Assessments

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

RIN 3064-AB59

Assessments

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

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SUMMARY: The FDIC is amending its assessment regulations by adopting

interpretive rules pertaining to transactions in which an institution

belonging to one insurance fund acquires deposits that are treated as

insured by the other insurance fund (Oakar transactions). The FDIC is

codifying and refining its procedures for determining the amount of the

deposits so acquired and for attributing the deposits to the two

insurance funds. In addition, recent merger and branch-sale cases have

revealed certain weaknesses in the FDIC's procedures for computing the

growth of the amounts so attributed.

[[Page 64961]]

The interpretive rules repair those weaknesses. The FDIC is also

simplifying and clarifying the existing rule by making changes in

nomenclature.

EFFECTIVE DATE: The final rule is effective January 1, 1997.

FOR FURTHER INFORMATION CONTACT: Stephen Ledbetter, Chief, Assessments

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

Assistant Director, Division of Finance, (202) 416-6991; Jules Bernard,

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

Corporation, Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION: This interpretive regulation addresses the

computation of assessments paid by Oakar institutions. An Oakar

institution is one that is a member of one insurance fund (the

institution's primary fund), but holds deposits that are treated as

insured by the other fund (the institution's secondary fund). The

regulation directly affects all Oakar institutions. The regulation also

indirectly affects non-Oakar institutions, because it alters the

business considerations that they must take into account when they

transfer deposits to or from an Oakar institution (or to an institution

that becomes an Oakar institution as a result of the transfer).

I. Background

Section 7(l) of the Federal Deposit Insurance Act (FDI Act), 12

U.S.C. 1817(l), says that upon becoming insured, a depository

institution becomes a member either of the Bank Insurance Fund (BIF) or

of the Savings Association Insurance Fund (SAIF).

Section 5(d)(2) of the FDI Act, id. 1815(d)(2), maintains the

separation between the BIF and the SAIF. Section 5(d)(2) says that no

institution may participate in a ``conversion transaction'' without the

FDIC's prior approval. Id. 1815(d)(2)(A)(i). A ``conversion

transaction'' includes, inter alia, any inter-fund deposit-transfer

transaction: that is, any merger, acquisition, or other transaction in

which a BIF member assumes the obligation to pay deposits owed by a

SAIF member (or conversely). Id. 1815(d)(2)(B) (ii), (iii) and (iv).

Each institution that participates in such a transaction--whether as

the acquiring or resulting institution (buyer) or as the transferring

or merging institution (seller)--must pay an entrance fee to one

insurance fund and an exit fee to the other fund. Id. 1815(d)(2)(F).

The fees are substantial. See 12 CFR part 312.

When an institution acquires deposits pursuant to section 5(d)(2)

and pays the requisite fees, the deposits so assumed become insured by

the buyer's primary fund (primary-fund deposits). Until recently the

SAIF assessment rate has been substantially higher than the BIF

assessment rate. Some institutions that have assumed SAIF-assessable

deposits have found it advantageous to pay the fees and convert the

deposits to BIF-assessable ones.

There is also another avenue open to institutions that would like

to engage in inter-fund deposit-transfer transactions. Section 5(d)(3)

of the FDI Act, id. 1815(d)(3), known as the Oakar Amendment, allows

institutions to participate in such transactions without paying

entrance and exit fees, but only under certain conditions. The most

prominent conditions are these:

--The buyer becomes subject to assessment by the seller's insurance

fund, see id. 1815(d)(3)(B) and (D); and

--The acquired deposits remain insured by the seller's insurance fund,

which is the secondary fund of the buyer (secondary-fund deposits). Id.

1815(d)(3) (B) and (H).

An inter-fund deposit-transfer transaction that proceeds under the

authority of the Oakar amendment is called an Oakar transaction.

The Oakar Amendment introduces the concept of the ``adjusted

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

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

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

AADA is first generated, its value is equal to the amount of the

secondary-fund deposits that the buyer has acquired from the seller.

The value remains constant until the end of the semiannual period in

which the transaction occurs.

Thereafter the AADA increases or decreases at the same underlying

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

growth or shrinkage due to its ordinary business operations, not

counting growth due to the acquisition of deposits from another

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

1815(d)(3)(C).

An Oakar institution's AADA is used for the following purposes:

--Assessments. An Oakar institution pays two assessments: one for

deposit in its secondary fund, and the other for deposit in its primary

fund. The secondary-fund assessment is based on the portion of the

assessment base that is equal to the AADA. The primary-fund assessment

is based on the remaining portion of the assessment base.

--Insurance. The AADA fixes the amount of the institution's deposits

that is to be ``treated as'' insured by an Oakar institution's

secondary fund (secondary-fund deposits). The remaining portion of the

institution's deposits is insured by the primary fund (primary-fund

deposits). If an Oakar institution fails, and the failure causes a loss

to the FDIC, the two insurance funds share the loss in proportion to

the amounts of deposits that they insure.

An Oakar institution's AADA is used prospectively. That is to say,

an Oakar institution's AADA for a current semiannual period is set at

the start of that period, and is used to compute the institution's

assessment for that current semiannual period.\1\

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

Oakar institutions typically participate in several Oakar

transactions. Accordingly, an Oakar institution generally has an

overall or composite AADA that consists of all the individual AADAs

generated in the various Oakar transactions, plus the growth

attributable to each individual AADA. The composite AADA can

generally be treated as a unit, however, because all the constituent

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

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II. The Final Rule

The FDIC has issued a proposed rule asking for comment on the

interpretations that are the subject of the final rule. 61 FR 34751

(July 3, 1996). The comment period remained open until September 4,

1996. The FDIC has received 20 comments: 10 from banks; eight from bank

holding companies; and two from trade groups. After the comment period

closed, however, Congress passed and the President signed the Deposit

Insurance Funds Act of 1996 (Funds Act), Pub. L. 104-208, 110 Stat.

3009 et seq. The Funds Act has altered the economic environment for

Oakar institutions, thereby mooting some of the comments.

The Funds Act makes two changes that, taken together, will cause

the FDIC to lower SAIF rates substantially. The Funds Act requires the

FDIC to capitalize the SAIF--that is, to raise the Savings Association

Insurance Fund reserve ratio to the designated reserve ratio (DRR)

\2\--as of October 1, 1996, by imposing a special assessment on all

SAIF-assessable institutions. Funds Act, section 2702(a); see 61 FR

53834 (Oct.

[[Page 64962]]

16, 1996) (imposing the special assessment). When the SAIF is

capitalized at the DRR, the FDIC may not (generally) impose higher SAIF

assessments than necessary to maintain the SAIF's capitalization at

that level. 12 U.S.C. 1817(b)(2)(A)(iii).\3\ In addition, the Funds Act

has separated the assessments imposed by the Financing Corporation

(FICO) from those imposed by the SAIF.\4\ Beginning on January 1, 1997,

the FICO assessments will no longer serve to reduce the amounts that

the FDIC is authorized to assess for the SAIF: accordingly, the SAIF

rates will no longer include the FICO draw.

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\2\ The Savings Association Insurance Fund reserve ratio is the

ratio of the SAIF's net worth to the aggregate amount of deposits

insured by the SAIF. 12 U.S.C. 1817(l)(7). The designated reserve

ratio (DRR) is a target ratio that has a fixed value for each year.

The DRR is currently set by statute at 1.25 percentum; the FDIC may

increase the ratio under certain conditions. Id. 1817(b)(2)(A)(iv).

\3\ If the Savings Association Insurance Fund reserve ratio

falls below the DRR, the FDIC may set rates that increase the

reserve ratio to the DRR. Id. 1817(b)(2)(A)(iii).

\4\ The FDIC must still approve the FICO's assessments, and the

FICO must still impose its assessments ``in the same manner'' as the

FDIC assesses institutions. 12 U.S.C. 1441(f)(2).

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In light of these developments, the FDIC has proposed to lower the

most favorable SAIF rate to zero, and to modify the rest of the SAIF

rate schedule. The proposed SAIF rates are set at the same levels as

the current BIF rates. 61 FR 53867 (October 16, 1996).

These changes would reduce--but not eliminate--the difference

between the rates for BIF-assessable deposits and SAIF-assessable ones.

The Funds Act gives the FICO authority to assess all insured

institutions, and also temporarily requires the FICO to assess SAIF-

assessable deposits at a higher rate than BIFassessable deposits. From

1997 through 1999 (or when the last savings association ceases to

exist, if that happens before the end of 1999), institutions will pay

roughly 6.4 basis points to the FICO on their SAIF-assessable deposits,

and roughly 1.3 basis points to the FICO on their BIF-assessable

deposits. 12 U.S.C. 1441(f)(2)(A); see Funds Act, section 2703(a)(1).

Accordingly, institutions still have some incentive to ``game'' the

assessment rules for the purpose of shifting deposits from SAIF-

assessable status to BIF-assessable status, although the incentive is

much less than before.

The final rule ends some of the anomalies that institutions can use

to engage in ``gaming'' strategies. The final rule also strengthens the

correlation between the assessment that an institution pays to an

insurance fund and the risk that the institution poses to that fund,

and helps preserve the balance in the insurance responsibilities of the

two funds.

A. Attribution of Transferred Deposits

Neither section 5(d)(2) nor the Oakar Amendment explicitly

addresses the case of an Oakar institution that transfers deposits to

another institution. The FDIC has by interpretation developed a

procedure for attributing the transferred deposits to the BIF and the

SAIF. See FDIC Advisory Op. 90-22, 2 FED. DEPOSIT INS. CORP., LAW,

REGULATIONS, RELATED ACTS 4452 (1990) (Rankin letter). The Rankin

letter adopts the principle that an Oakar institution transfers its

primary-fund deposits first, and only begins to transfer its secondary-

fund deposits after its primary-fund deposits have been exhausted.

The FDIC has asked for comment on the relative merits of the Rankin

principle and an alternative approach: treating the transferred

deposits as a blend of primary-fund and secondary-fund deposits. Under

the blended-deposits approach, the FDIC would attribute the transferred

deposits to the insurance funds in the same ratio as the overall

deposits of the transferring Oakar institution (seller) were attributed

immediately prior to the transfer.

The FDIC has received 15 comments that address this issue. Eight

commenters (including one of the trade groups) favor the Rankin

principle over the blended-deposits rule. Three prefer the blended-

deposits rule to the Rankin principle. The remaining four (including

the other trade group) express no preference as between these

alternatives. Several commenters suggest other options (discussed

below).

Having considered the comments, the FDIC has determined that the

Rankin approach is preferable both to the blended-deposits rule and to

the other options suggested by the commenters.

As a preliminary matter, it should be noted that two commenters

aver that there is no statutory foundation for either the Rankin

principle or the blended-deposits approach. The FDIC rejects this

contention. The FDIC considers that it has ample authority to adopt

either one of these deposit-attribution plans, and more generally has

ample authority to prescribe a method for attributing deposits that an

Oakar institution transfers to another institution. The contrary view

would render section 5(d)(2) and the Oakar Amendment meaningless. If

the FDIC had no such power, a BIF-member buyer could acquire deposits

from a SAIF-member seller without paying entrance and exit fees simply

by passing the deposits through an intermediary BIF-member Oakar bank.

The barrier between the insurance funds would effectively disappear.

Moreover, the acquired deposits would be neither SAIF-assessed nor

SAIF-insured: contrary to Congress' intent, the private capital of the

banking system would not help to bolster the SAIF. See 135 Cong. Rec.

H4970 (Aug. 3, 1989) (statement of Rep. Oakar).

The FDIC accepts the proposition that an Oakar institution is a

member of its primary fund only, and is not a member of its secondary

fund even though it holds secondary-fund deposits. The FDIC adopted

this view in the context of the original version of the Oakar

Amendment, which as in effect at the time when the FDIC adopted the

Rankin principle, and which made it abundantly clear that a BIF-member

bank continued to be a BIF member after acquiring deposits from a SAIF

member in an Oakar transaction. The Amendment carefully avoided

characterizing the buyer as a SAIF member. On the contrary, the

Amendment emphasized the point that the buyer was a BIF member that

happened to owe a payment to the SAIF. To be sure, the SAIF was obliged

to insure some of the buyer's deposits--but the Amendment went out of

its way to say that the deposits were only ``treated as'' SAIF insured,

not simply ``insured'' by the SAIF. 12 U.S.C. 1815(d)(3)(B)(iii) (Supp.

I 1989). The FDIC holds this view today. See Treatment of Assessments

Paid by ``Oakar'' Banks and ``Sasser'' Banks on SAIF-Insured Deposits,

General Counsel's Opinion No. 7, 60 FR 7059 (Feb. 6, 1995).

But the FDIC also takes the position that nominal fund membership

is not the touchstone for determining whether a transaction is a

conversion transaction within the meaning of section 5(d)(2), and

accordingly does not determine whether a transaction comes within the

scope of the Oakar Amendment. ``Membership'' is a label that denotes

the formal relationship of an insured institution to the FDIC as

insurer within the context of the two-fund system. Ordinarily--that is,

in the case of non-Oakar institutions--membership correctly signifies

the relationship between an institution and the FDIC. Membership

entails a well-defined set of obligations that the institution and the

FDIC have to each other. A member of a fund must pay assessments to the

FDIC for deposit in that fund. The FDIC must use the resources of that

fund to insure the member's deposits. The assessment that the FDIC

imposes on the member is determined by the strength of the fund

relative to the fund's insurance responsibilities.

But membership does not correctly express the relationship between

Oakar institutions and the FDIC as insurer. Oakar institutions owe

assessments to both funds, and both funds must share

[[Page 64963]]

the loss that the FDIC would suffer if an Oakar institution were to

fail.

The FDIC resolves these conflicting themes by focusing on the

relationship of an Oakar institution to the FDIC--the set of

obligations that the label ``BIF member'' or ``SAIF member'' ordinarily

signifies--and not on nominal fund membership. The FDIC takes the

position that the substance of the relationship, and the effect of a

deposit-transfer on that relationship, is the touchstone for

determining whether the deposit-transfer is a conversion transaction

within the meaning of section 5(d)(2). Put another way, the FDIC

considers that the label ``member'' must be given only that degree of

significance that is appropriate to preserve the integrity of the two-

fund structure.

In proposing the blended-deposits rule, the FDIC has suggested that

institutions might adopt ``gaming'' strategies that use the Rankin

principle to convert SAIF-assessed deposits into BIF-assessed ones. One

commenter, a trade group, urges the FDIC to prevent ``gaming''

strategies, but has not endorsed any particular method of prevention.

Three commenters express doubt that institutions will engage in

``gaming'' strategies. Finally, two commenters say that the FDIC cannot

fairly oppose such strategies if the FDIC is willing to countenance

tandem-banking plans and deposit-migration programs. These two

commenters further urge the FDIC to view such ``gaming'' strategies as

beneficial rather than pernicious, on the ground that the strategies

are equivalent to the options available to non-Oakar thrifts, and that

the strategies therefore place Oakar banks on an equal competitive

footing with other institutions.

The FDIC considers that these comments have all been overtaken by

events. On one hand, notwithstanding the doubts expressed by the

commenters, the FDIC has found that, prior to enactment of the Funds

Act, a number of institutions had begun to pursue ``gaming''

strategies. For example, some holding companies had proposed elaborate

schemes to purge AADAs from their Oakar banks by means of linked

deposit-transfer transactions and deposit-migration programs. But on

the other hand, the Funds Act has considerably reduced the threat posed

by ``gaming'' strategies. Institutions will have much less incentive to

adopt such strategies once the SAIF rates have been reduced to the

level that maintains the SAIF's capitalization at the DRR. In addition,

the Funds Act gives the FDIC and the other federal banking agencies

broad and flexible authority to interdict strategies that facilitate or

encourage the shifting of deposits from SAIF-assessable deposits to

BIF-assessable deposits. Funds Act, section 2703(d).

One reason the FDIC has decided to retain the Rankin principle

rather than shift to the blended-deposits approach is that the Rankin

principle has the virtue of simplicity. Sellers rarely transfer all

their primary-fund deposits. A seller ordinarily has the same AADA

after the transaction as before, and a buyer does not ordinarily become

an Oakar institution. Six commenters agree that simplicity was one

advantage of the Rankin principle.

The Rankin principle also has the virtue of being well established

and well understood. Three commenters agree with this point. Two

commenters take issue with it, however. They point out that the Rankin

principle was first articulated in a staff opinion letter, not in a

rulemaking with public notice and comment, and declare that it is

implausible for the FDIC to assert that the Rankin principle is well

established or well understood in these circumstances.

The FDIC considers that commenters' point is not well taken. The

FDIC issued the Rankin letter more than six years ago, and has applied

its principles on a consistent basis. The FDIC accordingly has had a

consistent, well settled interpretation of section 5(d)(2) and the

Oakar Amendment since 1990; the Rankin letter expresses that

interpretation. Moreover, the FDIC has published the Rankin letter,

thereby providing public notice of the interpretation.

One commenter points out that, under the Rankin principle, SAIF-

insured deposits have a greater propensity to move from SAIF-member

savings associations to BIF-member Oakar banks than the other way

around. The Rankin principle therefore has the effect of reducing the

store of deposits available for assessment by the FICO. The FDIC

considers that the Funds Act has mooted this point, however, as the

FICO now has authority to assess deposits held by BIF members. See 12

U.S.C. 1441(f)(2).

Another commenter objects to the Rankin principle on the ground

that when a BIF-member Oakar bank buys a branch from a SAIF-member

institution, and incurs an obligation to the SAIF as a result, the

Oakar bank cannot escape the obligation merely by selling off the

branch. This commenter--along with several others--also makes the more

general point that the statutory rules for determining the AADA do not

reflect practical business realities. These commenters say the branches

and customers that they have acquired from SAIF-member institutions do

not make a proportionate contribution to the overall growth of their

deposits: as a result, the assessment base for their SAIF assessments

is artificially large.

The FDIC considers, however, that these objections touch upon the

structure and purposes of the Oakar Amendment, rather than upon the

Rankin principle. The Oakar Amendment is specifically designed to avoid

deposit-tracing--that is, keeping track of deposits based on their

origin. An AADA's initial value may be equal to the amount of the

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

the Oakar Amendment does not connect the AADA to those particular

deposits, or to the customers that hold them, or to the branches in

which the deposits are located. The Oakar Amendment treats an Oakar

institution as a unit. The Amendment uses the institution's overall

rate of growth to compute the institution's AADA, thereby--in effect--

applying that growth equally to the institution's primary-fund and

secondary-fund deposits. In objecting to that effect, the commenters

challenge the basic principles of the Oakar Amendment itself. The

commenters' redress lies with Congress.

The blended-deposits approach, for its part, has certain

attractions. It helps prevent ``gaming''. It also maintains the

relative proportions of the seller's primary-fund deposit-base and the

secondary-fund deposit base, just as those proportions are preserved in

the ordinary course of business. By contrast, as one commenter has

pointed out, the Rankin principle tends to inflate the AADA. When an

institution buys branches from a member of the opposite fund, the buyer

gains secondary-fund deposits and increases its AADA. But when it acts

as the seller, it does not normally lose any secondary-fund deposits,

because it does not normally sell off all its primary-fund deposits:

its AADA remains the same.

At the same time, however, the blended-deposits approach has a

number of disadvantages. As nine commenters point out, the blended-

deposits rule would cause Oakar institutions to proliferate. If a non-

Oakar institution were to acquire deposits from an Oakar institution,

the buyer would necessarily assume secondary-fund deposits, and would

therefore become an Oakar institution in its own right. Six commenters

observe that the blended-deposits rule would generate burdensome

reporting and record-keeping obligations. Six commenters

[[Page 64964]]

(not all the same ones) say further that the blended-deposit approach

would result in higher costs for buyers and lost sales for sellers.

Four commenters indicate that the blended-deposits rule could cause

uncertainty or confusion in determining the assessment costs with

respect to transferred deposits, particularly in light of the uncertain

prospects for future assessment rates. One says the blended-deposits

rule would impede banks in selling off branches in order to rationalize

branch networks or for other corporate purposes.

These comments continue to have force despite the economic and

legal changes made by the Funds Act. Buyers would have to bear the

extra record-keeping and reporting burdens associated with secondary-

fund deposits. Moreover, even though the disparity between BIF rates

and SAIF rates will be reduced, the FICO's rates retain a differential:

institutions will still have to pay higher rates to the FICO on SAIF-

insured deposits than on BIF-insured deposits, at least temporarily.

Id. 1441(d)(2); see Funds Act section 2703(c). The differential

(roughly five basis points) is smaller than the recent differential

between the BIF and SAIF assessment rates, and is short-lived as well.

But so long as it persists, buyers will be less willing to assume

SAIFassessable deposits.

One commenter objects to the blended-deposits rule on the ground

that it would force banks that acquire deposits from an Oakar bank--and

banks that purchase deposits from those subsequent acquirers, and so

on, ad infinitum--to pay SAIF assessments. The commenter says this

result is improper. The commenter asserts that a buyer always loses a

significant portion of the acquired deposits soon after acquiring them,

and that accordingly a third-generation or fourth-generation buyer does

not assume any of the SAIF-insured deposits that changed hands in the

original Oakar transaction. The FDIC does not agree with this point,

however. As discussed above, the FDIC considers that the Oakar

Amendment does not contemplate deposit-tracing. The FDIC further

considers that the Oakar Amendment is designed to preserve precisely

the obligation that the commenter seeks to end: namely, the buyer's

duty to pay SAIF assessments on the SAIF-insured deposits it has

acquired, and to do so an on-going basis, without regard for whether

any particular customers of the buyer have withdrawn their funds after

the Oakar transaction has taken place.

Several commenters offer deposit-attribution rules of their own.

Three commenters propose that the parties to a transaction should be

able to determine the attribution of the transferred deposits by

agreement. One of the commenters says the attribution-by-agreement rule

would minimize the creation of Oakar institutions, would reduce the

incentive to engage in the ``gaming'' strategies that the FDIC had

discussed in the proposed rule, and would not entail any heavier

reporting or record-keeping obligations than the blended-deposits

approach. A second commenter says this proposal would eliminate

uncertainty in pricing deposits and, from the point of view of a BIF-

member Oakar bank acting as the seller, would be fairer and more

flexible than the Rankin principle. The third commenter does not give

its reasons for supporting the proposal.

The FDIC declines to adopt the attribution-by-agreement rule,

however. The FDIC recognizes that its assessment rules and procedures

provide the environment within which parties negotiate transactions,

and that as a matter of course, the parties consider the likely

consequences of their agreements within that environment. But the FDIC

rejects the proposition that parties should be able to determine, by

agreement among themselves, which set of rules the FDIC will apply to

them. The FDIC considers that, as a matter of principle, its

relationship to the institutions that it insures and assesses derives

from its supervisory and rule-making authority, and accordingly is not

a fit subject for private negotiation. The FDIC also notes that, as a

practical matter, parties do not always take the same view of their

agreements after the agreements have been completed.

Another commenter proposes that the buyer's primary fund should

determine which of the seller's deposits are transferred first. Under

the buyer's-fund rule, any deposits transferred by the seller would be

attributed to the buyer's primary fund until the seller has exhausted

its store of such deposits; thereafter, transferred deposits would be

attributed to the buyer's secondary fund. The chief advantages of the

proposal, according to the commenter, are that it offers the simplicity

of the Rankin principle while helping to preserve or increase the

deposit-base subject to assessment by the FICO.

Here again, however, events have overtaken the comment. The FICO

may now assess both BIF and SAIF members. 12 U.S.C. 1441(f)(2). Under

these conditions, the buyer's-fund proposal has no material advantage

over the Rankin principle, while the Rankin principle has the advantage

of being a well-established precept.

B. FDIC Computation of the AADA; Reporting Requirements

In the past, every Oakar institution has prepared an annual growth

worksheet for submission to the FDIC. The worksheet shows the growth or

shrinkage of the institution's AADA during the prior calendar year, and

the computations used to determine that growth or shrinkage. In

addition, each institution that has acquired secondary-fund deposits in

an Oakar transaction (Oakar buyer) has prepared and submitted a

transaction worksheet for each such transaction. The FDIC has supplied

the worksheet, and has also provided the name of the Oakar buyer, the

name of the seller, and the date of the transaction. The Oakar buyer

has provided the volume of the acquired deposits and the AADA so

generated.

As part of the changeover to the quarterly adjustment of AADAs (see

II.C. below), the FDIC is lifting the burden of computing AADA growth

from Oakar institutions entirely. Oakar institutions will no longer

prepare annual growth worksheets or transaction worksheets, and will

not report their AADAs in their quarterly reports of condition.

Instead, each Oakar institution will provide the following three pieces

of information in its quarterly reports of condition:

--total deposits acquired during the quarter;

--secondary-fund deposits acquired in the quarter; and

--total deposits sold in the quarter.\5\

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\5\ The Comptroller of the Currency, the Board of Governors of

the Federal Reserve System, and the FDIC have issued a joint

proposal calling for institutions to report the three items in their

quarterly reports of condition. 61 FR 48687, 48693-48694 (Sept. 16,

1996). The Office of Thrift Supervision has issued a similar

proposal with respect to the institutions it supervises. Id. 53262,

53263 (Oct. 10, 1996). The FDIC expects both proposals to be

adopted. The alternative is for institutions to prepare and transmit

quarterly worksheets with the requisite information directly to the

FDIC.

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The FDIC will use this information to calculate the institution's

AADA, and will show the AADA (and the way it has been computed) in the

institution's quarterly assessment invoices.

The FDIC has received nine comments on this program. Four

(including a trade group) favor it; five (including another trade

group) are opposed. The supporters agree the program would reduce

regulatory burden. The opponents say the program would not lighten the

record-keeping burden of Oakar institutions, and could well increase

that burden, because the institutions would have to verify the accuracy

of the FDIC's figures. One of the opponents--the trade group--says

[[Page 64965]]

further that the program's reporting requirements are burdensome. The

commenter notes that Oakar institutions have not reported their

deposit-sales in the past, and have reported their acquired secondary-

fund deposits and their acquired total deposits annually, not

quarterly.

The FDIC considers that the reporting burden associated with its

program is minimal, however, especially as compared with the burden of

preparing and filing the two worksheets. Indeed, the program may not

constitute a net increase in burden at all in most cases. The items to

be reported are zero in most quarters; and even in other quarters, the

information should be readily available and easy to calculate.

Moreover, Oakar institutions have already been providing two of the

three items in their annual growth worksheets: only the last item is

new.

As an alternative, the FDIC has considered replacing the annual

growth worksheet with a more detailed quarterly worksheet, and

retaining the transaction worksheet. The FDIC has determined that this

approach would impose an additional and unnecessary burden on Oakar

institutions, however. The FDIC has further determined that this

approach could increase the frequency of errors associated with AADA

calculations.

C. Quarterly Treatment of AADAs

The FDIC is adopting the view that an AADA for a semiannual period

may be regarded as having two quarterly components. The increment by

which an AADA grows during a semiannual period is the result of the

growth of each quarterly component. Five commenters (including one

trade group) generally support this interpretation.

Three commenters oppose quarterly determination of AADAs, chiefly

on the ground that this procedure would cause increased recordkeeping

and reporting burdens. The burdens the commenters cite are essentially

the same as those discussed above (see II.B.) with respect to the

FDIC's computation of the AADA. For the reasons presented in that

discussion, the FDIC does not consider that the net increase in

burden--if any--will be material.

1. Quarterly Components

a. In General. The FDIC's assessment regulation speaks of an

institution's AADA ``for any semiannual period''. 12 CFR 327.32(a)(3).

The FDIC has previously interpreted this phrase to mean that an AADA

has a constant value throughout a semiannual period. Recent changes in

the Oakar Amendment give the FDIC room to alter its view.

The constant-value concept derived from the 1989 version of the

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

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

the average assessment base that the SAIF could assess. Id.

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

assessment base as the average of the institution's assessment bases on

the two dates for which the institution was required to file a call

report. Id. 1817(b)(3). As a result, an AADA--even a newly created one,

and even one that was generated in a transaction during the latter

quarter of the prior semiannual period--served to allocate an Oakar

bank's entire assessment base for the entire current semiannual period.

The FDIC issued rules in keeping with this view. 54 FR 51372 (Dec. 15,

1989).\6\

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

\6\ The FDIC revised its collection procedure late in 1994, and

began collecting the semiannual assessment in two quarterly

installments. 59 FR 67153 (Dec. 29, 1994). The new procedure did not

affect the relationship between an Oakar institution's AADA and its

assessment base.

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

Congress has decoupled the AADA from the assessment base as part of

the changeover to a risk-based assessment system. See Federal Deposit

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

242, section 302 (e) and (g), 105 Stat. 2236, 2349 (Dec. 19, 1991); see

also Defense Production Act Amendments of 1992, Pub L. 102-558, section

303(b)(6)(B), 106 Stat. 4198, 4225 (Oct. 28, 1992); cf. 58 FR 34357

(June 23, 1993). The Oakar Amendment no longer expressly links the AADA

directly to the assessment base. The Amendment now says that the AADA

measures the amount of an Oakar institution's deposits that are to be

treated as secondary-fund deposits. See 12 U.S.C. 1815(d)(3).

Accordingly, the FDIC is no longer compelled to retain the

constant-value view of the AADA. Furthermore, as discussed below, the

FDIC has found that the constant-value concept has certain

disadvantages. The FDIC is therefore re-interpreting the phrase ``for

any semiannual period'' as used in 12 CFR 327.32(a)(3) in the light of

the FDIC's quarterly assessment program. The FDIC is taking the

position that, consistent with this phrase, an Oakar institution's AADA

for a semiannual period is to be determined on a quarter-by-quarter

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

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

assessment base that is assessed by the institution's secondary fund.

The FDIC is also adopting the view that, if an AADA is generated in a

transaction that occurs during the second calendar quarter of a

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

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

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

deposits that the buyer has so acquired.

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

semiannual period'' is appropriate because the phrase is the

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

the Oakar Amendment:

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

adjusted attributable deposit amount which shall be taken into

account for purposes of determining the amount of the assessment

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

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

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

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

merely specifies the semiannual period for which the AADA is to be

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

that the phrase ``for any semiannual period'' in its own regulation may

properly be read to have the same meaning.

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

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

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

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

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

The FDIC's existing regulation is compatible with this

interpretation. The regulation speaks of an assessment base for each

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

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

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

not modifying the text that specifies the method for computing AADAs.

One commenter urges the FDIC to apply the revised interpretation on

a retroactive basis, effective either as of January 1, 1994 (when the

statutory changes took effect) or as of June 1, 1995 (when the BIF was

capitalized, and the most favorable BIF rate dropped substantially). To

apply the revised interpretation retroactively could cause considerable

difficulties for the FDIC, however, and perhaps for some institutions.

The FDIC would have to

[[Page 64966]]

identify every Oakar transaction occurring after the effective date of

the revision, and the amount of the assumed deposits; redetermine every

Oakar institution's initial AADA in such a transaction; recompute the

assessments payable to each insurance fund for every semiannual

assessment; restate the balance of each insurance fund; re-allocate the

insurance funds' earnings and expenses; and redetermine each insurance

fund's reserve ratio. A retroactive revision could even affect the data

used for determining the recent special assessment that recently

capitalized the SAIF. The FDIC has accordingly determined to apply the

revised interpretation only on a prospective basis.

b. Need for Quarterly Components: Appearance of Double-Counting

Under certain conditions, the FDIC's constant-value view of the AADA

appears to be tantamount to double-counting transferred deposits for a

calendar quarter. The appearance of double-counting occurs when an

Oakar institution acquires secondary-fund deposits in the latter half

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

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

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

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

approximately equal to an assessment on the transferred deposits for

both quarters in the semiannual period.

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

constant-value interpretation, an AADA--even a newly generated one--

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

semiannual period. The following example illustrates the point: \7\

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

\7\ In order to bring out the relationship between the AADA and

the assessment base more clearly, the table refers to the average

assessment base of an institution. The average assessment base is

derived from the average of the deposits that the institution has

reported in its two reports of condition for the prior semiannual

period. The FDIC has used the average assessment base to compute the

semiannual assessment for most of the time that Oakar institutions

have existed. The FDIC has collected the semiannual assessments in a

single payment.

The FDIC has recently changed its collection procedures,

however. Beginning with the second semiannual period of 1995, the

FDIC collects the semiannual assessment in two installments. The

first installment is computed using the assessment base that derives

from the deposits reported in the institution's first report of

condition for the prior quarter; the second installment is computed

using the assessment base derived from the second such report of

condition. 59 FR 67153 (Dec. 29, 1994).

The new collection procedure does not affect the amount that an

institution owes for a semiannual period. Accordingly, the effect

described in the example remains valid.

\8\ The equivalence is not so close as it appears. For one

thing, an Oakar institution's secondary-fund assessment base is not

a proportional part of the overall base, but rather is equal to the

full value of its AADA. See id. 327.32(a)(2). For another, an

initial AADA remains fixed during the semiannual period in which it

is generated, even though the Oakar institution's total deposits

rise or fall between the time of the transaction and the end of the

period.

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

Seller Industry

(SAIF) Buyer (BIF) total

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

Before the transaction:

Starting assessment bases (ignoring float,

&c.):

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

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

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

The transaction (May 1):

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

Deposits sold.............................. ($100) +$100 (AADA) (\1\)

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

After the transaction:

Ending assessment bases (ignoring float,

&c.):

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

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

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

$100 $200 $300

Average assessment bases:

(ignoring float, &c.):

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

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

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

$150 $150 $300

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

\1\ Neutral.

In this illustration, the buyer is a BIF member with $100 in

deposits, all insured by the BIF. The seller is a SAIF member with $200

in deposits, all insured by the SAIF. The buyer acquires $100 from the

thrift. The transaction takes place in May (the second half of the

first semiannual period).

The transaction generates an AADA for the buyer; the value of the

AADA is $100. The buyer's SAIF assessment is based on that amount (more

exactly, on the portion of its assessment base that is equal to that

amount). But the average of the buyer's SAIF insured deposits for the

prior two quarters is only $50. The buyer's SAIF assessment base--and

its SAIF assessment--is twice as large as it would have been had it

been computed in the ``usual'' way (that is, in the manner that applies

to non-Oakar institutions). The difference is roughly equivalent to

``double counting the acquired deposits'': counting the transferred

$100 in the buyer's deposit-base for both quarters rather than just for

the second one.\8\

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

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

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

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

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

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

$100. The buyer's AADA remains $100. Accordingly, the aggregate amount

of SAIF-assessable deposits retreats to $200 once more; and the

aggregate amount of BIF-assessable deposits is back to the full $100.

Broadening the focus to include both insurance funds also brings

out a more subtle point: the anomaly is not tantamount to double-

counting the

[[Page 64967]]

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

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

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

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

$100 for half the semiannual period.

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

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

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

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

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

specified therein even under the quarterly-payment schedule.

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

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

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

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

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

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

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

second quarterly payment in order to correct these defects.

Interpreting the semiannual AADA to consist of two quarterly

components eliminates this anomaly. Three commenters endorse the

quarterly determination of AADAs for that reason.

2. Quarterly Growth

a. In General. The Oakar Amendment says that the growth rate for an

AADA during a semiannual period is equal to the ``annual rate of growth

of deposits'' of the Oakar institution. The FDIC has previously

interpreted the phrase ``annual rate'' to mean a rate determined over

the interval of a full year. Under the procedures prescribed by the

FDIC, each Oakar institution has computed its ``annual rate of growth''

at the end of each calendar year, and has used this figure to calculate

the AADA for use during the following year.

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

tended to drift out of alignment with its deposit base, because the

AADA remains constant while the deposit base changes. At the end of the

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

AADA suddenly--but only temporarily--snaps back into its proper

proportion.

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

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

deposit base. Moreover, from the FDIC's standpoint as insurer, it is

appropriate to maintain a relatively steady correlation between the

AADA and the total deposit base. The FDIC is therefore revising its

view, and is taking the position that-after the end of the semiannual

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

grows and shrinks at the same underlying rate as the institution's

domestic deposit base (that is, excluding acquisitions and deposit

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

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

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

deposits'' during the semiannual period, thereby satisfying the

statutory requirement.

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

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

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

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

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

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

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

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

rates payable on time deposits having maturities as short as seven

days. See 12 CFR 329.3 (1993).

One commenter agrees with the FDIC that the statutory phrase

permits the computation of growth on a quarter-by-quarter basis. No

commenter takes the opposite view.

b. Annual vs. Quarterly Growth Adjustment

An AADA remains fixed until a growth adjustment is applied. Total

deposits fluctuate from day to day in the normal course of business,

however. These fluctuations are reflected entirely in an institution's

primary-fund deposits until the growth adjustment occurs. That

adjustment has hitherto been made on an annual basis: Accordingly, the

relationship between an institution's total deposits on one hand, and

its primary-fund deposits and its AADA on the other, has often varied

significantly. By contrast, the quarterly-adjustment method causes

primary-fund deposits and the AADA vary together with total deposits.

Three commenters cite this result as a reason for supporting the

quarterly determination of AADAs.

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

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

total deposits grow by $1 every quarter, and that the institution does

not participate in any additional acquisitions or deposit sales. The

following graphs show the effects of making growth adjustments to the

institution's AADA on an annual basis versus a quarterly basis:

BILLING CODE 6714-01-P

[[Page 64968]]

[GRAPHIC] [TIFF OMITTED] TR10DE96.000

[[Page 64969]]

[GRAPHIC] [TIFF OMITTED] TR10DE96.001

[[Page 64970]]

The following graphs express this difference in terms of percents

of total deposits:

[GRAPHIC] [TIFF OMITTED] TR10DE96.002

[[Page 64971]]

[GRAPHIC] [TIFF OMITTED] TR10DE96.003

[[Page 64972]]

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

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

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

of total deposits.

c. Rolling One-Year Adjustments vs. Quarterly Adjustments

The FDIC also considered an alternative approach: Using the rate of

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

measured from the current quarter. This technique would be as

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

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

and the deposit base.

Consider the same Oakar institution with beginning total deposits

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

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

on two different bases--namely, rolling one-year growth rates, and

quarter-to-quarter growth rates:

[[Page 64973]]

[GRAPHIC] [TIFF OMITTED] TR10DE96.004

[[Page 64974]]

[GRAPHIC] [TIFF OMITTED] TR10DE96.005

[[Page 64975]]

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

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

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

of total deposits are more illustrative:

[GRAPHIC] [TIFF OMITTED] TR10DE96.006

[[Page 64976]]

[GRAPHIC] [TIFF OMITTED] TR10DE96.007

BILLING CODE 6714-01-C

[[Page 64977]]

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

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

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

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

quarter results in a steadily decreasing rate of growth of total

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

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

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

While different growth characteristics for total deposits would yield

different relationships between the AADA and the primary fund over

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

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

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

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

As the latter graph shows, applying the actual quarterly growth

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

deposits for the AADA and primary fund deposits.

In sum, the FDIC considers that the quarterly approach is

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

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

D. Negative Growth of the AADA

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

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

period]\9\ would have increased during the preceding semiannual period

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

of [the Oakar institution's] deposits''. 12 U.S.C. 1815(d)(3)(C)(iii).

The FDIC is codifying its view that the terms ``growth'' and

``increase'' encompass negative growth (shrinkage). But the FDIC is

changing its interpretation by excluding shrinkage due to deposit

sales.

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

\9\ Theoretically, the growth is not applied directly to the

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

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

AADA.

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

1. Negative Growth in General

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

underlying rate of growth for the purpose of determining the Oakar

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

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

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

grow at the higher rate too. But the Amendment excluded growth

attributable to mergers, branch purchases, and other acquisitions of

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

subtracted from the Oakar bank's total deposits for the purpose of

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

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

(Supp. I 1989).

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

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

consistent in this regard, because AADAs could never decrease.

Congress eliminated the minimum growth rate as of the start of

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

result, the Oakar Amendment now specifies that an Oakar institution's

AADA grows at the same rate as its domestic deposits (excluding

mergers, branch acquisitions, and other acquisitions of deposits). 12

U.S.C. 1813(d)(3)(C).

The modern version of the Oakar Amendment continues to speak only

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

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

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

institution that transfers deposits in bulk to another insured

institution.

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

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

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

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

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

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

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

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

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

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

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

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

the SAIF.\10\

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

\10\ A shrinking Oakar thrift would have the opposite effect:

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

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

bias would run against the SAIF.

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

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

Congress made to the Oakar Amendment in 1991 are those of

simplification, liberalization, and symmetry. Congress allowed savings

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

Congress allowed institutions to deal with one another directly,

eliminating the requirement that the institutions must belong to the

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

supervisor). Congress established a mirrorimage set of rules for

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

repealed the seven percentum floor on AADA growth, thereby removing the

most prominent cause of divergence between an Oakar institution's

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

the Oakar Amendment and made it congruent with the relevant provisions

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

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

interprets the growth provisions of the Oakar Amendment symmetrically:

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

Nine commenters support this view; none oppose it. Accordingly, the

FDIC is taking the position that an Oakar institution's AADA grows and

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

domestic deposits.

The FDIC considers that this interpretation is appropriate because

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

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

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

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

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

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

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

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

currently carry a much higher rate) grow disproportionately when their

deposits shrank through ordinary business operations.

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

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

than its total deposit base.

2. Negative Growth due to Deposit-Transfers

The FDIC considers that--consistent with the principle of

separation between the insurance funds embodied in section 5(d)(2)--a

deposit-transfer from

[[Page 64978]]

an Oakar institution to another institution should have no effect on

the industry-wide stock of BIF-insured and SAIF-insured deposits.

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

upset that balance, however. A deposit sale reduces the Oakar bank's

total deposit base by a certain percentage: accordingly, the Oakar

bank's AADA--and therefore its volume of SAIF-insured deposits--has

been reduced by the same percentage. Its BIF-insured deposits have

increased correspondingly. In effect, SAIF deposits have been converted

into BIF deposits, in violation of the moratorium, and without

generating any entrance or exit fees for the insurance funds.\11\

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

\11\ The effect has occurred whenever an Oakar institution

transfers deposits, without regard for whether the transferred

deposits have been primary-fund or secondary-fund deposits. Any

deposit-transfer has shrunk the seller's overall deposit-base, and

has therefore reduced its AADA.

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

The FDIC is curing this defect by excluding deposit sales from the

growth computation. The FDIC continues to believe that the terms

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

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

not consider that it is required to extend these terms beyond

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

must necessarily interpret these terms to include a decrease that is

attributable to a bulk transfer of deposits. The statute itself

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

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

authority to make an equivalent exclusion for deposit sales.

The FDIC believes its interpretation is sound because deposit sales

do not--in and of themselves--represent any change in the industry-wide

deposit base of each fund. It is inappropriate for the FDIC to generate

such a change on its own as a collateral effect of its assessment

procedures. Moreover, the interpretation is in accord with the tenor of

the amendments made by the FDICIA, because it treats deposit sales

symmetrically with deposit-acquisitions.

Two commenters--both trade groups--support the FDIC's position.

Five commenters oppose the deposit-sale exclusion rule. Four of them do

so for the very reason that the FDIC is adopting it: when the Rankin

principle is in force, the deposit-exclusion rule prevents an

institution's store of secondary-fund deposits from shrinking except

insofar as the seller transfers the deposits to the buyer. One

commenter also objects to the deposit-sale exclusion rule on the ground

that the rule treats SAIF-member Oakar institutions (whose AADA

represents BIF-assessable deposits) more favorably than BIF-member

Oakar institutions, based on the higher rates in effect for SAIF-

assessable deposits at the time the comment was filed. The FDIC

considers that the Funds Act has deprived this comment of much of its

force. The SAIF rates are to be reduced significantly. The remaining

differential between the rates on SAIF-assessable and BIF-assessable

deposits is relatively small, and will soon expire.

One commenter, which opposed the deposit-sale exclusion rule if the

FDIC retained the Rankin principle, said further that the FDIC should

not apply the deposit-sale exclusion rule to sales that occur prior to

the effective date of the final rule. The commenter declared that the

FDIC should not expect institutions to make business decisions based

upon proposed rules. As a technical matter, of course, the FDIC is not

adopting the deposit-sale exclusion rule retroactively: rather, the

FDIC is changing the method for computing future assessments, beginning

with the assessment due for the first semiannual period of 1997. At the

same time, the FDIC acknowledges that the change would affect the

business decisions of institutions prior to that time, because

institutions must look ahead to consider the consequences of their

actions. The FDIC considers that institutions have had ample advance

notice of the deposit-sale exclusion rule, however. Moreover, the rule

repairs a significant weakness in the growth calculation. The adverse

effects resulting from that weakness must be eliminated without delay.

The FDIC will therefore apply the deposit-sale exclusion rule when

computing assessments for the first semiannual period of 1997.

E. Value of an Initial AADA

By statute, an Oakar institution's initial AADA is equal to ``the

amount of any deposits acquired by the institution in connection with

the transaction (as determined at the time of such transaction)''. Id.

1815(d)(3)(C). The FDIC has interpreted and explained three aspects of

this phrase.

1. The Nominal-Amount Principle

The FDIC has adopted an interpretive regulation specifying that the

``amount of any deposits acquired'' by the buyer--and therefore the

value of the buyer's initial AADA--is (generally) equal to the full

nominal amount of the deposits that the buyer assumes from the seller.

12 CFR 327.32(a)(3)(4). The FDIC is retaining the substance of this

provision. The final rule continues to emphasize the point that the

amount of the transferred deposits is measured by focusing on the

volume divested by the seller. The FDIC's purpose is to make it clear

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

on the calculation of the buyer's AADA.

Two commenters (including one trade group) support the nominalvalue

principle; two oppose it. The opposing commenters point out that the

FDIC discounts the transferred deposits when it serves as conservator

or receiver for a seller (troubled-seller cases). The FDIC provides the

discount on the ground that the buyer can expect to sustain a

substantial run-off of deposits after the transaction. The opposing

commenters contend that buyers sustain run-off even when the seller is

a healthy institution. The commenters therefore urge the FDIC to

provide for a discount in healthy-seller cases as well as in troubled-

seller ones.\12\

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

\12\ These two commenters further note that they, along with

nine other institutions, have petitioned the FDIC to amend its

regulations to provide for such a discount. The 11 petitioners have

provided data indicating that they have experienced run-off in

healthy-seller cases, although the methods used to identify and

measure run-off varied from institution to institution.

The FDIC has determined that it is appropriate to address the

subject matter of the petition in this rulemaking proceeding

together with other issues related to the computation of the AADA.

For the reasons given herein, the FDIC declines to adopt the

position that the petitioners have proposed.

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

The FDIC does not believe the commenters' point is well taken. As

discussed in more detail at II.E.2. below, the FDIC has established the

discount for troubled-seller cases because, as a historical matter, the

cases have arisen in the context of unusual economic conditions, and

presented special supervisory issues. These special circumstances do

not apply to healthy-seller transactions in the current economic

environment. Buyers and sellers negotiate the terms of their

transactions at arms' length, and take the effects of deposit run-off

into account in arriving at a price. The FDIC does not believe it

necessary or appropriate to contribute the resources of the seller's

insurance fund, in the form of foregone assessments, to assist such

transactions.

The FDIC is retaining the nominal-value principle for two chief

reasons. Most importantly, the principle reflects the manifest intent

of the statute, which specifies that the volume of the acquired

deposits are to be ``determined at the time'' of the transaction.

Second, the principle has the virtues of clarity and precision. Both

the buyer and a seller will know precisely the value of an AADA that is

generated in an Oakar

[[Page 64979]]

transaction. The buyer's expected secondary-fund assessments can be an

important cost for the parties to consider when deciding on an

acceptable price. The FDIC considers that the nominal-value principle

reduces uncertainty on this point.

The final rule updates the regulation in two minor ways. The

regulation has presumed that the buyer will assume all the seller's

deposits, and that all such deposits will be insured by the buyer's

secondary fund. The reason for these presumptions is purely historical.

At the time the regulation was adopted, the Oakar Amendment only spoke

of cases in which the seller merged into or consolidated with the

buyer, or in which the buyer acquired all the seller's assets and

liabilities. See 12 U.S.C. 1815(d)(3)(A) (Supp. I 1989). The Amendment

did not allow for less comprehensive Oakar transactions (e.g., branch

sales). Nor did it contemplate a transaction in which the seller was an

Oakar institution in its own right.

The final rule makes it clear that the nominal-amount principle

applies to all deposit-transfer transactions in which the buyer

acquires secondary-fund deposits. The final rule also specifies that

the AADA is only equal to the nominal amount of the secondary-fund

deposits, not necessarily all the transferred deposits. Each point

represents the current view of the FDIC.

2. Deposits Acquired in Troubled-Seller Cases

As noted above, the FDIC has discounted the nominal amount of the

transferred deposits in troubled-seller cases. The discount is two-

fold:

--Brokered deposits: All brokered deposits have been subtracted from

the nominal volume of the transferred deposits.

--The ``80/80'' principle: Each remaining deposit has been capped at

$80,000. The buyer's AADA has been equal to 80 percent of the aggregate

of the deposits as so capped.

See 12 CFR 327.32(a)(3)(4). The FDIC is ending these discounts for

future transactions, on the ground that they are no longer needed. The

FDIC is making the change effective as of July 1, 1997, in order to

avoid disrupting any negotiations that may currently be under way.

The FDIC adopted the discounts because the funding decisions for

troubled-seller cases--and particularly for troubled-thrift cases--were

subject to constraints and considerations that fell outside the normal

range of factors influencing such decisions in the market place for

healthy institutions. The sellers had often been held in

conservatorship for some time. In order to maintain the assets in such

institutions, the conservator had often found it necessary to obtain

large and other high-yielding deposits. The FDIC determined that, while

any bidder had to evaluate and price all aspects of a transaction, it

would be counterproductive to require bidders to price the

contingencies related to volatile deposits in assisted transactions,

given that these deposits were primarily artifacts of government

conservatorships. Considering the objective of attracting private

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

sought to avoid the potential deterrent effect of including these

artificial elements in the pricing equation.

The FDIC recognized that healthy sellers sometimes relied upon

volatile deposits for funding as well. But the FDIC regarded their

funding decisions as a normal part of a strategy to maximize the

profits of a going concern. The comparable decisions for troubled

sellers were made by managers of government conservatorships that were

subject to funding constraints, relatively inflexible operating rules

(necessary to control a massive government effort to sell failed

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

private transaction.

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

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

such institutions was relatively severe. The stress has been

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

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

rules for troubled-seller cases.

Moreover, the FDIC ordinarily must contribute its own resources to

induce buyers to acquire such institutions. Any reduction in future

assessments that the FDIC offers as an incentive merely reduces the

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

transaction. The simpler and more straightforward approach is to

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

such institutions at the time of the transaction.

Two commenters, both trade groups, oppose the FDIC's position. One

commenter agrees with the FDIC's reasons for ending the discount, but

suggests that the FDIC should retain it for the purpose of ``giving

prospective bidders the choice of accepting the predetermined deposit

haircut or pricing deposit volatility contingencies''. The other

commenter strongly urges the FDIC to retain the discount, giving the

following reasons: ``deposit runoff remains a factor''; and ``pricing

variations that depend on runoff calculation are uncertain''. The FDIC

does not believe these reasons are persuasive, however. The discount is

not an alternative to estimating the volatility of deposits and

determining an appropriate price for them. The discount is simply a

reduction in the base amount on which future assessments will be

computed. Whatever uncertainties are present will persist, without

regard for whether the base amount retains its full nominal value or is

discounted by a fixed amount.

3. Conduit Deposits

The FDIC staff has taken the position that, when an Oakar

institution assumes secondary-fund deposits from one institution

(original transferor) but promptly re-transfers them to another

institution (re-transferee) under certain conditions, the retransferred

deposits are not counted as ``acquired'' deposits for the purpose of

computing the Oakar institution's AADA. The Oakar institution is

regarded as a mere conduit for the deposits. The deposits themselves

retain their original insurance status after the re-transfer: whatever

their status in the hands of the original transferor, whether BIF-

insured or SAIF-insured, the deposits have that status in the hands of

the ultimate retransferee. The FDIC described this interpretation,

which is the settled view of the FDIC, in the preamble to the proposed

rule, but the proposed rule itself did not set forth a provision making

this point explicit. The final rule contains such a provision.

The FDIC has invoked the conduit principle only in very narrow

circumstances. The FDIC has agreed to exclude the re-transferred

deposits when determining an Oakar institution's AADA only when all of

the following conditions have been met: the Oakar institution has

committed to re-transfer specified branches as a condition of approval

of the transaction; the commitment has been enforceable; and the re-

transfer has been required to occur within six months after

consummation of the initial Oakar transaction. See, e.g., FDIC Advisory

Op. 94-48, 2 FED. DEPOSIT INS. CORP., LAW, REGULATIONS, RELATED ACTS

4901-02 (1994).

The FDIC is codifying and refining the ``conduit'' principle. Under

the final rule, secondary-fund deposits have the status of ``conduit''

deposits in the hands of an Oakar institution only if the Oakar

institution has acquired them in an Oakar transaction, if a federal

[[Page 64980]]

banking supervisory agency or the United States Department of Justice

has explicitly ordered the institution to re-transfer the deposits

within six months after the date of that transaction, if the

institution's obligation to make the re-transfer is enforceable, and if

the re-transfer must be completed in the six-month grace period. If the

conditions are not satisfied, the conduit principle does not come into

play, and the deposits are regarded as having been assumed by the Oakar

institution at the time of the original Oakar transaction. Any

subsequent re-transfer of the deposits would be treated as a separate

transaction, and analyzed independently of the Oakar transaction.

The final rule also clarifies the point that conduit deposits are

used to compute the Oakar institution's AADA on a temporary basis. The

deposits are counted in the ``amount of deposits acquired'' by the

Oakar institution--and therefore in its AADA--during the semiannual

period in which the transaction occurs. The AADA so computed is used to

determine the assessment due for the next semiannual period. If the

institution retains the deposits during part of that following period,

the deposits are again included in the ``amount of deposits

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

purpose of computing the assessment for the semiannual period after

that. But thereafter the deposits are excluded from the ``amount of

deposits acquired'' by the Oakar institution. In this regard, one

commenter (a trade group) says the deposits should ``be assessed on a

pro rata basis for the time they remain on the institution's books''.

The FDIC declines to adopt this suggestion. The suggestion is a

departure from the FDIC's general method of determining assessments,

which derives an institution's assessment base from the deposits that

the institution holds at the end of each calendar quarter, and which

does not take into account the length of time the institution holds the

deposits.

Two commenters support the conduit rule as proposed by the FDIC.

Three others urge the FDIC to broaden the conduit rule to reach cases

in which the buyer re-transfers the deposits voluntarily. The FDIC

declines to do so, however. One of the primary purposes for the conduit

rule--absent which the FDIC would not have adopted the rule--is to

accommodate the directives of the Department of Justice and the federal

banking agencies. That purpose is not served when the seller does not

act under government compulsion.

One commenter urged the FDIC to extend the conduit rule to cases in

which the buyer does not re-transfer the deposits, but merely divests

itself of them by paying them off. The commenter suggests that deposits

should qualify as conduit deposits if the buyer knows it will re-

transfer the deposits within a very short time after acquiring them,

and if the buyer can identify the deposits with great specificity. The

FDIC declines to adopt this position, however. The FDIC wishes to

confine the conduit rule to circumstances where the actions of the

parties, and the relationships among them, are reasonably well defined.

When the Department of Justice or a federal banking supervisor orders a

buyer to re-transfer deposits to another institution, the FDIC may

safely expect that the link between the buyer and the deposits will be

severed. Moreover, the buyer remains subject to continuing federal

oversight, the focus of which is on the structural and economic changes

that the divestiture has been designed to produce. The result is that

the oversight ensures that the link between the buyer and the deposits

will remain severed. The case is otherwise when a buyer merely pays off

the deposits. When no other institution is involved, the buyer may

easily re-establish its connection with the depositors--and, as a

practical matter, recover the deposits--either directly or indirectly.

Moreover, any continuing federal oversight of the buyer is more likely

to focus on general regulatory objectives, such as the maintenance of

an appropriate capital level, that do not prevent the buyer from re-

establishing its link to the deposits.

F. Transitional Matters

1. Freezing prior AADAs

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

semiannual period. An institution's AADA for a current semiannual

period is equal to the sum of three elements:

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

institution originally acquired in the Oakar transaction;

Element 2: The aggregate of the growth increments computed

with respect to the semiannual periods prior to the one with respect to

which Element 3 is being determined; and

Element 3: The growth increment with respect to the period

just prior to the current period (i.e., just prior to the period for

which the assessment is due, and for which the AADA is being computed).

Element 3 is computed on a base that equals the sum of elements 1 and

2.

The FDIC has consistently interpreted its existing rules to mean

that, when a growth increment has already been determined with respect

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

value thereafter. See, e.g., FDIC Advisory Op. 9219, 2 FED. DEPOSIT

INS. CORP., LAW, REGULATIONS, RELATED ACTS 4619, 4620-21 (1992). The

net effect has been to ``freeze'' AADAs--and their elements--for prior

semiannual periods. The final rule codifies this principle.

In keeping with this principle, the interpretations set forth in

the final rule apply on a purely prospective basis. They come into play

only for the purpose of computing future AADAs. The final rule's

interpretations do not affect AADAs already computed for prior

semiannual periods, or the assessments that Oakar institutions have

already paid on them. Nor do they affect the prior-period elements of

AADAs that are to be determined for future semiannual periods (except

insofar as the interpretations affect the increment computed with

respect to the second semiannual period of 1996). In short, the final

rule ``leaves prior AADAs alone''.

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

Calculation

The FDIC will follow its existing procedures in computing AADAs for

the first semiannual period of 1997, with one exception. An

institution's AADA for the first semiannual period of 1997 will be

based on the growth of the institution's deposits as measured over the

entire calendar year 1996. The AADA so determined will be used to

compute both quarterly payments for the first semiannual period of

1997.

The exception is that, when computing an AADA's increment of growth

with respect to the second semiannual period of 1996, the FDIC will

apply its new limitation on ``negative'' growth: that is, the FDIC will

decline to consider shrinkage attributable to deposit-transfer

transactions that have occurred on and after July 3, 1996 (the date on

which the Federal Register published the proposed rule).

The FDIC acknowledges that this limitation makes a significant

break with the past. The FDIC further recognizes that the limitation

can affect the business considerations that affect deposit-transfer

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

of the limitation, however, and that the parties to any such

transaction have been able to factor in any new costs that the

limitation may have produced.

[[Page 64981]]

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

apply the limitation retroactively to transactions that have been

completed earlier in 1996. The parties to these transactions did not

have notice of the FDIC's proposal. The FDIC will therefore include

shrinkage attributable to a deposit sale that occurred during the first

semiannual period of 1996 when determining the annual growth rate for

an Oakar institution with respect to that semiannual period. The annual

growth rate as so computed will be used in computing the institution's

AADA for the first semiannual period of 1997 and for future periods.

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

The FDIC will begin measuring AADAs on a quarterly basis during the

first semiannual period of 1997. The first quarterly AADA component

that the FDIC will identify and measure will be the quarterly component

as of March 31, 1997. That component will reflect the rate of growth of

the institution's deposits during the first calendar quarter of 1997

(January-March). The component so measured will be used to determine

the institution's first quarterly payment for the second semiannual

period in 1997--that is, the June payment.

The second quarterly AADA component that the FDIC will identify and

measure will reflect the rate of growth of the institution's deposits

during the second calendar quarter of 1997 (April-June). The second

component will be used to determine the institution's second quarterly

payment for the second semiannual period in 1997 (the September

payment).

G. Simplification and Clarification of the Regulation

The final rule makes certain changes to the current regulation that

clarify and simplify it without changing its meaning. The FDIC is

making these changes in response to two initiatives. Section 303 of the

Riegle Community Development and Regulatory Improvement Act of 1994,

Pub. L. 103-325, 108 Stat. 2160 (Sept. 23, 1994), requires federal

agencies to streamline and modify their regulations. In addition, the

FDIC has voluntarily committed itself to review its regulations on a 5-

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

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

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

review under each of these initiatives.

The final rule clarifies subpart B by defining and using the terms

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

fund is the fund to which the institution belongs; its secondary fund

is the other insurance fund. Using these terms, the FDIC is simplifying

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

language; the changes do not alter the meaning of these provisions.

In addition, the FDIC is clarifying Sec. 327.6(a) by changing the

nomenclature used therein. ``Deposit-transfer transaction'' is replaced

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

by ``surviving institution''; and ``transferring institution'' is

replaced by ``terminating institution''. The terms previously used in

Sec. 327.6(a) are also used in other provisions of part 327, where they

have different and less specialized meanings. The change in

nomenclature in Sec. 327.6(a) is intended to avoid any confusion that

the previous terminology might have caused.

III. Effective Date

The final rule is effective on January 1, 1997. Notwithstanding the

fact that the FDIC has asked for comment on the changes made by the

final rule, the final rule is an interpretive rule, and may be made

effective without having been published 30 days prior to its effective

date. 5 U.S.C. 553(d)(2).

Moreover, the FDIC has determined that there is good cause for the

rule to be made effective on January 1, 1997, and not after a 30-day

delay. The 30-day delay is not necessary in the case of provisions that

codify the FDIC's existing interpretations: e.g., those pertaining to

the Rankin doctrine, to the principle of negative growth in general,

the conduit principle, to the nominal-value rule for initial AADAs in

healthy-seller cases, and to the principle that the value of AADAs for

prior semiannual periods will be ``frozen''. The 30-day delay is

likewise not necessary in the case of provisions that, by their terms,

do not affect the assessment for the first semiannual period of 1997:

e.g., those that shift the burden of computing AADAs to the FDIC, those

that interpret the AADA--and the growth thereof--on a quarterly basis,

and those that apply the nominal-value rule to initial AADAs in

troubled-seller cases.

The FDIC has refrained from adopting the final rule earlier,

inasmuch as the rule is predicated in part on certain prior actions of

the Board, notably the reduction of assessment rates for SAIF members.

Nevertheless, the FDIC considers it necessary for certain of the

changes made by the rule to apply with respect to the assessment for

the first semiannual period of 1997, which begins on January 1, 1997--

notably, the exclusion of deposit-sales from the computation of growth

in the AADA. The FDIC has therefore determined that it has good cause

to adopt the final rule with respect to these provisions without the

full 30-day delay.

IV. Request for Public Comment

The FDIC has solicited comment on all aspects of the rule. In

particular, the FDIC has solicited comment on the following points:

attributing deposits that an Oakar institution transfers to another

institution according to principles articulated in the Rankin letter,

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

both insurance funds; having the FDIC, rather than individual

institutions, compute AADAs using information provided by the

institutions; interpreting AADAs as consisting of quarterly components,

and computing the growth of AADAs on a quarterly cycle rather than an

annual one; retaining the concept of negative growth for the purpose of

computing AADAs; excluding deposit sales from the computation of

growth; applying the nominal-amount principle for determining initial

AADAs in all cases, including troubled-seller cases; and preserving the

conduit-deposit concept.

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

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

solicited comment for the following purposes on the collection of

information described herein:

To evaluate whether the collection of information is necessary

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

whether the information has practical utility;

To evaluate the accuracy of the FDIC's estimate of the burden

of the collection of information;

To enhance the quality, utility, and clarity of the

information to be collected; and

To minimize the burden of the collection of information on

those who are to respond, including through the use of automated

collection techniques or other forms of information technology.

The FDIC has also solicited comment on all other points raised or

options described herein, and on their merits relative to the rule.

V. Paperwork Reduction Act

Under the FDIC's prior procedures, each Oakar institution was

required to

[[Page 64982]]

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

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

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

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

the assessment due for the first semiannual period of the current

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

year. The institution was required to provide the annual growth

worksheet to the FDIC as a part of the institution's certified

statement.

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

transaction, it was required to submit a transaction worksheet showing

the total deposits acquired on the transaction date. If the seller were

an Oakar institution, and if the buyer had acquired the entire

institution, the buyer was also required to report the seller's last

AADA (as shown in the seller's last call report). The buyer was then

required to subtract this number from the total deposits acquired in

order to determine its new AADA.

The final rule changes this procedure for the annual growth

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

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

only affects Oakar institutions that transferred deposits to other

institutions during 1996. Such an institution must report the total

amount of deposits that it transferred in transactions from July 1-

December 31, 1996.

Thereafter the FDIC will compute the AADAs for all Oakar

institutions, using information taken from their quarterly call

reports. Institutions will not have to report additional information in

most cases. An Oakar institution that has neither acquired nor

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

additional information at all. An Oakar institution that has acquired

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

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

change in the timing, but no change in burden.

Only an Oakar institution that transferred deposits will have to

provide additional information. Sellers will have to report the volume

of deposits transferred and the date of the transaction. This

information is readily available: the extra reporting burden is small.

More to the point, the net effect is to reduce the overall

reporting burden on Oakar institutions. The burden of submitting extra

information in deposit-sale cases is more than offset by the

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

burden of computing AADAs.

Accordingly, the FDIC is revising an existing collection of

information. The revision has been reviewed and approved by the Office

of Management and Budget pursuant to the Paperwork Reduction Act of

1980 (44 U.S.C. 3501 et seq.).

The impact of the final rule on paperwork burden is to require a

one-time de minimis report from approximately 100 institutions for the

first semiannual period in 1997, and thereafter to eliminate the annual

growth worksheet for all 900 Oakar institutions, which takes an

estimated two hours to prepare. The effect of this procedure on the

estimated annual reporting burden for this collection of information is

a reduction of 1,800 hours:

Approximate Number of Respondents: 900.

Number of Responses per Respondent: -1.

Total Annual Responses: 900.

Average Time per Response: 2 hours.

Total Average Annual Burden Hours: -1800 hours.

The FDIC expects the Federal Financial Institutions Examination

Council and the Office of Thrift Supervision to require (as needed) the

information in the quarterly reports of condition, starting with the

report for March 31, 1997.

VI. Regulatory Flexibility Analysis

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

the final rule. Although the FDIC has chosen to publish general notice

of the rule, and to ask for public comment on it, the FDIC was not

obliged to do so, as the rule is interpretive in nature. See id. 553(b)

and 603(a).

Moreover, the FDIC considers that the rule amounts to a net

reduction in burden for all Oakar institutions, as they no longer have

to prepare or file regular annual growth worksheets after the worksheet

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

must submit one new piece of information, and only for quarters in

which they have transferred deposits.

In addition, although the Regulatory Flexibility Act requires a

regulatory flexibility analysis when an agency publishes a rule, the

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

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

The final rule relates to the rates that Oakar institutions must pay,

because it addresses various aspects of the method for determining the

base on which assessments are computed. The Regulatory Flexibility Act

is therefore inapplicable to this aspect of the final rule.

Finally, the legislative history of the Regulatory Flexibility Act

indicates that its requirements are inappropriate to this aspect of the

final rule. The Regulatory Flexibility Act is intended to assure that

agencies' rules do not impose disproportionate burdens on small

businesses:

Uniform regulations applicable to all entities without regard to

size or capability of compliance have often had a disproportionate

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

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

of those to be regulated whenever this is consistent with the

underlying statute authorizing the rule.

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

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

The final rule does not impose a uniform cost or requirement on all

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

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

has on Oakar institutions' assessments. An institution's assessment is

proportional to its size. Moreover, while the FDIC has authority to

establish a separate risk-based assessment system for large and small

members of each insurance fund, see 12 U.S.C. 1817(b)(1)(D), the FDIC

has not done so. Within the current assessment scheme, the FDIC cannot

``tailor'' assessment rates to reflect the ``size and nature'' of

institutions.

VII. Congressional Review

The FDIC is submitting a report to each House of the Congress and

to the Comptroller General with respect to the final rule in conformity

with the procedures specified in 5 U.S.C. 801. The FDIC is submitting

the report voluntarily and not under compulsion of the statute,

however. The term ``rule''--as that term is used in section 801--

excludes ``any rule of particular applicability, including a rule that

approves or prescribes * * * rates''. Id. 804(3). The FDIC considers

that the final rule is governed by this exclusion, because the final

rule pertains to the computations associated with assessment rates.

Accordingly, the requirements of id. 801-808 do not apply.

In any case, because the final rule is interpretive in character,

notice and comment are not required under the Administrative Procedure

Act. See 5 U.S.C. 553(b). Accordingly, the FDIC has for good cause

found that notice and public procedure thereon are

[[Page 64983]]

``unnecessary'' within the meaning of 5 U.S.C. 808(2). The final rule

will therefore take effect on the date specified herein.

List of Subjects in 12 CFR Part 327

Assessments, Bank deposit insurance, Banks, banking, Financing

Corporation, Reporting and recordkeeping requirements, Savings

associations.

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

of the Federal Deposit Insurance Corporation is amending 12 CFR part

327 as follows:

PART 327--ASSESSMENTS

1. 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.

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

to read as follows:

Sec. 327.6 Terminating transfers; other terminations of insurance.

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

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

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

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

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

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

first half.

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

section, the phrase pro rata share means a fraction the numerator of

which is the deposits assumed by the surviving institution from the

terminating institution during the second half of the semiannual period

during which the terminating transfer occurs, and the denominator of

which is the total deposits of the terminating institution as required

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

of that semiannual period.

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

discretion make such adjustments to the assessment base of an

institution participating in a terminating transfer, or in a related

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

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

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

the Corporation may increase the assessment bases of surviving or other

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

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

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

period during which the terminating transfer occurs.

* * * * *

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

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

Sec. 327.8 Definitions.

* * * * *

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

following meanings:

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

insured depository institution that assumes some or all of the deposits

of another insured depository institution in a terminating transfer.

(2) Terminating institution. The term terminating institution means

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

are assumed by another insured depository institution in a terminating

transfer.

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

assumption by one insured depository institution of another insured

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

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

contract, when the terminating institution goes out of business or

transfers all or substantially all its assets and liabilities to other

institutions or otherwise ceases to be obliged to pay subsequent

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

assumption of liability for deposits occurs. The term terminating

transfer does not refer to the assumption of liability for deposits

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

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

institution to assume liabilities of a terminating institution.

* * * * *

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

institution is the insurance fund of which the institution is a member.

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

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

institution.

4. Section 327.32 is amended by revising paragraph (a)(1), (a)(2),

and (a)(4) introductory text, and removing paragraph (a)(5), to read as

follows:

Sec. 327.32 Computation and payment of assessment.

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

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

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

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

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

such institution. (ii) Such applicable rate shall be applied to the

institution's assessment base less that portion of the assessment base

which is equal to the institution's adjusted attributable deposit

amount.

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

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

the assessment base of any acquiring, assuming, or resulting

institution which is equal to the adjusted attributable deposit amount

of such institution shall:

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

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

of this part; and

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

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

* * * * *

(4) Deposits acquired by the institution. As used in paragraph

(a)(3)(i) of this section, the term ``deposits acquired by the

institution'' means all deposits that are held in the institution

acquired by such institution on the date of such transaction; provided,

that if on or before June 30, 1997, the Corporation has been appointed

or serves as conservator or receiver for the acquired institution, such

term:

* * * * *

5. New Secs. 327.33 through 327.37 are added to subpart B to read

as follows:

Sec. 327.33 ``Acquired'' deposits.

This section interprets the phrase ``deposits acquired by the

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

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

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

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

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

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

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

nominal dollar amount of any deposits that the transferring institution

holds on the date

[[Page 64984]]

of the transaction and transfers to the acquiring institution.

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

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

institution has assumed from another institution (original transferor)

in the course of a transaction described in Sec. 327.31(a), and that

are treated as insured by the secondary fund of the acquiring

institution, but which the acquiring institution has been explicitly

and specifically ordered by the Corporation, or by the appropriate

federal banking agency for the institution, or by the Department of

Justice to commit to re-transfer to another insured depository

institution (re-transferee institution) as a condition of approval of

the transaction. The commitment must be enforceable, and the

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

after the date of the initial transaction.

(2) Treatment with respect to acquiring institution. Conduit

deposits are not considered to be acquired by the acquiring institution

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

the acquiring institution's adjusted attributable deposit amount for a

current semiannual period that begins after the end of the semiannual

period following the semiannual period in which the acquiring

institution re-transfers the deposits.

(3) Treatment with respect to re-transferee institution. Conduit

deposits are treated as insured by the same insurance fund after having

been acquired by the re-transferee institution as when held by the

original transferor.

Sec. 327.34 Application of AADAs.

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

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

semiannual period'' as used in the introductory text of

Sec. 327.32(a)(3).

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

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

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

deposit amount (AADA) is computed.

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

period consists of 2 quarterly AADA components. The first quarterly

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

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

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

second quarter of the prior period.

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

applied to a quarterly assessment base in accordance with

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

corresponding quarter.

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

been generated in a transaction that has occurred in the second

calendar quarter of the prior semiannual period, the first quarterly

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

zero.

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

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

July 1, 1997.

Sec. 327.35 Grandfathered AADA elements.

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

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

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

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

of growth determined in accordance with Sec. 327.32(a)(3)(iii). Each

such increment is deemed to be computed in accordance with the

contemporaneous provisions and interpretations of such section.

Accordingly, any increment of growth that is computed with respect to a

semiannual period has the value appropriate to the proper calculation

of the institution's assessment for the semiannual period immediately

following such semiannual period.

Sec. 327.36 Growth computation.

This section interprets various phrases used in the computation of

growth as prescribed in Sec. 327.32(a)(3)(iii).

(a) Annual rate. The annual rate of growth of deposits refers to

the rate, which may be expressed as an annual percentage rate, of

growth of an institution's deposits over any relevant interval. A

relevant interval may be less than a year.

(b) Growth; increase; increases. Except as provided in paragraph

(c) of this section, references to ``growth'', ``increase'', and

``increases'' may generally include negative values as well as positive

ones.

(c) Growth of deposits. ``Growth of deposits'' does not include any

decrease in an institution's deposits representing deposits transferred

to another insured depository institution, if the transfer occurs on or

after July 1, 1996.

(d) Quarterly determination of growth. For the purpose of computing

assessments for semiannual periods beginning on July 1, 1997, and

thereafter, the rate of growth of deposits for a semiannual period, and

the amount by which the sum of the amounts specified in

Sec. 327.32(a)(3)(i) and (ii) would have grown during a semiannual

period, is to be determined by computing such rate of growth and such

sum of amounts for each calendar quarter within the semiannual period.

Sec. 327.37 Attribution of transferred deposits.

This section explains the attribution of deposits to the BIF and

the SAIF when one insured depository institution (acquiring

institution) acquires deposits from another insured depository

institution (transferring institution). For the purpose of determining

whether the assumption of deposits (assumption transaction) constitutes

a transaction undertaken pursuant to section 5(d)(3) of the Federal

Deposit Insurance Act (12 U.S.C. 1815(d)(3)), and for the purpose of

computing the adjusted attributable deposit amounts, if any, of the

acquiring and the transferring institutions after the transaction:

(a) Transferring institution.--(1) Transfer of primary-fund

deposits. To the extent that the aggregate volume of deposits that is

transferred by a transferring institution in a transaction, or in a

related series of transactions, does not exceed the volume of deposits

that is insured by its primary fund (primary-fund deposits) immediately

prior to the transaction (or, in the case of a related series of

transactions, immediately prior to the initial transaction in the

series), the transferred deposits shall be deemed to be insured by the

institution's primary fund. The primary institution's volume of

primary-fund deposits shall be reduced by the aggregate amount so

transferred.

(2) Transfer of secondary-fund deposits. To the extent that the

aggregate volume of deposits that is transferred by the transferring

institution in a transaction, or in a related series of transactions,

exceeds the volume of deposits that is insured by its primary fund

immediately prior to the transaction (or, in the case of a related

series of transactions, immediately prior to the initial transaction in

the series), the following volume of the deposits so transferred shall

be deemed to be insured by the institution's secondary fund (secondary-

fund deposits): the aggregate amount of the transferred deposits minus

that portion thereof that is equal to the institution's primary-fund

deposits. The transferring institution's volume of secondary-fund

deposits shall be reduced by the volume of the secondary-fund deposits

so transferred.

[[Page 64985]]

(b) Acquiring institution. The deposits shall be deemed, upon

assumption by the acquiring institution, to be insured by the same fund

or funds in the same amount or amounts as the deposits were so insured

immediately prior to the transaction.

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.

[FR Doc. 96-31207 Filed 12-9-96; 8:45 am]

BILLING CODE 6714-01-P