIC does not believe that this level of reserves is 
excessive.
    Historically, the reserve ratio has never even reached 2 percent. 
Given the proposed rate reductions once the reserve ratio reaches 2 
percent and 2.5 percent, combined with the near certainty that higher 
than average losses will occur at some time in the future, the FDIC has 
limited how much the fund can grow. This graduated approach to curbing 
fund growth is consistent with Congress's removal of the hard cap on 
the fund's size.
    A fund reserve ratio in excess of 2 percent would not 
inappropriately curb credit availability. As described in the proposed 
rule, the FDIC estimates that the reserve ratio will not reach 2 
percent for about 17 years; that estimate assumes a long period of 
economic expansion after the current recession ends. After a lengthy 
expansion, the greater risk to the banking industry and the economy is 
overextension of credit, not insufficient credit.
    A trade group argued that the FDIC's historical analysis ignores 
the overreserving for contingent fund losses that occurred in 1990, 
which, had it not occurred, would have meant that the reserve ratio 
would not have needed to be 2.31 percent to maintain a positive fund. 
The trade group also noted that there may have been overreserving for 
contingent fund losses when the reserve ratio reached its low point 
earlier this year.
    The historical analysis in the October NPR used reported contingent 
loss reserves, which were created in accordance with GAAP. That these 
reserves were not (and may not be) perfect predictors of loss merely 
reflects the uncertainty inherent in predicting the future. In other 
ways, the historical analysis in the October NPR used extremely 
conservative loss assumptions. The analysis excluded the great majority 
of losses from thrift failures during the crisis of the late 1980s and 
early 1990s. The analysis also excluded losses that would have occurred 
but for extraordinary government assistance during the recent crisis. 
Moreover, the analysis sought to determine the reserve ratio needed 
before a crisis to keep the fund from becoming negative. Public 
confidence in the strength of the fund increases when the fund has a 
significant positive balance (rather than simply not being negative).
    A trade group also argued that the FDIC's analysis ignored the 
large amount of interest income that would be generated by a fund with 
a reserve ratio of 2 percent, and that this would be particularly 
significant during periods of stability and low losses to the fund. In 
fact, however, the FDIC's analysis did not ignore interest income. The 
analysis simulated fund growth by combining assessment income and 
investment income earned based on historical interest rates. The 
analysis covered periods of stability and low losses as well as crisis 
periods accompanied by high losses. It covered periods of high interest 
rates as well as low rates. The simulated fund also covered an extended 
period during which the fund reached or exceeded a reserve ratio of 2 
percent. (See Chart 2 above.) This period was not accompanied by 
exponential fund growth, and fund growth was limited by the use of 
assessment rate reductions. Had such a high reserve ratio been 
uninterrupted for the entire 60-year period, the fund might gradually 
have reached a size not warranted by historical experience, but, 
historically, periods of stability are not the norm--rather they are 
interrupted by periods of high losses when the fund's growth decreases 
significantly.
    Two trade groups were concerned that a large fund would become a 
target for funding activities unrelated to protecting insured deposits. 
This argument has been raised periodically over many years as a 
justification to keep assessments low and the fund size small. However, 
there is little evidence that this is a serious risk. The FDIC has 
consistently argued against legislative or other proposals that would 
expand the use of the fund beyond insured depositor protection.
    Two trade groups also noted that the National Credit Union Share 
Insurance Fund (NCUSIF) reserve ratio is limited by statute to 1.5 
percent and argued that a higher DIF reserve ratio could exacerbate 
competitive imbalances. The presence or absence of a cap on fund size 
is but one of several statutory differences between FDIC-insured 
institutions and Federally insured credit unions. The FDIC has proposed 
lower assessment rates that would go into effect when the reserve ratio 
reaches 1.15 percent. The FDIC believes that these assessment rates are 
sufficiently moderate that any competitive effect is likely to be 
small. Moreover, this difference is likely to be more than offset by 
the lower assessment rates that the FDIC should be able to maintain 
during a downturn. In 2010, for example, credit unions paid on average 
slightly less than 26 basis points of insured shares. Since almost all 
credit union deposits are insured, insured shares are analogous to 
domestic deposits as an assessment base.\21\ In comparison, the FDIC 
estimates that, in 2010, banks and thrifts will have paid an average 
assessment rate of slightly less than 18 basis points on a domestic-
deposit-related assessment base. Under the assessment rates that the 
FDIC proposed in the October NPR, banks and thrifts would pay much 
lower average assessment rates during a future crisis similar in 
magnitude to the current one. The proposed system is less pro-cyclical 
than both the existing system and the NCUSIF system, which is a 
positive

[[Page 79292]]

feature when considered across a complete business cycle.
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    \21\ The average rate in the text includes premiums paid to the 
National Credit Union Share Insurance Fund and assessments paid to 
the Temporary Corporate Credit Union Stabilization Fund.
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V. Regulatory Analysis and Procedure

A. Administrative Procedure Act

    The final rule setting the DRR at 2 percent will become effective 
on January 1, 2011. The Administrative Procedure Act (APA) provides 
that: ``The required publication or service of a substantive rule shall 
be made not less than 30 days before its effective date, except * * * 
(3) as otherwise provided for by the agency for good cause found and 
published with the rule.'' \22\ The FDIC has determined that good cause 
exists for waiving the customary 30-day delayed effective date. The FDI 
Act requires that, ``[b]efore the beginning of each calendar year, the 
Board of Directors shall designate the reserve ratio applicable with 
respect to the Deposit Insurance Fund and publish the reserve ratio so 
designated'' and that ``[a]ny change to the designated reserve ratio 
shall be made by the Board of Directors by regulation after notice and 
opportunity for comment.'' \23\ The FDIC will have fulfilled its 
statutory obligations in setting a DRR upon publication of this final 
rule in the Federal Register or on the FDIC's Web site before January 
1, 2011; accordingly, the inclusion of a particular effective date is 
incidental to this rulemaking. Nevertheless, in the interests of 
consistency and to avoid any uncertainty or confusion regarding the 
applicability of the new DRR, the FDIC is invoking the good cause 
exception so that the final rule setting the DRR at 2 percent will 
become effective on January 1, 2011.
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    \22\ 5 U.S.C. 553(b)(3).
    \23\ 12 U.S.C. 1817(b)(3)(A).
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    Dodd-Frank, which became law on July 21, 2010, raised the minimum 
DRR from 1.15 percent to 1.35 percent, which required the FDIC to 
change the DRR. In determining the appropriate DRR, the FDIC has 
conducted the historical analyses described in this rulemaking and in 
the October NPR. The FDIC has also considered the increase in the DRR 
in the context of other comprehensive changes made by Dodd-Frank. 
Although the FDIC moved expeditiously to determine an appropriate DRR, 
began the rulemaking process as soon as possible, and provided for a 
comment period of 30 days (as opposed to a comment period of 45 or 60 
days) when issuing the October NPR, insufficient time remained to adopt 
a final rule more than 30 days before January 1, 2011.
    As stated above, the FDIC is required to designate and publish the 
DRR before the beginning of each calendar year; a regulatory effective 
date is incidental to such designation and publication. The DRR does 
not, by itself, either by statute or regulation, serve as a trigger in 
assessment rate determinations, recapitalization of the fund, or 
declaration of dividends. Further, the DRR imposes no obligations and 
provides no benefits, and consequently no entity is prejudiced, 
inconvenienced or benefitted by the January 1, 2011 effective date; 
rather, the FDIC is establishing the effective date as January 1, 2011 
to avoid any possible uncertainty or confusion.
    For the foregoing reasons, the FDIC finds that good cause exists to 
justify a January 1, 2011 effective date for the DRR final rule.

B. Regulatory Flexibility Act

    Under the Regulatory Flexibility Act (RFA), each Federal agency 
must prepare a final regulatory flexibility analysis in connection with 
the promulgation of a final rule,\24\ or certify that the final rule 
will not have a significant economic impact on a substantial number of 
small entities.\25\ Certain types of rules, such as rules of particular 
applicability relating to rates or corporate or financial structures, 
or practices relating to such rates or structures, are expressly 
excluded from the definition of ``rule'' for purposes of the RFA.\26\ 
As of September 30, 2010, of the 7,770 insured commercial banks and 
savings associations, there were 4,229 small insured depository 
institutions as that term is defined for purposes of the RFA (i.e., 
institutions with $175 million or less in assets).
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    \24\ 5 U.S.C. 604.
    \25\ See 5 U.S.C. 605(b).
    \26\ See 5 U.S.C. 601.
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    Setting the DRR at 2 percent will not have a significant economic 
impact on a substantial number of small insured depository 
institutions. Nevertheless, the FDIC is voluntarily undertaking a 
regulatory flexibility analysis on the small business impact of the 
final rule.
    The DRR has no legal effect on small business entities for purposes 
of the RFA. The DRR is a minimum target only, and although Dodd-Frank 
sets a minimum DRR of 1.35 percent of estimated insured deposits, the 
FDIC has the discretion to set the DRR above that level as it chooses. 
The DRR does not drive the needs of the Deposit Insurance Fund: the 
FDIC's total assessment needs are driven by statutory requirements and 
by the FDIC's aggregate insurance losses, expenses, investment income, 
and insured deposit growth, among other factors. Neither the FDI Act 
nor the amendments under Dodd-Frank establish a statutory role for the 
DRR as a trigger, whether for assessment rate determination, 
recapitalization of the fund, or dividends. Nor does setting the DRR at 
2 percent alter the distribution of assessments among insured 
depository institutions. Accordingly, the final rule setting the DRR at 
2 percent of estimated insured deposits has no significant economic 
impact on small entities for purposes of the RFA.

C. Small Business Regulatory Enforcement Fairness Act

    The Office of Management and Budget has determined that the final 
rule is not a ``major rule'' within the meaning of the relevant 
sections of the Small Business Regulatory Enforcement Act of 1996 
(SBREFA) Public Law 110-28 (1996). As required by law, the FDIC will 
file the appropriate reports with Congress and the Government 
Accountability Office so that the final rule may be reviewed.

D. Paperwork Reduction Act

    No collections of information pursuant to the Paperwork Reduction 
Act (44 U.S.C. Ch. 3501 et seq.) are contained in the final rule.

E. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 113 
Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking agencies 
to use plain language in all proposed and final rules published after 
January 1, 2000. The FDIC invited comments on how to make this proposal 
easier to understand. No comments addressing this issue were received.

F. The Treasury and General Government Appropriation Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The FDIC has determined that the final rule will not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, enacted as part of the Omnibus 
Consolidated and Emergency Supplemental Appropriations Act of 1999 
(Pub. L. 105-277, 112 Stat. 2681).

List of Subjects in 12 CFR Part 327

    Bank deposit insurance, Banks, Banking, Savings associations.
    For the reasons set forth in the preamble, the FDIC proposes to 
amend chapter III of title 12 of the Code of Federal Regulations as 
follows:

[[Page 79293]]

PART 327--ASSESSMENTS

0
1. The authority citation for part 327 is revised to read as follows:

    Authority:  12 U.S.C. 1441, 1813, 1815, 1817-19, 1821.

0
2. Revise Sec.  327.4(g) to read as follows:


Sec.  327.4  Assessment rates.

* * * * *
    (g) Designated Reserve Ratio. The designated reserve ratio for the 
Deposit Insurance Fund is 2 percent.

    By order of the Board of Directors.

    Dated at Washington, DC, this 14th day of December 2010.
Valerie J. Best,
Assistant Executive Secretary, Federal Deposit Insurance Corporation.
[FR Doc. 2010-31829 Filed 12-17-10; 8:45 am]
BILLING CODE P