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FIL-40-96 Attachment B

[Federal Register: May 24, 1996 (Volume 61, Number 102)]

[Rules and Regulations]

[Page 26083-26088]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]



 

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[[Page 26083]]



 

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327


 

 

Assessments; Retention of Existing Assessment Rate Schedule for

SAIF-Member Institutions


 

AGENCY: Federal Deposit Insurance Corporation (FDIC).


 

ACTION: Confirmation of assessment rate.


 

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SUMMARY: On May 14, 1996, the Board of Directors of the FDIC (Board)

adopted a resolution to retain the existing assessment rate schedule

applicable to members of the Savings Association Insurance Fund (SAIF)

for the semiannual period beginning July 1, 1996. As a result of this

action, the SAIF assessment rates to be paid by depository institutions

whose deposits are subject to assessment by the SAIF will continue to

range from 23 cents per $100 of assessable deposits to 31 cents per

$100 of assessable deposits, depending on risk classification.


 

EFFECTIVE DATE: July 1, 1996, through December 31, 1996.


 

FOR FURTHER INFORMATION CONTACT: James R. McFadyen, Senior Financial

Analyst, Division of Research and Statistics, (202) 898-7027; Christine

E. Blair, Financial Economist, Division of Research and Statistics,

(202) 898-3936; Christopher L. Hencke, Counsel, Legal Division, (202)

898-8839; Federal Deposit Insurance Corporation, 550 17th Street NW.,

Washington, D.C., 20429.


 

SUPPLEMENTARY INFORMATION:


 

I. Confirmation of Assessment Rate


 

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

1817(b), provides that the Board shall set semiannual assessments for

insured depository institutions. For members of the undercapitalized

SAIF, the Board must set assessment rates to increase the reserve ratio

of the SAIF to the designated reserve ratio (DRR) of 1.25 percent of

estimated insured deposits. 12 U.S.C. 1817(b)(2)(A)(i). The Board must

consider SAIF's expected operating expenses, case resolution

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

and capital, and any other factors that the Board may deem appropriate.

12 U.S.C. 1817(b)(2)(A)(ii).

The minimum semiannual assessment for each member is $1,000. 12

U.S.C. 1817(b)(2)(A)(iii). Moreover, the total amount raised by SAIF

assessments must not be less than the total amount that would be raised

by a rate of 18 basis points. 12 U.S.C. 1817(b)(2)(E). The assessment

revenue is subject to a priority claim by the Financing Corporation

(FICO). 12 U.S.C. 1817(b)(2)(D).

In accordance with the statutory requirements above, the Board

adopted the SAIF assessment rate schedule codified at 12 CFR

327.9(d)(1). The Board has applied this schedule in previous assessment

periods as well as the current period from January 1, 1996 through June

30, 1996. 60 FR 63406 (December 11, 1995). The Board has now decided to

retain this schedule for the upcoming semiannual period from July 1,

1996 through December 31, 1996.


 

II. Basis for Confirmation


 

In setting assessment rates, the Board must increase the reserve

ratio of the SAIF to the DRR of 1.25 percent of estimated insured

deposits. On December 31, 1995, the SAIF had a balance of nearly $3.4

billion and a reserve ratio of 0.47 percent of insured deposits, about

$5.5 billion below the amount needed to meet the DRR. The SAIF reserve

ratio continues to rise, but the rate of progress is slowed by the

diversion of assessment revenues to other statutory purposes. Since the

inception of the SAIF in 1989, these diversions have totaled $7.7

billion. Without these diversions, the SAIF would be fully capitalized

today. Some of these demands on the SAIF have been fully satisfied, but

FICO continues to have an annual draw of up to $793 million against

SAIF assessments, until 2019.

The SAIF grew by $1.4 billion in 1995, but a large share of that

growth--$321 million--stemmed from the reduction in loss reserves for

anticipated failures. These reductions in loss reserves reflect recent

improvements in the health of the thrift industry and a decline in

projected thrift failures. Further reductions in reserves of this

magnitude will not happen again because the remaining loss reserves are

now only approximately $111 million.

At the present pace and under reasonably optimistic conditions, the

SAIF is not expected to meet the DRR until 2001, which is slightly

ahead of the capitalization date projected last year. The acceleration

of the capitalization date is attributable to lower-than-expected loss

experience in 1995 and the lowering of loss projections for 1996 and

1997. The thrift industry is healthy today, and no large thrifts are

expected to fail in the near future. Thrifts earned record profits of

$7.6 billion in 1995, and the number and assets of ``problem'' thrifts

continue to decline. Presently, 88 percent of all SAIF members qualify

for the lowest premium under the FDIC's risk-based assessment system.

However, it is not known how much longer the present favorable

conditions can continue, and it would be prudent for the SAIF to be

fully capitalized as quickly as possible to be prepared for future

uncertainties.

The Board has the option of lowering SAIF assessment rates to a

minimum average annual assessment rate of 18 basis points until January

1, 1998, at which time rates must return to a minimum average annual

assessment rate of 23 basis points until the DRR is attained. However,

the lowering of rates for this 18-month period would delay the SAIF

from reaching full capitalization and could result in a FICO default in

1997.

Other developments have threatened the stability of the SAIF. Given

the recapitalization of the Bank Insurance Fund (BIF) in 1995, the

Board subsequently lowered BIF premiums to an average of just 0.3 basis

points, compared to the average SAIF premium of 23.4 basis points. This

disparity between BIF and SAIF premiums of about 23 basis points

provides powerful economic incentives for SAIF-insured institutions to

reduce their SAIF-assessable deposits. Despite a general ban on

conversions between insurance funds, thrifts have developed and are

pursuing means to transfer deposits from SAIF to BIF insurance or

otherwise reduce their reliance on SAIF-assessable deposits. During

1995, for example, one large SAIF member shifted an estimated $3.4

billion in deposits to a BIF-member affiliate, and another thrift took

advantage of an Oakar accounting anomaly that caused $3.3 billion of

SAIF deposits to be reclassified as BIF deposits following the sale of

BIF-insured deposits.

The migration of deposits out of the SAIF deposit base would

accelerate the capitalization of the SAIF (see Table 2), but it would

exacerbate the problems facing the SAIF by reducing the fund's ability

to diversify its risks. It is likely to be the stronger SAIF members

that will be successful in shifting deposits to the BIF. As a result,

weaker thrifts and the banks that own SAIF deposits would be more

exposed to the losses of an insurance fund that will have a higher risk

profile.

If the Board were to lower SAIF assessment rates to 18 basis

points, it would reduce the premium disparity from 23 basis points to

18 basis points, but it is unlikely that a temporary reduction of 5

basis points would temper the existing incentives to reduce reliance on

SAIF-assessable deposits. Moreover, a reduction in assessment rates, in

combination with a shrinking assessment base, would hasten a FICO

shortfall (see Tables 3 and 4).


 

[[Page 26084]]


 

In recommending that SAIF assessment rates remain unchanged, the

Board has considered the impact on the earnings and capital of SAIF

members and found no unwarranted adverse effects. As discussed earlier,

the earnings and capital of SAIF members are satisfactory though the

Board has recognized that the full impact of the premium disparity may

not yet be realized.

Pending enactment of a comprehensive legislative solution to the

problems facing the SAIF, the FDIC must operate within the existing

statutory framework. For the reasons discussed above, the Board has

decided to retain the current SAIF assessment rate schedule of 23 to 31

basis points in order to enable the SAIF to reach full capitalization

as quickly as possible. The schedule to be applied for the semiannual

period from July 1, 1996, through December 31, 1996, is codified at 12

CFR 327.9(d)(1).


 

By order of the Board of Directors.


 

Dated at Washington, D.C., this 14th day of May, 1996.


 

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Deputy Executive Secretary.


 

BILLING CODE 6714-01-P


 

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[FR Doc. 96-12884 Filed 5-23-96; 8:45 am]

BILLING CODE 6714-01-C

Last Updated: March 24, 2024