Assessments; Continuation of Adjusted Rate Schedule for BIF- Assessable Deposits

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

Assessments; Continuation of Adjusted Rate Schedule for BIF-

Assessable Deposits

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Continuation of adjusted rate schedule.

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SUMMARY: On November 26, 1996, the Board of Directors of the FDIC

(Board) adopted a resolution to continue in effect the current downward

adjustment to the assessment rate schedule applicable to deposits

assessable by the Bank Insurance Fund (BIF). The continuation of the

downward adjustment will apply to the semiannual assessment period

beginning January 1, 1997. As a result, the BIF assessment rates will

continue to range from 0 to 27 basis points. The only difference

between the existing adjustment and the continuing adjustment adopted

by the Board is that the continuing schedule will no longer include a

reference to a minimum assessment amount. This change results from

recent legislation that eliminates a statutorily-imposed minimum

assessment amount. With this modification, the adjusted rate schedule

will result in an estimated average annual assessment rate of

approximately 0.17 basis points; the estimated annual revenue produced

by this rate schedule will be $43 million. In connection with the

elimination of the mandatory assessment amount, the Board has also

decided to refund minimum assessment payments made to BIF with respect

to that portion of the current semiannual assessment period remaining

after enactment of the amending legislation.

EFFECTIVE DATE: January 1, 1997, through June 30, 1997.

FOR FURTHER INFORMATION CONTACT: Steven Ledbetter, Chief, Assessment

Evaluation Section, Division of Insurance, (202) 898-8658; James R.

McFadyen, Senior Financial Analyst, Division of Research and

Statistics, (202) 898-7027; Martha Coulter, Counsel, Legal Division,

(202) 898-7348; Federal Deposit Insurance Corporation, 550 17th Street,

N.W., Washington, D.C., 20429.

SUPPLEMENTARY INFORMATION:

I. Introduction

This announcement pertains to deposit insurance assessments to be

paid for the semiannual assessment period beginning January 1, 1997, by

insured depository institutions on deposits assessable by the Bank

Insurance Fund (BIF). Invoices reflecting these assessments will be

sent to BIF member institutions around December 11, 1996.1

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1 Normally, invoices are sent approximately one month prior to

collection date, which would be December 3 for the January 2

collection date. However, in this instance the invoices are being

delayed approximately one week in order to permit the FDIC to

include any reduction in Savings Association Insurance Fund (SAIF)

rates adopted by the Board in early December for the upcoming

semiannual assessment period. The Board has decided to delay all

invoices, not just invoices for SAIF-member institutions, because of

the large number of BIF members with SAIF-assessable deposits and

SAIF members with BIF-assessable deposits. The Board is concerned

that sending bifurcated invoices approximately one week apart would

result in significant confusion and additional burden for such

institutions that can be avoided by a delayed, combined invoice.

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These invoices will also bill for assessments to be paid to the

Financing Corporation (FICO). As a result of recently-enacted

legislation, BIF-assessable deposits are now also subject to assessment

by FICO. As it has in the past, the FDIC will continue to collect FICO

assessments on FICO's behalf.

In providing for the FICO-assessability of BIF-assessable deposits,

section 2703 of the Deposit Insurance Funds Act of 1996 (DIFA) 2

further provided that the assessments imposed by FICO on insured

depository institutions with respect to BIF-assessable deposits will be

at a rate equal to one-fifth the assessment rate applicable to deposits

assessable by the Savings Association Insurance Fund (SAIF). Thus, the

upcoming FDIC assessment invoice is expected to reflect a FICO rate for

BIF-assessable deposits of approximately 1.3 basis points, which is

one-fifth the FICO rate of approximately 6.4 basis points anticipated

for SAIF-assessable deposits.

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2 DIFA is Subtitle G of Title II of Pub. L. 104-208, which

was enacted on September 30, 1996.

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The remainder of this announcement pertains solely to deposit

insurance assessments and does not further address FICO assessments.

II. Continuation of Adjustment to BIF Rate Schedule 2

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

1817(b), provides that the Board shall set semiannual deposit insurance

assessments for insured depository institutions. On August 8, 1995, the

Board adopted a new assessment rate schedule for deposits subject to

assessment by BIF. 60 FR 42680 (August 16, 1995). The new schedule was

codified as Rate Schedule 2 at 12 CFR 327.9(a). This schedule provided

for an assessment-rate range of 4 to 31 basis points and became

effective retroactively on June 1, 1995, the beginning of the month

following the month in which the BIF reached its designated reserve

ratio (DRR) of 1.25 percent of total estimated insured deposits.

In adopting Rate Schedule 2, the Board also amended the FDIC's

assessment regulations to permit the Board to make limited adjustments

to the schedule without notice-and-comment rulemaking. Any such

adjustments can be made as the Board deems necessary to maintain the

BIF reserve ratio at the DRR and can be accomplished by Board

resolution. Under this provision, codified at 12 CFR 327.9(b), any such

adjustment must not exceed an increase or decrease of 5 basis points

and must be uniform across the rate schedule.

The amount of an adjustment adopted by the Board under 12 CFR

327.9(b) is to be determined by the following considerations: (1) The

amount of assessment revenue necessary to maintain the reserve ratio at

the DRR; and (2) the assessment schedule that would generate such

amount of assessment revenue considering the risk profile of BIF

members. In determining the relevant amount of assessment revenue, the

Board is to consider BIF's expected operating expenses, case resolution

expenditures and income, the effect of assessments on BIF members'

earnings and capital, and any other factors the Board may deem

appropriate.

Having considered all of these factors, the Board decided on

November 14, 1995, to adopt an adjustment factor of 4 basis points for

the semiannual assessment period beginning January 1, 1996, with a

resulting adjusted schedule ranging from 0 to 27 basis points. 60 FR

63400 (December 11, 1995). The Board continued the same adjustment for

the semiannual period beginning July 1, 1996. 61 FR 26078 (May 24,

1996).

Until now, the adjusted schedule has included a reference to a

statutory requirement in section 7(b)(2)(A)(iii) of the Federal Deposit

Insurance Act, 12 U.S.C. 1817(b)(2)(A)(iii), that each insured

depository institution pay a minimum assessment amount of $2,000

annually. However, that requirement

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recently has been eliminated by section 2708 of DIFA, which replaced it

with a new section 7(b)(2)(A)(iii). The new provision requires that,

with respect to institutions posing the least risk to the deposit

insurance fund,3 semiannual assessments not be set to exceed the

amount needed to maintain the reserve ratio of BIF at the designated

reserve ratio, which is currently set at 1.25 percent of total

estimated insured deposits.

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3 New section 7(b)(2)(A)(iii) provides that the FDIC may

set assessments in excess of the amount needed to maintain or

achieve the DRR with respect to insured depository institutions that

exhibit financial, operational, or compliance weaknesses ranging

from moderately severe to unsatisfactory, or are not well

capitalized as that term in defined in section 38 of the Federal

Deposit Insurance Act, 12 U.S.C. 1831o. The Board has determined

that, for purposes of the existing rate structure comprised of the

current nine risk classifications, this language should be read as

permitting the FDIC to set assessments in excess of the amount

needed to maintain or achieve the DRR with respect to institutions

other than those with an assessment risk classification of 1A.

This reading of new section 7(b)(2)(A)(iii) was proposed by the

Board and published for public comment in the pending SAIF- rate

rulemaking proceeding, 61 FR 53867, 53872 (October 16, 1996). The

comment period for that rulemaking has now closed, with no opposing

comments having been received as to this interpretation. A

discussion of the Board's determination to adopt regulations

reflecting this interpretation will be included in the Federal

Register notice announcing the Board's decision regarding SAIF

rates.

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In light of this change, and for the reasons discussed below, the

Board has decided to continue the same adjustments to Rate Schedule 2

for the upcoming semiannual period beginning January 1, 1997, with the

exception that the reference in the adjusted rate schedule to a minimum

assessment amount has been eliminated. The adjusted rate schedule is

set forth below.

BIF Rate Schedule as Adjusted for the First Semiannual Period of 1997

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

Supervisory

subgroup

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

A B C

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

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

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

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

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

In addition to continuing the adjusted rate schedule, the Board has

also decided to refund to BIF member institutions any minimum

assessment amount they paid to BIF for the September 30, 1996,

quarterly assessment collection. Although the Board believes that it

has the authority to retain these payments and to implement the

elimination of the minimum assessment requirement beginning with the

upcoming semiannual period, it has decided on a different approach.

The Board has decided that the more appropriate action is to refund

that portion of the minimum assessment that corresponds with the

portion of the current semiannual period remaining after the September

30, 1996, enactment of the statute--that is, the quarter beginning

October 1, 1996. The Board believes that this approach promotes the

intent reflected in new section 7(b)(2)(A)(iii) to assess the least

risky institutions no more than necessary to maintain the BIF

designated reserve ratio.

Affected institutions will be contacted with further information

regarding the refund, which is expected to occur by means of an ACH

credit on or about January 2, 1997. The majority of BIF members can

expect to receive a refund of $500 plus interest.

III. Basis for the Adjustment

A. Maintaining at the Designated Reserve Ratio

In adopting a rate adjustment under 12 CFR 327.9(b), as mentioned

above, the Board must consider the following: (1) The amount of

assessment revenue necessary to maintain the reserve ratio at the DRR;

and (2) the assessment schedule that would generate such amount of

assessment revenue considering the risk profile of BIF members.

The BIF reserve ratio stood at 1.30 percent as of June 30, 1996,

the latest date for which complete data are available. The recent

strong performance of the industry and consequent growth of the BIF

reserve ratio, and the outlook for the reserve ratio over the near

term, have persuaded the Board to continue the existing adjusted rate

schedule for the first semiannual period of 1997. Following is an

analysis of the potential effect of changes in the fund balance and the

rate of insured deposit growth on the reserve ratio through June 30,

1997.

1. Fund Balance

The adjusted BIF balance was $25.888 billion on June 30, 1996

(Table 2, see note 4). Changes in the balance are largely determined by

changes in insurance losses and interest income.

Insurance Losses. Insurance losses are comprised of two components:

A contingent liability for future failures and an allowance for losses

on institutions that have already failed. Using current staff estimates

of failed assets through June 30, 1997, and a 20 percent loss rate on

assets, the change in the contingent liability for future failures is

estimated to be between $100 million (lower bound) and $300 million

(upper bound) for the twelve months ending June 30, 1997 4.

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4 In internal discussions, the FDIC staff has recently

projected assets of failed BIF institutions to be between $200-

$1,050 million through the first half of 1997. Table 1 assumes a 20%

loss rate on these assets (staff assumption for institutions with

less than $500 million in assets), rounded to the nearest $100

million, and assumes that all of these losses are in addition to the

amount of the current reserve.

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The estimated recovery value of closed banks was $4.26 billion as

of September 30, 1996. While annual changes in the allowance for losses

as a percentage of the estimated net recovery value of closed banks

have been as high as 13 percent and as low as -16 percent over the last

five years, the change in 1994 was -5.75 percent and +10.2 percent in

1995. Proforma statements for December 31, 1996, project an increase in

the allowance for losses for closed banks of $195 million from June 30,

1996. This is a +5 percent variance for the second semiannual period of

1996, which is consistent with the range of -5 percent to +10 percent

assumed for purposes of this analysis. Table 1 elaborates on these two

components.

Interest Income. Interest income on BIF's investment portfolio

averaged $103 million a month for the first six months of 1996.

Assuming relatively stable interest rates (i.e. between 5.7 percent and

6.2 percent) through the first semiannual period of 1997, interest

income is projected to be between $1.210 billion and $1.316 billion for

the twelve months ending June 30, 1997. Table 2 summarizes the effects

on the fund balance of the lower bound and upper bound ranges assumed

for interest income and insurance losses.

2. Insured Deposits

Recent experience with respect to insured deposit growth has been

mixed. While the total amount of BIF-insured deposits has remained

essentially unchanged since 1991, there has been substantial volatility

historically. Since 1985, annual growth has been as high as 8.7 percent

and annual shrinkage as much as 2 percent (see Figure 1). The recent

trend has been towards growth; over the last two years there have been

only two quarters when insured deposits have shrunk and then only

slightly (.01 percent and .03 percent). It should also be noted that

the amount of BIF-insured deposits reported for the third quarter may

reflect extraordinary growth due to the results of deposit- shifting

strategies implemented by

[[Page 64611]]

SAIF-insured institutions prior to enactment of DIFA. In light of this

evidence and the experience over the last five years, the FDIC believes

that BIF-insured deposits are likely to experience a growth rate in the

range of -2 percent to +5 percent between June 1996 and June 1997.

3. BIF Reserve Ratio

Based on the projected BIF balance and the growth of the insured

deposit base, the FDIC projects that the BIF reserve ratio will be

within the range of 1.25 to 1.38 at June 30, 1997 (Table 3). The lower

bound estimate, which produces a 5 basis point decrease below the June

30, 1996, ratio, reflects an assumed increase in the insured deposit

base (-6 basis points) with a small offset from an increase in the fund

balance (+1 basis point). The large increase in interest income and the

effect on the fund balance were mitigated by increased insurance

losses. The upper bound estimate, which produces an 8 basis point

increase above the June 30, 1996, ratio, reflects an assumed shrinkage

of the insured deposit base (+3 basis points) and a large increase in

the BIF balance (+5 basis points). In this projection, the impact of

the increase in interest income was accentuated by the decrease in

insurance losses.

In light of recent trends and current conditions in the banking

industry, the FDIC's view is that the lower-bound scenario is not

likely to be realized. If this were to occur, however, the current rate

schedule still would be sufficient to maintain the target DRR through

midyear 1997.

B. Other Considerations

1. Risk-Based Assessment System

The adjusted rate schedule retains the current spread of 27 basis

points between the highest- and lowest-rated institutions, as well as

the rate spreads among other cells in the assessment rate matrix. The

Board has previously determined that, relative to the rate spreads in

the assessment rate schedule in effect prior to June 1, 1995--which

ranged from 23 to 31 basis points, with a resulting maximum spread of 8

basis points--the current rate spreads provide greater incentives for

weaker institutions to improve their condition and for all institutions

to avoid excessive risk-taking, consistent with the goals of risk-based

assessments. The current rate spreads also provide greater consistency

with the historical variation in bank failure rates across cells of the

assessment rate matrix.

The continued adjusted rate schedule, which ranges from 0 to 27

basis points, appears in Table 4 along with supplemental data. Table 5

summarizes the distribution of institutions across the risk-based

assessment matrix. Estimated annual assessment revenue from this

schedule is expected to be $43 million, and the average annual

assessment rate is estimated to be 0.17 basis points.

2. Impact on Bank Earnings and Capital

The estimated annual revenue from the existing rate schedule is $43

million. In deciding to continue this schedule, the Board has

considered the impact on bank earnings and capital and found no

unwarranted adverse effects.

3. Long-Term Outlook

In the past, the Board has expressed the view that an important

consideration in setting rates is the long-term revenue needs of BIF.

The Board has previously indicated a belief that a balance should exist

between long-term BIF revenues and long-term BIF expenses (where

expenses include monies needed to prevent dilution due to deposit

growth). In August of 1995, the FDIC determined that an effective

average BIF assessment rate of 4 to 5 basis points would be appropriate

to achieve such a balance. This determination was based on a thorough

historical analysis of FDIC experience and consideration of statutory

changes in the past few years that may moderate deposit insurance

losses going forward. 60 FR 42680 (August 16, 1995).

While the latest available data indicate the continuation of slow

growth rates for BIF-insured deposits and minimal BIF insurance losses,

there is no clear indication that these developments represent long-

term trends. Thus, it could be concluded that an effective average

assessment rate of 4 to 5 basis points is still needed to achieve long-

term balance.

However, under the existing statutory scheme, the current balance

in the BIF also is directly relevant to determining the appropriate

assessment schedule for the first semiannual assessment period of 1997.

Moreover, in light of the favorable current conditions and the outlook

for the next several months, it is anticipated that continuation of the

existing rate structure will provide adequate assessment revenue over

the near term to prevent BIF from falling below a reserve ratio of 1.25

percent.

For the reasons discussed above, the Board has decided to continue

in effect the current adjustment to the BIF assessment rate schedule

with a range of 0 to 27 basis points for the semiannual period

beginning January 1, 1997.

By order of the Board of Directors.

Dated at Washington, D.C., this 26th day of November, 1996.

Federal Deposit Insurance Corporation

Jerry L. Langley,

Executive Secretary.

Table 1.--Changes in Contingent Liabilities and Allowance for Losses \1\

[$ in millions]

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

Lower Upper

bound bound

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

Contingent Liability for Future Cases \2\........... $100 $300

Allowance for Losses: Closed Banks \3\.............. ($200) $400

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

Total Provision for Losses...................... ($100) $700

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

\1\ Both projections assume a continuation of current economic

conditions during 1997.

\2\ The June 30, 1996 BIF balance includes a $100 million reserve for

institutions already identified as anticipated failures.

\3\ Assumes a range of -5% to 10% of the net recovery value of closed

banks ($4.26 billion as of 9/30/96).

Table 2.--Fund Balance

[$ in millions]

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

Lower Upper

bound bound

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

Revenue:

Assessments \1\................................... $43 $43

Interest Income \2\............................... 1,210 1,316

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Total revenue................................... 1,253 1,359

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Expenses & Losses:

Operating Expenses \3\............................ 450 450

Provision for Losses.............................. 700 (100)

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

Total Expenses & Losses......................... 1,150 350

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

Net Income.......................................... 103 1,009

Fund Balance--6/30/96 \4\........................... 25,888 25,888

Fund Balance--6/30/97............................... 25,991 26,897

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

\1\ Assuming the current assessment rate schedule through June 30, 1997,

assessment income is expected to be $43 million for the twelve months

from June 30, 1996 to June 30, 1997.

\2\ Interest rates are 5.7% (lower bound) and 6.2% (upper bound).

\3\ Operating expenses were approximately $38 million a month for the

first six months of 1996. Operating expenses are expected to remain

the same through June 30, 1997. The savings from corporate downsizing

is offset by a higher allocation of overhead expenses to corporate, a

result of fewer receiverships.

\4\ BIF balance increased by $60 million to reflect the fact that two

institutions are no longer likely failures; FDIC expects to reverse

the related reserves in the 4th quarter, 1996.

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Table 3.--Projected BIF Ratios

[$ in millions]

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

June 30,

1996

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

Adjusted Fund Balance \1\.................................. $25,888

Estimated Insured Deposits \2\............................. 1,986,578

Adjusted BIF Ratio \1\..................................... 1.30

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

Lower Upper

bound \3\ bound \4\

June 30, June 30,

1997 1997

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

Projected Fund Balance.......................... $25,991 $26,897

Estimated Insured Deposits...................... 2,085,907 1,946,846

Estimated BIF Ratio............................. 1.25 1.38

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

\1\ The BIF balance includes the $60 million reserve reversal for two

institutions.

\2\ As a result of the DIFA, the SAIF insured deposits of certain Oakar

institutions have been decreased by $28.2 billion and their BIF

insured deposits have been increased by the same amount. Estimated

insured deposits as of 6/30/96 have thus been adjusted by this amount.

\3\ The lower bound refers to the scenario of lower interest income

(interest rate: 5.7%), higher insurance losses ($700 million) and a

higher insured deposit growth rate (+5%).

\4\ The upper bound refers to the scenario of higher interest income

(interest rate: 6.2%), a reduction in insurance losses (-$100 million)

and a shrinkage of the insured deposit base (-2%).

Table 4.--Assessment Rate Schedule First Semiannual 1997 Assessment

Period BIF-Insured Institutions

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

Supervisory risk

subgroups

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

Group A Group B Group C

(bp) (bp) (bp)

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

Well......................................... 0 3 17

Adequate..................................... 3 10 24

Under........................................ 10 24 27

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

Table 5.--BIF Assessment Base Distribution \1\; Deposits as of June 30, 1996 \2\; Supervisory and Capital

Ratings in Effect July 1, 1996

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(5)Supervisory risk subgroups

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Capital group

(1) A

(1) B

(1) C

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Well: (percent) (percent) (percent)

Number................................. 9,538 94.4 368 3.6 59 0.6

Base ($ billion)....................... 2,415.7 96.8 35.9 1.4 3.8 0.2

Adequate:

Number................................. 73 0.7 19 0.2 17 0.2

Base ($ billion)....................... 32.6 1.3 2.4 0.1 1.5 0.1

Under:

Number................................. 6 0.1 1 0.0 18 0.2

Base ($ billion)....................... 0.5 0.0 0.3 0.0 1.7 0.1

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Estimated annual assessment revenue \3\: $43 million.

Assessment Base: $2,494 billion.

Average annual assessment rate (bp) \3\: 0.17 basis points.

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\1\ ``Number'' reflects the number of BIF members and SAIF-member Oakar institutions; ``Base'' reflects the BIF-

assessable deposits of BIF members and SAIF-member Oakar institutions.

\2\ Figures do not reflect the adjusted attributable deposit amount reduction for certain BIF-member Oakars,

effective 9/30/96.

\3\ Assumes a refund of $500 with interest, for BIF 1A institutions and no $1,000 minimum semiannual BIF

assessment in 1997.

[FR Doc. 96-30906 Filed 12-5-96; 8:45 am]

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