Form, Instructions, and Reports

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 304

RIN 3064-AB33

Form, Instructions, and Reports

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Proposed rescission of rule.

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SUMMARY: The FDIC is proposing to rescind section 304.6 of its

regulations, which 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

an 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 (that is, insured brokered

deposits); the solicitation of fully insured deposits outside a bank's

normal trade area; or secured borrowings, including repurchase

agreements.

The proposed rescission would lessen the regulatory burden on banks

which are currently required to comply as well 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. The brokered deposit regulation was mandated by the Financial

Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and

amended to conform to the Federal Deposit Insurance Corporation

Improvement Act of 1991 (FDICIA). The prompt corrective action rule was

mandated by FDICIA. The rapid growth rule was not mandated by any

statute, but was authorized by the FDIC's general regulatory powers.

DATES: Comments must be received on or before May 5, 1994.

.ADDRESSES: Send comments to Robert E. Feldman, Acting Executive

Secretary, Federal Deposit Insurance Corporation, 550 17th Street, NW.,

Washington, DC 20429. Comments may be hand-delivered to Room F-402,

1776 F Street, NW., Washington, DC, on business days between 8:30 a.m.

and 5 p.m. [FAX number: (202) 898-3838.] Comments may be inspected in

the FDIC's Reading Room, room 7118, 550 17th Street, NW., between 9

a.m. and 4:30 p.m. on business days. FAX number: (202) 898-3838.

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 (that is, 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 ff. and 325.101 ff.

Should the rapid growth rule be rescinded, the brokered deposit and

prompt corrective action regulations will be the principal means by

which rapid growth will be regulated. For this reason, 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 met even if the rapid

growth rule is rescinded.

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 all kinds 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 nine 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 (that is,

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

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

include 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, FIRREA and 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 ff. and 325.101

ff., 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 is

considering whether there is 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

dialog 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

rapid growth rule may no longer be necessary given the existence of

those other two regulations. For this reason, the FDIC is proposing

that the rapid growth rule be rescinded. This action will ease the

regulatory burden on those institutions now subject to all three rules.

(If the FDIC rescinds the rapid growth rule, 12 CFR 304.6, it 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.)

Request for Public Comment

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 was 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. If the rapid

growth rule were rescinded, some of the rapid growth resulting from

rapid growth rule activities would 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 would be

controlled or prohibited by the brokered deposit rule, and some would

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 is sought on whether the rescission of the rapid growth

rule would create a regulatory gap that would have harmful effects on

banking.

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 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

would result in a saving of 1,625 burden hours a year.

Regulatory Flexibility Act

The FDIC's Board of Directors has concluded that the proposed

amendment, if adopted, will not impose a significant economic hardship

on small institutions. The proposal does not establish any

recordkeeping or reporting requirements that necessitate the expertise

of specialized accountants, lawyers or managers. The proposal 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

proposal, if adopted, 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 proposes to

amend 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 line in the table pertaining to Sec. 304.6 is

removed.

By Order of the Board of Directors.

Dated at Washington, DC, this 22 day of March 1994.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Acting Executive Secretary.

[FR Doc. 94-7939 Filed 4-4-94; 8:45 am]

BILLING CODE 6714-01-P