[Federal Register Volume 59, Number 65 (Tuesday, April 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-7939]


[[Page Unknown]]

[Federal Register: April 5, 1994]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 304

RIN 3064-AB33

 

Form, Instructions, and Reports

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Proposed rescission of rule.

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SUMMARY: The FDIC is proposing to rescind section 304.6 of its 
regulations, which currently requires all insured banks, with the 
exception of insured bankers' banks, to give the FDIC prior notice of 
planned rapid growth as a result of any ``special funding plan or 
arrangement.'' For purposes of this requirement, such a funding plan is 
an effort to increase the assets of a bank through the solicitation and 
acceptance of fully insured deposits obtained from or through the 
mediation of brokers or affiliates (that is, insured brokered 
deposits); the solicitation of fully insured deposits outside a bank's 
normal trade area; or secured borrowings, including repurchase 
agreements.
    The proposed rescission would lessen the regulatory burden on banks 
which are currently required to comply as well with the FDIC's brokered 
deposit regulation and the prompt corrective action rule, both of which 
were designed in part to address the same risks resulting from rapid 
growth. The brokered deposit regulation was mandated by the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and 
amended to conform to the Federal Deposit Insurance Corporation 
Improvement Act of 1991 (FDICIA). The prompt corrective action rule was 
mandated by FDICIA. The rapid growth rule was not mandated by any 
statute, but was authorized by the FDIC's general regulatory powers.

DATES: Comments must be received on or before May 5, 1994.

.ADDRESSES: Send comments to Robert E. Feldman, Acting Executive 
Secretary, Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429. Comments may be hand-delivered to Room F-402, 
1776 F Street, NW., Washington, DC, on business days between 8:30 a.m. 
and 5 p.m. [FAX number: (202) 898-3838.] Comments may be inspected in 
the FDIC's Reading Room, room 7118, 550 17th Street, NW., between 9 
a.m. and 4:30 p.m. on business days. FAX number: (202) 898-3838.

FOR FURTHER INFORMATION CONTACT: William G. Hrindac, Examination 
Specialist, (202) 898-6892, Division of Supervision, FDIC, 550 17th 
Street, NW., Washington, DC 20429, or Adrienne George, Attorney, (202) 
898-3859, Legal Division, FDIC, 550 17th Street, NW., Washington, DC 
20429.

SUPPLEMENTARY INFORMATION:

Background

    Although rapid growth is not necessarily an indicator of unsafe or 
unsound banking practices, and many banks have been able to manage 
rapid growth safely, rapid growth does present special risks to a bank 
(and to the FDIC's insurance fund). Because these risks warrant special 
monitoring, the FDIC adopted a rule requiring advance notice to the 
FDIC of planned rapid growth. That provision of the FDIC's regulations, 
12 CFR 304.6, known as ``the rapid growth rule,'' states that an 
insured bank may not undertake any special funding plan or arrangement 
designed to increase its assets by more than 7.5 percent during any 
consecutive three-month period without first notifying the appropriate 
FDIC regional director for supervision in writing at least 30 days 
before the implementation of the special funding plan or arrangement. A 
special funding plan or arrangement is defined as any effort to 
increase the assets of a bank through (1) the solicitation and 
acceptance of fully insured deposits obtained from or through the 
mediation of brokers or affiliates (that is, insured brokered 
deposits), (2) the solicitation of fully insured deposits outside a 
bank's normal trade area (depending upon the circumstances, these may 
be insured brokered deposits) or (3) secured borrowings, including 
repurchase agreements.
    In regulating rapid growth, the rapid growth rule in part overlaps 
both the FDIC's brokered deposit regulation, 12 CFR 337.6, and its 
prompt corrective action regulation, 12 CFR 308.200 ff. and 325.101 ff. 
Should the rapid growth rule be rescinded, the brokered deposit and 
prompt corrective action regulations will be the principal means by 
which rapid growth will be regulated. For this reason, in deciding 
whether to rescind the rapid growth rule, the FDIC examined the 
rationale and history behind all three regulations, to see if the 
FDIC's safety-and-soundness concerns will be met even if the rapid 
growth rule is rescinded.
    The rapid growth rule, adopted in 1990, replaced a regulation that 
called for the reporting of fully insured brokered deposits and fully 
insured deposits placed directly by other depository institutions. In 
the preamble to the proposed rapid growth rule, the FDIC stated that 
its intention was to broaden the prior regulation's focus from brokered 
deposits to all kinds of rapid growth, including brokered deposits:

    Since a bank may obtain its funding from a variety of sources in 
addition to brokered deposits, the FDIC believes that any effort to 
monitor and control rapid growth in insured banks should not focus 
solely or even principally on brokered deposits. Instead, the focus 
should be on rapid growth per se as an indication of the need for 
close monitoring and supervisory oversight.

54 FR 13693, April 5, 1989. The proposed rapid growth rule stated that:

an insured bank may not undertake any special funding plan or 
arrangement designed to increase its assets by more than nine 
percent during any consecutive three-month period without first 
notifying the appropriate FDIC regional director for supervision in 
writing at least 30 days in advance of the implementation of the 
special funding plan or arrangement. For purposes of this 
requirement, a special funding plan or arrangement is any effort to 
rapidly increase the assets of the bank by any means.

Id. at 13695. The final rule changed the nine percent to 7.5 percent, 
making the rule more stringent in that respect, but it narrowed the 
scope of the rule by making the notice necessary only if there was 7.5 
percent growth resulting from one or more of the following activities: 
(1) The solicitation and acceptance of fully insured deposits obtained 
from or through the mediation of brokers or affiliates (that is, 
insured brokered deposits); (2) the solicitation of fully insured 
deposits outside a bank's normal trade area (this category would 
include insured brokered deposits); or (3) secured borrowings, 
including repurchase agreements. Thus, while it is not the sole aim of 
the rapid growth rule to curb the rapid growth that may result from the 
acceptance of brokered deposits, controlling a bank's acceptance of 
brokered deposits is one of the primary aims of that rule.
    Although the rapid growth rule was not mandated by any statute, the 
history of the present brokered deposit regulation involves two 
statutes, FIRREA and FDICIA. In 1989, FIRREA amended the Federal 
Deposit Insurance Act (FDI Act), prohibiting an undercapitalized 
institution from accepting funds obtained, directly or indirectly, by 
or through any deposit broker for deposit into one or more deposit 
accounts except upon specific application to, and waiver of the 
prohibition by, the FDIC. Section 224 of FIRREA, adding section 29 to 
the FDI Act, 12 U.S.C. 1831f. In addition to deposits obtained through 
the mediation of third-party brokers, the definition of ``brokered 
deposits'' included deposits on which an institution offers or has 
agreed to pay rates of interest that are ``significantly'' higher than 
the prevailing rates of interest offered by other depository 
institutions with the same type of charter in the first institution's 
normal market area.
    Two years later, the FDI Act was amended again. This time, FDICIA 
rewrote section 29 of the Act to restrict the acceptance of brokered 
deposits by certain institutions on the basis of their capital levels. 
Section 301 of FDICIA, amending section 29 of the FDI Act and adding 
section 29A thereto, 12 U.S.C. 1831f, 1831f-1. According to FDICIA and 
the brokered deposit regulation implementing it, 12 CFR 337.6, 
undercapitalized institutions may not accept brokered deposits at all, 
and adequately capitalized institutions must obtain a waiver from the 
FDIC before they can accept brokered deposits. Further, FDICIA limits 
the interest rates which adequately capitalized institutions can pay on 
brokered deposits. Well-capitalized insured depository institutions, 
however, can accept, renew or roll over brokered deposits without first 
obtaining a waiver from the FDIC, and without being limited in the 
interest rates they can pay.
    In addition to these restrictions on brokered deposits, FDICIA also 
established a comprehensive regulatory scheme for insured depository 
institutions based on their capital levels. Section 131 of FDICIA, 
adding section 38 to the FDI Act, 12 U.S.C. 1831o. Under the ``prompt 
corrective action'' provisions of FDICIA, the statute places severe 
constraints on what undercapitalized institutions can do, including 
severe restrictions on asset growth. As explained in the regulation 
which implements section 131 of FDICIA, 12 CFR 308.200 ff. and 325.101 
ff., and which took effect on December 19, 1992, as soon as a bank 
receives notice, or is deemed to have received notice, that it is 
undercapitalized, significantly undercapitalized, or critically 
undercapitalized, the bank must restrict the growth of its assets as 
set forth in section 38(e)(3) of the FDI Act. That section of the Act 
states that an undercapitalized insured depository institution shall 
not permit its average total assets during any calendar quarter to 
exceed its average total assets during the preceding calendar quarter 
unless: (1) The appropriate Federal banking agency has accepted the 
institution's capital restoration plan; (2) any increase in total 
assets is consistent with the plan; and (3) the institution's ratio of 
tangible equity to assets increases during the calendar quarter at a 
rate sufficient to enable the institution to become adequately 
capitalized within a reasonable time. 12 U.S.C. 1831o(e)(3).
    In view of the above statutes and regulations, the FDIC is 
considering whether there is a continuing need for the rapid growth 
rule. Under the rule, the FDIC, upon being informed by a bank that it 
is about to undergo rapid growth, can engage the institution in a 
dialog as to whether such growth would be prudent and should be 
pursued. Under the brokered deposit and prompt corrective action 
regulations, restrictions on brokered deposits and rapid growth attach 
automatically to certain banks having an insufficient capital level. 
Thus, although the rapid growth rule operates somewhat differently from 
the brokered deposit and prompt corrective action regulations, the 
rapid growth rule may no longer be necessary given the existence of 
those other two regulations. For this reason, the FDIC is proposing 
that the rapid growth rule be rescinded. This action will ease the 
regulatory burden on those institutions now subject to all three rules. 
(If the FDIC rescinds the rapid growth rule, 12 CFR 304.6, it will also 
rescind the line on the table in 12 CFR 304.7, which pertains to the 
Office of Management and Budget's Control Number for the rapid growth 
rule.)

Request for Public Comment

    While the rapid growth rule overlaps the brokered deposit 
regulation and the prompt corrective action regulation, this overlap is 
only partial. For instance, rescinding the rapid growth rule would mean 
that an insured bank would no longer have to notify the FDIC before it 
either solicited fully insured deposits outside its normal trade area, 
or when it acquired secured borrowings, including repurchase 
agreements, if one or a combination of both of these activities were 
designed to increase the bank's assets by more than 7.5 percent during 
any consecutive three-month period. And while a well-capitalized bank 
planning to accept brokered deposits on a large scale would no longer 
have to inform the FDIC of this fact in advance once the rapid growth 
rule was rescinded, that bank still must report the amount of brokered 
money it has accepted after the fact in its quarterly Report of 
Condition and Income (``call report''). Also, deposit brokers must 
continue to register with the FDIC, and, if requested, could be 
required to provide data on the extent of a given bank's brokered 
deposit activities, under the brokered deposit regulation. If the rapid 
growth rule were rescinded, some of the rapid growth resulting from 
rapid growth rule activities would continue to be detected by the 
FDIC's Growth Monitoring System (a system administered by the FDIC's 
Division of Supervision which identifies rapid growth over a single 
quarter in assets or loans and long-term securities and any related 
deterioration in key performance ratios), some rapid growth would be 
controlled or prohibited by the brokered deposit rule, and some would 
be prohibited by the regulation on prompt corrective action, but a 
small part of rapid growth might not be controlled or detected at all. 
Thus, comment is sought on whether the rescission of the rapid growth 
rule would create a regulatory gap that would have harmful effects on 
banking.

Paperwork Reduction Act

    The collection of information contained in the rapid growth rule, 
which consists of the required written notice of rapid growth, has been 
approved by the Office of Management and Budget pursuant to the 
Paperwork Reduction Act (44 U.S.C. 3501 et seq.). The current estimate 
of annual reporting burden for the collection of information in this 
regulation is 1,625 burden hours. Rescission of the rapid growth rule 
would result in a saving of 1,625 burden hours a year.

Regulatory Flexibility Act

    The FDIC's Board of Directors has concluded that the proposed 
amendment, if adopted, will not impose a significant economic hardship 
on small institutions. The proposal does not establish any 
recordkeeping or reporting requirements that necessitate the expertise 
of specialized accountants, lawyers or managers. The proposal would, in 
fact, reduce the reporting requirements to which banks are presently 
subject. Rescinding the rapid growth rule will afford some insured 
banks the opportunity to conduct activities previously prohibited 
unless notice were given in accordance with the rule (for instance, the 
solicitation of fully insured deposits outside a bank's normal trade 
area, or the acquisition of secured borrowings, including repurchase 
agreements, such that one or a combination of both activities were 
designed to increase the bank's assets by more than 7.5 percent during 
any consecutive three-month period).
    The FDIC's Board of Directors therefore certifies pursuant to 
section 605 of the Regulatory Flexibility Act (5 U.S.C. 605) that the 
proposal, if adopted, will not have a significant economic impact on a 
substantial number of small entities within the meaning of the 
Regulatory Flexibility Act (5 U.S.C. 601 et seq.).

List of Subjects in 12 CFR Part 304

    Bank deposit insurance, Banks, banking, Freedom of information, 
Reporting and recordkeeping requirements.

    In consideration of the foregoing, the FDIC hereby proposes to 
amend part 304 of chapter III of title 12 of the Code of Federal 
Regulations as follows:

PART 304--FORMS, INSTRUCTIONS, AND REPORTS

    1. The authority citation for part 304 continues to read as 
follows:

    Authority: 5 U.S.C. 552; 12 U.S.C. 1817, 1818, 1819, 1820; 
Public Law 102-242, 105 Stat. 2251 (12 U.S.C. 1817 note).


Sec. 304.6   [Removed and reserved]

    2. Section 304.6 is removed and reserved.


Sec. 304.7   [Amended]

    3. In Sec. 304.7, the line in the table pertaining to Sec. 304.6 is 
removed.

    By Order of the Board of Directors.

    Dated at Washington, DC, this 22 day of March 1994.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Acting Executive Secretary.
[FR Doc. 94-7939 Filed 4-4-94; 8:45 am]
BILLING CODE 6714-01-P