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

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

RIN 3064-AB59

Assessments; Retention of Existent Assessment Rate Schedule for

SAIF-Member Institutions

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

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SUMMARY: This final rule retains the existing assessment rate schedule

applicable to members of the Savings Association Insurance Fund (SAIF).

The effect of this final rule is that 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: This final rule becomes effective September 15, 1995.

FOR FURTHER INFORMATION CONTACT: James R. McFadyen, Senior Financial

Analyst, Division of Research and Statistics, (202) 898-7027, or

Valerie Jean Best, Counsel, Legal Division, (202) 898-3812, Federal

Deposit Insurance Corporation, Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION: The Board of Directors of the FDIC (Board)

is retaining the existing assessment rate

[[Page 42742]]

schedule applicable to members of the SAIF. The order of discussion

under this caption is as follows. The proposed rule to retain the

existing assessment rate schedule for SAIF-member institutions is

outlined in Section I. The final rule adopted by the Board through this

rulemaking procedure is described in Section II. The statutory

provisions governing SAIF assessment rates are summarized in Section

III. Next, a detailed description of the problems confronting the SAIF

is set forth in Section IV. The comment letters received in response to

the proposed rule are analyzed under the caption ``Comment Summary'',

and the FDIC's response to the comments is set forth under the caption

``Adoption of Final Rule''.

Background

I. Introduction; The SAIF Assessment-Rate Proposal

The Board has the legal authority to reduce SAIF assessment rates

to a minimum average of 18 basis points until January 1, 1998.

Beginning January 1, 1998, the minimum average rate must be 23 basis

points until SAIF achieves its designated reserve ratio (DRR) of 1.25

percent of estimated insured deposits. Based upon the results of its

semiannual review of the capitalization of the SAIF and of the SAIF

assessment rates, the Board was inclined to retain the existing

assessment rate schedule applicable to SAIF-member institutions for the

second semiannual assessment period of 1995 so that capitalization of

the SAIF is accomplished as soon as possible.

The FDIC wished to have the benefit of public comment before ending

its review for the period, however. Therefore, on February 16, 1995,

the Board published a proposed rule to retain the existing assessment

rate schedule applicable to members of the SAIF.1 The Board

requested comment on all aspects of the proposed rule. At the same

time, the Board published a proposed rule to decrease the assessment

rate schedule for members of the Bank Insurance Fund (BIF) to a range

of 4-31 basis points, depending on risk classification, when the

reserve ratio of the BIF attains the minimum DRR of 1.25 percent of

estimated insured deposits.2

\1\ 60 FR 9266 (Feb. 16, 1995).

\2\ 60 FR 9270 (Feb. 16, 1995).

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The Board held a hearing at FDIC headquarters in Washington, D.C.

on March, 17, 1995 to provide opportunity for interested parties to

express orally their views on the proposals to decrease assessment

rates for members of the BIF while retaining the 23-31 basis point

assessment schedule for members of the SAIF. Every person or

organization that requested an opportunity to testify was accommodated.

A total of twenty witnesses were heard by the full Board during the

day-long hearing. They included the Savings Association Insurance Fund

Industry Advisory Committee, the American Bankers Association, the

Independent Bankers Association of America, America's Community

Bankers, the National Association of Home Builders, several bank or

thrift associations, individual bank and thrift executives, consumer

organizations, a private sector attorney and an independent consultant.

The written testimony of each witness as well as the hearing record

were included in the FDIC's public comment file on the two proposals.

The public comment period for both proposals expired on April 17,

1995. The Board received a combined total of over 3,200 comment letters

including testimony from the public hearing. After taking into account

duplicate letters submitted by the same commenter, 2,891 comments were

tabulated representing 2,310 individual BIF member respondents, 454

individual SAIF member respondents, 61 trade associations and 66 other

individuals/organizations. Comments concerning the BIF proposal are

discussed in a separate final rule governing BIF assessment rates

published elsewhere in this Federal Register.

As detailed in the Comment Summary below, thrifts commenting on the

SAIF proposal uniformly asked that the impending disparity between

premiums assessed against the banking industry and the thrift industry

be reduced or eliminated. A significant number of SAIF members stated,

however, that a reduction in SAIF assessment rates to the minimum

authorized by current law would not resolve the long-term challenges

facing SAIF. They noted that, among other things, draws on the SAIF by

the Financing Corporation (FICO) would continue to undermine the SAIF.

Many of these commenters urged legislative action, stating that ``the

Congress must act decisively to defuse the coming crisis of the SAIF''.

The legislative initiatives suggested by the various commenters require

Congressional action and were not part of the assessment-rate

proposals. Nonetheless, these initiatives are included in the Comment

Summary in an effort to present a complete review of the comments

received by the FDIC and in recognition of the significant number of

letters that offered comments on such initiatives.

II. Description of Final Rule

After considering the comments received in response to the proposed

rule and other relevant information, the Board has determined to retain

the existing assessment rate schedule applicable to members of the

SAIF. As a result of this action, the SAIF assessment rate to be paid

by 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.

Despite the general good health of the thrift industry, the SAIF is

not in good condition and its prospects are not favorable. The issues

confronting the SAIF are discussed in detail under Section IV. To

summarize, the SAIF is significantly undercapitalized. On March 31,

1995, the SAIF had a balance of $2.2 billion, or about 31 cents in

reserves for every $100 in insured deposits. An additional $6.6 billion

would have been required on that date to fully capitalize the SAIF to

its DRR of 1.25 percent of estimated insured deposits. At the current

pace, and under reasonably optimistic assumptions, the SAIF would not

reach the statutorily mandated DRR until at least the year 2002.

Moreover, the SAIF became responsible for resolving failed thrifts on

July 1, 1995. The failure of a single large SAIF-insured institution or

several sizeable institutions or an economic downturn leading to higher

than anticipated losses could render the fund insolvent. While the FDIC

is not currently predicting such thrift failures, they are possible.

The main source of income for the SAIF is assessments. A sizable

portion of the SAIF's ongoing assessments is diverted to meet interest

payments on obligations of the FICO. Reducing the minimum average rate

to 18 basis points is presently projected to delay SAIF capitalization

until 2005, and it would cause a FICO shortfall as early as 1996.

Moreover, there will still be a significant differential between BIF

and SAIF assessment rates even if the Board reduces the SAIF

assessments to the minimum average allowed by statute.

III. Statutory Provisions Governing SAIF Assessment Rates

A. Section 7 of the Federal Deposit Insurance Act

Section 7(b) of the Federal Deposit Insurance Act (FDI Act) governs

the Board's authority for setting assessments for SAIF members. 12

U.S.C. 1817(b). Section 7(b)(1)(A) and (C) require that the FDIC

maintain a risk-based

[[Page 42743]]

assessment system, setting assessments based on: (1) The probable risk

to the fund posed by each insured depository institution taking into

account different categories and concentrations of assets and

liabilities and any other relevant factors; (2) the likely amount of

any such loss; and (3) the revenue needs of the fund. Section

7(b)(2)(A)(iii) further directs the Board to impose a minimum

assessment on each institution not less than $1,000 semiannually. The

Board must set semiannual assessments and the DRR for each deposit

insurance fund independently. FDI Act section 7(b)(2)(B).

In general, the Board must set semiannual assessments for SAIF

members to maintain the reserve ratio at the DRR or, if the reserve

ratio is less than the DRR, to increase the reserve ratio to the DRR.

FDI Act section 7(b)(2)(A)(i). The reserve ratio is the dollar amount

of the fund balance divided by estimated SAIF-insured deposits. The DRR

for the SAIF is currently 1.25 percent of estimated insured deposits,

the minimum level permitted by the FDI Act. In setting SAIF assessments

to achieve and maintain the DRR, the Board must consider the 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. FDI Act section

7(b)(2)(D).

Before January 1, 1998, if the SAIF remains below the DRR, the

total amount raised by semiannual assessments on SAIF members may not

be less than the amount that would have been raised if section 7(b) as

in effect on July 15, 1991 remained in effect. See FDI Act section

7(b)(2)(E) and (F). The minimum rate required by section 7(b) as then

in effect was 0.18 percent.

Beginning January 1, 1998, all minimum assessment provisions

applicable to BIF members also apply to SAIF members. Under these

provisions, if the SAIF remains below the DRR, the total amount raised

by semiannual assessments on SAIF members may not be less than the

amount that would have been raised by an assessment rate of 0.23

percent. See FDI Act section 7(b)(2)(E).

In setting semiannual assessments for members of the SAIF,

beginning January 1, 1998, if the reserve ratio of the SAIF is less

than the DRR, the Board must set semiannual assessments either, (a) at

rates sufficient to increase the reserve ratio to the DRR within 1 year

after setting the rates, or (b) in accordance with a schedule for

recapitalization, adopted by regulation, that specifies target reserve

ratios at semiannual intervals culminating in a reserve ratio that is

equal to the DRR not later than 15 years after implementation of the

schedule. FDI Act section 7(b)(3). Section 8(h) of the Resolution Trust

Corporation Completion Act (RTCCA), Public. Law. No. 103-204, 107 Stat.

2369, 2388, amended section 7(b)(3) to allow the Board, by regulation,

to amend the SAIF capitalization schedule to extend the date by which

the SAIF must be capitalized beyond the 15-year time limit to a date

which the Board determines will, over time, maximize the amount of

semiannual assessments received by the SAIF, net of insurance losses

incurred. FDI Act section 7(b)(3)(C).

Amounts assessed by the FICO against SAIF members must be

subtracted from the amounts authorized to be assessed by the Board. FDI

Act section 7(b)(2)(D).

In order to achieve SAIF capitalization, the Board adopted a risk-

related assessment matrix in September 1992 (see Table 1) which has

remained unchanged.

Table 1.--SAIF-Member Assessment Rate Schedule for the First Semiannual

Assessment Period of 1995

[Basis points]

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Supervisory

subgroup

Capital group --------------------

A B C

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Well Capitalized.................................. 23 26 29

Adequately Capitalized............................ 26 29 30

Undercapitalized.................................. 29 30 31

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B. Statutory Provisions Governing FICO Assessments

FICO was originated by section 302 of the Competitive Equality

Banking Act of 1987 (CEBA), Public Law 100-86, 101 Stat. 552, 585,

which added section 21 to the Federal Home Loan Bank Act (FHLB Act).\3\

FICO's assessment authority derives from section 21(f) of the FHLB Act,

12 U.S.C. 1441(f). As amended by section 512 of the Financial

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

Public Law 101-73, 103 Stat. 183, 406, section 21(f) requires that FICO

obtain funding for ``anticipated interest payments, issuance costs, and

custodial fees'' on FICO obligations from the following sources, in

descending priority order: (1) FICO assessments previously imposed on

savings associations under pre-FIRREA funding provisions; (2) ``with

the approval'' of the FDIC Board, assessments against SAIF member

institutions; and (3) FSLIC Resolution Fund (FRF) receivership proceeds

not needed for the Resolution Funding Corporation (REFCORP) Principal

Fund.

\3\ Title III of CEBA, entitled the Federal Savings and Loan

Insurance Corporation Recapitalization Act of 1987, directed the

Federal Home Loan Bank Board to charter FICO for the purpose of

financing the recapitalization of the FSLIC by purchasing FSLIC

securities (and, subsequently, securities issued by the FSLIC

Resolution Fund as successor to FSLIC).

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Under section 21(f)(2), FICO assessments against SAIF members are

to be made in the same manner as FDIC insurance assessments under

section 7 of the FDI Act. The amount of the FICO assessment--together

with any amount assessed by REFCORP under section 21B of the FHLB Act--

must not exceed the insurance assessment amount authorized by section

7.\4\ Section 21(f)(2) further provides that FICO ``shall have first

priority to make the assessment'', and that the amount of the insurance

assessment under section 7 is to be reduced by the amount of the FICO

assessment. One important effect of the FICO assessment is to

exacerbate any differential that may exist between BIF and SAIF

assessment rates.

\4\ The REFCORP Principal Fund is now fully funded and,

accordingly, REFCORP's assessment authority has effectively

terminated.

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IV. Problems Confronting the SAIF

A. Background: SAIF Assessment Rates

As stated in the Board's proposal, in deciding against changes in

the SAIF assessment rate, the Board has considered the SAIF's expected

operating expenses, case resolution expenditures and income under a

range of scenarios. The Board also has considered the effect of an

increase in the assessment rate on SAIF members' earnings and capital.

When first adopted, the assessment rate schedule yielded a weighted

average rate of 25.9 basis points. With subsequent improvements in the

industry and the migration of institutions to lower rates within the

assessment matrix, the average rate has declined to 23.7 basis points

(based on risk-based assessment categories as of July 1, 1995 and the

assessment base as of March 31, 1995--see Table 2).

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Table 2.--SAIF Assessment Base Distribution Supervisory and Capital Ratings in Effect July 1, 1995 Deposits as of March 31, 1995

[In billions]

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Supervisory subgroup

Capital group --------------------------------------------------------------------------------

A A B B C C

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Well Capitalized............................. Number.................. 1,553 85.9% 138 7.6 25 1.4%

Base.................... $604.8 83.4% $58.0 8.0% $16.6 2.3%

Adequately Capitalized....................... Number.................. 25 1.4% 31 1.7% 26 1.4%

Base.................... $17.4 2.4% $18.3 2.5% $6.9 1.0%

Under Capitalized............................ Number.................. 0 0.0% 0 0.0% 10 0.6%

Base.................... $0.2 0.0% $0.0 0.0% $3.4 0.5%

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``Number'' reflects the number of SAIF members; ``Base'' reflects the SAIF-assessable deposits of SAIF members and of BIF-member Oakar banks.

The primary source of funds for the SAIF is assessment revenue from

SAIF-member institutions. Since the creation of the fund and through

the end of 1992, however, all assessments from SAIF-member institutions

were diverted to other needs as required by FIRREA.\5\ Only assessment

revenue generated from BIF-member institutions that acquired SAIF-

insured deposits under section 5(d)(3) of the FDI Act (12 U.S.C.

1815(d)(3)) (so-called ``Oakar'' banks) was deposited in the SAIF

throughout this period.

\5\ From 1989 through 1992, more than 90 percent of SAIF

assessment revenue went to the FRF, the REFCORP and the FICO.

B. The SAIF is Significantly Undercapitalized

SAIF-member assessment revenue began flowing into the SAIF on

January 1, 1993. However, the FICO has a priority claim on SAIF-member

assessments in order to service FICO bond obligations. Under existing

statutory provisions, FICO has assessment authority through 2019, the

maturity year of its last bond issuance. At a maximum of $793 million

per year, the FICO draw is substantial, and is expected to represent 45

percent of estimated assessment revenue for 1995, or 11 basis points of

the average assessment rate of 23.7 basis points.\6\ The SAIF had a

balance of $2.2 billion (unaudited) on March 31, 1995. With primary

resolution responsibility residing with the Resolution Trust

Corporation (RTC), there have been few demands on the SAIF. The SAIF

assumed resolution responsibility for failed thrifts from the RTC on

July 1, 1995, however. In addition to assessment revenue and investment

income, there are other potential sources of funds for the SAIF as

follows. First, the FDIC has a $30 billion line of credit available

from the Department of the Treasury (Treasury) for deposit insurance

purposes, which to date has not been utilized. FDI Act section 14(a).

The SAIF would have to repay any amounts borrowed from the Treasury

with premium revenues, however. The FDIC would have to provide the

Treasury with a repayment schedule demonstrating that future premium

revenue would be adequate to repay any amount borrowed plus interest.

FDI Act section 14(c).

\6\ The FICO has an annual call on up to the first $793 million

in SAIF assessments until the year 2017, with decreasing calls for

two additional years thereafter. With interest credited for early

payment, the actual annual draw is expected to approximate $780

million.

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Next, the RTCCA authorized the appropriation of up to $8 billion in

Treasury funds to pay for losses incurred by the SAIF during fiscal

years 1994 through 1998, to the extent of the availability of

appropriated funds. In addition, at any time before the end of the 2-

year period beginning on the date of the termination of the RTC, the

Treasury is to provide out of funds appropriated to the RTC but not

expended, such amounts as are needed by the SAIF and are not needed by

the RTC. To obtain funds from either of these sources, however, certain

certifications must be made to the Congress by the Chairman of the

FDIC. FDI Act sections 11(a)(6)(D), (E) and (J). Among these, the

Chairman must certify that the Board has determined that:

(1) SAIF members are unable to pay additional semiannual

assessments at the rates required to cover losses and to meet the

repayment schedule for any amount borrowed from the Treasury for

insurance purposes under the FDIC's line of credit without adversely

affecting the SAIF members' ability to raise capital or to maintain

the assessment base; and

(2) An increase in assessment rates for SAIF members to cover

losses or meet any repayment schedule could reasonably be expected

to result in greater losses to the Government.

It may require extremely grave conditions in the thrift industry in

order for the FDIC to certify that raising SAIF assessments would

result in increased losses to the Government. Moreover, these funds

cannot be used to capitalize the fund--that is, to provide an insurance

reserve, which was the original purpose of requiring a 1.25 reserve

ratio.

The RTC's resolution activities and the thrift industry's

substantial reduction of troubled assets in recent years have resulted

in a relatively sound industry as the SAIF assumes resolution

responsibility. However, with a balance of $2.2 billion, the SAIF does

not have a large cushion with which to absorb the costs of thrift

failures. The FDIC has significantly reduced its projections of failed-

thrift assets for 1995 and 1996, but the failure of a single large

institution or several sizeable institutions or an economic downturn

leading to higher than anticipated losses could render the fund

insolvent. The FDIC's loss projections for the SAIF are discussed in

more detail below.

C. Condition and Performance of SAIF-Member Institutions \7\

During the first quarter of 1995, SAIF-member institutions

continued to improve asset quality and posted improved, though modest,

earnings. SAIF members had a return on assets of 0.64 percent in the

first quarter, up from 0.55 percent in the fourth quarter and 0.40

percent in the first quarter of 1994, when a few of the largest thrifts

incurred substantial restructuring charges. Earnings improvement over

the fourth quarter was due to lower loss provisions (down 18 percent)

and reduced noninterest expense (down 10 percent). This helped offset

lower net interest income caused by a narrowing of the average net

interest margin, which fell to 2.97 percent from 3.12 percent in the

fourth quarter. Increased competition for deposits, particularly in the

West Region, raised interest expense

[[Page 42745]]

by 6.5 percent over the fourth quarter, while interest income was up

only 1.7 percent.

\7\ Excluding one RTC conservatorship and one self-liquidating

savings institution.

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Asset quality continued to improve in the first quarter, as

noncurrent loans fell 4.2 percent from year-end 1994 and 28 percent

from the level of a year ago. The inventory of foreclosed real estate

fell even further, down 7.3 percent during the first quarter and 40

percent over four quarters. Although loss reserves have declined

slightly over the past year, the drop in noncurrent loans resulted in a

coverage ratio of 84 cents for each dollar of noncurrent loans, about

the same as in December and 10 cents higher than in March 1994. Most

major balance sheet categories, including total assets, loans and

deposits, showed small declines during the first three months of 1995,

although equity capital grew slightly, raising the equity-to-assets

ratio to 7.88 percent.

As of March 31, 1995, there were 1,806 members of the SAIF,

including 1,731 savings institutions and 75 commercial banks. On this

date, there were 58 SAIF-member ``problem'' institutions with total

assets of $32 billion, compared to 83 institutions with $63 billion a

year earlier. No SAIF members failed during the first quarter of 1995.

This discussion has focused on the improving condition of the SAIF-

member thrift industry, but any such discussion must mention the

relatively weak economic conditions still confronting a large segment

of the industry. Eighteen percent of all SAIF-insured deposits are

concentrated in the nation's eight largest thrift institutions, all of

which operate predominantly in California. This state, in general, has

lagged behind most of the nation in recovering from the most recent

recession, and many California thrifts have significant exposure in the

weakest areas of southern California. Additionally, a few large

institutions have suffered low earnings and still have relatively high

levels of risk in their loan portfolios. Consequently, despite the

improving health of the thrift industry, the SAIF still faces

significant risk relative to the fund's current reserve level.

D. Impact of a Premium Differential

In a separate rule-making on August 8, 1995, the Board adopted a

final rule amending the FDIC's regulation on assessments to establish a

new assessment rate schedule for institutions whose deposits are

subject to assessment by the BIF. Under the new schedule, BIF

assessment rates range from 4 to 31 basis points, compared to a range

of 23 to 31 basis points under the former BIF schedule and the current

SAIF schedule. Lower BIF rates were adopted because the BIF is believed

to have recapitalized during the second quarter of 1995. Largely due to

the FICO obligation, the SAIF is not expected to capitalize until 2002

(this projection is discussed below), and SAIF assessment rates cannot

be lowered below the statutory minimum of 18 basis points.

Under the current BIF and SAIF assessment rate schedules, average

SAIF rates are likely to remain about 20 basis points higher than

average BIF rates for the next seven years, until the SAIF is

capitalized. After capitalization, SAIF rates would continue to be at

least 11 basis points higher until the FICO bonds mature in 2017 to

2019, assuming the Board sets SAIF assessment rates to cover FICO's

needs.

If BIF members pass along their assessment savings to their

customers, SAIF members may be forced to pay more for deposits or

charge less for loans to remain competitive. For SAIF members, this

could result in reduced earnings and an impaired ability to raise funds

in the capital markets. Among the weakest thrifts, a 20-basis point

differential could result in competitive pressures that cause

additional failures. An analysis of over a five-year time span suggests

that any such increase in failures attributable to an average 20-basis

point differential is likely to be sufficiently small as to be

manageable by the SAIF under current interest-rate and asset-quality

conditions. Moreover, the analysis indicates that under harsher than

assumed interest-rate and asset-quality conditions, these economic

factors would have a significantly greater effect on SAIF-member

failure rates than would an average 20-basis point premium

differential.

A separate analysis focused on BIF and SAIF members in the 3C

assessment categories (undercapitalized/supervisory subgroup C) that

will be paying 31 basis points. These weaker institutions will be

competing with a large group of BIF members in category 1A (well

capitalized/supervisory category A) that will be paying only 4 basis

points. The analysis assumed that the 3C institutions would have to

absorb the entire 27-basis point differential in the form of higher

interest paid or lower interest earned. The result was that apart from

institutions that have already been identified by the FDIC's

supervisory staff as likely failures, the wider spread is likely to

have a minimal impact in terms of additional failures.

Nevertheless, the Board recognizes that a premium differential

between BIF- and SAIF-insured institutions is likely to increase

competitive pressures on thrifts and impede their ability to generate

capital both internally and externally.\8\

\8\ See ``The Condition of the BIF and the SAIF and Related

Issues,'' Testimony of Ricki Helfer, Chairman, FDIC, before the

Subcommittee on Financial Institutions and Consumer Credit,

Committee on Banking and Financial Services, U.S. House of

Representatives, Attachment C entitled ``Analysis of Issues

Confronting the Savings Association Insurance Fund,'' March 23,

1995.

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E. Assessment Rate Spread

Under the SAIF assessment rate schedule there is a spread of 8

basis points, from 23 basis points for institutions in category 1A to

31 basis points for institutions in category 3C. Under the newly

adopted BIF assessment schedule, the spread for BIF members was

increased from 8 to 27 basis points. This was accomplished by dropping

the minimum, most favorable rate from 23 to 4 basis points. Thus, the

weakest BIF members will incur no additional deposit insurance cost. In

order to apply a similar 27-basis point spread to SAIF members, it

would be necessary to raise the highest SAIF assessment rate to 45 to

50 basis points, based on a lowest rate of 18 to 23 basis points.

Because 86 percent of SAIF members would continue to pay the lowest

rate, the revenue benefit of a 27-basis point spread would be limited.

However, analysis indicates that SAIF assessments ranging to 50 basis

points, creating a premium differential of as much as 46 basis points,

would greatly increase the expenses of SAIF members and likely would

result in significant additional failures. While the Board recognizes

that a spread of more than 8 basis points would better serve the goals

of a risk-related premium system, given the minimum average of 18 basis

points currently prescribed by law, a wider spread could only be

implemented by raising rates for all but the strongest SAIF members,

which likely would have adverse consequences for an undercapitalized

SAIF. For these reasons, the Board chose to retain an assessment rate

spread of 8 basis points for members of the SAIF.

F. The Ability of the SAIF to Fund FICO

Under law, SAIF assessments paid by BIF-member Oakar banks are

deposited in the SAIF and are not subject to FICO draws.\9\

\9\ See Notice of FDIC General Counsel's Opinion No. 7, 60 FR

7055 (Feb. 6, 1995).

Further, SAIF assessments paid by any former savings association

that: (i) Has converted from a savings association charter to a bank

charter, and (ii) remains a SAIF member in accordance with section

5(d)(2)(G) of the FDI Act (12 U.S.C. 1815(d)(2)(G)) (a

[[Page 42746]]

so-called ``Sasser'' bank), are likewise not subject to assessment by

FICO.10 On March 31, 1995, BIF-member Oakar banks held 26.8

percent of the SAIF assessment base, and SAIF-member Sasser banks held

an additional 7.2 percent (see Table 3).

\10\ Id.

Table 3.--Percentage Distribution of the SAIF Assessment Base

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Not available to FICO

Available --------------------------------------- Total

to FICO Oakar Sasser Subtotal (percent)

(percent) (percent) (percent) (percent)

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12/89.......................................... 99.8 0.2 0.0 0.2 100.0

12/90.......................................... 95.8 3.9 0.3 4.2 100.0

12/91.......................................... 89.9 8.7 1.5 10.1 100.0

12/92.......................................... 85.9 10.3 3.8 14.1 100.0

12/93.......................................... 74.7 19.4 5.9 25.3 100.0

12/94.......................................... 67.3 25.4 7.3 32.7 100.0

3/95........................................... 66.0 26.8 7.2 34.0 100.0

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While the pace of Oakar acquisitions slowed as RTC resolution

activity wound down, Oakar acquisitions may continue and become an even

greater proportion of the SAIF assessment base.11 This has the

potential result of the SAIF having insufficient assessments to cover

the FICO obligation at current assessment levels. The rate of Sasser

conversions is difficult to predict and is partially dependent on state

laws, but any future conversions would also decrease the proportion of

SAIF assessment revenues available to FICO.

\11\ SAIF-assessable deposits held by BIF-member Oakar banks

will continue to grow at the same rate as the Oakar bank's overall

deposit base. Under section 5(d)(3) of the FDI Act, as amended by

the Federal Deposit Insurance Corporation Improvement Act of 1991

(FDICIA), such deposits are adjusted annually by the acquiring

institution's overall deposit growth rate (excluding the effects of

mergers or acquisitions).

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In addition to the growth of the Oakar/Sasser portion of the SAIF

assessment base, the ability of the SAIF to fund FICO interest payments

will be adversely affected by an ongoing premium differential. A

differential is likely to create powerful incentives for SAIF-insured

institutions to minimize their premium costs by reducing their SAIF-

assessable deposits.12 This can be accomplished in a number of

ways despite the current moratorium on the conversion of SAIF-insured

deposits to BIF-insured deposits. SAIF-insured institutions could

reduce their SAIF deposits by shifting their funding to nondeposit

liabilities, such as Federal Home Loan Bank advances and reverse

repurchase agreements. Institutions could also reduce their funding

needs by securitizing assets or by changing business strategies, such

as choosing to become a mortgage bank. Lastly, SAIF-insured

institutions and their parent companies could structure affiliate

relationships that would facilitate the migration of deposits from a

SAIF-insured institution to a BIF-insured affiliate. At least a dozen

organizations have already filed applications seeking to establish such

affiliate relationships.

\12\ ``The Condition of the SAIF and Related Issues,'' Testimony

of Ricki Helfer, Chairman, FDIC, before the Committee on Banking,

Housing, and Urban Affairs, U.S. Senate, Attachment A entitled ``The

Immediacy of the Savings Association Insurance Fund Problem'', July

28, 1995. ``The Condition of the SAIF and Related Issues,''

Testimony of Ricki Helfer, Chairman, FDIC, before the Subcommittee

on Financial Institutions and Consumer Credit, Committee on Banking

and Financial Services, U.S. House of Representatives, Attachment A

entitled ``The Immediacy of the Savings Association Insurance Fund

Problem,'' August 2, 1995.

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If a competitive imbalance attributable to a premium differential

materializes, that is, if BIF members pass along their savings to their

customers, a rapid acceleration in the shrinkage of the SAIF assessment

base could begin soon thereafter. With two insurance funds providing

essentially the same product at significantly different prices, it must

be expected that purchasers will seek the lower price. Attempts to

control this behavior through legislation or regulation are likely to

be ineffective and may only result in companies finding less efficient

means. A result of the expected shrinkage of the SAIF assessment base

could be a default on FICO bonds. At current assessment rates, a SAIF

assessment base of $328 billion is needed to generate sufficient

assessment revenue to cover the FICO draw of up to $793 million per

year. The FICO-available base, which excludes Oakar and Sasser

deposits, was $478 billion on March 31, leaving a ``cushion'' of $150

billion. This cushion could quickly be depleted if the strategies

described above are successful, possibly causing a FICO default. A

legislated reversal of the Oakar/Sasser exemption would only defer a

FICO shortfall because the existence of a significant, prolonged

premium differential is likely to result in continued erosion of the

SAIF assessment base.

G. Failed-Asset Estimates for the SAIF

Among the factors that affect the ability of the SAIF to capitalize

and to meet the FICO assessment are the number of thrift failures and

the dollar amount of failed assets going forward.

Estimates of failed-institution assets are made by the FDIC's

interdivisional Bank and Thrift Failure Working Group. In July 1995,

the Working Group estimated failed thrift assets of $100 million for

the second half of 1995, $2 billion for 1996 and $2 billion for the

first half of 1997. The estimate of $100 million for the second half of

1995 represented a sharp decline from the $3 billion estimated by the

Working Group in November 1994. The $2 billion estimate for 1996 was

unchanged. In the estimation process, failed assets for the first

twelve months of the two-year period are based on the FDIC's projected

failure of specific institutions. Estimates for the second twelve

months are derived from the FDIC's longer-term loss experience. For

loss projections beyond mid-year 1997, the assumed failed-asset rate

for the SAIF was 22 basis points, or about $2 billion per year.

In the FDIC's projections, banks and thrifts were assumed to face

similar longer-run loss experience. The BIF's historical average

failed-asset rate from 1974 to 1994 was about 45 basis points. However,

a lower failure rate than the recent historical experience of the BIF

was assumed because the thrift industry is relatively sound following

the RTC's removal of failing institutions from the system, and the

health and performance of the remaining SAIF members has improved

markedly. As of March 31,

[[Page 42747]]

1995, 86 percent of all SAIF-member institutions were in the best risk

classification of the FDIC's risk-related premium matrix.

One of the purposes of the FDICIA was to minimize losses to the

insurance funds. FDICIA increased regulatory oversight and emphasized

capital. Specifically, FDICIA requires the closing of failing

institutions prior to the full depletion of their capital, limits

riskier activities by institutions that are less than adequately

capitalized, and establishes audit standards and statutory time frames

for examinations. The law also requires the implementation of risk-

related assessments, which have provided effective incentives for

institutions to achieve and maintain the highest capital and

supervisory standards. In light of these provisions, the high levels of

thrift failures and insurance losses experienced over the past decade

must be tempered when considering the industry's near-term future

performance.

H. Projections for the SAIF

The FDIC currently projects that, under reasonably optimistic

assumptions, the SAIF is not likely to reach the statutorily mandated

DRR of 1.25 percent until 2002. Also, projections indicate the fund

will not encounter problems meeting the FICO obligation through 2004.

It is important to note that the baseline assumptions underlying these

projections foresee shrinkage in the non-Oakar portion of the SAIF

assessment base of 2 percent per year. If thrifts react aggressively to

the premium differential and reduce their SAIF-assessable deposits, as

discussed in Section IV.F, substantially greater shrinkage may occur.

Under higher rates of shrinkage, the SAIF is likely to capitalize

sooner than 2002 because a lower level of insured deposits would

require a smaller fund to meet the DRR; however, FICO interest payments

could soon be imperiled.

As stated earlier, the Board has the authority to reduce SAIF

assessment rates to a minimum average of 18 basis points until January

1, 1998, at which time the average rate would rise to 23 basis points

until capitalization occurs. Projections made under this scenario (and

using the other baseline assumptions) indicate that the SAIF would

capitalize in 2005, or three years later than under the existing rate

schedule. Perhaps more importantly, reduction of the SAIF assessment

rate to 18 basis points is expected to cause a FICO shortfall in 1996.

Comment Summary

I. Comments Regarding SAIF Assessment Rates

A. General Comments

Approximately 111 commenters said that the SAIF rate should be

decreased to 18 basis points; an additional 108 commenters urged that

the differential between BIF members and SAIF members be limited to 5

basis points, regardless of the rates prescribed. With regard to the

potential 19 basis point differential between BIF-members and SAIF-

members, one large savings association stated:

Such a differential is significant in a narrow margin business

such as home mortgage lending, which is the primary business of most

SAIF members. This differential when leveraged at 20 to 1 will

result in the BIF members producing 4 percent greater returns on

equity than the SAIF members for the same business.

This savings association suggested that some SAIF members would try

to overcome any disadvantage a differential may pose by reducing their

costs, while others may attempt to increase revenue through potentially

risky investments which could increase SAIF losses. Most commenters

urging a reduction in SAIF rates were SAIF members.

Many commenters did not offer comments concerning the particular

rate at which the minimum SAIF assessment rate should be set. Rather,

the vast majority of SAIF-affiliated commenters simply commented that a

disparity between SAIF rates and BIF rates would harm the thrift

industry and asked that the premium differential be reduced or

eliminated: ``If disparity must exist, make it minimal''. These

comments are discussed in more detail later in this summary.

In contrast, approximately 67 commenters (64 BIF members, 2 SAIF

members, 1 trade group, and 1 other) said that the SAIF assessment rate

should not be decreased below the current minimum rate of 23 basis

points. The following comment is typical of those who supported

maintaining SAIF assessment rates at current levels: ``[T]he current

level of assessments * * * has not posed problems for the capital or

earnings of thrifts. Most thrifts are healthy today''.

While expressing alarm as to the impending disparity, many SAIF-

members did not specifically oppose the proposed reduction in BIF

rates. For example, one large savings association stated: ``[The

savings association] supports the revised assessment schedule that is

proposed for BIF members but believes that the effect of the resulting

substantial SAIF/BIF premium differential could overwhelm the currently

healthy savings institutions and render the SAIF insolvent''.

B. Impact of an Assessment Rate Differential

Comments from SAIF-insured institutions focused on the competitive

disadvantage inherent in the proposed premium differential.

Approximately 133 commenters argued that capital will flow away from

savings associations if a disparity in the rates were permitted; over

300 argued that savings associations will be at a disadvantage

competitively if rates were disparate; more than 90 commenters claimed

that a disparity would mean fewer funds for home buyers. Over 80

commenters argued that a rate disparity would cause the SAIF assessment

base to shrink. One thrift expressed its concerns as follows:

The impending disparity between BIF and SAIF deposit insurance

premiums will bring about the gradual demise of the thrift industry.

The significant competitive disadvantage to SAIF members will cause

a natural migration of deposits to BIF-insured institutions and an

erosion of the SAIF's premium assessment income. Lower profits will

make it increasingly difficult for savings institutions to raise

capital in the marketplace, eventually contributing to a rise in

thrift failures. The SAIF will be faced with a dwindling deposit

assessment base, fixed obligations to the FICO bond holders, and

waning capitalization levels of its members.

* * * * *

The thrift industry today is profitable, well-managed, and well-

capitalized. It provides consumer and financial services in more

than 12,500 offices nationwide, and it employs 217,600 people.

Thrifts specialize in home financing and hold $649 billion in

mortgage loans and securities. The thrift industry plays an

important role in the U.S. economy; it does not deserve the fate

which awaits it if Congress does not promptly address the premium

disparity issue.

Many thrifts compared the proposed premium disparity to an

additional 15 percent tax on thrifts' earnings. One letter said the

differential would raise the effective tax rate for savings

associations to 60 percent, compared to about 30 percent for banks and

zero for credit unions. Another stated that thrifts would be hurt

because depositors are almost solely focused on yields and would not

hesitate to move their funds if their savings institutions could not

pay competitive interest rates on deposits.

Approximately 215 commenters argued that savings associations had a

competitive advantage in the 1970s with the interest-rate advantage

accorded

[[Page 42748]]

thrifts under Regulation Q. They indicated that banks had been able to

survive in such an environment of disparate rates and that savings

associations should also be able to survive. Under such a differential,

thrifts ``certainly did not get all of the deposit dollars and they

certainly would not lose all of them now,'' stated one letter. Another

claimed: ``Nineteen basis points is hardly an unbridgeable competitive

gulf.'' A state trade association for bankers agreed that the premium

differential would undoubtedly cause some savings associations

competitive problems, but noted that banks and savings associations

already compete with a number of financial firms that do not currently

pay deposit premiums and cited credit unions as an example. A number of

other letters also downplayed the competitive disadvantage of a premium

disparity by arguing that thrifts already compete with nondeposit

competitors such as securities firms, mutual funds, mortgage bankers,

insurance companies and finance companies that do not pay any deposit-

insurance premium.

Of particular interest were those comments submitted by holding

companies that control both BIF-member banks and SAIF-member thrifts,

as well as comments submitted by institutions that were obligated to

pay assessments to BIF and SAIF as a result of participating in a

transaction pursuant to the so-called ``Oakar'' provisions (12 U.S.C.

1815(d)(3)). One holding company that owned both a BIF member and a

SAIF member wrote:

To the extent that the rate differential is a Government imposed

cost, there is a significant advantage to the bank and a real

disadvantage to the thrift that has nothing to do with the way

either the bank or the thrift handles its own business or cares for

the customer. This will be the effect of the disparity of premium

rates, resulting in fewer thrifts to pay insurance premiums,

potential FICO bond defaults and, in the end, a more expensive

solution will be imposed to resolve a crisis much larger than at

present, and banks will be forced to participate in the expense of

solving that problem. Therefore, if we want to talk fairness, this

is where fairness begins and ends: it is not fair to anyone to

impose a more expensive solution later when much less is needed if

we act now and can offer a quid pro quo to the banks for their

participation.

This holding company recommended that the Board champion

legislation that would merge the funds but, at the same time, provide

the banking industry with a quid pro quo for the additional cost that

would be placed on it. It suggested that regulatory relief from the

burdens of data gathering, retention and reporting could provide

significant savings to offset what would otherwise be deposit insurance

premium savings. It also suggested that the remaining RTC funds be used

to capitalize the SAIF.

A bank holding company that acquired failed thrifts from the RTC

commented that a premium disparity would force its thrift to pay less

interest to its depositors and/or increase the charge on borrowers,

make it more difficult for its thrift to provide home loans or lend to

small businesses, and threaten its thrift's ability to participate in

low and moderate income housing programs. Another bank holding company

with both bank and thrift subsidiaries commented that banks should not

be forced to pay for FICO but that any remaining RTC funds should be

used to reduce FICO obligations. Another such holding company suggested

a 3-basis point surcharge on BIF members, dropping the SAIF rate to 15

basis points and merging the funds when SAIF became fully capitalized.

C. Need for Immediate Action

Many commenters suggested that if immediate steps were not taken to

eliminate the impending disparity between SAIF and BIF rates, the

ultimate cost to SAIF and FICO would be higher. One federally-chartered

savings association wrote:

The shrinkage of the deposit base of savings institutions since

FIRREA has already called into question whether the business can

recapitalize itself given the tax being imposed by the FICO

obligation. The creation of a significant premium disparity will

bring about new and ever creative ways to avoid or reduce the impact

of the high cost alternative. I do not believe that the premium

disparity will wreak widespread destruction over the savings

institution industry. It will, however, cause the business to

disappear and hasten the day of reckoning for the SAIF.

A holding company stated:

We believe that leaving solutions to these problems for another

day will be most harmful to both banks and thrifts and to the

country as a whole and certainly more expensive to resolve than if

the issues are faced now and resolved.

Many commenters suggested that if SAIF rates remained high, SAIF

members would find other means to shift deposits out of SAIF. One

holding company commented:

[We believe that a] solution needs to be found and implemented

at once, that delay is costly in solving this problem and that delay

encourages business to channel its talent and resources towards

``artificial restructuring'' such as Great Western's proposal (which

makes business sense only because of the anticipated disparity in

premium costs for deposit insurance), rather than towards true

business reorganizations that have lasting value to the business and

our nation as a whole.

Approximately 293 institutions suggested that there was no

immediate SAIF problem, implying that there was no urgent need to

capitalize SAIF. For example, a trade association said: ``[T]he S&L

industry and SAIF are in much better shape than anyone could have

imagined only two years ago. The S&L industry is profitable and

increasingly well capitalized''. It suggested that the SAIF situation

be carefully monitored through Congressional oversight hearings and

other mechanisms. One banker said: ``If and when the SAIF fund is in

jeopardy or the FICO payment cannot be made, call us''. A few bankers

suggested implementing the proposed assessments and waiting two years

to see if, in fact, a differential materializes and whether it

adversely impacts thrifts. However, it seems likely that some cost

differential would materialize between banks and thrifts because, among

bankers indicating a likely use for their premium savings, they most

frequently mentioned paying higher interest on deposits and/or charging

lower rates for loans. Other possible uses included augmenting capital

to fund growth, technology updates and higher dividends to

shareholders.

A few bankers saw it as inevitable that some of the cleanup costs

borne by thrifts will be shifted to the banking industry. ``My fellow

bankers would probably hang me for even suggesting we pay,'' wrote one

banker who recommended using excess RTC funds to reduce FICO by one-

half, adding 1 or 2 basis points to the proposed BIF rates to be used

toward FICO and leaving SAIF rates at current levels until FICO is paid

and SAIF capitalized. Another banker offered to pay an additional 1\1/

2\ to 2\1/2\ basis points toward SAIF and FICO if other financial

service providers did the same. The taxation of credit unions was

frequently mentioned as a potential source of funding.

A number of BIF-affiliated commenters noted that the Board should

not take into account a potential differential between BIF and SAIF

when setting BIF assessment rates. A large trade association for

bankers noted, however, that the Board is permitted to consider the

effect of SAIF assessments on the earnings and capital of thrift

members.

II. Suggested Legislative Initiatives

A. Summary

As indicated above, SAIF members uniformly agreed that the

impending disparity would harm their industry. Many commenters

affiliated with SAIF-

[[Page 42749]]

members argued that the SAIF rate should be lowered to the statutory

minimum average of 18 basis points, and others argued that the SAIF

rate should be lowered to within 5 basis points of the BIF rates. A

significant number of such commenters noted, however, that reducing or

eliminating the disparity would not be a final solution, noting that

FICO draws would continue to undermine SAIF. Some commenters predicted

another insurance fund crisis which would ``cause irreparable damage to

the entire industry which already has lost significant market share to

less regulated non-bank competitors''. Many of these commenters urged

legislative action. A thrift trade association wrote:

The [FDIC] is charged with the management of both BIF and SAIF

and with the responsibility of seeing to it that neither fund

becomes a burden on the taxpayers of America. For this reason, it is

incumbent on the FDIC board to promptly recommend to the Congress a

course of action that will mitigate the effects of the premium

differential and achieve competitive parity between all insured

institutions as soon as possible.

B. ``Fairness'' Arguments

In an apparent attempt to explain why SAIF members alone should not

bear the burden of recapitalizing SAIF, approximately 159 commenters

(10 BIF members, 134 SAIF members, 4 trade associations, and 11 other

organizations/individuals) argued that savings associations in

operation today were no more responsible than BIF members for the

condition of SAIF. One holding company commented:

While none of the existing thrifts today caused the S&L crisis

of the last decade any more than did the banks, the banks were

promised premium relief once BIF was adequately capitalized at 1.25

percent. However, going forward, there is no moral issue about

having deposit insurance available at the same rate to thrifts and

to banks even though in the past failed thrifts cost much more than

failed banks.

Some commenters criticized earlier legislative policy concerning

SAIF funding. One trade association for bankers wrote:

In 1989 when SAIF was created, Congress authorized two types of

supplemental funding from the Treasury--a backup funding for SAIF

premiums and payments to maintain a minimum fund balance. The

requirement under prior law was that the Treasury capitalize the

SAIF at $8.8 billion by fiscal 1999. Treasury never requested these

authorized funds. The RTC Completion Act repealed this

authorization. But it is important to note that in 1989, the

government promised to contribute $8.8 billion to the SAIF and then

five years later reversed itself. This is unfair to the thrift

industry.

A thrift holding company added that FICO bonds were issued with

non-callable provisions, which precluded refinancing of these

obligations in the recent low interest rate environment. It argued:

``We believe that this oversight in the FICO bond provisions and the

lack of supplemental funding by the Treasury for the SAIF, support an

argument that the recapitalization of the SAIF should be borne by the

government and not SAIF members.''

A large savings association referenced the additional payments from

Treasury contemplated by FIRREA, and suggested that these ``safety net

payments'' were intended to balance the additional burdens imposed on

the thrift business by FIRREA (on top of the FICO burden imposed in

1987). It described these added burdens to be ``confiscating the thrift

industry's $2.5 billion investment in the retained earnings of the Home

Loan Banks, diverting an added $3.1 billion in premiums to REFCORP and

FRF, and requiring the Home Loan Banks each year to pay $300 million in

interest on REFCORP bonds.'' The savings association argued that if the

original FIRREA payments had been carried out, the Treasury would have

paid $5.3 billion into SAIF over the five year period from fiscal year

1993 through fiscal year 1997 and the fund would have reached its

reserve target of 1.25 percent in early 1998 based on FDIC assumptions

regarding future losses and deposit growth.

Approximately 949 commenters (922 BIF members, 1 SAIF member, 12

trade associations, and 14 other organizations/individuals) stated as a

general principle that the banking industry should not pay for SAIF

problems. Bankers stated that they solved their own problem by

recapitalizing the BIF and did not cause the problems now confronting

the SAIF. They were adamant about not using BIF funds to capitalize or

otherwise assist the SAIF even though this was not part of the

assessment rate proposals. ``The SAIF should paddle their own boat'',

commented one banker, which succinctly expressed the views of others

that SAIF members should continue to pay higher premiums until their

fund is capitalized.

Some bankers commented that banks and thrifts operate in separate

industries, and there is no rationale for asking one to assist the

other (``* * * no different than asking a cow man to bail out a broke

sheep farmer under the guise that both raise livestock''). Others see

banks and thrifts as competitors in the same industry and similarly see

no reason to assist a competitor (``* * * like asking General Motors to

bail out Chrysler''). A few letters contended that the banking industry

has already paid dearly for the savings and loan crisis of the 1980s

through an increased regulatory burden. A number of bankers cited

higher interest rates paid by thrifts with which they compete, and a

few letters included newspaper clippings of advertisements placed by

thrifts. ``If they can afford to pay higher interest rates for

deposits'', wrote one banker, ``they can afford to bear the burden to

recapitalize SAIF''.

Thrifts countered along the following lines: ``The simple fact is

today's thrift institutions are now being punished for the savings and

loan cleanup of the 1980s. While this may be emotionally gratifying for

some, it makes little sense from an economic perspective''.

C. Use of RTC Funds

Over 250 commenters (179 BIF members, 60 SAIF members, 9 trade

associations, and 8 other organizations/individuals) urged that RTC

funds be made available to SAIF for capitalization purposes; over 90 (9

BIF members, 65 SAIF members, 9 trade associations, and 9

organizations/individuals) urged that the RTC funds be made available

to SAIF on a contingent basis to rescue SAIF from future losses.

The solution most frequently recommended by thrifts (and their

primary trade group) involved having the FICO burden shared

proportionately by BIF and SAIF, using excess RTC funds to cover losses

in institutions identified as problems as of year-end 1997 and reducing

the SAIF differential to 5 basis points until the SAIF is capitalized.

These measures would require Congressional action, but as an interim

measure, the FDIC was urged to reduce the SAIF premium to 18 basis

points, the minimum average SAIF rate allowed under current law.

Variations on this proposal included lowering the DRR to 1 percent,

although a few writers asked that this ratio be raised to as high as

1.50 percent for BIF and SAIF.

D. One-time Special Assessment Against SAIF Members

Approximately 11 BIF members and 10 SAIF members, as well as 2

trade groups, urged that a one-time assessment be imposed against SAIF

members. In opposition to such a proposal, one large thrift holding

company asserted that the thrift industry had already paid sufficient

deposit premiums since FIRREA to have capitalized the SAIF but of the

$9.5

[[Page 42750]]

billion in premiums paid, only $2.4 billion went into SAIF. It argued:

``Any substantial up front assessment on thrifts is not only unfair, it

is counterproductive in the sense that it could precipitate even grater

losses to the insurance fund''. At the same time, however, it indicated

that if its preferred method of recapitalizing SAIF--using RTC funds--

proved insufficient to reach the 1.25 percent ratio, a variety of means

might be considered to fill the gap, including the use of borrowed

funds, a ``one-time assessment or a temporarily higher premium''. It

stated that such methods would have to be structured so as to minimize

the impact on the earning capacity of the thrift business.\13\

\13\ In conjunction with this proposal, it suggested that RTC be

extended for two years to cover any failures of thrifts currently

under its supervisory watch.

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E. Merge the BIF and the SAIF

Merging the BIF and the SAIF was frequently suggested

(approximately 121 commenters, including approximately 6 trade groups)

and was seen by some as inevitable and possibly less expensive today

than ``four or five years down the road''. As one thrift executive

wrote: ``The consumer views deposit insurance as coming from one

source--backed by the U.S. Government''. A state trade association

representing thrifts supported the merging of the two funds ``as the

only solution that will assure that all institutions of equal risk

profiles will pay the same premium for federal deposit insurance''.\14\

\14\ In light of the political sensitivity to such a merger,

this trade association wrote that it could support a package of

changes which contained all of the following: (1) A sharing of the

FICO obligation proportionately between BIF and SAIF; (2) Use of

excess RTC funds as a backstop against near-term losses; and (3) A

reasonable SAIF premium differential to be paid until such time as

the SAIF reaches the mandated reserve ratio.

---------------------------------------------------------------------------

One thrift holding company supporting merger of the funds if the

remaining RTC funds were not available submitted the following comment:

The original distinction between commercial banks and savings

institutions has significantly blurred over the last decade * * *.

In addition, most, if not all, of the tax and regulatory

``advantages'' which benefitted savings institutions in the past

have been eliminated or significantly curtailed. Likewise, the

Federal Home Loan Bank system, which was an exclusive province of

savings institutions, is now being embraced as a significant

competitive benefit by an increasing number of commercial banks. Any

portion of a weakened federal deposit insurance fund will have

adverse consequences on the entire banking industry in the public's

perception.

Another thrift urged that the funds be merged with the FICO

interest obligations to be borne by the new fund as a whole and noted:

Effecting this merger will enable the government to keep its

promise to the American people and will avoid using taxpayer funds

either to capitalize the SAIF today, or to bail it out several years

from now. If deposit insurance premiums for both banks and thrifts

were kept at their current levels, a combined fund could reach full

capitalization at 1.25% within approximately 20 months after the

merger * * *. Thus banks and thrifts would experience very little

delay in seeing their premiums reduced.

A California savings association argued that even after SAIF is

fully capitalized, the fund would be unsound because the SAIF has too

much geographic concentration in California. It urged that the funds be

merged to generate sufficient geographic spread.

Some suggested that SAIF members could pay a one-time assessment

(80 basis points was mentioned) to capitalize the SAIF prior to a

merger of the funds. The premium differential could then be reduced to

5 basis points or less or eliminated altogether. A savings banker

suggested that thrifts be allowed to record the special assessment as a

credit against the tax bad debt reserve in order to lessen the

immediate impact on tax revenues. A variety of writers, including

banks, thrifts and an industry watchdog group, questioned the need for

a separate thrift charter once the funds have been merged.

Over 775 commenters, including approximately 10 trade groups,

argued against a merger of the insurance funds. Many of those opposing

a merger of the funds essentially argued that the banking industry

should not be required to participate in an economic solution which

would benefit their competition. For example, a state trade association

representing banks argued that ``for decades S&Ls enjoyed a lax

regulatory environment, significant tax breaks, and a mandated

competitive advantage''. It said: ``Asking banks to shoulder the

bailout burden of a key competitor because a long time competitive

advantage will be reversed is unfair and inappropriate, particularly

when banks are not responsible for the problems of the thrifts''.

One large trade association opposing a merger of the funds wrote:

``The looming premium differential will prompt thrifts to continue to

look for loopholes to leave SAIF, further exacerbating the SAIF/FICO

problem. However, merging the funds or delaying the banks' premium

reduction is not the answer''. This trade association expressed support

for using the remaining authorized and appropriated funds for the RTC

to capitalize the SAIF and/or defease the FICO bond obligation. It

suggested various ways to use the remaining RTC monies for SAIF/FICO,

such as: (1) Transferring the remaining RTC funds to SAIF, leaving the

principle intact, but investing the funds so as to generate sufficient

interest earnings to pay FICO bond interest of up to $793 million; (2)

using the remaining RTC funds to capitalize SAIF, which they claimed

would leave ample funds to address the FICO problem; (3) using the RTC

funds only to defease the FICO obligation thereby enabling SAIF to

capitalize at the current assessment rates by 1998.

F. FICO Issues

Over 200 commenters urged that BIF members share in FICO

assessments, with the majority of these urging that BIF members share

proportionately. Over 200 commenters urged that RTC funds be used to

defease FICO and a few commenters urged that the $8 billion from RTCCA

be used as well. Over 70 commenters urged that premiums paid by Oakar

and Sasser institutions should be used for FICO bond interest payments.

It was recognized, however, that such a change in the law would be of

limited benefit to SAIF. A large banking trade group commented:

Using Oakar and Sasser premiums for FICO bond interest, however,

would slow the recapitalization of the SAIF. To address this

problem, the Congress could also extend the recapitalization

schedule of SAIF, giving FDIC more leeway to reduce SAIF premiums.

One large thrift suggested that if the FICO burden were spread over

all SAIF and BIF members equally, the cost would be approximately 2

basis points per institution. It suggested that bank deposit premiums

should not be increased to absorb such an additional cost. Rather, the

FICO charge should be deducted from any BIF premium paid. In contrast,

a bank trade group argued: ``Such payments would merely protect FICO

bondholders. * * * Tapping BIF funds for uses other than protection of

BIF depositors would set a very dangerous precedent''.

G. Other Approaches

Other recommended alternatives included reducing BIF rates to 15

basis points and putting the excess assessment in a ``secondary

reserve'' account, such as existed under FSLIC at one time, which would

pay interest to BIF members but would also be used to defray SAIF

expenses; transferring the net worth of mutual thrifts to SAIF; and

merging the SAIF with the credit union insurance fund.

[[Page 42751]]

III. Miscellaneous Comments

A. Spread From 23 Basis Points to 31 Basis Points

The Board received few comments in response to its question as to

whether the current spread of 8 basis points from the lowest to the

highest assessment rates should be retained for SAIF members.

B. Transactions Which Would Have the Effect of Allowing Deposits to

Shift From One Insurance Fund to the Other

Over 300 BIF-member institutions and 6 trade associations commented

that steps should be taken to prohibit transactions which would have

the effect of allowing deposits to shift from the SAIF to the BIF,

thereby depleting the SAIF. Approximately 42 BIF-member institutions

stated that exit and entrance fees should be assessed against

transactions which would have the effect of allowing deposits to shift

from the SAIF to the BIF (assuming that such transactions were not

otherwise subject to exit and entrance fees). A bank trade group

commented that, among other options for recapitalizing SAIF, policy

makers should consider prohibiting thrifts from chartering banks for

the purpose of exiting SAIF; declaring such institutions to be Sasser

institutions that remain SAIF-insured; or requiring such institutions

to pay the equivalent of exit/entrance fees and continue contributing

to FICO.

Thrifts and their trade associations, however, noted that when

significant costs are involved on an ongoing basis, institutions and

their advisors would spend their time, energy and talent to find ways

to avoid these ongoing costs and noted that this could leave Oakar

banks and slow-moving thrifts without any relief. They suggested that

methods already existed whereby depositors at a thrift could be

encouraged to move their deposits to an existing bank affiliate while

the thrift would service the deposits (i.e., agent branches).

C. Comments Regarding Oakar Transactions

Seven BIF-members contended that the SAIF-assessable deposits held

by BIF-member Oakar banks should be assessed at a lower rate than that

imposed against SAIF member institutions (apparently to reflect the

fact that FICO's assessment authority does not extend to such banks).

Other commenters want banks and holding companies that acquired SAIF-

insured institutions, and thereby benefited from the savings and loan

bailout to continue to be liable to SAIF (although this is already the

case because these acquirers pay SAIF premiums on the acquired

deposits).

Adoption of Final Rule

As indicated above, the FDIC has determined to retain the existing

assessment rate schedule applicable to members of the SAIF. The Board

fully understands and appreciates the concerns raised in the comment

letters concerning the impending rate differential. Most of the

solutions suggested by SAIF-affiliated commenters require Congressional

action, however, and are beyond the scope of this rulemaking procedure.

Nonetheless, the FDIC agrees with these commenters that the

difficulties facing the SAIF can only be addressed comprehensively

through Congressional action. Therefore, after extensive analysis of

the relevant issues, the FDIC has informed Congress of the FDIC's

strong support for a proposal developed on an interagency basis for

resolving the problems of the SAIF.15

\15\ The Condition of the SAIF and Related Issues, Testimony of

Ricki Helfer, Chairman, FDIC, before the Committee on Banking,

Housing, and Urban Affairs, U.S. Senate, July 28, 1995. The

Condition of the SAIF and Related Issues, Testimony of Ricki Helfer,

Chairman, FDIC, before the Subcommittee on Financial Institutions

and Consumer Credit, Committee on Banking and Financial Services,

U.S. House of Representatives, August 2, 1995.

---------------------------------------------------------------------------

The proposal has three components to address the immediate,

pressing financial problems of the SAIF: (1) The SAIF would be

capitalized through a special up-front cash assessment on SAIF

deposits; (2) the responsibility for the FICO payments would be spread

proportionally over all FDIC-insured institutions; and (3) the BIF and

the SAIF would be merged as soon as practicable, after a number of

additional issues related to the merger are resolved. In addition to

the three components of the proposal, the FDIC and the Office of Thrift

Supervision also recommend making unspent RTC funds available as a kind

of reinsurance policy against extraordinary, unanticipated SAIF losses

to limit the potential future costs to taxpayers from the existing full

faith and credit guarantee of the U.S. Government that the SAIF enjoys.

This proposal is further explained in the Testimony of Ricki Helfer,

Chairman, FDIC, on The Condition of the SAIF and Related Issues, before

the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, July

28, 1995, and before the Subcommittee on Financial Institutions and

Consumer Credit, Committee on Banking and Financial Services, U.S.

House of Representatives, August 2, 1995. The proposal is consistent

with many of the suggestions made by commenters in response to this

final rule.

The FDIC further recognizes that a differential is likely to

increase competitive pressures and impede thrifts' ability to generate

capital both internally and externally. At this time, however, the FDIC

must decline to reduce the minimum average SAIF assessment rate to 18

basis points. As detailed in Sections II and IV above, the SAIF is

grossly undercapitalized. At the end of the first quarter of 1995, the

SAIF had a balance of $2.2 billion, or only 0.31 percent of insured

deposits. That balance was less than 7 percent of the assets of SAIF-

insured ``problem'' institutions. At the current pace, and under

reasonably optimistic assumptions, the SAIF is unlikely to reach the

minimum reserve ratio of 1.25 percent until the year 2002. Even though

the SAIF is grossly undercapitalized, a sizable portion of the SAIF's

ongoing assessments is, by law, diverted to meet interest payments on

obligations of the FICO. On July 1 the SAIF assumed responsibility from

the RTC for paying the costs arising from any new failures of thrift

institutions. These problems are exacerbated by several additional

factors, including the shrinkage of the SAIF assessment base since the

SAIF was created in 1989. Given the fund's relatively low balance and

the transfer of resolution authority from the RTC to the SAIF on July

1, the FDIC believes that the SAIF must be built as quickly as possible

to its mandated reserve level.

Having determined not to reduce the SAIF rate to the statutory

minimum average of 18 basis points, one other way to maintain parity

between SAIF members and BIF members would be to retain the BIF

assessment rate schedule at 23-31 basis points. Few SAIF-affiliated

commenters specifically urged such action, however. In contrast to the

SAIF, the $23.2 billion BIF balance at the end of the first quarter was

1.22 percent of BIF-insured deposits and 70 percent of the assets of

BIF-insured ``problem'' institutions. The BIF probably reached the 1.25

minimum reserve ratio during the second quarter of this year, although

the FDIC cannot confirm this fact until the Call Reports for the second

quarter have been received and analyzed. For the reasons set forth in

the BIF rule published elsewhere in this Federal Register, the FDIC has

determined to establish a new assessment rate schedule of 4 to 31 basis

points for BIF members.

Paperwork Reduction Act

No collection of information pursuant to section 3504(h) of the

Paperwork

[[Page 42752]]

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.

Regulatory Flexibility Analysis

The Board hereby certifies that the final 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 final 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 final

rule. Therefore, the provisions of that Act regarding an initial and

final regulatory flexibility analysis (Id. at 603 and 604) do not apply

here.

Riegle Community Development and Regulatory Improvement Act of 1994

Section 302(b) of the Riegle Community Development and Regulatory

Improvement Act of 1994 (RCDRIA), 12 U.S.C. 4802(b), requires that all

new regulations and amendments to regulations prescribed by a Federal

banking agency which impose additional reporting, disclosures, or other

new requirements on insured depository institutions shall take effect

on the first day of a calendar quarter. This provision was designed to

assist institutions by establishing a consistent date for complying

with new regulations so that institutions would be more regularly

informed of new rules and be able to effectuate necessary training,

software, and other operational modifications in an orderly manner.

However, this final rule does not impose such additional or new

regulatory requirements, rather it retains the existing assessment rate

schedule for SAIF-member institutions. The FDIC has therefore

determined that section 302 of RCDRIA does not apply to this final

rule.

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, a portion of part 327 of

title 12 of the Code of Federal Regulations is republished as set forth

below:

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 (d)(1) of Sec. 327.9 as redesignated from paragraph

(c)(1) elsewhere in this issue of the Federal Register is republished

for the convenience of the reader as set forth below:

Sec. 327.9 Assessment rate schedules.

* * * * *

(d) SAIF members. (1) Subject to Sec. 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 Sec. 327.4(a) to that SAIF member

(the schedule utilizes the group and subgroup designations specified in

Sec. 327.4(a)):

Schedule

------------------------------------------------------------------------

Supervisory

subgroup

Capital group --------------------

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 8th day of August, 1995.

Federal Deposit Insurance Corporation.

Jerry L. Langley,

Executive Secretary.

[FR Doc. 95-20172 Filed 8-15-95; 8:45 am]

BILLING CODE 6714-01-P