Assessments

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

RIN 3064-AB59

Assessments

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Proposed Rule.

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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is proposing

to amend its assessment regulations by adopting interpretive rules

regarding certain provisions therein that pertain to so-called Oakar

institutions: institutions that belong to one insurance fund (primary

fund) but hold deposits that are treated as insured by the other

insurance fund (secondary fund). Recent merger transactions and branch-

sale cases have revealed weaknesses in the FDIC's procedures for

attributing deposits to the two insurance funds and for computing the

growth of the amounts so attributed. The interpretive rules would

repair those weaknesses.

In addition, the FDIC is proposing to simplify and clarify the

existing rule by making changes in nomenclature.

DATES: Comments must be received by the FDIC on or before September 3,

1996.

ADDRESSES: Send comments to the Office of the Executive Secretary,

Federal Deposit Insurance Corporation, 550 17th Street, N.W.,

Washington, D.C. 20429. Comments may be hand- delivered to Room F-400,

1776 F Street, N.W., Washington, D.C., on business days between 8:30

a.m. and 5:00 p.m. (FAX number: 202/898-3838. Internet address:

[email protected]). Comments will be available for inspection in the

FDIC Public Information Center, Room 100, 801 17th Street, N.W.,

Washington, D.C. between 9:00 a.m. and 4:30 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: Allan K. Long, Assistant Director,

Division of Finance, (703) 516-5559; Stephen Ledbetter, Chief,

Assessments Evaluation Section, Division of Insurance (202) 898-8658;

Jules Bernard, Counsel, Legal Division, (202) 898-3731, Federal Deposit

Insurance Corporation, Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION: This proposed interpretive regulation would

alter the method for determining the assessments that Oakar

institutions pay to the two insurance funds. Accordingly, the proposed

regulation would directly affect all Oakar institutions. The proposed

regulation would also indirectly affect non-Oakar institutions,

however, by altering the business considerations that non-Oakar

institutions must take into account when they transfer deposits to or

from an Oakar institution (including an institution that becomes an

Oakar institution as a result of the transfer).

I. Background

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

moratorium on inter-fund deposit-transfer transactions: mergers,

acquisitions, and other transactions in which an institution that is a

member of one insurance fund (primary fund) assumes the obligation to

pay deposits owed by an institution that is a member of the other

insurance fund (secondary fund). The moratorium is to remain in place

until the reserve ratio of the Savings Association Insurance Fund

(SAIF) reaches the level prescribed by statute. Id. 1815(d)(2)(A)(ii);

see id. 1817(b)(2)(A)(iv) (setting the target ratio at 1.25 percentum).

The next paragraph of section 5(d)--section 5(d)(3) of the FDI

Act--is known as the Oakar Amendment. See Financial Institutions

Reform, Recovery and Enforcement Act of 1989 (FIRREA), Pub. L. 101-73

section 206(a)(7), 103 Stat. 183, 199-201 (Aug. 9, 1989); 12 U.S.C.

1815(d)(3). The Amendment permits certain deposit-transfer transactions

that would otherwise be prohibited by section 5(d)(2) (Oakar

transactions).

The Oakar Amendment introduces the concept of the ``adjusted

attributable deposit amount'' (AADA). An AADA is an artificial

construct: a number, expressed in dollars, that is generated in the

course of an Oakar transaction, and that pertains to the buyer. The

initial value of a buyer's AADA is equal to the amount of the

secondary-fund deposits that the buyer acquires from the seller. The

Oakar Amendment specifies that the AADA then increases at the same

underlying rate as the buyer's overall deposit base--that is, at the

rate of growth due to the buyer's ordinary business operations, not

counting growth due to the acquisition of deposits from another

institution (e.g., in a merger or a branch purchase). Id.

1815(d)(3)(C)(iii). The FDIC has adopted the view that ``growth'' and

``increases'' can refer to ``negative growth'' under the FDIC's

interpretation of the Amendment, an AADA decreases when the

institution's deposit base shrinks.

An AADA is used for the following purposes:

--Assessments. An Oakar institution pays two assessments to the FDIC--

one for deposit in the institution's secondary fund, and the other for

deposit in its primary fund. The secondary-fund assessment is based on

the portion of the institution's assessment base that is equal to its

AADA. The primary-fund assessment is based on the remaining portion of

the assessment base.

--Insurance. The AADA measures the volume of deposits that are

``treated as'' insured by the institution's secondary fund. The

remaining deposits are insured by the primary fund. If an Oakar

institution fails, and the failure causes a loss to the FDIC, the two

insurance funds share the loss in proportion to the amounts of deposits

that they insure.

For assessment purposes, the AADA is applied prospectively, as is

the assessment base. An Oakar institution has an AADA for a current

semiannual period, which is used to determine the institution's

assessment for that period.1 The current-period AADA is calculated

using deposit-growth and other information from the prior period.

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\1\ Technically, each Oakar transaction generates its own AADA.

Oakar institutions typically participate in several Oakar

transactions. Accordingly, and Oakar institution generally has an

overall or composite AADA that consists of all the individual AADAs

generated in the various Oakar transactions, plus the growth

attributable to each individual AADA. The composite AADA can

generally be treated as a unit as a practical matter, because all

the constituent AADAs (except initial AADAs) grow at the same rate.

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II. The proposed rule

A. Attribution of transferred deposits

1. The FDIC's Current Interpretation: The ``Rankin'' Rule

The FDIC has developed a methodology for attributing deposits to

the Bank Insurance Fund (BIF) on one hand and to the SAIF on the other

when the seller is an Oakar institution. See FDIC Advisory Op. 90-22, 2

FED. DEPOSIT INS. CORP., LAW, REGULATIONS, RELATED ACTS 4452 (1990)

(Rankin letter). The Rankin letter adopts the following rule: an Oakar

institution transfers its primary-fund deposits first, and only begins

to

[[Page 34752]]

transfer its secondary-fund deposits after its primary-fund deposits

have been exhausted.

The chief virtue of this approach is that of simplicity. Sellers

rarely transfer all their primary-fund deposits. A seller ordinarily

has the same AADA after the transaction as before, and a buyer does not

ordinarily become an Oakar institution. The Rankin letter's approach

also has the virtue of being a well- established and well-understood

interpretation.

Nevertheless, the Rankin letter's approach has certain weaknesses.

For example, if a seller transfers a large enough volume of deposits,

the seller becomes insured and assessed entirely by its secondary

fund--even though it remains a member of its primary fund in name, and

even though its business has not changed in character.

The Rankin letter's approach may also lend itself to ``gaming'' by

Oakar institutions. Oakar banks--and their owners--have an incentive to

eliminate their AADAs, because the SAIF assessment rates are currently

much higher than the BIF rates. If an Oakar bank belonged to a holding

company system, the holding company could purge the AADA from the

system as a whole by having the Oakar bank transfer all its BIF-insured

deposits to an affiliate, and then allowing the remnant of the Oakar

bank to wither away.

2. ``Blended'' deposits

An alternative approach would be to adopt the view that an Oakar

institution transfers a blend of deposits to the assuming institution.

The transferred deposits would be attributed to the two insurance funds

in the same ratio as the Oakar institution's overall deposits were so

attributed immediately prior to the transfer. This ``blended deposits''

approach would have the virtue of maintaining the relative proportions

of the seller's primary-fund deposit-base and the secondary-fund

deposit base, just as they are preserved in the ordinary course of

business.

As a general rule, the ratio would be fixed at the start of the

quarter in which the transfer takes place. If the institution were to

acquire deposits after the start of the quarter but prior to the

transfer, the acquired deposits would be added to the institution's

store of primary-fund and secondary-fund deposits as appropriate, and

the resulting amounts would be used to determine the ratio.

This procedure would be designed to exclude intra-quarter growth

from the calculation of the ratio. The FDIC considers that it would be

desirable to do so for two main reasons: it would keep the methodology

simple; and (in the ordinary case) it would make use of numbers that

are readily available to the parties.

At the same time, the ``blended deposits'' approach would create a

new Oakar institution each time a non-Oakar institution acquired

deposits from an Oakar institution. Accordingly, this approach would

generally subject buyers to more complex reporting and tracking

requirements. This approach would also require more disclosure on the

part of sellers, because buyers would have to be made aware that they

were acquiring high-cost SAIF deposits. But the ``blended deposits''

approach could remove some uncertainty because the buyer would know

that it was acquiring such deposits whenever the seller was an Oakar

institution.

In cases where the seller has acquired deposits prior to the sale

but during the same semiannual period as the sale, the blended-deposit

approach could be more complex. The acquisition of deposits would

change the seller's AADA-to-deposits ratio, which would need to be

calculated and made available in conjunction with the sale. At first,

the FDIC considered that this problem could be addressed by using the

ratio at the beginning of the quarter for all transactions during that

quarter. But the FDIC later came to the view that this technique could

open up the blended-deposit approach to gaming strategies that

institutions could use to decrease their AADAs.

Finally, under the blended-deposit approach, Oakar banks--which are

BIF members--could find it difficult (or expensive) to transfer

deposits to other institutions, due to market uncertainty regarding the

prospect of a special assessment to capitalize SAIF and the alternative

prospect of a continued premium differential between BIF and SAIF.

Any change to a blended-deposit approach would only apply to

transfers that take place on and after January 1, 1997. Accordingly,

the change would not affect any assessments that Oakar institutions

have paid in prior years. Nor would it affect the business aspects of

transactions that have already occurred, or that may occur during the

remainder of 1996.

B. FDIC Computation of the AADA; Reporting Requirements

The FDIC currently requires all institutions that assume secondary-

fund deposits in an Oakar transaction to submit an Oakar transaction

worksheet for the transaction. The FDIC provides the worksheet. The

FDIC provides the name of the buyer and the seller, and the

consummation date of the transaction. The buyer provides the total

deposits acquired, and the value of the AADA thereby generated. In

addition, Oakar institutions must complete a growth adjustment

worksheet to re-calculate their AADA as of December 31 of each year.

Finally, Oakar banks report the value of their AADA, on a quarterly

basis, in their quarterly reports of condition (call reports).

To implement the proposal to adjust AADAs on a quarterly basis, and

to ensure compliance with the statutory requirement that an AADA does

not grow during the semiannual period in which it is acquired, see 12

U.S.C. 1815(d)(3)(C)(iii), the FDIC initially considered replacing the

current annual growth adjustment worksheet with a slightly more

detailed quarterly worksheet. The FDIC was concerned that this approach

might impose a burden on Oakar institutions, however. The FDIC was

further concerned that this approach could result in an increase in the

frequency of errors associated with these calculations. Accordingly,

the FDIC now believes it might be more appropriate to relieve Oakar

institutions of this burden by assuming the responsibility for

calculating each Oakar institution's AADA, and eliminating the growth

adjustment worksheet entirely. The FDIC would calculate the AADA as

part of the current quarterly payment process. The calculation, with

supporting documentation, would accompany each institution's quarterly

assessment invoice.

If the FDIC assumes the responsibility for calculating the AADA,

Oakar institutions would no longer have to report their AADAs in their

call reports. But they would have to report three items on a quarterly

basis. Oakar institutions already report two of the items as part of

their annual growth adjustment worksheets: total deposits acquired in

the quarter, and secondary-fund deposits acquired in the quarter. Oakar

institutions would therefore have to supply one other item: total

deposits sold in the quarter.

These items will be zero in most quarters. Even in quarters in

which some transactions have occurred, the FDIC considers that the

items should be readily available and easy to calculate.

While for operational purposes, the FDIC would prefer to add these

three items to the call report, an alternative approach would be simply

to replace the current growth adjustment worksheet with a very simple

quarterly worksheet essentially consisting only of these items. The

FDIC expects this specific issue to be addressed in a Request for

Comment on Call Report

[[Page 34753]]

Revisions for 1997 currently expected to be issued jointly by the three

banking agencies in July.

In addition, if the FDIC adopts the blended-deposit approach for

attributing transferred deposits, the FDIC would need an additional

quarterly worksheet from Oakar institutions in order to calculate AADAs

accurately. The additional worksheet would report the date and amount

of deposits involved in each transaction in which the Oakar institution

transferred deposits to another institution during the quarter. This

information is not currently collected.

C. Treatment of AADAs on a Quarterly Basis

The FDIC is proposing to adopt the view that--under its existing

regulation--an AADA for a semiannual period may be considered to have

two quarterly components. The increment by which an AADA grows during a

semiannual period may be considered to be the result of the growth of

each quarterly component.

1. Quarterly Components

a. Propriety of quarterly components. The FDIC's assessment

regulation speaks of an institution's AADA ``for any semiannual

period''. 12 CFR 327.32(a)(3). The FDIC currently interprets this

phrase to mean that an AADA has a constant value throughout a

semiannual period. The FDIC has taken this view largely for historical

reasons. Recent changes in the Oakar Amendment give the FDIC room to

alter its view.

The FDIC's ``constant value'' view derives from the 1989 version of

the Oakar Amendment. See 12 U.S.C. 1815(d)(3) (Supp. I 1989). That

version of the Amendment said that an Oakar bank's AADA measured the

``portion of the average assessment base'' that the SAIF could assess.

Id. 1815(d)(3)(B). The FDI Act (as then in effect) defined the

``average assessment base'' as the average of the institution's

assessment bases on the two dates for which the institution was

required to file a call report. Id. 1817(b)(3). As a result, an AADA--

even a newly created one, and even one that was generated in a

transaction during the latter quarter of the prior semiannual period--

served to allocate an Oakar bank's entire assessment base for the

entire current semiannual period. The FDIC issued rules in keeping with

this view. 54 FR 51372 (Dec. 15, 1989).

Congress decoupled the AADA from the assessment base at the

beginning of 1994, as part of the FDIC's changeover to a risk-based

assessment system. See Federal Deposit Insurance Corporation

Improvement Act of 1991 (FDICIA), Pub. L. 102-242, section 302(e) &

(g), 105 Stat. 2236, 2349 (Dec. 19, 1991); see also Defense Production

Act Amendments of 1992, Pub L. 102-558, section 303(b)(6)(B), 106 Stat.

4198, 4225 (Oct. 28, 1992) (amending the FDICIA in relevant part); cf.

58 FR 34357 (June 23, 1993). The Oakar Amendment no longer links the

AADA directly to the assessment base. The Amendment merely declares,

``[T]hat portion of the deposits of [an Oakar institution] for any

semiannual period which is equal to [the Oakar institution's AADA] * *

* shall be treated as deposits which are insured by [the Oakar

institution's secondary fund]''. See 12 U.S.C. 1815(d)(3).

The FDIC has not changed its rules for assessing Oakar

institutions, and has continued to interpret the rules in the same

manner as before. Accordingly, the ``constant value'' concept of the

AADA has continued to be the view of the FDIC.

But the FDIC is no longer compelled to retain this view.

Furthermore, as discussed below, the FDIC has found that this approach

has certain disadvantages. The FDIC is therefore proposing to re-

interpret the phrase ``for any semiannual period'' as it appears in

Sec. 327.32(a)(3) in the light of the FDIC's quarterly assessment

program. The FDIC would take the position that an Oakar institution's

AADA for a semiannual period may be determined on a quarter-by-quarter

basis--just as the assessment base for a semiannual period is so

determined--and may be used to measure the portion of each quarterly

assessment base that is to be assessed by the institution's secondary

fund. The FDIC would also take the view that, if an AADA is generated

in a transaction that takes place during the second calendar quarter of

a semiannual period, the first quarterly component of the AADA for the

current (following) semiannual period is zero; only the second

quarterly component is equal to the volume of the secondary-fund

deposits that the buyer so acquired.

The FDIC considers that this view of the phrase ``for any

semiannual period'' is appropriate because the phrase is the

counterpart of, and is meant to interpret, the following language in

the Oakar Amendment:

(C) DETERMINATION OF ADJUSTED ATTRIBUTABLE DEPOSIT AMOUNT.--The

adjusted attributable deposit amount which shall be taken into

account for purposes of determining the amount of the assessment

under subparagraph (B) for any semiannual period * * *

12 U.S.C. 1815(d)(3)(C).

This passage speaks of the assessment--not the AADA--``for any

semiannual period''. Insofar as the AADA is concerned, the statutory

language merely specifies the semiannual period for which the AADA is

to be computed: the period for which the assessment is due. The FDIC

believes that the phrase ``for a semiannual period'' may properly be

read to have the same meaning.

Moreover, while the Amendment says the AADA must ``be taken into

account'' in determining a semiannual assessment, the Amendment does

not prescribe any particular method for doing so. The FDIC considers

that this language provides enough latitude for the FDIC to apply the

AADA in a manner that is appropriate to the quarterly payment program.

The FDIC's existing regulation is compatible with this

interpretation. The regulation speaks of an assessment base for each

quarter, not of an average of such bases. The regulation further says

that an Oakar institution's AADA fixes a portion of its ``assessment

base''. See 12 CFR 327.32(a)(2) (i) & (ii). Accordingly, the FDIC is

not proposing to modify the text that specifies the method for

computing AADAs.

b. Need for the re-interpretation. Under certain conditions, the

FDIC's ``constant value'' view of the AADA appears to be tantamount to

double-counting transferred deposits for a calendar quarter.

The appearance of ``double-counting'' occurs when an Oakar

institution acquires secondary-fund deposits in the latter half of a

semiannual period--i.e., in the second or fourth calendar quarter. The

seller has the deposits at the end of the first (or third) quarter; its

first payment for the upcoming semiannual period is based on them. At

the same time, the buyer's secondary-fund assessment is approximately

equal to an assessment on the transferred deposits for both quarters in

the semiannual period.2

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\2\ The correlation is not so close as it first appears. Various

factors distort the relation between an Oakar institution's deposit

base on one hand and its primary-fund and secondary-fund assessment

bases on the other.

The chief factor is the so-called float deduction, which is

equal to the sum of one-sixth of an institution's demand deposits

plus one percentum of its time and savings deposits. See 12 CFR

327.5(a)(2). An Oakar institution's secondary-fund assessment base

is equal to the full value of its AADA, however. See id.

327.32(a)(2). The impact of the float deduction falls entirely on

the primary-fund assessment base.

Accordingly, neither the primary-fund assessment base nor the

secondary-fund assessment base is directly proportional to the

institutional's total deposits. Nor does the split between the

institutions two assessment base match the split between the

institution's primary-fund and secondary-fund deposits.

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[[Page 34754]]

The source of this apparent effect is that, under the FDIC's

current interpretation of its rule, an AADA--even a newly generated

one--applies to an Oakar institution's entire assessment base for the

entire semiannual period. The following example illustrates the point.

The example focuses on the average assessment base, in order to show

the relationship between the AADA and the assessment base up to the

time the FDIC adopted the quarterly-payment procedure:

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Seller

(SAIF) Buyer (BIF) Industry total

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Before the transaction:

Starting assessment bases (ignoring

float, &c.):

SAIF........................... $200 $0 $200.

BIF............................ 0 100 100.

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200 100 300.

The transaction:

March call report...................... 200 100 300.

Deposits sold.......................... (100) +100 (AADA) Neutral.

June call report....................... 100 200 300.

After the transaction:

Ending assessment bases (ignoring

float, &c.):

SAIF........................... 100 100 (AADA) 200.

BIF............................ 0 100 100.

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100 200 300.

Average assessment bases:

(Ignoring float, &c.):

SAIF........................... 150 100 (AADA) 250.

BIF............................ 0 50 50.

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150 150 300.

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The SAIF-assessable portion of the buyer's average assessment base

is $100. If the SAIF-assessable portion were based directly on the

average of the buyer's SAIF-insured deposits for the prior two

quarters--rather than on the buyer's AADA--that portion would only be

$50. The difference is equivalent to attributing the transferred $100

to the buyer for an extra one-half of the semiannual period: by

implication, for the first (or third) quarter as well as for the second

(or fourth) quarter.

The anomaly is most apparent from the standpoint of the industry as

a whole. The aggregate amount of the SAIF-assessable deposits

temporarily balloons to $250, while the aggregate amount of the BIF-

assessable deposits shrinks to $50. The anomaly only lasts for one

semiannual period, however. In the following period, the seller's

assessment base is $100 for both quarters, making its average

assessment base $100. The buyer's AADA remains $100. Accordingly, the

aggregate amount of SAIF-assessable deposits retreats to $200 once

more; and the aggregate amount of BIF-assessable deposits is back to

the full $100.

Broadening the focus to include both funds also brings out a more

subtle point: the anomaly is not tantamount to double-counting the

transferred deposits for a quarter, but rather to re-allocating the

buyer's assessment base from the BIF to the SAIF. The BIF-assessable

portion of the buyer's average assessment base is $50, not $100. The

difference is equivalent to cutting the buyer's BIF assessment base by

$100 for half the semiannual period.

The FDIC's quarterly-payment procedure has brought attention to

these anomalous effects. The quarterly-payment schedule is merely a new

collections schedule, not a new method for determining the amount due.

See 59 FR 67153 (Dec. 29, 1994). Accordingly, under current procedures,

the buyer and the seller in the illustration would pay the amounts

specified therein even under the quarterly-payment schedule.

When an Oakar transaction occurs in the latter half of a semiannual

period, however, the buyer's call report for the prior quarter does not

show an AADA. The buyer's first payment for the current semiannual

period is therefore based on its assessment base for that quarter, not

on its AADA. Moreover, the entire payment is computed using the

assessment rate for the institution's primary fund. The FDIC therefore

adjusts (and usually increases) the amount to be collected in the

second quarterly payment in order to correct these defects.

Interpreting the semiannual AADA to consist of two quarterly

components would eliminate this anomaly.

2. Quarterly Growth

The Oakar Amendment says that the growth rate for an AADA during a

semiannual period is equal to the ``annual rate of growth of deposits''

of the Oakar institution. The FDIC currently interprets the phrase

``annual rate'' to mean a rate determined over the interval of a full

year. An Oakar institution computes its ``annual rate of growth'' at

the end of each calendar year, and uses this figure to calculate the

AADA for use during the following year.

This procedure has a weakness. An Oakar institution's AADA tends to

drift out of alignment with the deposit base, because the AADA remains

constant while the deposit base changes. At the end of the year, when

the institution computes its AADA for the next year, the AADA

suddenly--but only temporarily--snaps back into its proper proportion.

The FDIC does not believe that Congress intended to cause such a

fluctuation in the relation between an institution's AADA and its

deposit base.

[[Page 34755]]

Moreover, from the FDIC's standpoint as insurer, it would be

appropriate to maintain a relatively steady correlation between the

AADA and the total deposit base. The FDIC is therefore proposing to

revise its view, and take the position that--after the end of the

semiannual period in which an institution's AADA has been established--

the AADA grows and shrinks at the same basic rate as the institution's

domestic deposit base (that is, excluding acquisitions and deposit

sales), measured contemporaneously on a quarter-by-quarter basis. Over

a full semiannual period, any increase or decrease in the AADA would

automatically occur at a rate equal to the ``rate of growth of

deposits'' during the semiannual period, thereby satisfying the

statutory requirement.

The FDIC considers that the statutory reference to an ``annual

rate'' does not foreclose this approach. In ordinary usage, ``annual

rate'' can refer to a rate that is expressed as an annual rate, even

though the interval during which the rate applies, and over which it is

determined, is a shorter interval such as a semiannual period (e.g., in

the case of six-month time deposits). For example, until recently, the

FDIC's rules regarding the payment of interest on deposits spoke of

``the annual rate of simple interest''--a phrase that pertained to

rates payable on time deposits having maturities as short as seven

days. See 12 CFR 329.3 (1993).

Comparison of Annual and Quarterly AADA Growth Adjustment Methods

Consider an Oakar institution that has total deposits of $15 as of

12/31/93, with an AADA of $6.5. Further assume that the institution's

total deposits grow by $1 every quarter, and that it does not

participate in any additional acquisitions or deposit sales. The

following graphs show the effects of making growth adjustments to its

AADA on an annual basis versus a quarterly basis.

BILLING CODE 6714-01-P

[[Page 34756]]

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Since an AADA remains constant until a growth adjustment is

applied, any change in total deposits is reflected in the institution's

primary-fund deposits in the annual-adjustment method, while primary-

fund deposits and the AADA vary together with total deposits in the

quarterly-adjustment method.

The following graphs express this difference in terms of percents

of total deposits.

[[Page 34757]]

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In the annual-adjustment method, the AADA becomes a smaller percent

of total deposits as the total grows. In the quarterly-adjustment

method, the AADA and the primary-fund deposits remain constant percents

of total deposits.

The FDIC considered an alternative approach: using the rate of

growth in the institution's deposit base for the prior four quarters,

measured from the current quarter. This technique would be as

consistent with the letter of the statute as the current method. But

the four-prior-quarters method would preserve the lag between the AADA

and the deposit base.

Comparison of Quarterly AADA Adjustments Using Different Growth Rate

Bases

Consider the same Oakar institution with beginning total deposits

of $15 and constant growth of $1 per quarter. The following graphs

illustrate the effects on deposits of using total-deposit growth rates

on two different bases: rolling one-year growth rates, and quarter-to-

quarter growth rates.

[[Page 34758]]

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In both cases, the primary-fund deposits and the AADA appear to

vary together with total deposits, but it is difficult to discern their

precise relationship. Graphs of the same effects in terms of percents

of total deposits are more illustrative:

[[Page 34759]]

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BILLING CODE 6714-01-C

[[Page 34760]]

In the percent-of-deposits graphs, the AADA and the primary-fund

deposits are shown to converge when the AADA growth adjustment is based

on rolling one-year growth rates. In this particular example, the

effect occurs because the institution's constant growth of $1 per

quarter results in a steadily decreasing rate of growth of total

deposits. Therefore, a rolling one-year growth rate of those total

deposits at any point in time will be more than the actual rate of

growth over the quarter to which the rolling rate is being applied.

While different growth characteristics for total deposits would yield

different relationships between the AADA and the primary fund over

time, the general point is that the relationships of the AADA and the

primary-fund deposits can vary when the AADA is adjusted, unless the

total-deposit rate of growth used for the adjustment is drawn from the

same period for which the rate is applied to the AADA.

As shown in the right-hand graph, applying the actual quarterly

growth rate for total deposits to the AADA results in stable percents

of total deposits for the AADA and primary fund deposits.

In sum, the FDIC considers that the quarterly approach is

permissible under the statute, and is preferable to any approach that

relies on a yearly interval to determine growth in the AADA.

D. Negative Growth of the AADA

One element of an Oakar institution's AADA for a current semiannual

period is ``the amount by which [the AADA for the preceding semiannual

period] 3 would have increased during the preceding semiannual

period if such increase occurred at a rate equal to the annual rate of

growth of [the Oakar institution's] deposits''. 12 U.S.C.

1815(d)(3)(C)(iii). The FDIC is proposing to codify its view that the

terms ``growth'' and ``increase'' encompass negative growth

(shrinkage). But the FDIC is proposing to change its interpretation by

excluding shrinkage due to deposit sales.

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

\3\ Theoretically, the growth rate is not applied directly to

the prior AADA, but rather to an amount that is computed afresh each

time--which amount is the sum of the various elements of the prior

AADA.

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

1. Negative Growth in General

The 1989 version of the Oakar Amendment focused on an Oakar bank's

underlying rate of growth for the purpose of determining the Oakar

bank's AADA. The 1989 version of the Amendment set a minimum growth

rate for an AADA of 7 percent. The Amendment then specified that, if an

Oakar bank's deposit base grew at a higher rate, the AADA would grow at

the higher rate too. But the Amendment excluded growth attributable to

mergers, branch purchases, and other acquisitions of deposits from

other BIF members: the deposits so acquired were to be subtracted from

the Oakar bank's total deposits for the purpose of determining the

growth in the Oakar bank's deposit base (and therefore the rate of

growth of the AADA). See 12 U.S.C. 1813(d)(3)(C)(3)(iii) (Supp. I

1989).

The 1989 version of the Oakar Amendment spoke only of ``growth''

and ``increases'' in the AADA. Id. The statute was internally

consistent in this regard, because AADAs could never decrease.

Congress eliminated the minimum growth rate as of the start of

1992. FDICIA section 501 (a) & (b), 105 Stat. 2389 & 2391. As a result,

the Oakar Amendment now specifies that an Oakar institution's AADA

grows at the same rate as its domestic deposits (excluding mergers,

branch acquisitions, and other acquisitions of deposits). 12 U.S.C.

1813(d)(3)(C).

The modern version of the Oakar Amendment continues to speak only

of ``growth'' and ``increases,'' however. Congress has not--at least

not explicitly--modified it to address the case of an institution that

has a shrinking deposit base. Nor has Congress addressed the case of an

institution that transfers deposits in bulk to another insured

institution.

The FDIC regards this omission as a gap in the statute that

requires interpretation. The FDIC does so because, if the statute were

read to allow only increases in AADAs, the statute would generate a

continuing shift in the relative insurance burden toward the SAIF. Most

Oakar institutions--and nearly all large Oakar institutions--are BIF-

member Oakar banks. If an Oakar bank's deposit base were to shrink

through ordinary business operations, but its AADA could not decline in

proportion to that shrinkage, the SAIF's share of the risk presented by

the Oakar bank would increase. But the reverse would not be true: if an

Oakar bank's deposit base increased, its AADA would rise as well, and

the SAIF would continue to bear the same share of the risk. The result

would be a tendency to displace the insurance burden from the BIF to

the SAIF.4

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\4\ A shrinking Oakar thrift would have the opposite effect: The

BIF's exposure would increase, and the SAIF's exposure would

decrease. The Oakar thrifts are comparatively rare, however. The net

bias would run against the SAIF.

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

The FDIC further considers that the main themes of the changes that

Congress made to the Oakar Amendment in 1991 are those of

simplification, liberalization, and symmetry. Congress allowed savings

associations to acquire banks, as well as the other way around.

Congress allowed institutions to deal with one another directly,

eliminating the requirement that the institutions must belong to the

same holding company (and the need for approval by an extra federal

supervisor). Congress established a mirror-image set of rules for

assessing Oakar banks and Oakar thrifts. As noted above, Congress

repealed the 7 percentum floor on AADA growth, thereby eliminating the

most prominent cause of divergence between an Oakar institution's

assessment base and its deposit base. Congress expanded the scope of

the Oakar Amendment and made it congruent with the relevant provisions

of section 5(d)(2). See FDICIA section 501(a), 105 Stat. 2388-91 (Dec.

19, 1991).

In keeping with this view of the 1991 amendments, the FDIC

interprets the growth provisions of the Oakar Amendment symmetrically:

that is, to encompass negative growth rates as well as positive ones.

The FDIC takes the position that an Oakar institution's AADA grows and

shrinks at the same underlying rate of growth as the institution's

domestic deposits.

The FDIC considers that this interpretation is appropriate because

it accords with customary usage in the banking industry, and because it

is consistent with the purposes and the structure of the statute. Under

the FDIC's interpretation, each fund continues to bear a constant share

of the risk posed by the institution, and continues to draw assessments

from a constant proportion of the institution's deposit base.

Moreover, the FDIC's interpretation encourages banks to make the

investment that Congress wished to promote. If ``negative increases''

were disallowed, Oakar banks would see their SAIF assessments (which

currently carry a much higher rate) grow disproportionately when their

deposits shrank through ordinary business operations.

Finally, the interpretation is designed to avoid--and has generally

avoided--the anomaly of an institution having an AADA that is larger

than its total deposit base.

2. Negative Growth Due to Deposit-Transfers

As noted above, for the purpose of analyzing deposit sales, the

FDIC

[[Page 34761]]

follows the deposit-attribution principles set forth in the Rankin

letter: the Oakar institution transfers its primary-fund deposits until

they have been exhausted, and only then transfers its secondary-fund

deposits. The FDIC further considers that--consistent with the

moratorium imposed by section 5(d)(2)--the deposits continue to have

the same status for insurance purposes after the deposit sale as

before. The industry-wide stock of BIF-insured and SAIF-insured

deposits should remain the same.

The FDIC's procedure for calculating the growth of the AADA upsets

that balance, however. The deposit sale reduces the Oakar bank's total

deposit base by a certain percentage: accordingly, the Oakar bank's

AADA--and therefore its volume of SAIF-insured deposits--is reduced by

the same percentage. Its BIF-insured deposits increase correspondingly.

In effect, SAIF deposits are converted into BIF deposits, in violation

of the moratorium.

This effect occurs without regard for whether the transferred

deposits are primary-fund or secondary-fund deposits. Even when a BIF-

member Oakar bank transfers deposits to another BIF-member bank--a

transfer that, under the Rankin letter, would only involve BIF-insured

deposits--the deposit sale serves to shrink the transferring bank's

AADA.

The FDIC is proposing to cure this defect by excluding deposit

sales from the growth computation. The FDIC continues to believe that

the terms ``growth'' and ``increase'' as used in the statute are broad

enough to refer to a negative rate as well as a positive one. But the

FDIC does not consider that it is required to extend these terms beyond

reasonable limits. In particular, the FDIC does not believe that it

must necessarily interpret these terms to include a decrease that is

attributable to a bulk transfer of deposits. The statute itself

excludes the effect of an acquisition or other deposit-assumption from

the computation of growth. The FDIC considers that it has ample

authority to make an equivalent exclusion for deposit sales.

The FDIC believes its proposed interpretation is sound because

deposit sales do not--in and of themselves--represent any change in the

industry-wide deposit base of each fund. It is inappropriate for the

FDIC to generate such a change on its own as a collateral effect of its

assessment procedures. Moreover, the proposed interpretation is in

accord with the tenor of the amendments made by the FDICIA, because it

treats deposit sales symmetrically with deposit-acquisitions.

E. Value of an Initial AADA

The Oakar Amendment says that an Oakar institution's initial AADA

is equal to ``the amount of any deposits acquired by the institution in

connection with the transaction (as determined at the time of such

transaction)''. Id. 1815(d)(3)(C). The FDIC has by regulation

interpreted the phrase ``deposits acquired by the institution''. 12 CFR

327.32(a)(4). The regulation distinguishes between cases in which a

buyer assumes deposits from a healthy seller (healthy-seller cases),

and cases in which the FDIC is serving as conservator or receiver for

the seller at the time of the transaction (troubled-seller

cases).5

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

\5\ The regulation also refers to the Resolution Trust

Corporation (RTC). The reference is obsolete, as the RTC no longer

exists.

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

The FDIC proposes to retain but refine its interpretation with

respect to healthy-seller cases. The FDIC also proposes to codify its

``conduit'' rule for certain deposits that a buyer promptly retransfers

to a third party. The FDIC proposes to eliminate the special provisions

for troubled-seller cases.

1. The ``Nominal Amount'' Rule

The general rule is that a buyer's initial AADA equals the full

nominal amount of the assumed deposits. 12 CFR 327.32(a)(3)(4).

The FDIC is proposing to retain the substance of this provision.

The proposed rule would continue to emphasize the point that the amount

of the transferred deposits is to be measured by focusing on the volume

divested by the seller. The purpose of the rule is to make it clear

that post-transaction events--such as deposit run-off--have no bearing

on the calculation of the buyer's AADA.

The FDIC considers that the nominal-value rule is appropriate for

two chief reasons. Most importantly, it reflects the manifest intent of

the statute, which says that the volume of the acquired deposits are to

be ``determined at the time'' of the transaction. Second, the nominal-

value rule has the virtues of clarity and precision. A buyer and a

seller will both know precisely the value of an AADA that is generated

in an Oakar transaction. The buyer's expected secondary-fund

assessments can be an important cost for the parties to consider when

deciding on an acceptable price. The FDIC considers that the nominal-

value rule reduces uncertainty on this point.

The proposed rule would update this aspect of the regulation in two

minor ways. The existing rule is somewhat obsolete: it presumes that

the buyer assumes all the seller's deposits, and that all such deposits

are insured by the buyer's secondary fund. The reason for these

presumptions is purely historical. At the time the regulation was

adopted, the Oakar Amendment only spoke of cases in which the seller

merged into or consolidated with the buyer, or in which the buyer

acquired all the seller's assets and liabilities. See 12 U.S.C.

1815(d)(3)(A) (Supp. I 1989). The Amendment did not allow for less

comprehensive Oakar transactions (e.g., branch sales). Nor did it

contemplate a transaction in which the seller was an Oakar institution

in its own right.

The proposed rule would make it clear that the nominal-amount rule

applies to all Oakar transactions. The proposed rule would also specify

that the AADA is only equal to the nominal amount of the transferred

deposits that are insured by the secondary fund of the buyer, not

necessarily all the transferred deposits. Both these points represent

the current view of the FDIC.

2. Deposits Acquired From Troubled Institutions

The FDIC's current regulation provides various discounts that serve

to reduce the buyer's AADA when the seller is in conservatorship or

receivership at the time of the sale. See 12 CFR 327.32(a)(3)(4). The

FDIC is proposing to eliminate the discounts, on the ground that they

are no longer needed.

In adopting the rule, the FDIC observed that the deposits that a

buyer assumes from a troubled seller are quite volatile: the buyer

generally loses a certain percentage of the deposits almost

immediately. The FDIC characterized the lost deposits as ``phantom

deposits'', and said it would make no sense to require the bank to

continue to pay assessments on them. The FDIC further said that such a

requirement would impair its ability to transfer the business of such

thrifts to healthy enterprises, to the detriment of the communities the

thrifts were serving. See 54 FR at 51373. The FDIC accordingly adopted

an interpretive rule stating that the nominal amount of the deposits

transferred in such cases were to be discounted for the purpose of

computing the AADA generated in the transaction, as follows:

--Brokered deposits: All brokered deposits are subtracted from the

nominal volume of the transferred deposits.

--The ``80/80'' rule: Each remaining deposit is capped at $80,000. The

[[Page 34762]]

AADA is equal to 80% of the aggregate of the deposits as so capped.

The FDIC explained that these discounts reflected its actual

experience--that is, its experience with arranging purchase-and-

assumption transactions for institutions in receivership. Id. But the

discounts were not intended to represent the actual run-off that an

individual Oakar institution would sustain in a particular case.

Rather, they were an approximation or estimate of the run-off that

Oakar institutions ordinarily sustain in troubled-seller cases.

As an historical matter, the FDIC determined that it was

appropriate to provide the discounts because the funding decisions for

troubled thrift institutions were subject to constraints and

considerations that fell outside the normal range of factors

influencing such decisions in the market place for healthy thrifts. The

sellers had often been held in conservatorship for some time. In order

to maintain the assets in such institutions, it often was necessary for

the conservator to obtain large and other high-yielding deposits for

funding purposes. Both the size of the discounts, and the fact that the

discounts were restricted to troubled-seller cases, were known publicly

in 1989 and were relevant to every potential buyer's decision to

acquire and price a thrift institution.

Although healthy sellers in unassisted transactions also sometimes

relied upon volatile deposits for funding, these funding decisions were

part of a strategy to maximize the profits of a going concern, and the

management of the purchasing institutions were accountable to

shareholders. The comparable decisions for troubled sellers in assisted

transactions were made by managers of government conservatorships that

were subject to funding constraints, relatively inflexible operating

rules (necessary to control a massive government effort to sell failed

thrifts), and other considerations outside the scope of the typical

private transaction.

While the FDIC recognized that it was incumbent upon any would-be

buyer to evaluate and price all aspects of a transaction, the FDIC

determined that it would be counterproductive to require bidders to

price the contingencies related to volatile deposits in assisted

transactions, given that these deposits primarily were artifacts of

government conservatorships. Considering the objective of attracting

private capital in order to avoid additional costs to the taxpayer, the

FDIC sought to avoid the potential deterrent effect of including these

artificial elements in the pricing equation. In order to reflect the

volatile deposits acquired in assisted transactions, the FDIC

determined to provide the above-described discounts.

The FDIC adopted this interpretive rule at a time when troubled and

failed thrifts were prevalent, and the stress on the safety net for

such institutions was relatively severe. The stress has been

considerably relieved, however. The FDIC considers that, under current

conditions, there is no longer any need to maintain a special set of

rules for troubled-seller cases.

Moreover, the discounts are, at bottom, simply another factor that

helps to determine the price that a buyer will pay for a troubled

institution. The FDIC ordinarily must contribute its own resources to

induce buyers to acquire such institutions. Any reduction in future

assessments that the FDIC offers as an incentive merely reduces the

amount of money the FDIC must contribute at the time of the

transaction. The simpler and more straightforward approach is to

reflect all such considerations in the net price that buyers pay for

such institutions at the time of the transaction.

3. Conduit Deposits

The FDIC staff has taken the position that, under certain

circumstances, when an Oakar institution re-transfers some of the

secondary-fund deposits it has assumed in the course of an Oakar

transaction, the re-transferred deposits will not be counted as

``acquired'' deposits for purposes of computing the Oakar institution's

AADA. The Oakar institution is regarded as a mere conduit for the re-

transferred deposits. The deposits themselves retain their original

status as BIF-insured or SAIF-insured after the re-transfer: whatever

their status in the hands of the original transferor, the deposits have

that status in the hands of the ultimate transferee.

The FDIC has applied its ``conduit'' principle only in very narrow

circumstances. The FDIC has done so only when the Oakar institution has

been required to commit to re-transfer specified branches as a

condition of approval of the acquisition of the seller; the commitment

has been enforceable; and the re-transfer has been required to occur

within six months after consummation of the initial Oakar transaction.

See, e.g., FDIC Advisory Op. 94-48, 2 FED. DEPOSIT INS. CORP., LAW,

REGULATIONS, RELATED ACTS 4901-02 (1994).

The FDIC is proposing to codify and refine this view. As codified,

secondary-fund deposits would have the status of ``conduit'' deposits

in the hands of an Oakar institution only if a Federal banking

supervisory agency or the United States Department of Justice

explicitly ordered the Oakar institution to re-transfer the deposits

within six months, if the institution's obligation to make the re-

transfer was enforceable, and if the re-transfer had to be completed in

the six-month grace period.

Conduit deposits would be included in the Oakar institution's AADA

only on a temporary basis: for one semiannual period, or in some cases

two periods, but no more. The deposits would be counted in the ``amount

of deposits acquired'' by the Oakar institution--and therefore in its

AADA--during the semiannual period in which the transaction occurs. The

AADA so computed would be used to determine the assessment due for the

following semiannual period. In addition, if the Oakar institution

retained the deposits during part of that following period, the

deposits would again be included in the ``amount of deposits

acquired''--and would again be part of the institution's AADA--for the

purpose of computing the assessment for the semiannual period after

that. But thereafter the deposits would be excluded from the ``amount

of deposits acquired'' by the Oakar institution.

If the conditions were not satisfied, the conduit principle would

not come into play, and the deposits would be regarded as having been

assumed by the Oakar institution at the time of the original Oakar

transaction. Any subsequent transfer of the deposits would be treated

as a separate transaction, and analyzed independently of the Oakar

transaction.

The FDIC is currently considering alternative methodologies for

attributing any deposits that an Oakar institution might transfer to

another institution. The conduit principle's economic impact is

somewhat greater in the context of one such methodology than in that of

the other.

The FDIC currently takes the view that, when an Oakar institution

transfers deposits to another institution, the seller transfers its

primary-fund deposits until they have been exhausted, and only then

transfers its secondary-fund deposits. A BIF-member Oakar bank has a

comparatively strong incentive to invoke the conduit principle under

this methodology. If an Oakar bank can succeed in characterizing re-

transferred deposits as conduit deposits, the bank will escape the full

impact of the SAIF assessment on those deposits, which is comparatively

high at the present time.

The FDIC is also considering a ``blended'' approach, however. Under

[[Page 34763]]

this methodology, whenever an Oakar institution transferred any

deposits to another institution, the transferred deposits would be

regarded as consisting of a blend of primary-fund and secondary-fund

deposits. The ratio of the blend would be the same as that of the

institution as a whole. This methodology would reduce the incentive for

Oakar banks to invoke the conduit principle to some extent,

particularly in the case of Oakar banks having large AADAs. An Oakar

bank's AADA would shrink as a result of any transfer of deposits, even

one that did not involve conduit deposits. The comparative benefit of

invoking the conduit rule would be correspondingly reduced.

F. Transitional Considerations

1. Freezing Prior AADAs

In theory, an Oakar institution's AADA is computed anew for each

semiannual period. An AADA for a current semiannual period is equal to

the sum of three elements:

--Element 1: The volume of secondary-fund deposits that the institution

originally acquired in the Oakar transaction;

--Element 2: The aggregate of the growth increments for all semiannual

periods prior to the one for which Element 3 is being determined; and

--Element 3: The growth increment for the period just prior to the

current period (i.e., just prior to the one for which the assessment is

due). Element 3 is calculated on a base that equals the sum of elements

1 and 2.

The FDIC has consistently interpreted its existing rules to mean

that, when a growth increment has already been determined for an AADA

for a semiannual period, the growth increment continues to have the

same value thereafter. See, e.g., FDIC Advisory Op. 92- 19, 2 FED.

DEPOSIT INS. CORP., LAW, REGULATIONS, RELATED ACTS 4619, 4620-21

(1992). The net effect has been to ``freeze'' AADAs-- and their

elements--for prior semiannual periods. The proposed rule would codify

this principle.

Accordingly, the new interpretations set forth in the proposed rule

would apply on a purely prospective basis. They would come into play

only for the purpose of computing future elements of future AADAs. The

new interpretations would not affect AADAs already computed for prior

semiannual periods (or the assessments that Oakar institutions have

already paid on them). Nor would they affect the prior-period elements

of AADAs that are to be determined for future semiannual periods. In

short, the proposed rule would ``leave prior AADAs alone''.

2. 1st-Half 1997 Assessments: Excluding Deposit Sales From the Growth

Calculation

The FDIC proposes to follow its existing procedures in computing

AADAs for the first semiannual period of 1997, with one exception. In

particular, an institution's AADA for the first semiannual period of

1997 would be based on the growth of the institution's deposits as

measured over the entire calendar year 1996. The AADA so determined

would be used to compute both quarterly payments for the first

semiannual period of 1997.

The exception is that, when computing the growth rate for deposits

during the second semiannual period of 1996, the FDIC would apply its

new interpretation of ``negative'' growth, and would decline to

consider shrinkage attributable to transactions that occurred during

July-December 1996.

The FDIC acknowledges that its proposed new interpretation would

make a significant break with the past. The FDIC further recognizes

that the new interpretation could affect the business considerations

that the parties must evaluate when they enter into deposit-transfer

transactions. The FDIC considers that the industry has ample notice of

the proposed exclusion, however, and that the parties to any such

transaction can factor in any costs that the exclusion might produce.

At the same time, the FDIC agrees that it would be inappropriate to

apply its new interpretation retroactively to transactions that have

been completed earlier in 1996. The parties to these transactions did

not have notice of the FDIC's proposal. The FDIC would therefore

include shrinkage attributable to deposit sales that occurred during

the first semiannual period of 1996 when determining the annual growth

rate to be used in computing Oakar institutions' AADAs for the first

semiannual period of 1997.

3. 2nd-Half 1997 Assessments: Use of Quarterly AADAs

The FDIC proposes to begin measuring AADAs on a quarterly basis

during the first semiannual period of 1997. The first payment that

would be computed using a quarterly component of an AADA would be the

initial payment for the next semiannual period--the payment due at the

end of June.

The first time the FDIC would identify and measure a quarterly

component of a semiannual AADA would be as of March 31, 1997. The

quarterly component with respect to that date would reflect the basic

rate of growth of the institution's deposits during the first calendar

quarter of 1997 (January-March). The quarterly AADA component so

measured would be used to determine the institution's first quarterly

payment for the second semiannual period in 1997 (the June payment).

The second quarterly AADA component would reflect the basic rate of

growth of the institution's deposits during the second calendar quarter

of 1997 (April-June). The quarterly AADA component so measured would be

used to determine the institution's second quarterly payment for the

second semiannual period in 1997 (the September payment).

G. Simplification and Clarification of the Regulation

In some respects, the proposed rule would simplify and clarify the

current regulation without changing its meaning. The FDIC is doing so

in response to two initiatives. Section 303 of the Riegle Community

Development and Regulatory Improvement Act of 1994, Pub. L. 103-325,

108 Stat. 2160 (Sept. 23, 1994), requires federal agencies to

streamline and modify their regulations. In addition, the FDIC has

voluntarily committed itself to review its regulations on a 5-year

cycle. See Development and Review of FDIC Rules and Regulations, 2 FED.

DEPOSIT INS. CORP., LAW, REGULATIONS, RELATED ACTS 5057 (1984). The

FDIC considers that subpart B of part 327 is a fit candidate for review

under each of these initiatives.

The proposed rule would clarify subpart B by defining and using the

terms ``primary fund'' and ``secondary fund''. An Oakar institution's

primary fund would be the fund to which it belongs; it would be the

other insurance fund. Using these terms, the FDIC is proposing to

simplify paragraphs (1) and (2) of Sec. 327.32(a) by eliminating

redundant language; the changes would not alter the meaning of these

provisions.

In addition, the FDIC would clarify Sec. 327.6(a) by changing the

nomenclature used therein. ``Deposit-transfer transaction'' would be

replaced by ``terminating transaction;'' ``acquiring institution''

would be replaced by ``surviving institution;'' and ``transferring

institution'' would be replaced by ``terminating institution''. The

terms now found in Sec. 327.6(a) are also used in other provisions of

part 327, where they have different and less specialized meaning. The

change in nomenclature in Sec. 327.6(a) is intended

[[Page 34764]]

to avoid any confusion that the current terminology might cause.

III. Proposed Effective Date

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

Improvement Act of 1994, Pub. L. 103-325, 108 Stat. 2160, 2214-15

(1994), requires that new and amended regulations imposing additional

reporting, disclosure, or other new requirements on insured depository

institutions must generally take effect on the first day of a calendar

quarter. In keeping with this requirement, the FDIC is proposing that

the rule, if adopted, would take effect on January 1, 1997.

IV. Request for Public Comment

The FDIC hereby solicits comment on all aspects of the proposed

rule. In particular, the FDIC solicits comment on the following points:

attributing deposits that an Oakar institution transfers to another

institution according to principles articulated in the Rankin letter,

or treating the transferred deposits as a blend of deposits insured by

both funds; having the FDIC, rather than individual institutions,

compute AADAs using information provided by the institutions;

interpreting AADAs as consisting of quarterly components, and computing

the growth of AADAs on a quarterly cycle rather than an annual one;

retaining the concept of negative growth for the purpose of computing

AADAs; excluding deposit sales from the computation of growth; applying

the nominal-amount principle for determining initial AADAs in all

cases, including troubled-seller cases; and preserving the conduit-

deposit concept.

In addition, in accordance with section 3506(c)(2)(B) of the

Paperwork Reduction Act, 44 U.S.C. 3506(c)(2)(B), the FDIC solicits

comment for the following purposes on the collection of information

proposed herein:

--to evaluate whether the proposed collection of information is

necessary for the proper performance of the functions of the FDIC,

including whether the information has practical utility;

--to evaluate the accuracy of the FDIC's estimate of the burden of the

proposed collection of information;

--to enhance the quality, utility, and clarity of the information to be

collected; and

--to minimize the burden of the collection of information on those who

are to respond, including through the use of automated collection

techniques or other forms of information technology.

The FDIC also solicits comment on all other points raised or

options described herein, and on their merits relative to the proposed

rule.

V. Paperwork Reduction Act

Under the FDIC's existing procedures, each Oakar institution must

compute its AADA at the end of each year, using a worksheet provided by

the FDIC (annual growth worksheet). The annual growth worksheet shows

the computation of the institution's AADA for the first semiannual

period of the current year--that is, the AADA that is used to compute

the assessment due for the first semiannual period of the current

year--which is based on the institution's growth during the prior year.

The institution must provide the annual growth worksheet to the FDIC as

a part of the institution's certified statement.

In addition, whenever an institution is the buyer in an Oakar

transaction, it must submit a transaction worksheet showing the total

deposits acquired on the transaction date. If the seller is an Oakar

institution, and if the buyer acquires the entire institution, the

buyer must also report the seller's last AADA (as shown in the seller's

last call report). The buyer must then subtract this number from the

total deposits acquired in order to determine its new AADA.

The proposed rule would change this procedure for the annual growth

worksheets for the first semiannual period of 1997 (i.e., for the

worksheets that show the growth of deposits during 1996). The change

would only affect Oakar institutions that transferred deposits to other

institutions during 1996. Such an institution would have to report the

total amount of deposits that it transferred in transactions from July

1-December 31, 1996.

Thereafter the FDIC would compute the AADAs for all Oakar

institutions, using information taken from their quarterly call

reports. Institutions would not have to report additional information

in most cases. An Oakar institution that neither acquired nor

transferred deposits in the prior quarter would not have to provide any

additional information at all. An Oakar institution that acquired

deposits would have to provide the same information at the end of the

quarter that it now provides at the end of the year; there would be a

change in the timing, but no change in burden.

Only an Oakar institution that transferred deposits would have to

provide additional information. The items of information needed, and

the number of institutions affected, would depend on the deposit-

attribution methodology chosen by the FDIC. Under the Rankin letter's

approach, the FDIC presently anticipates that approximately 100

institutions per year would report deposit sales. Sellers would have to

report the volume of deposits they transferred in the transaction.

Under the ``blended deposits'' approach, the FDIC estimates that

approximately 250 Oakar institutions per year would report deposit

sales. Sellers would have to report both the volume of deposits

transferred, and the date of the transaction. In either case, the

information would be readily available: the extra reporting burden

would be small.

The FDIC expects that the net effect would be to reduce the overall

reporting burden on Oakar institutions. The burden of submitting extra

information in deposit-sale cases would be more than offset by the

elimination of the growth worksheet and by the FDIC's assumption of the

burden of computing AADAs.

Accordingly, the FDIC is proposing to revise an existing collection

of information. The revision has been submitted to the Office of

Management and Budget for review and approval pursuant to the Paperwork

Reduction Act of 1980 (44 U.S.C. 3501 et seq.). Comments on the

accuracy of the burden estimate, and suggestions for reducing the

burden, should be addressed to the Office of Management and Budget,

Paperwork Reduction Project (3064-0057), Washington, D.C. 20503, with

copies of such comments sent to Steven F. Hanft, Assistant Executive

Secretary (Administration), Federal Deposit Insurance Corporation, Room

F-400, 550 17th St., N.W., Washington, D.C. 20429. The impact of this

proposal on paperwork burden would be to require a one-time de minimis

report from approximately 100 Oakar institutions for the first

semiannual period in 1997, and thereafter to eliminate the annual

growth worksheet for all 900 Oakar institutions, which takes an

estimated two hours to prepare. The FDIC would then compute each Oakar

institution's AADA from the deposit data in the institution's quarterly

call report. The effect of this proposal on the estimated annual

reporting burden for this collection of information is a reduction of

1,800 hours:

Approximate Number of Respondents: 900.

Number of Responses per Respondent: -1.

Total Annual Responses: 900.

Average Time per Response: 2 hours.

Total Average Annual Burden Hours: -1800 hours.

[[Page 34765]]

The FDIC expects the Federal Financial Institutions Examination

Council to require (as needed) the information in the quarterly call

reports, starting with the report for March 31, 1997. If the Council

does recommend these changes, they will be submitted to the Office of

Management and Budget for review and approval as part of the call

report submission.

VI. Regulatory Flexibility Analysis

The Regulatory Flexibility Act (5 U.S.C. 601-612) does not apply to

the proposed rule. Although the FDIC has chosen to publish general

notice of the proposed rule, and to ask for public comment on it, the

FDIC is not obliged to do so, as the proposed rule is interpretive in

nature. See id. 553(b) and 603(a).

Moreover, the FDIC considers that the proposed rule would amount to

a net reduction in burden for all Oakar institutions, as they would no

longer have to prepare or file regular annual growth worksheets after

the worksheet with respect to 1996. Instead, a limited number of Oakar

institutions would have to submit one new piece of information, and

would have to do so only for quarters in which they transferred

deposits.

In addition, although the Regulatory Flexibility Act requires a

regulatory flexibility analysis when an agency publishes a rule, the

term ``rule'' (as defined in the Regulatory Flexibility Act) excludes

``a rule of particular applicability relating to rates''. Id. 601(2).

The proposed rule relates to the rates that Oakar institutions must

pay, because it addresses various aspects of the method for determining

the base on which assessments are computed. The Regulatory Flexibility

Act is therefore inapplicable to this aspect of the proposed rule.

Finally, the legislative history of the Regulatory Flexibility Act

indicates that its requirements are inappropriate to this aspect of the

proposed rule. The Regulatory Flexibility Act is intended to assure

that agencies' rules do not impose disproportionate burdens on small

businesses:

Uniform regulations applicable to all entities without regard to

size or capability of compliance have often had a disproportionate

adverse effect on small concerns. The bill, therefore, is designed

to encourage agencies to tailor their rules to the size and nature

of those to be regulated whenever this is consistent with the

underlying statute authorizing the rule.

126 Cong. Rec. 21453 (1980) (``Description of Major Issues and

Section-by-Section Analysis of Substitute for S. 299'').

The proposed rule would not impose a uniform cost or requirement on

all Oakar institutions regardless of size: to the extent that it

imposes any costs at all, the costs have to do with the effects that

the proposed rule would have on Oakar institutions' assessments.

Assessments are proportional to an institution's size. Moreover, while

the FDIC has authority to establish a separate risk-based assessment

system for large and small members of each insurance fund, see 12

U.S.C. 1817(b)(1)(D), the FDIC has not done so. Within the current

assessment scheme, the FDIC cannot ``tailor'' assessment rates to

reflect the ``size and nature'' of institutions.

List of Subjects in 12 CFR Part 327

Assessments, Bank deposit insurance, Banks, banking, Financing

Corporation, Reporting and recordkeeping requirements, Savings

associations.

For the reasons set forth in the preamble, the Board of Directors

of the Federal Deposit Insurance Corporation proposes to amend 12 CFR

part 327 as follows:

PART 327--ASSESSMENTS

1-2. The authority citation for part 327 is revised to read as

follows:

Authority: 12 U.S.C. 1441, 1441b, 1815, 1817-1819.

3. In Sec. 327.6 the section heading and paragraph (a) are revised

to read as follows:

Sec. 327.6 Terminating transfers; other terminations of insurance.

(a) Terminating transfer--(1) Assessment base computation. If a

terminating transfer occurs at any time in the second half of a

semiannual period, each surviving institution's assessment base (as

computed pursuant to Sec. 327.5) for the first half of that semiannual

period shall be increased by an amount equal to such institution's pro

rata share of the terminating institution's assessment base for such

first half.

(2) Pro rata share. For purposes of paragraph (a)(1) of this

section, the phrase ``pro rata share'' means a fraction the numerator

of which is the deposits assumed by the surviving institution from the

terminating institution during the second half of the semiannual period

during which the terminating transfer occurs, and the denominator of

which is the total deposits of the terminating institution as required

to be reported in the quarterly report of condition for the first half

of that semiannual period.

(3) Other assessment-base adjustments. The Corporation may in its

discretion make such adjustments to the assessment base of an

institution participating in a terminating transfer, or in a related

transaction, as may be necessary properly to reflect the likely amount

of the loss presented by the institution to its insurance fund.

(4) Limitation on aggregate adjustments. The total amount by which

the Corporation may increase the assessment bases of surviving or other

institutions under this paragraph (a) shall not exceed, in the

aggregate, the terminating institution's assessment base as reported in

its quarterly report of condition for the first half of the semiannual

period during which the terminating transfer occurs.

* * * * *

4. Section 327.8 is amended by revising paragraph (h) and adding

paragraphs (j) and (k) to read as follows:

Sec. 327.8 Definitions.

* * * * *

(h) As used in Sec. 327.6(a), the following terms are given the

following meanings:

(1) Surviving institution. The term surviving institution means an

insured depository institution that assumes some or all of the deposits

of another insured depository institution in a terminating transfer.

(2) Terminating institution. The term terminating institution means

an insured depository institution some or all of the deposits of which

are assumed by another insured depository institution in a terminating

transfer.

(3) Terminating transfer. The term terminating transfer means the

assumption by one insured depository institution of another insured

depository institution's liability for deposits, whether by way of

merger, consolidation, or other statutory assumption, or pursuant to

contract, when the terminating institution goes out of business or

transfers all or substantially all its assets and liabilities to other

institutions or otherwise ceases to be obliged to pay subsequent

assessments by or at the end of the semiannual period during which such

assumption of liability for deposits occurs. The term terminating

transfer does not refer to the assumption of liability for deposits

from the estate of a failed institution, or to a transaction in which

the FDIC contributes its own resources in order to induce a surviving

institution to assume liabilities of a terminating institution.

* * * * *

(j) Primary fund. The primary fund of an insured depository

institution is the

[[Page 34766]]

insurance fund of which the institution is a member.

(k) Secondary fund. The secondary fund of an insured depository

institution is the insurance fund that is not the primary fund of the

institution.

5. In Sec. 327.32, paragraph (a) is amended by revising paragraphs

(a)(1) and (a)(2), and by removing paragraphs (a)(4) and (a)(5), to

read as follows:

Sec. 327.32 Computation and payment of assessment.

(a) Rate of assessment--(1) BIF and SAIF member rates. (i) Except

as provided in paragraph (a)(2) of this section, and consistent with

the provisions of Sec. 327.4, the assessment to be paid by an

institution that is subject to this subpart B shall be computed at the

rate applicable to institutions that are members of the primary fund of

such institution.

(ii) Such applicable rate shall be applied to the institution's

assessment base less that portion of the assessment base which is equal

to the institution's adjusted attributable deposit amount.

(2) Rate applicable to the adjusted attributable deposit amount.

Notwithstanding paragraph (a)(1)(i) of this section, that portion of

the assessment base of any acquiring, assuming, or resulting

institution which is equal to the adjusted attributable deposit amount

of such institution shall:

(i) Be subject to assessment at the assessment rate applicable to

members of the secondary fund of such institution pursuant to subpart A

of this part; and

(ii) Not be taken into account in computing the amount of any

assessment to be allocated to the primary fund of such institution.

* * * * *

6. New Secs. 327.33 through 327.36 are added to read as follows:

Sec. 327.33 ``Acquired'' deposits.

This section interprets the phrase ``deposits acquired by the

institution'' as used in Sec. 327.32(a)(3)(i).

(a) In general. (1) Secondary-fund deposits. The phrase ``deposits

acquired by the institution'' refers to deposits that are insured by

the secondary fund of the acquiring institution, and does not include

deposits that are insured by the acquiring institution's primary fund.

(2) Nominal dollar amount. Except as provided in paragraph (b) of

this section, an acquiring institution is deemed to acquire the entire

nominal dollar amount of any deposits that the transferring institution

holds on the date of the transaction and transfers to the acquiring

institution.

(b) Conduit deposits--(1) Defined. As used in this paragraph (b),

the term ``conduit deposits'' refers to deposits that an acquiring

institution has assumed from another institution in the course of a

transaction described in Sec. 327.31(a), and that are treated as

insured by the secondary fund of the acquiring institution, but which

the acquiring institution has been explicitly and specifically ordered

by the Corporation, or by the appropriate federal banking agency for

the institution, or by the Department of Justice to commit to re-

transfer to another insured depository institution as a condition of

approval of the transaction. The commitment must be enforceable, and

the divestiture must be required to occur and must occur within 6

months after the date of the initial transaction.

(2) Exclusion from AADA computation. Conduit deposits are not

considered to be acquired by the acquiring institution within the

meaning of Sec. 327.32(a)(3)(i) for the purpose of computing the

acquiring institution's adjusted attributable deposit amount for a

current semiannual period that begins after the end of the semiannual

period following the semiannual period in which the acquiring

institution re-transfers the deposits.

Sec. 327.34 Application of AADAs.

This section interprets the meaning of the phrase ``an insured

depository institution's `adjusted attributable deposit amount' for any

semiannual period'' as used in the opening clause of Sec. 327.32(a)(3).

(a) In general. The phrase ``for any semiannual period'' refers to

the current semiannual period: that is, the period for which the

assessment is due, and for which an institution's adjusted attributable

deposit amount (AADA) is computed.

(b) Quarterly components of AADAs. An AADA for a current semiannual

period consists of two quarterly AADA components. The first quarterly

AADA component for the current period is determined with respect to the

first quarter of the prior semiannual period, and the second quarterly

AADA component for the current period is determined with respect to the

second quarter of the prior period.

(c) Application of AADAs. The value of an AADA that is to be

applied to a quarterly assessment base in accordance with

Sec. 327.32(a)(2) is the value of the quarterly AADA component for the

corresponding quarter.

(d) Initial AADAs. If an AADA for a current semiannual period has

been generated in a transaction that has occurred in the second

calendar quarter of the prior semiannual period, the first quarterly

AADA component for the current period is deemed to have a value of

zero.

(e) Transition rule. Paragraphs (b), (c) and (d) of this section

shall apply to any AADA for any semiannual period beginning on or after

July 1, 1997.

Sec. 327.35 Grandfathered AADA elements.

This section explains the meaning of the phrase ``total of the

amounts determined under paragraph (a)(3)(iii)'' in

Sec. 327.32(a)(3)(ii). The phrase ``total of the amounts determined

under paragraph (a)(3)(iii)'' refers to the aggregate of the increments

of growth determined in accordance with Sec. 327.32(a)(3)(iii). Each

such increment is deemed to be computed in accordance with the

contemporaneous provisions and interpretations of such section.

Accordingly, any increment of growth that is computed with respect to a

semiannual period has the value appropriate to the proper calculation

of the institution's assessment for the semiannual period immediately

following such semiannual period.

Sec. 327.36 Growth computation.

This section interprets various phrases used in the computation of

growth as prescribed in Sec. 327.32(a)(3)(iii).

(a) Annual rate. The annual rate of growth of deposits refers to

the rate, which may be expressed as an annual percentage rate, of

growth of an institution's deposits over any relevant interval. A

relevant interval may be less than a year.

(b) Growth; increase; increases. Except as provided in paragraph

(c) of this section, references to ``growth,'' ``increase,'' and

``increases'' may generally include negative values as well as positive

ones.

(c) Growth of deposits. ``Growth of deposits'' does not include any

decrease in an institution's deposits representing deposits transferred

to another insured depository institution, if the transfer occurs on or

after July 1, 1996.

(d) Quarterly determination of growth. For the purpose of computing

assessments for semiannual periods beginning on July 1, 1997, and

thereafter, the rate of growth of deposits for a semiannual period, and

the amount by which the sum of the amounts specified in

Sec. 327.32(a)(3) (i) and (ii) would have grown during a semiannual

period, is to be determined by computing such rate of growth and such

sum of amounts for each calendar quarter within the semiannual period.

7. Section 327.37 is added to read as follows:

[[Page 34767]]

ALTERNATIVE ONE

Sec. 327.37 Attribution of transferred deposits.

This section explains the attribution of deposits to the BIF and

the SAIF when one insured depository institution (acquiring

institution) acquires deposits from another insured depository

institution (transferring institution). For the purpose of determining

whether the assumption of deposits (assumption transaction) constitutes

a transaction undertaken pursuant to section 5(d)(3) of the Federal

Deposit Insurance Act, and for the purpose of computing the adjusted

attributable deposit amounts, if any, of the acquiring and the

transferring institutions after the transaction:

(a) Transferring institution--(1) Transfer of primary-fund

deposits. To the extent that the aggregate volume of deposits that is

transferred by a transferring institution in a transaction, or in a

related series of transactions, does not exceed the volume of deposits

that is insured by its primary fund (primary-fund deposits) immediately

prior to the transaction (or, in the case of a related series of

transactions, immediately prior to the initial transaction in the

series), the transferred deposits shall be deemed to be insured by the

institution's primary fund. The primary institution's volume of

primary-fund deposits shall be reduced by the aggregate amount so

transferred.

(2) Transfer of secondary-fund deposits. To the extent that the

aggregate volume of deposits that is transferred by the transferring

institution in a transaction, or in a related series of transactions,

exceeds the volume of deposits that is insured by its primary fund

immediately prior to the transaction (or, in the case of a related

series of transactions, immediately prior to the initial transaction in

the series), the following volume of the deposits so transferred shall

be deemed to be insured by the institution's secondary fund (secondary-

fund deposits): the aggregate amount of the transferred deposits minus

that portion thereof that is equal to the institution's primary-fund

deposits. The transferring institution's volume of secondary-fund

deposits shall be reduced by the volume of the secondary-fund deposits

so transferred.

(b) Acquiring institution. The deposits shall be deemed, upon

assumption by the acquiring institution, to be insured by the same fund

or funds in the same amount or amounts as the deposits were so insured

immediately prior to the transaction.

ALTERNATIVE TWO

Sec. 327.37 Attribution of transferred deposits.

This section explains the attribution of deposits to the BIF and

the SAIF when one insured depository institution (acquiring

institution) assumes the deposits from another insured depository

institution (transferring institution). On and after January 1, 1997,

for the purpose of determining whether the assumption of deposits

constitutes a transaction undertaken pursuant to section 5(d)(3) of the

Federal Deposit Insurance Act, and for the purpose of computing the

adjusted attributable deposit amounts, if any, of the acquiring and the

transferring institutions after the transaction:

(a) Attribution of the deposits as to the transferring institution.

The deposits shall be attributed to the primary and secondary funds of

the transferring institution in the same ratio as the transferring

institution's total deposits were so attributed immediately prior to

the deposit-transfer transaction. The transferring institution's stock

of BIF-insured deposits and of SAIF-insured deposits shall each be

reduced in the appropriate amounts.

(b) Attribution of deposits as to the acquiring institution. Upon

assumption by the acquiring institution, the deposits shall be

attributed to the same insurance funds in the same amounts as the

deposits were so attributed immediately prior to the transaction. The

acquiring institution's stock of BIF-insured deposits and of SAIF-

insured deposits shall each be increased in the appropriate amounts.

(c) Ratio fixed at start of quarter. For the purpose of determining

the ratio specified in paragraph (a) of this paragraph for any

transaction:

(1) In general. The ratio shall be determined at the beginning of

the quarter in which the transaction occurs. Except as provided in

paragraph (c)(2) of this section, the ratio shall not be affected by

changes in the transferring institution's deposit base.

(2) Prior acquisitions by a transferring institution. If the

transferring institution acquires deposits after the start of the

quarter but prior to the transaction, the deposits so acquired shall be

added to the transferring institution's deposit base, and shall be

attributed to the transferring institution's primary and secondary

funds in accordance with this section.

By order of the Board of Directors.

Dated at Washington, DC, this 17th day of June 1996.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Deputy Executive Secretary.

[FR Doc. 96-16349 Filed 7-2-96; 8:45 am]

BILLING CODE 6714-01-P