Assessments

SUMMARY: The FDIC is proposing to lower the rates on assessments paid

to the Savings Association Insurance Fund (SAIF), and to widen the

spread of the rates, in order to avoid collecting more than needed to

maintain the SAIF's capitalization at 1.25 percent of aggregate insured

deposits, and improve the effectiveness of the risk-based assessment

system.

The proposed rule would establish a base assessment schedule for

the SAIF with rates ranging from 4 to 31 basis points, and an adjusted

assessment schedule that reduces these rates by 4 basis points. In

general, the effective SAIF rates would range from 0 to 27 basis

points, beginning October 1, 1996. The proposed rule would also

establish a special interim schedule of rates ranging from 18 to 27

basis points for SAIF-member savings associations for just the last

quarter of 1996, reflecting the fact that the Financing Corporation's

assessments are included in the SAIF rates for these institutions

during that interval. Excess assessments collected under the prior

assessment schedule would be refunded or credited, with interest.

The proposed rule would enable the FDIC to make limited adjustments

to the base assessment rates, both for the SAIF and for the Bank

Insurance Fund (BIF), by a limited amount without notice-and-comment

rulemaking.

The proposed rule would clarify and correct certain provisions

without making substantive changes.

DATES: Comments must be received by the FDIC on or before November 15,

1996.

ADDRESSES: Send comments 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, 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, NW.,

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

FOR FURTHER INFORMATION CONTACT: Allan Long, Assistant Director,

Division of Finance, (202) 416-6991; James McFadyen, Senior Financial

Analyst, (202) 898-7027; Christine Blair, Financial Economist, (202)

898-3936, Division of Research and Statistics; Stephen Ledbetter,

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

8658; Richard Osterman, Senior Counsel, (202) 898-3736; Jules Bernard,

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

Corporation, Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

I. The Proposed Rule

A. Background

Under the assessment schedule currently in effect, SAIF members are

assessed rates for FDIC insurance ranging from 23 basis points for

institutions with the best assessment risk classification to 31 basis

points for the riskiest institutions. This assessment schedule

implements the risk-based assessment program required by section 7 of

the Federal Deposit Insurance (FDI Act), 12 U.S.C. 1817, and has been

designed to increase the reserve ratio of the SAIF--the ratio of the

SAIF's net worth to aggregate SAIF-insured deposits, see id.

1817(l)(7)--to the DRR.1

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\1\ The DRR is a target ratio that has a fixed value for each

year. The value is either 1.25 percent or such higher percentage as

the Board determines to be justified for that year by circumstances

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

Id. 1817(b)(2)(A)(iv). The Board has not altered the statutory DRR

for either fund.

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Since the creation of the SAIF and through the end of 1992,

however, all assessments from SAIF-member institutions were diverted to

other needs. While some SAIF-assessment revenue began flowing into the

SAIF on January 1, 1993, the amounts authorized to be assessed against

SAIF-member savings associations by the SAIF were reduced by the

amounts assessed by the FICO in order to service the interest on its

bond obligations. At $793 million per year, the FICO draw was

substantial, and contributed to the slow growth in the SAIF reserve

ratio, which only increased from .28 percent to .47 percent in 1995.

With the capitalization of the BIF in 1995, the Board has lowered

the assessment rate schedule for BIF members, creating a significant

disparity in the assessment rates paid by BIF and SAIF members. This

disparity has created incentives for institutions to move deposits from

SAIF-insured status to BIF-insured status, raising the question of

whether a shrinking SAIF-assessable deposit base could continue both to

service the interest on FICO debt and to capitalize the SAIF.

On September 30, 1996, the Deposit Insurance Funds Act of 1996

(Funds Act), Pub. L. 104-208, 110 Stat. 3009 et seq., was enacted,

requiring the FDIC to impose a one-time special assessment on SAIF-

assessable deposits to capitalize the SAIF at 1.25 percent of SAIF-

insured deposits as of October 1, 1996. The FDIC is issuing a final

rule to impose the special assessment; the special assessment is to be

collected on November 27, 1996.

The Funds Act also eliminates the statutory link between the FICO's

assessments and amounts authorized to be assessed by the SAIF,

effective January 1, 1997. Accordingly, the rate-setting process for

the SAIF takes the FICO's draw into account until that date, but not

afterward.

In response to these developments, the FDIC is proposing to lower

the regular SAIF assessment rates as of October 1, 1996, and to refund

or credit any excess SAIF assessments collected for the second

semiannual period of 1996.

B. Statutory Framework for Setting Assessment Rates

Section 7(b)(1) of the FDI Act, id. 1817(b)(1), requires the Board

to establish a risk-based assessment system for all insured

institutions, and to set semiannual assessments for each institution

based on: (1) The probability that the institution will cause a loss to

the BIF or to the SAIF, (2) the likely

[[Page 53868]]

amount of the loss, and (3) the revenue needs of the appropriate fund.

Id. 1817(b)(1)(C).

Section 7(b)(2)(A) requires the Board to set assessments to

maintain each fund's reserve ratio at the DRR (or, if the fund's

reserve ratio is below the DRR, to increase the ratio to that level).

Id. 1817(b)(2)(A)(i).2 The Board must take into consideration the

fund's: (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 that the Board deems

appropriate. Id. 1817(b)(2)(A)(ii). Once the SAIF's reserve ratio is at

the DRR, the FDIC may not set SAIF assessments in excess of the amount

necessary to maintain that ratio (although the Board may set higher

rates for institutions that exhibit weakness or are not well

capitalized). Id. 1817(b)(2)(A)(iii) & (v).

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\2\ The Board may set higher rates for institutions that exhibit

weakness or are not well capitalized, however. Id. 1817(b)(2)(A)(v).

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Until January 1, 1997, the amounts assessed by the FICO may not

exceed the amount ``authorized to be assessed'' by the FDIC against

SAIF member savings associations pursuant to section 7 of the FDI Act.

Conversely, the amount of a SAIF assessment ``shall be reduced'' by the

amount of the FICO draw. Id. 1441(f)(2).

Finally, until December 31, 1998, the assessment rate for a SAIF

member may not be less than the assessment rate for a BIF member that

poses a comparable risk to the deposit insurance fund. Id.

1817(b)(2)(E).

C. The SAIF Assessment Schedule

1. New Rate Spread

Risk-based assessment rates have a dual purpose: to reflect the

risk posed to each Fund by individual institutions, and to provide

institutions with proper incentives to control risk-taking. The FDIC

has considered whether a spread of 8 basis points is sufficient for

achieving these goals. In December 1992, the FDIC proposed to establish

risk-based premium matrices of 23 to 31 basis points for both the BIF

and the SAIF. The Board asked for comment on whether the proposed

assessment rate spread of 8 basis points should be widened. See 57 FR

62502 (Dec. 31, 1992). Ninety-six commenters addressed this issue; 75

of them 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 implement the 8-basis point rate spread. The

Board expressed concern that widening the spread while keeping

assessment revenue constant might unduly burden the weaker institutions

that would be subject to greatly increased rates. See 58 FR 34357,

34361 (June 25, 1993).

The 8-basis point rate spread has continued to be criticized by

bankers, banking scholars and regulators as unduly narrow. 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. The

precise estimates vary; but there is a clear consensus from this

evidence that the rate spread should be widened.3

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\3\ The FDIC's research also suggests that a substantially

larger spread would be necessary to establish an ``actuarially

fair'' assessment rate system. See Gary S. Fissel, ``Risk

Measurement, Actuarially Fair Deposit Insurance Premiums and the

FDIC's Risk-Related Premium System'', FDIC Banking Review 16-27,

Table 5, Panel B (1994).

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There also is a concern 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, as seen in the following table:

Table 1.--Historical Thrift Failure Rates by Cell 1988-1993*

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

Supervisory risk subgroup Not rated

Tangible capital category --------------------------------------- as of 12/31/

A B C 87

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

1. Well:

Thrifts................................................. 1,189 172 21 25

Failures................................................ 43 28 9 5

Failure Rate............................................ 2.9% 16.3% 42.9% 20.0%

2. Adequate:

Thrifts................................................. 215 73 14 1

Failures................................................ 26 20 7 0

Failure Rate............................................ 12.1% 27.4% 50.0% 0.0%

3. Under:

Thrifts................................................. 460 389 541 37

Failures................................................ 134 205 447 35

Failure Rate............................................ 29.1% 52.7% 82.6% 94.6%

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

Average failure rate: 30.6%

* Percentage of thrifts in cell at year-end 1987 that failed during 1988-1993. These figures reflect different

examination policies and procedures than exist today. In particular, examinations may have been relatively

infrequent for some institutions during this period.

The precise magnitude of the proper rate differences is open to

debate, given the sensitivity of estimates to small changes in

assumptions and to the selection of the sample periods. However, the

evidence indicates that larger rate differences between adjacent cells

of the risk-based assessment matrix are warranted.

Because of concern for the impact of a wider spread on weaker SAIF-

insured institutions, the FDIC has performed analyses on increasing the

spread from 8 to 27 basis points and has found that, apart from

institutions already recognized as likely failures, the wider spread is

expected to have a minimal impact in terms of additional failures. The

FDIC therefore proposes that a 27-basis point spread be adopted for

members of the SAIF.

2. Spreading Risk Over Time

The FDIC has recognized that, in setting deposit insurance

premiums, the risk of adverse events that may occur beyond the

immediate semiannual assessment period must be considered, in order to

spread risk over time and to moderate the cyclical effects of insurance

losses on insured institutions. A strict ``pay-as-you-go'' insurance

[[Page 53869]]

system-- one that attempts only to balance revenue and expense over the

current assessment period--can result in rate volatility that would

adversely impact weak institutions in periods of economic stress,

increasing the risk of loss to the fund. Historical evidence shows that

in peak loss years, pay-as-you-go rates would substantially exceed the

rates required to balance revenues and expenses over the longer term.

The FDIC believes that, for the purpose of estimating future losses

for the thrift industry, the industry's loss experience in the 1980s is

not likely to be especially informative. The insurance losses

associated with thrifts far exceeded insurance losses from banks during

this period both in dollars and, to an even greater extent, as a

percentage of the size of the industry.

The losses prompted Congress to adopt a number of legislative

reforms that have the effect of placing thrifts in a regulatory context

that resembles that of the banks much more closely. The FDIC has

replaced the Federal Savings and Loan Insurance Corporation (FSLIC) as

insurer for the thrift industry. The Office of Thrift Supervision, an

office within the Department of the Treasury, has replaced the Federal

Home Loan Bank Board as the supervisor for thrift institutions. Thrifts

are now subject to stronger capital standards, which are set at the

same levels as required of banks. Thrifts, like banks, now pay

assessments based on risk. The losses generated in thrift failures are

limited by the same safeguards as those that apply to bank failures--

notably, the early-closure rule of the prompt corrective action

statute, the cross-guarantees among affiliates, the least-cost

resolution requirement, and the depositor-preference statute. In view

of these changes in the regulatory and insurance environment for

thrifts, the failure experience of commercial banks is likely to be

more illuminating for the purpose of estimating future thrift losses.

The FDIC has recently analyzed its historical loss experience with

banks, and has considered the likely effect of recently enacted

statutory provisions that are expected to moderate deposit insurance

losses going forward. The FDIC has concluded that an assessment rate of

4 to 5 basis points would be appropriate to achieve a long-run balance

between BIF revenues and expenses. See 60 FR 42680 (Aug. 16, 1995).

These rates reflect the experience of the FDIC during the period from

1950 to 1980. From 1980 through 1994, rates in the range of 10 to 13

basis points would have been required to balance revenues and expenses:

but for banks as well as thrifts, failures during this period were

attributable to extraordinary conditions brought on by volatile

interest rates, ineffective supervision and real-estate values that

first soared and then collapsed. While regulators still may not have

the ability to foresee a real-estate collapse or other severe economic

adversities, the statutory and regulatory safeguards now in place are

likely to limit losses to the funds under such extreme conditions.

Accordingly, average assessment rates in the range of 4 to 5 basis

points are thought to be adequate to balance long-range revenues and

expenses for the BIF.

The FDIC expects that this same range is an appropriate benchmark

for SAIF rates as well. From 1950 to 1980, the rates paid by FSLIC-

insured thrifts were about twice the effective rate paid by FDIC-

insured banks, reflecting higher annual rates of deposit growth for

thrifts and a somewhat higher loss experience for the FSLIC.4 But

differences between the banking and thrift industries are less

significant today than they were in the period from 1950 to 1980;

thrifts generally are better protected than they were from the effects

of interest-rate swings; regulatory and accounting standards are more

exacting; and deposits have generally declined since 1989. The FDIC

recognizes that structural weaknesses of the SAIF, including a

relatively small membership base and geographic and product

concentrations, suggest that the appropriate SAIF assessment rate to

achieve a long-range balance may be higher than the BIF rate. Lacking a

compelling empirical basis for determining different assessment

structures for the two industries, however, the FDIC currently expects

that an assessment rate of 4 to 5 basis points would likely result in a

long-range balance of revenues and expenses for the SAIF as well as for

the BIF.

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4 See James R. Barth, John J. Feid, Gabriel Riedel and M.

Hampton Tunis, Alternative Federal Deposit Insurance Schemes, Office

of Policy and Economic Research, Federal Home Loan Bank Board,

(January 1989), at 12-20.

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3. Maintaining the SAIF Reserve Ratio at the DRR

In setting assessments to maintain the reserve ratio at the DRR the

Board is required to consider the following factors:

a. Expected operating expenses and revenues. With a balance of

approximately $8.6 billion, the SAIF will be fully capitalized at 1.25

percent as of October 1, 1996. Table 2 shows the projected SAIF reserve

ratio on June 30, 1997, under pessimistic, optimistic and moderate

conditions. The pessimistic conditions combine relatively high loss

provisions, high deposit growth and low investment earnings; the

optimistic conditions combine zero loss provisions, negative deposit

growth and high investment earnings. Table 2 indicates that, under

pessimistic conditions, an assessment rate range of 4 to 31 basis

points falls just short of maintaining the DRR of 1.25 percent. But

under moderate conditions, which can be viewed as more likely than

either the pessimistic or optimistic scenarios, rates of 0 to 27 basis

points would result in a SAIF reserve ratio of 1.27 percent:

Table 2.--SAIF Assessment Rates and Reserve Ratio Under Varying Conditions

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

Conditions Pessimistic Optimistic Moderate

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

Deposit growth rate (%)......................................... 4.0 -2.0 2.0

Loss provisions ($M)............................................ 270 0 50

Investment rate (%)............................................. 5.2 6.2 5.7

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

Assessment rates (bp) Estimated reserve ratio (%) June 30, 1987

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

Range Average Pessimistic Optimistic Moderate

4 to 31......................................... 4.7 1.24 1.36 1.30

2 to 29......................................... 2.7 1.23 1.34 1.28

[[Page 53870]]

0 to 27......................................... 0.7 1.21 1.33 1.27

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

Following is a discussion of each of the main variables affecting the

estimated reserve ratio:

Yield on investments: The SAIF is very liquid, not having had any

significant receivership activity. Although FDIC policy limits the

proportion of investments with maturities beyond five years, a fully

capitalized SAIF will have significant investment earnings. Short-term

interest rates have been generally stable in 1996, and the FDIC's

recent investment yield of 5.7 percent may be a reasonable

approximation for the expected yield through the first half of 1997.

The investment rates utilized in Table 2 range from 5.2 percent to 6.2

percent, or 50 basis points on either side of the recent experience.

Estimated annual operating expenses are assumed to be $40 million, the

same as in 1995.\5\

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\5\ The FDIC presently is addressing the allocation of operating

expenses between the BIF and the SAIF. A likely outcome is that the

proportion of expenses borne by the SAIF will increase.

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Growth of SAIF-insured deposits: For the 12 months ending December

31, 1995, SAIF-insured deposits increased 2.5 percent, reversing a

long-term decline that began with the inception of the SAIF in 1989.

But insured deposit growth slowed in the first six months of 1996 to an

annual rate of 0.3 percent. The FDIC regards an annual growth rate of

2.5 percent as near the high end of the possible range of deposit

growth for the near future. Accordingly, the FDIC's analysis uses a

range of insured deposit growth from -2 percent to 4 percent

(annualized).

Provisions for loss: The FDIC has already established a reserve for

losses within the SAIF, and has accordingly reduced SAIF's reported net

worth by the amount of the reserve.\6\ This reserve represents the

estimated loss for institutions that, absent some favorable event, are

likely to fail within 18 months. That projection is subject to

considerable uncertainty.

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\6\ The SAIF loss reserve was $114 million on June 30, 1996.

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The optimistic scenario assumes the existing reserve is adequate.

Table 2 shows an additional loss provision of zero under this scenario.

The pessimistic scenario has an additional loss provision of $270

million. This scenario represents the long-range failure rate for SAIF-

insured institutions, which is estimated to be 22 basis points per year

of total assets (or slightly more than $2 billion in failed assets per

year). The pessimistic scenario is not a worst-case scenario. But given

the currently favorable economic conditions and the relative health of

the thrift industry, deterioration in the industry would have to be

sudden and sharp for the SAIF to require additional loss reserves at

the long-term rate.

The moderate scenario reflects the fact that the FDIC has

identified a few SAIF members as possible failures by year-end 1997 but

has not yet established loss reserves for them. If loss reserves were

established for these thrifts in 1996, the cost to the SAIF would be

about $50 million.

b. Case resolution expenditures and income. As noted above, the

SAIF has no significant receivership activity. Accordingly, case

resolution expenditures and income are negligible.

c. Effect on SAIF members' earnings and capital. The proposed rule

would reduce assessment rates for all institutions that pay assessments

to the SAIF, and therefore would have a beneficial impact on all such

institutions' earnings and capital.

Thrifts had record earnings and a return on assets above 1 percent

in each of the first two quarters of 1996. Nearly 98 percent of all

SAIF members are well capitalized. The assets of ``problem'' SAIF

members fell to $7 billion as of June 30, down from over $200 billion

at the end of 1991. Only one SAIF member has failed in 1996.

The commercial banking industry, which owns one-fourth of the SAIF

assessment base, is even stronger. Based on net income for the first

half of 1996, the banking industry is expected to have record annual

earnings for the fifth consecutive year.

d. Summary. As discussed above, while the appropriate long-term

assessment rate would be 4 to 5 basis points, the analysis summarized

in Table 2 indicates that, under current conditions, this rate would

likely result in a reserve ratio well in excess of 1.25%. The Board is

therefore proposing to lower the rate to a range of 0 to 27 basis

points, which would yield an average rate of 0.6 basis points

(annualized) and an estimated reserve ratio of 1.27 percent at midyear

1997, under moderate conditions. With no significant receivership

activity and a very liquid fund, investment earnings presently are more

than adequate to maintain the DRR.

4. The Base Schedule and the Effective Rates

The Funds Act requires the special assessment to be in an amount

that capitalizes the SAIF at the DRR as of October 1, 1996.

Accordingly, from that date forward the FDIC must set SAIF assessments

no higher than necessary to maintain the SAIF's reserve ratio at the

DRR (although the Board may set higher rates for institutions that

exhibit certain kinds of weakness or are not well capitalized). 12

U.S.C. 1817(b)(2)(A) (i), (iii) and (v). The FDIC must therefore lower

the SAIF assessment schedule as a whole.\7\

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\7\ The proposed rule would give the FDIC flexibility to delay

issuing the invoices for the first quarterly payment for the first

semiannual period of 1997, which is the first payment under the new

schedule. As a rule, the FDIC must issue invoices not less than 30

days prior to the collection date. 12 CFR 327.3(c)(1). A shorter

interval is warranted in this case in order to afford time for

notice and comment on the proposed regulation.

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At the same time, in order to maintain a risk-based assessment

system, the FDIC must set rates for riskier institutions at higher

levels, even if the resulting collections would cause the SAIF's

reserve ratio to rise above the DRR. The higher rates are required to

preserve the incentive for those institutions to control risk-taking

behavior, and also to cover the long-term costs of the obligations that

the institutions present to the SAIF. The FDIC has explicit authority

to set higher assessments for such institutions. See 12 U.S.C.

1817(b)(2)(A)(v).

The FDIC is proposing to fulfill these requirements by adopting a

base assessment schedule that sets forth a permanent (and reduced) set

of rates for the SAIF, and an adjusted assessment schedule that further

lowers the SAIF rates to the level that is appropriate under current

conditions. The FDIC is also proposing to adopt a procedure for making

limited modifications to the adjusted assessment schedule in an

expeditious manner (discussed in paragraph I.E., below). Finally, in

order to accommodate the special circumstances of institutions that pay

FICO assessments, the FDIC is

[[Page 53871]]

proposing to adopt a special interim set of rates that apply to these

institutions from October 1, 1996, through the end of the year. (See

discussion at paragraph I.C.4.d., below).

a. The SAIF Base Assessment Schedule. The SAIF rates currently

range from 23 basis points for institutions with the most favorable

assessment risk classification to 31 basis points for the riskiest

institutions:

Current SAIF Assessment Schedule

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

Supervisory subgroup

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

A B C

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

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

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

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

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

See 12 CFR 327.9(d)(1). The proposed rule would retain the basic

framework of this schedule and name it the ``SAIF Base Assessment

Schedule''.

The proposed SAIF Base Assessment Schedule would have generally

lower rates, however, and would also have a wider range between the

highest and lowest rates:

Proposed SAIF Base Assessment Schedule

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

Supervisory subgroup

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

A B C

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

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

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

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

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

Until January 1, 1999, SAIF rates may not be lower than the BIF

rates for institutions that pose comparable risks to their funds. 12

U.S.C. 1817(b)(2)(E)(iii). Accordingly, the rates in the proposed SAIF

Base Assessment Schedule are as low as, but no lower than, the

permanent (or base) BIF rates set forth in Rate Schedule 2.8 See

id. 327.9(a).

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8 The proposed rule would redesignate Rate Schedule 2 as

the BIF Base Assessment Schedule.

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The SAIF Base Assessment Schedule would, in principle, apply

immediately to all institutions. As described below, however, the rates

set forth in the SAIF Base Assessment Schedule would not be the rates

that are actually effective upon adoption of the proposed rule.

b. Effective rates. The FDIC is proposing to modify the rates in

the SAIF Base Assessment Schedule in two ways. Both modifications would

be effective as of October 1, 1996. The first proposed modification is

a general adjustment to the rates in the SAIF Base Assessment Schedule

that lowers these rates by 4 basis points. The adjusted rate schedule

would immediately apply to all institutions other than those that pay

assessments to the FICO. The second proposed modification is a special

interim set of rates for institutions that pay assessments to the FICO.

The special interim rates would apply to these institutions from

October 1, 1996, through December 31, 1996. After the end of 1996, the

special interim rates would terminate, and these institutions--like

other institutions that pay SAIF assessments--would pay the rates

prescribed in the SAIF Base Assessment Schedule as reduced by the 4-

basis-point adjustment.

The SAIF Adjusted Assessment Schedule. When the SAIF's reserve

ratio is at the DRR, the FDIC cannot lawfully impose regular semiannual

assessments with respect to the SAIF in excess of the amount needed to

maintain the SAIF at the DRR (although the Board may set such

assessments for institutions that exhibit weakness or are not well

capitalized). Id. 1817(b)(2)(A)(iii) and (v). Accordingly, the FDIC is

proposing to adopt an immediate adjustment to the SAIF Base Assessment

Schedule that would avoid collecting such excess amounts. Like the SAIF

Base Assessment Schedule, the adjusted assessment schedule would take

effect on October 1, 1996.

The adjusted assessment schedule would apply at that time to all

institutions other than institutions that pay FICO assessments. On and

after January 1, 1997, the adjusted assessment schedule would apply to

all institutions. The adjustment would reduce each SAIF assessment rate

by 4 basis points.

The FDIC may not lower the rates in the SAIF Base Assessment

Schedule by more than the proposed 4 basis-point adjustment. Any

further reduction would cause the lowest rate to be less than zero, and

would also cause the effective SAIF rates to fall below the current

rates for BIF members.

Interim schedule for institutions paying FICO assessments. SAIF-

member savings associations must pay assessments to the FICO to fund

the FICO's interest obligations. 12 U.S.C. 1441(f)(2); see id.

1441(k)(1). Through year-end 1996, the FICO's assessments serve to

reduce the amounts that the SAIF is authorized to assess against these

institutions. Accordingly, in order to maintain a risk-based system of

rates for these institutions, the FDIC is setting each rate in the

system at a level that is sufficient to pay the FICO's requirements,

and also to establish the incentives and generate the revenues

necessary to carry out the mission of the risk-based assessment

program.

Other institutions--BIF members and SAIF-member banks--do not make

such payments to the FICO, even though these institutions may pay SAIF

assessments. See ``Treatment of Assessments Paid by `Oakar' Banks and

`Sasser' Banks on SAIF-Insured Deposits, General Counsel's Opinion No.

7'', 60 FR 7059 (February 6, 1995).9 If the FDIC were to extend

the special interim rates for SAIF-member savings associations to other

institutions, the FDIC would collect amounts in excess of the amount

needed to preserve the SAIF's reserve ratio at the DRR. But if the FDIC

were to subject SAIF-member savings associations to the schedule that

applies to these other institutions, the SAIF would not receive the

amounts necessary to compensate it for the risk that the institutions

present to it. Accordingly, the FDIC cannot adopt a single rate-

schedule for all SAIF-assessable institutions between October 1, 1996,

and year-end 1996.

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9 A prior version of the Funds Act, which was contained

in the ``Balanced Budget Act of 1995'' (H.R. 2491) but vetoed by the

President on December 6, 1995, would have required pro rata sharing

of the FICO payments by savings associations and banks essentially

immediately, as that provision would have been effective January 1,

1996. Later on, however, Congress altered the effective date for the

FICO sharing provision to apply to semiannual periods beginning

after December 31, 1996. By implication, banks do not share in the

FICO assessment payments prior to that date.

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Conversely, the Federal Home Loan Bank Act currently provides--and

will continue to provide until January 1, 1997--that the amount

assessed by the FICO against SAIF-member savings associations ``shall

not exceed the amount authorized to be assessed'' by the SAIF against

those institutions, and that the amount of the applicable SAIF

assessment ``shall be reduced'' by the amount of the FICO draw. 12

U.S.C. 1441(f)(2)(A). If SAIF-member savings associations were subject

to the rate-schedule for other institutions, the amounts collected from

the SAIF-member savings associations would not be sufficient to cover

the FICO draw.

The FDIC is proposing to set rates for SAIF-member savings

associations at a level that is sufficient to cover the FICO draw, yet

does not cause these institutions to pay amounts to the SAIF that would

cause the SAIF's reserve ratio to exceed the DRR. The rates in the

risk-based assessment system for SAIF-member savings associations must

also be high enough to carry out the policies that underlie such a

system, but not so high as to constitute an excessive burden. The FDIC

is therefore proposing

[[Page 53872]]

to retain, as a general matter, the relationships among the assessment-

risk categories in the current SAIF assessment schedule, while reducing

each rate in the schedule by 5 basis points. The only exception to this

principle is found in the relationship between the highest-risk

category and adjacent categories. Section 7(b)(2)(E) of the FDI Act

specifies that the assessment rate for a SAIF member may not be less

than the assessment rate for a BIF member that poses a comparable risk

to its fund. Id. 1817(b)(2)(E)(iii). Accordingly, the rate proposed for

institutions in the highest-risk category schedule is not the current

rate reduced by the full 5 basis points, but rather is set at the same

level as that for BIF members in the highest-risk category.

Summary. The effective rates applicable to institutions that pay

assessments to the SAIF from October 1, 1996, through December 31,

1996, are shown in the following table:

SAIF Adjusted Assessment Schedule

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

Supervisory subgroup

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

A B C

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

1............................................ 018 321 1724

2............................................ 321 1024 2425

3............................................ 1024 2425 2727

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

The rates in large type apply to all SAIF-assessable institutions from

January 1, 1997, forward; these rates also apply from October 1, 1996,

forward to institutions that are not SAIF-member savings associations.

The rates in small type apply to SAIF member savings associations from

October 1, 1996, through December 31, 1996.

5. Refund of Excess SAIF Assessments

Both the proposed SAIF Adjusted Assessment Schedule and the interim

rate schedule for SAIF-member savings associations would become

effective as of October 1, 1996. The FDIC has already sent out invoices

for the second quarterly payment for the current semiannual period

(July-December 1996), however. These assessments were computed at the

rates presently in effect, which are generally higher than the proposed

rates.

Accordingly, the proposed rule would provide for a refund or credit

of the excess amount collected in the regular SAIF assessment, with

interest. The excess amount would be refunded or credited in one or

more installments. The refunds and credits would be made according to

the procedures applicable to regular quarterly payments.

D. Assessments Paid by Certain Institutions

Even if a fund has been capitalized, the FDIC may collect

assessments for the fund from institutions ``that exhibit financial,

operational, or compliance weaknesses ranging from moderately severe to

unsatisfactory, or that are not well capitalized as defined in [FDI

Act] section 38''. Id. 1817(b)(2)(A)(v). The FDIC proposes to interpret

this clause in a manner that is consistent with the existing framework

of the risk-based assessment program.

``Financial, operational, or compliance weaknesses''. For

assessment purposes, the FDIC classifies each institution into one of

three supervisory subgroups:

Subgroup A Financially sound institutions with only a few minor

weaknesses. 12 CFR 327.4(a)(2)(i).

Subgroup B Institutions that demonstrate weaknesses which, if not

corrected, could result in significant deterioration of the

institution and increased loss to the BIF or SAIF. Id.

327.4(a)(2)(ii).

Subgroup C Institutions that pose a substantial probability of loss

to the BIF or SAIF unless effective corrective action is taken. Id.

327.4(a)(2)(iii).

When Congress adopted the Funds Act, Congress was aware that the

FDIC already had these standards and definitions in place, and that the

FDIC already used them for the purpose of imposing risk-based

assessments. Moreover, the standards and definitions focus on

institutions'' financial and operational activities, and with their

compliance with laws and regulations. The FDIC accordingly believes

that it is reasonable and appropriate--and consistent with the intent

of Congress--to apply these standards and definitions in determining

whether an institution ``exhibit[s] * * * weaknesses ranging from

moderately severe to unsatisfactory'' for assessment purposes.

The FDIC considers that if an institution's weaknesses are so

severe that ``if not corrected, [they] could result in significant

deterioration of the institution and increased loss to the BIF or

SAIF'', the weaknesses may properly be characterized as ``moderately

severe'. The FDIC further considers that if the weaknesses ``pose a

substantial probability of loss to the BIF or SAIF unless effective

corrective action is taken', they may properly be regarded as

``unsatisfactory''. The FDIC therefore proposes to interpret section

7(b)(2)(A)(v) to include any institution that is classified in

supervisory subgroup B or C.

``Not well capitalized''. Section 7(b)(2)(A)(v) also authorizes the

FDIC to set higher rates for institutions ``that are not well

capitalized as defined in [FDI Act] section 38''. Section 38 of the FDI

Act, 12 U.S.C. 1831o, defines a ``well capitalized'' institution as one

that ``significantly exceeds the required minimum level for each

relevant capital measure''. 12 U.S.C. 1831o(b)(1)(A).

Section 38 requires each agency to specify the relevant capital

measure at which insured depository institution is well capitalized.

Id. 1831o(c)(2). The FDIC has done so in subpart B of part 325 of its

regulations, 12 CFR part 325 (``Capital Maintenance''). See id.

325.103(b)(1). But subpart B--and therefore its definition of ``well

capitalized''--only applies to state nonmember banks and to insured

state branches of foreign banks for which the FDIC is the appropriate

federal banking agency. Id. 325.101(c).

The FDIC also defines the term ``well capitalized'' in part 327.

See id. 327.4(a)(1)(i). Here the FDIC does so for the broader purpose

of implementing a risk-based assessment system: accordingly, part 327's

definition applies to all insured institutions.

While the two definitions employ the same numerical ratios, part

325's definition also includes an extra criterion: an institution may

not be ``subject to any written agreement, order, capital directive, or

prompt corrective action directive * * * to meet and maintain a

specific capital level for any capital measure''. Id. 325.103(b)(1)(v).

Within the context of the assessment regulation, this kind of

consideration helps to determine an institution's supervisory subgroup,

but not its capital category. Accordingly, the FDIC considers that it

is not appropriate to apply that criterion for the purpose of

determining whether an institution is ``well capitalized'' for

assessment purposes. The FDIC therefore proposes to apply part 327's

current definition of ``well capitalized'' for the purpose of

interpreting section 7(b)(2)(A)(v) of the FDI Act.

E. Adjustments to the Assessment Schedule

1. In General

Section 327.9(b) sets forth a procedure under which the Board may

increase or decrease the BIF Base Assessment Schedule without engaging

in separate notice-and-comment rulemaking proceedings for each

adjustment. 12 CFR 327.9(b).

The allowable adjustments are subject to strict limits. No

adjustment may, when aggregated with prior adjustments, cause the

adjusted BIF rates to deviate ``over time'' by more than 5 basis points

from those set forth

[[Page 53873]]

in Rate Schedule 2, which is the permanent or base rate schedule for

the BIF. An adjustment may not result in a negative assessment rate. No

one adjustment may constitute an increase or decrease of more than 5

basis points. See id. 327.9(b)(1).

The Board proposes to modify and clarify this process somewhat, and

extend it to SAIF rates as well. The proposed regulation would not

change the limits on allowable adjustments, but would clarify the

following two points.

First, the Board may not, without notice-and-comment rulemaking,

establish an adjusted assessment schedule for a fund in which the

adjusted rates differ by more than 5 basis points at any time from the

base assessment schedule for that fund. For example, if the rate for 1A

SAIF members in the SAIF Base Assessment Schedule were 4 basis points,

the adjusted rate for 1A SAIF members could never rise above 9 basis

points without a new notice-and-comment rulemaking proceeding.

Second, the Board may not reduce the rates in either base

assessment schedule any more than those rates have already been

lowered, because in that event the lowest rate in the schedule would be

less than zero. The proposed regulation makes it clear that zero serves

as a lower bound on the most favorable rate, and prevents the other

rates from being adjusted by the full 5 basis points.

2. Procedure

The proposed regulation would alter the formal mechanism by which

the Board would make an adjustment to the base assessment schedules.

The current regulation calls for the Board to adopt the semiannual

assessment schedule and any adjustment thereto by means of a

resolution, a procedure that does not require public notice or comment.

12 CFR 327.9(b)(3). Under the proposed rule, the Board would adopt the

new assessment schedule pursuant to a rulemaking proceeding, but still

without public notice and comment. The Board would present each current

assessment schedule in an appendix to part 327.

Consistent with the current rule, the proposed rule would provide

that an adjustment to the base assessment schedule could not be applied

only to selected risk classifications, but rather would be applied to

each cell in the schedule uniformly. The differences between the

respective cells in the rate schedule would therefore remain constant.

Similarly, adjustments would neither expand nor contract the spread

between the lowest- and highest-risk classifications.

The adjustment for any particular semiannual period would be

determined by: (1) The amount of assessment income necessary to

maintain the SAIF reserve ratio at 1.25 percent (taking into account

operating expenses and expected losses and the statutory mandate for

the risk-based assessment system); 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 expects to

adjust the assessment schedule every six months by the amount (if any),

up to and including the maximum adjustment of 5 basis points, necessary

to maintain the reserve ratio at the DRR.

Such adjustments would be adopted in a regulation that reflects

consideration of the following statutory factors: (1) Expected

operating expenses; (2) projected losses; (3) the effect on SAIF

members' earnings and capital; and (4) any other factors the Board

determined to be relevant. The regulation would be adopted and

announced at least 15 days prior to the date the invoice is provided

for the first quarter of the semiannual period for which the adjusted

rate schedule would take effect.

If the amount of the adjustment under consideration by the FDIC

would result in an adjusted schedule exceeding the 5 basis-point

maximum, then the Board would initiate a notice-and-comment rulemaking

proceeding.

As discussed in more detail in the preamble to the final rule in

which the FDIC established the adjustment procedure for BIF rates, the

FDIC fully recognizes and understands the concern for the possibility

of assessment rate increases without the benefit of full notice-and-

comment rulemaking. See 60 FR 42680, 42739-42740 (Aug. 16, 1995).

Nevertheless, for the reasons given below, the FDIC considers that

notice and public participation with respect to an adjustment would

generally be ``impracticable, unnecessary, or contrary to the public

interest'' within the meaning of 5 U.S.C. 553(b). Furthermore, the FDIC

considers that for the same reasons it has ``good cause'' within the

meaning of id. 553(d) to make any such rule effective immediately, and

not after a 30-day delay.

Section 7(b)(2)(A)(i) of the FDI Act declares that the FDIC ``shall

set rates when necessary, and only to the extent necessary'' to

maintain each fund's reserve ratio at the DRR, or to raise a fund's

reserve ratio to that level (although the Board may set higher rates

for institutions that exhibit weakness or are not well capitalized, see

id. 1817(b)(2)(A)(v)). Section 7(b)(2)(A)(iii) of the FDI Act restates

the substance of this mandate in a different way: the FDIC ``shall not

set assessment rates in excess of the amount needed'' for those

purposes. These twin commands require the FDIC to monitor the size of

each fund, the amount of deposits that each fund insures, and the

relationship between them. Section 7(b)(2)(A) requires the FDIC to set

``semiannual assessments''. Accordingly, the FDIC evaluates the

assessment schedules every six months.

Notice-and-comment rulemaking procedures are generally

``unnecessary'' because institutions are already on notice with respect

to the benchmark rates that are set forth in the base assessment

schedules, with respect to the need for making semiannual adjustments

to the rates, and with respect to the maximum amount of any such

adjustments. Moreover, the adjustments would be limited: the FDIC would

not be able to change a current assessment schedule by more than 5

basis points, or to deviate from the base assessment schedule by more

than 5 basis points.

Notice-and-comment rulemaking procedures also are generally

``unnecessary'' because they would not generate additional information

that is relevant to the rate-setting process. The institutions already

provide part of the needed information in their quarterly reports of

condition. The remainder of the needed information is data that the

FDIC generates internally: e.g., the current balance and expected

operating expenses of each fund, and each fund's case resolution

expenditures and income.

Finally, notice-and-comment rulemaking procedures are also

generally ``impracticable'' and ``contrary to the public interest'' in

this context because they are not compatible with the need to make

frequent small adjustments to the assessment rates in order to maintain

the funds' reserve ratios at the DRR. The FDIC must use data that is as

current as possible to generate an assessment schedule that complies

with the statutory standards. Notice-and-comment rulemaking procedures

entail considerable delay. Such delay could force the FDIC to use out-

of-date information to compute the amount of revenue needed and to

produce an appropriate assessment schedule. Using out-of-date

information could cause the FDIC to set rates for a fund that were

higher or lower than necessary to achieve the fund's target DRR.

[[Page 53874]]

For these reasons, the FDIC is proposing that any adjustment to the

base assessment schedule would be adopted as a final rule without

notice and public procedure thereon. Any such final rule would be

adopted at least 15 days before the invoice date for the first payment

of a semiannual period (and 45 days before the collection date for that

payment). The adjusted assessment schedule would be published in the

Federal Register as an appendix to subpart A of part 327.

F. Effective Date

The FDIC proposes that the rule, if adopted in final form, would

become effective immediately upon adoption. The FDIC considers that an

immediate effective date would be both necessary and appropriate

because the FDIC must issue invoices reflecting the new lower rates, in

order that institutions may know the amounts they are to pay for the

first quarter of 1997. By making the rule effective immediately, the

FDIC can issue the invoices as promptly as possible.

G. Technical Adjustments

The proposed rule would update, clarify, and correct various

references in part 327. For example, Sec. 327.4(a) refers to

Sec. 327.9(a) and to Sec. 327.9(c); the proposed rule would replace the

references with a single reference to Sec. 327.9. Section 327.4(c)

speaks of institutions for which either the FDIC or the Resolution

Trust Corporation (RTC) has been appointed conservator; the proposed

rule would eliminate the reference to the RTC, and would speak instead

of institutions for which the FDIC either has been appointed or serves

as conservator. The proposed rule would remove the definitions for

``adjustment factor'' and ``assessment schedule,'' which are found in

Sec. 327.8(i), on the ground they are not needed. Finally, the proposed

rule would delete certain obsolete provisions relating to the BIF after

the BIF achieved its DRR.

H. Capital Calculation for Risk-Based Assessment Purposes

The FDIC recognizes that payment of the special assessment could

negatively impact the capital ratings of some institutions, affecting

their risk classification under the risk-based assessment system. The

risk classification for the first semiannual assessment period of 1997

will be based on an institution's capital as of June 30, 1996, and

would be unaffected by payment of the special assessment. But the risk

classification for the second semiannual assessment period of 1997 will

be based on an institution's capital as of December 30, 1996, and

therefore would reflect payment of the special assessment. Given the

extraordinary nature of the special assessment, the FDIC is seeking

comment on whether, for purposes of assigning an institution's risk

classification under the risk-based assessment system for the second

semiannual period of calendar year 1997 only, the FDIC should calculate

the institution's capital as if the special assessment had not been

paid, while taking into account other capital fluctuations.

II. Request for Public Comment

The FDIC is hereby requesting comment on all aspects of the

proposed rule. The FDIC is particularly interested in receiving

comments on whether it is appropriate to lower SAIF assessment rates

from a range of 23 to 31 basis points to a range of 4 to 31 basis

points, and then through application of the adjustment factor, to

further reduce the SAIF assessment rates to a range of 0 to 27 basis

points; whether the proposed spread of 27 basis points from the lowest

to the highest assessment rates is appropriate; whether the 5-basis

point adjustment factor should be extended to SAIF members; whether it

is appropriate to establish an interim schedule for SAIF-member savings

associations from October 1, 1996, through December 31, 1996; and

whether the proposed rate-spread therein is appropriate. The FDIC also

seeks particular comment on its proposed revision to the procedure for

adjusting the base assessment schedules of the funds. Finally, the FDIC

seeks comment on the propriety and advisability of determining an

institution's risk classification under the risk-based assessment

system, the second semiannual period of calendar year 1997 only, based

on a calculation of the institution's capital as if the special

assessment had not been paid, while taking into account other capital

fluctuations.

III. Paperwork Reduction Act

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

Paperwork Reduction Act of 1980 (44 U.S.C. 3501 et seq.) are contained

in this proposed rule. Consequently, no information has been submitted

to the Office of Management and Budget (OMB) for review.

IV. Regulatory Flexibility Analysis

The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., does

not apply to the proposed rule. The RFA's definition of the term

``rule'' excludes ``a rule of particular applicability relating to

rates.'' Id. 601(2). The FDIC considers that the proposed rule is

governed by this exclusion.

In addition, the legislative history of the RFA indicates that its

requirements are inappropriate to this proceeding. The RFA focuses on

the ``impact'' that a rule will have on small entities. The legislative

history shows that the ``impact'' at issue is a differential impact--

that is, an impact that places a disproportionate burden 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 institutions regardless of size. Rather, it would impose an

assessment that is directly proportional to each institution's size.

Nor would the proposed rule cause an affected institution to incur any

ancillary costs of compliance (such as the need to develop new

recordkeeping or reporting systems, to seek out the expertise of

specialized accountants, lawyers, or managers) that might cause

disproportionate harm to small entities. As a result, the purposes and

objectives of the RFA are not affected, and an initial regulatory

flexibility analysis is not required.

V. Riegle Community Development and Regulatory Improvement Act

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

Improvement Act of 1994 requires that, as a general rule, new and

amended regulations that impose additional reporting, disclosure, or

other new requirements on insured depository institutions shall take

effect on the first day of a calendar quarter. See 12 U.S.C. 4802(b).

This restriction is inapplicable because the final rule would not

impose such additional or new requirements.

List of Subjects in 12 CFR Part 327

Assessments, Bank deposit insurance, Banks, banking, Financing

Corporation, Savings associations.

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

of the Federal Deposit Insurance Corporation proposes to amend part 327

of title 12

[[Page 53875]]

of the Code of Federal Regulations as follows:

PART 327--ASSESSMENTS

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

follows:

Authority: 12 U.S.C. 1441, 1441b, 1813, 1815, 1817-1819; Deposit

Insurance Funds Act of 1996, Pub. L. 104-208, 110 Stat. 3009 et seq.

3. Section 327.3 is amended by revising the first sentence of

paragraph (c)(1) to read as follows:

Sec. 327.3 Payment of semiannual assessments.

* * * * *

(c) First-quarterly payment--(1) Invoice. Unless the Board

determines that special and exigent circumstances require a shorter

period with respect to the invoice for the first quarterly payment for

the first semiannual period of 1997, no later than 30 days prior to the

payment date specified in paragraph (c)(2) of this section, the

Corporation will provide to each insured depository institution an

invoice showing the amount of the assessment payment due from the

institution for the first quarter of the upcoming semiannual period,

and the computation of that amount. * * *

* * * * *

4. Section 327.4 is amended by revising the first sentence of

paragraph (a) introductory text and paragraph (c) to read as follows:

Sec. 327.4 Annual assessment rate.

(a) Assessment risk classification. For the purpose of determining

the annual assessment rate for insured depository institutions under

Sec. 327.9, each insured depository institution will be assigned an

``assessment risk classification''. * * *

* * * * *

(c) Classification for certain types of institutions. The annual

assessment rate applicable to institutions that are bridge banks under

12 U.S.C. 1821(n) and to institutions for which the Corporation has

been appointed or serves as conservator shall in all cases be the rate

applicable to the classification designated as ``2A'' in the

appropriate assessment schedule prescribed pursuant to Sec. 327.9.

* * * * *

Sec. 327.8 [Amended]

5. Section 327.8 is amended by removing paragraph (i).

6. Section 327.9 is revised to read as follows:

Sec. 327.9 Assessment schedules.

(a) Base assessment schedules--(1) In general. Subject to

Sec. 327.4(c) and subpart B of this part, and except as provided in

paragraph (c) of this section, the base annual assessment rate for an

insured depository institution shall be the rate prescribed in the

appropriate base assessment schedule set forth in paragraph (a)(2) of

this section applicable to the assessment risk classification assigned

by the Corporation under Sec. 327.4(a) to that institution. Each base

assessment schedule utilizes the group and subgroup designations

specified in Sec. 327.4(a).

(2) Assessment schedules--(i) BIF members. The following base

assessment schedule applies with respect to assessments paid to the BIF

by BIF members and by other institutions that are required to make

payments to the BIF pursuant to subpart B of this part:

BIF Base Assessment Schedule

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

Supervisory subgroup

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

A B C

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

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

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

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

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

(ii) SAIF members. Except as provided in paragraph (c) of this

section, the following base assessment schedule applies with respect to

assessments paid to the SAIF by SAIF members and by other institutions

that are required to make payments to the SAIF pursuant to subpart B of

this part:

SAIF Base Assessment Schedule

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

Supervisory subgroup

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

A B C

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

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

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

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

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

(b) Rate adjustments; procedures--(1) Semiannual adjustment. The

Board may increase or decrease the BIF Base Assessment Schedule set

forth in paragraph (a)(2)(i) of this section or the SAIF Base

Assessment Schedule set forth in paragraph (a)(2)(ii) of this section

up to a maximum increase of 5 basis points or a fraction thereof or a

maximum decrease of 5 basis points or a fraction thereof (after

aggregating increases and decreases), as the Board deems necessary to

maintain the reserve ratio of an insurance fund at the designated

reserve ratio for that fund. Any such adjustment shall apply uniformly

to each rate in the base assessment schedule. In no case may such

adjustments result in an assessment rate that is mathematically less

than zero or in a rate schedule for an insurance fund that, at any

time, is more than 5 basis points above or below the base assessment

schedule for that fund, nor may any one such adjustment constitute an

increase or decrease of more than 5 basis points. The adjustment for

any semiannual period for a fund 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 (b)(1)(i) of this section considering the risk

profile of the institutions required to pay assessments to the fund.

(2) Amount of revenue. In determining the amount of assessment

revenue in paragraph (b)(1)(i) of this section, the Board shall take

into consideration the following:

(i) Expected operating expenses of the insurance fund;

(ii) Case resolution expenditures and income of the insurance fund;

(iii) The effect of assessments on the earnings and capital of the

institutions paying assessments to the insurance fund; and

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

(3) Adjustment procedure. Any adjustment adopted by the Board

pursuant to this paragraph (b) will be adopted by rulemaking.

Nevertheless, because the Corporation is required by statute to set

assessment rates as necessary (and only to the extent necessary) to

maintain or attain the designated reserve ratio, and because the

Corporation must do so in the face of constantly changing conditions,

and because the purpose of the adjustment procedure is to permit the

Corporation to act expeditiously and frequently to maintain or attain

the designated reserve ratio in an environment of constant change, but

within set parameters not exceeding 5 basis points, without the delays

associated with full notice-and-comment rulemaking, the Corporation has

determined that it is ordinarily impracticable, unnecessary and not in

the public interest to follow the procedure for notice and public

comment in such a rulemaking, and that accordingly notice and public

procedure thereon are not required as provided in 5 U.S.C. 553(b). For

the same reasons, the Corporation has determined that the requirement

of a 30-day delayed effective date is not required under 5 U.S.C.

553(d). Any adjustment adopted by the Board pursuant to a rulemaking

specified in this paragraph (b) will be reflected in an adjusted

assessment

[[Page 53876]]

schedule set forth in appendix A to this subpart A.

(4) Announcement. The Board shall announce the semiannual

assessment schedule and the amount and basis for any adjustment thereto

not later than 15 days before the invoice date specified in

Sec. 327.3(c) for the first quarter of the semiannual period for which

the adjustment shall be effective.

(c) Special provisions--(1) Interim assessment schedule for SAIF-

member savings associations. From October 1, 1996, through December 31,

1996, savings associations that are members of the SAIF shall pay

assessments according to the schedule in effect for such institutions

on September 30, 1996, except that each rate in the schedule shall be

reduced by 5 basis points (0.50 percent). No rate prescribed under this

paragraph (c) shall be applied for the purpose of Sec. 327.32(a)(2)(i).

(2) Refunds or credits of certain assessments. If the amount paid

by an institution for the regular semiannual assessment for the second

semiannual period of 1996 exceeds, as a result of the reduction in the

rate schedule for a portion of that semiannual period, the amount due

from the institution for that semiannual period, the Corporation will

refund or credit any such excess payment and will provide interest on

the excess payment in accordance with the provisions of Sec. 327.7.

Notwithstanding Sec. 327.7(a)(3)(ii), such interest will accrue

beginning on the date as of which the reserve ratio of the Savings

Association Insurance Fund has reached the designated reserve ratio.

7. A new Sec. 327.10 is added to subpart A to read as follows:

Sec. 327.10 Interpretive rule: section 7(b)(2)(A)(v).

This interpretive rule explains certain phrases used in section

7(b)(2)(A)(v) of the Federal Deposit Insurance Act, 12 U.S.C.

1817(b)(2)(A)(v).

(a) An institution classified in supervisory subgroup B or C

pursuant to Sec. 327.4(a)(2) exhibits ``financial, operational, or

compliance weaknesses ranging from moderately severe to

unsatisfactory'' within the meaning of such section 7(b)(2)(A)(v).

(b) An institution classified in capital group 2 or 3 pursuant to

Sec. 327.4(a)(1) is not well capitalized within the meaning of such

section 7(b)(2)(A)(v).

8. Subpart A of part 327 is amended by adding appendix A to read as

follows:

Appendix A to Subpart A of Part 327--Adjusted Assessment Schedules

(a) BIF members. The Board has determined to adjust the BIF Base

Assessment Schedule by reducing the rates therein by 4 basis points.

The following adjusted assessment schedule applies to BIF members for

the second semiannual period of 1996 and for subsequent semiannual

periods:

BIF Adjusted Assessment Schedule

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

Supervisory subgroup

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

A B C

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

1............................................ 0 3 17

2............................................ 3 10 24

3............................................ 10 24 27

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

(b) SAIF members. The Board has determined to adjust the SAIF Base

Assessment Schedule by reducing the rates therein by 4 basis points,

and has determined to present the adjusted rates in the following

schedule. The Board has further determined to present the interim rates

prescribed by Sec. 327.9(c) in the same schedule. Accordingly, the

following schedule sets forth in large type the adjusted rate schedule

that applies to SAIF members generally on and after October 1, 1996,

and also sets forth in small type the rates that apply to SAIF members

that are savings associations pursuant to Sec. 327.9(c) from October 1,

1996, through December 31, 1996:

SAIF Adjusted Assessment Schedule

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

Supervisory subgroup

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

A B C

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

1............................................ 0/18 3/21 17/24

2............................................ 3/21 10/24 24/25

3............................................ 10/24 24/25 27/27

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

By order of the Board of Directors.

Dated at Washington, D.C., this 8th day of October 1996.

Federal Deposit Insurance Corporation.

Jerry L. Langley,

Executive Secretary.

[FR Doc. 96-26506 Filed 10-11-96; 10:23 am]

BILLING CODE 6714-01-P