Assessments

SUMMARY: The FDIC is lowering the rates on assessments paid to the

Savings Association Insurance Fund (SAIF), and widening the spread of

the rates, in order to avoid collecting more than needed to maintain

the SAIF's capitalization at 1.25 percent of aggregate insured

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

system.

The final rule establishes a base assessment schedule for the SAIF

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

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

general, effective SAIF rates range from 0 to 27 basis points as of

October 1, 1996. The final rule also prescribes a special interim

schedule of rates ranging from 18 to 27 basis points for SAIF-member

savings associations for just the last quarter of 1996, reflecting the

fact that assessments paid to the Financing Corporation (FICO) are

included in the SAIF rates for these institutions during that interval.

Excess assessments collected under the prior assessment schedule will

be refunded or credited, with interest.

The final rule establishes a procedure for making limited

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

Bank Insurance Fund (BIF), by rulemaking without notice and comment.

The final rule clarifies and corrects certain provisions without

making substantive changes.

EFFECTIVE DATE: December 11, 1996.

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; James

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

Financial Economist, (202) 898-3936, Division of Research and

Statistics; Richard Osterman, Senior Counsel, (202) 898-3523; Jules

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

Insurance Corporation, Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

I. The Final Rule

A. Background

Under the prior assessment schedule, SAIF rates have ranged from 23

basis points for institutions in the best assessment risk

classification to 31 basis points for institutions in the least

favorable one. This schedule has implemented the risk-based assessment

program required by section 7 of the Federal Deposit Insurance (FDI

Act), 12 U.S.C. 1817. The schedule has been designed to increase the

reserve ratio of the SAIF--the ratio of the SAIF's net worth to

aggregate SAIF-insured deposits, see id. 1817(l)(7)--to the designated

reserve ratio (DRR).\1\

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

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

the Board determines to be justified for that year by circumstances

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

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

for either fund.

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The SAIF has never received the full amount of the revenues that

the SAIF rates have generated, however. The SAIF did not receive any

revenues at all from its creation in 1989 through the end of 1992: all

such revenues were diverted to other needs. Revenues have begun to flow

into the SAIF after January 1, 1993, but still not at the full amounts.

Certain SAIF-assessable institutions--namely, SAIF-member savings

associations--have been required to pay assessments to the FICO in

order to enable the FICO to pay the interest on its bonds. The amounts

that these institutions have paid to the FICO have served to reduce the

amounts that the institutions have paid to the SAIF. At $793 million

per year, the FICO draw has been substantial. It has contributed to the

slow growth in the SAIF reserve ratio, which has only increased from

.28 percent to .47 percent during 1995.

Moreover, the assessment rates for the BIF were much lower than the

comparable rates for the SAIF, because the BIF's reserve ratio had

already reached the DRR. The disparity created incentives for

institutions to move deposits from SAIF-insured status to BIF-insured

status, and raised the question of whether a shrinking SAIF-assessable

deposit base could continue both to service the interest on FICO debt

and to capitalize the SAIF.

In response to these circumstances, Congress adopted the Deposit

Insurance Funds Act of 1996 (Funds Act), Public Law 104-208, sections

2701-2711, 110 Stat. 3009 et seq. (Sept. 30, 1996). The Funds Act

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

assessable deposits to raise the SAIF's reserve ratio to the DRR as of

October 1, 1996. Id. section 2702. The FDIC carried out this mandate.

See 61 FR 53834 (Oct. 16, 1996). The Funds Act also ended the link

between the amounts assessed by the FICO and the amounts authorized to

be assessed by the SAIF, effective January 1, 1997.

B. Statutory Framework for Setting Assessment Rates

Section 7(b)(1) of the FDI Act, 12 U.S.C. 1817(b)(1), requires the

Board to establish a risk-based assessment system for all insured

institutions. Id. 1817(b)(1)(A).

The Board must set semiannual assessments for each institution

based on the following factors: (1) The probability that the

institution will cause a loss to the BIF or to the SAIF, (2) the likely

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

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

Section 7(b)(2)(A) sets forth the requirement that the FDIC's

assessments must be designed to maintain each fund's reserve ratio at

the DRR or, if the fund's reserve ratio is below that level, to lift

the ratio to the DRR. Section 7(b)(2)(A)(i) states this requirement as

a mandate to the Board to set assessments that are sufficient to

achieve the appropriate goal. Id. 1817(b)(2)(A)(i). Section

7(b)(2)(A)(iii), as amended by section 2708(b) of the Funds Act, states

this requirement as a limitation on the amounts to be collected: The

Board may not collect more for a fund than is needed to fulfill the

appropriate goal. Id. 1817(b)(2)(A)(iii).

[[Page 67688]]

Whether a fund is capitalized at the DRR or otherwise, the Board

may set higher rates for institutions that exhibit weakness or are not

well capitalized. Id. 1817(b)(2)(A)(v).

In setting semiannual assessments for an insurance fund, the Board

must consider the following factors: (1) The fund's expected operating

expenses; (2) the fund's case resolution expenditures and income; (3)

the effect of assessments on the earnings and capital of fund members;

and (4) any other factors that the Board deems appropriate. Id.

1817(b)(2)(A)(ii).

Through the end of 1996, the FICO draw serves to reduce the amounts

that the FDIC assesses against SAIF-member savings associations. Id.

1441(f)(2) & 1817(b)(2)(D).\2\ Thereafter, the FICO assessments are

independent of and in addition to those of the FDIC. Funds Act section

2703 (a) and (c). But the FICO still must assess institutions in the

same manner as the FDIC does, and the FDIC still must approve the

FICO's assessments. 12 U.S.C. 1441(f)(2).

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\2\ Section 21(f)(2) of the Federal Home Loan Bank Act, 12

U.S.C. 1441(f)(2), provides that amounts assessed by the FICO reduce

the amounts authorized to be assessed by the FDIC for the SAIF.

Section 7(b)(2)(D) of the FDI Act, id. 1817(b)(2)(D), states a

parallel requirement. Section 2703 of the Funds Act repeals both

provisions. Section 2703(a) repeals section 21(f)(2); section

2703(b) repeals section 7(b)(2)(B).

The repeals are not simultaneous--at least, not on their face.

Section 2703(c)(1) sets an effective date for section 2703(a) of

January 1, 1997. Section 2703(c) does not mention section 2703(b).

Accordingly, section 2703(b) is--apparently--effective upon passage

of the Funds Act. If so, section 7(b)(2)(D) has been repealed since

September 30, 1996. A repeal of section 7(b)(2)(D) would have no

practical consequence, as section 21(f)(2) remains in effect through

the end of 1996.

The FDIC takes the view, however, that section 2703(c)(1)

contains a drafting error in this regard. Section 2703(c)(1) says it

applies to section 2703(a) and to section 2703(c)--that is, to

itself. The FDIC considers that the self-reference makes no sense,

and that a reference to subsection (b) was intended. Accordingly,

the FDIC interprets the Funds Act to repeal section 7(b)(2)(D) on

January 1, 1997, in concert with the repeal of the Federal Home Loan

Bank Act's parallel provisions.

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Finally, through the end of 1998, the assessment rate for a SAIF

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

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

1817(b)(2)(E).

C. The Base and Adjusted Assessment Schedules for the SAIF

1. Overview

The SAIF's reserve ratio has been well below the DRR. The SAIF

rates have been designed to increase the SAIF's capitalization to the

DRR. In accordance with the Funds Act, however, the FDIC has

capitalized the SAIF at the DRR as of October 1, 1996. The FDIC is

therefore lowering the SAIF rates as of that date. See id.

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

The FDIC is retaining the 9-cell framework for SAIF assessment

rates, but is replacing the prior set of rates with a new and lower

rate-schedule, entitled the SAIF Base Assessment Schedule. The SAIF

Base Assessment Schedule sets forth a permanent set of rates that will

remain in place until changed through notice-and-comment rulemaking

proceedings. The SAIF Base Assessment Schedule is adopted as of October

1, 1996. The SAIF Base Assessment Schedule is as follows:

SAIF Base Assessment Schedule

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

Supervisory subgroup

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

A B C

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

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

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

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

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

The FDIC is also making an immediate adjustment to the rates set

forth in the SAIF Base Assessment Schedule. The adjustment, like the

SAIF Base Assessment Schedule, is adopted as of October 1, 1996. The

adjusted rates are the ones that are effective.

The adjustment is two-fold:

--The FDIC is making a general adjustment to the SAIF Base Assessment

Schedule that lowers the rates therein by 4 basis points for all

institutions other than SAIF-member savings associations. This

adjustment is temporary, but indefinite: the FDIC expects to review it

every semiannual period, but will not necessarily modify it, nor will

the adjustment automatically terminate on its own.

--The FDIC is making a special adjustment to the SAIF Base Assessment

Schedule that replaces the rates therein with a special interim set of

rates just for SAIF-member savings associations, but only for the

fourth calendar quarter of 1996. Thereafter these institutions pay the

same SAIF rates as the others.

The SAIF Adjusted Assessment Schedule sets forth both sets of

adjusted rates. The rates on the right in each risk classification

category apply to SAIF-member savings associations during the last

calendar quarter of 1996. The rates on the left in each risk

classification category apply to all other SAIF-assessable institutions

during that quarter, and to all SAIF-assessable institutions on and

after January 1, 1997:

SAIF Adjusted Assessment Schedule

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

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

(5)Supervisory subgroup

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

Capital group

(1)A

(1)B

(1)C

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

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

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

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

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

The rates on the left in each risk classification category--those

that represent the SAIF base rates as modified by the 4-basis- point

adjustment--may be amended from time to time within certain limits by

rulemaking without notice-and-comment procedures.

The FDIC has published these rates as a proposed rule, 61 FR 53867

(Oct. 16, 1996), and has received comments from 13 entities and

organizations. Comments have come from three holding-company

organizations (including their affiliates), six savings banks, and four

trade groups. In addition, FDIC staff has conducted a briefing for

members of the Savings Association Insurance Fund Industry Advisory

Committee.

2. The SAIF Base Assessment Schedule

a. The Rate-Spread. Risk-based assessment rates have two purposes:

To reflect the risk posed to each insurance fund by individual

institutions, and to provide institutions with proper incentives to

control risk-taking. The FDIC believes that a 27-basis-point rate-

spread serves these purposes.

The FDIC has considered the comparative merits of a rate-spread of

8 basis points. In December, 1992, when the BIF and SAIF were both

below the DRR, and assessment revenues were designed to build up the

capitalization of both funds, the FDIC proposed to establish risk-based

premium matrices of 23 to 31 basis points for each fund. The Board

asked for comment on whether the proposed assessment rate spread of 8

basis points should be widened. See 57 FR 62502 (Dec. 31, 1992).

Ninety-six commenters addressed this issue; 75 of them favored a wider

rate spread. In the final rule, the Board expressed its conviction that

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

implement the 8-basis point rate spread. The Board expressed concern

that widening the spread while keeping assessment revenue constant

might unduly burden the weaker institutions that would be subject to

greatly increased rates. See 58 FR 34357, 34361 (June 25, 1993).

Bankers, banking scholars and regulators have all criticized the 8-

basis point rate-spread as being unduly

[[Page 67689]]

narrow. There is considerable empirical support for this criticism.

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

majority of relevant studies of deposit-insurance pricing have produced

results that are consistent with the conclusion that the rate-spread

between healthy and troubled institutions should exceed 8 basis points.

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

evidence that the rate-spread should be widened.3

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3 The FDIC's research also suggests that a substantially

larger spread is necessary to establish an ``actuarially fair''

assessment rate system. See Gary S. Fissel, ``Risk Measurement,

Actuarially Fair Deposit Insurance Premiums and the FDIC's Risk-

Related Premium System'', FDIC Banking Review 16-27, Table 5, Panel

B (1994).

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There also is a concern that rate differences between adjacent

cells in the current matrix do not provide adequate incentives for

institutions to improve their condition. Larger differences are

consistent with historical variations in failure rates across cells of

the matrix, as seen in the following table:

Table 1.--Historical Thrift Failure Rates by Cell

[1988-1993*]

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

Supervisory risk subgroup Not

--------------------------------- rated

Tangible capital category (as of

A B C 12/31/

87)

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

1. Well:

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

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

Failure rate............. 2.9%..... 16.3%.... 42.9%.... 20.0%

2. Adequate:

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

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

Failure rate............. 12.1%.... 27.4%.... 50.0%.... 0.0%

3. Under:

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

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

Failure rate............. 29.1%.... 52.7%.... 82.6%.... 94.6%

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

Average failure rate: 30.6%.

* Percentage of thrifts in cell at year-end 1987 that failed during 1988-

1993. These figures reflect different examination policies and

procedures than exist today. In particular, examinations may have been

relatively infrequent for some institutions during this period.

The precise magnitude of the proper rate differences is open to

debate, given the sensitivity of estimates to small changes in

assumptions and to the selection of the sample periods. But the

evidence indicates that larger rate differences between adjacent cells

of the risk-based assessment matrix are warranted.

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

insured institutions, the FDIC has performed analyses on increasing the

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

institutions already recognized as likely failures, the wider spread is

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

FDIC is therefore adopting a 27-basis point spread for members of the

SAIF.

Two trade groups express support for the rate-spread in the SAIF

Base Assessment Schedule, but without providing any extensive analysis.

No commenter opposes it.

b. The Rates. The FDIC recognizes that, in setting deposit

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

the immediate semiannual assessment period must be considered, in order

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

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

insurance system--one that attempts only to balance revenue and expense

over the current assessment period--can result in rate volatility that

would adversely impact weak institutions in periods of economic stress,

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

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

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

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

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

not especially informative. The insurance losses associated with

thrifts far exceeded insurance losses from banks during this period

both in dollars and, to an even greater extent, as a percentage of the

size of the industry. The losses prompted Congress to adopt a number of

legislative reforms that have the effect of placing thrifts in a

regulatory context that resembles that of the banks much more closely.

The FDIC has replaced the Federal Savings and Loan Insurance

Corporation (FSLIC) as insurer for the thrift industry. The Office of

Thrift Supervision, an office within the Department of the Treasury,

has replaced the Federal Home Loan Bank Board as the supervisor for

thrift institutions. Thrifts are now subject to stronger capital

standards, which are set at the same levels as required of banks.

Thrifts, like banks, now pay assessments based on risk. The losses

generated in thrift failures are limited by the same safeguards as

those that apply to bank failures--notably, the early-closure rule of

the prompt corrective action statute, the cross-guarantees among

affiliates, the least-cost resolution requirement, and the depositor-

preference statute. In view of these changes in the regulatory and

insurance environment for thrifts, the failure experience of commercial

banks is likely to be more illuminating for the purpose of estimating

future thrift losses than is the experience of the thrifts themselves.

The FDIC has recently analyzed its historical loss experience with

banks, and has considered the likely effect of recently enacted

statutory provisions that are expected to moderate deposit insurance

losses going forward. The FDIC has concluded that average assessment

rates of 4 to 5 basis points

[[Page 67690]]

are appropriate to achieve a long-run balance between BIF revenues and

expenses. See 60 FR 42680 (Aug. 16, 1995). These rates reflect the

experience of the FDIC during the period from 1950 to 1980. From 1980

through 1994, rates in the range of 10 to 13 basis points would have

been required to balance revenues and expenses: but for banks as well

as thrifts, failures during this period were attributable to

extraordinary conditions brought on by volatile interest rates,

ineffective supervision and real estate values that first soared and

then collapsed. While regulators still may not have the ability to

foresee a real estate collapse or other severe economic adversities,

the statutory and regulatory safeguards now in place are likely to

limit losses to the funds under such extreme conditions. Accordingly,

average assessment rates in the range of 4 to 5 basis points are

thought to be adequate to balance long-range revenues and expenses for

the BIF.

The FDIC considers that this range is an appropriate benchmark for

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

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

reflecting higher annual rates of deposit growth for thrifts and a

somewhat higher loss experience for the FSLIC.4 But differences

between the banking and thrift industries are less significant today

than they were in the period from 1950 to 1980; thrifts generally are

better protected than they were from the effects of interest-rate

swings; regulatory and accounting standards are more exacting; and

deposits have generally declined since 1989. The FDIC recognizes that

structural weaknesses of the SAIF, including a relatively small

membership base and geographic and product concentrations, suggest that

the appropriate SAIF assessment rate to achieve a long-range balance

may be higher than the BIF rate. Lacking a compelling empirical basis

for determining different assessment structures for the two industries,

however, the FDIC currently expects that average assessment rates of 4

to 5 basis points will likely result in a long-range balance of

revenues and expenses for the SAIF as well as for the BIF.

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

Hampton Tunis, Alternative Federal Deposit Insurance Schemes, Office

of Policy and Economic Research, Federal Home Loan Bank Board

(January 1989), at 12-20.

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The vast majority of institutions qualify for the highest

assessment risk classification, and pay assessments at the most

favorable rate; conversely, the most favorable rate generates the vast

majority of the revenues that the insurance funds receive. For the

SAIF's average assessment rates to yield 4 to 5 basis points, the most

favorable rate for the SAIF Base Assessment Schedule is set at 4 basis

points; the other rates in the schedule are set in accordance with the

rate-spreads described above.

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

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

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

Assessment Schedule are no lower than the permanent (or base) BIF rates

set forth in Rate Schedule 2.5 See id. 327.9(a).

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5 The final rule redesignates Rate Schedule 2 as the BIF

Base Assessment Schedule.

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The SAIF Base Assessment Schedule (see I.C.1. above) applies to all

institutions as of October 1, 1996. As discussed below, however, the

rates set forth in the SAIF Base Assessment Schedule are not the rates

that are actually effective as of that date.

Two trade groups and one savings bank express support for the rates

in the SAIF Base Assessment Schedule. No commenter opposes the rates.

3. The SAIF Adjusted Assessment Schedule

a. The General 4-Basis-Point Adjustment

The Board is making a general adjustment to the rates in the SAIF

Base Assessment Schedule that lowers each such rate by 4 basis points.

The adjusted rates range from 0 to 27 basis points, which yield an

average rate of 0.6 basis points (annualized) and an estimated reserve

ratio of 1.27 percent at midyear 1997, under moderate conditions.6

The adjusted rates are effective as of October 1, 1996, for all

institutions other than SAIF-member savings associations. On January 1,

1997, the adjusted rates are effective for all institutions.

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6 While the appropriate long-term average assessment

rates are 4 to 5 basis points (as discussed above), the analysis

summarized in Table 2 indicates that, under current conditions,

these rates would likely result in a reserve ratio well in excess of

1.25 percent. With no significant receivership activity and a very

liquid fund, investment earnings presently are more than adequate to

maintain the DRR.

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In setting these rates, the FDIC has considered the SAIF's expected

operating expenses and revenues, its case resolution expenditures and

income, and the effect of the new rates on the earnings and capital of

SAIF members. See id. 1817(b)(2)(A)(ii).

Expected operating expenses and revenues of the SAIF. Table 2 shows

the projected SAIF reserve ratio on June 30, 1997, under pessimistic,

optimistic and moderate conditions. The pessimistic conditions combine

relatively high loss provisions, high deposit growth and low investment

earnings; the optimistic conditions combine zero loss provisions,

negative deposit growth and high investment earnings.

Table 2 indicates that, under pessimistic conditions, an assessment

rate range of 4 to 31 basis points falls just short of maintaining the

DRR of 1.25 percent. But under moderate conditions, which can be viewed

as more likely than either the pessimistic or optimistic scenarios,

rates of 0 to 27 basis points result in a SAIF reserve ratio of 1.27

percent:

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

Conditions

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

Conditions Pessimistic Optimistic Moderate

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

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

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

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

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

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

Assessment rates (bp) Estimated reserve ratio (%) June

-------------------------------------- 30, 1997

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

Range Average Pessimistic Optimistic Moderate

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

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

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

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

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

Following is a discussion of each of the main variables affecting

the estimated reserve ratio:

Yield on investments: After having been capitalized on October 1,

1996, the SAIF's balance stood at approximately $8.6 billion. The SAIF

is very liquid, not having had any significant receivership activity.

Although FDIC policy limits the proportion of investments with

maturities beyond five years, a fully capitalized SAIF will have

significant investment earnings. Short-term interest rates have been

generally stable in 1996, and the FDIC's recent investment yield of 5.7

percent may be a reasonable approximation for the expected yield

through the first half of 1997. The investment rates utilized in Table

2 range from 5.2 percent to 6.2 percent, or 50 basis points on either

side of the recent experience. Estimated annual operating expenses are

assumed to be $40 million, the same as in 1995.7

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\7\ The FDIC presently is addressing the allocation of operating

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

proportion of expenses borne by the SAIF will increase.

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[[Page 67691]]

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

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

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

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

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

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

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

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

(annualized).

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

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

worth by the amount of the reserve.8 This reserve represents the

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

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

considerable uncertainty.

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8 The SAIF loss reserve was $114 million on June 30,

1996.

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The optimistic scenario assumes the existing reserve is adequate.

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

The pessimistic scenario has an additional loss provision of $270

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

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

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

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

the currently favorable economic conditions and the relative health of

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

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

the long-term rate.

The moderate scenario reflects the fact that the FDIC has

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

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

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

about $50 million.

The SAIF's case resolution expenditures and income. As noted above,

the SAIF has no significant receivership activity. Accordingly, case

resolution expenditures and income are negligible.

SAIF members' earnings and capital. The final rule reduces

assessment rates for all institutions that pay assessments to the SAIF,

and therefore has a beneficial impact on all such institutions'

earnings and capital.

Thrifts had record earnings and a return on assets above one

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

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

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

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

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

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

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

earnings for the fifth consecutive year.

Three commenters--2 trade groups and a savings bank--express

support for the 4-basis-point adjustment to the rates in the SAIF Base

Assessment Schedule. No commenter opposes the adjusted rates.

b. The Interim Schedule for SAIF-Member Savings Associations

The FDIC is prescribing a special interim rate-schedule for SAIF-

member savings associations for the final quarter of 1996. The interim

schedule generally retains the relationships among the assessment-risk

categories in the prior SAIF assessment schedule, but reduces each rate

in the schedule by 5 basis points. There is one exception: the rate for

institutions in the highest-risk category is only reduced by 4 basis

points, in order to comply with section 7(b)(2)(E) of the FDI Act.

These interim rates do not generate revenue for the SAIF that is in

excess of the amount needed to maintain the SAIF's reserve ratio at the

DRR. Accordingly, the interim rates do not violate the prohibition

stated in section 7(b)(2)(A)(iii) of the FDI Act. Nor are the interim

rates set so high as to impose an unreasonable burden on the SAIF-

member savings associations.

The special interim rate-schedule is needed because SAIF-member

savings associations are subject to a special requirement: they (and

only they) must pay FICO assessments for the final quarter of 1996. 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).9 This special requirement prevents the FDIC from

establishing a single rate-schedule for all SAIF-assessable

institutions. If the SAIF-member savings associations were to pay at

the general rates (as adjusted), the FICO draw would absorb all the

amounts assessed on them, and the SAIF would not be compensated for the

risks they pose. On the other hand, if all institutions were to pay

assessments at the special interim rates, the SAIF would receive

revenues far in excess of the amounts needed to preserve the SAIF's

reserve ratio at the DRR.

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

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

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

of the FICO payments by savings associations and banks essentially

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

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

FICO sharing provision to apply to semiannual periods beginning

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

FICO assessment payments prior to that date.

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Eleven commenters--five savings banks, two holding companies, and

all four trade groups--expressly consider the interim schedule. One

trade group endorses it. The other 10 commenters oppose it.

Five savings banks and two trade groups object to the interim

schedule's effects. Four savings banks and both trade groups contend

that the interim schedule is improper because the institutions that are

subject to it must pay different (and higher) rates than other

comparable institutions must pay. Two savings banks assert that, having

paid a special assessment to capitalize the SAIF as of October 1, 1996,

they should not have to sustain the burden of paying a FICO assessment

for the fourth quarter of 1996. While the FDIC recognizes that the

special interim rate-schedule has a disparate impact, the FDIC does not

agree that the interim rate-schedule is therefore discriminatory or

otherwise improper. The disparate impact merely reflects the different

statutory obligations that these institutions have with respect to the

FICO.

In essence, the FDIC's reduced rate-schedules--both for SAIF-member

savings associations and for other institutions--serve to return the

amounts that institutions have paid to the SAIF for the fourth quarter

of 1996. In the case of SAIF-member savings associations, however,

those amounts have been reduced by the FICO draw. The FICO draw is not

subject to refund: accordingly, SAIF-member savings associations

experience less of a reduction in rates than do other institutions.

Seven commenters--three trade organizations, two holding companies

and two savings banks--expressly challenge the FDIC's authority to

adopt the special interim rate-schedule. They contend that, when an

insurance fund's reserve ratio is at the DRR, the FDIC cannot impose

assessments with respect

[[Page 67692]]

to the fund. They recognize, as they must, that any sums assessed by

the FICO against SAIF-member savings associations will serve to reduce

the amounts that the SAIF is authorized to assess against those

institutions during the final quarter of 1996. But they assert that

SAIF is not authorized to impose any assessments for that quarter, and

that accordingly there are no revenues to be directed to the FICO.

The FDIC does not agree. The FDIC considers that section

7(b)(2)(A)(ii)(IV) of the FDI Act, 12 U.S.C. 1817(b)(2)(A)(ii)(IV),

provides ample authority for the special interim rate-schedule. Section

7(b)(2)(A)(ii)(IV) says that, when setting assessments for the purpose

of maintaining a fund's reserve ratio at the DRR, the Board may--

indeed, must--consider ``any other factors'' that it may deem

appropriate. The FICO draw is just such a factor. SAIF-member savings

associations must pay assessments at rates that are high enough to

cover the full amount of the FICO draw: otherwise the rates would not

generate any revenues for the SAIF at all. Moreover, every rate--even

the lowest rate--must be high enough to cover each SAIF-member savings

association's pro-rata share of the FICO draw. Otherwise institutions

in less-favorable risk classifications would bear a disproportionately

large share of the FICO draw. One consequence would be to deform the

structure of the assessment-rate schedule, because the spread between

the most-favorable rate and the other rates would be increased. Another

consequence would be to impose an extra measure of risk on the SAIF,

because the weaker institutions would have to sustain the burden of

paying higher rates. The FDIC considers that these consequences would

adversely affect its risk-based assessment program. More basically, the

FDIC considers that section 7(b)(2)(A)(ii)(IV) gives the FDIC the

necessary authority to consider and deal with these effects in

constructing the SAIF rate-schedule.

The FDIC further considers that the legal interpretation espoused

by the opponents contravenes the clear intent of Congress. The Federal

Home Loan Bank Act makes it clear that the FDIC's assessment procedures

govern the FICO's assessments. Id. 1441(f)(2). Both the Federal Home

Loan Bank Act and the FDI Act also make it clear that the FICO is to

receive (as a general matter) the full amount it needs from the

revenues generated by means of those procedures, while the SAIF is to

receive the residual amount of the revenues after the FICO draw has

been subtracted from them. See id. and 1817(b)(2)(D). The clear

expectation is that the FDIC will assess--and has full authority to

assess--amounts that are sufficient to cover the FICO draw.

By contrast, the interpretation offered by the opponents leads to a

result that is, in the FDIC's view, untenable: namely, that Congress

intended to fund the FICO only intermittently. The FDI Act has, since

1989, instructed the FDIC to set semiannual assessments ``to maintain

the reserve ratio of a fund at the designated reserve ratio''. Under

the opponents' view, that language prevents the FDIC from setting rates

sufficient to cover the FICO draw--and effectively cuts off the FICO's

power to assess SAIF-member savings associations--whenever the SAIF is

capitalized at the DRR. At the same time, however, the SAIF's reserve

ratio can be expected to fluctuate: indeed, Congress has expressly

provided for that possibility. The opponents' view thus implies a stop-

and-go funding plan for the FICO, in which the FICO's access to SAIF

assessments depends on the current status of the SAIF's capitalization.

The FDIC declines to adopt this view.

More generally, the FDIC considers that the Funds Act expresses

Congress' intention to revise the existing relationship between the

FICO and the SAIF, but not until the start of 1997. See Funds Act

section 2703(a). The FDIC considers that Congress has intended to

preserve the existing relationship through the end of 1996.

As a final note, the opponents say their view is not unreasonable

because, if the FICO has no access to assessments paid by SAIF-member

savings associations (or to any other source of funding) during the

final quarter of 1996, the exit fees now held in escrow by the Treasury

Department are available to pay the interest on the FICO's bonds. The

FDIC does not agree that the escrowed funds are available for this

purpose. These funds are to be paid to the FICO only if the Secretary

of the Treasury determines that the FICO has exhausted all other

sources of funding for its interest payments, and orders that the fees

be so paid. Id. 1815(d)(2)(E)(i)(II); see 12 CFR 312.5(d) and 312.8(f).

The Secretary has not made such a determination or issued such an

order.

Moreover, it is apparent that the FICO has no current need for

these funds. The FICO has collected its assessments for the second

semiannual period of 1996, and is entitled to retain them. The SAIF-

rate reductions merely serve the purpose of returning to each

institution the amount that the FDIC has collected from that

institution for the SAIF in excess of the amount needed to maintain the

SAIF at the DRR during the final quarter of 1996, while preserving

appropriate risk-based rates for all such institutions. Seen from this

standpoint, the SAIF-rate reductions have no effect on the FICO

assessments or on the FICO's financial condition.

Conversely, the escrowed exit fees may not be released to the SAIF

until the FDIC and the Secretary of the Treasury determine that it is

not necessary to reserve the funds for the payment of interest on the

FICO bonds. See 12 CFR 312.5(e) and 312.8(g). No such determination has

been made. On the contrary, the FDIC considers that the exit-fee

reserve serves to protect against the possibility of an interim short-

fall during the period in which the FICO's assessment procedures are

converted from those currently in effect to those prescribed for 1997

and thereafter by the Funds Act. Accordingly, the funds in the exit-fee

reserve are required for other purposes: they cannot replace the FICO

assessments due from SAIF-member savings associations for the final

quarter of 1996.

D. The BIF Assessment Schedules

The final rule publishes the rates that currently apply to BIF

members without change, except insofar as changes have been made by the

Funds Act. The final rule does not make any change of substance to the

FDIC's assessment regulation with respect to BIF rates.

1. The BIF Base Assessment Schedule

The FDIC's assessment regulation has presented the base rates for

the BIF-assessable institutions in Rate Schedule 2. The final rule

retains these base rates, and redesignates them as the BIF Base

Assessment Schedule. The BIF Base Assessment Schedule is as follows:

BIF Base Assessment Schedule

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

Supervisory subgroup

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

A B C

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

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

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

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

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

2. The BIF Adjusted Assessment Schedule

In addition, the final rule sets forth the effective BIF rates for

the second semiannual period of 1996 and the first semiannual period of

1997. These rates have been prescribed by the Board in resolutions

dated May 14 and November 26, 1996, which were issued pursuant to the

procedures in effect prior to the adoption of the final rule. See 61 FR

26078 (May 24, 1996) and id. 64609

[[Page 67693]]

(Dec. 6, 1996). The final rule presents the adjusted rates in the BIF

Adjusted Assessment Schedule, as follows:

BIF Adjusted Assessment Schedule

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

Supervisory subgroup

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

A B C

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

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

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

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

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

These adjusted rates will terminate at the end of June, 1997. The

final rule indicates that, upon termination of the adjusted rates, the

rates in the BIF Base Assessment Schedule will apply to BIF members and

other BIF-assessable institutions. The Board may adjust the rates in

the BIF Base Assessment Schedule pursuant to the procedures herein

adopted, however (see I.E. below).

The Funds Act has eliminated the minimum assessment required by

statute. Funds Act section 2708(b). The FDIC's regulations have not

stated that requirement, and the FDIC is not now retaining it.

Accordingly, neither the BIF Base Assessment Schedule nor the adjusted

rate-schedule refers to minimum assessments.

E. Procedure for Adjusting the Base Assessment Schedules

1. In General

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

increase or decrease the BIF Base Assessment Schedule without engaging

in separate notice-and-comment rulemaking proceedings for each

adjustment. 12 CFR 327.9(b).

The allowable adjustments are subject to strict limits. No

adjustment may, when aggregated with prior adjustments, cause the

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

from those set forth in Rate Schedule 2, which is the permanent or base

rate-schedule for the BIF. An adjustment may not result in a negative

assessment rate. No one adjustment may constitute an increase or

decrease of more than 5 basis points. See id. 327.9(b)(1).

The Board is modifying and clarifying this process somewhat, and

extending it to SAIF rates as well. The final rule does not change the

limits on allowable adjustments, but clarifies the following two

points.

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

establish an adjusted assessment schedule for a fund in which the

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

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

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

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

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

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

assessment schedule any more than those rates have already been

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

less than zero. The final rule makes it clear that zero serves as a

lower bound on the most favorable rate, and prevents the other rates

from being adjusted by the full 5 basis points.

2. Procedure

The final rule alters the formal mechanism by which the Board makes

adjustments to the base assessment schedules.

The prior regulation called for the Board to adopt the semiannual

assessment schedule and any adjustment thereto by means of a

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

12 CFR 327.9(b)(3). Under the final rule, the Board adopts the new

assessment schedule pursuant to a rulemaking proceeding, but still

without public notice and comment.

Consistent with the current rule, the final rule provides that an

adjustment to the base assessment schedule may not be applied only to

selected risk classifications, but rather must be applied to each cell

in the schedule uniformly. The differences between the respective cells

in the rate-schedule therefore remain constant. Similarly, adjustments

neither expand nor contract the spread between the lowest- and highest-

risk classifications.

The adjustment for any particular semiannual period is determined

by: (1) The amount of assessment income necessary to maintain the SAIF

reserve ratio at 1.25 percent (taking into account operating expenses

and expected losses and the statutory mandate for the risk-based

assessment system); and (2) the particular risk-based assessment

schedule that would generate that amount considering the risk

composition of the industry at the time. The Board expects to adjust

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

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

maintain the reserve ratio at the DRR.

Such adjustments will be adopted in a regulation that reflects

consideration of the following statutory factors: (1) Expected

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

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

determines to be relevant. The regulation will be adopted and announced

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

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

schedule is to take effect.

If the amount of the adjustment under consideration by the FDIC

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

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

proceeding.

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

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

FDIC fully recognizes and understands the concern for the possibility

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

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

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

notice and public participation with respect to an adjustment would

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

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

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

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

not after a 30-day delay.

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

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

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

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

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

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

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

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

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

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

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

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

assessment schedules every six months.

Notice-and-comment rulemaking procedures are ``unnecessary'' as a

general rule because institutions are already on notice with respect to

the benchmark rates that are set forth in the base assessment

schedules, with respect to the need for making semiannual

[[Page 67694]]

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

such adjustments. Moreover, the adjustments are limited: The FDIC may

not change a current assessment schedule by more than 5 basis points,

or deviate from the base assessment schedule by more than 5 basis

points.

Notice-and-comment rulemaking procedures also are generally

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

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

provide part of the needed information in their quarterly reports of

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

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

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

expenditures and income.

Finally, notice-and-comment rulemaking procedures are also

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

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

frequent small adjustments to the assessment rates in order to maintain

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

current as possible to generate an assessment schedule that complies

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

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

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

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

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

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

For these reasons, the FDIC has determined that any adjustment to

the base assessment schedule may be adopted as a final rule without

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

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

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

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

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

Two trade groups endorse the adjustment procedure; one of them

specifically supports the 5-basis-point limit on adjustments. No

commenters opposed the procedure.

F. Institutions That ``Exhibit Weaknesses'' or Are ``Not Well

Capitalized''

Although the FDIC may not generally collect assessments in excess

of the amounts necessary to maintain an insurance fund's reserve ratio

at the DRR (or to raise the fund's reserve ratio to the DRR), the FDIC

may continue to collect assessments from institutions ``that exhibit

financial, operational, or compliance weaknesses ranging from

moderately severe to unsatisfactory, or that are not well capitalized

as defined in [FDI Act] section 38''. Id. 1817(b)(2)(A)(v). In setting

adjusted BIF rates for the first semiannual period of 1997, the FDIC

has interpreted this clause in a manner that is consistent with the

existing framework of the risk-based assessment program. 61 FR 64609

(Dec. 6, 1996). The FDIC has now determined to formalize this

interpretation in part 327 of its rules and regulations. No commenters

addressed this aspect of the final rule.

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

assessment purposes, the FDIC classifies each institution into one of

three supervisory subgroups:

Subgroup A--Financially sound institutions with only a few minor

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

Subgroup B--Institutions that demonstrate weaknesses which, if not

corrected, could result in significant deterioration of the institution

and increased loss to the BIF or SAIF. Id. 327.4(a)(2)(ii).

Subgroup C--Institutions that pose a substantial probability of loss to

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

327.4(a)(2)(iii).

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

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

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

assessments. Moreover, the standards and definitions focus on

institutions' financial and operational activities, and with their

compliance with laws and regulations. The FDIC accordingly believes

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

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

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

moderately severe to unsatisfactory'' for assessment purposes.

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

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

deterioration of the institution and increased loss to the BIF or

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

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

substantial probability of loss to the BIF or SAIF unless effective

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

``unsatisfactory''. The FDIC is therefore interpreting section

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

supervisory subgroup B or C.

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

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

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

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

that ``significantly exceeds the required minimum level for each

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

Section 38 requires each agency to specify the relevant capital

measure at which insured depository institution is well capitalized.

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

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

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

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

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

federal banking agency. Id. 325.101(c).

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

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

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

definition applies to all insured institutions.

While the two definitions employ the same numerical ratios, part

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

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

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

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

Within the context of the assessment regulation, this kind of

consideration helps to determine an institution's supervisory subgroup,

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

is not appropriate to apply that criterion for the purpose of

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

assessment purposes. The FDIC therefore is applying part 327's current

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

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

G. Transitional Matters

1. Refunds

The FDIC has already collected the second quarterly payments for

the current semiannual period (July-December 1996). These payments were

computed at the rates in effect prior to

[[Page 67695]]

passage of the Funds Act and prior to adoption of the final rule.

Both the SAIF Adjusted Assessment Schedule and the interim rate-

schedule for SAIF-member savings associations are effective as of

October 1, 1996. In addition, Congress has repealed the minimum

assessment rate for all institutions. The final rule therefore provides

for a refund or credit of any excess amounts collected for the BIF or

the SAIF for the final quarter of 1996. Interest will accrue on the

excess amounts as of October 1, 1996.

The excess amounts will be refunded or credited in one or more

installments. The refunds and credits will be made according to the

procedures applicable to regular quarterly payments.

2. Capital Ratios

The FDIC recognizes that payment of the special assessment could

negatively impact the capital ratings of some institutions, affecting

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

risk classification for the first semiannual assessment period of 1997

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

unaffected by payment of the special assessment. But the risk

classification for the second semiannual assessment period of 1997 is

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

therefore reflects payment of the special assessment.

The FDIC has determined that, for purposes of assigning an

institution's risk classification under the risk-based assessment

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

FDIC will calculate the institution's capital as if the special

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

fluctuations. The chief basis for this determination is that the

special assessment is a one-time cost that is extraordinary in

character: It neither derives from nor necessarily implies the presence

of any adverse conditions or any procedural or managerial weaknesses in

the institution. The FDIC has therefore concluded that, taken in

isolation, the effect of the special assessment on an institution does

not automatically represent an increase in the insurance risk that the

institution poses to the SAIF as measured by the institution's capital.

The FDIC recognizes, however, that for some institutions the cost

of the special assessment could have a more lasting effect.

Accordingly, the FDIC is only calculating capital in this manner one

time. All subsequent calculations will reflect all costs incurred by an

institution.

The FDIC wishes to emphasize the point that it is excluding the

special assessment from the capital calculation only for assessment

purposes, and not for supervisory or regulatory purposes. For example,

the exclusion does not come into play for the purpose of determining

the adequacy of an institution's capital under the prompt corrective

action statute, section 38 of the FDI Act, 12 U.S.C. 1831o. Part 325 of

the FDIC's regulations, 12 CFR part 325 (Capital Maintenance),

implements section 38 and sets capital ratios equivalent to those found

in part 327. The ratios computed pursuant to part 325 will not reflect

the exclusion allowed under part 327. If the ratios indicate that

supervisory action may be warranted in a particular case, the FDIC will

inquire further into the condition of the institution, and determine

the supervisory action that is appropriate. Similarly, the exclusion

does not come into play when determining whether an institution is

``well capitalized'' within the meaning of section 29 of the FDI Act,

12 U.S.C. 1831f, which sets minimum capital requirements for

institutions that accept brokered deposits.

Two trade groups express support for the one-time relief in

computing capital ratios. One of the two suggests that the FDIC should

provide relief of this kind during the first semiannual period of 1998

on a case-by-case basis. The FDIC believes that such an extension is

unwarranted, and would be imprudent. If an institution's capital ratios

continued to be impaired for so long an interval, there would be no

basis for allowing such relief, as the institution's financial

condition would present an increased and on-going risk to the SAIF.

3. Deadlines

a. Invoices. The FDIC must generally issue invoices not less than

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

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

and comment on the final rule, however. The final rule allows the FDIC

to delay issuing the invoices for the first quarterly payment for the

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

new schedule.

b. Announcement of the Adjusted Rates. The assessment regulation

has provided that, when the Board adopts an adjustment to the base

rates by resolution, the Board must announce the adjustment and the new

rate-schedule at least 15 days before the invoice date for the first

payment of the semiannual period to which the rates will apply. For the

reasons given above with respect to the invoice date, the Board has

determined that it is appropriate to relax this requirement with

respect to the rates for the first semiannual period of 1997.

H. Effective date

The final rule is effective immediately upon adoption. The FDIC

considers that an immediate effective date is both necessary and

appropriate because the FDIC must issue invoices reflecting the new

lower rates, in order that institutions may know the amounts they are

to pay for the first quarter of 1997. By making the rule effective

immediately, the FDIC can issue the invoices as promptly as possible.

I. Technical Adjustments

The final rule updates, clarifies, and corrects various references

in part 327. For example, Sec. 327.4(a) refers to Sec. 327.9(a) and to

Sec. 327.9(c); the final rule replaces the references with a single

reference to Sec. 327.9. Section 327.4(c) speaks of institutions for

which either the FDIC or the Resolution Trust Corporation (RTC) has

been appointed conservator; the final rule eliminates the reference to

the RTC, and speaks instead of institutions for which the FDIC either

has been appointed or serves as conservator. The final rule removes the

definitions for ``adjustment factor'' and ``assessment schedule'',

which are found in Sec. 327.8(i), on the ground they are not needed.

The final rule deletes certain obsolete provisions relating to the BIF

after the BIF achieved its DRR.

II. Paperwork Reduction Act

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

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

in this rule. Consequently, no information has been submitted to the

Office of Management and Budget (OMB) for review.

III. Regulatory Flexibility Analysis

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

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

excludes ``a rule of particular applicability relating to rates'. Id.

601(2). The FDIC considers that the rule is governed by this exclusion.

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

requirements are inappropriate to this proceeding. The RFA focuses on

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

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

that is, an impact that places a disproportionate burden on small

businesses:

[[Page 67696]]

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

institutions regardless of size. Rather, it imposes an assessment that

is directly proportional to each institution's size. Nor does the rule

cause an affected institution to incur any ancillary costs of

compliance (such as the need to develop new recordkeeping or reporting

systems, to seek out the expertise of specialized accountants, lawyers,

or managers) that might cause disproportionate harm to small entities.

As a result, the purposes and objectives of the RFA are not affected,

and an initial regulatory flexibility analysis is not required.

IV. Riegle Community Development and Regulatory Improvement Act

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

Improvement Act of 1994 (Riegle Act) requires that, as a general rule,

new and amended regulations that impose additional reporting,

disclosure, or other new requirements on insured depository

institutions shall take effect on the first day of a calendar quarter.

See 12 U.S.C. 4802(b). This restriction is inapplicable because the

final rule would not impose such additional or new requirements.

Nevertheless, the final rule takes effect on January 1, 1997, in

conformity with the Riegle Act.

V. Congressional Review

As a general matter, when an agency adopts a final rule, the agency

must submit to each House of Congress and to the Comptroller General a

report containing a copy of the rule, a general statement relating to

the rule, and the rule's proposed effective date. 5 U.S.C. 801(a)(1).

The term ``rule'' excludes ``any rule of particular applicability,

including a rule that approves or prescribes for the future rates'',

however. Id. 804(3). The final rule is governed by this exclusion,

because the final rule sets assessment rates and relates to the

computations associated with assessment rates. Accordingly, the

reporting requirement of id. 801(a)(1), and the more general

requirements of id. sections 801-808, do not apply.

List of Subjects in 12 CFR Part 327

Assessments, Bank deposit insurance, Banks, banking, Financing

Corporation, Savings associations.

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

of the Federal Deposit Insurance Corporation is amending part 327 of

title 12 of the Code of Federal Regulations as follows:

PART 327--ASSESSMENTS

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

follows:

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

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

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

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

Sec. 327.3 Payment of semiannual assessments.

* * * * *

(c) First-quarterly payment--(1) Invoice. Except in the case of

invoices for the first quarterly payment for the first semiannual

period of 1997, no later than 30 days prior to the payment date

specified in paragraph (c)(2) of this section, the Corporation will

provide to each insured depository institution an invoice showing the

amount of the assessment payment due from the institution for the first

quarter of the upcoming semiannual period, and the computation of that

amount. * * *

* * * * *

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

paragraph (a) introductory text, paragraph (a)(1)(i)(A), paragraph

(a)(1)(ii)(A), and paragraph (c) to read as follows:

Sec. 327.4 Annual assessment rate.

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

the annual assessment rate for insured depository institutions under

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

``assessment risk classification''. * * *

(1) * * *

(i) * * *

(A) Except as provided in paragraph (a)(1)(i)(B) of this section,

this group consists of institutions satisfying each of the following

capital ratio standards: Total risk-based ratio, 10.0 percent or

greater; Tier 1 risk-based ratio, 6.0 percent or greater; and Tier 1

leverage ratio, 5.0 or greater. New insured depository institutions

coming into existence after the report date specified in paragraph

(a)(1) of this section will be included in this group for the first

semiannual period for which they are required to pay assessments. For

the purpose of computing the ratios referred to in this paragraph

(a)(1)(i)(A) for the second semiannual period of 1997, each such ratio

shall be computed for an institution as if the institution had retained

the funds that the institution disbursed in payment of the special

assessment prescribed by Sec. 329.41(a).

* * * * *

(ii) * * *

(A) Except as provided in paragraph (a)(1)(ii)(B) of this section,

this group consists of institutions that do not satisfy the standards

of ``well capitalized'' under this paragraph but which satisfy each of

the following capital ratio standards: Total risk-based ratio, 8.0

percent or greater; Tier 1 risk-based ratio, 4.0 percent or greater;

and Tier 1 leverage ratio, 4.0 percent or greater. For the purpose of

computing the ratios referred to in this paragraph (a)(1)(ii)(A) for

the second semiannual period of 1997, each such ratio shall be computed

for an institution as if the institution had retained the funds that

the institution disbursed in payment of the special assessment

prescribed by Sec. 327.41(a).

* * * * *

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

assessment rate applicable to institutions that are bridge banks under

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

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

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

appropriate assessment schedule prescribed pursuant to Sec. 327.9.

* * * * *

Sec. 327.8 [Amended]

4. Section 327.8 is amended by removing and reserving paragraph

(i).

5. Section 327.9 is revised to read as follows:

Sec. 327.9 Assessment schedules.

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

Sec. 327.4(c) and subpart B of this part, the base annual assessment

rate for an insured depository institution shall be the rate prescribed

in the appropriate base assessment schedule set forth in paragraph

(a)(2) of this section applicable to the assessment risk classification

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

Each base assessment schedule utilizes the group and subgroup

designations specified in Sec. 327.4(a). An institution shall pay

assessments at the rate specified in the appropriate base assessment

schedule except as provided in paragraph (b) of this section.

[[Page 67697]]

(2) Assessment schedules--(i) Base rates for BIF members. The

following base assessment schedule applies with respect to assessments

paid to the BIF by BIF members and by other institutions that are

required to make payments to the BIF pursuant to subpart B of this

part:

BIF Base Assessment Schedule

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

Supervisory subgroup

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

A B C

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

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

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

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

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

(ii) Base rates for SAIF members. The following base assessment

schedule applies with respect to assessments paid to the SAIF by SAIF

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

the SAIF pursuant to subpart B of this part:

SAIF Base Assessment Schedule

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

Supervisory subgroup

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

A B C

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

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

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

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

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

(b) Adjusted assessment schedules--(1) In general. Institutions

shall pay semiannual assessments at the rates specified in this

paragraph (b) whenever such rates have been prescribed by the Board.

(2) Adjusted rates for BIF members. (i) The Board has adjusted the

BIF Base Assessment Schedule by reducing each rate therein by 4 basis

points for the second semiannual period of 1996 and for the first

semiannual period of 1997 by resolution of the Board of Directors of

the Corporation. Accordingly, the following adjusted assessment

schedule applies to BIF members for those two semiannual periods:

BIF Adjusted Assessment Schedule

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

Supervisory subgroup

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

A B C

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

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

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

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

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

(ii) The rates set forth in paragraph (b)(2)(i) of this section

shall terminate at the end of the first semiannual period of 1997.

(3) SAIF members--(i) General reduction. Except as provided in

paragraph (b)(3)(ii) of this section, the Board has adjusted the SAIF

Base Assessment Schedule as of October 1, 1996, by reducing the rates

therein by 4 basis points. The adjusted rates are presented to the left

in each risk classification category in the schedule shown in paragraph

(b)(3)(iii) of this section.

(ii) Interim assessment schedule for SAIF-member savings

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

associations that are members of the SAIF shall pay assessments

according to the schedule in effect for such institutions on September

30, 1996, except that each rate in the schedule other than the rate for

institutions in assessment risk classification 3C shall be reduced by 5

basis points (0.05 percent), and the rate for institutions in

assessment risk classification 3C shall be reduced by 4 basis points

(0.04 percent). No rate prescribed under this paragraph (b)(3)(ii)

shall be applied for the purpose of Sec. 327.32(a)(2)(i). The rates

specified by this paragraph (b)(3)(ii) are presented to the right in

each risk classification category in the schedule shown in paragraph

(b)(3)(iii) of this section.

(iii) Adjusted rates for SAIF members. The following schedule sets

forth to the left in each risk classification category the adjusted

rate schedule that applies to SAIF members generally on and after

October 1, 1996, in accordance with paragraph (b)(3)(i) of this

section, and also sets forth to the right in each risk classification

category the rates that apply to savings associations that are members

of the SAIF from October 1, 1996, through December 31, 1996, in

accordance with paragraph (b)(3)(ii) of this section:

SAIF Adjusted Assessment Schedule

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

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

(5) Supervisory subgroup

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

Capital group

(1)A

(1)B

(1)C

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

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

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

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

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

(c) Rate adjustments; procedures--(1) Semiannual adjustments. The

Board may increase or decrease the BIF Base Assessment Schedule set

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

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

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

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

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

maintain the reserve ratio of an insurance fund at the designated

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

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

adjustments result in an assessment rate that is mathematically less

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

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

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

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

any semiannual period for a fund shall be determined by:

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

reserve ratio at the designated reserve ratio; and

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

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

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

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

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

into consideration the following:

(i) Expected operating expenses of the insurance fund;

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

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

institutions paying assessments to the insurance fund; and

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

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

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

Nevertheless, because the Corporation is generally required by statute

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

to maintain or attain the target designated reserve ratio, and because

the Corporation must do so in the face of constantly changing

conditions, and because the purpose of the adjustment procedure is to

permit the Corporation to act expeditiously and frequently to maintain

or attain the designated reserve ratio in an environment of constant

change, but within set parameters not exceeding 5 basis points, without

the delays associated with full notice-and-comment rulemaking, the

Corporation has determined that it is ordinarily impracticable,

unnecessary and not in the public interest to follow the procedure for

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

notice and public procedure thereon are not required as provided in

[[Page 67698]]

5 U.S.C. 553(b). For the same reasons, the Corporation has determined

that the requirement of a 30-day delayed effective date is not required

under 5 U.S.C. 553(d). Any adjustment adopted by the Board pursuant to

a rulemaking specified in this paragraph (c) will be reflected in an

adjusted assessment schedule set forth in paragraph (b)(2) or (b)(3) of

this section, as appropriate.

(4) Announcement. Except with respect to assessments for the first

semiannual period of 1997, the Board shall announce the semiannual

assessment schedule and the amount and basis for any adjustment thereto

not later than 15 days before the invoice date specified in

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

the adjustment shall be effective.

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

by an institution for the regular semiannual assessment for the second

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

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

from the institution for that semiannual period, the Corporation will

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

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

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

beginning as of October 1, 1996.

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

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

This interpretive rule explains certain phrases used in section

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

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

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

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

compliance weaknesses ranging from moderately severe to

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

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

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

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

By order of the Board of Directors.

Dated at Washington, D.C., this 11th day of December 1996.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Deputy Executive Secretary.

[FR Doc. 96-32113 Filed 12-23-96; 8:45 am]

BILLING CODE 6714-01-P