Liability of Commonly Controlled Depository Institutions

FEDERAL DEPOSIT INSURANCE CORPORATION

Liability of Commonly Controlled Depository Institutions

AGENCY: Federal Deposit Insurance Corporation (FDIC).

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ACTION: Statement of policy.

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SUMMARY: The FDIC is revising its 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 from the Statement

of Policy and incorporates those same procedures into Sec. 303.245 of

the FDIC's Rules published elsewhere in today's Federal Register.

EFFECTIVE DATE: October 1, 1998.

FOR FURTHER INFORMATION CONTACT: Jesse G. Snyder, Assistant Director,

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

Counsel, Legal Division, (202) 898-3728, Federal Deposit Insurance

Corporation, 550 17th Street, N.W., Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION: In accordance with section 303(a) of the

Riegle Community Development and Regulatory Improvement Act of 1994 (12

U.S.C. 4803(a)), the FDIC conducted a systematic review of its

regulations and written policies and determined that it was appropriate

to revise the Statement of Policy. As a result of this review, the

Board of Directors of the FDIC revised the Statement of Policy

Regarding Liability of Commonly Controlled Depository Institutions to

move the application procedures for requesting a conditional waiver of

cross guaranty liability from the Statement of Policy to part 303 (12

CFR part 303). Specifically, the contents of an application for

requesting a conditional waiver of liability will be located in

Sec. 303.245. The purpose of this revision is to place virtually all of

FDIC's application procedures into one regulation to facilitate ease of

use.

The FDIC received two comments regarding the revision to the

Statement of Policy. Both of the commenters supported the FDIC's

proposal to revise the Statement of Policy.

For the above reasons, the FDIC is adopting the following revision

to the Statement of Policy:

Liability of Commonly Controlled Depository Institutions

Introduction

Section 5(e) of the Federal Deposit Insurance Act (12 U.S.C.

1815(e)), 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 reasonably 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 FDI 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 or reasonably anticipated to be 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, a conditional waiver may be

granted when requisite additional capital and managerial resources are

being provided which substantially lessen the exposure of the affected

insurance fund. When a conditional waiver is granted to an unaffiliated

acquirer of an institution in default or in danger of default it 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 may

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

acquirer 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 acquirer

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 shall

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

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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, D.C. this 7th day of July, 1998.

Federal Deposit Insurance Corporation.

James LaPierre,

Deputy Executive Secretary.

[FR Doc. 98-21490 Filed 8-19-98; 8:45 am]

BILLING CODE 6714-01-P