United States General Accounting Office

GAO Report to Congressional Requesters

March 1995 DEPOSIT INSURANCE

FUNDS

Analysis of Insurance

Premium Disparity

Between Banks and

Thrifts

GAO/AIMD-95-84

GAO United States

General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

B-258995 

March 3, 1995

The Honorable Alfonse M. D’Amato

Chairman

Committee on Banking, Housing, and

 Urban Affairs

United States Senate

The Honorable John J. LaFalce

Ranking Minority Member

Committee on Small Business

House of Representatives

This report responds to your June 10, 1994, request that we (1) analyze issues related to a

possible premium rate disparity that could occur between banks and thrifts if the Federal

Deposit Insurance Corporation (FDIC) reduces premiums for banks when their insurance fund

recapitalizes before the insurance fund for thrifts is capitalized, and (2) present various policy

options to avoid or mitigate problems that a premium rate differential may create.

As agreed with your office, unless you publicly announce its contents earlier, we plan no further

distribution of this report until 30 days from the date of this letter. At that time, we will send

copies of this report to the Chairman of the Federal Deposit Insurance Corporation; the Acting

Director of the Office of Thrift Supervision; the Secretary of the Treasury; the Director of the

Office of Management and Budget; the Chairman and Ranking Minority Member of the House

Committee on Banking and Financial Services; the Ranking Minority Member of the Senate

Committee on Banking, Housing, and Urban Affairs; the Chairman of the House Committee on

Small Business; and other interested parties. We will also make copies available to others on

request.

Please call me at (202) 512-9406 if you or your staffs have any questions concerning the report.

Other major contributors to this report are listed in appendix IV.

Robert W. Gramling

Director, Corporate Financial

 Audits
Executive Summary

Purpose The Congress, administration, regulators, thrift industry, and other

interested parties have expressed concern that a significant insurance

premium disparity between banks and thrifts could develop when the

Federal Deposit Insurance Corporation (FDIC) lowers bank premiums once

the Bank Insurance Fund (BIF) is fully recapitalized. It is expected that

thrift premiums could be as much as 5 times greater than bank premiums

because thrift premiums would need to remain at higher levels to fully

capitalize the Savings Association Insurance Fund (SAIF). Also, the higher

thrift premiums would be needed to pay interest on bonds issued

specifically to help pay for resolving the thrift crisis that developed in the

1980s. Such a premium disparity has raised concern that thrifts would be

at a significant competitive disadvantage with banks. This could adversely

affect the viability of the thrift industry and its insurance fund, ultimately

resulting in the need for appropriated funds.

Pursuant to a June 10, 1994, congressional request, GAO’s principal

objectives were to (1) determine the likelihood, potential size, and timing

of a premium rate differential between banks and thrifts, (2) analyze

possible effects of the premium rate differential on the two industries,

(3) assess potential adverse effects on SAIF’s viability, and (4) identify

policy options to avoid or mitigate problems the premium rate differential

may create.

Background The thrift crisis of the 1980s overwhelmed the industry’s insurance fund,

resulting in hundreds of billions of dollars in taxpayer assistance and

industry costs to protect insured depositors. Legislative action in response

to the crisis included establishing the Financing Corporation (FICO) in 1987

to recapitalize the thrift insurance fund. FICO issued $8.2 billion in bonds

and was given authority to assess thrifts for the annual bond interest

expense. Other legislation (1) established the Resolution Trust

Corporation (RTC) to resolve troubled thrifts, (2) created SAIF as a new

insurance fund for thrifts and retitled the insurance fund for banks—BIF,

(3) designated FDIC as the insurer and administrator of the two funds,

(4) set a designated ratio of reserves to insured deposits of 1.25 percent

($1.25 for each $100 of deposits) for the insurance funds, and provided for

the designated reserve ratio to be reached within certain time frames, and

(5) gave FDIC authority to set premiums for the funds to reach the

designated reserve ratio.

As of December 31, 1994, BIF had unaudited reserves of $21.8 billion, or

about 1.16 percent of insured deposits, and SAIF had unaudited reserves of

Page 2 GAO/AIMD-95-84 Deposit Insurance Funds
Executive Summary

$1.9 billion, or about 0.27 percent of insured deposits. Current average

premium rates are 23 cents for every $100 in insured deposits for banks,

and 24 cents for thrifts.

SAIF originated in 1989 without any initial capital, and funds authorized for

SAIF were not appropriated. More recent legislation (1) authorized

$8 billion for SAIF for insurance losses, (2) made available, also for

insurance losses, any remaining RTC funding (RTC is to terminate by

year-end 1995) for 2 years under certain conditions, and (3) increased

borrowing authority from the Treasury.

SAIF’s capitalization has been slowed by its members’ premiums being used

to pay for certain obligations created in financing the resolution of the

thrift crisis. From 1989 through 1993, about $6.4 billion, or 84 percent of

SAIF’s premiums were used for other obligations created in response to the

thrift crisis, including FICO. Since 1993, only the FICO obligation has

remained. However, the thrift industry’s assessable base has been

shrinking. Since SAIF’s inception, deposits have declined an average of 5

percent annually, from $948 billion in 1989 to $711 billion in 1994. In 1993,

the FICO payments totaled $779 million, or about 46 percent of SAIF’s total

insurance premiums.

Results in Brief Given BIF’s current condition and short-term outlook, it is fairly certain

that it will achieve the designated reserve ratio in 1995. FDIC has proposed

adjusting bank premium rates as early as the September 1995 payment to

reflect the Fund’s capitalization date. In contrast, current FDIC projections

show that SAIF will not be fully capitalized for another 7 years. Although

the estimation process has inherent uncertainties, FDIC projects BIF’s

reduced premiums will average 4 to 5 basis points, while SAIF’s will average

24 basis points until SAIF is fully capitalized.

A significant portion of assessments paid by SAIF-insured thrifts is used to

pay FICO’s bond interest. GAO assumed that FDIC would continue to set SAIF

premium rates at a level sufficient to service the FICO bond interest. If

SAIF-insured thrifts are not assessed for FICO bond interest, FICO will be

unable to pay the interest expense unless other funding mechanisms are

made available. FDIC officials advised GAO that they will be examining this

matter. In setting SAIF premium rates, FDIC stated it has the discretion to

consider the effects on the ability of FICO to meet its obligations.

Page 3 GAO/AIMD-95-84 Deposit Insurance Funds
Executive Summary

SAIF’s total deposit base has declined by 25 percent since 1989. Further,

premiums paid on thrift deposits acquired by banks and deposits held by

former thrifts that converted to bank charters cannot be used to pay FICO

bond interest. The portion of the base available to pay FICO has declined by

48 percent. If the deposit base continues to decline and if premium levels

are set to pay the FICO bond interest, the premium differential could be

significantly affected.

Reliable statistical estimates are not available to predict banks’ and thrifts’

responses to a premium rate differential. However, banks could pass on

savings resulting from reduced premiums by increasing deposit interest

rates and improving customer services to compete more aggressively for

deposits. Thrifts would likely incur additional costs trying to match bank

actions to remain competitive.

This report discusses a range of options for the Congress and the

administration to consider in dealing with the concerns raised by a

premium differential, including an option of taking no action.

GAO’s Analysis

Significant Uncertainties

Affect Timing of SAIF’s

Capitalization and Ability

to Pay FICO Interest

Long-range estimates of future thrift failures and losses associated with

those failures are very uncertain. Given the unprecedented size of the

thrift industry crisis, recent thrift failure and loss experience does not

provide a sound basis for estimating future losses. In projecting that SAIF

would be capitalized in 2002, FDIC considered historical bank failure rates

and current conditions in the thrift industry and assumed an annual

2 percent shrinkage of SAIF’s deposit base available to pay FICO bond

interest.

FDIC projected that insured institutions holding 0.22 percent of total thrift

industry assets will fail each year and that losses associated with such

failures will average 13 percent of their assets. However, if greater annual

failure rates of 0.35 percent, 0.53 percent, or 0.70 percent were

experienced, SAIF’s capitalization would be delayed until 2004, 2007, or

2010, respectively.

SAIF’s total deposit base has declined by an annual average of 5 percent

since 1989, and the portion of the base available to pay FICO has declined

Page 4 GAO/AIMD-95-84 Deposit Insurance Funds
Executive Summary

by an annual average of nearly 10 percent. Although these declines reflect

RTC’s resolution of problem thrifts, the deposit base continues to decline,

although at a decreasing rate, and the portion of the base available to pay

FICO interest continues to decline. If this experience continues, the

premium differential is likely to increase and the sufficiency of SAIF

premiums to pay the FICO bond interest is threatened.

At December 31, 1994, SAIF’s assessment base available to pay FICO bond

interest was about $500 billion. Given the current assessment rate of 24

basis points, that base could shrink to about $325 billion before premium

rates would need to be raised to meet the FICO obligation. If shrinkage in

the portion of SAIF’s assessment base available to pay FICO were to

continue at the average rate experienced since the Fund’s inception, FDIC

would need to increase SAIF’s premium rates in the year 2000 to meet the

FICO obligation.

Currently, SAIF does not have a large capital cushion to absorb the cost of

thrift failures. Thus, SAIF will be vulnerable to the potential cost of a large

thrift failure when it assumes full resolution responsibility from RTC this

year. While FDIC projections indicate that SAIF could manage the projected

rate of failures, any delays in SAIF’s capitalization will extend the period of

risk associated with a thinly capitalized insurance fund.

Potential Effects of

Premium Differential on

Industry Costs and Capital

Banks and thrifts compete in a wide market, including nondepository

financial institutions, which contributes to uncertainties in predicting

banks’ responses to a decline in premium rates. Although reliable

statistical evidence is not available to predict these responses, in one

illustration GAO assumed banks would pass 50 percent of the savings from

reduced premiums to customers and that thrifts, to remain competitive,

would fully match bank actions. Using the median thrift return on assets of

1 percent (100 basis points) and assets financed with 60 to 90 percent of

assessable deposits, the estimated cost increase for these thrifts would be

about 3.9 percent to 5.8 percent of annual after-tax earnings. A return on

assets of only 0.5 percent (50 basis points) would double the cost as a

share of earnings.

The duration of a premium rate differential is a significant factor in

determining its impact. FDIC’s projections show a premium rate differential

of 19.5 basis points existing during the years 1996 through 2002. However,

because FICO’s bonds will not be fully liquidated until 2019, a substantial

differential could continue an additional 17 years beyond 2002. Regardless

Page 5 GAO/AIMD-95-84 Deposit Insurance Funds
Executive Summary

of its duration, the impact of the premium differential will be more severe

for thrifts with low earnings and low capital.

Policy Options There are several policy options for decisionmakers to consider to prevent

a premium rate differential between BIF and SAIF members from occurring

or to reduce the size and duration of a differential. Taking no action is also

an option, but poses significant risk in terms of SAIF’s exposure to thrift

failures and the ability to pay FICO bond interest.

Most of the options to avoid or mitigate the potential impact of the

premium differential involve shifting some of the costs of capitalization or

future FICO interest payments to either BIF members or to the taxpayer.

Opponents of any option that involves shifting all or a portion of the FICO

obligation to the banking industry contend it is unfair to require banks to

assist in paying for the thrift industry’s obligation. Others contend that the

institutions that comprise today’s thrift industry were no more responsible

for the thrift crisis of the 1980s than banks.

The options GAO presents do not attempt to judge the merits of either side,

but rather present the impact of such options on banks and thrifts, and on

eliminating or reducing the risks associated with the premium differential.

These options include

• taking no action at this time, but monitoring the effects of the premium

differential on the thrift industry and SAIF;

• merging BIF and SAIF, and several possible scenarios within that option,

such as (1) including no initial funding to capitalize SAIF and using both BIFand SAIF-member premiums to pay FICO bond interest, (2) assessing SAIF

members to capitalize SAIF and using BIF- and SAIF-member premiums to

pay FICO, and (3) including no initial capitalization of SAIF and using only

SAIF-member premiums to pay FICO;

• requiring BIF and SAIF members to share FICO bond interest costs

proportionally;

• using BIF premiums to pay FICO bond interest; and

• using appropriated funds to capitalize SAIF or to fund FICO bond interest.

As of December 31, 1995, GAO estimates that the present value cost to

increase SAIF’s reserves to the designated ratio and to fund the FICO bond

interest would be $13.8 billion or $14.4 billion, depending on the source of

funding. GAO has costed out the various policy options, including the

Page 6 GAO/AIMD-95-84 Deposit Insurance Funds
Executive Summary

option of taking no action, using these estimates. GAO presents the risks to

the thrift industry, SAIF, and the taxpayers under these policy options.

Agency Comments FDIC, the Office of Thrift Supervision (OTS), and the Department of the

Treasury provided written comments on a draft of this report. These

comments are included as appendixes I, II, and III. They were

incorporated as appropriate, throughout the report. FDIC, OTS, and Treasury

generally agreed with the broad analysis presented in the report. FDIC, OTS,

and Treasury agreed that assumptions used in FDIC’s projections are

subject to significant uncertainties, and any changes in assumed thrift

failures and deposit shrinkage could affect SAIF’s ability to attain its target

capitalization and its ability to service the FICO obligation.

FDIC noted that SAIF’s premium income has thus far been sufficient to pay

the annual FICO bond interest and gradually build SAIF’s reserves. However,

at some future date, servicing the FICO obligation could become an issue if

SAIF experiences a dramatic increase in the portion of its assessment base

whose premiums are not available to pay FICO, or if FDIC reduces premium

rates once SAIF achieves its designated reserve ratio. FDIC pointed out that,

in setting SAIF’s premiums, FDIC has the discretion to consider the effects of

the premium rates on the ability of FICO to meet its obligations.

Both OTS and Treasury expressed concern over the risks concerning taking

no action. OTS emphasized its concerns regarding SAIF’s current capital

position, the funding mechanism for FICO bond interest, and the potential

adverse effects of a significant premium rate disparity. Treasury

emphasized the lack of the thrift industry’s risk diversification, the

long-term effect of a premium differential on the industry, and the limited

assessment base for paying FICO bond interest.

Page 7 GAO/AIMD-95-84 Deposit Insurance Funds
Contents

Executive Summary 2

Chapter 1 

Introduction

10

Background 10

Objectives, Scope, and Methodology 16

Chapter 2 

Premium Rate

Differential Could

Occur and SAIF’s

Future Outlook Is

Uncertain

18

A Significant Premium Rate Differential Could Develop in 1995 18

Future Payment of FICO Bond Interest 20

Uncertainties Regarding Failure Rates and Loss Assumptions

Affect Timing of SAIF’s Capitalization

21

Uncertainties Regarding Assessment Base Growth Assumptions

Affect SAIF Members’ Ability to Pay FICO Interest

24

Thinly Capitalized Insurance Fund Is Risky 28

Conclusions 29

Chapter 3 

Premium Rate

Differential Will

Impact Thrift Industry

Costs and Capital

30

Banks’ and Thrifts’ Response to a Premium Differential Is

Uncertain

30

Cost of Premium Differential to Thrifts Is Uncertain 31

Impact of Thrifts Absorbing the Premium Differential 31

Impact on Troubled Institutions Over Time 32

Impact of Premium Differential on Capital Investment in

SAIF-Member Institutions

33

Conclusions 33

Chapter 4 

Policy Options to

Address Concerns

Resulting From a

Premium Rate

Differential

34

Total Cost of Capitalizing SAIF and Funding the FICO Interest

Expense

35

Risks Associated With No Action 36

Options Not Requiring Use of Appropriated Funds 37

Options Using Appropriated Funds 43

Appendixes Appendix I: Comments From the Federal Deposit Insurance

Corporation

46

Appendix II: Comments From the Office of Thrift Supervision 53

Appendix III: Comments From the Department of the Treasury 61

Appendix IV: Major Contributors to This Report 64

Page 8 GAO/AIMD-95-84 Deposit Insurance Funds
Contents

Tables Table 2.1: Effects of Various Failure Rates on SAIF’s

Capitalization

24

Table 2.2: FDIC-Projected Reserves for SAIF 28

Table 4.1: Policy Options and Related Costs 35

Figures Figure 2.1: SAIF and BIF Premium Rates Projected by FDIC 19

Figure 2.2: Failed Bank Asset Experience and Future Projections

for SAIF

22

Figure 2.3: Failed Bank Loss Rates and Future Projections for

SAIF

23

Figure 2.4: SAIF Deposit Base Shrinkage Since Inception 25

Abbreviations

BIF Bank Insurance Fund

FDIC Federal Deposit Insurance Corporation

FDICIA FDIC Improvement Act of 1991

FDI Federal Deposit Insurance

FICO Financing Corporation

FIRREA Financial Institutions Reform, Recovery, and Enforcement

Act of 1989

FRF FSLIC Resolution Fund

FSLIC Federal Savings and Loan Insurance Corporation

GAO General Accounting Office

OTS Office of Thrift Supervision

REFCORP Refinancing Corporation

RTC Resolution Trust Corporation

SAIF Savings Association Insurance Fund

Page 9 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 1 

Introduction

The Bank Insurance Fund (BIF) has substantially rebuilt its reserves over

the last 3 years from a deficit position at the end of calendar year 1991.

The Savings Association Insurance Fund (SAIF), while also building its

reserves, is doing so at a significantly slower rate.

The Congress, administration, savings association trade groups,

regulators, and other interested parties have expressed concern that a

significant disparity in premium rates between BIF and SAIF could develop

when BIF is fully recapitalized if the Federal Deposit Insurance

Corporation (FDIC) lowers BIF’s premium rates. They are concerned that a

significant insurance premium rate differential could put SAIF-insured

institutions at a competitive disadvantage with their BIF-insured

counterparts. They believe that this, in turn, could have serious

implications for the long-term viability of the industry and its insurance

fund.

Pursuant to the June 10, 1994, request of the now Chairman of the Senate

Committee on Banking, Housing, and Urban Affairs and the now Ranking

Minority Member of the House Committee on Small Business, we

undertook a review of the issues related to the likelihood that an

insurance premium rate differential would develop between bank and

thrift institutions and the potential impact of such a differential on the

banking and thrift industries and their respective insurance funds.

Background During the 1980s, the savings and loan industry experienced severe

financial difficulties, and the deterioration of the industry’s financial

condition overwhelmed the resources of its deposit insurance fund, the

Federal Savings and Loan Insurance Corporation (FSLIC). By 1988, the

condition of the industry and its insurance fund had reached crisis

proportions. At December 31, 1988, FSLIC reported a deficit of $75 billion.

The Financing Corporation (FICO) was established in 1987 to recapitalize

FSLIC. FICO was funded mainly through the issuance of public debt

offerings, which were limited to $10.8 billion.1

 The net proceeds of FICO’s

debt offerings were used to purchase capital stock and capital certificates

issued by FSLIC—in effect, providing capital to FSLIC. FICO was authorized to

assess FSLIC-insured institutions for the annual interest expense on the

obligations issued, as well as for bond issuance and custodial costs. The

1

The Resolution Trust Corporation Refinancing, Restructuring, and Improvement Act of 1991 later

terminated FICO’s bond issuance authority, effectively capping it at $8.2 billion.

Page 10 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 1 

Introduction

industry’s problems, however, required far more funding than that

provided through FICO.

2

In response to the thrift crisis, the Financial Institutions Reform,

Recovery, and Enforcement Act of 1989 (FIRREA) was enacted. FIRREA

abolished FSLIC and created the Resolution Trust Corporation (RTC) to

manage and resolve all troubled savings institutions that were previously

insured by FSLIC and for which a conservator or receiver was appointed

during the period January 1, 1989, through August 8, 1992.3

FIRREA also provided RTC with an initial $50 billion for the cost of resolving

these institutions. FIRREA created a new insurance fund for thrifts—the

Savings Association Insurance Fund, retitled the insurance fund for

banks—the Bank Insurance Fund, and designated FDIC as sole insurer of

all banks and savings associations and administrator of the insurance

funds.4

FIRREA Established

Assessment Authority and

Capitalization Levels for

BIF and SAIF

FIRREA authorized FICO, with the approval of the FDIC Board of Directors, to

assess SAIF-member savings associations to cover its interest payments,

issuance costs, and custodial fees. Subsequently, the RTC Refinancing,

Restructuring, and Improvement Act terminated FICO’s authority to issue

bonds, but it did not modify FICO’s authority to assess SAIF members to

cover its annual interest expense, which will continue until the 30-year

recapitalization bonds mature in the years 2017 through 2019.5 FIRREA

provided that the amount of FICO’s assessment was not to exceed the

amount authorized to be assessed SAIF members by FDIC for insurance

2

The thrift crisis resulted in hundreds of billions of dollars in appropriated funds and industry costs to

protect insured depositors.

3

The RTC Refinancing, Restructuring, and Improvement Act of 1991 extended RTC’s resolution

authority through September 30, 1993. This date was subsequently extended to a date not earlier than

January 1, 1995, nor later than July 1, 1995, by the RTC Completion Act. The act stated that the final

date would be determined by the Chairperson of the Thrift Depositor Protection Oversight Board. On

December 5, 1994, the Chairperson made the determination that RTC will continue to resolve failed

thrift institutions through June 30, 1995.

4

FDIC was created by the Banking Act of 1933 to provide insurance coverage for bank depositories

and to foster sound banking practices. FDIC was authorized to promulgate and enforce rules and

regulations relating to the supervision of insured banks and to perform other regulatory and

supervisory duties consistent with its responsibilities as insurer. Prior to enactment of FIRREA, FDIC

insurance authority extended only to bank depositories.

5

Fifteen percent of the outstanding bond principal matures in the year 2017, 57 percent matures in

2018, and the remaining 28 percent matures in 2019. FICO’s bond principal will be paid using the

proceeds of its investments, which have a face value sufficient to repay the principal amount upon

maturity.

Page 11 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 1 

Introduction

premiums, and that FICO’s assessment was to be deducted from the amount

FDIC was authorized to assess SAIF members.

FIRREA and subsequent legislation also amended the Federal Deposit

Insurance Act (FDI Act), particularly with respect to insurance

assessments. Under the FDI Act, as amended, the FDIC Board of Directors is

to set semiannual insurance premium rates for SAIF and BIF independently.

Further, the Board is to set such rates for SAIF to increase SAIF’s reserve

ratio to the designated reserve ratio and, once SAIF attains the designated

reserve ratio, to maintain SAIF’s reserve ratio at the designated reserve

ratio. In setting insurance premium rates, the Board of Directors is

required to consider the Fund’s expected operating expenses, case

resolution expenditures and income, the effect of assessments on

members’ earnings and capital, and any other factors that the Board of

Directors may deem appropriate.

The FDI Act, as amended, establishes a designated reserve ratio of

1.25 percent for both BIF and SAIF so that both funds build reserves

sufficient to withstand the pressures of any substantial financial institution

failures in the future. FDIC’s Board of Directors must set insurance

premium rates at a level that will enable each fund to build its reserves to

reach this ratio. The fund capitalization provisions added to the FDI Act by

the FDIC Improvement Act of 1991 (FDICIA) required FDIC to establish a

recapitalization schedule for BIF to achieve the designated reserve ratio not

later than 15 years after implementation and to set insurance assessments

in accordance with this schedule.

Until January 1, 1998, FDIC must set SAIF’s insurance premium rates at a

level that will enable SAIF to achieve the designated reserve ratio within a

reasonable period of time. FDIC’s Board of Directors has the authority to

lower SAIF premiums to an average annual rate of 18 basis points until

January 1, 1998. After January 1, 1998, FDIC must set premium rates for SAIF

to meet the designated reserve ratio according to a 15-year schedule. FDIC

may extend the date specified in the schedule to a later date that it

determines will, over time, maximize the amount of insurance premiums

received by SAIF, net of insurance losses incurred.

FDIC currently projects that BIF will reach the 1.25 percent designated

reserve ratio during 1995, and SAIF is projected to attain its ratio in 2002. As

of December 31, 1994, BIF had unaudited reserves of $21.8 billion,

representing approximately 1.16 percent of insured deposits. As of the

same date, SAIF had unaudited reserves of $1.9 billion, representing

Page 12 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 1 

Introduction

approximately 0.27 percent of insured deposits. Currently, BIF-insured

institutions are assessed insurance premiums at a rate averaging 23 cents

for every $100 in deposits subject to assessments (23 basis points), while

SAIF-insured institutions are assessed at premium rates averaging 24 cents

for every $100 of assessable deposits (24 basis points).6

Original Authorized

Funding for SAIF Was Not

Appropriated

SAIF was created without any initial capital, and from SAIF’s inception

through December 31, 1992, FICO, the Resolution Funding Corporation

(REFCORP),7

 and the FSLIC Resolution Fund (FRF)8 had prior claim on a

substantial portion of SAIF members’ insurance premiums. During the

period 1989 through 1993, approximately $6.4 billion, or 84 percent of

SAIF’s insurance premiums, were used to fund the priority claims of FICO,

REFCORP, and FRF. Beginning in 1993, only FICO continued to have prior

claim on SAIF members’ insurance premiums, with SAIF receiving the

remaining amount. In 1993, FICO received $779 million, which represented

approximately 46 percent of SAIF’s total insurance premiums for that year.

To address the problem of SAIF’s capitalization in light of the other claims

on its insurance premiums, the FDI Act, as amended by FIRREA, provided for

two types of supplemental funding from the Treasury—backup funding for

SAIF insurance premiums and payments to maintain a minimum fund

balance. As subsequently amended by the RTC Refinancing, Restructuring,

and Improvement Act of 1991, these provisions required the Treasury to

provide funding to SAIF each fiscal year from 1993 to 2000 to the extent

that the SAIF-member insurance premiums deposited in the Fund did not

total $2 billion a year. This would have assured SAIF of at least $16 billion

in either premium income or Treasury payments. In addition, Treasury was

authorized to make annual payments necessary to ensure that SAIF had a

specific net worth, ranging from zero during fiscal year 1992 to $8.8 billion

during fiscal year 2000. The cumulative amounts of these payments were

also not to exceed $16 billion. The FDI Act, as amended, also authorized

funds to be appropriated to the Secretary of the Treasury for purposes of

6

As required by the FDI Act, as amended, FDIC has implemented a risk-based assessment system that

charges higher rates to those institutions that pose greater risks to the insurance funds. Banks and

thrifts currently pay an assessment rate of between 23 cents and 31 cents per $100 of assessable

deposits, depending on their risk classifications.

7

REFCORP was established by FIRREA to provide funding for RTC. REFCORP was entitled to SAIF

insurance premiums in order to purchase zero-coupon bonds to finance its activities. REFCORP

ceased its bond issuance activities in 1991 and, therefore, has no further claim to SAIF insurance

premiums.

8

FRF was established by FIRREA to liquidate the assets and liabilities of the former FSLIC and was

entitled, through December 31, 1992, to the SAIF-member premiums not taken by FICO or REFCORP.

Page 13 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 1 

Introduction

these payments. However, none of the funds authorized were actually

appropriated.

Current Funding

Provisions for SAIF

Contain Significant

Restrictions

The funding provisions contained in the FDI Act were again amended in

December 1993 by the RTC Completion Act. The amendments authorize

Treasury payments of up to $8 billion to SAIF for insurance losses incurred

in fiscal years 1994 through 1998. Additionally, before any funds can be

made available to SAIF for this purpose, FDIC must certify to the Congress,

among other things, that (1) SAIF-insured institutions are unable to pay

premiums sufficient to cover insurance losses and to meet a repayment

schedule for any amount borrowed from the Treasury for insurance

purposes under the FDI Act, as amended, without adversely affecting their

ability to raise and maintain capital or to maintain the assessment base

and (2) an increase in premiums could reasonably be expected to result in

greater losses to the government.

The RTC Completion Act also makes available to SAIF any of the RTC’s

unused loss funding to cover insurance losses during the 2-year period

beginning on the date of RTC’s termination. However, SAIF’s use of this

funding is subject to restrictions similar to those of the Treasury funding

authorized under the act.

Additionally, FDICIA provided SAIF a mechanism for funding insurance

losses. Specifically, FDICIA authorized FDIC to borrow up to $30 billion from

the Treasury, on behalf of SAIF or BIF, for insurance purposes. No

borrowing has yet occurred, however, BIF or SAIF would have to repay any

amounts borrowed from the Treasury with premium revenues. Also, FDIC

would have to provide the Treasury with a repayment schedule

demonstrating that future premium revenue would be adequate to repay

any amounts borrowed plus interest. Additionally, the amount of such

borrowings is further restricted by a formula limiting each fund’s total

obligations.

FICO Obligation Requires

Greater Portion of

Assessments Than

Originally Assumed

At the time FIRREA was enacted, the administration projected annual thrift

deposit growth of 6 to 7 percent. Under this assumption, the annual FICO

interest obligation would have accounted for 7 basis points (29 percent) of

the 24 basis points charged annually for SAIF premiums. Since SAIF’s

inception, however, total SAIF deposits have declined an average of 5

percent annually, from $948 billion in 1989 to $711 billion in 1994. As a

result, the annual FICO interest obligation is being spread over a smaller

Page 14 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 1 

Introduction

than anticipated assessment base. Thus, the FICO interest obligation

represents a significantly higher proportion of the assessment rate and the

premiums paid by SAIF members than originally assumed.

Growing Segment of SAIF

Assessment Base Is Not

Available to Service FICO

Obligation

Another factor which exacerbates the problem of shrinkage in SAIF’s

assessment base is the growth of a segment of the SAIF assessment base

whose premiums may not be used to fund the FICO interest obligation. This

segment of SAIF’s assessment base includes deposits which have been

acquired by BIF members from SAIF members, and former savings

associations that have converted to bank charters while retaining SAIF

membership.

Thrift deposits acquired by BIF members, referred to as “Oakar” deposits,

retain SAIF insurance coverage, and the acquiring institution pays

insurance premiums to SAIF for these deposits at SAIF’s premium rates.

However, because the institution acquiring these deposits is not a savings

association and remains a BIF member as opposed to a SAIF member, the

insurance premiums it pays to SAIF, while available to capitalize the Fund,

are not available to service the FICO interest obligation. When the

acquisition occurs, FDIC establishes a ratio of BIF-insured deposits to

SAIF-insured deposits for the BIF member acquiring institution. This ratio

remains constant for the institution in the event of subsequent deposit

growth or shrinkage. Similarly, premiums paid by SAIF-member savings

associations that have converted to bank charters, referred to as “Sasser”

institutions, are unavailable to fund the FICO interest obligation since the

institutions are banks as opposed to savings associations.

Institution Conversions

From SAIF to BIF

Membership Are

Restricted Until SAIF Is

Capitalized

Currently, SAIF-insured institutions cannot voluntarily change or convert

their membership from SAIF to BIF. The FDI Act, as amended, contains a

moratorium on conversions from SAIF to BIF except in limited cases where

(1) the conversion transaction affects an insubstantial portion of the total

deposits of the institution as determined by FDIC and (2) the conversion

occurs in connection with the acquisition of a SAIF member in default or in

danger of default and FDIC determines that the benefits to SAIF or RTC equal

or exceed FDIC’s estimate of the loss of insurance premium income over

the remaining balance of the moratorium period and RTC concurs with

FDIC’s determination. Once SAIF is fully capitalized, the moratorium on

conversions will be lifted. However, institutions converting their

membership will be subject to substantial entrance and exit fees.

Page 15 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 1 

Introduction

Objectives, Scope,

and Methodology

As directed by the requesters’ June 10, 1994, letter, our objectives were to

(1) determine the likelihood, potential size, and timing of a differential in

premium rates between BIF- and SAIF-insured institutions, (2) analyze

possible effects of the premium rate differential on the thrift and banking

industries, (3) assess potential threats to SAIF’s viability, and (4) present

various policy options to avoid or mitigate problems which a premium rate

differential may create. As agreed with the requesters, we did not analyze

the potential effects of the premium rate differential on the availability of

housing finance.

To address the above questions, we obtained background information and

data from officials at FDIC, the Office of Thrift Supervision (OTS), the Board

of Governors of the Federal Reserve System, the Federal Housing Finance

Board, and the Department of the Treasury. We also met with officials at

the Savings and Community Bankers Association, the California League of

Savings Institutions, the Savings Association Insurance Fund Industry

Advisory Committee (SAIFIAC), the American Bankers Association, and

other knowledgeable parties who provided us with information and their

perspectives.

For our analyses, we relied on FDIC’s projected capitalization schedules for

BIF and SAIF, and detailed financial data for SAIF-member institutions. We

also relied on information reported by FDIC regarding troubled thrifts and

potential future failures. We verified that key beginning figures in FDIC’s

capitalization schedules were reasonable in relation to BIF’s and SAIF’s

financial statements; however, we did not audit the data presented in the

schedules. Also, we did not audit the detailed financial data for SAIF

members provided by FDIC, nor did we audit the information regarding

troubled thrifts and potential future failures reported by FDIC.

In order to determine the likelihood, potential size, and timing of a

differential in premium rates between BIF- and SAIF-insured institutions and

to assess the future outlook for SAIF, we identified the major assumptions

underlying FDIC’s projected capitalization schedules for BIF and SAIF. We

considered the potential effects of major uncertainties associated with

these assumptions as well as other uncertainties affecting the duration of a

differential in premium rates. We also analyzed the effects of various

institution failure rates on SAIF’s ability to attain its designated reserve

ratio. Additionally, we analyzed the effects of shrinkage in the portion of

SAIF’s assessment base available to pay FICO on SAIF’s ability to finance the

annual interest obligation to FICO’s bondholders.

Page 16 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 1 

Introduction

In order to analyze the possible effects of the premium rate differential on

the thrift and banking industries, we developed economic scenarios as a

framework to forecast the potential magnitude of the impact of FDIC’s

projected premium differential. We used this approach due to the lack of

reliable statistical estimates of the likely behavioral responses of banks

and thrifts resulting from a differential in premium rates. Using detailed

financial data for SAIF members on a national level, we converted the

premium differential into a cost increase for SAIF members. We also

analyzed data for SAIF-member institutions in California, a state with a

significant level of thrift assets. In our calculations, we used FDIC’s

projected premium rate differential between BIF and SAIF.

We used information gained throughout the assignment to present various

options available for mitigating or avoiding the potential problems

associated with a premium differential between BIF and SAIF. We altered

assumptions in FDIC’s BIF and SAIF projection schedules to correspond with

some of the options presented.

We conducted our work in Washington, D.C., from August 1994 through

February 1995 in accordance with generally accepted government auditing

standards.

FDIC, OTS, and the Department of the Treasury provided written comments

on a draft of this report. These comments have been incorporated, as

appropriate, throughout this report, and are reprinted in appendixes I

through III.

Page 17 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 2 

Premium Rate Differential Could Occur and

SAIF’s Future Outlook Is Uncertain

A significant differential in premium rates charged by BIF and SAIF will

develop in 1995, if FDIC lowers rates for BIF members immediately after BIF

reaches its designated reserve ratio in 1995. FDIC projections indicate that,

beginning in 1996, SAIF’s premium rates will be more than five times the

rate of BIF premiums until SAIF’s projected capitalization in the year 2002.

The premium rate differential could continue for the duration of the FICO

interest obligation if SAIF-insured thrifts continue to be assessed at rates

sufficient to pay the interest on the FICO bonds. Significant uncertainties

exist with respect to key assumptions in FDIC’s projection schedules,

including institution failure and loss assumptions, and future shrinkage in

the portion of SAIF’s deposit base available to fund the FICO interest

obligation. These factors could affect SAIF’s capitalization date and future

premium rates.

A Significant Premium

Rate Differential

Could Develop in 1995

FDIC’s current projections for BIF indicate that BIF will attain its designated

ratio of reserves to insured deposits of 1.25 percent in 1995. Given the

Fund’s current condition and short-term outlook, it is fairly certain that BIF

will achieve the designated reserve ratio in 1995. In response to the Fund’s

rapid improvement and its current outlook, on January 31, 1995, FDIC’s

Board of Directors issued for public comment a proposal that would

significantly reduce the average annual premium rates charged to

BIF-insured institutions. FDIC’s Board of Directors could adjust BIF-member

premium rates as early as the September 30, 1995, payment date to reflect

the date in which the Fund achieves the designated reserve ratio. FDIC’s

projections for SAIF indicate that SAIF will attain its designated reserve ratio

in the year 2002, 7 years later than BIF.

FDIC projects that BIF insurance premium rates will average 4 to 5 basis

points (4 to 5 cents per $100 of deposits) after BIF reaches its designated

reserve ratio. FDIC estimates that this rate will be sufficient to cover future

insurance losses and maintain the Fund’s reserve ratio. In contrast, FDIC

projects that SAIF’s premium rates will remain at an average of 24 basis

points, more than five times the rate for BIF-insured institutions, until SAIF

reaches its designated reserve ratio. (See figure 2.1.)

Page 18 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 2 

Premium Rate Differential Could Occur and

SAIF’s Future Outlook Is Uncertain

Figure 2.1: SAIF and BIF Premium

Rates Projected by FDIC Projected premium rates (basis points)

0

5

10

15

20

25

1995 1996 1997 1998 1999 2000 2001 2002

Years

SAIF

BIF

Because of the potential magnitude of the differential in premium rates

between BIF and SAIF that could develop under the Board’s proposal and

the potential effects such a differential could have on thrifts and their

insurance fund, the Director of OTS, at the January 31, 1995, FDIC Board

meeting requested that the Board hold public hearings to discuss the

issues and concerns raised by the Board’s proposal. We concur with the

OTS Director’s request and believe such hearings would be a useful forum

for examining the implications associated with the premium rate disparity

that would develop under the Board’s proposal.

Uncertainties inherent in the estimation process could result in the actual

premium rate differential being significantly different from the projected

differential in any given year. However, it is fairly certain that a period of

high premium rate differentials will exist between BIF and SAIF until SAIF

reaches its designated reserve ratio.

Page 19 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 2 

Premium Rate Differential Could Occur and

SAIF’s Future Outlook Is Uncertain

Future Payment of

FICO Bond Interest

Since FICO bonds were first issued in 1987, the thrift industry has paid

assessments for the annual interest expense on FICO’s bonds. FDIC

projections are that SAIF will achieve its designated reserve ratio in 2002

and that SAIF-insured thrifts will be assessed for FICO bond interest through

that time. For purpose of our analyses, we assume that assessments of

SAIF-insured thrifts for FICO bond interest will continue until the bonds

mature in 2017 through 2019.

If FICO assesses1 SAIF members to pay the annual FICO interest, using the

assumptions underlying FDIC’s projections, annual assessment rates could

be lowered to approximately 19 basis points after SAIF attains its

designated reserve ratio. However, these rates would need to be gradually

increased as the portion of SAIF’s assessment base available to pay FICO

decreases. This would result in a substantial premium rate differential

continuing through the liquidation of FICO bonds, while at the same time

increasing the Fund’s reserve ratio to a level significantly higher than the

designated reserve ratio.2

 The premium rates for SAIF and the resulting

differential could be even higher under scenarios where the portion of the

SAIF assessment base available to pay FICO interest experiences significant

shrinkage.

FDIC official projections on assessments for SAIF-insured thrifts do not go

beyond the year 2002 or otherwise address to what extent SAIF-insured

thrifts may be assessed for FICO bond interest after SAIF achieves its

designated reserve ratio.3

 If SAIF-insured thrifts are not assessed for the

FICO bond interest, FICO will be unable to pay the interest expense unless

other funding mechanisms are made available. FDIC officials advised us

that they will be examining this issue. In its comments on a draft of this

report, FDIC stated that in setting SAIF premiums, it may consider FICO

assessments and the effects of SAIF premiums on the ability of FICO to meet

its obligations. However, FDIC’s comments also reflected the tension that

FDIC may face at some future time between its duty to protect SAIF and

FICO’s debt service requirements.

1

As previously discussed, the approval of FDIC’s Board of Directors is required for FICO assessments

of SAIF members.

2

This assumes that Oakar and Sasser institutions continue to be charged premiums at a rate FDIC

determines is sufficient to maintain the Fund’s designated reserve ratio and service the FICO bond

interest. Because Oakar and Sasser premiums cannot be used for this latter purpose, their premiums

would serve to further increase the Fund’s reserves.

3

Although FDIC published projections showing SAIF’s balance and designated reserve ratio through

the year 2012 in the Federal Register on February 16, 1995, these projections do not indicate the

assessment rates to be charged insured institutions.

Page 20 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 2 

Premium Rate Differential Could Occur and

SAIF’s Future Outlook Is Uncertain

Uncertainties

Regarding Failure

Rates and Loss

Assumptions Affect

Timing of SAIF’s

Capitalization

SAIF’s ability to achieve its designated reserve ratio in 2002 as currently

projected by FDIC is subject to significant uncertainties regarding assumed

institution failure rates and associated losses used by FDIC in its

projections. Long-range estimates of future thrift failures and losses

associated with those failures are extremely uncertain. The health of the

industry is subject to many variables which are extremely difficult to

predict, such as changes in interest rates, the economy, and real estate

markets. If financial institution failures and associated losses for SAIF are

higher than those projected, SAIF may not achieve its designated reserve

ratio in the time frame projected by FDIC.

Because of the unprecedented nature of the thrift industry crisis, recent

thrift failure and loss experience may not provide a sound basis for

estimating future losses. Also, requirements for corporate governance and

accounting reforms and prompt corrective action by regulators are

intended to prevent such high levels of financial institution failures in the

future and to limit the losses associated with those that do fail.4

 For these

reasons, FDIC used historical bank failure rates, rather than thrift failure

rates, as a consideration in projecting future SAIF-institution failures. FDIC

also considered current conditions in the thrift industry in projecting SAIFinstitution failures. Additionally, FDIC used historical losses on failed bank

assets to estimate SAIF’s future losses on failed institution assets.

Because recent bank failure rates also may not provide a sound basis for

projecting future failures due to recent, significant changes in the business

and regulatory environments for financial institutions, FDIC adjusted the

average of BIF’s failure rate over the last 20 years to arrive at the rate used

in SAIF’s projections. The institution failure rates used in SAIF’s projections

are about one-half the average bank failure rate over the last 20 years.

Specifically, FDIC projected that, beginning in 1996, institutions holding

approximately 0.22 percent of total industry assets will fail each year. (See

figure 2.2.)

4

The Federal Deposit Insurance Corporation Improvement Act of 1991 (Public Law 102-242,

December 19, 1991).

Page 21 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 2 

Premium Rate Differential Could Occur and

SAIF’s Future Outlook Is Uncertain

Figure 2.2: Failed Bank Asset Experience and Future Projections for SAIF

FDIC projected that losses associated with the failures of such institutions

will be 13 percent of their assets, which is approximately the average loss

experience on failed bank assets over the last 20 years. However, the loss

rates have fluctuated significantly from year to year, and future loss rates

could be significantly different from those projected. (See figure 2.3.)

Page 22 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 2 

Premium Rate Differential Could Occur and

SAIF’s Future Outlook Is Uncertain

Figure 2.3: Failed Bank Loss Rates and Future Projections for SAIF

Failed bank asset loss rates (percent)

0

5

10

15

20

25

30

35

40

45

73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93

Year

Actual failed bank asset loss rates FDIC future projection 13%

Average loss rate, 1973 - 1993

In addition to the uncertainties associated with failure and loss rates, the

rates used in FDIC’s projections are constant. As such, they spread the

effects of business cycles across all of the years presented. Consequently,

the effects of business cycles could cause actual insurance losses for any

given year to vary significantly from what FDIC’s projections indicate.

Higher Than Projected

Failures Could Delay

SAIF’s Capitalization

If SAIF experiences a higher level of failures than assumed by FDIC in its

projections and all other factors are held constant, the Fund’s ability to

capitalize by the year 2002 would be seriously jeopardized. As of

September 30, 1994, FDIC reported in the FDIC Quarterly Banking Profile -

Third Quarter 1994 that 62 SAIF members with $47 billion in assets were

considered problem institutions, with financial, operational, or managerial

weaknesses that threaten their continued financial viability. It is difficult

to reliably predict the amount and timing of institution failures, even for

problem institutions. Not all problem institutions ultimately fail; many,

Page 23 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 2 

Premium Rate Differential Could Occur and

SAIF’s Future Outlook Is Uncertain

historically, have corrected conditions that caused regulatory concerns

and strengthened their financial condition. Conversely, institutions not

currently considered to be problem institutions could become troubled as

a result of unfavorable changes in future economic conditions, including

changes in interest rates and real estate markets.

Currently, FDIC projections show that failures totaling 31 percent of the

assets in the current group of SAIF-insured problem institutions are

estimated to fail between 1996 and 2002, on which SAIF is projected to

incur losses equal to 13 percent. If future failures are higher than projected

and premium rates remain unchanged at the average annual rate of 24

basis points, SAIF’s capitalization could be delayed. (See table 2.1.)

Table 2.1: Effects of Various Failure

Rates on SAIF’s Capitalization

Total annual asset failure rate

(percent)

Percent of 12/94

problem assets

failing: 1996-2002

Total asset

failures

1996-2002

Year of SAIF

capitalization

0.22

(FDIC projection) 31 $15 billion 2002

0.35 50 $24 billion 2004

0.53 75 $35 billion 2007

0.70 100 $47 billion 2010

Another uncertainty affecting the projected institution failure and loss

rates for SAIF is the potential effect of a premium rate differential on SAIF

institutions. FDIC’s failed asset projections for SAIF do not explicitly

consider the possible effects of a premium rate differential on thrift

failures.5

Uncertainties

Regarding Assessment

Base Growth

Assumptions Affect

SAIF Members’ Ability

to Pay FICO Interest

FDIC projected an annual deposit shrinkage of 2 percent for the portion of

SAIF’s deposit base available to service the annual FICO interest obligation.

However, significant uncertainties exist regarding FDIC’s assumptions of

changes in SAIF’s future assessment base. Since SAIF’s inception, both its

total deposit base and the portion available to pay FICO have experienced

significant shrinkage. With the pending significant differential between BIF

and SAIF premium rates, the SAIF deposit base available to service FICO bond

interest may decline by more than the 2-percent annual rate projected by

FDIC.

5

FDIC is currently finalizing an internal study entitled Analysis of Issues Confronting the SAIF, which

is expected to be published in February 1995. This study does analyze the impact of a 5- and 20-basis

point premium differential on SAIF-member failures.

Page 24 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 2 

Premium Rate Differential Could Occur and

SAIF’s Future Outlook Is Uncertain

The FICO Assessment

Base Has Experienced

Dramatic Shrinkage

Currently, about 31 percent of SAIF’s assessment base belongs to

institutions whose premiums are not subject to FICO assessments. About

24 percent of SAIF’s assessment base consists of Oakar deposits, which are

held by BIF members, and about 7 percent is held by Sasser institutions,

former savings associations that have converted to bank charters yet

retain SAIF membership. As explained in chapter 1, the insurance

premiums paid on these deposits cannot be used to pay FICO, since FICO’s

assessment authority to pay its costs extends only to SAIF-member savings

associations.

SAIF’s total deposit base has declined by 25 percent since its inception, or

an average decline of 5 percent each year, from $948 billion in 1989 to

$711 billion in 1994. The portion of SAIF’s base available to pay FICO—the

FICO assessment base—has experienced a decline of 48 percent since SAIF’s

inception, or an average annual decline of almost 10 percent. (See figure

2.4.)

Figure 2.4: SAIF Deposit Base

Shrinkage Since Inception Deposits (in billions)

0

100

200

300

400

500

600

700

800

900

1000

1989 1990 1991 1992 1993 1994

Year

Total SAIF deposit base

FICO assessment base

Page 25 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 2 

Premium Rate Differential Could Occur and

SAIF’s Future Outlook Is Uncertain

It is difficult to predict future shrinkage in the portion of SAIF’s assessment

base available to pay FICO. Growth in Oakar deposits from BIF-member

acquisitions of thrift deposits causes shrinkage in the portion of SAIF’s

assessment base available to pay FICO. The amount of Oakar deposits has

grown rapidly since SAIF’s inception. Between 1990 and 1994, Oakar

deposits have increased by $136 billion, to a total deposit base of

$167 billion. Coupled with a decline in SAIF’s total deposit base, Oakar

deposits have grown substantially as a portion of SAIF’s deposit base.

Deposits in Sasser institutions, although significant, have not experienced

substantial growth.

Some of the past growth in Oakar deposits resulted from BIF-member

institutions acquiring deposits from thrifts resolved by RTC. The

unprecedented high number of thrift failures is unlikely to continue.

However, it is not possible to predict future BIF-member acquisitions of

thrift deposits due to voluntary shrinkage within the thrift industry. For

example, in 1993 and 1994, the increase in Oakar deposits was significantly

greater than the amount of deposits in institutions resolved by the RTC

during this period.

Consequently, it is difficult to predict future growth in Oakar deposits.

Nonetheless, if SAIF’s Oakar deposits grow at only the 2-percent annual

growth rate FDIC projects for BIF members, while the portion of SAIF’s

assessment base available to pay FICO experiences the 2-percent annual

decline projected by FDIC, the Oakar portion of SAIF’s assessment base will

continue to increase in proportion to the Fund’s total assessment base.

This would result in a continually decreasing portion of SAIF’s total annual

premium income being available to service the FICO interest obligation.

Greater Shrinkage in

SAIF’s Assessment Base

Could Result in Higher

Premium Rates Than

Projected

Changes in SAIF’s assessment base could also have a significant effect on

the premium rates charged to institutions with SAIF-insured deposits.

Assuming payments for the FICO interest obligation are included in SAIF’s

premium rates, FDIC’s projections indicate that the portion of SAIF’s

assessment base available to pay FICO cannot withstand significant

shrinkage without FDIC having to increase insurance premium rates in

order to fund the annual FICO interest obligation.

The portion of SAIF’s assessment base available to pay FICO totaled about

$500 billion at December 31, 1994. At the current assessment rate of 24

basis points, the base could shrink to approximately $325 billion before

premium rates would need to be increased in order to pay the FICO

Page 26 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 2 

Premium Rate Differential Could Occur and

SAIF’s Future Outlook Is Uncertain

obligation. Under FDIC’s assumptions of a 2-percent decline in the portion

of SAIF’s base available to pay FICO and no future purchases of thrift

deposits by BIF members, premiums would need to be increased in about

the year 2012 in order to pay the FICO obligation. If the average of past SAIF

deposit shrinkage and purchases of thrift deposits by BIF members were to

continue, SAIF would need to increase rates in the year 2000 in order to

raise enough funds to pay the FICO obligation.

With the pending significant differential between BIF and SAIF premium

rates, the SAIF deposit base is likely to continue declining in the

foreseeable future. To reduce the burden of a significant cost disadvantage

in relation to BIF members, SAIF members could place less reliance on

deposits as a source of funding and turn to alternative sources, such as

Federal Home Loan Bank advances and repurchase agreements.6

 The

differential could also accelerate deposit shrinkage within institutions,

further reducing SAIF’s assessment base. This, in turn, could cause further

increases in premium rates to fund the fixed FICO interest obligation.

The future ability of SAIF-insured institutions to voluntarily convert from

SAIF to BIF membership is another factor that could significantly impact

SAIF’s future assessment base. Generally, institutions cannot currently

convert their membership from SAIF to BIF until SAIF achieves its designated

reserve ratio. Once SAIF reaches its reserve ratio, the moratorium in effect

for conversions from SAIF to BIF membership will be lifted. Institutions

converting from SAIF to BIF membership will pay an exit fee to SAIF and an

entrance fee to BIF.

7

 Whether or not institutions will be motivated to

voluntarily convert from SAIF to BIF when the moratorium is lifted will

depend, in part, on the cost of the fixed FICO interest obligation in relation

to the SAIF assessment base at the time.

Given the fact that the premium rate differential could continue after SAIF’s

capitalization for the duration of the FICO obligation, institutions could find

6

The substitution of these funding sources for deposits carries the risk of additional losses to SAIF

were these institutions to fail. This is due to the fact that Federal Home Loan Bank advances and

repurchase agreements are fully collateralized and have priority over SAIF’s claims resulting from

payments to depositors in the event the institution is closed and its assets liquidated to satisfy its

obligations.

7

Currently, FDIC regulations set the amount of exit fees payable to SAIF in connection with a

conversion transaction as a result of which insured deposits are transferred from a SAIF member to a

BIF member at 90 basis points multiplied by the amount of total deposits transferred to BIF. BIF

entrance fees payable in connection with such a transaction are calculated by multiplying the dollar

amount of total deposits transferred by the BIF reserve ratio at the time of conversion. If BIF’s reserve

ratio is 1.25 percent, the entrance fee would be 125 basis points. Thus, an institution would have to pay

215 basis points (90 + 125) multiplied by its deposit base in order to convert to BIF membership after

SAIF reaches its designated reserve ratio.

Page 27 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 2 

Premium Rate Differential Could Occur and

SAIF’s Future Outlook Is Uncertain

it beneficial to convert their membership to avoid continued payment of

higher premiums than those paid by BIF members. Therefore, institutions

could be motivated to convert from SAIF to BIF membership based on cost.

This voluntary conversion would cause further shrinkage in SAIF’s

assessment base, which would make the fixed FICO obligation relatively

more expensive for the shrinking base, in turn, causing additional

shrinkage in the base.

Thinly Capitalized

Insurance Fund Is

Risky

As of December 31, 1994, SAIF had unaudited reserves of $1.9 billion,

representing approximately 0.27 percent of insured deposits, or 27 cents

for every $100 in insured deposits. FDIC projects that SAIF’s reserves will

gradually increase until SAIF reaches its designated reserve ratio in 2002,

with approximately $8.0 billion in reserves. (See table 2.2.)

Table 2.2: FDIC-Projected Reserves for

SAIF 1995 1996 1997 1998 1999 2000 2001 2002

Reserves (billions) $2.4 $3.3 $4.1 $4.8 $5.6 $6.5 $7.3 $8.0

Reserve ratio

(percent) 0.35 0.49 0.61 0.74 0.86 1.0 1.14 1.25

To date, few demands have been placed on SAIF for resolution of failed

institutions, since the primary responsibility for resolving failed thrifts has

been with RTC. However, RTC’s authority to place failed thrifts into

conservatorship expires on June 30, 1995, at which time SAIF will assume

full responsibility for failures of SAIF-insured institutions.

Currently, SAIF does not have a large capital cushion to absorb the cost of

thrift failures. Although FDIC’s projections indicate that SAIF could manage

the currently projected rate of failures, the failure of a single large

institution or a higher than projected level of failures could delay SAIF’s

capitalization and increase the risk of SAIF becoming insolvent. SAIF’s

exposure will continue until its reserves are substantially increased.

Although the condition of the thrift industry has substantially improved

over the past few years, a large segment of the industry is still confronting

weak economic conditions. The nation’s seven largest thrift institutions

are headquartered in California and hold 23 percent of the industry’s

assets. In general, California has lagged behind most of the nation in

recovering from the most recent recession. Additionally, a few large

institutions have raised supervisory concerns due to low earnings and

relatively high levels of risk in their portfolios. Therefore, SAIF still faces

Page 28 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 2 

Premium Rate Differential Could Occur and

SAIF’s Future Outlook Is Uncertain

significant exposure relative to its current level of reserves. Any delays in

SAIF’s capitalization will only extend the period of risk associated with a

thinly capitalized insurance fund.

It should be noted, however, that the prompt corrective action provisions

and regulatory requirements in FDICIA were designed to minimize losses to

the insurance funds. The degree to which regulators exercise their

regulatory and supervisory responsibilities under these provisions will

thus be a significant factor in preventing or minimizing SAIF’s future

insurance losses from thrift failures.

Conclusions A significant premium rate differential will develop in 1995 if FDIC lowers

deposit insurance premium rates for BIF members after BIF reaches its

designated reserve ratio, although the duration and magnitude of the rate

differential are subject to significant uncertainties. FDIC’s projections

indicate that significant premium rate differentials will exist between BIF

and SAIF until SAIF’s capitalization. Although FDIC projects that SAIF will

reach its designated reserve ratio in the year 2002, the timing is uncertain

and could be affected by higher than projected insurance losses from

failed institutions. Assuming SAIF-insured thrifts continue to be responsible

for paying the FICO bond interest, the differential in premium rates will

continue after SAIF’s capitalization for the duration of the FICO obligation.

Accelerated shrinkage in the portion of SAIF’s assessment base available to

pay FICO could also cause SAIF premiums to be even higher than the current

average rate of 24 basis points.

SAIF’s outlook is tenuous given the various uncertainties surrounding its

exposure to insurance losses from future financial institution failures and

changes in its assessment base, along with the impact of a significant

premium rate disparity between its members and those of BIF. Because the

fixed FICO obligation is significant in relation to the portion of SAIF’s

assessment base whose premiums can be used to pay FICO, future

shrinkage in SAIF’s assessment base, or additional purchases of thrift

deposits by BIF members could affect SAIF members’ ability to pay the FICO

obligation. SAIF’s premium rates could be higher than projected, causing

the premium differential to be larger than currently projected. The higher

premium rates could induce further shrinkage in SAIF’s assessment base

and jeopardize future payment of the FICO interest obligation.

Page 29 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 3 

Premium Rate Differential Will Impact Thrift

Industry Costs and Capital

The potential premium rate differential between BIF and SAIF discussed in

chapter 2 is likely to have a significant impact on the banking and thrift

industries’ costs and on their ability to attract deposits and capital.

Reliable statistical estimates are not available to predict banks’ and thrifts’

responses to a premium rate differential. However, the lower cost of

insurance coverage could motivate banks to increase interest rates paid on

deposits and improve customer services in order to compete more

aggressively for deposits. Thrifts would likely incur additional costs in

their attempt to match bank actions and remain competitive with banks

for deposits.

Banks’ and thrifts’ actions and the impact of those actions on thrift

industry earnings and capital will depend on the duration and amount of

the premium differential, which are subject to the uncertainties discussed

in chapter 2. The cost increase thrifts are likely to incur will represent a

larger share of earnings for thrifts that depend heavily on deposits for

funding and have low earnings. Additionally, the high premium rates for

thrifts could motivate them to replace deposits with other nondeposit

sources of funding in an effort to reduce the costs associated with the

premium rate differential. Such action could result in a further shrinkage

in SAIF’s assessment base and could lead to higher insurance premium

rates charged by SAIF.

Banks’ and Thrifts’

Response to a

Premium Differential

Is Uncertain

Predicting BIF and SAIF member responses to a reduction in BIF premium

rates cannot be done with a high degree of certainty because reliable

statistical estimates of the likely behavior do not exist. Consequently,

when analyzing the potential effects of the premium rate differential on

the thrift and banking industries, it is necessary to make assumptions

regarding bank and thrift behavior.

The fact that banks and thrifts compete in a wide market that includes

nondepository financial institutions contributes to the uncertainties in

predicting banks’ responses to a decline in insurance premium rates.

Competitive factors within the broader financial marketplace could

determine whether banks use their reduction in insurance premiums to

increase interest rates paid on deposits and increase customer service.

Competition in the broader marketplace could also impact the portion of

savings from reduced premiums that banks pass on to customers.

If banks pass on all or part of their savings to customers, it is likely that

SAIF members will match bank actions in order to remain competitive. The

Page 30 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 3 

Premium Rate Differential Will Impact Thrift

Industry Costs and Capital

borrowing and lending activities of SAIF members have few unique

characteristics in relation to BIF members that would help them remain

competitive without matching bank actions. Commercial banks compete

with thrift institutions in local mortgage origination markets and business

lending, and both types of institutions compete for customer deposits to

fund their activities.

Cost of Premium

Differential to Thrifts

Is Uncertain

The portion of the premium reduction that banks pass through to

depositors, as well as the extent of SAIF members’ attempts to match those

actions, are both uncertain factors that will be significant in determining

the actual cost increase to SAIF members resulting from the premium rate

differential. Thrifts could potentially reduce these costs by replacing

deposits with other nondeposit sources of funding.

If banks do not pass on the benefits of their lower premium expenses to

customers and instead use these benefits to directly increase earnings, the

cost increase to SAIF members from the premium differential would be

zero.1

 If banks pass 100 percent of their reduction in insurance premiums

through to their customers and SAIF members fully match banks’ actions,

SAIF members would absorb 100 percent of the premium differential

through their increased costs. Similarly, if banks pass 50 percent of their

reduction in insurance premiums through to their customers and SAIF

members fully match banks’ actions, SAIF members would absorb

50 percent of the premium differential through increased costs.

Impact of Thrifts

Absorbing the

Premium Differential

If BIF members pass 50 percent of their savings associated with FDIC’s

projected decline in premiums through to their customers and SAIF

members fully match those actions, the cost increase for SAIF members on

average would be about 4.8 percent of annual after-tax earnings, assuming

a 19.5 basis point premium differential.2

 The cost increase to SAIF members

would be double if BIF members pass 100 percent of their savings through

to customers and SAIF members fully match BIF-member actions.

1

This assumes that BIF members do not represent a large enough share of investor capital in the

financial marketplace to create a general increase in the required rate of return investors demand for

investments in depositories.

2

This calculation is for a SAIF member with a 100 basis point return on assets with an assessment base

equal to 75 percent of assets. Under a 50-percent absorption scenario, the above institutions’ return on

assets would be reduced by 7.3 basis points on a pre-tax basis (50 percent of the 19.5 basis point

differential, multiplied by the 0.75 ratio of assessment base to assets) and 4.8 basis points on an

after-tax basis, assuming a corporate tax rate of 34 percent. The 4.8 percent after-tax reduction to

return on assets represents 4.8 percent of earnings.

Page 31 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 3 

Premium Rate Differential Will Impact Thrift

Industry Costs and Capital

The cost increase as a percentage of earnings for individual SAIF members

depends on their profitability, as well as the extent to which their assets

are financed with assessable deposits. The median return on assets for SAIF

members is about 100 basis points. Most SAIF-member assets are financed

with 60 to 90 percent of assessable deposits. Under the 50-percent

absorption assumption, the cost increase for institutions with a return on

assets of 100 basis points varies from about 3.9 percent to 5.8 percent of

annual after-tax earnings, respectively. These costs would be double under

a 100-percent absorption scenario.

Institutions with a return on assets of 50 basis points, or one-half of the

median return on assets, would face double the cost increase as a share of

earnings at each level of assessable deposits. Further, this scenario could

cause institutions which would otherwise have had low earnings to begin

incurring losses. The cost increase associated with the premium rate

differential would increase the losses of institutions already experiencing

losses. Prolonged periods of losses deplete institution capital and can

eventually lead to failure. However, an institution’s earnings can vary

dramatically over time. Therefore, it is also important to consider an

institution’s likely earnings over the time horizon of the premium rate

differential.

Because the cost of the premium differential is also related to the share of

assets financed with assessable deposits, SAIF members are likely to

replace deposits with other funding sources, such as Federal Home Loan

Bank advances. Therefore, some of the costs referred to above could be

mitigated somewhat if an institution replaces deposits with other sources

of funding. However, in the aggregate, the cushion provided by such

substitution is limited because eventually SAIF’s premium rates would need

to be increased in response to declines in the portion of SAIF’s assessment

base available to pay FICO in order to continue paying the FICO bond

interest.

Impact on Troubled

Institutions Over Time

Although the impact of the premium rate differential will be more severe

for institutions with low earnings and low capital, the impact should be

considered over the duration of the premium rate differential. Some SAIF

members are likely to fail in their business operations whether a premium

disparity develops or not. However, institutions that are currently troubled

could recover within a short period of time, since national, regional, and

local economic fluctuations cause institutions to go through periods of

earnings fluctuations in which they experience relatively low earnings for

Page 32 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 3 

Premium Rate Differential Will Impact Thrift

Industry Costs and Capital

a number of years, followed by a subsequent recovery. The existence of a

differential could make the climb back to recovery more difficult.

For example, the state of California has experienced significant declines in

real estate prices over the past few years. Approximately 26 percent of all

thrift industry assets are held in California, and, in 1993, 78 of the 98 SAIF

members in California had a return on assets of less than 100 basis points.

It is possible that some of these institutions could ultimately fail with or

without the introduction of a premium differential. However, many of

these institutions could experience earnings growth if real estate values

rebound and asset quality subsequently improves.

Impact of Premium

Differential on Capital

Investment in

SAIF-Member

Institutions

The premium differential will reduce earnings for SAIF members. Also, the

premium differential, as well as the expectation of a future differential,

will likely reduce capital investments in SAIF-member institutions

compared to the outcomes that otherwise would result without the

disparity. Unfortunately, reliable statistical estimates do not exist to

predict how capital investments in financial institutions will respond to

changes in earnings. Furthermore, a number of other factors also affect

capital investment in financial institutions, including the term structure of

interest rates and the regulatory environment in which financial

institutions operate. It should be noted, however, that the thrift industry as

a whole is currently well-capitalized, with a median equity capital ratio in

excess of 8 percent at September 30, 1994.

Conclusions The potential premium rate differential is likely to impact banks’ and

thrifts’ costs and their ability to attract deposits and capital. While

predicting the response of banks and thrifts to the lowering of premium

rates for BIF members is subject to considerable uncertainties, it is likely

that banks will take at least some advantage of their lower cost of

insurance coverage to expand their deposit base and capital by offering

incentives to customers. The likely reaction by thrifts would be to match

bank actions to retain and compete for deposits. The severity of the effect

of such actions on thrift earnings and capital is subject to the duration and

size of the premium differential but will generally be more severe for

thrifts already experiencing low earnings or losses and for thrifts that rely

heavily on deposits for funding. Thrifts may also replace deposits with

other nondeposit sources of funding in an effort to reduce their costs

relative to banks, which would further decrease SAIF’s assessment base

and could lead to a widening of the premium differential.

Page 33 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 4 

Policy Options to Address Concerns

Resulting From a Premium Rate Differential

Several policy options exist to prevent a premium rate differential

between BIF and SAIF members from occurring or to reduce the size and

duration of the projected differential. If a premium rate differential is

prevented, many of the potential negative effects on the thrift industry and

SAIF discussed in chapters 2 and 3 could be avoided. Options that reduce

the differential would likely cause the potential effects on thrift

institutions and SAIF to be less severe than if a higher differential develops.

Some options also reduce or eliminate the risks associated with a thinly

capitalized fund and a small assessment base. Aside from the option of

taking no action at this time, most of the options in this chapter involve

the shifting of at least some costs to either BIF members or the taxpayer.

Table 4.1 presents most of the policy options that are discussed

throughout this chapter. These options assume the continued servicing of

the FICO interest obligation.

Page 34 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 4 

Policy Options to Address Concerns

Resulting From a Premium Rate Differential

Table 4.1: Policy Options and Related Costs

Merge BIF and SAIF

Dollars in billions, present value

No actiona

No capital

infusion—

all members

pay FICO

SAIF

provides

capital—all

members

pay FICO

No capital

infusion—

SAIF

members

pay FICO

BIF and SAIF

share FICO

proportionally

Use BIF

premiums

to fund

FICO

Use

appropriated

funds to

capitalize

SAIF

Use

appropriated

funds to

fund FICO

Cost to SAIF $13.8 $2.6 $7.9 $8.0 $7.9 $6.1 $7.7 $6.1

Cost to BIF $0 $11.2 $5.9 $5.8 $5.9 $7.7 $0 $0

Cost to

Treasury

No

immediate

cost

$0 $0 $0 $0 $0 $6.1 $8.3

Year of SAIF

capitalization

2002 1996 1995 1996 2000 1999 1995 1999

Year of BIF

recapitalization

1995 1996 1995 1996 1995 1997 1995 1995

Risks

associated

with premium

differential

High Eliminated Eliminated High Significantly

reduced

Significantly

reduced

Reduced Significantly

reduced

Risks

associated

with thinly

capitalized

fund

High Eliminated Eliminated Eliminated Reduced Reduced Eliminated Reduced

Risks

associated

with small

assessment

base

High Eliminated Eliminated High Eliminated Eliminated High Eliminated

aThis column represents the effect on the various attributes (cost to SAIF, cost to BIF, etc.) if BIF

were to achieve the designated reserve ratio in 1995 and FDIC were to lower BIF-member

premiums as outlined in the FDIC Board of Director’s January 31, 1995, proposal, which was

published in the February 16, 1995, Federal Register.

Total Cost of

Capitalizing SAIF and

Funding the FICO

Interest Expense

At December 31, 1995, we project the present value of the total cost to

increase SAIF’s reserves to their 1.25 percent designated ratio to insured

deposits and to fund the FICO interest obligation, when discounted at 8.60

percent,2

 to be $13.8 billion. When discounted at 7.55 percent,3 the total

cost increases to $14.4 billion. Based on FDIC’s projections, SAIF would need

2

8.60 percent is a private market rate equal to the yield on highly rated corporate bonds as of year-end

1994.

3

7.55 percent is the rate equal to the yield on 30-year Treasury bonds as of February 23, 1995.

Page 35 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 4 

Policy Options to Address Concerns

Resulting From a Premium Rate Differential

additional capital of $6.1 billion to achieve its designated reserve ratio at

the end of 1995. The present value of the total FICO interest obligation from

1996 through 2019 is approximately $7.7 billion using an 8.60-percent

discount rate and $8.3 billion using a 7.55-percent discount rate. 4

SAIF’s fund balance at December 31, 1995, is projected by FDIC to be

$2.4 billion. Based on FDIC’s projections, this would represent a ratio of

reserves to estimated insured deposits of 0.35 percent at year-end 1995.

SAIF would need an additional $6.1 billion in capital at December 31, 1995,

to reach its designated reserve ratio, for a total capital base of $8.5 billion.

Risks Associated With

No Action

If no action is taken, and FDIC lowers BIF-member premiums after the Fund

reaches its designated reserve ratio in 1995, several significant risks for

SAIF’s long-term outlook exist which could result in the need for future use

of appropriated funds. These risks are interrelated and could result in

premium rates increasing to a level which cannot be sustained by SAIF

members, thereby calling into question SAIF’s long-term viability and its

ability to service its members’ long-term FICO obligation.

A thinly capitalized SAIF leaves the Fund at risk that it does not have

sufficient capital to withstand significant fluctuations in the assumptions

of future failures used in FDIC’s projections, particularly over the next

several years.

As discussed in chapters 2 and 3, a premium rate differential carries the

risks that SAIF members will have difficulty competing with BIF members

and attracting capital, possibly leading to additional shrinkage in SAIF’s

assessment base. This is particularly true if future servicing of the FICO

interest obligation after SAIF’s capitalization is a factor considered by FDIC

in setting SAIF’s future premium rates.

According to FDIC’s projections, the annual FICO interest expense currently

represents about 16 basis points in relation to the portion of SAIF’s

assessment base available to pay FICO. FDIC is currently projecting an

annual shrinkage of 2 percent in the portion of SAIF’s deposit base available

to pay FICO bond interest, which will make the FICO obligation more

expensive in relation to the assessment base. According to FDIC’s

4

The annual payments to FICO used for these estimates are based on FICO’s 1993 assessment of SAIF

members, which was $779 million. Although FICO’s actual interest expense in 1993 was $793 million,

SAIF was only assessed $779 million due to the fact that FICO uses the interest it earns on its cash

balances toward its bond interest expense. Therefore, the amount paid by SAIF each year for the FICO

obligation may vary slightly depending on FICO’s annual interest earnings.

Page 36 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 4 

Policy Options to Address Concerns

Resulting From a Premium Rate Differential

projections, the FICO obligation will require 19 basis points at the time of

SAIF’s capitalization and increase to 23.5 basis points in the year 2012.

However, as discussed in chapters 2 and 3, SAIF’s future levels of

assessment base shrinkage is extremely uncertain and could be greater

than projected. Greater than projected shrinkage in the portion of SAIF’s

assessment base available to pay FICO would increase the risk that SAIF

members would be unable to service the annual FICO interest obligation

without FDIC further increasing premiums above SAIF’s currently projected

rates.

Options Not Requiring

Use of Appropriated

Funds

Several options exist to prevent a premium rate differential and its

potentially adverse effects from occurring or to reduce the size and

duration of the projected differential. The Congress could pass legislation

to merge BIF and SAIF into one combined deposit insurance fund, thereby

providing a broad assessment base and diversification of risk. Within a

merger scenario, several options exist for handling the costs associated

with SAIF’s capital needs and the fixed FICO obligation. Other options exist

which involve a continuation of separate insurance funds for the banking

and thrift industries. However, each option has different outcomes, and

some options carry more risk and uncertainty than others.

Arguments have been made that any option that involves the banking

industry contributing to service the FICO interest obligation is unfair to the

industry. These arguments contend that the FICO obligation was incurred

during the thrift crisis of the 1980s and, as such, is an obligation of the

thrift industry. However, there are also arguments that those thrift

institutions that comprise today’s thrift industry still exist because they are

healthy, well-managed institutions that avoided the mistakes made by

many thrifts in the 1970s and 1980s that ultimately led to the thrift debacle.

As such, they argue, they should be no more responsible for the FICO

interest burden than the banking industry. The options discussed in the

remainder of this chapter do not attempt to judge the merits of either side

of this issue. Rather, they simply attempt to present how various

approaches to dealing with the premium rate differential will impact

banking and thrift institutions and eliminate or reduce the risks discussed

throughout this report.

Merge BIF and SAIF to

Form One Deposit

Insurance Fund

An option available to the Congress is to pass legislation which would

merge BIF and SAIF into one combined deposit insurance fund. A merger

would provide a large assessment base and diversification of risk, thereby

Page 37 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 4 

Policy Options to Address Concerns

Resulting From a Premium Rate Differential

eliminating the current risks associated with a thinly capitalized SAIF.

Within a merger scenario, several options exist for dealing with the FICO

obligation and SAIF’s capitalization. The following scenarios assume a

merger on January 1, 1996.

Spread FICO Expense and

Combined Fund’s Costs Among

All Members

The Congress could pass legislation to merge BIF and SAIF into a combined

deposit insurance fund on January 1, 1996, with each fund bringing into

the combined fund their current level of reserves. If BIF and SAIF are

combined without first capitalizing SAIF, and all members of the combined

fund continue to pay premiums at the current average annual rate of 23 to

24 basis points until the combined fund reaches the designated reserve

ratio, the combined fund would be capitalized in mid-1996. This would be

1 year later than BIF’s current projected recapitalization in 1995 and 6 years

earlier than SAIF’s currently projected capitalization in 2002. Once the

combined fund is capitalized, premium rates for the combined fund

members could be lowered and would average approximately 6 to 7 basis

points annually. This rate would be sufficient to service the annual FICO

interest obligation and would be about 2 basis points higher than the

future premium rate of 4 to 5 basis points FDIC currently projects for BIF

members once BIF attains its designated reserve ratio.

Under this scenario, no premium rate differential would develop, and

therefore, the risks associated with a rate differential would be eliminated.

The risks associated with a small assessment base would also be

eliminated since the FICO obligation would be spread over the combined

base. BIF members would, in effect, provide most of the initial capital

infusion and pay a portion of the FICO obligation. Assuming that the FICO

obligation is spread proportionally between the BIF and SAIF assessment

bases and that the bases grow at equal rates after the merger, the present

value of the additional premiums BIF members would pay under this

scenario would be approximately $11.2 billion.

SAIF Members Capitalize SAIF

Prior to Combining Funds

The Congress could pass legislation to merge BIF and SAIF into a combined

deposit insurance fund but require that both BIF and SAIF be adequately

capitalized prior to the merger. Under this scenario, FDIC could assess SAIF

members a special assessment to bring SAIF’s reserves up to the designated

reserve ratio before merging the two funds. SAIF’s reserves could be raised

to a ratio of reserves to insured deposits of 1.25 percent by FDIC charging a

one-time assessment of approximately 84 basis points on the Fund’s

assessment base in 1995, prior to merging the funds.

Page 38 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 4 

Policy Options to Address Concerns

Resulting From a Premium Rate Differential

A merger under this scenario would allow BIF to recapitalize in 1995, as

currently projected. BIF-member premiums could then be reduced from

their current level on schedule with FDIC’s current projections. The new

premium rates charged to the combined fund members would average

approximately 6 to 7 basis points annually. These rates would be sufficient

to service the annual FICO interest obligation and would be about 2 basis

points higher than the future annual premium rates of 4 to 5 basis points

currently projected for BIF members.

Under this scenario, the risks associated with a premium differential and a

thinly capitalized fund would be eliminated. Additionally, the risks

associated with a small assessment base would be eliminated, since the

FICO obligation would be spread over the combined base. SAIF members

would provide the necessary infusion of capital, and BIF members would

pay a share of the FICO obligation. Assuming equal growth rates among all

fund members after the merger, the present value of the additional

premiums BIF members would pay under this scenario would be

approximately $5.9 billion.

An 84 basis point special assessment to capitalize SAIF would pose some

risks to the industry. Specifically, SAIF members and other institutions with

SAIF-insured deposits would be forced to contribute $6.1 billion more to

SAIF in 1995 than currently projected to bring sufficient capital into the

combined fund. Clearly, this is a significant cost to these institutions. Even

for profitable institutions, the special assessment could result in losses

and a reduction in capital in the year of the assessment. Few institutions

that are currently meeting capital requirements would not meet these

requirements as a result of the special assessment. However, for some

institutions with both low earnings or losses and low capital that are

identified as troubled by the regulators, the special assessment could

accelerate their failure. The impact of the special assessment on thrifts

could be minimized by spreading the special assessment over several

years.

However, the risks to the thrift industry under this option are not as great

as those associated with the premium rate differential indicated in FDIC’s

current projections, assuming the prolonged duration of this differential to

service the annual FICO interest obligation through 2019. This special

assessment would be a one-time cost increase to SAIF members, after

which their rates would decline significantly and would be the same as

those charged to BIF members. Overall, the one-time assessment of 84

basis points, combined with a merger of the funds, would carry

Page 39 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 4 

Policy Options to Address Concerns

Resulting From a Premium Rate Differential

significantly less risk than the currently projected rate differential

extended through the duration of the FICO interest obligation, since the

cost to SAIF members would be less than the cost SAIF members would

otherwise incur if they were required to capitalize SAIF and fund the entire

FICO obligation. Additionally, a future premium rate differential would be

eliminated.

Former SAIF Members

Continue to Service Combined

Fund’s FICO Obligation

The Congress could also pass legislation to merge BIF and SAIF into a

combined deposit insurance fund with all members contributing to

capitalize the fund but require the former SAIF members to retain

responsibility for servicing the annual FICO interest obligation. Under this

scenario, BIF and SAIF are combined without first capitalizing SAIF. All

members of the combined fund would continue to pay premiums at the

current average annual rate of 23 to 24 basis points until the combined

fund achieves a ratio of reserves to insured deposits of 1.25 percent in

1996. Premium rates would then decline for both former BIF and SAIF

members from their current level; however, premium rates for the former

SAIF members would only decline slightly if their rates are set at a level

sufficient to pay the FICO obligation.

Under this scenario, a premium rate differential would still develop after

the combined fund is capitalized because former SAIF members would still

be responsible for servicing the FICO interest obligation. BIF members

would, in effect, provide a substantial portion of the capital infusion

needed to capitalize the combined fund and the cushion against exposure

to future financial institution failures. BIF members would pay

approximately $5.8 billion more in premiums to cover the capital infusion.

It is also possible that the combined fund would incur higher than

projected costs in the future if the former SAIF members are negatively

impacted by the premium differential that would still develop under this

scenario.

If this approach were employed, the risks associated with a small

assessment base would not change, since the former SAIF members would

still retain responsibility for the FICO obligation. However, the risks

associated with a thinly capitalized fund would be eliminated, since the

combined fund would be capitalized and better able to withstand

insurance losses than an undercapitalized SAIF. The risks associated with

the premium differential would probably not change as continued

servicing of the FICO obligation would continue to result in a significant

premium differential.

Page 40 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 4 

Policy Options to Address Concerns

Resulting From a Premium Rate Differential

Options Not Requiring a

Merger

Several options exist for maintaining BIF and SAIF as separate funds, while

avoiding the immediate use of appropriated funds. The Congress could

require that BIF members fund a portion of the FICO obligation, thereby

reducing the size and the duration of the projected premium rate

differential. FDIC could reduce SAIF’s premiums before the Fund capitalizes,

thereby extending the time frame in which SAIF becomes fully capitalized

but reducing the size of the premium rate differential currently projected

through the year 2002. The Congress could also make all SAIF resources

available to service the FICO obligation.

BIF and SAIF Members Service

the FICO Obligation

As discussed previously, servicing the interest on the FICO bonds

represents a substantial cost for the portion of SAIF’s assessment base

responsible for paying FICO. This creates the potential for a significant

premium rate differential even with a fully capitalized insurance fund. To

eliminate this situation and place thrifts on an equal competitive footing

with banks, the Congress could pass legislation requiring BIF members to

share the cost of servicing the FICO obligation with SAIF members beginning

in 1996. Under this option, if BIF and SAIF members shared the FICO

obligation proportionally based on their projected 1995 assessment bases,

BIF members would fund 77 percent of the FICO obligation and SAIF

members would fund the remaining 23 percent, eliminating the risks

associated with a small assessment base servicing the FICO obligation. BIF

would still attain its designated reserve ratio in 1995 as currently

projected; however, SAIF would capitalize in the year 2000, 2 years earlier

than currently projected by FDIC.

5

 After capitalization, SAIF’s projected

premium rates could be lowered to a level comparable with BIF’s, thereby

significantly reducing the risks associated with the premium differential.

Under this scenario, a significant premium rate differential would still

exist until the year 2000, when SAIF capitalizes. The present value of the

additional premium cost to BIF members under this scenario would be

approximately $5.9 billion. SAIF members would still be required to

capitalize SAIF and would fund their proportionate share of the FICO

obligation. The present value of SAIF members’ cost under this scenario

would be approximately $7.9 billion.

BIF Members Service the FICO

Obligation

Given the relative capital positions of the two insurance funds and the

risks associated with a prolonged period of a significant premium rate

differential, another option would be for the Congress to pass legislation

5

This estimate assumes that institution failure and loss rates used in FDIC’s SAIF projections would

hold true. This estimate also assumes that SAIF members would experience growth in deposits and

assets equal to BIF members due to the fact that both funds would be sharing the FICO burden

proportionately.

Page 41 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 4 

Policy Options to Address Concerns

Resulting From a Premium Rate Differential

requiring BIF to raise sufficient funds to pay the FICO obligation. If FDIC

maintained BIF’s premium rate at the current annual average of 23 basis

points through early 1997, sufficient funds would be raised to pay the FICO

obligation on a present value basis, assuming a discount rate of 8.6

percent. BIF members would pay approximately $7.7 billion more in

premiums than currently projected by FDIC.

Under this scenario, BIF premiums would not be reduced until 1997.

Additionally, SAIF would reach its designated reserve ratio in 1999, 3 years

earlier than currently projected by FDIC. With SAIF’s earlier capitalization,

the risks associated with a thinly capitalized fund would be reduced. After

SAIF’s capitalization, its premium rates would be comparable to BIF’s.

Because SAIF’s members would, in effect, be relieved from the FICO interest

obligation, the risks associated with a small assessment base paying the

fixed FICO interest obligation would be eliminated.

Lower SAIF Premiums Before

SAIF Is Capitalized

Under current law, FDIC has the option of lowering SAIF premiums prior to

SAIF’s capitalization. FDIC’s Board of Directors has the authority to lower

SAIF premiums to an average annual rate of 18 basis points until January 1,

1998, after which the average rate must remain at 23 basis points or higher

until the Fund is capitalized. Reducing the average annual rate to 18 basis

points is presently projected to delay SAIF’s capitalization for 2 years, until

2004. Although this option would slightly reduce the size of the projected

premium rate differential, it does little to address the risks associated with

a prolonged premium rate differential. This option would also increase the

risks associated with a thinly capitalized fund, since SAIF’s capitalization

would be delayed until the year 2004 and remain vulnerable to any

increases in thrift failures.

All SAIF Resources Available to

Service FICO Obligation

As discussed earlier, SAIF’s inability to use assessments collected from

Oakar and Sasser institutions to help fund FICO interest payments is a

significant limitation on its ability to service the industry’s FICO obligation.

Currently, a significant and growing portion of SAIF’s assessment base is

not available for this purpose. The Congress could modify current law to

specify that all SAIF assessments, including assessments paid by Oakar and

Sasser institutions, are available to service the FICO obligation. This action

could help SAIF meet future FICO payments without a need to maintain

premiums at the current rate beyond the date SAIF attains its designated

reserve ratio. However, the risks associated with a thinly capitalized fund

over the next several years would not be eliminated. Additionally, the risks

associated with the projected premium rate differential would also not be

eliminated, as the annual FICO interest obligation would still represent a

Page 42 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 4 

Policy Options to Address Concerns

Resulting From a Premium Rate Differential

significant additional cost in SAIF’s premium rates that would not be

present in BIF’s premium rates.

As discussed in chapter 2, if that portion of SAIF’s assessment base

available to pay the FICO obligation declines beyond FDIC’s current

projections, it is possible that SAIF would need to charge

higher-than-projected premium rates in the years following its

capitalization. These higher premium rates would increase the size of the

premium differential and the potential for negative effects on SAIF-insured

institutions and SAIF.

If this were the only action taken, a premium rate differential would not be

avoided or reduced. Consequently, the potential negative effects for

SAIF-insured institutions and SAIF discussed in chapters 2 and 3 would not

be avoided or mitigated.

Options Using

Appropriated Funds

The options discussed previously to deal with the funding concerns for

SAIF and the thrift industry’s long-term FICO obligation require significant

cost to be borne by banks, thrifts, or a combination of both industries.

Alternatively, other options are available that shift this burden to the

Treasury and, ultimately, the taxpayers. The Congress could provide SAIF

with new funding as a source of capital and as a means to pay the FICO

obligation. Another option is to make the funds previously appropriated or

the funds authorized, but not appropriated, available for these purposes.

Each of these funding options would require legislation and would be

subject to budget scorekeeping procedures.6

Authorize and Appropriate

New Funding

The Congress could appropriate funds to SAIF as a source of capital and as

a means to pay the FICO obligation. As discussed earlier, SAIF would require

approximately $14.4 billion at the end of 1995 in order to reach its reserve

ratio and fund its future FICO obligation, using a discount rate of

7.55 percent.

Remove the Restrictions

on Availability of Loss

Funding Already

Appropriated for RTC

The Resolution Trust Corporation Refinancing, Restructuring, and

Improvement Act of 1991 (Public Law 102-233) provided RTC with

$25 billion in December 1991 to fund resolution activity. However, these

funds were only available for obligation until April 1, 1992. On that date,

6

Scorekeeping is the process of estimating the budgetary effects of proposed and enacted legislation

and comparing them to limits set in the budget resolution or legislation.

Page 43 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 4 

Policy Options to Address Concerns

Resulting From a Premium Rate Differential

RTC returned $18.3 billion of unobligated funds to the Treasury. In

December 1993, the RTC Completion Act removed the April 1, 1992,

deadline, thus making the $18.3 billion available to RTC for completion of

its resolution activities. The RTC Completion Act also makes any unused

RTC funding available during the 2-year period beginning on the date of its

termination to SAIF for insurance losses. As of December 31, 1993, RTC’s

audited financial statements showed that RTC could have $13 billion in

unused loss funds after resolving all institutions for which it is

responsible.7

SAIF’s use of RTC funding is subject to significant restrictions. Before these

funds can be used, FDIC must certify to the Congress, among other things,

that (1) SAIF-insured institutions are unable to pay premiums sufficient to

cover insurance losses without adversely affecting their ability to raise and

maintain capital or to maintain the assessment base, and (2) an increase in

premiums could reasonably be expected to result in greater losses to the

government.

The Congress could pass legislation removing the restrictions on SAIF’s use

of RTC funding and make the funds available to capitalize SAIF and to pay

the FICO obligation. Based on the estimates presented in RTC’s

December 31, 1993, audited financial statements, it appears that significant

funding may be available to both capitalize SAIF and fund a substantial

portion of the FICO obligation.

If this funding were made available at the end of 1995, SAIF would need

approximately $6.1 billion to reach its designated reserve ratio, as well as

$8.3 billion on a present value basis to cover the future FICO obligation.

Because some uncertainty exists regarding RTC’s final loss funding needs,

the Congress could withhold a portion of the RTC funding for possible

future use by RTC until it is either used by RTC, or it becomes fairly certain

that RTC will not need the funding.

If the RTC funding were used as a capital infusion and as a mechanism for

funding a substantial portion of the FICO obligation, the premium

differential would be significantly reduced. Therefore, the risk of negative

effects on SAIF members and SAIF resulting from the differential would also

be substantially reduced. The capital infusion would provide SAIF with a

cushion against future losses, and the risks associated with a thinly

capitalized fund would be eliminated.

7

The estimated $13 billion of unused loss funds is dependent on RTC’s ability to recover amounts

currently estimated to be collectible from receiverships and future resolutions. Therefore, the amount

of unused loss funds available could be higher or lower, depending on RTC’s actual recoveries.

Page 44 GAO/AIMD-95-84 Deposit Insurance Funds
Chapter 4 

Policy Options to Address Concerns

Resulting From a Premium Rate Differential

Remove the Restrictions

on Funding Already

Authorized for SAIF

The FDI Act, as amended by FIRREA and by the RTC Refinancing,

Restructuring, and Improvement Act of 1991, authorized Treasury to

provide funding to SAIF each fiscal year from 1993 to 2000 to the extent

that the SAIF member assessments deposited in the Fund did not total

$2 billion a year. Additionally, Treasury was authorized to make annual

payments necessary to ensure that SAIF had a specific net worth, ranging

from zero during fiscal year 1992 to $8.8 billion during fiscal year 2000. The

cumulative amounts of these payments were not to exceed $16 billion.

However, while the FDI Act, as amended, authorized the appropriation of

funds to the Secretary of the Treasury, such funds were not actually

appropriated. These funding provisions were later amended by the RTC

Completion Act. That act authorized up to $8 billion for SAIF’s insurance

losses incurred in fiscal years 1994 through 1998 and placed restrictions on

the availability of these funds similar to the restrictions on the availability

of RTC funding.

The Congress could pass legislation removing the restrictions on this

funding source and appropriate the funds to aid in capitalizing SAIF and

funding the FICO obligation. The $8 billion authorized would not be

sufficient to both capitalize SAIF and completely fund the FICO obligation.

However, it would be sufficient to capitalize SAIF and fund about

one-fourth of the FICO obligation. If this funding were authorized and

appropriated for these purposes, SAIF would be capitalized when the funds

are received.

Providing this funding to SAIF would result in SAIF’s capitalization, and

would have the overall effect of a capital infusion. SAIF would also be

relieved of a significant portion of the future FICO obligation. Under this

approach, the premium differential after capitalization would be reduced.

Alternatively, another option using these funds would be to fund the FICO

obligation and let SAIF members continue to fund the cost of capitalizing

SAIF as well as paying for the small portion of the FICO obligation not

covered by these funds. Under this option, SAIF members would continue

to pay higher premiums than their BIF counterparts for 4 years, and the

Fund would be capitalized in 1999.

Some uncertainties are associated with these options, since a premium

differential would exist, although its size and duration would be subject to

how these funds would be applied. However, the risks associated with the

differential would be significantly reduced as a result of reducing either

the size or duration of the differential.

Page 45 GAO/AIMD-95-84 Deposit Insurance Funds
Appendix I 

Comments From the Federal Deposit

Insurance Corporation

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

See comment 1.

See comment 2.

Page 46 GAO/AIMD-95-84 Deposit Insurance Funds
Appendix I 

Comments From the Federal Deposit

Insurance Corporation

See comment 3.

See comment 4.

Page 47 GAO/AIMD-95-84 Deposit Insurance Funds
Appendix I 

Comments From the Federal Deposit

Insurance Corporation

See comment 5.

Page 48 GAO/AIMD-95-84 Deposit Insurance Funds
Appendix I 

Comments From the Federal Deposit

Insurance Corporation

See comment 6.

See comment 7.

Page 49 GAO/AIMD-95-84 Deposit Insurance Funds
Appendix I 

Comments From the Federal Deposit

Insurance Corporation

See comment 8.

See comment 9.

Page 50 GAO/AIMD-95-84 Deposit Insurance Funds
Appendix I 

Comments From the Federal Deposit

Insurance Corporation

Page 51 GAO/AIMD-95-84 Deposit Insurance Funds
Appendix I 

Comments From the Federal Deposit

Insurance Corporation

The following are GAO’s comments on the Federal Deposit Insurance

Corporation’s letter dated February 22, 1995.

GAO Comments 1. FDIC’s technical comments on the draft report were incorporated in the

final report as appropriate.

2. We agree with FDIC that the statutory provisions listed are important

provisions of law that govern FDIC’s setting of deposit insurance premiums.

These provisions are discussed as appropriate throughout our report.

3. See chapter 2 for our discussion of the timing and duration of a

premium rate differential between banks and thrifts.

4. We agree with FDIC that the policy options discussed in chapter 4, except

for FDIC’s limited authority to reduce SAIF’s premiums until January 1, 1998,

would require legislation.

5. See chapter 2 for our discussion of the payment of FICO bond interest.

6. As FDIC acknowledges, there will be a substantial premium disparity

between banks and thrifts that will likely continue for some time if FDIC

lowers premiums for banks when the Bank Insurance Fund recapitalizes

in 1995. SAIF is thinly capitalized and its deposit base is shrinking while a

substantial long-term obligation to pay FICO bond interest exists. While

analyses of the effects of these conditions are subject to inherent

uncertainty, the conditions are facts that present substantial risk to the

thrift industry and SAIF.

7. See chapter 3 for our discussion and illustration of how a premium rate

differential will impact thrift industry costs and capital. We would note

that, while a substantial increase in BIF acquisitions of thrifts could

mitigate the decline in SAIF’s total assessment base, such an increase

would result in a further shrinkage of the portion of SAIF’s assessment base

available to service the FICO obligation.

8. See chapter 2 for our analysis regarding asset failure rates and loss

assumptions affecting the timing of SAIF’s capitalization.

9. See chapter 2 for our analysis of deposit base changes and their affect

on SAIF members’ ability to pay FICO interest.

Page 52 GAO/AIMD-95-84 Deposit Insurance Funds
Appendix II 

Comments From the Office of Thrift

Supervision

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

See comment 1.

See comment 2.

Page 53 GAO/AIMD-95-84 Deposit Insurance Funds
Appendix II 

Comments From the Office of Thrift

Supervision

See comment 3.

See comment 4.

Page 54 GAO/AIMD-95-84 Deposit Insurance Funds
Appendix II 

Comments From the Office of Thrift

Supervision

See comment 5.

Page 55 GAO/AIMD-95-84 Deposit Insurance Funds
Appendix II 

Comments From the Office of Thrift

Supervision

Page 56 GAO/AIMD-95-84 Deposit Insurance Funds
Appendix II 

Comments From the Office of Thrift

Supervision

Page 57 GAO/AIMD-95-84 Deposit Insurance Funds
Appendix II 

Comments From the Office of Thrift

Supervision

Page 58 GAO/AIMD-95-84 Deposit Insurance Funds
Appendix II 

Comments From the Office of Thrift

Supervision

Page 59 GAO/AIMD-95-84 Deposit Insurance Funds
Appendix II 

Comments From the Office of Thrift

Supervision

The following are GAO’s comments on the Office of Thrift Supervision’s

letter dated February 23, 1995.

GAO Comments 1. See chapter 2 for our discussion of the usefulness of public hearings to

discuss the implications associated with a premium rate differential.

2. See chapter 2 for our analyses regarding asset failure rate and loss rate

assumptions affecting the timing of SAIF’s capitalization and our analysis of

the impact of deposit base changes on SAIF members’ ability to pay FICO

bond interest.

3. See chapter 2 for our discussion of FDIC’s asset failure and loss rate

assumptions and actual and projected deposit base changes.

4. See chapter 2 for our discussion of SAIF’s current capital position.

5. See chapter 4 for our analysis of several policy options available to

address concerns resulting from a premium rate differential.

Page 60 GAO/AIMD-95-84 Deposit Insurance Funds
Appendix III 

Comments From the Department of the

Treasury

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

See comment 1.

See comment 2.

See comment 3.

Page 61 GAO/AIMD-95-84 Deposit Insurance Funds
Appendix III 

Comments From the Department of the

Treasury

See comment 4.

See comment 5.

Page 62 GAO/AIMD-95-84 Deposit Insurance Funds
Appendix III 

Comments From the Department of the

Treasury

The following are GAO’s comments on the Department of the Treasury’s

letter dated February 23, 1995.

GAO Comments 1. The Department of the Treasury’s technical comments on the draft

report were incorporated in the final report as appropriate.

2. See chapter 2 for our discussion of the concentration of SAIF’s insured

deposits and the effect of higher than projected thrift failures on SAIF’s

ability to attain its designated reserve ratio.

3. See chapter 3 for our discussion of the effect of a premium rate

differential on the thrift industry’s costs and ability to attract capital and

its effect on institutions with low earnings and low capital.

4. See chapter 2 for our discussion of the effects that shrinkage in the

portion of SAIF’s assessment base available to pay FICO have on the ability

to service FICO bond interest.

5. As discussed in chapter 4, while modifying current law to require all SAIF

assessments be available to service the FICO interest obligation could help

SAIF meet future FICO payments without a need to maintain premiums at

their current rate once SAIF is fully capitalized, the risks associated with a

thinly capitalized fund and a premium rate differential would not be

eliminated.

Page 63 GAO/AIMD-95-84 Deposit Insurance Funds
Appendix IV 

Major Contributors to This Report

Accounting and

Information

Management Division,

Washington, D.C.

Steven J. Sebastian, Assistant Director

Jeanette M. Franzel, Audit Manager

Lynda E. Downing, Auditor

Bonnie L. Lane, Auditor

General Government

Division, Washington,

D.C.

William B. Shear, Assistant Director

Office of the General

Counsel

Helen T. Desaulniers, Attorney

(917640) Page 64 GAO/AIMD-95-84 Deposit Insurance Funds
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. Orders for 100 or more copies to be mailed to a

single address are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 6015

Gaithersburg, MD 20884-6015

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (301) 258-4097 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Mail

Postage & Fees Paid

GAO

Permit No. G100
GAO/AIMD-95-84 Deposit Insurance Funds