Assessments; New Assessment Rate Schedule for BIF Member Institutions

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

RIN 3064-AB58

Assessments; New Assessment Rate Schedule for BIF Member

Institutions

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Proposed Rule.

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SUMMARY: The Board of Directors (Board) of the Federal Deposit

Insurance Corporation (FDIC) is proposing to amend its regulation on

assessments to establish a new assessment rate schedule of 4-31 basis

points for members of the Bank Insurance Fund (BIF) to apply to the

semiannual period in which the reserve ratio of the BIF reaches the

designated reserve ratio (DRR) of 1.25% of total estimated insured

deposits and to semiannual periods thereafter. The Board is further

proposing to amend the assessment risk classification framework to

widen the existing assessment rate spread from 8 basis points to 27

basis points.

When the DRR is achieved, the Board is required to set rates to

maintain the reserve ratio at the DRR. Based on current projections,

the reserve ratio is expected to reach the DRR between May 1 and July

31, 1995. Therefore, the Board is proposing to lower assessment rates

to maintain the reserve ratio at the DRR and to maintain a risk-based

assessment system. The Board is further proposing to amend the

assessments regulation to establish a procedure for adjusting the

proposed rate schedule semiannually as necessary to maintain the DRR at

1.25%.

DATES: Written comments must be received by the FDIC on or before April

17, 1995.

ADDRESSES: Written comments shall be addressed to the Office of the

Executive Secretary, Federal Deposit Insurance Corporation, 550 17th

Street NW., Washington, DC 20429. Comments may be hand-delivered to

room F-400, 1776 F Street NW., Washington, DC 20429, on business days

between 8:30 a.m. and 5 p.m. (FAX number: (202) 898-3838). Comments

will be available for inspection in room 7118, 550 17th Street, NW.,

Washington, DC, between 9 a.m. and 4:30 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: Christine Blair, Financial Economist,

Division of Research (202) 898-3936; or Connie Brindle, Chief,

Assessment Operations Section, Division of Finance, (703) 516-5553; or

Lisa Stanley, Senior Counsel, Legal Division (202) 898-7494;

[[Page 9271]] or Cristeena Naser, Attorney, Legal Division (202) 898-

3587, Federal Deposit Insurance Corporation, Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

I. Background

At present, BIF members are assessed rates for FDIC insurance

ranging from 23 basis points for the best risk classification to 31

basis points for the riskiest classification. This assessment schedule

is based on the requirements of section 7(b)(2)(E) of the Federal

Deposit Insurance Act (FDI Act), 12 U.S.C. 1817(b)(2)(E). That

provision was enacted as part of section 302 of the Federal Deposit

Insurance Corporation Improvement Act of 1991 (FDICIA) (Pub. L. 102-

242, 105 Stat. 2236, 2345) which completely revised the assessment

provisions of the FDI Act by requiring the FDIC to: (1) establish a

system of risk-based assessments; (2) establish rates sufficient to

provide revenue at least equivalent to that generated by an annual 23

basis point rate until the BIF reserve ratio achieves the DRR of 1.25%

of total estimated insured deposits; (3) when the reserve ratio remains

below the DRR of 1.25%, set rates to achieve that ratio within one year

or establish a recapitalization schedule to do so within 15 years; and

(4) once the DRR is achieved, set rates to maintain the reserve ratio

at the DRR.

Based on the financial condition of the BIF, the Board has

established two recapitalization schedules, most recently on May 25,

1993, which estimated that the DRR would be achieved in the year 2002.

58 FR 31150 (May 25, 1993). Once the DRR has been attained, the

recapitalization schedule will no longer apply. Due to the health of

the banking industry, current projections indicate that the BIF will

recapitalize sometime between May 1 and July 31, 1995. Accordingly, the

Board must implement the statutory provisions which will apply once the

DRR is reached. In particular, because the mandate to collect at a

minimum average rate of 23 basis points will no longer be operative,

the Board must determine when and how much to lower assessments of BIF

members.

Following is a discussion of the statutory provisions which must be

considered in determining how and when rates may be set, a proposed new

assessment rate schedule, a method for applying the proposed rate in

the semiannual period during which the DRR is achieved, and a process

for adjusting that assessment schedule in future semiannual periods.

II. Statutory Framework for Setting Assessment Rates

A. Summary

Section 7(b) of the FDI Act governs the Board's authority for

setting assessment rates for members of the BIF. 12 U.S.C. 1817(b). The

assessment rates the Board is authorized or required to set are

dependent on whether the fund's reserve ratio has reached its DRR. The

reserve ratio is the dollar amount of the BIF fund balance divided by

the estimated insured deposits of BIF members. The Board must set

semiannual assessments and the DRR for the BIF and the Savings

Association Insurance Fund (SAIF) independently. FDI Act, section

7(b)(2)(B).

The DRR for the BIF currently is 1.25% of estimated insured

deposits (i.e., $1.25 for each $100 of insured deposits), the minimum

level permitted by the FDI Act. FDI Act, section 7(b)(2)(A)(iv). The

Board may increase the DRR to such higher percentage as the Board

determines to be justified for a particular year by circumstances

raising a significant risk of substantial future losses to the fund.

However, the Board is not authorized to decrease the DRR below 1.25%.

Id.

Section 7(b), among other things, directs the Board to:

(1) establish a risk-based assessment system whereby an

institution's assessment is based in part on the probability that the

deposit insurance fund will incur a loss with respect to that

institution [FDI Act, section 7(b)(1)(C)(i)]; and

(2) set assessments, not less than $2000 annually per BIF member,

to ``maintain'' the reserve ratio ``at'' 1.25% when that ratio has been

achieved [FDI Act, section 7(b)(2)(A)(i)(I), (iii)].

In the current economic environment, because of investment income

alone, the reserve ratio may continue to grow beyond 1.25%. Moreover, a

risk-based assessment system contemplates a range of rates such that

even if the least risky institutions pay the lowest rate consistent

with a meaningful risk-based assessment system, riskier institutions

must pay a higher rate. While the Board must set rates to maintain fund

reserves at the 1.25% DRR once that level is achieved, even with

assessment rates as low as prudently possible the fund could continue

to grow as a result of assessments paid by riskier institutions and

investment income. The following sections address these statutory

directives.

B. Directive: Set Rates To Maintain the Reserve Ratio at the DRR

Pursuant to section 7(b)(2)(A)(i) of the FDI Act, the Board must

set semiannual assessments to maintain the reserve ratio of the BIF at

the DRR taking into consideration the following factors: (1) Expected

operating expenses; (2) case resolution expenditures and income; (3)

the effect of assessments on members' earnings and capital; and (4) any

other factors the Board may deem appropriate. Section 7(b)(2)(A)(iii)

limits the Board's discretion to set assessment rates by imposing a

minimum semiannual assessment of $1,000 per BIF member. The directive

to ``set rates to maintain the reserve ratio at the designated reserve

ratio'' was enacted as part of the amendments to section 7 made by the

FDIC Assessment Rate Act of 1990 (Assessment Rate Act). Public Law 101-

508, 104 Stat. 1388, 1388-14. The Assessment Rate Act is Subtitle A of

Title II of the Omnibus Budget Reconciliation Act of 1990. While the

phrase ``set assessments * * * to maintain the reserve ratio at the

designated reserve ratio'' is not defined in the statute, the

legislative history discussed below illuminates Congress' intentions.

1. Interpretations of ``maintain * * * at the DRR''.

The Board is of the opinion that this phrase establishes the DRR as

a target, a position supported both by the difficulty of managing the

size of the reserve ratio as well as the statutory history. Changes in

the reserve ratio are a function of the size of estimated insured

deposits, investment earnings, assessment revenue (which, in turn, is a

function of the risk profile of the industry and revenue received from

the statutory minimum assessment), and revenue from corporate-owned and

other assets, none of which is in the complete control of the FDIC. In

addition, operating expenses and insurance losses to the fund will

vary.

The primary factors affecting the fund balance are assessment

revenues, investment income, operating expenses and insurance losses

resulting from bank failures. Assessment revenues depend upon deposit

growth, and investment income depends upon interest rate movements as

well as factors affecting the fund's investable balance. Deposit growth

and interest rate movements in turn are related, but as the number and

variety of financial instruments and financial management techniques

expand that relationship becomes less predictable. Both deposit growth

and interest rates have become more variable and, thus, less

predictable [[Page 9272]] in recent years. Finally, bank failures and

the resulting losses for the insurance fund historically have

represented a major source of uncertainty in forecasting the fund

balance. Failures can arise from developments in the global

marketplace, smaller geographic markets, or specific product markets,

and the failure rate is affected by numerous other factors. The 1980s

offer strong evidence that changes in these determinants and their

implications cannot, as a rule, be anticipated far in advance. The

specific timing of failures is particularly difficult to project, even

for short forecast horizons. Taken together, the above considerations

indicate that the reserve ratio cannot be managed with sufficient

precision to achieve a precise target consistently.

Section 208 of the Financial Institutions Reform, Recovery, and

Enforcement Act of 1989 (FIRREA) amended section 7(b) of the FDI Act to

establish a DRR and set the level at 1.25%. Public Law 101-73, 103

Stat. 183, 206. Prior to FIRREA, beginning in 1980, the FDI Act

required or authorized the Board to adjust the amount of assessment

income transferred to the insurance fund, and thereby to increase or

decrease the rebate amount, based on the actual reserve ratio of the

fund within a range from 1.10 percent to 1.40 percent, with 1.25

percent as the target. See discussion infra, Rebates.

FIRREA also prescribed minimum annual assessment rates which could

be increased from the scheduled levels, ``if necessary to restore the

fund's ratio of reserves to insured deposits to its target level within

a reasonable period of time.'' [Emphasis added.] H.R. Conf. Rep. No.

222, 101st Cong., 1st Sess. 396 (1989). Thus, when the DRR was

established, Congress appears to have considered the DRR as a target

level.

The view that the DRR is a target finds further support in Senate

legislation which was considered when enacting the Assessment Rate Act.

Section 1(a) of S. 3045, which was sponsored by then Senate Banking

Committee Chairman Riegle and other members of the Senate Banking

Committee, required the Board to ``maintain the reserve ratio at a

level equal to the designated reserve ratio''. This language was almost

identical to the comparable provision of S. 3093, the Administration

bill, which ultimately was enacted. The section-by-section analysis of

S. 3045 describes Section 1(a) as permitting

* * * the FDIC to set the assessment rate at the level the FDIC

determines to be appropriate: to maintain the Bank Insurance Fund's

reserves at the target level (now $1.25 in reserves for each $100 in

insured deposits, with the FDIC having the discretion under the

current law to increase it to $1.50); or if the Fund's reserves are

below the target level, to restore the reserves to the target level.

The FDIC would have `a reasonable period of time' to restore the

Fund's reserves to the target level. [Emphasis added.]

The Senate banking committee clearly considered the DRR as a

target.

Finally, FDICIA section 104, Recapitalizing the Bank Insurance

Fund, amended the assessment rate provisions of section 7(b)(1)(C) (in

effect December 19, 1991 through December 31, 1993) as follows:

If the reserve ratio of the Bank Insurance Fund equals or

exceeds the fund's designated reserve ratio under subparagraph (B),

the Board of Directors shall set semiannual assessment rates for

members of that fund as appropriate to maintain the reserve ratio at

the designated reserve ratio. [Emphasis added.]

Thus Congress appears to have recognized that the reserve ratio

would fluctuate around a target DRR.

Treating the DRR as a target would necessarily include the concept

of fluctuations above and below the target, thus incorporating into the

rate-setting process a measure of economic reality. If the reserve

ratio falls below 1.25% in a semiannual period, the Board could adjust

the assessment schedule in the next semiannual period to restore the

ratio. Section 7(b)(3)(A) of the FDI Act contemplates precisely that.

That section provides that, after the DRR is achieved, if the reserve

ratio falls below the DRR, the Board is required to set semiannual

assessments sufficient to increase the reserve ratio to the DRR within

one year or in accordance with a recapitalization schedule promulgated

to restore the reserve ratio to the DRR within 15 years. Conversely,

when the reserve ratio rises above the DRR for any semiannual period,

the Board could adjust the assessment schedule downward to reflect the

increase.

Current projections show, however, that even if the assessment rate

for risk classification 1A banks were as low as possible consistent

with a meaningful risk-based assessment system, the fund may continue

to grow as a result of the revenue from investment income. In such a

case where the rates are set as low as possible consistent with a risk-

based assessment system and the fund nevertheless continues to grow,

the Board considers that it will have complied with the statute because

the Board will have set rates to maintain the reserve ratio at 1.25% in

accordance with statutory requirements for a risk-based assessment

system.

Congress could not have understood that the reserve ratio can be

maintained precisely at 1.25%. Under this interpretation, amounts in

excess of that fixed point should be returned to the industry. However,

as discussed above, the FDIC cannot completely control the factors that

produce fluctuations in the level of the reserve ratio. Therefore,

management of the reserve ratio is necessarily imprecise. In the

current economic situation, the fund will likely grow beyond the DRR as

a result of investment income alone. Thus, an interpretation which

requires the FDIC to maintain the reserve ratio precisely at 1.25%

would necessarily require a mechanism for providing assessment credits

(known as rebates) to BIF members for amounts in excess of 1.25%.

Putting aside issues of whether investment income, reserve corpus or

both can be rebated, more importantly, the FDIC's authority in section

7(d), 12 U.S.C. 1817(d), to provide assessment credits was deleted in

FDICIA as being obsolete. See, section-by-section analysis of section

212(e)(3) of S. 543 which became the language of section 302(a) of

FDICIA at 138 Cong. Rec. S2073 (daily ed. February 21, 1992). See

discussion infra, Rebates.

The Board believes that viewing the DRR as a target is the correct

position because (1) it reflects economic reality and the impossibility

of maintaining the reserve ratio precisely at 1.25%; (2) it gives

effect to other relevant requirements in the statute for a minimum

assessment, a risk-based assessment system, and maintenance of the DRR;

and 3) it better comports with Congressional intent as indicated by the

legislative history and the fact that Congress eliminated the rebate

authority of section 7(d).

2. BIF Members shall pay a minimum semiannual assessment of $1,000.

Section 302 of FDICIA completely revised section 7(b) of the FDI

Act. The minimum assessment language was modified only to reflect the

fact that rates are to apply semiannually and to combine separate

provisions into a single provision applicable to both the BIF and SAIF

as follows:

The semiannual assessment for each member of a deposit insurance

fund shall be not less than $1,000. FDI Act, section

7(b)(2)(A)(iii).

After FDICIA, BIF members must pay the greater of their risk-based

rate or $2000 each year.

C. The FDIC Shall Establish a Risk-Based Assessment System

In FDICIA, Congress completely restructured the basis upon which

assessment rates are determined. Section 302(a) of FDICIA required the

[[Page 9273]] FDIC to establish by January 1, 1994, a risk-based

assessment system based on:

(i) the probability that the deposit insurance fund will incur a

loss with respect to the institution, taking into consideration the

risks attributable to--

(I) different categories and concentrations of assets;

(II) different categories and concentrations of liabilities, both

insured and uninsured, contingent and noncontingent;

(III) any other factors the Corporation determines are relevant to

assessing such probability;

(ii) the likely amount of any such loss; and

(iii) the revenue needs of the deposit insurance fund.

Within the scope of these broad factors, FDIC was granted complete

discretion to design a risk-based assessment system. See, i.e., S. Rep.

No. 167, 102d Cong., 1st Sess., 57 (1991). One statutory restraint,

however, is that the system must be designed so that as long as the BIF

reserve ratio remains below the DRR, the total amount raised by

semiannual assessments on members cannot be less than the total amount

resulting from a flat rate of 23 basis points. FDI Act, section

7(b)(2)(E). This provision currently applies, but will cease to be

operative when the BIF meets the DRR. This provision may again become

operative if the reserve ratio remains below the DRR at some future

time. The Board interprets the minimum assessment provision of section

7(b)(2)(E), which requires weighted average assessments of 23 basis

points, as applying only when the reserve ratio remains below the DRR

for at least a year.

Any time the reserve ratio goes below the DRR, the Board must

either set rates 1) to restore the reserve ratio within one year or 2)

in accordance with a recapitalization schedule not to exceed fifteen

years. FDI Act, section 7(b)(3)(A). Because the Board has the

discretion to determine the rate necessary to restore the reserve ratio

to the DRR within one year, it is reasonable to conclude that the

minimum assessment provision (which mandates the Board to set rates

sufficient to provide revenue equivalent to that generated by an annual

flat rate of .0023) would not apply until the reserve ratio stays below

the DRR for at least one year. Moreover, it is unlikely that Congress

intended such a drastic result if the DRR falls slightly below the

target DRR, when a small adjustment in the assessment schedule for the

following semiannual period could bring the fund back up to the DRR. In

such a case, if the minimum assessment provision applied, the result

would be an enormous overcollection of assessment revenue which, as

explained below, the FDIC lacks the authority to rebate.

D. Rebates

It appears, based on the statutory framework and legislative

history of section 7 of the FDI Act, that the FDIC has not had

authority to provide rebates since the permanent risk-based assessment

system took effect on January 1, 1994. Prior to FDICIA, two provisions

of section 7 expressly addressed rebates or assessment credits, section

7(d), Assessment Credits, and section 7(e), Refunds to Insured

Depository Institutions.

In section 302(e)(3) of FDICIA, Congress removed the assessment

credit provisions of section 7(d) of the FDI Act and at the same time

established a rate-setting scheme requiring the Board to set rates to

maintain the reserve ratio at the DRR. Pub. L. 102-242, 105 Stat. 2236,

2349. As is clear from the statutory history of assessment credits,

such credits were intended as a means to provide flexibility to keep

the fund balance from growing too large at a time when assessment rates

were set in the statute and all institutions paid the same flat rate.

See generally, S. Rep. No. 1269, 81st Cong., 2nd Sess. 1-2 (1950);

Cong. Rec. H10648 et seq. (daily ed. July 19, 1950) (statement of Mr.

McCormack); Federal Deposit Insurance Corporation, The First Fifty

Years at 58-60, Wash., D.C. 1984. Because of the large number of bank

failures in the mid-to-late 1980s, Congress gradually provided the FDIC

with greater flexibility to determine the timing and amount of

assessment rates. This culminated in the requirement in FDICIA that the

FDIC implement a risk-based assessment system. FDICIA also provided the

FDIC with the flexibility, after the DRR was reached, to set assessment

rates to maintain the DRR.

1. Statutory History of Section 7(d)

Section 7(d), 12 U.S.C. 1817(d), was enacted in the FDI Act in

1950. Public Law 797, Ch. 967, 64 Stat. 873. At that time all banks

paid a flat assessment rate of 0.83 percent. Due to favorable economic

circumstances, the fund had built up excess reserves, but the FDIC

lacked the authority to return the excess funds to the industry.

Congress adopted an assessment credit formula to credit to insured

banks 60 percent of the fund's net assessment income and to transfer

the remaining 40 percent to the Corporation's surplus (Permanent

Insurance Fund). ``The committee desires to emphasize that the formula

thus provides a flexible method for granting a reduction in the

assessments paid by banks in normal years, and in bad years provides

for payment of the full assessment if needed. This should reasonably

protect the insurance fund in years of extraordinary losses.'' H. Rep.

No. 2564, 81st Cong. 2nd Sess. (1950) reprinted in 1950 U.S.C.C.S.

3770. This formula returned net assessment revenues only; it did not

extend to investment income.

The percentage of net assessment income rebated to insured banks

was modified from time to time as warranted given the constraints of a

statutory flat assessment rate system. In the Consumer Checking Account

Equity Act of 1980, enacted as part of the Depository Institutions

Deregulation and Monetary Control Act of 1980, Public Law 96-221, 94

Stat. 132, Congress tied the amount of the rebate to the status of the

reserve ratio. If the reserve ratio was less than 1.10%, the amount

transferred to the Corporation's capital account was required to be

increased to an amount (not to exceed 50% of net assessment income)

that would restore the ratio to at least 1.10%. If the reserve ratio

exceeded 1.25%, the amount transferred to the capital account could be

reduced by such amount that would keep the reserve ratio at not less

than 1.25%; finally, if the reserve ratio exceeded 1.40%, the amount

transferred to the capital account was required to be increased such

that the reserve ratio would be not more than 1.40%. Id. at section

308(d).

In section 208 of FIRREA, Congress specified certain flat annual

assessment rates to be in effect through 1991, but provided the FDIC

with authority to increase those rates as needed to protect the BIF and

to raise the DRR from 1.25% to a maximum of 1.50% as justified by

circumstances raising a significant risk of substantial future losses.

In the event the Board increased the DRR above 1.25%, it was required

to establish supplemental reserves for that increased revenue, the

income from which was to be distributed annually to BIF members through

an Earnings Participation Account. (This was the first time Congress

provided any mechanism for returning to the industry any investment

income.) In addition, to the extent the supplemental reserves were not

needed to satisfy the next year's projected DRR, those amounts were to

be rebated. FIRREA, section 208(4). Congress also barred any assessment

credits until the DRR was achieved. When forecasts indicated the DRR

would be achieved in the following year, the Board was required to

provide assessment credits for that following year equal to the lesser

of: (1) the amount necessary to [[Page 9274]] reduce the BIF reserve

ratio to the DRR; or (2) 100 percent of the net assessment income to be

received in that following year. Id.

In sections 2002 and 2003 of the Assessment Rate Act, Congress

provided the FDIC with greater flexibility in both the timing and

amount of assessment rates. It also eliminated the requirement that the

investment income on the supplemental reserves be distributed annually

to BIF members. Assessment Rate Act, section 2004. Because the Board

did not increase the DRR above 1.25%, the provision authorizing

Earnings Participation Accounts and supplemental reserves never became

effective.

In FDICIA, Congress provided for establishment of a risk-based

assessment system that, after the DRR was achieved, would provide the

FDIC with much greater flexibility to set assessment rates. In 1990,

Congress had already provided the FDIC with the authority to adjust

assessment rates upward to ensure that the BIF received sufficient

revenue. In FDICIA, Congress intended that same rate adjustment

authority to operate in lieu of providing assessment credits in the

event that the established rates resulted in collection of excess

assessment revenue. Therefore, Congress eliminated the assessment

credit provisions of section 7(d) in their entirety as being obsolete

because the ability to adjust rates would take the place of a rebate

mechanism.

The discussion of section 212(e)(3) in the Senate Report on S. 543

(which became the language of section 302(a) of FDICIA) describes

Congress' intent:

Section 212(e)(3) replaces current section 7(d) with a new

section 7(d) recodifying current section 7(b)(9). The deleted text,

providing for assessment credits to insured depository institutions

when deposit insurance fund reserve ratios exceed designated reserve

ratios, is obsolete in light of the standards for establishing

assessments set forth in new section 7(b)(2)(A)(i) [setting rates to

maintain at the DRR]. Under section 7(b)(2)(A)(i), funds that, under

current section 7(d), would have been rebated to insured depository

institutions through assessment credits will now be rebated through

reduced assessments.

138 Cong. Rec. S2073 (daily ed. Feb. 21, 1992).

This position finds further support in the language of section 104

of FDICIA (in effect December 19, 1991 through December 31, 1993) which

required the Board to set rates to maintain the reserve ratio at the

DRR when the reserve ratio equals or exceeds 1.25%. FDICIA, section

104(a) amending section 7(b)(1)(C) of the FDI Act. Clearly, Congress

contemplated a situation in which the reserve ratio would rise above

the DRR, but nonetheless eliminated rebate authority. Thus, Congress

appears to have intended the rate setting process to be the appropriate

mechanism for adjustment.

2. Section 7(e) Does Not Provide Rebate Authority

An argument has been raised that section 7(e), 12 U.S.C. 1817(e),

authorizes the FDIC to provide rebates of fund assets to keep the

reserve ratio at 1.25%. Section 7(e) was enacted in 1950 in the Federal

Deposit Insurance Act, along with section 7(d), assessment credits.

Section 7(e) has been amended only once--in FIRREA, by changing

``insured bank'' to ``insured depository institution''.

Section 7(e) provides that the FDIC:

(1) may refund to an insured depository institution any payment

of assessment in excess of the amount due to the Corporation or (2)

may credit such excess toward the payment of the assessment next

becoming due from such bank and upon succeeding assessments until

the credit is exhausted.

By its terms, the statutory language contemplates that such refunds

or credits are to be made in respect of overpayments. The report

accompanying the legislation describes section 7(e) as ``expressly

authoriz[ing] the Corporation to refund any overpayments of assessments

or to credit such overpayments on future assessments''. H. Rep. No.

2564, 81st Cong., 2d Sess. (1950), reprinted in 1950 U.S.C.C.S. 3771.

Because section 7(d) contained express authority to provide rebates,

Congress appears to have intended in section 7(e) to provide the FDIC

with alternative methods (refunds or credits) to correct computational

errors or other forms of overpayments outside of the rebate context so

that the FDIC could return funds which clearly did not belong to it.

Because section 7(d) providing assessment credits was adopted as

part of the same legislation, an interpretation that section 7(e) also

provides the same authority would mean that the provisions were

redundant. Rather, each provision has independent meaning and purpose

if section 7(d) is interpreted to provide the substantive authority to

provide rebates, while section 7(e) grants the FDIC the discretion to

choose the method of refunding overpayments, i.e., by either providing

an assessment credit or a refund check. Moreover, section 7(e) has

never been interpreted as providing rebate authority precisely because

until January 1, 1994 when the statutory risk-based assessment system

became effective, that authority existed in section 7(d). Given the

intent of the drafters as expressed in the section-by-section analysis

of S. 543, that rebates will be provided through reduced assessment

rates, an interpretation that section 7(e) provides rebate authority

outside its historical context would seem to be contrary to

Congressional intent.

In sum, the Board believes that the better interpretation of the

statute is that the FDIC has no authority to grant rebates and that to

do so would be in violation of the statute and contrary to the

legislative history. As discussed above, this position is based on:

(1) the statutory history of sections 7(d) and (e); 2) the fact

that Congress deleted the rebate authority in section 7(d); and (3) the

legislative history indicating that Congress intended that lower rates

would be the substitute for rebates.

III. Proposed Assessment Rate Schedule

The Board proposes to set a new assessment rate schedule with a

spread of 4 to 31 basis points (see Table 1). The Board further

proposes to make adjustments to this schedule by an adjustment factor

not to exceed 5 basis points.

The following definitions are used in the proposal:

Assessment Schedule: A set of rates based on the risk

classification matrix with a spread of 27 basis points between the

minimum rate which would apply to institutions classified as 1A and the

maximum rate which would apply to institutions classified as 3C.

Spread: The difference between the minimum and maximum rate in any

given assessment schedule.

Adjustment Factor: The maximum number of basis points or a fraction

thereof by which the Board would be authorized to increase or decrease

the proposed 4-31 basis point assessment schedule without going through

the rulemaking process.

A. Statutory Factors

As discussed in Section II, pursuant to sections 7(b)(1) and

7(b)(2)(A)(ii), the Board is required to take into consideration the

following factors when setting risk-based assessments: the probability

of loss, the amount of such loss, 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. These factors are discussed below. [[Page 9275]]

1. Risk-Based Assessment Schedule

The fundamental goals of risk-based assessment rates are to reflect

the risk posed to the insurance fund by insured institutions and to

provide institutions with incentives to control risk taking. The

maximum rate spread in the existing assessment rate matrix (see Table

1) is 8 basis points. Institutions rated 1A pay an annual rate of 23

basis points while institutions rated 3C pay 31 basis points. A concern

is whether 8 basis points represents a sufficient spread for achieving

these goals.

In the FDIC's proposal for the current risk-based premium system,

the Board sought comment on whether the assessment rate spread embodied

in the existing system, i.e., 8 basis points, should be widened. Of the

96 commenters addressing this issue, 75 favored a wider rate spread. In

the final rule, the Board expressed its conviction that widening the

rate spread was desirable in principle, but chose to retain the

proposed rate spread. The Board expressed concern that widening the

rate spread while keeping assessment revenue constant, might unduly

burden the weaker institutions which would be subject to greatly

increased rates. However, the Board retained the right to revisit the

issue at some future date. 58 FR 34357 (June 25, 1993).

The current assessment rate spread for BIF institutions has been

criticized widely by bankers, banking scholars and regulators as overly

narrow, and there is considerable empirical support for this criticism.

Using a variety of methodologies and different sample periods, the vast

majority of relevant studies of deposit insurance pricing have produced

results that are consistent with the conclusion that the rate spread

between healthy and troubled institutions should exceed 8 basis

points.\1\ While the precise estimates vary, there is a clear consensus

from this evidence that the rate spread should be widened.

\1\For a representative sampling of academic studies on this

issue, see Estimating the Value of Federal Deposit Insurance, The

Office of Economic Analysis, Securities and Exchange Commission

(1991); Berry K. Wilson, and Gerald R. Hanweck, A Solvency Approach

to Deposit Insurance Pricing, Georgetown University and George Mason

University (1992); Sarah Kendall and Mark Levonian, A Simple

Approach to Better Deposit Insurance Pricing, Proceedings,

Conference on Bank Structure and Competition, Federal Reserve Bank

of Chicago (1991); R. Avery, G. Hanweck and M. Kwast, An Analysis of

Risk-Based Deposit Insurance for Commercial Banks, Proceedings,

Conference on Bank Structure and Competition, Federal Reserve Bank

of Chicago (1985).

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FDIC research likewise suggests that a substantially larger spread

would be necessary to establish an ``actuarially fair'' assessment rate

system. Insurance premiums are actuarially fair when the discounted

value of the premiums paid over the life of the insurance contract is

expected to generate revenues that equal expected discounted costs to

the insurer from claims made by the insured over the same period. A

1994 FDIC study used a ``proportional hazards'' model to estimate the

expected lifetime of banks that were in existence as of January 1,

1993. The study estimated the actuarially fair premium that each bank

must pay annually so that the cost of each bank failure to the FDIC

would equal the revenue collected through insurance assessments. The

estimates indicated a rate spread for 1A versus 3C institutions on the

order of magnitude of 100 basis points.\2\

\2\See, Gary S. Fissel Risk Measurement, Actuarially Fair

Deposit Insurance Premiums and the FDIC's Risk-Related Premium

System, FDIC Banking Review (1994), at 16-27, Table 5, Panel B.

Single-copy subscriptions of this study are available to the public

free of charge by writing to FDIC Banking Review, Office of

Corporate Communications, Federal Deposit Insurance Corporation, 550

17th Street, N.W., Washington, D.C. 20429.

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

The Board is concerned also that rate differences between adjacent

cells in the current matrix do not provide adequate incentives for

institutions to improve their condition. Larger differences are

consistent with historical variations in failure rates across cells of

the matrix, viewed in connection with the preponderance of evidence

regarding actuarially fair premiums.\3\ The precise magnitude of the

differences is open to debate, given the sensitivity of any estimates

to small changes in assumptions and to selection of the sample period.

However, the Board believes that larger rate differences between

adjacent cells of the matrix are warranted.

\3\Id., at Tables 2 and 5.

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The Board believes that the assessment rate matrix should be

adjusted in the direction of an actuarially fair rate structure, as

described above. Consistent with the results of the relevant studies on

this topic, regardless of the sample period selected, the Board

believes at this time that the highest-rated institutions pose a small

but positive risk to the insurance fund and that the spread between the

highest- and lowest-rated institutions should be widened.

The Board does not wish to adopt major changes in the assessment

rate structure at this time. The proposed rate matrix retains the nine-

cell structure. As noted above, in the final rule adopting the current

assessment rate schedule, the Board expressed its conviction that

widening the rate spread was desirable but declined to do so because of

the potential hardship for troubled institutions and possible

additional losses for the insurance fund. The Board remains unwilling

to increase the maximum rate other than by means of the adjustment

factor discussed below, without further study regarding the proper

insurance pricing structure for the industry.

Accordingly, FDIC staff currently are undertaking a comprehensive

reevaluation of the risk-based assessment rate matrix, and will present

recommendations to the Board in the near future. Any proposed changes

to the risk-based assessment rate structure that may result from this

process will be addressed in a separate future notice of proposed

rulemaking.

In the interim, the Board believes that the proposed assessment

schedule represents an equitable set of rate adjustments. It widens the

rate spread between the lowest- and highest-rated institutions,

consistent with the implications of the best empirical evidence on this

issue and with the Board's previously stated conviction. Moreover, the

rate differences between adjacent cells in the matrix are widened,

providing additional incentive for weaker institutions to improve their

condition and for all institutions to avoid excessive risk-taking. This

is consistent with the Board's desire to create adequate incentives via

the assessment rate structure to encourage behavior that will protect

the deposit insurance fund against excessive losses.

2. Expected Operating Expenses and Case Resolution Expenses and Income

Operating expenses are projected to be approximately $260 million

for the second half of 1995 (See Table 2). Case resolution expenditures

or ``insurance losses'' for the second half of 1995 are projected to be

$130 million. If the 1994 loss experience of $70 million per semiannual

period (estimated) continues in 1995, losses may be lower than the

projected amount. Insurance losses in 1994 were less than one-quarter

of the historical average, relative to insured deposits, and baseline

assumptions indicate that losses will begin to revert toward the norm

in 1996 (see Tables 2-4). See additional discussion of loss assumptions

in Section III.B, below.

3. Impact on Earnings and Capital

Because assessment rates for most BIF members will decline, the

impact on earnings and capital will be positive. Lower assessment costs

will reduce expenses by approximately $4.6 billion [[Page 9276]] per

year. Based on the industry's year-end 1993 average tax rate of 31.5

percent, there will be an after-tax impact on profits of approximately

$3.15 billion per year. BIF members may pass some portion of the cost

savings on to their customers through lower borrowing rates, lower

service fees, and higher deposit rates. Their ability to do so will be

affected by factors such as the level of competition faced by banks.

4. Other Factors--Consideration of the Impact on the SAIF of Decreased

BIF Rates

A question has been raised concerning whether the Board may take

into consideration the impact on SAIF in setting BIF rates. Based on

recent projections, the BIF is expected to recapitalize between May 1

and July 31, 1995. By contrast, recent projections show that the SAIF

will not recapitalize until 2002 because assessments to cover interest

payments on bonds issued by the Financing Corporation (FICO) divert

about $780 million per year, or about 45 percent of total SAIF

assessment revenue. In addition, the SAIF assessment base has been

shrinking since the SAIF was created in 1989. The FICO will continue to

divert SAIF assessments for interest payments on FICO bonds until 2019

when the bonds mature.

Section 7(b)(2)(A)(ii) of the FDI Act requires the Board to

consider certain factors in setting assessment rates, one of which is

``any other factors that the Board of Directors may deem appropriate''.

Section 7(b)(2)(B) of the FDI Act requires the Board to set semiannual

assessments for members of each fund ``independently'' from semiannual

assessments for members of the other insurance fund. Read together,

these provisions do not specifically prohibit Board consideration of

the impact of BIF rates on SAIF members as long as the rates are set

independently.

However, section 7(b)(2)(A)(i) requires the Board to set rates to

maintain the BIF reserve ratio. If the Board were to take into

consideration the impact on the SAIF when it set BIF rates and, as a

result, the reserve ratio continued to increase in excess of the DRR,

it might be considered a violation of the statute. By contrast, an

increase in the reserve ratio due to revenue generated from the minimum

assessments and maintaining a risk-based assessment system would not be

a violation because those provisions are mandated by the statute.

B. Need for Decreased Rates

As discussed in Section II, management of the reserve ratio is

necessarily imprecise because the factors affecting this ratio cannot

be predicted with certainty. Changes in the reserve ratio are primarily

a function of assessment revenues, investment income, operating

expenses and insurance losses resulting from bank failures.

The BIF is expected to recapitalize between May 1 and July 31,

1995. It is unlikely that the BIF will recapitalize prior to the second

quarter of 1995 because, after declining from 1992 through mid-year

1994, there are indications that insured deposits have begun to

increase.

Other than the revenues that may be necessary to achieve and

maintain the DRR of 1.25% in the second half of 1995, projections

indicate that the BIF will require little or no assessment income to

cover losses and expenses for that period. Investment income is

expected to approach $500 million for the second half of the year. As

noted above, for the same period insurance losses are projected to be

$130 million, and operating expenses are projected to be approximately

$260 million. Thus, based on current projections, investment income

alone should suffice to cover BIF obligations unrelated to the reserve

ratio in the second half of 1995.

The proposed assessment rate schedule is the current, nine-cell

matrix with assessment rates ranging from 4 basis points per year for

the highest-rated institutions to 31 basis points for the lowest-rated

institution (see Table 1, Proposed Rate Schedule). For purposes of

maintaining the reserve ratio at 1.25%, the relevant fact is that the

estimated 4.5 basis point average assessment rate resulting from this

matrix will produce approximately $1.1 billion of annual revenue for

the BIF in the short run. If the proposed matrix takes effect at or

near the beginning of the second semiannual period in 1995, the reserve

ratio will reach nearly 1.3% by year-end, under current assumptions

concerning insurance losses, operating expenses, insured deposit

growth, and other relevant factors.

However, the staff's baseline assumptions imply that an average

assessment rate of 4 to 5 basis points is necessary to maintain the BIF

reserve ratio at 1.25% over a 5-7 year horizon (see Tables 2-4). While

the baseline assumptions for insurance losses may be characterized as

relatively pessimistic given current economic conditions, it is

important to recognize that such conditions are rare in the banking

industry's recent history. For 1994, the ratio of insurance losses to

estimated insured deposits was approximately one-half of 1 basis point

(estimated). This ratio had not previously fallen below 1 basis point

in any year since 1980, averaging 16 basis points for the 1981-93

period and exceeding 30 basis points in three of those years.

Therefore, the staff's baseline loss assumptions may be considered

rather optimistic relative to recent historical experience.

The proposed matrix would yield assessment revenue sufficient to

finance losses equal to the 60-year annual average, nearly 4 basis

points of estimated insured deposits, with a margin to absorb losses

that moderately exceed the average. In view of the recent experience

reviewed above, the staff believes this to be the minimum amount

necessary to maintain the DRR consistently over the near-term future.

Given the increasing degree of competition faced by insured

institutions, the increasing opportunities for risk-taking as a result

of rapid financial innovation, and the increased variability of

interest rates as well as other prices due to the globalization of

markets and other factors, the staff believes that the loss experience

in the banking industry is unlikely to revert to pre-1980 norms.

Rather, the average yearly loss ratio is likely to exceed the 60-year

average going forward, with large year-to-year variability.

Prudence requires that the Board be provided with the flexibility

to adjust assessment rates in a timely manner in response to changing

conditions. Accordingly, the Board proposes to increase or decrease the

proposed assessment schedule by an adjustment factor of up to 5 basis

points or fraction thereof. The adjustment factor is the maximum amount

by which the Board could adjust the assessment rate schedule without

going through an additional notice and comment rulemaking process. Such

adjustments could only be made to the assessment schedule in its

entirety, not to individual risk classification cells. Nor could the

spread of 27 basis points be changed by means of the adjustment factor.

Accordingly, by means of the adjustment factor, the Board could adjust

the proposed assessment schedule of 4-31 basis points to a maximum

assessment schedule of 9-36 basis points and a minimum assessment

schedule of 0-27 basis points.

This adjustment factor would provide the Board with the flexibility

to raise a maximum additional $1.2-$1.4 billion in the near term

without undertaking a rulemaking. An adjustment factor of 5 basis

points appears modest when viewed historically, as the loss-to-insured

deposits ratio has been quite variable; the standard deviation was 8.6

basis points for the 1933-93 period and [[Page 9277]] 11.7 basis points

for 1983-93. In view of the currently favorable banking environment,

however, a 5 basis point adjustment factor should be sufficient to

maintain the DRR in the short run.

IV. Application and Adjustment of Proposed Assessment Rate Schedule

A. Summary

The proposal would establish (1) the manner in which the new

schedule of assessment rates set forth in Section III, will be applied

in the semiannual period during which the DRR is achieved, and (2) a

process for adjusting the proposed rate schedule (within prescribed

parameters) to maintain the reserve ratio at 1.25% without the

necessity of notice and comment rulemaking procedures for each

adjustment. In conformity with the statutory directives, the proposed

assessment schedule would not become effective unless and until the DRR

is, in fact, achieved. Once effective, however, the proposed rate would

apply to the remainder of the semiannual period after the DRR is

achieved and to semiannual periods thereafter.

For semiannual periods after that period in which the DRR is

achieved, the proposed rate would be adjusted semiannually up or down

by the adjustment factor of up to and including 5 basis points as

necessary to maintain the target DRR at 1.25%. The semiannual

assessment schedule, and any adjustment thereto, would be adopted by

the Board in a resolution which reflects consideration of the statutory

factors upon which it is determined. The Board would announce the

semiannual assessment schedule not later than 45 days prior to the

November 30 and May 30 quarterly invoice dates, and the adjusted rates

would first be reflected in those invoices.

B. Semiannual Period During Which DRR Is Achieved

Section 7(b)(2)(E) provides that:

The Corporation shall design the risk-based assessment system

for any deposit insurance fund so that, if the *** reserve ratio of

that fund remains below the designated reserve ratio, the total

amount raised by semiannual assessments on members of that fund

shall be not less than the total amount that would have been raised

if--

(i) section 7(b) as in effect on July 15, 1991 remained in

effect; and

(ii) the assessment rate in effect on July 15, 1991 [23 basis

points] remained in effect.

Based on the language of this section as well as its legislative

history, the Board believes that it has no authority to decrease the

assessment rates paid by BIF members until after the reserve ratio has,

in fact, reached the DRR, regardless of projections for BIF

recapitalization. Section 7(b)(2)(E) indicates that the Board may not

lower BIF assessment rates in anticipation of meeting the DRR during

the upcoming semiannual period. If the Board were to decrease the rates

based on projections for BIF recapitalization, the reserve ratio would

``remain'' below the DRR at the time of the Board's action and the

minimum assessments provisions of section 7(b) would continue to apply.

This interpretation is consistent with Congressional intent that

the FDIC maintain a minimum assessment rate of 23 basis points for BIF

members until the fund achieves its DRR. In connection with the Senate

Banking Committee's consideration of whether to establish a maximum

assessment for BIF members, the Committee stated, ``[t]he Committee is

firm in its view that the 23 basis point premium rate now in effect

[during the second semiannual period of 1991] should not be reduced

until the BIF achieves its designated reserve ratio.'' [Emphasis

added.] S. Rep. No. 167, 102d Cong., 1st Sess., 30 (1991). The

Committee believed that, ``So long as BIF reserves remain insufficient

to cover demands on the BIF as they arise, taxpayers will be at risk''

and passed a bill which ``encourages the FDIC to begin rebuilding the

BIF by restricting the FDIC's discretion to delay recapitalization.''

Id. at 29.

If section 7(b)(2)(E) were further interpreted to mean that the

FDIC must wait to reduce BIF rates until the beginning of the

semiannual period after the DRR was reached, the FDIC would have

collected far in excess of the revenue required to maintain the reserve

ratio at the DRR with no mechanism for rebating the excess amounts.

This is particularly the case if the BIF recapitalizes early in the

semiannual period, as is indicated by current projections. If this

provision were interpreted in this manner, the vast majority of the

assessment revenue collected would not be needed to maintain the BIF at

the DRR.

Although the Board must set semiannual assessments for BIF members,

the FDI Act is silent as to when assessments must be announced or set

and expressly allows the Board to prescribe the manner and time of

assessment collections. See FDI Act, sections 7(b)(2)(A); 7(b)(3) and

7(c)(2)(B).4 12 U.S.C. 1817(b)(2)(A); 1817(b)(3) and

1817(c)(2)(B). Thus, the Board may set semiannual assessment rates to

take effect after the DRR has been achieved.

\4\Section 7(b)(1)(A) was amended in FDICIA to permit the FDIC

to establish ``and, from time to time, adjust the assessment rates *

* *''. FDICIA, section 104(b). This provision was in effect from

December 19, 1991 until January 1, 1994 when the risk-based

assessment provisions became operative.

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The reserve ratio is the dollar amount of the BIF fund balance

divided by the estimated insured deposits of BIF members. Although data

for the fund balance is accounted for on a monthly basis, the amount of

estimated insured deposits is based on data from the quarterly reports

of condition (call reports). Because current projections indicate that

the BIF will recapitalize early in the July-December semiannual period,

the amount of estimated insured deposits would be determined by the

information on the June call reports which are due on July 30 (or for

some institutions, August 14). Due to the customary time lag involved

in verifying the information from the call reports, it is probable that

the determination that the DRR has been achieved will not be made until

mid-September. Moreover, because the fund balance is determined only on

a monthly, rather than daily basis, the date on which the Board

ascertains that the DRR has been attained must necessarily be the last

day of the month.

Because the Board cannot lower assessment rates until it is certain

that the DRR has been attained, the May 30 quarterly invoice and, very

likely, the August 30 quarterly invoice will reflect the pre-DRR rate

of approximately 6 basis points (one-quarter of the annual assessment

rate of 23 basis points). The June 30 direct debit of the amount

specified on the May 30 invoice will proceed as planned. However, in

the event it is determined that the DRR has been attained before the

September 30 direct debit occurs, the Board proposes to promptly notify

BIF members that the September 30 direct debit will be modified to

reflect the new assessment rate.

Because the proposed 4-31 basis point assessment rate would apply

from the first day of the month after the DRR was achieved for the

remainder of the semiannual period, it is likely that some BIF members

will have overpaid their semiannual assessments. For example, if the

DRR is determined to have been achieved on July 31 and the 4-31 basis

point rate becomes effective on August 1, a portion of the assessment

paid for the July-September quarter would constitute an overpayment. In

such a case, pursuant to section 7(e) of the FDI Act, the FDIC is

permitted to refund any assessment overpayment or to credit the

overpayment toward the next assessment due until the overpayment amount

is exhausted.

Section 7(e) applies in the case of ``any payment in excess of the

amount [[Page 9278]] due''. The FDIC has interpreted this provision to

apply case-by-case to an overpayment by an individual institution

caused by a computation error or revisions to the institution's

reported assessment base. Because individual institutions would have

overpaid the amount that actually was due once the proposed rate became

effective, section 7(e) should also be applicable in this situation.

On the other hand, if the DRR is not achieved, no action would be

required because the existing collection process would simply remain in

effect. In such a case, the September 30 direct debit of the amount

specified on the August 30 quarterly invoices would go forward. If the

DRR were to be reached, for example, on September 30, the proposed rate

would nonetheless take effect at that point for the remainder of the

July-December semiannual period.

In the event the FDIC collects more assessment revenue from an

institution than is required for the July-December semiannual period, a

refund of the overpayment, with interest from the time the DRR is

achieved, would be provided. The FDIC intends to provide any such

refund electronically using the ACH facility, but may do so by check.

The same routing transit numbers and accounts used for the direct debit

collection would be used for electronic refunds.

C. Semiannual Periods After the DRR Is Achieved

The 4-31 basis point assessment schedule would continue to apply to

semiannual periods commencing with the semiannual period after the DRR

has been achieved (presumably January 1996). However, to enable the

Board to maintain the reserve ratio at the target DRR in future

semiannual periods, the proposal would authorize the Board to adjust

(by resolution) the proposed assessment schedule by an adjustment

factor of up to and including 5 basis points or fraction thereof. By

this means the Board proposes to limit its discretion to adjust rates

within a range of 5 basis points. As noted above, such adjustments

could only be made to the assessment schedule in its entirety, not to

individual risk classification cells. Nor could the spread of 27 basis

points be changed by means of the adjustment factor. Accordingly, by

means of the adjustment factor, the Board could adjust the proposed

assessment schedule of 4-31 basis points to a maximum assessment

schedule of 9-36 basis points and a minimum assessment schedule of 0-27

basis points. Thus, for example, if the rate for 1A banks was 4 basis

points, no matter how many times the assessment schedule were adjusted

up or down, the rate for 1A banks could never go above 9 basis points

without going through the notice and comment rulemaking process.

Finally, if financial conditions warranted a change beyond the maximum

amount of the adjustment factor, the Board would make such adjustments

through the notice and comment rulemaking process.

The adjustment factor for any particular semiannual period would be

determined by (1) the amount of assessment income necessary to maintain

the reserve ratio at 1.25% (taking into account operating expenses and

expected losses) and (2) the particular risk-based assessment schedule

that would generate that amount considering the risk composition of the

industry at the time. The Board proposes to adjust the assessment rate

schedule every six months by the amount, up to and including the

maximum adjustment factor of 5 basis points, necessary to maintain the

reserve ratio at the DRR. Such adjustments will be adopted in a Board

resolution that reflects consideration of the statutory factors. These

include expected operating expenses, projected losses, the effect on

BIF members' earnings and capital and any other factors the Board

determines to be relevant to the BIF. The resolution will be adopted

and announced at least 45 days prior to the invoice date for the first

quarter of the semiannual period in which the rate will take effect

(i.e., November 30 and May 30 invoice dates). Those invoices would then

first reflect the adjusted assessment rate schedule.

V. Request for Comment

The Board invites comments on all aspects of the proposal.

VI. Paperwork Reduction Act

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

Paperwork Reduction Act (44 U.S.C. 3501 et seq.) are contained in this

notice. Consequently, no information has been submitted to the Office

of Management and Budget for review.

VII. Regulatory Flexibility Act

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) does not

apply to a rule of particular applicability relating to rates, wages,

corporate or financial structures or reorganizations thereof. Id. at

601(2). Accordingly, the statute does not apply to the proposed changes

in the assessment rate schedule, the structure of that schedule and

future adjustments thereto. In any event, to the extent an

institution's assessment is based on the amount of its domestic

deposits, the primary purpose of the Regulatory Flexibility Act, that

agencies' rules do not impose disproportionate burdens on small

businesses, is fulfilled.

List of Subjects in 12 CFR Part 327

Assessments, Bank deposit insurance, Banks, Banking, Financing

Corporation, Savings associations.

For the reasons stated in the preamble, the Board proposes to amend

part 327, as amended at 59 FR 67153 effective April 1, 1995, of title

12 of the Code of Federal Regulations as follows:

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. Section 327.8 is amended by adding a new paragraph (i) to read

as follows:

Sec. 327.8 Definitions.

* * * * *

(i) As used in Sec. 327.9, the following terms have the following

meanings:

(1) Adjustment factor. The maximum number of basis points by which

the Board may increase or decrease Rate Schedule 2 set forth in

Sec. 327.9(a).

(2) Assessment schedule. The set of rates based on the assessment

risk classifications of Sec. 327.4(a) with a difference of 27 basis

points between the minimum rate which applies to institutions

classified as 1A and the maximum rate which applies to institutions

classified as 3C.

3. Section 327.9 is amended by revising paragraphs (a) and (b), by

redesignating paragraph (c) as paragraph (e) and adding new paragraphs

(c) and (d) to read as follows:

Sec. 327.9 Assessment rate schedules.

(a) BIF members. Subject to Sec. 327.4(c), the annual assessment

rate for each BIF member other than a bank specified in Sec. 327.31(a)

shall be the rate in the Rate Schedules below applicable to the

assessment risk classification assigned by the Corporation under

Sec. 327.4(a) to that BIF member. Until the BIF designated reserve

ratio of 1.25 percent is achieved, the rates set forth in Rate Schedule

1 shall apply. After the BIF designated reserve ratio is achieved, the

rates set forth in Rate Schedule 2 shall apply. The schedules utilize

the group and subgroup designations specified in Sec. 327.4(a):

[[Page 9279]]

Rate Schedule 1

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

Supervisory subgroup

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

A B C

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

1............................................... 23 26 29

2............................................... 26 29 30

3............................................... 29 30 31

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

Rate Schedule 2

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

Supervisory subgroup

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

A B C

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

1............................................... 4 7 21

2............................................... 7 14 28

3............................................... 14 28 31

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

(b) BIF recapitalization schedule. The following schedule indicates

the stages by which the Corporation seeks to achieve the BIF designated

reserve ratio of 1.25 percent. The schedule begins with the semiannual

period ending December 31, 1991 and ends on the earlier of the

semiannual period ending June 30, 2002 or the date on which the BIF

designated reserve ratio is achieved:

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

Target

reserve

Semi-annual period ratio

(percent)

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

1991.2....................................................... -0.36

1992.1....................................................... -0.28

1992.2....................................................... -0.01

1993.1....................................................... 0.03

1993.2....................................................... 0.06

1994.1....................................................... 0.08

1994.2....................................................... 0.09

1995.1....................................................... 0.15

1995.2....................................................... 0.21

1996.1....................................................... 0.28

1996.2....................................................... 0.34

1997.1....................................................... 0.42

1997.2....................................................... 0.50

1998.1....................................................... 0.59

1998.2....................................................... 0.67

1999.1....................................................... 0.76

1999.2....................................................... 0.85

2000.1....................................................... 0.94

2000.2....................................................... 1.03

2001.2....................................................... 1.12

2001.2....................................................... 1.21

2002.1....................................................... 1.25

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

(c) Rate adjustment; announcement--(1) Semiannual adjustment. The

Board may increase or decrease Rate Schedule 2 set forth in paragraph

(a) of this section semiannually by an adjustment factor of up to and

including 5 basis points or fraction thereof as the Board deems

necessary to maintain the reserve ratio at the BIF designated reserve

ratio. In no case may such adjustment result in a negative assessment

rate. The adjustment factor for any semiannual period shall be

determined by:

(i) The amount of assessment revenue necessary to maintain the

reserve ratio at the designated reserve ratio; and

(ii) The assessment schedule that would generate the amount of

revenue in paragraph (c)(1)(i) of this section considering the risk

profile of BIF members.

(2) In determining the amount of assessment income in paragraph

(c)(1)(i) of this section, the Board shall take into consideration the

following:

(i) Expected operating expenses;

(ii) Case resolution expenditures and income;

(iii) The effect of assessments on BIF members' earnings and

capital; and

(iv) Any other factors the Board may deem appropriate.

(3) Announcement. The Board shall:

(i) Adopt the semiannual assessment schedule and any adjustment

thereto by means of a resolution reflecting consideration of the

factors specified in paragraph (c)(2)(i) through (iv) of this section;

and

(ii) Announce the semiannual assessment schedule and any adjustment

thereto not later than 45 days before the invoice date specified in

Sec. 327.4(c) for the first quarter of the semiannual period for which

the adjusted assessment schedule shall be effective.

(d) Special provisions. The following provisions apply only for the

first semiannual period after January 1, 1995 in which the BIF

designated reserve ratio is achieved:

(1) Notwithstanding the provisions of Sec. 327.3(c)(2) or

Sec. 327.3(d)(2), the Corporation may modify the time of the direct

debit of the assessment payment which next occurs after the Board

determines that the designated reserve ratio has been achieved; and

(2) Notwithstanding the provisions of Sec. 327.7(a)(3), if the

designated reserve ratio is achieved at the end of a month which is not

the end of a quarter and, as a result, an institution has overpaid its

assessment, the Corporation shall provide interest on any such

overpayment beginning on the date the designated reserve ratio was

achieved.

* * * * *

By order of the Board of Directors.

Dated at Washington, D.C., this 31st day of January 1995.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Acting Executive Secretary.

[FR Doc. 95-3670 Filed 2-15-95; 8:45 am]

BILLING CODE 6714-01-P