# Form, Instructions, and Reports > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A94-7939 ## Record - **Collection:** Federal Register - **Document type:** Uncategorized Document - **Published:** April 5, 1994 ## Text 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. ----------------------------------------------------------------------- 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-7939. Public record. Not legal advice.