Federal Register / Vol. 71, No. 230 / Thursday, November 30, 2006 / Rules and Regulations 69323 

1Section 2104 of the Reform Act, Public Law 

109–171, 120 Stat. 9. 

2To be codified at 12 U.S.C. 1817(b)(3)(A)(i), (B). 

3Thereafter, any change to the DRR must be made 

by regulation after notice and opportunity for 

comment. Section 2105 of the Reform Act, to be 

codified at 12 U.S.C. 1817(b)(3)(A) (ii). 

4To be codified at 12 U.S.C. 1817(b)(3)(C). The 

Reform Act provides: 

(C) FACTORS—In designating a reserve ratio for 

any year, the Board of Directors shall—

(i) take into account the risk of losses to the 

Deposit Insurance Fund in such year and future 

years, including historic experience and potential 

and estimated losses from insured depository 

institutions; 

(ii) take into account economic conditions 

generally affecting insured depository institutions 

so as to allow the designated reserve ratio to 

increase during more favorable economic 

conditions and to decrease during less favorable 

Continued 

[FR Doc. 06–9204 Filed 11–29–06; 8:45 am] 

BILLING CODE 6714–01–C 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

12 CFR Part 327 

RIN 3064–AD02 

Deposit Insurance Assessments—

Designated Reserve Ratio 

AGENCY: Federal Deposit Insurance 

Corporation. 

ACTION: Final rule. 

SUMMARY: Under the Federal Deposit 

Insurance Reform Act of 2005, the 

Federal Deposit Insurance Corporation 

(FDIC) must by regulation set the 

Designated Reserve Ratio (DRR) for the 

Deposit Insurance Fund (DIF) within a 

range of 1.15 percent to 1.50 percent. In 

this rulemaking, the FDIC establishes 

the DRR for the DIF at 1.25 percent. 

DATES: Effective Date: January 1, 2007. 

FOR FURTHER INFORMATION CONTACT: 

Munsell St. Clair, Senior Policy Analyst, 

Division of Insurance and Research, 

(202) 898–8967; or Christopher Bellotto, 

Counsel, Legal Division, (202) 898–

3801, Federal Deposit Insurance 

Corporation, 550 17th Street, NW., 

Washington, DC 20429. 

SUPPLEMENTARY INFORMATION: 

I. Background 

The Federal Deposit Insurance Reform 

Act of 2005 (the Reform Act) amends 

section 7(b)(3) of the Federal Deposit 

Insurance Act (the FDI Act) to eliminate 

the current fixed designated reserve 

ratio (DRR) of 1.25 percent.1 Section 

2105 of the Reform Act directs the FDIC 

Board of Directors (Board) to set and 

publish annually a DRR for the Deposit 

Insurance Fund (DIF) within a range of 

1.15 percent to 1.50 percent.2 12 U.S.C. 

1817(b)(3)(A), (B). Under section 

2109(a)(1) of the Reform Act, the Board 

must prescribe final regulations setting 

the DRR after notice and opportunity for 

comment not later than 270 days after 

enactment of the Reform Act.3

In setting the DRR for any year, 

section 2105(a) of the Reform Act, 

amending section 7(b)(3) of the FDI Act, 

directs the Board to consider the 

following factors: 

(1) The risk of losses to the DIF in the 

current and future years, including 

historic experience and potential and 

estimated losses from insured 

depository institutions. 

(2) Economic conditions generally 

affecting insured depository 

institutions. (In general, the Board 

should consider allowing the DRR to 

increase during more favorable 

economic conditions and decrease 

during less favorable conditions.) 

(3) That sharp swings in assessment 

rates for insured depository institutions 

should be prevented. 

(4) Other factors as the Board may 

deem appropriate, consistent with the 

requirements of the Reform Act.4 The 


jlentini on PROD1PC65 with RULES2ER30NO06.020</GPH>
69324 Federal Register / Vol. 71, No. 230 / Thursday, November 30, 2006 / Rules and Regulations 

economic conditions, notwithstanding the 

increased risks of loss that may exist during such 

less favorable conditions, as determined to be 

appropriate by the Board of Directors; 

(iii) seek to prevent sharp swings in the 

assessment rates for insured depository institutions; 

and 

(iv) take into account such other factors as the 

Board of Directors may determine to be appropriate, 

consistent with the requirements of this 

subparagraph. 

Section 2105 of the Reform Act (to be codified at 

12 U.S.C. 1817(b)(3)(C)). 

5Any future change to the DRR shall be made by 

regulation after notice and opportunity for 

comment. In soliciting comment on any proposed 

change in the DRR, the FDIC must include in the 

published proposal a thorough analysis of the data 

and projections on which the proposal is based. 

Section 2105 of the Reform Act (to be codified at 

12 U.S.C. 1817(b)(3)(D)). 

DRR may not exceed 1.50 percent nor be 

less than 1.15 percent.5

II. The Final Rule 

Statutory Analysis 

In July 2006, the FDIC published a 

proposed rule that would set the DRR at 

1.25 percent. In its proposal, the FDIC 

analyzed the statutory factors that must 

be considered in setting the DRR. The 

FDIC also identified three ‘‘other 

factors’’ that it considered. 

1. Risk of Losses to the DIF 

In the proposal, the FDIC’s best 

estimate of potential loss provisions for 

2006 related to future failures was $93 

million. The FDIC also considered 

economic stress events and their 

potential implications for losses to the 

insurance fund by running several twoyear stress event simulations. The 

results of each simulation, which were 

derived from historical stress events, 

demonstrate that banks are well 

positioned to withstand a significant 

degree of financial adversity. In no case 

did the stress simulation results raise 

any significant concerns. 

So far this year no banks have failed. 

In addition, loss provisions anticipated 

for next year are expected to remain 

low. These estimates suggest that nearterm losses to the insurance fund would 

not significantly alter the reserve ratio. 

2. Economic Conditions Affecting FDICInsured Institutions 

U.S. economic growth appears to be 

moderating in the second half of 2006. 

Consensus estimates of U.S. economic 

growth are in the 2.0 to 2.5 percent 

range for the second half of 2006, 

compared to growth of 3.2 percent 

reported for 2005. While the cumulative 

effects of higher interest rates, higher 

energy prices and slower home price 

appreciation are expected to slow 

consumer spending, exports and 

nonresidential investment appear 

poised to make up a larger portion of net 

growth in the economy. This 

rebalancing of economic activity should 

be consistent with stability in the 

outlook for bank credit quality, and 

problem loan ratios are likely to move 

up modestly over time from today’s 

historic low levels. Possible exceptions 

to this generally positive credit outlook 

include certain subsectors of residential 

real estate loan portfolios, where higher 

interest rates and a leveling off of home 

price increases could contribute to a 

higher incidence of credit distress. 

The condition of the banking industry 

remains strong. Earnings have set 

records each of the last five years, 

capital measures are still near 

historically high levels, and asset 

quality indicators remain solid. For the 

first half of 2006, the industry’s 

annualized return on assets (ROA) 

remained high at 1.34 percent. The 

aggregate equity-to-asset ratio was 10.27 

percent as of June 30, 2006, and more 

than 99 percent of all insured 

institutions met or exceeded the 

requirements of the highest regulatory 

capital standards. The ratio of 

noncurrent loans to total loans is its 

lowest since institutions began reporting 

that data 23 years ago. No insured 

institutions have failed in over two 

years, extending the longest period 

without a failure since the creation of 

the FDIC in 1933. Therefore, banks and 

thrifts generally appear to be well 

positioned to withstand the financial 

stress that may arise from potential 

economic shocks in the next few years. 

3. Prevent Sharp Swings in Assessment 

Rates 

The Reform Act directs the FDIC’s 

Board to consider preventing sharp 

swings in assessment rates for insured 

depository institutions. 

Strong insured deposit growth has 

contributed to a decline in the reserve 

ratio from 1.31 percent at year-end 2004 

to 1.23 percent as of June 30, 2006. If 

recent robust insured deposit growth 

continues, there will be further 

downward pressure on the reserve ratio. 

This downward pressure could be offset 

by raising assessment rates; however, 

the availability of assessment credits 

will temporarily limit future revenue. 

Raising the reserve ratio to a DRR of 

1.25 percent within a reasonably short 

time frame could require (depending 

upon insured deposit growth) a 

temporary, substantial increase in 

assessment rates, which would exhaust 

most of the credits rapidly. Increasing 

the reserve ratio more gradually could 

result in less substantial increases in 

rates. 

4. Other Factors 

The FDIC’s Board also considered 

certain ‘‘other factors’’ in its decision to 

propose setting the DRR at 1.25 percent. 

a. Transition to a new aassessment 

system. The FDIC noted that the 

assessment system is about to undergo 

significant change. Once proposed riskbased assessment regulations are 

finalized and become effective, all 

insured institutions will pay deposit 

insurance assessments regardless of the 

level of the reserve ratio. These 

proposed regulations also will change 

how the FDIC differentiates among 

insured institutions for risk in assigning 

assessment rates. 

Furthermore, to provide institutions a 

transition to the new system, one-time 

assessment credits will be available to 

those institutions that contributed in 

earlier years to the build-up of the 

insurance funds. The application of 

these credits to assessments will limit 

assessment revenue in the near term. If 

insured deposit growth remains strong, 

this may place temporary downward 

pressure on the reserve ratio, which is 

expected to reverse itself once banks 

begin to use up their credits. 

Finally, the FDIC will be changing to 

a system where the reserve ratio will be 

managed within a range from a system 

where a hard target for the reserve ratio 

applied. 

b. Midpoint of the normal operating 

range for the reserve ratio. The Reform 

Act authorizes the Board to set the DRR 

at no less than 1.15 percent and no 

greater than 1.50 percent. The FDIC 

must adopt a restoration plan when the 

reserve ratio falls below 1.15 percent. 

When the reserve ratio exceeds 1.35 

percent, the Reform Act generally 

requires the FDIC to begin to pay 

dividends. Because there is no 

requirement to achieve a specific 

reserve ratio within a given time frame, 

these provisions in effect establish a 

normal operating range for the reserve 

ratio of 1.15 percent to 1.35 percent 

within which the Board has 

considerable discretion to manage the 

size of the insurance fund. The FDIC 

noted that the current DRR of 1.25 

percent is the midpoint of the normal 

operating range. 

c. Historical experience. The FDIC 

also observed that historical experience 

with a DRR of 1.25 percent indicates 

that it has worked well under varying 

economic conditions in ensuring an 

adequate insurance fund and 

maintaining a sound deposit insurance 

system and concluded that more 

experience with managing the fund 

under the new framework established 

by the Reform Act will be of benefit in 


jlentini on PROD1PC65 with RULES2
Federal Register / Vol. 71, No. 230 / Thursday, November 30, 2006 / Rules and Regulations 69325 

6Several other commenters also addressed the 

DRR, at least in passing, in comments directed to 

other FDIC rulemakings, particularly the 

rulemaking that proposed substantive 

improvements to the risk-based assessment system. 

71 FR 41910 (July 24, 2006). All of the comments 

received that relate to the DRR have been 

considered in adopting this final rule and are 

available on the FDIC’s Web site at http:// 

www.fdic.gov/regulations/laws/federal/index.html. 

7The final rule adds paragraph (g) of 327.4 

(Subpart A) to the revised part 327 as set forth in 

the final rule on Operational Changes to 

Assessments (RIN 3064–AD03) published elsewhere 

in this issue of the Federal Register. 

determining whether the DRR should be 

raised or lowered from 1.25 percent. 

5. Role of the DRR 

The FDIC also noted that the manner 

in which the FDIC’s Board evaluates the 

statutory factors may depend on its view 

of the role of the DRR, which may 

change over time. The FDIC identified 

two potential general roles for the DRR: 

a signal of the reserve ratio that the 

Board would like the fund to achieve; 

and a signal of the Board’s expectation 

of the change in the reserve ratio under 

the assessment rate schedule adopted by 

the Board. 

III. Comments on the Proposed Rule 

The FDIC received 16 comments 

directly addressed to the proposed rule 

for setting the DRR.6 These comments 

generally fell into several main groups: 

the DRR should be set at the low end of 

the range; the DRR should be raised 

gradually over time; the reserve ratio 

should be raised gradually; the DRR 

should not be set at the minimum of the 

range; the DRR should be a rough guide 

to the DIF reserve ratio; and further 

economic rationale should be provided 

for setting the DRR at 1.25. 

One individual set out several 

arguments for setting the DRR at 1.50 

percent, including: 

• Greater risk in the banking industry; 

• Strong insured deposit growth; 

• Inadequacy of a 1.25 percent DRR 

as evidenced by the FDIC fund falling 

from 1.24 percent in 1981 to a negative 

number in 1991; and 

• The number of times the reserve 

ratio has been above 1.50 percent during 

the FDIC’s history. 

Several other commenters suggested 

setting the DRR below 1.25 percent. 

Arguments in support of this suggestion 

included: 

• A lower ratio would provide the 

industry with time to recapitalize the 

fund without facing sharp swings in 

assessment rates, particularly for those 

institutions which will not have credits; 

• The FDIC is unrealistic in its 

optimism about the economy, and 

Congress expected the FDIC to set the 

DRR at the lower end of the range when 

institutions generally would face 

difficulty making payments, such as in 

difficult economic times, while setting 

the DRR higher when the economy was 

good and payments could be made more 

easily; 

• The banking industry is financially 

healthy; 

• The risk of fund losses is low, at 

least in part due to prompt corrective 

action requirements and other new 

supervisory and enforcement tools that 

enhance safety and soundness; 

• Congress intended for the FDIC to 

determine an appropriate level for the 

DRR annually, rather than allowing the 

reserve ratio to meet the DRR over a 

period of a few years; 

• The number of bank failures has 

been low; 

• hardship on new growth 

institutions would be lessened; and 

• The risk to the industry is lower 

now than in 1991 when Congress set the 

DRR at 1.25. 

Other commenters suggested that 

increases in the DRR be phased in 

gradually: 

• Starting with a DRR of 1.20 percent 

and phasing in an increase to 1.25 

percent over a five-year period; and 

• Allowing an initial drift toward 

1.15 percent, with a phased-in move to 

1.25 percent over time. 

One comment from a banking 

industry trade group, however, stated 

that ‘‘it would not be prudent’’ to set the 

target at the minimum of 1.15 percent. 

Several commenters suggested that, if 

the DRR were set at 1.25 percent 

initially, or wherever it is set, the FDIC 

should increase the reserve ratio 

gradually over a period of no less than 

three years, or three to five years, in 

order to avoid unnecessary surges in 

assessment rates. More generally, the 

FDIC should take a slow and steady 

approach. 

Several commenters viewed the DRR 

as useful only for guidance in setting 

assessments, suggesting that the DRR: 

• Is a very rough guide to a long-run 

equilibrium for the reserve ratio, and 

not a primary driver of premiums in the 

short-run; 

• Should be analyzed each year to 

determine whether it is reasonable given 

the actual risk of loss to the DIF; 

• Should not be viewed as requiring 

the imposition of higher assessments, 

but rather the FDIC should consider 

economic factors and the condition of 

the banking industry generally to 

determine whether to lower the DRR or 

whether it will be restored through 

deposit base changes, growth in 

investment earnings, low levels of 

expected failures, and similar factors. 

Three commenters sought greater 

analytical justification for setting the 

DRR at 1.25 percent, asserting that the 

FDIC’s rationale was: 

• Unclear; 

• Not sufficiently explained, 

requesting more thorough analysis 

within two years; and 

• Not justified based on actual risk 

and market conditions. 

IV. The Final Rule 

The FDIC believes that the statutory 

analysis conducted in the proposed 

rulemaking is correct. Based upon that 

analysis, and for the reasons that follow, 

the FDIC has determined to set the DRR 

at 1.25 percent.7

The FDIC concludes that the best way 

to balance all of the statutory factors 

(including the ‘‘other factors’’ identified 

above) and to preserve the FDIC’s new 

flexibility to manage the DIF is to 

maintain the DRR at 1.25 percent. 

Several factors that the Board must (or 

may) consider—preventing sharp 

swings in assessment rates, the 

transitional nature of the assessment 

system, maintaining a DRR at the 

midpoint of the reserve ratio’s normal 

operating range, the historical 

experience with a DRR of 1.25 percent, 

as well as the intent of the new 

legislation to provide the FDIC with 

flexibility to manage the reserve ratio 

within a range—all support or are 

consistent with maintaining the current 

DRR of 1.25 percent. 

Several commenters argued that the 

present good health of the industry 

argues in favor of a DRR lower than 1.25 

percent. A goal of the Reform Act, 

however, is to allow the fund to rise 

when conditions are good so that it 

could decline when conditions are less 

favorable without the need to raise 

assessments sharply. In fact, the Reform 

Act directs the FDIC to consider 

allowing the DRR to increase under 

favorable economic conditions. 

Generally favorable economic 

conditions and the strong condition of 

the industry provide little justification 

for lowering the DRR. 

Further, most of the comments 

seeking to have the DRR set lower than 

1.25 percent appear to be concerned 

with the assessment rates that will be 

charged, and the resulting amount of 

assessments that will be collected, if the 

DRR is set at 1.25 percent. This issue 

will be addressed in the risk-based 

assessments final rule being presented 

to the FDIC Board of Directors along 

with this DRR final rule case. 

How the FDIC will use the DRR may 

change over time. The FDIC views the 

role of the DRR as a signal of the level 

that the DIF should achieve; however, 


jlentini on PROD1PC65 with RULES2
69326 Federal Register / Vol. 71, No. 230 / Thursday, November 30, 2006 / Rules and Regulations 

the FDIC does not expect the DIF to 

reach this level within the first year of 

the new system. As required by the 

Reform Act, the FDIC will determine the 

appropriate DRR annually. Section 2105 

of the Reform Act, to be codified at 12 

U.S.C. 1817(b)(3)(A). 

V. Effective Date 

The final rule setting the DRR at 1.25 

percent will become effective on 

January 1, 2007. 

VI. Paperwork Reduction Act 

The proposed rule will set the 

Designated Reserve Ratio for the Deposit 

Insurance Fund. It will not involve any 

new collections of information pursuant 

to the Paperwork Reduction Act (44 

U.S.C. 3501 et seq.). Consequently, no 

information has been submitted to the 

Office of Management and Budget for 

review. 

VII. Regulatory Flexibility Act 

Pursuant to 5 U.S.C. 605(b), the FDIC 

certifies that the final rule will not have 

a significant economic impact on a 

substantial number of small businesses 

(i.e., insured depository institutions 

with $165 million or less in assets) 

within the meaning of the Regulatory 

Flexibility Act (RFA) (5 U.S.C. 601, et 

seq.). The final rule sets the Designated 

Reserve Ratio (DRR) at 1.25 percent, 

which is unchanged from the present 

Designated Reserve Ratio. Under the 

Federal Deposit Insurance Reform Act of 

2005, the DRR provides no trigger for 

assessment determinations, 

recapitalization of the insurance fund, 

assessment credit use, or dividends. 

Consequently, retaining the DRR at 1.25 

percent will not have a significant 

economic impact on a substantial 

number of small insured institutions. 

No comments were received concerning 

the proposal’s RFA certification. 

VIII. The Treasury and General 

Government Appropriations Act, 

1999—Assessment of Federal 

Regulations and Policies on Families 

The FDIC has determined that the 

final rule will not affect family wellbeing within the meaning of section 654 

of the Treasury and General 

Government Appropriations Act, 

enacted as part of the Omnibus 

Consolidated and Emergency 

Supplemental Appropriations Act of 

1999 (Pub. L. 105–277, 112 Stat. 2681). 

IX. Small Business Regulatory 

Enforcement Fairness Act 

The Office of Management and Budget 

has determined that the final rule is not 

a ‘‘major rule’’ within the meaning of 

the relevant sections of the Small 

Business Regulatory Enforcement 

Fairness Act of 1996 (SBREFA) (5 U.S.C. 

801, et seq.). As required by SBFERA, 

the FDIC will file the appropriate 

reports with Congress and the General 

Accounting Office so that the final rule 

may be reviewed. 

List of Subjects in 12 CFR Part 327 

Bank deposit insurance, Banks, 

banking, Savings associations. 

■ For the reasons stated above, the 

Board of Directors of the Federal 

Deposit Insurance Corporation hereby 

amends part 327 of Title 12 of the Code 

of Federal Regulations as follows: 

PART 327—ASSESSMENTS 

■ 1. The authority citation for part 327 

continues to read as follows: 

Authority: 12 U.S.C. 1441, 1813, 1815, 

1817–1819, 1821; Sec. 2101–2109, Pub. L. 

109–171, 120 Stat. 9–21, and Sec. 3, Pub. L. 

109–173, 119 Stat. 3605. 

Subpart A—In General 

■ 2. In § 327.4 of subpart A, add 

paragraph (g) to read as follows: 

§ 327.4 Assessment rates. 

* * * * * 

(g) Designated reserve ratio. The 

designated reserve ratio for the Deposit 

Insurance Fund is 1.25 percent. 

By order of the Board of Directors. 

Dated at Washington, DC this 2nd day of 

November 2006. 

Federal Deposit Insurance Corporation. 

Robert E. Feldman, 

Executive Secretary. 

[FR Doc. 06–9203 Filed 11–29–06; 8:45 am] 

BILLING CODE 6714–01–P 


jlentini on PROD1PC65 with RULES2