Liability of Commonly Controlled Depository Institutions

FEDERAL DEPOSIT INSURANCE CORPORATION

Liability of Commonly Controlled Depository Institutions

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Proposed statement of policy.

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SUMMARY: The FDIC is revising the Statement of Policy on Liability of

Commonly Controlled Depository Institutions (Statement of Policy) which

sets forth the procedures and guidelines the FDIC uses in assessing or

waiving liability against commonly controlled depository institutions

under section 5(e) of the Federal Deposit Insurance Act. The revised

Statement of Policy removes the application procedures for requesting a

conditional waiver of the cross-guaranty liability and incorporates

those same procedures into a proposed section of the FDIC's

applications regulation published for comment elsewhere in today's

Federal Register.

DATES: Comments must be received by January 7, 1998.

ADDRESSES: Send written comments to Robert E. Feldman, Executive

Secretary, Attention: Comments/OES, Federal Deposit Insurance

Corporation, 550 17th Street NW, Washington, DC 20429. Comments may be

hand delivered to the guard station located at the rear of the 17th

Street building (located on F Street), on business days between 7 a.m.

and 5 p.m. (FAX number (202) 898-3838; Internet address:

[email protected]). Comments may be inspected and photocopied at the

FDIC Public Information Center, Room 100, 801 17th Street NW,

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

FOR FURTHER INFORMATION CONTACT: Jesse Snyder, Assistant Director of

Operations, Division of Supervision (202) 898-6915, or Grovetta N.

Gardineer, Counsel, Legal Division, (202) 736-0665, Federal Deposit

Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION: Effective April 1, 1997, the Board of

Directors of the FDIC revised the Statement of Policy Regarding

Liability of Commonly Controlled Depository Institutions, 62 FR 15480.

Such liability is a consequence of section 5(e) of the Federal Deposit

Insurance Act (Act), 12 U.S.C. 1815(e), which was added by the passage

of section 206(a)(7) of the Financial Institutions Reform, Recovery,

and Enforcement Act of 1989. Section 5(e) created liability for

commonly controlled insured depository institutions for losses incurred

or anticipated by the FDIC in connection with (i) the default of a

commonly controlled insured depository institution; or (ii) any

assistance provided by the FDIC to any commonly controlled insured

depository institution in danger of default. The purpose of section

5(e) is to ensure that the assets of healthy depository institution

subsidiaries within the same holding company structure, or of a healthy

institution which controls a failing institution, will be available to

the FDIC to help offset the cost of resolving the failed subsidiary.

While the FDIC seeks to recover its losses associated with failing

institutions, it also seeks to encourage the acquisition of troubled

institutions by those capable of rehabilitating them and to avoid

instances in which the assessment of liability against an otherwise

healthy institution will cause its failure, thus exposing the FDIC and

the insurance funds to greater loss.

The revised Statement of Policy contained information regarding the

content of requests for conditional waiver of cross guaranty liability.

The revised Statement of Policy also indicated that any changes in part

303 of the FDIC's rules may necessitate further revisions to the policy

statement. The decision has been made by the FDIC that all information

regarding applications be addressed in revised part 303 of the FDIC

Rules and Regulations (Rules). Accordingly, the application procedures

for requesting a conditional waiver of cross guaranty liability are

being moved to part 303. The appropriate section of part 303 that

discusses conditional waiver applications will be referenced in the

revised Statement of Policy.

The Statement of Policy provides for the issuance of a Notice of

Assessment of Liability, Findings of Fact and Conclusions of Law, an

Order to Pay and a Notice of Hearing, a good faith estimate of the

FDIC's loss, and the determination of the method and schedule of

repayment. The liability under the statute attaches at the time of

default of a commonly controlled depository institution. The FDIC, in

its discretion, may assess liability for the losses incurred by the

default or for any assistance provided by the FDIC to a commonly

controlled institution in danger of default. Generally, liability

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will be assessed against an institution except in instances of the

acquisition of a distressed institution by an unaffiliated entity prior

to the default of a commonly controlled institution. A conditional

waiver of the liability will be considered when, as determined within

the sole discretion of the Board of Directors of the FDIC, the

exemption is in the best interests of either of the insurance funds

administered by the FDIC or where a waiver facilitates an alternative

that is in the best interests of the FDIC. Institutions that believe

that an assessment of liability would be inappropriate are required to

submit supporting documentation. The contents of an application for

requesting a conditional waiver of liability will be located in

proposed Sec. 303.245 of the FDIC's Rules, 12 CFR 303.245. Commenters

are invited to review the proposed Statement of Policy in conjunction

with proposed Sec. 303.245 published elsewhere in today's Federal

Register.

For the above reasons, the FDIC proposes the following Statement of

Policy:

Liability of Commonly Controlled Depository Institutions

Introduction

Section 5(e) of the Federal Deposit Insurance Act, as added by

section 206(a)(7) of the Financial Institutions Reform, Recovery, and

Enforcement Act of 1989, creates liability for commonly controlled

insured depository institutions for losses incurred or anticipated by

the Federal Deposit Insurance Corporation (FDIC) in connection with:

(i) The default of a commonly controlled insured depository

institution; or (ii) any assistance provided by the FDIC to any

commonly controlled insured depository institution in danger of

default. In addition to certain statutory exceptions and exclusions

contained in sections 5(e)(6), (7) and (8), the Act also permits the

FDIC, in its discretion, to exempt any insured depository institution

from this liability if it determines that such exemption is in the

``best interests of the Bank Insurance Fund or the Savings Association

Insurance Fund''.

The liability of an insured depository institution attaches at the

time of default of a commonly controlled institution. It is completely

within the discretion of the FDIC whether or not to issue a notice of

assessment to the liable institution for the estimated amount of the

loss incurred by the FDIC.

Guidelines for Conditional Waiver of Liability

The FDIC may, in its discretion, choose not to assess liability

based upon analysis of a particular situation, and it may entertain

requests for waivers from affiliated or unaffiliated parties of an

institution in default or in danger of default. The determination of

whether an exemption is in the best interests of either insurance fund

rests solely with the Board of Directors of the FDIC (Board). Should

the Board make such a determination, a waiver will be issued setting

forth terms and conditions that must be met in order to receive an

exemption from liability (conditional waiver of liability). The

following guidelines apply to conditional waivers of liability under

the provisions of this section:

(1) A conditional waiver of liability will be considered in those

cases where the waiver facilitates an alternative that would be in the

best interests of the FDIC; for example, the conditional waiver may be

granted when requisite additional capital and managerial resources are

being provided which substantially lessen exposure to the affected

insurance fund. When conditional waivers are granted to an otherwise

unaffiliated acquire of a failing or failed institution they will be

granted for a fixed period, generally not to exceed a period of time

reasonably required for existing problems to be identified and

resolved.

(2) If one or more institutions in a commonly controlled

relationship is otherwise solvent, well-managed and viable, it may be

in the best interest of the FDIC to waive or reduce claims against such

entities. In determining whether a conditional waiver is appropriate,

consideration will be given to actions of a holding company which

contribute to or diminish the FDIC's losses, as well as proposals to

strengthen other weakened institutions, if any.

(3) Procedures to request a conditional waiver of liability are

contained in Sec. 303.245 of the FDIC's Rules and Regulations, 12 CFR

303.245.

(4) In cases where an insured depository institution is sold to an

acquire with no financial interest, directly or indirectly, in the

institution prior to the acquisition, it is the general policy of the

FDIC to forego the issuance of a notice of assessment to the acquire

and its affiliated institutions in the event of a default of an insured

depository institution formerly affiliated with the acquired

institution. The FDIC will review all such transactions prior to making

a final determination to forego the issuance of the notice of

assessment.

Guidelines for Assessment of Liability

Whenever the FDIC determines that assessment of liability in

connection with a commonly controlled insured depository institution(s)

is appropriate, a Notice of Assessment of Liability, Findings of Fact

and Conclusions of Law, Order to Pay, and Notice of Hearing (Notice of

Assessment) will be served upon the liable institution. In assessing

the amount of the FDIC's loss and the liable institution(s) method of

payment, the following guidelines shall apply:

(1) A good faith estimate of the amount of loss the FDIC will incur

shall be based upon (a) the actual sale or calculation of loss from a

review by the FDIC of the assets and liabilities of the institution

prior to default or the granting of assistance; or (b) any other cost

estimate bases as explained in the Notice of Assessment.

(2) If there is more than one commonly controlled depository

institution to be assessed, each such institution is jointly and

severally liable for all losses; however, the FDIC shall make a good

faith estimate of the liability of each institution as determined by

(a) first assessing an initial amount on a pro rata capital basis that

brings about parity in the capital ratios of the liable institutions

and (b) then apportioning any residual assessment on a pro-rata size

basis utilizing the most recent Report of Condition. Any final

assessment can be based on the estimated liability of each institution

by the FDIC and/or negotiations with the liable institutions.

(3) In the event that any liable institution is closed prior to

paying an assessment, the amount assessed or to have been assessed

against that institution may be assessed against the remaining liable

institution(s).

(4) The FDIC, after consulting with the appropriate Federal and

State financial institutions regulatory agencies, shall establish in

each case a schedule for payment which may include a lump sum

reimbursement, as well as procedures for receipt of such payment.

(5) Once liability has attached, the FDIC will consider information

similar to that provided with a request for a conditional waiver of

liability in determining the amount of the estimated loss to be

assessed. Such information may also include suggested payment plans.

By order of the Board of Directors.

Dated at Washington, DC, this 23rd day of September, 1997.

[[Page 52886]]

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

[FR Doc. 97-26231 Filed 10-8-97; 8:45 am]

BILLING CODE 6714-01-P