9270 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

that the Board retain the existing

assessment rate schedule for the second

semiannual assessment period of 1995

so that recapitalization is accomplished

as soon as possible. The SAIF had an

estimated balance of $1.8 billion

(unaudited) at year-end 1994, and SAIF

assumes resolution responsibility from

the RTC on July 1, 1995. Although

estimated failed-institution assets

appear manageable for 1995 and 1996,

the SAIF remains vulnerable in the

short run to a single large-institution

failure and to any significant increase in

anticipated loss rates.

VI. Request for Public Comment

Based upon the results of its

semiannual review of the

recapitalization of the SAIF and of the

SAIF assessment rates, the FDIC is

inclined to retain the existing

assessment rate schedule applicable to

SAIF-member institutions. The FDIC

wishes to have the benefit of public

comment before ending its review for

this period, however. The FDIC

therefore requests comment as to

whether it is appropriate for the FDIC to

retain the existing assessment rate

schedule applicable to SAIF-members,

or whether the rates should be lowered

to the statutory minimum of 18 basis

points or some point in between. The

FDIC is interested in receiving analyses

exploring the impact a differential

between BIF and SAIF premiums might

have on SAIF members, and the FDIC

invites comment as to whether the

current spread of 8 basis points from the

lowest to the highest assessment rates

should be retained for SAIF members.

The FDIC solicits comment as to how

lower SAIF rates would impact current

efforts to recapitalize the SAIF. The

FDIC further invites comments as to

whether current rates are sufficient to

recapitalize the SAIF in an expeditious

manner.

VII. Paperwork Reduction Act

No collection of information pursuant

to section 3504(h) of the Paperwork

Reduction Act of 1980 (44 U.S.C. 3501

et seq.) are contained in this proposed

rule. Consequently, no information has

been submitted to the Office of

Management and Budget (OMB) for

review.

VIII. Regulatory Flexibility Analysis

The Board hereby certifies that the

proposed rule would not have a

significant economic impact on a

substantial number of small entities

within the meaning of the Regulatory

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

This proposed rule will not necessitate

the development of sophisticated

recordkeeping or reporting systems by

small institutions nor will small

institutions need to seek out the

expertise of specialized accountants,

lawyers, or managers to comply with

this proposed rule. Therefore, the

provisions of that Act regarding an

initial and final regulatory flexibility

analysis (Id. at 603 and 604) do not

apply here.

List of Subjects in 12 CFR Part 327

Assessments, Bank deposit insurance,

Banks, Banking, Financing Corporation,

Savings associations.

For the reasons set forth in the

preamble, the Board of Directors of the

Federal Deposit Insurance Corporation

proposes to amend 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, 1441b, 1817–

1819.

2. Paragraph (c)(1) of § 327.9 as added

at 59 FR 67165, effective April 1, 1995,

will be retained without change. The

text of paragraph (c)(1) is republished

for the convenience of the reader to read

as follows:

§ 327.9 Assessment rate schedules.

* * * * *

(c) SAIF members. (1) Subject to

§ 327.4(c), the annual assessment rate

for each SAIF member shall be the rate

designated in the following schedule

applicable to the assessment risk

classification assigned by the

Corporation under § 327.4(a) to that

SAIF member (the schedule utilizes the

group and subgroup designations

specified in § 327.4(a)):

SCHEDULE

Capital group

Supervisory

subgroup

A B C

1 .................................... 23 26 29

2 .................................... 26 29 30

3 .................................... 29 30 31

* * * * *

By the order of the Board of Directors.

Dated at Washington, D.C., this 31 day of

January, 1995.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Acting Executive Secretary.

[FR Doc. 95–3669 Filed 2–15–95; 8:45 am]

BILLING CODE 6714–01–P

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 327

RIN 3064–AB58

Assessments; New Assessment Rate

Schedule for BIF Member Institutions

AGENCY: Federal Deposit Insurance

Corporation.

ACTION: Proposed Rule.

SUMMARY: The Board of Directors

(Board) of the Federal Deposit Insurance

Corporation (FDIC) is proposing to

amend its regulation on assessments to

establish a new assessment rate

schedule of 4–31 basis points for

members of the Bank Insurance Fund

(BIF) to apply to the semiannual period

in which the reserve ratio of the BIF

reaches the designated reserve ratio

(DRR) of 1.25% of total estimated

insured deposits and to semiannual

periods thereafter. The Board is further

proposing to amend the assessment risk

classification framework to widen the

existing assessment rate spread from 8

basis points to 27 basis points.

When the DRR is achieved, the Board

is required to set rates to maintain the

reserve ratio at the DRR. Based on

current projections, the reserve ratio is

expected to reach the DRR between May

1 and July 31, 1995. Therefore, the

Board is proposing to lower assessment

rates to maintain the reserve ratio at the

DRR and to maintain a risk-based

assessment system. The Board is further

proposing to amend the assessments

regulation to establish a procedure for

adjusting the proposed rate schedule

semiannually as necessary to maintain

the DRR at 1.25%.

DATES: Written comments must be

received by the FDIC on or before April

17, 1995.

ADDRESSES: Written comments shall be

addressed to the Office of the Executive

Secretary, Federal Deposit Insurance

Corporation, 550 17th Street NW.,

Washington, DC 20429. Comments may

be hand-delivered to room F–400, 1776

F Street NW., Washington, DC 20429, on

business days between 8:30 a.m. and 5

p.m. (FAX number: (202) 898–3838).

Comments will be available for

inspection in room 7118, 550 17th

Street, NW., Washington, DC, between 9

a.m. and 4:30 p.m. on business days.

FOR FURTHER INFORMATION CONTACT:

Christine Blair, Financial Economist,

Division of Research (202) 898–3936; or

Connie Brindle, Chief, Assessment

Operations Section, Division of Finance,

(703) 516–5553; or Lisa Stanley, Senior

Counsel, Legal Division (202) 898–7494;
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9271

or Cristeena Naser, Attorney, Legal

Division (202) 898–3587, Federal

Deposit Insurance Corporation,

Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

I. Background

At present, BIF members are assessed

rates for FDIC insurance ranging from 23

basis points for the best risk

classification to 31 basis points for the

riskiest classification. This assessment

schedule is based on the requirements

of section 7(b)(2)(E) of the Federal

Deposit Insurance Act (FDI Act), 12

U.S.C. 1817(b)(2)(E). That provision was

enacted as part of section 302 of the

Federal Deposit Insurance Corporation

Improvement Act of 1991 (FDICIA)

(Pub. L. 102–242, 105 Stat. 2236, 2345)

which completely revised the

assessment provisions of the FDI Act by

requiring the FDIC to: (1) establish a

system of risk-based assessments; (2)

establish rates sufficient to provide

revenue at least equivalent to that

generated by an annual 23 basis point

rate until the BIF reserve ratio achieves

the DRR of 1.25% of total estimated

insured deposits; (3) when the reserve

ratio remains below the DRR of 1.25%,

set rates to achieve that ratio within one

year or establish a recapitalization

schedule to do so within 15 years; and

(4) once the DRR is achieved, set rates

to maintain the reserve ratio at the DRR.

Based on the financial condition of

the BIF, the Board has established two

recapitalization schedules, most

recently on May 25, 1993, which

estimated that the DRR would be

achieved in the year 2002. 58 FR 31150

(May 25, 1993). Once the DRR has been

attained, the recapitalization schedule

will no longer apply. Due to the health

of the banking industry, current

projections indicate that the BIF will

recapitalize sometime between May 1

and July 31, 1995. Accordingly, the

Board must implement the statutory

provisions which will apply once the

DRR is reached. In particular, because

the mandate to collect at a minimum

average rate of 23 basis points will no

longer be operative, the Board must

determine when and how much to

lower assessments of BIF members.

Following is a discussion of the

statutory provisions which must be

considered in determining how and

when rates may be set, a proposed new

assessment rate schedule, a method for

applying the proposed rate in the

semiannual period during which the

DRR is achieved, and a process for

adjusting that assessment schedule in

future semiannual periods.

II. Statutory Framework for Setting

Assessment Rates

A. Summary

Section 7(b) of the FDI Act governs

the Board’s authority for setting

assessment rates for members of the BIF.

12 U.S.C. 1817(b). The assessment rates

the Board is authorized or required to

set are dependent on whether the fund’s

reserve ratio has reached its DRR. The

reserve ratio is the dollar amount of the

BIF fund balance divided by the

estimated insured deposits of BIF

members. The Board must set

semiannual assessments and the DRR

for the BIF and the Savings Association

Insurance Fund (SAIF) independently.

FDI Act, section 7(b)(2)(B).

The DRR for the BIF currently is

1.25% of estimated insured deposits

(i.e., $1.25 for each $100 of insured

deposits), the minimum level permitted

by the FDI Act. FDI Act, section

7(b)(2)(A)(iv). The Board may increase

the DRR to such higher percentage as

the Board determines to be justified for

a particular year by circumstances

raising a significant risk of substantial

future losses to the fund. However, the

Board is not authorized to decrease the

DRR below 1.25%. Id.

Section 7(b), among other things,

directs the Board to:

(1) establish a risk-based assessment

system whereby an institution’s

assessment is based in part on the

probability that the deposit insurance

fund will incur a loss with respect to

that institution [FDI Act, section

7(b)(1)(C)(i)]; and

(2) set assessments, not less than

$2000 annually per BIF member, to

‘‘maintain’’ the reserve ratio ‘‘at’’ 1.25%

when that ratio has been achieved [FDI

Act, section 7(b)(2)(A)(i)(I), (iii)].

In the current economic environment,

because of investment income alone, the

reserve ratio may continue to grow

beyond 1.25%. Moreover, a risk-based

assessment system contemplates a range

of rates such that even if the least risky

institutions pay the lowest rate

consistent with a meaningful risk-based

assessment system, riskier institutions

must pay a higher rate. While the Board

must set rates to maintain fund reserves

at the 1.25% DRR once that level is

achieved, even with assessment rates as

low as prudently possible the fund

could continue to grow as a result of

assessments paid by riskier institutions

and investment income. The following

sections address these statutory

directives.

B. Directive: Set Rates To Maintain the

Reserve Ratio at the DRR

Pursuant to section 7(b)(2)(A)(i) of the

FDI Act, the Board must set semiannual

assessments to maintain the reserve

ratio of the BIF at the DRR taking into

consideration the following factors: (1)

Expected operating expenses; (2) case

resolution expenditures and income; (3)

the effect of assessments on members’

earnings and capital; and (4) any other

factors the Board may deem appropriate.

Section 7(b)(2)(A)(iii) limits the Board’s

discretion to set assessment rates by

imposing a minimum semiannual

assessment of $1,000 per BIF member.

The directive to ‘‘set rates to maintain

the reserve ratio at the designated

reserve ratio’’ was enacted as part of the

amendments to section 7 made by the

FDIC Assessment Rate Act of 1990

(Assessment Rate Act). Public Law 101–

508, 104 Stat. 1388, 1388–14. The

Assessment Rate Act is Subtitle A of

Title II of the Omnibus Budget

Reconciliation Act of 1990. While the

phrase ‘‘set assessments * * * to

maintain the reserve ratio at the

designated reserve ratio’’ is not defined

in the statute, the legislative history

discussed below illuminates Congress’

intentions.

1. Interpretations of ‘‘maintain * * *

at the DRR’’.

The Board is of the opinion that this

phrase establishes the DRR as a target,

a position supported both by the

difficulty of managing the size of the

reserve ratio as well as the statutory

history. Changes in the reserve ratio are

a function of the size of estimated

insured deposits, investment earnings,

assessment revenue (which, in turn, is

a function of the risk profile of the

industry and revenue received from the

statutory minimum assessment), and

revenue from corporate-owned and

other assets, none of which is in the

complete control of the FDIC. In

addition, operating expenses and

insurance losses to the fund will vary.

The primary factors affecting the fund

balance are assessment revenues,

investment income, operating expenses

and insurance losses resulting from

bank failures. Assessment revenues

depend upon deposit growth, and

investment income depends upon

interest rate movements as well as

factors affecting the fund’s investable

balance. Deposit growth and interest

rate movements in turn are related, but

as the number and variety of financial

instruments and financial management

techniques expand that relationship

becomes less predictable. Both deposit

growth and interest rates have become

more variable and, thus, less predictable
9272 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

in recent years. Finally, bank failures

and the resulting losses for the

insurance fund historically have

represented a major source of

uncertainty in forecasting the fund

balance. Failures can arise from

developments in the global marketplace,

smaller geographic markets, or specific

product markets, and the failure rate is

affected by numerous other factors. The

1980s offer strong evidence that changes

in these determinants and their

implications cannot, as a rule, be

anticipated far in advance. The specific

timing of failures is particularly difficult

to project, even for short forecast

horizons. Taken together, the above

considerations indicate that the reserve

ratio cannot be managed with sufficient

precision to achieve a precise target

consistently.

Section 208 of the Financial

Institutions Reform, Recovery, and

Enforcement Act of 1989 (FIRREA)

amended section 7(b) of the FDI Act to

establish a DRR and set the level at

1.25%. Public Law 101–73, 103 Stat.

183, 206. Prior to FIRREA, beginning in

1980, the FDI Act required or authorized

the Board to adjust the amount of

assessment income transferred to the

insurance fund, and thereby to increase

or decrease the rebate amount, based on

the actual reserve ratio of the fund

within a range from 1.10 percent to 1.40

percent, with 1.25 percent as the target.

See discussion infra, Rebates.

FIRREA also prescribed minimum

annual assessment rates which could be

increased from the scheduled levels, ‘‘if

necessary to restore the fund’s ratio of

reserves to insured deposits to its target

level within a reasonable period of

time.’’ [Emphasis added.] H.R. Conf.

Rep. No. 222, 101st Cong., 1st Sess. 396

(1989). Thus, when the DRR was

established, Congress appears to have

considered the DRR as a target level.

The view that the DRR is a target finds

further support in Senate legislation

which was considered when enacting

the Assessment Rate Act. Section 1(a) of

S. 3045, which was sponsored by then

Senate Banking Committee Chairman

Riegle and other members of the Senate

Banking Committee, required the Board

to ‘‘maintain the reserve ratio at a level

equal to the designated reserve ratio’’.

This language was almost identical to

the comparable provision of S. 3093, the

Administration bill, which ultimately

was enacted. The section-by-section

analysis of S. 3045 describes Section

1(a) as permitting

* * * the FDIC to set the assessment rate

at the level the FDIC determines to be

appropriate: to maintain the Bank Insurance

Fund’s reserves at the target level (now $1.25

in reserves for each $100 in insured deposits,

with the FDIC having the discretion under

the current law to increase it to $1.50); or if

the Fund’s reserves are below the target level,

to restore the reserves to the target level. The

FDIC would have ‘a reasonable period of

time’ to restore the Fund’s reserves to the

target level. [Emphasis added.]

The Senate banking committee clearly

considered the DRR as a target.

Finally, FDICIA section 104,

Recapitalizing the Bank Insurance Fund,

amended the assessment rate provisions

of section 7(b)(1)(C) (in effect December

19, 1991 through December 31, 1993) as

follows:

If the reserve ratio of the Bank Insurance

Fund equals or exceeds the fund’s designated

reserve ratio under subparagraph (B), the

Board of Directors shall set semiannual

assessment rates for members of that fund as

appropriate to maintain the reserve ratio at

the designated reserve ratio. [Emphasis

added.]

Thus Congress appears to have

recognized that the reserve ratio would

fluctuate around a target DRR.

Treating the DRR as a target would

necessarily include the concept of

fluctuations above and below the target,

thus incorporating into the rate-setting

process a measure of economic reality.

If the reserve ratio falls below 1.25% in

a semiannual period, the Board could

adjust the assessment schedule in the

next semiannual period to restore the

ratio. Section 7(b)(3)(A) of the FDI Act

contemplates precisely that. That

section provides that, after the DRR is

achieved, if the reserve ratio falls below

the DRR, the Board is required to set

semiannual assessments sufficient to

increase the reserve ratio to the DRR

within one year or in accordance with

a recapitalization schedule promulgated

to restore the reserve ratio to the DRR

within 15 years. Conversely, when the

reserve ratio rises above the DRR for any

semiannual period, the Board could

adjust the assessment schedule

downward to reflect the increase.

Current projections show, however,

that even if the assessment rate for risk

classification 1A banks were as low as

possible consistent with a meaningful

risk-based assessment system, the fund

may continue to grow as a result of the

revenue from investment income. In

such a case where the rates are set as

low as possible consistent with a riskbased assessment system and the fund

nevertheless continues to grow, the

Board considers that it will have

complied with the statute because the

Board will have set rates to maintain the

reserve ratio at 1.25% in accordance

with statutory requirements for a riskbased assessment system.

Congress could not have understood

that the reserve ratio can be maintained

precisely at 1.25%. Under this

interpretation, amounts in excess of that

fixed point should be returned to the

industry. However, as discussed above,

the FDIC cannot completely control the

factors that produce fluctuations in the

level of the reserve ratio. Therefore,

management of the reserve ratio is

necessarily imprecise. In the current

economic situation, the fund will likely

grow beyond the DRR as a result of

investment income alone. Thus, an

interpretation which requires the FDIC

to maintain the reserve ratio precisely at

1.25% would necessarily require a

mechanism for providing assessment

credits (known as rebates) to BIF

members for amounts in excess of

1.25%. Putting aside issues of whether

investment income, reserve corpus or

both can be rebated, more importantly,

the FDIC’s authority in section 7(d), 12

U.S.C. 1817(d), to provide assessment

credits was deleted in FDICIA as being

obsolete. See, section-by-section

analysis of section 212(e)(3) of S. 543

which became the language of section

302(a) of FDICIA at 138 Cong. Rec.

S2073 (daily ed. February 21, 1992). See

discussion infra, Rebates.

The Board believes that viewing the

DRR as a target is the correct position

because (1) it reflects economic reality

and the impossibility of maintaining the

reserve ratio precisely at 1.25%; (2) it

gives effect to other relevant

requirements in the statute for a

minimum assessment, a risk-based

assessment system, and maintenance of

the DRR; and 3) it better comports with

Congressional intent as indicated by the

legislative history and the fact that

Congress eliminated the rebate authority

of section 7(d).

2. BIF Members shall pay a minimum

semiannual assessment of $1,000.

Section 302 of FDICIA completely

revised section 7(b) of the FDI Act. The

minimum assessment language was

modified only to reflect the fact that

rates are to apply semiannually and to

combine separate provisions into a

single provision applicable to both the

BIF and SAIF as follows:

The semiannual assessment for each

member of a deposit insurance fund shall be

not less than $1,000. FDI Act, section

7(b)(2)(A)(iii).

After FDICIA, BIF members must pay

the greater of their risk-based rate or

$2000 each year.

C. The FDIC Shall Establish a RiskBased Assessment System

In FDICIA, Congress completely

restructured the basis upon which

assessment rates are determined.

Section 302(a) of FDICIA required the
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9273

FDIC to establish by January 1, 1994, a

risk-based assessment system based on:

(i) the probability that the deposit

insurance fund will incur a loss with

respect to the institution, taking into

consideration the risks attributable to—

(I) different categories and

concentrations of assets;

(II) different categories and

concentrations of liabilities, both

insured and uninsured, contingent and

noncontingent;

(III) any other factors the Corporation

determines are relevant to assessing

such probability;

(ii) the likely amount of any such loss;

and

(iii) the revenue needs of the deposit

insurance fund.

Within the scope of these broad

factors, FDIC was granted complete

discretion to design a risk-based

assessment system. See, i.e., S. Rep. No.

167, 102d Cong., 1st Sess., 57 (1991).

One statutory restraint, however, is that

the system must be designed so that as

long as the BIF reserve ratio remains

below the DRR, the total amount raised

by semiannual assessments on members

cannot be less than the total amount

resulting from a flat rate of 23 basis

points. FDI Act, section 7(b)(2)(E). This

provision currently applies, but will

cease to be operative when the BIF

meets the DRR. This provision may

again become operative if the reserve

ratio remains below the DRR at some

future time. The Board interprets the

minimum assessment provision of

section 7(b)(2)(E), which requires

weighted average assessments of 23

basis points, as applying only when the

reserve ratio remains below the DRR for

at least a year.

Any time the reserve ratio goes below

the DRR, the Board must either set rates

1) to restore the reserve ratio within one

year or 2) in accordance with a

recapitalization schedule not to exceed

fifteen years. FDI Act, section 7(b)(3)(A).

Because the Board has the discretion to

determine the rate necessary to restore

the reserve ratio to the DRR within one

year, it is reasonable to conclude that

the minimum assessment provision

(which mandates the Board to set rates

sufficient to provide revenue equivalent

to that generated by an annual flat rate

of .0023) would not apply until the

reserve ratio stays below the DRR for at

least one year. Moreover, it is unlikely

that Congress intended such a drastic

result if the DRR falls slightly below the

target DRR, when a small adjustment in

the assessment schedule for the

following semiannual period could

bring the fund back up to the DRR. In

such a case, if the minimum assessment

provision applied, the result would be

an enormous overcollection of

assessment revenue which, as explained

below, the FDIC lacks the authority to

rebate.

D. Rebates

It appears, based on the statutory

framework and legislative history of

section 7 of the FDI Act, that the FDIC

has not had authority to provide rebates

since the permanent risk-based

assessment system took effect on

January 1, 1994. Prior to FDICIA, two

provisions of section 7 expressly

addressed rebates or assessment credits,

section 7(d), Assessment Credits, and

section 7(e), Refunds to Insured

Depository Institutions.

In section 302(e)(3) of FDICIA,

Congress removed the assessment credit

provisions of section 7(d) of the FDI Act

and at the same time established a ratesetting scheme requiring the Board to

set rates to maintain the reserve ratio at

the DRR. Pub. L. 102–242, 105 Stat.

2236, 2349. As is clear from the

statutory history of assessment credits,

such credits were intended as a means

to provide flexibility to keep the fund

balance from growing too large at a time

when assessment rates were set in the

statute and all institutions paid the

same flat rate. See generally, S. Rep. No.

1269, 81st Cong., 2nd Sess. 1–2 (1950);

Cong. Rec. H10648 et seq. (daily ed. July

19, 1950) (statement of Mr.

McCormack); Federal Deposit Insurance

Corporation, The First Fifty Years at 58–

60, Wash., D.C. 1984. Because of the

large number of bank failures in the

mid-to-late 1980s, Congress gradually

provided the FDIC with greater

flexibility to determine the timing and

amount of assessment rates. This

culminated in the requirement in

FDICIA that the FDIC implement a riskbased assessment system. FDICIA also

provided the FDIC with the flexibility,

after the DRR was reached, to set

assessment rates to maintain the DRR.

1. Statutory History of Section 7(d)

Section 7(d), 12 U.S.C. 1817(d), was

enacted in the FDI Act in 1950. Public

Law 797, Ch. 967, 64 Stat. 873. At that

time all banks paid a flat assessment

rate of 0.83 percent. Due to favorable

economic circumstances, the fund had

built up excess reserves, but the FDIC

lacked the authority to return the excess

funds to the industry. Congress adopted

an assessment credit formula to credit to

insured banks 60 percent of the fund’s

net assessment income and to transfer

the remaining 40 percent to the

Corporation’s surplus (Permanent

Insurance Fund). ‘‘The committee

desires to emphasize that the formula

thus provides a flexible method for

granting a reduction in the assessments

paid by banks in normal years, and in

bad years provides for payment of the

full assessment if needed. This should

reasonably protect the insurance fund in

years of extraordinary losses.’’ H. Rep.

No. 2564, 81st Cong. 2nd Sess. (1950)

reprinted in 1950 U.S.C.C.S. 3770. This

formula returned net assessment

revenues only; it did not extend to

investment income.

The percentage of net assessment

income rebated to insured banks was

modified from time to time as warranted

given the constraints of a statutory flat

assessment rate system. In the

Consumer Checking Account Equity Act

of 1980, enacted as part of the

Depository Institutions Deregulation

and Monetary Control Act of 1980,

Public Law 96–221, 94 Stat. 132,

Congress tied the amount of the rebate

to the status of the reserve ratio. If the

reserve ratio was less than 1.10%, the

amount transferred to the Corporation’s

capital account was required to be

increased to an amount (not to exceed

50% of net assessment income) that

would restore the ratio to at least 1.10%.

If the reserve ratio exceeded 1.25%, the

amount transferred to the capital

account could be reduced by such

amount that would keep the reserve

ratio at not less than 1.25%; finally, if

the reserve ratio exceeded 1.40%, the

amount transferred to the capital

account was required to be increased

such that the reserve ratio would be not

more than 1.40%. Id. at section 308(d).

In section 208 of FIRREA, Congress

specified certain flat annual assessment

rates to be in effect through 1991, but

provided the FDIC with authority to

increase those rates as needed to protect

the BIF and to raise the DRR from 1.25%

to a maximum of 1.50% as justified by

circumstances raising a significant risk

of substantial future losses. In the event

the Board increased the DRR above

1.25%, it was required to establish

supplemental reserves for that increased

revenue, the income from which was to

be distributed annually to BIF members

through an Earnings Participation

Account. (This was the first time

Congress provided any mechanism for

returning to the industry any investment

income.) In addition, to the extent the

supplemental reserves were not needed

to satisfy the next year’s projected DRR,

those amounts were to be rebated.

FIRREA, section 208(4). Congress also

barred any assessment credits until the

DRR was achieved. When forecasts

indicated the DRR would be achieved in

the following year, the Board was

required to provide assessment credits

for that following year equal to the

lesser of: (1) the amount necessary to
9274 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

reduce the BIF reserve ratio to the DRR;

or (2) 100 percent of the net assessment

income to be received in that following

year. Id.

In sections 2002 and 2003 of the

Assessment Rate Act, Congress provided

the FDIC with greater flexibility in both

the timing and amount of assessment

rates. It also eliminated the requirement

that the investment income on the

supplemental reserves be distributed

annually to BIF members. Assessment

Rate Act, section 2004. Because the

Board did not increase the DRR above

1.25%, the provision authorizing

Earnings Participation Accounts and

supplemental reserves never became

effective.

In FDICIA, Congress provided for

establishment of a risk-based assessment

system that, after the DRR was achieved,

would provide the FDIC with much

greater flexibility to set assessment

rates. In 1990, Congress had already

provided the FDIC with the authority to

adjust assessment rates upward to

ensure that the BIF received sufficient

revenue. In FDICIA, Congress intended

that same rate adjustment authority to

operate in lieu of providing assessment

credits in the event that the established

rates resulted in collection of excess

assessment revenue. Therefore,

Congress eliminated the assessment

credit provisions of section 7(d) in their

entirety as being obsolete because the

ability to adjust rates would take the

place of a rebate mechanism.

The discussion of section 212(e)(3) in

the Senate Report on S. 543 (which

became the language of section 302(a) of

FDICIA) describes Congress’ intent:

Section 212(e)(3) replaces current section

7(d) with a new section 7(d) recodifying

current section 7(b)(9). The deleted text,

providing for assessment credits to insured

depository institutions when deposit

insurance fund reserve ratios exceed

designated reserve ratios, is obsolete in light

of the standards for establishing assessments

set forth in new section 7(b)(2)(A)(i) [setting

rates to maintain at the DRR]. Under section

7(b)(2)(A)(i), funds that, under current

section 7(d), would have been rebated to

insured depository institutions through

assessment credits will now be rebated

through reduced assessments.

138 Cong. Rec. S2073 (daily ed. Feb. 21,

1992).

This position finds further support in

the language of section 104 of FDICIA

(in effect December 19, 1991 through

December 31, 1993) which required the

Board to set rates to maintain the

reserve ratio at the DRR when the

reserve ratio equals or exceeds 1.25%.

FDICIA, section 104(a) amending

section 7(b)(1)(C) of the FDI Act.

Clearly, Congress contemplated a

situation in which the reserve ratio

would rise above the DRR, but

nonetheless eliminated rebate authority.

Thus, Congress appears to have

intended the rate setting process to be

the appropriate mechanism for

adjustment.

2. Section 7(e) Does Not Provide Rebate

Authority

An argument has been raised that

section 7(e), 12 U.S.C. 1817(e),

authorizes the FDIC to provide rebates

of fund assets to keep the reserve ratio

at 1.25%. Section 7(e) was enacted in

1950 in the Federal Deposit Insurance

Act, along with section 7(d), assessment

credits. Section 7(e) has been amended

only once—in FIRREA, by changing

‘‘insured bank’’ to ‘‘insured depository

institution’’.

Section 7(e) provides that the FDIC:

(1) may refund to an insured depository

institution any payment of assessment in

excess of the amount due to the Corporation

or (2) may credit such excess toward the

payment of the assessment next becoming

due from such bank and upon succeeding

assessments until the credit is exhausted.

By its terms, the statutory language

contemplates that such refunds or

credits are to be made in respect of

overpayments. The report

accompanying the legislation describes

section 7(e) as ‘‘expressly authoriz[ing]

the Corporation to refund any

overpayments of assessments or to

credit such overpayments on future

assessments’’. H. Rep. No. 2564, 81st

Cong., 2d Sess. (1950), reprinted in 1950

U.S.C.C.S. 3771. Because section 7(d)

contained express authority to provide

rebates, Congress appears to have

intended in section 7(e) to provide the

FDIC with alternative methods (refunds

or credits) to correct computational

errors or other forms of overpayments

outside of the rebate context so that the

FDIC could return funds which clearly

did not belong to it.

Because section 7(d) providing

assessment credits was adopted as part

of the same legislation, an interpretation

that section 7(e) also provides the same

authority would mean that the

provisions were redundant. Rather, each

provision has independent meaning and

purpose if section 7(d) is interpreted to

provide the substantive authority to

provide rebates, while section 7(e)

grants the FDIC the discretion to choose

the method of refunding overpayments,

i.e., by either providing an assessment

credit or a refund check. Moreover,

section 7(e) has never been interpreted

as providing rebate authority precisely

because until January 1, 1994 when the

statutory risk-based assessment system

became effective, that authority existed

in section 7(d). Given the intent of the

drafters as expressed in the section-bysection analysis of S. 543, that rebates

will be provided through reduced

assessment rates, an interpretation that

section 7(e) provides rebate authority

outside its historical context would

seem to be contrary to Congressional

intent.

In sum, the Board believes that the

better interpretation of the statute is that

the FDIC has no authority to grant

rebates and that to do so would be in

violation of the statute and contrary to

the legislative history. As discussed

above, this position is based on:

(1) the statutory history of sections

7(d) and (e); 2) the fact that Congress

deleted the rebate authority in section

7(d); and (3) the legislative history

indicating that Congress intended that

lower rates would be the substitute for

rebates.

III. Proposed Assessment Rate Schedule

The Board proposes to set a new

assessment rate schedule with a spread

of 4 to 31 basis points (see Table 1). The

Board further proposes to make

adjustments to this schedule by an

adjustment factor not to exceed 5 basis

points.

The following definitions are used in

the proposal:

Assessment Schedule: A set of rates

based on the risk classification matrix

with a spread of 27 basis points between

the minimum rate which would apply

to institutions classified as 1A and the

maximum rate which would apply to

institutions classified as 3C.

Spread: The difference between the

minimum and maximum rate in any

given assessment schedule.

Adjustment Factor: The maximum

number of basis points or a fraction

thereof by which the Board would be

authorized to increase or decrease the

proposed 4–31 basis point assessment

schedule without going through the

rulemaking process.

A. Statutory Factors

As discussed in Section II, pursuant

to sections 7(b)(1) and 7(b)(2)(A)(ii), the

Board is required to take into

consideration the following factors

when setting risk-based assessments: the

probability of loss, the amount of such

loss, expected operating expenses, case

resolution expenditures and income, the

effect of assessments on members’

earnings and capital, and any other

factors that the Board may deem

appropriate. These factors are discussed

below.
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9275

1For a representative sampling of academic

studies on this issue, see Estimating the Value of

Federal Deposit Insurance, The Office of Economic

Analysis, Securities and Exchange Commission

(1991); Berry K. Wilson, and Gerald R. Hanweck, A

Solvency Approach to Deposit Insurance Pricing,

Georgetown University and George Mason

University (1992); Sarah Kendall and Mark

Levonian, A Simple Approach to Better Deposit

Insurance Pricing, Proceedings, Conference on Bank

Structure and Competition, Federal Reserve Bank of

Chicago (1991); R. Avery, G. Hanweck and M.

Kwast, An Analysis of Risk-Based Deposit

Insurance for Commercial Banks, Proceedings,

Conference on Bank Structure and Competition,

Federal Reserve Bank of Chicago (1985).

2See, Gary S. Fissel Risk Measurement,

Actuarially Fair Deposit Insurance Premiums and

the FDIC’s Risk-Related Premium System, FDIC

Banking Review (1994), at 16–27, Table 5, Panel B.

Single-copy subscriptions of this study are available

to the public free of charge by writing to FDIC

Banking Review, Office of Corporate

Communications, Federal Deposit Insurance

Corporation, 550 17th Street, N.W., Washington,

D.C. 20429.

3 Id., at Tables 2 and 5.

1. Risk-Based Assessment Schedule

The fundamental goals of risk-based

assessment rates are to reflect the risk

posed to the insurance fund by insured

institutions and to provide institutions

with incentives to control risk taking.

The maximum rate spread in the

existing assessment rate matrix (see

Table 1) is 8 basis points. Institutions

rated 1A pay an annual rate of 23 basis

points while institutions rated 3C pay

31 basis points. A concern is whether 8

basis points represents a sufficient

spread for achieving these goals.

In the FDIC’s proposal for the current

risk-based premium system, the Board

sought comment on whether the

assessment rate spread embodied in the

existing system, i.e., 8 basis points,

should be widened. Of the 96

commenters addressing this issue, 75

favored a wider rate spread. In the final

rule, the Board expressed its conviction

that widening the rate spread was

desirable in principle, but chose to

retain the proposed rate spread. The

Board expressed concern that widening

the rate spread while keeping

assessment revenue constant, might

unduly burden the weaker institutions

which would be subject to greatly

increased rates. However, the Board

retained the right to revisit the issue at

some future date. 58 FR 34357 (June 25,

1993).

The current assessment rate spread for

BIF institutions has been criticized

widely by bankers, banking scholars and

regulators as overly narrow, and there is

considerable empirical support for this

criticism. Using a variety of

methodologies and different sample

periods, the vast majority of relevant

studies of deposit insurance pricing

have produced results that are

consistent with the conclusion that the

rate spread between healthy and

troubled institutions should exceed 8

basis points.1 While the precise

estimates vary, there is a clear

consensus from this evidence that the

rate spread should be widened.

FDIC research likewise suggests that a

substantially larger spread would be

necessary to establish an ‘‘actuarially

fair’’ assessment rate system. Insurance

premiums are actuarially fair when the

discounted value of the premiums paid

over the life of the insurance contract is

expected to generate revenues that equal

expected discounted costs to the insurer

from claims made by the insured over

the same period. A 1994 FDIC study

used a ‘‘proportional hazards’’ model to

estimate the expected lifetime of banks

that were in existence as of January 1,

1993. The study estimated the

actuarially fair premium that each bank

must pay annually so that the cost of

each bank failure to the FDIC would

equal the revenue collected through

insurance assessments. The estimates

indicated a rate spread for 1A versus 3C

institutions on the order of magnitude of

100 basis points.2

The Board is concerned also that rate

differences between adjacent cells in the

current matrix do not provide adequate

incentives for institutions to improve

their condition. Larger differences are

consistent with historical variations in

failure rates across cells of the matrix,

viewed in connection with the

preponderance of evidence regarding

actuarially fair premiums.3 The precise

magnitude of the differences is open to

debate, given the sensitivity of any

estimates to small changes in

assumptions and to selection of the

sample period. However, the Board

believes that larger rate differences

between adjacent cells of the matrix are

warranted.

The Board believes that the

assessment rate matrix should be

adjusted in the direction of an

actuarially fair rate structure, as

described above. Consistent with the

results of the relevant studies on this

topic, regardless of the sample period

selected, the Board believes at this time

that the highest-rated institutions pose a

small but positive risk to the insurance

fund and that the spread between the

highest- and lowest-rated institutions

should be widened.

The Board does not wish to adopt

major changes in the assessment rate

structure at this time. The proposed rate

matrix retains the nine-cell structure. As

noted above, in the final rule adopting

the current assessment rate schedule,

the Board expressed its conviction that

widening the rate spread was desirable

but declined to do so because of the

potential hardship for troubled

institutions and possible additional

losses for the insurance fund. The Board

remains unwilling to increase the

maximum rate other than by means of

the adjustment factor discussed below,

without further study regarding the

proper insurance pricing structure for

the industry.

Accordingly, FDIC staff currently are

undertaking a comprehensive

reevaluation of the risk-based

assessment rate matrix, and will present

recommendations to the Board in the

near future. Any proposed changes to

the risk-based assessment rate structure

that may result from this process will be

addressed in a separate future notice of

proposed rulemaking.

In the interim, the Board believes that

the proposed assessment schedule

represents an equitable set of rate

adjustments. It widens the rate spread

between the lowest- and highest-rated

institutions, consistent with the

implications of the best empirical

evidence on this issue and with the

Board’s previously stated conviction.

Moreover, the rate differences between

adjacent cells in the matrix are widened,

providing additional incentive for

weaker institutions to improve their

condition and for all institutions to

avoid excessive risk-taking. This is

consistent with the Board’s desire to

create adequate incentives via the

assessment rate structure to encourage

behavior that will protect the deposit

insurance fund against excessive losses.

2. Expected Operating Expenses and

Case Resolution Expenses and Income

Operating expenses are projected to

be approximately $260 million for the

second half of 1995 (See Table 2). Case

resolution expenditures or ‘‘insurance

losses’’ for the second half of 1995 are

projected to be $130 million. If the 1994

loss experience of $70 million per

semiannual period (estimated)

continues in 1995, losses may be lower

than the projected amount. Insurance

losses in 1994 were less than onequarter of the historical average, relative

to insured deposits, and baseline

assumptions indicate that losses will

begin to revert toward the norm in 1996

(see Tables 2–4). See additional

discussion of loss assumptions in

Section III.B, below.

3. Impact on Earnings and Capital

Because assessment rates for most BIF

members will decline, the impact on

earnings and capital will be positive.

Lower assessment costs will reduce

expenses by approximately $4.6 billion
9276 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

per year. Based on the industry’s yearend 1993 average tax rate of 31.5

percent, there will be an after-tax impact

on profits of approximately $3.15 billion

per year. BIF members may pass some

portion of the cost savings on to their

customers through lower borrowing

rates, lower service fees, and higher

deposit rates. Their ability to do so will

be affected by factors such as the level

of competition faced by banks.

4. Other Factors—Consideration of the

Impact on the SAIF of Decreased BIF

Rates

A question has been raised

concerning whether the Board may take

into consideration the impact on SAIF

in setting BIF rates. Based on recent

projections, the BIF is expected to

recapitalize between May 1 and July 31,

1995. By contrast, recent projections

show that the SAIF will not recapitalize

until 2002 because assessments to cover

interest payments on bonds issued by

the Financing Corporation (FICO) divert

about $780 million per year, or about 45

percent of total SAIF assessment

revenue. In addition, the SAIF

assessment base has been shrinking

since the SAIF was created in 1989. The

FICO will continue to divert SAIF

assessments for interest payments on

FICO bonds until 2019 when the bonds

mature.

Section 7(b)(2)(A)(ii) of the FDI Act

requires the Board to consider certain

factors in setting assessment rates, one

of which is ‘‘any other factors that the

Board of Directors may deem

appropriate’’. Section 7(b)(2)(B) of the

FDI Act requires the Board to set

semiannual assessments for members of

each fund ‘‘independently’’ from

semiannual assessments for members of

the other insurance fund. Read together,

these provisions do not specifically

prohibit Board consideration of the

impact of BIF rates on SAIF members as

long as the rates are set independently.

However, section 7(b)(2)(A)(i) requires

the Board to set rates to maintain the

BIF reserve ratio. If the Board were to

take into consideration the impact on

the SAIF when it set BIF rates and, as

a result, the reserve ratio continued to

increase in excess of the DRR, it might

be considered a violation of the statute.

By contrast, an increase in the reserve

ratio due to revenue generated from the

minimum assessments and maintaining

a risk-based assessment system would

not be a violation because those

provisions are mandated by the statute.

B. Need for Decreased Rates

As discussed in Section II,

management of the reserve ratio is

necessarily imprecise because the

factors affecting this ratio cannot be

predicted with certainty. Changes in the

reserve ratio are primarily a function of

assessment revenues, investment

income, operating expenses and

insurance losses resulting from bank

failures.

The BIF is expected to recapitalize

between May 1 and July 31, 1995. It is

unlikely that the BIF will recapitalize

prior to the second quarter of 1995

because, after declining from 1992

through mid-year 1994, there are

indications that insured deposits have

begun to increase.

Other than the revenues that may be

necessary to achieve and maintain the

DRR of 1.25% in the second half of

1995, projections indicate that the BIF

will require little or no assessment

income to cover losses and expenses for

that period. Investment income is

expected to approach $500 million for

the second half of the year. As noted

above, for the same period insurance

losses are projected to be $130 million,

and operating expenses are projected to

be approximately $260 million. Thus,

based on current projections,

investment income alone should suffice

to cover BIF obligations unrelated to the

reserve ratio in the second half of 1995.

The proposed assessment rate

schedule is the current, nine-cell matrix

with assessment rates ranging from 4

basis points per year for the highestrated institutions to 31 basis points for

the lowest-rated institution (see Table 1,

Proposed Rate Schedule). For purposes

of maintaining the reserve ratio at

1.25%, the relevant fact is that the

estimated 4.5 basis point average

assessment rate resulting from this

matrix will produce approximately $1.1

billion of annual revenue for the BIF in

the short run. If the proposed matrix

takes effect at or near the beginning of

the second semiannual period in 1995,

the reserve ratio will reach nearly 1.3%

by year-end, under current assumptions

concerning insurance losses, operating

expenses, insured deposit growth, and

other relevant factors.

However, the staff’s baseline

assumptions imply that an average

assessment rate of 4 to 5 basis points is

necessary to maintain the BIF reserve

ratio at 1.25% over a 5–7 year horizon

(see Tables 2–4). While the baseline

assumptions for insurance losses may be

characterized as relatively pessimistic

given current economic conditions, it is

important to recognize that such

conditions are rare in the banking

industry’s recent history. For 1994, the

ratio of insurance losses to estimated

insured deposits was approximately

one-half of 1 basis point (estimated).

This ratio had not previously fallen

below 1 basis point in any year since

1980, averaging 16 basis points for the

1981–93 period and exceeding 30 basis

points in three of those years. Therefore,

the staff’s baseline loss assumptions

may be considered rather optimistic

relative to recent historical experience.

The proposed matrix would yield

assessment revenue sufficient to finance

losses equal to the 60-year annual

average, nearly 4 basis points of

estimated insured deposits, with a

margin to absorb losses that moderately

exceed the average. In view of the recent

experience reviewed above, the staff

believes this to be the minimum amount

necessary to maintain the DRR

consistently over the near-term future.

Given the increasing degree of

competition faced by insured

institutions, the increasing

opportunities for risk-taking as a result

of rapid financial innovation, and the

increased variability of interest rates as

well as other prices due to the

globalization of markets and other

factors, the staff believes that the loss

experience in the banking industry is

unlikely to revert to pre-1980 norms.

Rather, the average yearly loss ratio is

likely to exceed the 60-year average

going forward, with large year-to-year

variability.

Prudence requires that the Board be

provided with the flexibility to adjust

assessment rates in a timely manner in

response to changing conditions.

Accordingly, the Board proposes to

increase or decrease the proposed

assessment schedule by an adjustment

factor of up to 5 basis points or fraction

thereof. The adjustment factor is the

maximum amount by which the Board

could adjust the assessment rate

schedule without going through an

additional notice and comment

rulemaking process. Such adjustments

could only be made to the assessment

schedule in its entirety, not to

individual risk classification cells. Nor

could the spread of 27 basis points be

changed by means of the adjustment

factor. Accordingly, by means of the

adjustment factor, the Board could

adjust the proposed assessment

schedule of 4–31 basis points to a

maximum assessment schedule of 9–36

basis points and a minimum assessment

schedule of 0–27 basis points.

This adjustment factor would provide

the Board with the flexibility to raise a

maximum additional $1.2-$1.4 billion

in the near term without undertaking a

rulemaking. An adjustment factor of 5

basis points appears modest when

viewed historically, as the loss-toinsured deposits ratio has been quite

variable; the standard deviation was 8.6

basis points for the 1933–93 period and
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9277

4Section 7(b)(1)(A) was amended in FDICIA to

permit the FDIC to establish ‘‘and, from time to

time, adjust the assessment rates * * *’’. FDICIA,

section 104(b). This provision was in effect from

December 19, 1991 until January 1, 1994 when the

risk-based assessment provisions became operative.

11.7 basis points for 1983–93. In view

of the currently favorable banking

environment, however, a 5 basis point

adjustment factor should be sufficient to

maintain the DRR in the short run.

IV. Application and Adjustment of

Proposed Assessment Rate Schedule

A. Summary

The proposal would establish (1) the

manner in which the new schedule of

assessment rates set forth in Section III,

will be applied in the semiannual

period during which the DRR is

achieved, and (2) a process for adjusting

the proposed rate schedule (within

prescribed parameters) to maintain the

reserve ratio at 1.25% without the

necessity of notice and comment

rulemaking procedures for each

adjustment. In conformity with the

statutory directives, the proposed

assessment schedule would not become

effective unless and until the DRR is, in

fact, achieved. Once effective, however,

the proposed rate would apply to the

remainder of the semiannual period

after the DRR is achieved and to

semiannual periods thereafter.

For semiannual periods after that

period in which the DRR is achieved,

the proposed rate would be adjusted

semiannually up or down by the

adjustment factor of up to and including

5 basis points as necessary to maintain

the target DRR at 1.25%. The

semiannual assessment schedule, and

any adjustment thereto, would be

adopted by the Board in a resolution

which reflects consideration of the

statutory factors upon which it is

determined. The Board would announce

the semiannual assessment schedule not

later than 45 days prior to the November

30 and May 30 quarterly invoice dates,

and the adjusted rates would first be

reflected in those invoices.

B. Semiannual Period During Which

DRR Is Achieved

Section 7(b)(2)(E) provides that:

The Corporation shall design the risk-based

assessment system for any deposit insurance

fund so that, if the * * * reserve ratio of that

fund remains below the designated reserve

ratio, the total amount raised by semiannual

assessments on members of that fund shall be

not less than the total amount that would

have been raised if—

(i) section 7(b) as in effect on July 15, 1991

remained in effect; and

(ii) the assessment rate in effect on July 15,

1991 [23 basis points] remained in effect.

Based on the language of this section

as well as its legislative history, the

Board believes that it has no authority

to decrease the assessment rates paid by

BIF members until after the reserve ratio

has, in fact, reached the DRR, regardless

of projections for BIF recapitalization.

Section 7(b)(2)(E) indicates that the

Board may not lower BIF assessment

rates in anticipation of meeting the DRR

during the upcoming semiannual

period. If the Board were to decrease the

rates based on projections for BIF

recapitalization, the reserve ratio would

‘‘remain’’ below the DRR at the time of

the Board’s action and the minimum

assessments provisions of section 7(b)

would continue to apply.

This interpretation is consistent with

Congressional intent that the FDIC

maintain a minimum assessment rate of

23 basis points for BIF members until

the fund achieves its DRR. In

connection with the Senate Banking

Committee’s consideration of whether to

establish a maximum assessment for BIF

members, the Committee stated, ‘‘[t]he

Committee is firm in its view that the 23

basis point premium rate now in effect

[during the second semiannual period of

1991] should not be reduced until the

BIF achieves its designated reserve

ratio.’’ [Emphasis added.] S. Rep. No.

167, 102d Cong., 1st Sess., 30 (1991).

The Committee believed that, ‘‘So long

as BIF reserves remain insufficient to

cover demands on the BIF as they arise,

taxpayers will be at risk’’ and passed a

bill which ‘‘encourages the FDIC to

begin rebuilding the BIF by restricting

the FDIC’s discretion to delay

recapitalization.’’ Id. at 29.

If section 7(b)(2)(E) were further

interpreted to mean that the FDIC must

wait to reduce BIF rates until the

beginning of the semiannual period after

the DRR was reached, the FDIC would

have collected far in excess of the

revenue required to maintain the reserve

ratio at the DRR with no mechanism for

rebating the excess amounts. This is

particularly the case if the BIF

recapitalizes early in the semiannual

period, as is indicated by current

projections. If this provision were

interpreted in this manner, the vast

majority of the assessment revenue

collected would not be needed to

maintain the BIF at the DRR.

Although the Board must set

semiannual assessments for BIF

members, the FDI Act is silent as to

when assessments must be announced

or set and expressly allows the Board to

prescribe the manner and time of

assessment collections. See FDI Act,

sections 7(b)(2)(A); 7(b)(3) and

7(c)(2)(B).4 12 U.S.C. 1817(b)(2)(A);

1817(b)(3) and 1817(c)(2)(B). Thus, the

Board may set semiannual assessment

rates to take effect after the DRR has

been achieved.

The reserve ratio is the dollar amount

of the BIF fund balance divided by the

estimated insured deposits of BIF

members. Although data for the fund

balance is accounted for on a monthly

basis, the amount of estimated insured

deposits is based on data from the

quarterly reports of condition (call

reports). Because current projections

indicate that the BIF will recapitalize

early in the July–December semiannual

period, the amount of estimated insured

deposits would be determined by the

information on the June call reports

which are due on July 30 (or for some

institutions, August 14). Due to the

customary time lag involved in verifying

the information from the call reports, it

is probable that the determination that

the DRR has been achieved will not be

made until mid-September. Moreover,

because the fund balance is determined

only on a monthly, rather than daily

basis, the date on which the Board

ascertains that the DRR has been

attained must necessarily be the last day

of the month.

Because the Board cannot lower

assessment rates until it is certain that

the DRR has been attained, the May 30

quarterly invoice and, very likely, the

August 30 quarterly invoice will reflect

the pre-DRR rate of approximately 6

basis points (one-quarter of the annual

assessment rate of 23 basis points). The

June 30 direct debit of the amount

specified on the May 30 invoice will

proceed as planned. However, in the

event it is determined that the DRR has

been attained before the September 30

direct debit occurs, the Board proposes

to promptly notify BIF members that the

September 30 direct debit will be

modified to reflect the new assessment

rate.

Because the proposed 4–31 basis

point assessment rate would apply from

the first day of the month after the DRR

was achieved for the remainder of the

semiannual period, it is likely that some

BIF members will have overpaid their

semiannual assessments. For example, if

the DRR is determined to have been

achieved on July 31 and the 4–31 basis

point rate becomes effective on August

1, a portion of the assessment paid for

the July–September quarter would

constitute an overpayment. In such a

case, pursuant to section 7(e) of the FDI

Act, the FDIC is permitted to refund any

assessment overpayment or to credit the

overpayment toward the next

assessment due until the overpayment

amount is exhausted.

Section 7(e) applies in the case of

‘‘any payment in excess of the amount
9278 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

due’’. The FDIC has interpreted this

provision to apply case-by-case to an

overpayment by an individual

institution caused by a computation

error or revisions to the institution’s

reported assessment base. Because

individual institutions would have

overpaid the amount that actually was

due once the proposed rate became

effective, section 7(e) should also be

applicable in this situation.

On the other hand, if the DRR is not

achieved, no action would be required

because the existing collection process

would simply remain in effect. In such

a case, the September 30 direct debit of

the amount specified on the August 30

quarterly invoices would go forward. If

the DRR were to be reached, for

example, on September 30, the

proposed rate would nonetheless take

effect at that point for the remainder of

the July–December semiannual period.

In the event the FDIC collects more

assessment revenue from an institution

than is required for the July-December

semiannual period, a refund of the

overpayment, with interest from the

time the DRR is achieved, would be

provided. The FDIC intends to provide

any such refund electronically using the

ACH facility, but may do so by check.

The same routing transit numbers and

accounts used for the direct debit

collection would be used for electronic

refunds.

C. Semiannual Periods After the DRR Is

Achieved

The 4–31 basis point assessment

schedule would continue to apply to

semiannual periods commencing with

the semiannual period after the DRR has

been achieved (presumably January

1996). However, to enable the Board to

maintain the reserve ratio at the target

DRR in future semiannual periods, the

proposal would authorize the Board to

adjust (by resolution) the proposed

assessment schedule by an adjustment

factor of up to and including 5 basis

points or fraction thereof. By this means

the Board proposes to limit its

discretion to adjust rates within a range

of 5 basis points. As noted above, such

adjustments could only be made to the

assessment schedule in its entirety, not

to individual risk classification cells.

Nor could the spread of 27 basis points

be changed by means of the adjustment

factor. Accordingly, by means of the

adjustment factor, the Board could

adjust the proposed assessment

schedule of 4–31 basis points to a

maximum assessment schedule of 9–36

basis points and a minimum assessment

schedule of 0–27 basis points. Thus, for

example, if the rate for 1A banks was 4

basis points, no matter how many times

the assessment schedule were adjusted

up or down, the rate for 1A banks could

never go above 9 basis points without

going through the notice and comment

rulemaking process. Finally, if financial

conditions warranted a change beyond

the maximum amount of the adjustment

factor, the Board would make such

adjustments through the notice and

comment rulemaking process.

The adjustment factor for any

particular semiannual period would be

determined by (1) the amount of

assessment income necessary to

maintain the reserve ratio at 1.25%

(taking into account operating expenses

and expected losses) and (2) the

particular risk-based assessment

schedule that would generate that

amount considering the risk

composition of the industry at the time.

The Board proposes to adjust the

assessment rate schedule every six

months by the amount, up to and

including the maximum adjustment

factor of 5 basis points, necessary to

maintain the reserve ratio at the DRR.

Such adjustments will be adopted in a

Board resolution that reflects

consideration of the statutory factors.

These include expected operating

expenses, projected losses, the effect on

BIF members’ earnings and capital and

any other factors the Board determines

to be relevant to the BIF. The resolution

will be adopted and announced at least

45 days prior to the invoice date for the

first quarter of the semiannual period in

which the rate will take effect (i.e.,

November 30 and May 30 invoice

dates). Those invoices would then first

reflect the adjusted assessment rate

schedule.

V. Request for Comment

The Board invites comments on all

aspects of the proposal.

VI. Paperwork Reduction Act

No collections of information

pursuant to section 3504(h) of the

Paperwork Reduction Act (44 U.S.C.

3501 et seq.) are contained in this

notice. Consequently, no information

has been submitted to the Office of

Management and Budget for review.

VII. Regulatory Flexibility Act

The Regulatory Flexibility Act (5

U.S.C. 601 et seq.) does not apply to a

rule of particular applicability relating

to rates, wages, corporate or financial

structures or reorganizations thereof. Id.

at 601(2). Accordingly, the statute does

not apply to the proposed changes in

the assessment rate schedule, the

structure of that schedule and future

adjustments thereto. In any event, to the

extent an institution’s assessment is

based on the amount of its domestic

deposits, the primary purpose of the

Regulatory Flexibility Act, that agencies’

rules do not impose disproportionate

burdens on small businesses, is

fulfilled.

List of Subjects in 12 CFR Part 327

Assessments, Bank deposit insurance,

Banks, Banking, Financing Corporation,

Savings associations.

For the reasons stated in the

preamble, the Board proposes to amend

part 327, as amended at 59 FR 67153

effective April 1, 1995, 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, 1441b, 1817–

1819.

2. Section 327.8 is amended by

adding a new paragraph (i) to read as

follows:

§ 327.8 Definitions.

* * * * *

(i) As used in § 327.9, the following

terms have the following meanings:

(1) Adjustment factor. The maximum

number of basis points by which the

Board may increase or decrease Rate

Schedule 2 set forth in § 327.9(a).

(2) Assessment schedule. The set of

rates based on the assessment risk

classifications of § 327.4(a) with a

difference of 27 basis points between

the minimum rate which applies to

institutions classified as 1A and the

maximum rate which applies to

institutions classified as 3C.

3. Section 327.9 is amended by

revising paragraphs (a) and (b), by

redesignating paragraph (c) as paragraph

(e) and adding new paragraphs (c) and

(d) to read as follows:

§ 327.9 Assessment rate schedules.

(a) BIF members. Subject to § 327.4(c),

the annual assessment rate for each BIF

member other than a bank specified in

§ 327.31(a) shall be the rate in the Rate

Schedules below applicable to the

assessment risk classification assigned

by the Corporation under § 327.4(a) to

that BIF member. Until the BIF

designated reserve ratio of 1.25 percent

is achieved, the rates set forth in Rate

Schedule 1 shall apply. After the BIF

designated reserve ratio is achieved, the

rates set forth in Rate Schedule 2 shall

apply. The schedules utilize the group

and subgroup designations specified in

§ 327.4(a):
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9279

RATE SCHEDULE 1

Capital group

Supervisory subgroup

A B C

1 .............................. 23 26 29

2 .............................. 26 29 30

3 .............................. 29 30 31

RATE SCHEDULE 2

Capital group

Supervisory subgroup

A B C

1 .............................. 4 7 21

2 .............................. 7 14 28

3 .............................. 14 28 31

(b) BIF recapitalization schedule. The

following schedule indicates the stages

by which the Corporation seeks to

achieve the BIF designated reserve ratio

of 1.25 percent. The schedule begins

with the semiannual period ending

December 31, 1991 and ends on the

earlier of the semiannual period ending

June 30, 2002 or the date on which the

BIF designated reserve ratio is achieved:

Semi-annual period

Target

reserve

ratio

(percent)

1991.2 ............................................. ¥0.36

1992.1 ............................................. ¥0.28

1992.2 ............................................. ¥0.01

1993.1 ............................................. 0.03

1993.2 ............................................. 0.06

1994.1 ............................................. 0.08

1994.2 ............................................. 0.09

1995.1 ............................................. 0.15

1995.2 ............................................. 0.21

1996.1 ............................................. 0.28

1996.2 ............................................. 0.34

1997.1 ............................................. 0.42

1997.2 ............................................. 0.50

Semi-annual period

Target

reserve

ratio

(percent)

1998.1 ............................................. 0.59

1998.2 ............................................. 0.67

1999.1 ............................................. 0.76

1999.2 ............................................. 0.85

2000.1 ............................................. 0.94

2000.2 ............................................. 1.03

2001.2 ............................................. 1.12

2001.2 ............................................. 1.21

2002.1 ............................................. 1.25

(c) Rate adjustment; announcement—

(1) Semiannual adjustment. The Board

may increase or decrease Rate Schedule

2 set forth in paragraph (a) of this

section semiannually by an adjustment

factor of up to and including 5 basis

points or fraction thereof as the Board

deems necessary to maintain the reserve

ratio at the BIF designated reserve ratio.

In no case may such adjustment result

in a negative assessment rate. The

adjustment factor for any semiannual

period shall be determined by:

(i) The amount of assessment revenue

necessary to maintain the reserve ratio

at the designated reserve ratio; and

(ii) The assessment schedule that

would generate the amount of revenue

in paragraph (c)(1)(i) of this section

considering the risk profile of BIF

members.

(2) In determining the amount of

assessment income in paragraph (c)(1)(i)

of this section, the Board shall take into

consideration the following:

(i) Expected operating expenses;

(ii) Case resolution expenditures and

income;

(iii) The effect of assessments on BIF

members’ earnings and capital; and

(iv) Any other factors the Board may

deem appropriate.

(3) Announcement. The Board shall:

(i) Adopt the semiannual assessment

schedule and any adjustment thereto by

means of a resolution reflecting

consideration of the factors specified in

paragraph (c)(2)(i) through (iv) of this

section; and

(ii) Announce the semiannual

assessment schedule and any

adjustment thereto not later than 45

days before the invoice date specified in

§ 327.4(c) for the first quarter of the

semiannual period for which the

adjusted assessment schedule shall be

effective.

(d) Special provisions. The following

provisions apply only for the first

semiannual period after January 1, 1995

in which the BIF designated reserve

ratio is achieved:

(1) Notwithstanding the provisions of

§ 327.3(c)(2) or § 327.3(d)(2), the

Corporation may modify the time of the

direct debit of the assessment payment

which next occurs after the Board

determines that the designated reserve

ratio has been achieved; and

(2) Notwithstanding the provisions of

§ 327.7(a)(3), if the designated reserve

ratio is achieved at the end of a month

which is not the end of a quarter and,

as a result, an institution has overpaid

its assessment, the Corporation shall

provide interest on any such

overpayment beginning on the date the

designated reserve ratio was achieved.

* * * * *

By order of the Board of Directors.

Dated at Washington, D.C., this 31st day of

January 1995.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Acting Executive Secretary.

[FR Doc. 95–3670 Filed 2–15–95; 8:45 am]

BILLING CODE 6714–01–P