Forms, Instructions, and Reports

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 304

RIN 3064-AB33

Forms, Instructions, and Reports

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rescission of rule.

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SUMMARY: On April 5, 1994, the FDIC published for comment a proposal to

rescind a section of its regulations on notification of rapid growth.

The FDIC is publishing herewith a final rule to rescind this section.

The section, known as the ``rapid growth rule,'' currently requires

all insured banks, with the exception of insured bankers' banks, to

give the FDIC prior notice of planned rapid growth as a result of any

``special funding plan or arrangement.'' For purposes of this

requirement, such a funding plan is any effort to increase the assets

of a bank through the solicitation and acceptance of fully insured

deposits obtained from or through the mediation of brokers or

affiliates (which would include insured brokered deposits); the

solicitation of fully insured deposits outside a bank's normal trade

area; or secured borrowings, including repurchase agreements.

This rescission is intended to lessen the regulatory burden on

banks which are currently also required to comply with the FDIC's

brokered deposit regulation and the prompt corrective action rule, both

of which were designed in part to address the same risks resulting from

rapid growth.

EFFECTIVE DATE: November 7, 1994.

FOR FURTHER INFORMATION CONTACT: William G. Hrindac, Examination

Specialist, (202) 898-6892, Division of Supervision, FDIC, 550 17th

Street NW., Washington, DC 20429, or Adrienne George, Attorney, (202)

898-3859, Legal Division, FDIC, 550 17th Street NW., Washington, DC

20429.

SUPPLEMENTARY INFORMATION:

Background

Although rapid growth is not necessarily an indicator of unsafe or

unsound banking practices, and many banks have been able to manage

rapid growth safely, rapid growth does present special risks to a bank

(and to the FDIC's insurance fund). Because these risks warrant special

monitoring, the FDIC adopted a rule requiring advance notice to the

FDIC of planned rapid growth. That provision of the FDIC's regulations,

12 CFR 304.6, known as ``the rapid growth rule,'' states that an

insured bank may not undertake any special funding plan or arrangement

designed to increase its assets by more than 7.5 percent during any

consecutive three-month period without first notifying the appropriate

FDIC regional director for supervision in writing at least 30 days

before the implementation of the special funding plan or arrangement. A

special funding plan or arrangement is defined as any effort to

increase the assets of a bank through (1) the solicitation and

acceptance of fully insured deposits obtained from or through the

mediation of brokers or affiliates (which would include insured

brokered deposits), (2) the solicitation of fully insured deposits

outside a bank's normal trade area (depending upon the circumstances,

these may be insured brokered deposits) or (3) secured borrowings,

including repurchase agreements.

In regulating rapid growth, the rapid growth rule in part overlaps

both the FDIC's brokered deposit regulation, 12 CFR 337.6, and its

prompt corrective action regulation, 12 CFR 308.200 et seq. and 325.101

et seq. With the rescission of the rapid growth rule, the brokered

deposit and prompt corrective action regulations are now the principal

means by which rapid growth will be regulated. In deciding whether to

rescind the rapid growth rule, the FDIC examined the rationale and

history behind all three regulations, to see if the FDIC's safety-and-

soundness concerns will be satisfied without the rapid growth rule.

The rapid growth rule, adopted in 1990, replaced a regulation that

called for the reporting of fully insured brokered deposits and fully

insured deposits placed directly by other depository institutions. In

the preamble to the proposed rapid growth rule, the FDIC stated that

its intention was to broaden the prior regulation's focus from brokered

deposits to other funding of rapid growth, including brokered deposits:

Since a bank may obtain its funding from a variety of sources in

addition to brokered deposits, the FDIC believes that any effort to

monitor and control rapid growth in insured banks should not focus

solely or even principally on brokered deposits. Instead, the focus

should be on rapid growth per se as an indication of the need for

close monitoring and supervisory oversight.

54 FR 13693, April 5, 1989. The proposed rapid growth rule stated that

An insured bank may not undertake any special funding plan or

arrangement designed to increase its assets by more than nine

percent during any consecutive three-month period without first

notifying the appropriate FDIC regional director for supervision in

writing at least 30 days in advance of the implementation of the

special funding plan or arrangement. For purposes of this

requirement, a special funding plan or arrangement is any effort to

rapidly increase the assets of the bank by any means.

Id. at 13695. The final rule changed the 9 percent to 7.5 percent,

making the rule more stringent in that respect, but it narrowed the

scope of the rule by making the notice necessary only if there was 7.5

percent growth resulting from one or more of the following activities:

(1) The solicitation and acceptance of fully insured deposits obtained

from or through the mediation of brokers or affiliates (which would

include insured brokered deposits); (2) the solicitation of fully

insured deposits outside a bank's normal trade area (this category

would also include some insured brokered deposits); or (3) secured

borrowings, including repurchase agreements. Thus, while it is not the

sole aim of the rapid growth rule to curb the rapid growth that may

result from the acceptance of brokered deposits, controlling a bank's

acceptance of brokered deposits is one of the primary aims of that

rule.

Although the rapid growth rule was not mandated by any statute, the

history of the present brokered deposit regulation involves two

statutes, the Financial Institutions Reform, Recovery, and Enforcement

Act of 1989 (FIRREA) and the Federal Deposit Insurance Corporation

Improvement Act of 1991 (FDICIA). In 1989, FIRREA amended the Federal

Deposit Insurance Act (FDI Act), prohibiting an undercapitalized

institution from accepting funds obtained, directly or indirectly, by

or through any deposit broker for deposit into one or more deposit

accounts except upon specific application to, and waiver of the

prohibition by, the FDIC. Section 224 of FIRREA, adding section 29 to

the FDI Act, 12 U.S.C. 1831f. In addition to deposits obtained through

the mediation of third-party brokers, the definition of ``brokered

deposits'' included deposits on which an institution offers or has

agreed to pay rates of interest that are ``significantly'' higher than

the prevailing rates of interest offered by other depository

institutions with the same type of charter in the first institution's

normal market area.

Two years later, the FDI Act was amended again. This time, FDICIA

rewrote section 29 of the Act to restrict the acceptance of brokered

deposits by certain institutions on the basis of their capital levels.

Section 301 of FDICIA, amending section 29 of the FDI Act and adding

section 29A thereto, 12 U.S.C. 1831f, 1831f-1. According to FDICIA and

the brokered deposit regulation implementing it, 12 CFR 337.6,

undercapitalized institutions may not accept brokered deposits at all,

and adequately capitalized institutions must obtain a waiver from the

FDIC before they can accept brokered deposits. Further, FDICIA limits

the interest rates which adequately capitalized institutions can pay on

brokered deposits. Well-capitalized insured depository institutions,

however, can accept, renew or roll over brokered deposits without first

obtaining a waiver from the FDIC, and without being limited in the

interest rates they can pay.

In addition to these restrictions on brokered deposits, FDICIA also

established a comprehensive regulatory scheme for insured depository

institutions based on their capital levels. Section 131 of FDICIA,

adding section 38 to the FDI Act, 12 U.S.C. 1831o. Under the ``prompt

corrective action'' provisions of FDICIA, the statute places severe

constraints on what undercapitalized institutions can do, including

severe restrictions on asset growth. As explained in the regulation

which implements section 131 of FDICIA, 12 CFR 308.200 et seq. and

325.101 et seq., and which took effect on December 19, 1992, as soon as

a bank receives notice, or is deemed to have received notice, that it

is undercapitalized, significantly undercapitalized, or critically

undercapitalized, the bank must restrict the growth of its assets as

set forth in section 38(e)(3) of the FDI Act. That section of the Act

states that an undercapitalized insured depository institution shall

not permit its average total assets during any calendar quarter to

exceed its average total assets during the preceding calendar quarter

unless: (1) The appropriate Federal banking agency has accepted the

institution's capital restoration plan; (2) any increase in total

assets is consistent with the plan; and (3) the institution's ratio of

tangible equity to assets increases during the calendar quarter at a

rate sufficient to enable the institution to become adequately

capitalized within a reasonable time. 12 U.S.C. 1831o(e)(3).

In view of the above statutes and regulations, the FDIC considered

whether there was a continuing need for the rapid growth rule. Under

the rule, the FDIC, upon being informed by a bank that it is about to

undergo rapid growth, can engage the institution in a dialogue as to

whether such growth would be prudent and should be pursued. Under the

brokered deposit and prompt corrective action regulations, restrictions

on brokered deposits and rapid growth attach automatically to certain

banks having an insufficient capital level. Thus, although the rapid

growth rule operates somewhat differently from the brokered deposit and

prompt corrective action regulations, the FDIC felt that the rapid

growth rule is no longer necessary given the existence of those other

two regulations. For this reason, the FDIC proposed (59 FR 15869, April

5, 1994) that the rapid growth rule be rescinded. This action would

ease the regulatory burden on those institutions now subject to all

three rules.

While the rapid growth rule overlaps the brokered deposit

regulation and the prompt corrective action regulation, this overlap is

only partial. For instance, rescinding the rapid growth rule would mean

that an insured bank would no longer have to notify the FDIC before it

either solicited fully insured deposits outside its normal trade area,

or when it acquired secured borrowings, including repurchase

agreements, if one or a combination of both of these activities were

designed to increase the bank's assets by more than 7.5 percent during

any consecutive three-month period. And while a well-capitalized bank

planning to accept brokered deposits on a large scale would no longer

have to inform the FDIC of this fact in advance once the rapid growth

rule is rescinded, that bank still must report the amount of brokered

money it has accepted after the fact in its quarterly Report of

Condition and Income (``Call Report''). Also, deposit brokers must

continue to register with the FDIC, and, if requested, could be

required to provide data on the extent of a given bank's brokered

deposit activities, under the brokered deposit regulation. With

rescission of the rapid growth rule, some of the rapid growth resulting

from rapid growth rule activities will continue to be detected by the

FDIC's Growth Monitoring System (a system administered by the FDIC's

Division of Supervision which identifies rapid growth over a single

quarter in assets or loans and long-term securities and any related

deterioration in key performance ratios), some rapid growth will be

controlled or prohibited by the brokered deposit rule, and some will be

prohibited by the regulation on prompt corrective action, but a small

part of rapid growth might not be controlled or detected at all. Thus,

comment was sought on whether the rescission of the rapid growth rule

would create a regulatory gap that would have harmful effects on

banking.

Public Comment

The FDIC received only four comment letters on the proposal, three

from banking trade associations and one from the parent company of

several insured banks. All four comment letters enthusiastically

supported the rescission of the rapid growth rule.

One commenter acknowledged that the rescission would create a

regulatory gap--in that neither the brokered deposit rule nor the

prompt corrective action rule limits the activities of well-capitalized

institutions--but the same commenter believed that this gap would not

pose a significant supervisory risk due to the FDIC's system of Call

Reports and its Growth Monitoring System. A second commenter echoed

these sentiments, adding that rescission would reduce an unnecessary

regulatory burden. The third commenter opined that rescission of the

rapid growth rule would have no negative impact on the banking system;

on the contrary, rescission would remove unnecessary reporting burdens

and marketing restrictions. The fourth commenter added that, given the

trend toward consolidation in the banking industry, most institutions

will soon be so big that fewer and fewer of them will ever achieve the

percentage of rapid growth necessary to trigger the rapid growth rule.

After considering these comments and staff analysis of the issues

noted above, the FDIC has decided to rescind the rapid growth rule. (In

rescinding the rapid growth rule, 12 CFR 304.6, the FDIC will also

rescind the line on the table in 12 CFR 304.7, which pertains to the

Office of Management and Budget's Control Number for the rapid growth

rule.)

Paperwork Reduction Act

The collection of information contained in the rapid growth rule,

which consists of the required written notice of rapid growth, has been

approved by the Office of Management and Budget under Control Number

3064-0074, pursuant to the Paperwork Reduction Act (44 U.S.C. 3501 et

seq.). The current estimate of annual reporting burden for the

collection of information in this regulation is 1,625 burden hours.

Rescission of the rapid growth rule will result in a saving of 1,625

burden hours a year.

Regulatory Flexibility Act

The FDIC's Board of Directors has concluded that the final rule

will not impose a significant economic hardship on small institutions.

The rule does not establish any recordkeeping or reporting requirements

that necessitate the expertise of specialized accountants, lawyers or

managers. The rule would, in fact, reduce the reporting requirements to

which banks are presently subject. Rescinding the rapid growth rule

will afford some insured banks the opportunity to conduct activities

previously prohibited unless notice were given in accordance with the

rule (for instance, the solicitation of fully insured deposits outside

a bank's normal trade area, or the acquisition of secured borrowings,

including repurchase agreements, such that one or a combination of both

activities were designed to increase the bank's assets by more than 7.5

percent during any consecutive three-month period).

The FDIC's Board of Directors therefore certifies pursuant to

section 605 of the Regulatory Flexibility Act (5 U.S.C. 605) that the

final rule will 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.).

List of Subjects in 12 CFR Part 304

Bank deposit insurance, Banks, banking, Freedom of information,

Reporting and recordkeeping requirements.

In consideration of the foregoing, the FDIC hereby amends Part 304

of chapter III of title 12 of the Code of Federal Regulations as

follows:

PART 304--FORMS, INSTRUCTIONS AND REPORTS

1. The authority citation for part 304 continues to read as

follows:

Authority: 5 U.S.C. 552; 12 U.S.C. 1817, 1818, 1819, 1820;

Public Law 102-242, 105 Stat. 2251 (12 U.S.C. 1817 note).

Sec. 304.6 [Removed and reserved]

2. Section 304.6 is removed and reserved.

Sec. 304.7 [Amended]

3. In Sec. 304.7, the entry in the table for Sec. 304.6 is removed.

By Order of the Board of Directors.

Dated at Washington, D.C. this 27th day of September, 1994.

Federal Deposit Insurance Corporation

Robert E. Feldman,

Acting Executive Secretary.

[FR Doc. 94-24606 Filed 10-5-94; 8:45 am]

BILLING CODE 6714-01-P