[Federal Register Volume 72, Number 180 (Tuesday, September 18, 2007)]
[Proposed Rules]
[Pages 53181-53196]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-4596]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

RIN 3064-AD19


Assessment Dividends

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Advance notice of proposed rulemaking (ANPR).

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SUMMARY: The FDIC is seeking comments on alternative methods for 
allocating dividends as part of a permanent final rule to implement the 
dividend requirements of the Federal Deposit Insurance Reform Act of 
2005 (Reform Act) and the Federal Deposit Insurance Reform Conforming 
Amendments Act of 2005 (Amendments Act). The existing FDIC regulations 
on assessment dividends will expire on December 31, 2008.

DATES: Comments must be submitted on or before November 19, 2007.

ADDRESSES: You may submit comments by any of the following methods:
    <bullet> Agency Web Site: http://www.fdic.gov/regulations/laws/federal. Follow instructions for submitting comments on the Agency Web 
Site.
    <bullet> E-mail: <a href="/cdn-cgi/l/email-protection#b3f0dcdeded6ddc7c0f3f5f7faf09dd4dcc5"><span class="__cf_email__" data-cfemail="185b7775757d766c6b585e5c515b367f776e">[email protected]</span></a>. Include ``ANPR on Assessment 
Dividends'' in the subject line of the message.
    <bullet> Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.
    <bullet> Hand Delivery/Courier: Guard station at the rear of the 
550 17th Street Building (located on F Street) on business days between 
7 a.m. and 5 p.m. (EST).
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    Public Inspection: All comments received will be posted without 
change to http://www.fdic.gov/regulations/laws/federal including any 
personal information provided. Comments may be inspected and 
photocopied in the FDIC Public Information Center, 3501 North Fairfax 
Drive, Room E-1002, Arlington, VA 22226, between 9 a.m. and 5 p.m. 
(EST) on business days. Paper copies of public comments may be ordered 
from the Public Information Center by telephone at (877) 275-3342 or 
(703) 562-2200.

FOR FURTHER INFORMATION CONTACT: Munsell W. St. Clair, Senior Policy 
Analyst, Division of Insurance and Research, (202) 898-8967 or 
<a href="/cdn-cgi/l/email-protection#741907001718151d063412101d175a131b02"><span class="__cf_email__" data-cfemail="deb3adaabdb2bfb7ac9eb8bab7bdf0b9b1a8">[email protected]</span></a>; Missy Craig, Senior Program Analyst, Division of 
Insurance and Research, (202) 898-8724 or <a href="/cdn-cgi/l/email-protection#472a2435262e200721232e2469202831"><span class="__cf_email__" data-cfemail="bdd0decfdcd4dafddbd9d4de93dad2cb">[email protected]</span></a>; or Joseph A. 
DiNuzzo, Counsel, Legal Division, (202) 898-7349 or <a href="/cdn-cgi/l/email-protection#d1bbb5b8bfa4ababbe91b7b5b8b2ffb6bea7"><span class="__cf_email__" data-cfemail="f09a94999e858a8a9fb096949993de979f86">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

I. Background

    In October 2006, the FDIC issued a temporary final rule to 
implement the dividend requirements of the Reform

[[Page 53182]]

Act.\1\ At the time, the FDIC stated its intention to initiate a 
second, more comprehensive notice-and-comment rulemaking on dividends 
beginning with an advance notice of proposed rulemaking to explore 
alternative methods for distributing future dividends after the 
temporary dividend rules expire on December 31, 2008.
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    \1\ 71 FR 61385 (October 18, 2006).
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    The possibility of a dividend before the temporary rule expires 
appears remote. In fact, because the FDIC has the ability to lower 
assessment rates below the base assessment rate schedule (2 to 4 basis 
points for institutions in Risk Category I), the FDIC can, if it 
chooses, reduce the probability of a dividend occurring thereafter.

Reform Act Requirements

    The Federal Deposit Insurance Act (FDI Act), as amended by the 
Reform Act,\2\ requires that the FDIC, under most circumstances, 
declare dividends from the Deposit Insurance Fund (DIF or fund) when 
the reserve ratio at the end of a calendar year exceeds 1.35 percent, 
but is no greater than 1.5 percent.\3\ In that event, the FDIC 
generally must declare one-half of the amount in the DIF in excess of 
the amount required to maintain the reserve ratio at 1.35 percent as 
dividends to be paid to insured depository institutions. However, the 
FDIC's Board of Directors (Board) may suspend or limit dividends to be 
paid, if the Board determines in writing, after taking a number of 
statutory factors into account, that:
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    \2\ The Reform Act was included as Title II, Subtitle B, of the 
Deficit Reduction Act of 2005, Public Law 109-171, 120 Stat. 9, 
which was signed into law by the President on February 8, 2006.
    \3\ 12 U.S.C. 1817(e)(2).
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    1. The DIF faces a significant risk of losses over the next year; 
and
    2. It is likely that such losses will be sufficiently high as to 
justify a finding by the Board that the reserve ratio should 
temporarily be allowed to grow without requiring dividends when the 
reserve ratio is between 1.35 and 1.5 percent or exceeds 1.5 
percent.\4\
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    \4\ This provision would allow the FDIC's Board to suspend or 
limit dividends in circumstances where the reserve ratio has 
exceeded 1.5 percent, if the Board made a determination to continue 
a suspension or limitation that it had imposed initially when the 
reserve ratio was between 1.35 and 1.5 percent.
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    In addition, the statute requires that the FDIC, except in certain 
limited circumstances, declare a dividend from the DIF when the reserve 
ratio at the end of a calendar year exceeds 1.5 percent. In that event, 
the FDIC generally must declare the amount in the DIF in excess of the 
amount required to maintain the reserve ratio at 1.5 percent as 
dividends to be paid to insured depository institutions.
    The FDI Act directs the FDIC to consider each insured depository 
institution's relative contribution to the DIF (or any predecessor 
deposit insurance fund) when calculating an institution's share of any 
dividend. More specifically, when allocating dividends, the Board must 
consider:
    1. The ratio of the assessment base of an insured depository 
institution (including any predecessor) on December 31, 1996, to the 
assessment base of all eligible insured depository institutions on that 
date (the 1996 assessment base ratio);
    2. The total amount of assessments paid on or after January 1, 
1997, by an insured depository institution (including any predecessor) 
to the DIF (and any predecessor fund);
    3. That portion of assessments paid by an insured depository 
institution (including any predecessor) that reflects higher levels of 
risk assumed by the institution; and
    4. Such other factors as the Board deems appropriate.
    The statute does not define the term ``predecessor'' (of a 
depository institution) for purposes of distributing dividends. 
Predecessor deposit insurance funds are the Bank Insurance Fund (BIF) 
and the Savings Association Insurance Fund (SAIF), as those were the 
deposit insurance funds that existed after 1996 until their merger into 
the DIF pursuant to the Reform Act. The merger was effective March 31, 
2006.
    Among other things, the statute expressly requires the FDIC to 
prescribe by regulation the method for calculating, declaring, and 
paying dividends.\5\ In May 2006 the FDIC issued a proposed rule to 
implement the dividend requirements of the Reform Act.\6\ After 
considering the comments received on the proposed rule, the FDIC, as 
noted above, issued a temporary final rule on assessment dividends, 
with a sunset date of December 31, 2008.
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    \5\ The dividend regulation must also include provisions 
allowing a bank or thrift a reasonable opportunity to challenge 
administratively the amount of dividends it is awarded. Any review 
by the FDIC pursuant to these administrative procedures is final and 
not subject to judicial review.
    \6\ 71 FR 28804 (May 18, 2006).
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The Temporary Final Rule

    The temporary final rule mirrors the dividend provisions of the 
Reform Act, provides definitions (including the definition of a 
``predecessor'' depository institution) to implement the statute and 
details how an institution may request the FDIC's Division of Finance 
(DOF) to review the FDIC's determination of the institution's dividend 
amount and how an institution may appeal DOF's response to that 
request. In the temporary final rule, the FDIC adopted a simple system 
for allocating any dividends that might be declared during the two-year 
duration of the regulation. Any dividends awarded before January 1, 
2009, will be distributed in proportion to an institution's 1996 
assessment base ratio, as determined pursuant to the one-time 
assessment credit rule.\7\
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    \7\ 12 CFR 327.53.
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    The sole focus of this ANPR is on the type of assessment dividend 
allocation method that the FDIC should adopt. Whether and how the FDIC 
should retain or revise the other aspects of the temporary final rule 
(such as the timetable for determining and paying dividends and 
institutions' requests for review) will be addressed in the notice of 
proposed rulemaking that will follow the ANPR.

II. Alternative Methods

    The ANPR presents two general approaches to allocating dividends--
the fund balance method and the payments method. These methods are 
described below.\8\
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    \8\ Appendix A describes the two methods in more detail, using 
formulas.
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    The allocation methods potentially differ most significantly in the 
way they balance two of the statutory factors that the FDIC must 
consider when allocating dividends--institutions' relative 1996 
assessment bases and assessments paid after 1996--and, thus, in the way 
each method treats older versus newer institutions. The fund balance 
method implicitly balances the two factors; the payments method 
requires explicit decision making.

``Older'' and ``Newer'' Institutions

    In this context, the terms ``older'' and ``newer'' do not simply 
refer to age. For purposes of this ANPR, the smaller an institution's 
1996 assessment base is compared to its current assessment base, the 
``newer'' it is. Thus, an institution that was chartered after 1996 and 
had no 1996 assessment base is a newer institution. An institution 
chartered before 1996 that has since grown greatly--and whose 1996 
assessment base is, therefore, small compared to its current assessment 
base--is also a newer institution. Conversely, the larger an 
institution's 1996 assessment base is compared to its current 
assessment base, the ``older'' it is.

[[Page 53183]]

Relative Dividend Shares

    For purposes of analyzing the effects of each allocation method on 
older and newer institutions, the notion of an institution's relative 
dividend share is useful. An institution's relative dividend share at a 
given time is the ratio of its share of any potential dividend to its 
share of the current aggregate assessment base. A high relative 
dividend share means that an institution would receive more than its 
proportional share of a dividend given its current assessment base; a 
low relative dividend share means that an institution would receive 
less than its proportional share of a dividend given its current 
assessment base.
    The notion of a relative dividend share allows comparison of 
dividend allocation methods by eliminating the effect of size. A newer 
institution would initially have a zero or low relative dividend share, 
whatever its size, while an older institution (as that term is used in 
this ANPR) would initially have a high relative dividend share, again 
regardless of size.
    Some of the most important potential differences between the 
dividend allocation methods are how quickly and under what 
circumstances the relative dividend share of a newer institution would 
equal the relative dividend share of an older institution. Equal shares 
imply that what an institution paid prior to 1997 (using the 1996 
assessment base as a proxy) no longer affects its dividend share. Under 
most variations of the dividend allocation methods, the relative 
dividend shares of older and newer institutions may never be exactly 
equal, but they may become approximately equal; that is, over time, for 
both older and newer institutions, shares of any potential dividend may 
approximately equal shares of the current aggregate assessment base. 
For purposes of the analysis in this ANPR, relative dividends shares 
will be deemed to be approximately equal (or be said to have converged) 
when the average relative dividend share of the group of institutions 
that have the highest relative dividend shares as of January 1, 2007, 
are no more than 15 percent greater (or less) than the average relative 
dividend shares of newer institutions that initially have no dividend 
shares.\9\ Under both allocation methods, the average relative dividend 
share of the group of institutions that would have the highest relative 
dividend shares as of January 1, 2007, would be 2.2; that is, in this 
group, on average, an institution's share of any potential dividend 
would be 2.2 times its share of the current assessment base.
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    \9\ This group is determined by dividing all institutions into 1 
of 10 unequally sized groups, based on the size of their relative 
dividend shares as of January 1, 2007. Because this date is the 
beginning of the new risk-based assessment system, initial dividend 
shares are proportional to shares of the 1996 assessment base.
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The Fund Balance Method

Description

    Under the fund balance method, every quarter, each institution 
would be assigned a dollar portion of the fund balance (its fund 
allocation), solely for purposes of determining the institution's 
dividend share. Each institution's most recent fund allocation (as a 
percentage of the fund balance) would determine its share of any 
dividend. The fund allocation would increase or decrease each quarter 
depending upon fund performance and assessments paid by each 
institution. Specifically:
    <bullet> Initially, the December 31, 2006 fund balance would be 
divided up among institutions in proportion to 1996 assessment bases. 
Thus, initially, each institution's fund allocation would equal its 
1996 ratio times the December 31, 2006 fund balance.
    <bullet> A variant on this method would divide only a portion of 
the December 31, 2006 fund balance among institutions. The remainder of 
the fund balance would be unallocated.
    <bullet> Thereafter, from quarter to quarter, fund allocations 
would grow or shrink depending upon the performance of the fund.
    <bullet> Fund losses, FDIC operating expenses and dividends from 
the fund would diminish an institution's fund allocation, all else 
equal.
    <bullet> Fund gains (for example, from investment income or 
``ineligible'' premium income, which is discussed immediately below) 
would increase an institution's fund allocation, all else equal.
    <bullet> In addition, each ``eligible'' premium would increase an 
institution's fund allocation, dollar for dollar. An ``eligible'' 
premium (which would need to be defined) would be the portion of an 
institution's premium that would count toward increasing its share of 
dividends.
    <bullet> Possible definitions for an eligible premium include: (1) 
All premiums charged; (2) premiums charged up to the lowest rate 
charged a Risk Category I institution; or (3) something in between, for 
example, premiums charged up to the maximum rate for a Risk Category I 
institution, in all cases minus any credit use.\10\ Ineligible premiums 
would be those paid through the use of credits or those paid in cash at 
rates in excess of the eligible premium rate.
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    \10\ However, an eligible premium would never be negative.
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    <bullet> Eligible premiums would include surcharges in a 
restoration plan.\11\
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    \11\ The Reform Act requires that the FDIC adopt a restoration 
plan whenever the DIF reserve ratio is below 1.15 percent or is 
expected to be below 1.15 percent within 6 months. The plan must 
provide that the reserve ratio of the DIF will return to 1.15 
percent, ordinarily within 5 years. 12 U.S.C. 1817(b)(3)(E).
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Risk Reduction Incentives

    As set forth above, when allocating dividends the FDIC is required 
to take into account the portion of assessments paid by an insured 
depository institution that reflects higher levels of risk assumed by 
that institution. Consequently, in defining eligible premiums, an 
important consideration (which applies to any approach) is the degree 
to which dividend allocation should reinforce the risk incentives of 
the risk-based premium system. Would an institution in the riskiest 
category, for example, get credit for dividend purposes for the full 
premium it paid or just for some smaller portion? If an eligible 
premium were defined as a premium paid at the lowest (least-risky) 
rate, an institution paying the highest assessment rate and an 
institution paying the lowest assessment rate would increase their 
dividend shares at the same rate, all else equal. Thus, the institution 
paying the lower assessment rate on this base would benefit more, 
thereby increasing the incentives for an institution to lower the risk 
it poses. On the other hand, if the FDIC defined an eligible premium as 
any cash premium, dividend awards, per se, would not provide an 
institution with an incentive to reduce the risk it poses. If the FDIC 
defined an eligible premium as something in between (for example, cash 
premiums up to the maximum rate charged to an institution in Risk 
Category I), the dividend system would give those institutions paying 
higher rates than the eligible premium rate some incentive to lower 
risk.

The Treatment of Older Versus Newer Institutions

    Fund performance and assessment rates. Under the basic form of the 
fund balance method, in which the entire fund would be allocated among 
institutions, low to moderate fund losses would lead to older 
institutions retaining a relatively large share of any dividends for 
decades, while newer institutions would take decades to obtain a 
relatively similar share of dividends. In other words, the assessments 
paid by an institution prior

[[Page 53184]]

to 1997 (using the 1996 assessment base as a proxy) would affect an 
institution's potential dividend for a very long time. On the other 
hand, large fund losses would quickly diminish the relative shares of 
older institutions compared to newer institutions.\12\
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    \12\ The results in the text, charts and tables that follow: (1) 
Assume that the entire fund balance is allocated among institutions; 
(2) assume that an eligible premium is a premium paid at the minimum 
rate applicable to a Risk Category I institution; and (3) are based 
upon a model that divides all institutions into 1 of 10 unequally 
sized groups, based on the size of their relative dividend shares as 
of January 1, 2007. The model assumes that all institutions grow at 
the same rate. It makes many other assumptions, as well, including 
levels of assessment rates, investment income, and corporate 
expenses. These assumptions are set out in more detail in Appendix 
B.
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    Chart 1 illustrates the relative dividend shares of two groups of 
institutions--those that initially have no dividend shares (the newest 
group) and those with the highest relative dividend shares (the oldest 
group)--under a low loss scenario; Chart 2 illustrates the relative 
dividend shares of these two groups under a high loss scenario similar 
to the banking crisis of the late 1980s and early 1990s for the third 
through tenth years, preceded and followed by low losses in earlier and 
subsequent years. Assuming high fund losses similar to the banking 
crisis of the late 1980s and early 1990s, the relative dividend share 
of the newest group could take only 9 years to become approximately 
equal to that of the oldest group (i.e., the relative dividend shares 
of each group would be nearly equal to one).
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[GRAPHIC] [TIFF OMITTED] TP18SE07.001

    Using the low loss scenario used in Chart 1, Table 1 compares 
projected dividend share and dividends received for three institutions, 
each with $500 million in deposits on December 31, 2006; one initially 
has no dividend share (or credits) because it is new; one initially has 
the median relative dividend share of those institutions that have any 
initial dividend share (or credits); and one initially has a very large 
relative dividend share because it is in the oldest group shown in the 
charts above. Table 2 makes the comparison under the high loss scenario 
used in Chart 2. The institutions are assumed to pay the lowest rate 
applicable in any period. Like Charts 1 and 2, the dividend share 
amounts in Tables 1 and 2 illustrate that older institutions will 
benefit for many years from this method absent a repeat of the banking 
crisis era.
    The low loss scenario in Chart 1 and Table 1 (and in subsequent 
charts in tables) assumes annual insurance losses that are 
significantly lower than the average annual losses for the past 10 
years and that the Board would not lower rates below the base 
assessment rate schedule (2 to 4 basis points for institutions in Risk 
Category I). In fact, if the Board did lower assessment rates 
sufficiently below the base rate schedule, the dividends shown in Chart 
1 would not occur.
BILLING CODE 6714-01-P

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[[Page 53187]]


    All else equal, higher assessment rates (whether to cover rapid 
insured deposit growth or from other causes) would shorten the time to 
convergence of relative dividend shares of older and newer 
institutions. However, the effect of higher rates would likely be less 
marked than the effect of high fund losses similar to those during the 
banking crisis of the late 1980s and early 1990s.
    Institutions chartered in the future. Absent significant insurance 
fund losses, the fund balance will tend to increase over time. Under 
the fund balance method, all else equal, the larger the fund grows, the 
longer it would take an institution chartered in the future to obtain a 
share of potential dividends that was roughly equal to its share of the 
assessment base; that is, for its relative dividend share to 
approximately equal that of older institutions. Thus, an institution 
chartered 30 years from now could take many decades to obtain a share 
of potential dividends that was roughly equal to its share of the 
assessment base.

Simplicity

    The fund balance method relies on more data than the payments 
method described below and is more complex, which may reduce 
transparency. Both methods of fund allocation discussed in this ANPR 
are operationally feasible, however.

Remaining Decision-Making Requirements

    Both methods require the FDIC to define eligible premiums. Once the 
definition of an eligible premium is chosen, however, the fund balance 
method allocates dividends among older and newer institutions 
automatically, without the need for explicit FDIC decision making about 
the relative importance to assign the 1996 assessment base compared to 
post-1996 eligible premiums.\13\ Only if the FDIC adopted the variant 
of this method in which something less than the December 31, 2006 fund 
balance was allocated among older institutions would it make explicit 
decisions about how to allocate dividends between older and newer 
institutions.
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    \13\ The FDIC's definition of an ``eligible'' premium would have 
some effect on the way the fund balance method allocates dividends 
between newer and older institutions, considered as a group. The 
lower the eligible premium rate, the longer older institutions, as a 
group, would retain a relatively larger share of dividends, all else 
equal.
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The Payments Method

Description

    In its basic form, under most probable scenarios, the fund balance 
method would most likely benefit older institutions. The payments 
method, on the other hand, offers considerably more options for 
allocating dividends between older and newer institutions. The payments 
method could be constructed so as to benefit older institutions for 
many years, or it could be constructed to accelerate convergence 
between older and newer institutions.
    Under the payments method, unlike the fund balance method, neither 
fund performance nor dividends paid would affect dividend shares 
directly. Rather than hinging on its assigned portion of the fund 
balance, an institution's share of any dividend would depend upon its 
(and its predecessors') 1996 assessment base (or, equivalently, its 
1996 ratio), weighted in some manner, and its quarterly assessments 
under the new assessment system. Specifically:
    <bullet> Initially, each institution's dividend share would depend 
upon its 1996 assessment base compared to all other institutions. For 
example, initially, each institution's dividend share could equal:
    1. Its 1996 ratio times the fund balance on December 31, 2006;
    2. Its 1996 ratio times the fund balance at some other time; or
    3. Its 1996 ratio times insurance fund assessment income over some 
period of time leading up to December 31, 1996, in each case as a 
percentage of the total for all institutions.
    <bullet> The resulting value assigned to each institution based on 
its 1996 ratio could either remain unchanged or be assigned a declining 
weight over time.
    <bullet> The possible definitions of an eligible (and an 
ineligible) premium are the same as those under the fund balance 
method. However, under certain variations of this method discussed 
below, assessments offset through credit use could increase an 
institution's dividend share.
    <bullet> Cumulative eligible premiums paid into the fund since 1996 
would add to an institution's share.
    <bullet> Alternatively, the FDIC could count only eligible premiums 
paid over some recent period, for example, the most recent 3, 5, 10 or 
15 years. In contrast, the fund balance method would necessarily take 
into account all assessment payments made under the new assessment 
system.
    <bullet> Another variation would allow the FDIC to subtract 
dividends paid to an institution from its eligible premiums.

The Board would explicitly determine the relative importance to assign 
to each institution's 1996 assessment base and to its eligible premiums 
paid under the new system. The rate at which the relative importance of 
eligible premiums paid under the new system increased (and the relative 
importance of the 1996 assessment base decreased) could be slow or 
fast. Alternatively, the FDIC could, at the outset of the system, 
reserve the right to change the balance in the future.\14\
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    \14\ A simplified version of the payments method would 
substitute assessment bases as proxies for eligible premiums. Each 
institution's share of any dividend would depend on its portion of 
the 1996 assessment base, weighted in some fashion, and its 
cumulative quarterly assessment bases under the new system. In this 
version, an institution would automatically have an added incentive 
to be charged the lowest possible rate, since, given identical 
assessment bases, an institution paying the lowest assessment rate 
would increase its dividend share at the same rate as an institution 
paying the highest assessment rate, all else equal.
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Risk Reduction Incentives

    As under the fund balance method, the degree to which dividend 
allocation would reinforce the risk incentives of the risk-based 
premium system would depend upon the FDIC's definition of an eligible 
premium.

The Treatment of Older Versus Newer Institutions

    Relative weight of the 1996 assessment base. The relative weight to 
be accorded the 1996 assessment base could have a great influence on 
how quickly the relative dividend shares of newer and older 
institutions would converge.
    How the payments method would affect the dividend shares of older 
and newer institutions would depend on the weight that the Board 
assigned the 1996 assessment base (initially and over time) compared to 
the weight it assigned eligible premiums paid each year after 1996. Two 
illustrative variations of the payments method are described below.
    Variation 1. The Board could, as under the fund balance method, 
initially divide the 2006 fund balance based on each institution's 
share of the December 1996 assessment base. Eligible premiums after 
1996 would be added to that amount. As illustrated in Chart 3 and Table 
3, this method of implementation would result in older institutions 
retaining relatively large dividend shares for many years--similar to 
the fund balance method--given low losses. (Compare with Chart 1 and 
Table 1.) \15\
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    \15\ The low loss scenario in Chart 3 and Table 3 again assumes 
annual insurance losses that are significantly lower than the 
average annual losses for the past 10 years and that the Board would 
not lower rates below the base assessment rate schedule (2 to 4 
basis points for institutions in Risk Category I). In fact, if the 
Board did lower assessment rates below the base rate schedule, the 
dividends shown in Chart 3 and Table 3 would not occur. See also 
footnote 13.

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[[Page 53189]]


[GRAPHIC] [TIFF OMITTED] TP18SE07.004


[[Page 53190]]


    Under the payments method--unlike the fund balance method--fund 
gains and losses would not directly affect an institution's relative 
dividend share. However, higher insurance fund losses could lead to 
higher assessment rates, which would affect relative dividend shares. 
All else equal, higher assessment rates (either resulting from fund 
losses or rapid insured deposit growth) would tend to make the relative 
dividend shares of older and newer institutions converge more quickly. 
However, as illustrated in Chart 4 and Table 4, the effect of an 
increase in higher assessment rates on relative dividend shares would 
not be as large as the direct effect of large insurance losses under 
the fund balance method. (Compare with Table 2 and Chart 2.) \16\
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    \16\ Chart 4 and Table 4 assume that an institution's dividend 
share is initially determined by multiplying its 1996 ratio times 
the fund balance at the end of 2006 and adding eligible premiums 
over time. See also footnote 13.
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[[Page 53191]]


[GRAPHIC] [TIFF OMITTED] TP18SE07.006


[[Page 53192]]


    Variation 2. Another way to implement the payments method would be 
to consider only premiums paid over some prior period (such as the 
previous 15 years). When the prior period covered any year before 2007, 
the years 1997 through 2006 would be skipped, since the great majority 
of institutions paid no deposit insurance premiums then. Thus, for 
example, to determine dividend shares at the end of 2009, the method 
would consider premiums paid from 1985 through 1996 and from 2007 
through 2009. Premiums paid during 2007, 2008 and 2009 would include 
only eligible premiums. However, because the weight accorded the 1996 
ratio would effectively decline to zero over time, eligible premiums 
after 2006 would include eligible premiums offset with credits. An 
eligible premium paid in 1996 or any earlier year would be calculated 
as an institution's share of the 1996 assessment base times total 
deposit insurance fund assessment income in that year.\17\
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    \17\ For years prior to 1990, deposit insurance fund assessment 
income used to produce Chart 5 and Table 5 includes such income for 
both the FDIC and the Federal Savings and Loan Insurance 
Corporation.
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    As illustrated in Chart 5 and Table 5, newer and older institutions 
would have equal relative dividend shares after 15 years.\18\ \19\ \20\
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    \18\ The low loss scenario in Chart 5 and Table 5 again assumes 
annual losses that are significantly lower than the average annual 
losses for the past 10 years and that the Board would not lower 
rates below the base assessment rate schedule (2 to 4 basis points 
for institutions in Risk Category I). In fact, if the Board did 
lower assessment rates below the base rate schedule, the dividends 
shown in Chart 5 and Table 5 would not occur. See also footnote 13.
    \19\ If eligible premiums did not include eligible premiums 
offset with credits, newer institutions would actually have higher 
relative dividend shares than older ones after 15 years (because 
older institutions would use credits in early years, which would 
reduce their eligible premiums). Thereafter, however, the dividend 
shares of older and newer institutions would tend to converge again.
    \20\ A high loss scenario would lead to a more rapid 
convergence.
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[GRAPHIC] [TIFF OMITTED] TP18SE07.008

BILLING CODE 6714-01-C

[[Page 53194]]

    The relative dividend shares of older and newer institutions would 
converge similarly if an institution's dividend share were initially 
determined by multiplying its 1996 ratio by the fund balance at the end 
of 2006 and adding eligible premiums over time, where the weight 
accorded the 1996 ratio diminished linearly and steadily to zero over 
15 years (again allowing eligible premiums to include eligible premiums 
offset with credits). However, institutions chartered in the future 
would be at a greater disadvantage than if only recent payments (e.g., 
those made within the previous 15 years) were considered.
    In general, the length of time it would take an institution 
chartered in the future to obtain a share of potential dividends that 
was roughly equal to its share of the assessment base would depend to a 
great extent upon the relative weight to be accorded the 1996 ratio. If 
the 1996 ratio (or 1996 assessment base) were heavily weighted and 
payments accumulated indefinitely, it could take an institution 
chartered in the future many years to obtain an equal share of 
potential dividends. However, if the 1996 ratio received a small weight 
and only very recent assessments (rather than cumulative payments) were 
considered, it would take an institution chartered in the future only a 
short time to obtain an equal share of potential dividends.

Simplicity

    The payments method would require less data than the fund balance 
method and would be relatively easy to administer. If the payments 
method considered only recent payments (e.g., 3 or 5 years), data needs 
and record retention requirements for the industry and the FDIC would 
be particularly simple.\21\
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    \21\ The simplification of the method in which assessment bases 
are used as a proxy for actual payments requires only that 
institutions and the FDIC retain data on assessment bases.
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Decision-making

    Like the fund balance method, the payments method would require 
that the FDIC define eligible premiums. Under the payments method the 
FDIC would have considerably more options regarding the allocation of 
dividends between older and newer institutions than it would under the 
fund balance method. The FDIC would decide:
    <bullet> How much weight to accord the 1996 assessment base 
compared to premiums paid under the new system;
    <bullet> Whether that weight should change over time and whether 
the FDIC should reserve the right to change the weight in the future; 
and
    <bullet> Whether all payments under the new system should be 
considered or only more recent payments.

III. Request for Comments

    The FDIC requests comment on all aspects of the fund balance method 
and the payments method, and on any alternative approach not presented 
in this ANPR that a commenter chooses to discuss. In particular, the 
FDIC invites comment on the following:
    1. Which method is preferable and why?
    2. Is a method not presented in this ANPR preferable? If so, why?
    3. Is there a variation or way of implementing any method that is 
preferable or less preferable? If so, why?
    4. How should an eligible premium be defined and why should it be 
so defined?
    5. If the payments method were selected:
    (a) Are any of the two illustrative variations more or less 
preferable?
    (b) Should eligible premiums be considered only over some limited 
prior period, such as 3, 5 or 10 years?
    (c) Should premiums paid with credits count toward dividend share, 
as described in the second illustrative variation?
    (d) Should premiums paid over some very recent period (e.g., the 
previous year) be excluded to avoid creating an incentive for 
institutions to increase their assessment base and assessments in hope 
of obtaining a larger dividend?
    (e) Should dividends paid to an institution be subtracted from its 
eligible premiums?
    (f) How should the 1996 assessment base be taken into account or 
weighted? How quickly should its relative importance decrease over 
time? Should the FDIC reserve the right to change its relative 
importance in the future?
    6. Is any method particularly burdensome or not burdensome?
    7. Any other aspects of either of the two methods or of a method 
not presented in this ANPR.

Appendix A--Definition and Description of the Fund Balance Method

    An institution's dividend share would equal the dollar portion 
of the fund balance assigned to it (its fund allocation) as a 
percent of the total adjusted fund balance. An institution's 
dividend share would be defined recursively. Its initial dividend 
share (DS<INF>i,0</INF>), on January 1, 2007, would be:
[GRAPHIC] [TIFF OMITTED] TP18SE07.009

where a<INF>i,0</INF> is institution i's fund allocation on January 
1, 2007, and F<INF>0</INF> is the fund balance as of December 31, 
2006.
    For quarters ending after December 31, 2006, adjusted fund 
balances are used. An adjusted fund balance differs from the actual 
fund balance by excluding estimated premium income for the quarter. 
Premiums earned for each quarter would be estimated because they 
would not be determined for, and collected from, each institution 
until the following quarter.
    An institution's fund allocation at time 0 would be derived from 
its share of the 1996 aggregate assessment base. Therefore, equation 
(1) can be restated as:
[GRAPHIC] [TIFF OMITTED] TP18SE07.010

    In the equation above, f<INF>i</INF> is the share of the 1996 
aggregate base for institution i and is calculated as:

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[GRAPHIC] [TIFF OMITTED] TP18SE07.011

where ab<INF>96i</INF> is 1996 assessment base for institution i and 
j = 1 through N represents all institutions. Institutions that did 
not exist on December 31, 1996 or are not successors to institutions 
in existence then would have 1996 ratios set to zero.
    An institution's dividend share for each succeeding quarter 
(DS<INF>i,t</INF>) would be:
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where DS<INF>i,t</INF> is institution i's dividend share at time t, 
t is the end of the most recent quarter for which the fund balance 
is available, a<INF>i,t</INF> is institution i's fund allocation at 
time t and F<INF>t</INF> is the adjusted fund balance at time t.
    Institution i's fund allocation at time t, a<INF>i,t</INF>, in 
the equation (4) is derived as:
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where h<INF>t</INF> is an adjustment factor accounting for the 
growth or shrinkage of the adjusted fund balance (as defined above) 
from t-1 to t after excluding eligible premiums for the quarter 
ending at time t-1 that were collected at time t, r<INF>t</INF> is a 
redistribution factor that redistributes the shares of institutions 
that failed after time t-1 but before time t and 
p<INF>i</INF>,<INF>t</INF> is eligible premiums paid by institution 
i at time t for the quarter ending at time t-1.
    The adjustment factor for the growth or shrinkage of the 
adjusted fund balance, h<INF>t</INF>, is calculated as:
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where m<INF>t</INF> is all institutions in existence at time t. The 
redistribution factor, r<INF>t</INF>, is calculated as:\22\
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    \22\ However, an institution might fail after the end of the 
quarter on which dividend shares are calculated (which will always 
be the fourth quarter), but before distribution of a dividend. 
Consequently, a final adjustment of dividend shares may be 
necessary. This share would be calculated as follows:
    See equation 8 above.
    where DS<INF>i</INF>,<INF>B</INF> is institution i's dividend 
share at the time a dividend is distributed, B is the time at which 
a dividend is distributed, and m<INF>B</INF> is all institutions at 
time t that had not failed as of time B.
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Definition and Description of the Payments Method

    An institution's dividend share, DS<INF>i,t</INF>, would be 
defined as:

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where DS<INF>i,T</INF> is institution i's current dividend share, T 
is the end of the most recent quarter for which assessment base data 
is available, w<INF>T</INF> is the weight assigned to the 1996 ratio 
for period T, ab<INF>96,i</INF> is the 1996 assessment base for 
institution i, T-k is the earliest period to be covered, which could 
be all periods after 2006 or some recent period, such as the most 
recent 3, 5, 10 or 15 years, p<INF>i,t</INF> is eligible premiums 
paid by institution i at time t for the quarter ending at time t-1, 
and m<INF>T</INF> is total institutions as of time T.\23\, \24\
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    \23\ Under Variation 2 described in the text, T-k would not 
include any year before 2007. When a dividend share in any year 
depended upon premiums paid before 1997, the premiums would be 
factored into w<INF>T</INF> rather than being included in 
p<INF>i,t</INF>.
    \24\ If an institution failed after the end of the quarter on 
which dividend shares were calculated (which will always be the 
fourth quarter), but before distribution of a dividend, a final 
adjustment of dividend shares may be necessary. This share would be 
calculated simply by deleting the failed institution's payments and 
1996 ratio from the preceding formulas.
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Appendix B--Model Assumptions

    Among other things, the model assumes the following:
    1. Investment income in 2007 equals 4.7 percent of the start-of-
year fund balance. For each year thereafter, it equals 4.57 percent 
of that year's starting fund balance. These estimates are based on 
projections from an investment model that relies on Blue Chip 
forecasts of the yield curve through 3rd quarter 2008.
    2. The initial assessment rate schedule is 3 basis points above 
the base rate schedule; thus, the initial minimum rate is 5 basis 
points. Rates fall to base rates the year after the fund reserve 
ratio reaches or exceeds 1.25 percent. Risk Category I institutions 
that pay rates between the minimum and maximum rate for the category 
are assumed to pay 0.6 basis points above the minimum rate, which 
reflects the current weighted average rate for the group.
    3. Any restoration plan is assumed to be a 5 year plan. 
Surcharges in a restoration plan are estimated using an iterative 
procedure to account for the effect of credit use. During a 
restoration plan, an institution may use no more than 3 basis points 
in credit use.
    4. Operating expenses for 2007 are $988 million and grow at an 
annual rate of 5 percent thereafter.
    5. Insured and domestic deposits are assumed to grow at 5 
percent per year.
    6. The beginning fund balance at 2007 equals $50,165 million.
    7. Credit use is limited by the 90 percent rule during 2008, 
2009, and 2010. (No institution may apply credits to offset more 
than 90 percent of an assessment for these years.)
    8. Institutions are assigned to 1 of 10 credit groups and 1 of 6 
assessment rate groups based on December 31, 2006 Call Report and 
TFR data, CAMELS information, and one-time credits. An institution's 
credits are determined by its share of the December 31, 1996 
assessment base. An institution's credit group is determined by the 
ratio of its credits to its December 31, 2006 deposits. Because an 
institution's initial relative dividend share is determined 
analogously, based upon the ratio of its share of the December 31, 
1996 assessment base to its share of the December 31, 2006 deposits, 
institutions in the same credit group will have similar relative 
dividend shares. In the tables and charts in the text comparing the 
relative dividend shares under alternative allocation methods, the 
``oldest'' group refers to the credit group with the most credits 
relative to their December 31, 2006 deposits, those whose credits 
are more than 12 basis points of their December 31, 2006 deposits. 
The initial weighted average of credits-to-deposits for the credit 
group is 15.6 basis points.
    9. High fund losses correspond to the losses incurred by the 
Bank Insurance Fund from 1987 to 1994, with losses measured relative 
to total domestic deposits. Low fund losses assume losses are equal 
to 0.1 basis points of domestic deposits each year.

    Dated at Washington, DC, this 11th day of September, 2007.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.

[FR Doc. 07-4596 Filed 9-17-07; 8:45 am]
BILLING CODE 6714-01-P


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