[Federal Register Volume 61, Number 102 (Friday, May 24, 1996)]
[Rules and Regulations]
[Pages 26082-26088]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12884]



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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327


Assessments; Retention of Existing Assessment Rate Schedule for 
SAIF-Member Institutions

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Confirmation of assessment rate.

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SUMMARY: On May 14, 1996, the Board of Directors of the FDIC (Board) 
adopted a resolution to retain the existing assessment rate schedule 
applicable to members of the Savings Association Insurance Fund (SAIF) 
for the semiannual period beginning July 1, 1996. As a result of this 
action, the SAIF assessment rates to be paid by depository institutions 
whose deposits are subject to assessment by the SAIF will continue to 
range from 23 cents per $100 of assessable deposits to 31 cents per 
$100 of assessable deposits, depending on risk classification.

EFFECTIVE DATE: July 1, 1996, through December 31, 1996.

FOR FURTHER INFORMATION CONTACT: James R. McFadyen, Senior Financial 
Analyst, Division of Research and Statistics, (202) 898-7027; Christine 
E. Blair, Financial Economist, Division of Research and Statistics, 
(202) 898-3936; Christopher L. Hencke, Counsel, Legal Division, (202) 
898-8839; Federal Deposit Insurance Corporation, 550 17th Street NW., 
Washington, D.C., 20429.

SUPPLEMENTARY INFORMATION:

I. Confirmation of Assessment Rate

    Section 7(b) of the Federal Deposit Insurance Act, 12 U.S.C. 
1817(b), provides that the Board shall set semiannual assessments for 
insured depository institutions. For members of the undercapitalized 
SAIF, the Board must set assessment rates to increase the reserve ratio 
of the SAIF to the designated reserve ratio (DRR) of 1.25 percent of 
estimated insured deposits. 12 U.S.C. 1817(b)(2)(A)(i). The Board must 
consider SAIF's expected operating expenses, case resolution 
expenditures and income, the effect of assessments on members' earnings 
and capital, and any other factors that the Board may deem appropriate. 
12 U.S.C. 1817(b)(2)(A)(ii).
    The minimum semiannual assessment for each member is $1,000. 12 
U.S.C. 1817(b)(2)(A)(iii). Moreover, the total amount raised by SAIF 
assessments must not be less than the total amount that would be raised 
by a rate of 18 basis points. 12 U.S.C. 1817(b)(2)(E). The assessment 
revenue is subject to a priority claim by the Financing Corporation 
(FICO). 12 U.S.C. 1817(b)(2)(D).
    In accordance with the statutory requirements above, the Board 
adopted the SAIF assessment rate schedule codified at 12 CFR 
327.9(d)(1). The Board has applied this schedule in previous assessment 
periods as well as the current period from January 1, 1996 through June 
30, 1996. 60 FR 63406 (December 11, 1995). The Board has now decided to 
retain this schedule for the upcoming semiannual period from July 1, 
1996 through December 31, 1996.

II. Basis for Confirmation

    In setting assessment rates, the Board must increase the reserve 
ratio of the SAIF to the DRR of 1.25 percent of estimated insured 
deposits. On December 31, 1995, the SAIF had a balance of nearly $3.4 
billion and a reserve ratio of 0.47 percent of insured deposits, about 
$5.5 billion below the amount needed to meet the DRR. The SAIF reserve 
ratio continues to rise, but the rate of progress is slowed by the 
diversion of assessment revenues to other statutory purposes. Since the 
inception of the SAIF in 1989, these diversions have totaled $7.7 
billion. Without these diversions, the SAIF would be fully capitalized 
today. Some of these demands on the SAIF have been fully satisfied, but 
FICO continues to have an annual draw of up to $793 million against 
SAIF assessments, until 2019.
    The SAIF grew by $1.4 billion in 1995, but a large share of that 
growth--$321 million--stemmed from the reduction in loss reserves for 
anticipated failures. These reductions in loss reserves reflect recent 
improvements in the health of the thrift industry and a decline in 
projected thrift failures. Further reductions in reserves of this 
magnitude will not happen again because the remaining loss reserves are 
now only approximately $111 million.
    At the present pace and under reasonably optimistic conditions, the 
SAIF is not expected to meet the DRR until 2001, which is slightly 
ahead of the capitalization date projected last year. The acceleration 
of the capitalization date is attributable to lower-than-expected loss 
experience in 1995 and the lowering of loss projections for 1996 and 
1997. The thrift industry is healthy today, and no large thrifts are 
expected to fail in the near future. Thrifts earned record profits of 
$7.6 billion in 1995, and the number and assets of ``problem'' thrifts 
continue to decline. Presently, 88 percent of all SAIF members qualify 
for the lowest premium under the FDIC's risk-based assessment system. 
However, it is not known how much longer the present favorable 
conditions can continue, and it would be prudent for the SAIF to be 
fully capitalized as quickly as possible to be prepared for future 
uncertainties.
    The Board has the option of lowering SAIF assessment rates to a 
minimum average annual assessment rate of 18 basis points until January 
1, 1998, at which time rates must return to a minimum average annual 
assessment rate of 23 basis points until the DRR is attained. However, 
the lowering of rates for this 18-month period would delay the SAIF 
from reaching full capitalization and could result in a FICO default in 
1997.
    Other developments have threatened the stability of the SAIF. Given 
the recapitalization of the Bank Insurance Fund (BIF) in 1995, the 
Board subsequently lowered BIF premiums to an average of just 0.3 basis 
points, compared to the average SAIF premium of 23.4 basis points. This 
disparity between BIF and SAIF premiums of about 23 basis points 
provides powerful economic incentives for SAIF-insured institutions to 
reduce their SAIF-assessable deposits. Despite a general ban on 
conversions between insurance funds, thrifts have developed and are 
pursuing means to transfer deposits from SAIF to BIF insurance or 
otherwise reduce their reliance on SAIF-assessable deposits. During 
1995, for example, one large SAIF member shifted an estimated $3.4 
billion in deposits to a BIF-member affiliate, and another thrift took 
advantage of an Oakar accounting anomaly that caused $3.3 billion of 
SAIF deposits to be reclassified as BIF deposits following the sale of 
BIF-insured deposits.
    The migration of deposits out of the SAIF deposit base would 
accelerate the capitalization of the SAIF (see Table 2), but it would 
exacerbate the problems facing the SAIF by reducing the fund's ability 
to diversify its risks. It is likely to be the stronger SAIF members 
that will be successful in shifting deposits to the BIF. As a result, 
weaker thrifts and the banks that own SAIF deposits would be more 
exposed to the losses of an insurance fund that will have a higher risk 
profile.
    If the Board were to lower SAIF assessment rates to 18 basis 
points, it would reduce the premium disparity from 23 basis points to 
18 basis points, but it is unlikely that a temporary reduction of 5 
basis points would temper the existing incentives to reduce reliance on 
SAIF-assessable deposits. Moreover, a reduction in assessment rates, in 
combination with a shrinking assessment base, would hasten a FICO 
shortfall (see Tables 3 and 4).

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    In recommending that SAIF assessment rates remain unchanged, the 
Board has considered the impact on the earnings and capital of SAIF 
members and found no unwarranted adverse effects. As discussed earlier, 
the earnings and capital of SAIF members are satisfactory though the 
Board has recognized that the full impact of the premium disparity may 
not yet be realized.
    Pending enactment of a comprehensive legislative solution to the 
problems facing the SAIF, the FDIC must operate within the existing 
statutory framework. For the reasons discussed above, the Board has 
decided to retain the current SAIF assessment rate schedule of 23 to 31 
basis points in order to enable the SAIF to reach full capitalization 
as quickly as possible. The schedule to be applied for the semiannual 
period from July 1, 1996, through December 31, 1996, is codified at 12 
CFR 327.9(d)(1).

    By order of the Board of Directors.

    Dated at Washington, D.C., this 14th day of May, 1996.

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

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[FR Doc. 96-12884 Filed 5-23-96; 8:45 am]
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