[Federal Register Volume 59, Number 192 (Wednesday, October 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24607]


[[Page Unknown]]

[Federal Register: October 5, 1994]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

RIN 3064-AB46

 

Assessments

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Advance Notice of Proposed Rulemaking.

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SUMMARY: The Board of Directors (Board) of the Federal Deposit 
Insurance Corporation (FDIC) is seeking comment on whether the deposit-
insurance assessment base currently provided for in the FDIC's 
assessments regulations should be redefined and, if so, how. Because of 
recent statutory amendments and other developments affecting insured 
depository institutions, the Board believes review of the assessment-
base definition is desirable at this time. The FDIC will carefully 
consider comments received in response to this Advance Notice of 
Proposed Rulemaking (Notice) in determining whether revision of the 
assessment base is warranted. If the Board finds revision to be 
warranted, it will propose specific amendments on which public comment 
will then be invited.

DATES: Written comments must be received by the FDIC on or before 
February 2, 1995.

ADDRESSES: Written comments are to be addressed to the Office of the 
Executive Secretary, Federal Deposit Insurance Corporation, 550--17th 
Street, NW, Washington, DC 20429. Comments may be hand-delivered to 
Room F-400, 1776 F Street, NW, Washington, DC 20429, on business days 
between 8:30 a.m. and 5 p.m. (FAX number: (202) 898-3838). Comments 
will be available for inspection in room 7118, 550--17th Street, NW, 
between 9 a.m. and 4:30 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: William Farrell, Chief, Assessment 
Management Section, Division of Finance, (703) 516-5546; Christine 
Blair, Financial Economist, Division of Research and Statistics, (202) 
898-3936; Martha Coulter, Counsel, Legal Division (202) 898-7348; 
Federal Deposit Insurance Corporation, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Introduction

    The insurance premiums paid by an insured depository institution to 
the FDIC are calculated by multiplying the institution's assessment 
base by its assessment rate. At present, an institution's assessment 
base equals its total domestic deposits, as adjusted for certain 
elements. 12 CFR 327.4(b).
    Prior to January 1, 1994, the assessment base was defined by 
section 7(b) of the Federal Deposit Insurance Act (FDI Act), 12 U.S.C. 
1817(b). In amending section 7(b) to require the establishment of a 
risk-based deposit insurance system, section 302 of the Federal Deposit 
Insurance Corporation Improvement Act (FDICIA) (Pub. L. 102-242, 105 
Stat. 2236, 2345) removed the statutory assessment-base provisions. As 
a result, effective January 1, 1994, the assessment base is now 
governed by the FDIC by regulation. At present, the FDIC's assessment-
base regulations continue to be based on the former statutory 
provisions.
    In light of the recent transition to a risk-based deposit insurance 
system, the FDIC believes that it is desirable to review the existing 
assessment base. In the Board's view, it is important to determine 
whether the existing definition or some alternative definition more 
effectively furthers the purposes of the new deposit insurance system. 
In addition, a number of other significant developments in the 
financial services industry in recent years--including substantially 
higher deposit insurance rates and the resulting heightened awareness 
of insurance assessments, significant changes in the activities of 
insured depository institutions, adjustments in federal failure-
resolution policies, and Congressional adoption of ``depositor 
preference'' requirements--also support the desirability of such a 
review.
    Through this Notice, the FDIC seeks comment from all interested 
persons as to whether the assessment base should be redefined and, if 
so, how. The FDIC believes that it is important to review the 
definition of the assessment base from as many different perspectives 
as possible. Accordingly, this Notice poses various specific questions 
on which comment is sought. Commenters are requested to identify the 
question number to which their respective responses correspond. 
Questions need not be repeated, and interested persons are invited to 
respond to as many questions as they wish. Further, comment is 
requested on issues not specifically addressed in this Notice but which 
a prospective commenter considers pertinent to the definition of the 
assessment base.
    The FDIC will carefully review and consider the comments received 
in response to this Notice in determining whether to propose a 
regulatory amendment redefining the assessment base. Should the Board 
decide that such an amendment is warranted, it will issue a proposal to 
adopt specific changes to the assessments regulations and seek public 
comment on that proposal.

II. Background

    The assessment base has remained substantially unchanged since 
1935. Historically, the assessment base for banks and thrift 
institutions has been defined, broadly stated, as total domestic 
deposits. The existing assessment base, as defined in 12 CFR 327.4(b), 
begins with the amount of the ``demand deposits'' and ``time and 
savings deposits'' reported by an insured institution in its quarterly 
Report of Condition.\1\ From these amounts, the regulations provide for 
additions and subtractions.
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    \1\For banks, this report is called the Report of Income and 
Condition; for thrift institutions, the Thrift Financial Report; and 
for insured branches of foreign banks, the Report of Assets and 
Liabilities of U.S. Branches and Agencies of Foreign Banks.
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    Among the additions to ``demand deposits'' and ``time and savings 
deposits'' are adjustments for unposted credits. Among the subtractions 
are adjustments for unposted debits; pass-through reserve balances; a 
16\2/3\ percent ``float'' allowance for demand deposits and a 1 percent 
``float'' allowance for time and savings deposits; and the amount of 
any liabilities arising from depository institution investment 
contracts under section 11(a)(8) of the FDI Act.\2\
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    \2\Subtraction for the last item, or certain so-called ``BIC'' 
liabilities, was included by an amendment to 12 CFR 327.4(b) 
effective July 11, 1994. See 59 FR 29714 (June 9, 1994).
    The remaining adjustments provided for in 12 CFR 327.4(b) (such 
as additions for demand deposits that represent uninvested trust 
funds) are technical in nature and are included to adapt certain 
elements of the Reports of Condition for assessment purposes.
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    Until 1993, the premium rate by which an institution's assessment 
base was multiplied to determine its assessment payment was the same 
for all banks and the same for all thrifts. Beginning in January 1993, 
each institution is now assigned an assessment rate based on the risk 
that institution poses to its deposit insurance fund.
    As assessment rates have risen over the past few years, deposit 
insurance premiums have become a significant expense item for insured 
depository institutions. The expense factor has resulted in 
institutions and their depositors questioning the relevance of the 
existing assessment base in the current environment. In addition, 
increased rates have caused some institutions to take deliberate steps 
to decrease their assessments by temporarily reducing their deposits at 
quarter end.
    Also in recent years, there have been significant changes in the 
activities of insured depository institutions, in terms of reported 
assets and liabilities as well as off-balance-sheet operations 
(including derivative products such as options, swaps, interest-rate 
and foreign-exchange-rate contracts). Such changes, which to some 
extent have eroded the historical connection between deposits and 
lending, give rise to the question of whether total domestic deposits 
continues to be a meaningful definition for the assessment base. Other 
relevant developments include adjustments in federal failure-resolution 
policies and the adoption of ``depositor preference'' requirements.
    This section discusses the applicability of these developments to 
the question of whether the assessment base should be redefined. The 
areas addressed in this regard are the role of the assessment base in 
the risk-related deposit insurance system, the assessment-avoidance 
problem, failure- resolution policies, and depositor preference. The 
following discussions on these topics identify what the FDIC believes 
to be important issues that merit careful consideration in deciding on 
an assessment-base definition. Comment is requested with regard to how 
the assessment base should be defined in order to address these and 
other issues in an appropriate manner.
    Before turning to these topics, however, the FDIC wishes to stress 
that, in reviewing the definition of the assessment base, it is not the 
FDIC's intent to change the total dollar amount of assessments 
collected. Instead, the goal is to select an assessment base that best 
suits the purposes of federal deposit insurance. To the extent any 
decrease or increase in assessment income is warranted, the FDIC 
anticipates that it would achieve that decrease or increase by changing 
the assessment rates, and not by redefining the assessment base. In 
short, the amount of total assessment collections a particular 
assessment base definition would yield (assuming no change in the 
assessment rates) is not a criterion the FDIC intends to apply in 
deciding on an assessment-base definition, since assessment collections 
can be fairly readily adjusted by changing assessment rates.
    While the FDIC does not intend any redefinition of the assessment 
base to have a significant impact on the total amount of assessments 
industry-wide, there is a potential for significant change in the 
assessments paid on an institution-by-institution basis. Depending on 
the type of activities in which a particular institution is engaged, 
and the type of products and services it offers, a change in the 
assessment base could have a significant effect on the amount of the 
assessments it pays.

A. Risk-Based Assessment System

    Section 302 of FDICIA amended section 7 of the FDI Act to require 
that the FDIC establish a risk-based assessment system. Under the 
system mandated by FDICIA, the amount of an institution's assessment is 
to be based on the likelihood that its deposit insurance fund will 
incur a loss with respect to the institution, the likely amount of any 
such loss, and the revenue needs of the insurance funds. Under the 
risk-based system adopted by the FDIC pursuant to section 302, the rate 
component of the insurance system was changed from a single, flat rate 
applicable to all banks and a single, flat rate applicable to all 
thrift institutions to a risk-based rate structure.
    Having already addressed the rate component of the new risk-based 
assessment system in previous rulemaking proceedings, the FDIC is now 
turning its attention to the assessment-base component. This Notice 
does not revisit the matter of the rate structure.
    At present, the assessment-base component of the risk-based system 
remains unchanged from the form required by statute for the former 
flat-rate insurance system. One issue to be considered in connection 
with whether the assessment base should now be changed is how and to 
what extent the assessment base should reflect the risk factors 
identified in section 7(b) of the FDI Act, as amended by section 302 of 
FDICIA.
    For example, among the risks identified in section 7(b) are those 
attributable to ``different categories and concentrations of 
liabilities, both insured and uninsured * * *.'' 12 U.S.C. 
1817(b)(1)(C)(i)(II). One area of risk taken into account in the 
existing assessment base is that involving deposit liabilities. 
Potentially, the assessment base could be modified to take into account 
other ``categories'' of liabilities, such as non-deposit, secured 
liabilities. This example is discussed more fully in paragraph C of 
section IV, below.

B. Assessment Avoidance

    Whatever assessment base is applied, the FDIC believes that, in 
order to avoid imposing any additional regulatory burden on insured 
institutions, it is desirable to continue to collect assessment data 
from institutions in their quarterly Reports of Condition. If the 
assessment-base definition is changed, the information collected for 
assessment purposes by the Reports of Condition might also need to be 
changed.
    At present, the data collected in these reports reflect amounts 
``as of'' the report date. This has caused some institutions 
purposefully to reduce their assessment expenses by temporarily 
reducing the amount of the deposits held on the report date.
    It has been suggested that defining the assessment base in terms of 
a daily average over the quarter (that is, total dollars for the 
quarter divided by the number of days in the quarter), rather than 
actual ``as of'' report-date data, would mitigate this assessment-
avoidance problem. An averaging approach would also help to smooth out 
the effects of unusual occurrences such as misdirected wire transfers 
and the receipt, on or just before the report date, of abnormally large 
deposits to be held only briefly by an institution.

C. Failure-Resolution Policies

    In past years, governmental policies for resolving failed or 
failing depository institutions frequently provided protection for 
liabilities not specifically covered by federal deposit insurance. 
First, through the use of all-deposit purchase-and-assumption (P&A) 
transactions, all depositors--insured and uninsured alike--often 
received full protection for their deposit balances. Unlike a deposit 
payoff or an insured-deposit transfer, in which only insured deposits 
were covered (and which were used only when there was no acceptable bid 
for an all-deposit P&A), the all-deposit P&A allowed for de facto 100-
percent insurance protection. The protection of all depositors in the 
resolution of several large bank failures contributed to the perception 
that some banks were ``too big to fail'' and thus eligible for de facto 
100-percent insurance protection for all deposits, both domestic and 
foreign.
    While the use of all-deposit P&As and application of the so-called 
``too big to fail'' doctrine often resulted in protection for 
liabilities beyond the statutory limit for deposit insurance coverage, 
in all such cases it did so in satisfaction of a cost test or for clear 
policy objectives such as maintaining the stability of, and public 
confidence in, the banking system. Specifically, the FDI Act required 
that, subject to an ``essentiality'' exception, the resolution of an 
institution be no more costly to the FDIC than its liquidation. Hence, 
the FDIC could normally effect an all- deposit P&A only if the purchase 
premium paid by the acquirer for the transaction offset the additional 
cost to the FDIC of protecting uninsured liabilities, in comparison 
with the cost of a liquidation. In the handful of ``too big to fail'' 
cases where this cost test was not met, the FDIC acted under a 
statutory exception to the cost test based on the ``essentiality'' of 
the failing institution to the marketplace. That exception was used 
only in a small minority of the total number of resolutions the FDIC 
effected.
    Still, the de facto protection of uninsured liabilities fueled the 
argument that such protected liabilities should be assessed. Since the 
assessment base already consisted (as it still does) generally of total 
domestic deposits, the universe of non-assessed liabilities was limited 
to foreign deposits and non-deposit liabilities.
    Section 141(a) of FDICIA amended section 13(c) of the FDI Act to 
impose a revised test for failure resolution. Instead of requiring that 
the resolution be no more costly than liquidation, the new test 
requires use of the resolution method that is least costly to the 
affected deposit insurance fund. Provisions for present-value analyses 
and documentation are specified in order to determine the least-costly 
resolution method. The FDIC may not protect uninsured deposits unless 
it is less costly to provide such protection than not to do so. 
Further, the FDIC is prohibited from pursuing any action, directly or 
indirectly, that would have the effect of increasing losses to the 
insurance fund by protecting foreign deposits (generally meaning 
deposits payable only outside the United States). Hence, all-deposit 
P&A transactions are still permitted, provided the insurance fund does 
not incur any loss with respect to such deposit liabilities in an 
amount greater than the loss which would have been incurred with 
respect to such liabilities if they had not been assumed by the 
acquirer.
    The perceived ``too big to fail'' doctrine has been replaced by a 
new statutory exception for situations involving ``systemic risk''. In 
such cases--as determined by consensus among the FDIC, the Board of 
Governors of the Federal Reserve System, and the Secretary of the 
Treasury (in consultation with the President)--the FDIC may take action 
or provide assistance as necessary to avoid or mitigate the systemic 
effects of failure. However, the FDIC is required to recover the losses 
incurred under the systemic risk exception through one or more special 
assessments on the members of the affected insurance fund. As yet, this 
exception has not been used.
    The net result going forward is that for any individual resolution, 
protection will be provided only for insured deposits unless it is less 
costly to protect uninsured deposits as well. In any instance (expected 
to be quite rare) in which the ``systemic risk'' exception might be 
triggered, the FDIC is required to recover the loss to the applicable 
deposit insurance fund by means of a special assessment on the members 
of that fund.
    It has been argued in the past that the assessment base should be 
expanded beyond total domestic deposits in order to conform the base to 
the actual protections provided by the FDIC under the failure-
resolution policies. However, many now believe that, given the new 
failure-resolution policies, this rationale for expanding the base has 
been weakened. (Of course, a shrinking of the assessment base might be 
viewed as warranted under the failure-resolution requirements, or an 
expansion might be warranted for other reasons.)

D. Depositor Preference

    In August 1993, Congress enacted legislation establishing the 
priority order for payment on claims against an institution in 
receivership. As amended by this legislation, section 11(d)(11) of the 
FDI Act now provides for the priority of deposit liabilities of the 
institution over other general or senior liabilities. (Subject to the 
cross-guarantee provisions of section 5(e) of the FDI Act, claims with 
priority over deposit liabilities are secured claims to the extent of 
the security, and administrative expenses of the receiver.) This 
situation raises the question of whether, or to what extent, the 
assessment base should reflect the protection granted by this provision 
to uninsured deposits.

III. Analytical Framework

A. Evaluation Criteria

    It is the FDIC's intention to apply an assessment base definition 
that addresses the requirements of the deposit insurance program over 
the long run, rather than one designed only to respond to the current 
conditions in the banking industry. To this end, the FDIC has 
identified certain characteristics that it believes can be used as 
criteria for analyzing and comparing alternative definitions. These 
criteria, which address the issues and concerns discussed in the 
preceding section, are outlined below. They are applied in the final 
section of this Notice as a framework for analyzing various alternative 
assessment-base definitions.
    In the questions at the end of this section, comment is sought on 
the usefulness of these criteria in selecting an assessment-base 
definition, as well as on whether additional or alternative criteria 
should be applied.
1. Fairness
    This criterion refers to the extent to which institutions are 
neither systematically favored nor systematically disadvantaged due to 
factors such as size and geographic location. Under this concept of 
fairness, similar institutions operating under similar circumstances, 
and representing similar risks of failure and magnitude of potential 
loss to the insurance fund, would generally incur similar insurance 
costs.
    Fairness may suggest that claims receiving potentially equal 
protection in the event of a failure be assessed equally. Similarly, 
since there are varying degrees of protection for different categories 
of claims, it could be argued that fairness demands higher assessment 
payments for greater degrees of protection.
    Fairness may also refer to the extent to which abnormal 
occurrences, such as the receipt at quarter end of an unusually large 
deposit to be held only briefly by the institution, affect the amount 
of an institution's assessments. In this regard, fairness may suggest 
that the assessment base should be defined in terms of averages, which 
would help smooth out the effects of such abnormal occurrences, rather 
than on actual ``as-of'' report-date data.
2. Measurability
    This criterion refers to the extent to which the components of the 
assessment base can feasibly and objectively be calculated with a 
minimum degree of uncertainty and disagreement by separate, independent 
parties (such as the institution being assessed and the FDIC).
    For example, an assessment base that is limited to insured deposits 
might raise measurability concerns, since timely and reliable 
calculations of only those deposits (or portions of deposits) that 
actually would be covered by insurance in the event of a failure might 
not be feasible. (To the extent measurability is not an issue, the 
recordkeeping necessary to support such a calculation might be.) If 
measurability is a problem here, a possible solution might be to 
identify a ``proxy'' intended to provide a less precise (but related) 
substitute that is more readily available than actual insured deposits.
3. Relation to Risk
    This criterion refers to the extent to which the assessment base 
reflects the degree of risk posed to the deposit insurance funds. For 
example, there is a link between the existing assessment base, which is 
based on total domestic deposits, and the magnitude of the loss the 
failure of an institution could cause its deposit insurance fund.
    On the one hand, private insurance firms often base the amount of 
their premiums at least in part on the amount to be paid out under the 
policy if the insured event transpires. This practice might suggest an 
assessment base consisting of insured deposits only. Such a definition 
also would be consistent with the primary purpose of federal deposit 
insurance as clarified by FDICIA--to protect insured deposits.
    On the other hand, existing public policy provides protection for 
liabilities other than insured deposits, through such measures as 
depositor preference--which provides some protection to non-insured 
domestic deposits--and granting superior status to secured liabilities. 
In addition, to the extent that secured claims are elevated to a 
position superior to that of insured deposits, the FDIC may be at 
greater risk of not recovering the full amount of its payout on insured 
deposits. Thus, assessment of liabilities other than insured deposits 
is not inherently inconsistent with the concept of defining the 
assessment base in terms of the magnitude of the risk posed to the 
FDIC.
4. Non-Avoidability
    This criterion refers to the extent to which the assessment base 
precludes or minimizes transactions or adjustments made solely to avoid 
assessments. Under the existing assessment base, which is defined in 
terms of deposits held ``as of'' the last day of the quarter, avoidance 
activities usually involve the temporary transfer of deposits out of an 
institution's deposit base for a brief period extending over quarter 
end.
    One such example is the movement of deposits into non-deposit 
instruments (such as notes or repurchase agreements) within the same 
institution just prior to quarter end, solely for the purpose of 
reducing the assessment paid by the institution. The transferred funds 
are returned to deposit accounts at the beginning of the next quarter, 
after the ``as of'' date for determining the institution's assessment 
base.
    Another example, which involves the transfer of deposits from one 
insured institution to another, does not affect the total amount of 
assessments collected by the FDIC but rather forces the receiving 
institution to pay assessments on deposits that would otherwise have 
been included in the transferring institution's assessment base. In 
this example, deposits are transferred just prior to quarter end from 
one institution to another. The transfer is reversed shortly 
thereafter. The result is to disadvantage the (probably unsuspecting) 
receiving institution by increasing the deposit base on which its 
assessments are calculated.
    In both of these examples, the result is an artificial situation 
created solely for the purpose of avoiding assessments. Such situations 
could be mitigated by the use of ``average'' data in defining the 
assessment base.
5. Recordkeeping Burden
    This criterion refers to the ease of maintaining and reporting the 
data needed for computing an institution's assessment base. It 
encompasses the time and effort necessary for any additional 
recordkeeping beyond that required of reporting entities for purposes 
other than assessments.
    The FDIC fully appreciates the need to keep to a minimum any 
additional recordkeeping requirements. However, pursuant to section 
7(b)(5) of the FDI Act, as amended by FDICIA, each insured depository 
institution must maintain all records the FDIC may require for 
verifying the correctness of the institution's assessments. Depending 
on how the assessment base is defined, additional recordkeeping might 
be necessary to allow for the verification of the assessment-related 
information reported by an institution.
    If, in responding to any portion of this Notice, a comment 
recommends a particular recordkeeping requirement, the commenter is 
requested to include an estimate of the amount of time it would take a 
reporting entity to meet the requirement.

B. Questions for Comment Regarding the Criteria

    Response to the following questions is requested:
    1. Are the definitions of the aforementioned criteria sufficient in 
terms of evaluating the various options for defining the assessment 
base? If not, provide suggested definitions.
    2. Are there any other criteria that should be considered in 
evaluating the various options for defining the assessment base? If so, 
identify and define those criteria.

IV. Alternative Assessment-Base Definitions

    This section presents several options for defining the assessment 
base. It does not attempt to address all possible options, but rather 
discusses those the FDIC has identified to date as the primary 
alternatives.
    Following a discussion of each of these options are several 
specific questions pertaining to that option. Response to these 
questions is requested from all interested persons.

A. Status Quo

    Under this option, the assessment base would remain unchanged, and 
it would continue to be defined, broadly stated, as total domestic 
deposits. Because there would be no changes, the FDIC's existing 
assessment-base regulations would not be amended.
    Retaining the existing definition would avoid another regulatory 
change for insured depository institutions. The existing definition is 
generally well understood and operable, and has relatively few 
measurement problems. However, because quarter-end data are used to 
calculate the current assessment base, there is a high risk of 
assessment avoidance, and the problem of receiving abnormally large 
deposits or misdirected wire transfers at quarter end would not be 
addressed.
    Relative to assessable deposits, there has been recent growth of 
other liabilities and off-balance-sheet activities. If this is a long-
term trend, it might not be desirable to link assessments to a base 
that may be shrinking in relation to overall banking activity unless 
the protection provided in connection with the federal deposit 
insurance program is reduced commensurately.
    Commenters are requested to provide an evaluation of this option 
for defining the assessment base, in terms of the following criteria 
discussed in section III of this Notice:

3. Fairness
4. Measurability
5. Relation to Risk
6. Non-Avoidability
7. Recordkeeping Burden
8. Any other criteria suggested by the commenter.

    Commenters are also requested to respond to the following specific 
questions regarding this option:
    9. Should the float deductions be retained at their existing 
levels, or should they be modified? (The deduction for adjusted demand 
deposits is 16\2/3\ percent and the deduction for adjusted time and 
savings deposits is 1 percent.) State the advantages and disadvantages 
of the recommended method for addressing the float deduction for the 
status quo option.
    10. Identify other advantages or disadvantages of this option for 
defining the assessment base.

B. Total Unadjusted Domestic Deposits

    Under this option, the assessment base would be defined in its 
existing form (status quo), except that current assessment base 
adjustments would be eliminated. The float deductions, which were 
established over 30 years ago, are the most significant adjustments to 
the assessment base provided for in the current regulations. Since that 
time, there have been dramatic changes in the payments system in the 
United States that may have caused the current float deductions to 
become obsolete. Therefore, many advocate the elimination of these 
float deductions.
    The other existing adjustments to the assessment base have a less 
dramatic effect on the total assessments paid by institutions. However, 
these adjustments complicate the measurability of the assessment base 
and increase the reporting and recordkeeping burden.
    Commenters are requested to provide an evaluation of this option 
for defining the assessment base, in terms of the following criteria 
discussed in section III of this Notice:

11. Fairness
12. Measurability
13. Relation to Risk
14. Non-Avoidability
15. Recordkeeping Burden
16. Any other criteria suggested by the commenter.

    Commenters are also requested to respond to the following specific 
questions regarding this option:
    17. Should the existing float deductions be eliminated? State the 
advantages and disadvantages of eliminating these adjustments to 
deposits.
    18. Should other adjustments to deposits that are currently 
provided for be eliminated (such as ``BICs'' and pass-through reserve 
balances)? State the advantages and disadvantages of eliminating these 
adjustments.
    19. Identify other advantages or disadvantages of this option for 
defining the assessment base.

C. Expanded Base: Non-Deposit Secured Liabilities

    Under this option, the assessment base would consist, in general 
terms, of total adjusted domestic deposits plus non-deposit secured 
liabilities (such as secured notes and other secured borrowings). One 
argument given for assessing secured liabilities is that they are 
protected before the FDIC in the event of a failure and, accordingly, 
increase the risk of loss to the FDIC.
    Secured creditors of insured depository institutions are protected 
against loss by assets of the institution that are pledged as security 
for its debts to those creditors. Because more favorable terms can be 
obtained on borrowings by pledging high-quality, marketable assets as 
security, there is a tendency for institutions to pledge such assets 
for that purpose. If the institution were to fail, these pledged assets 
would not be available to reduce the FDIC's losses or to settle the 
claims of other unsecured creditors. As more of the institution's 
assets are pledged--often, the highest-quality, most marketable 
assets--there are fewer assets remaining to satisfy unsecured 
obligations, including unsecured deposit and non-deposit liabilities.
    The likely effect of a shrinking pool of quality assets on the FDIC 
is to increase its failure-resolution costs. FDIC costs could be 
increased even further if, as is often the case, the market realizes 
beforehand that an institution may be heading toward insolvency. 
Uninsured and unsecured creditors typically flee an institution 
perceived to be in trouble, leaving the institution more dependent on 
secured borrowings for funding, and further depleting the pool of 
unpledged assets available for settling claims.
    FDICIA allows secured claims to be paid up to the fair market value 
of the assets pledged against those claims. 12 U.S.C. 1821(d)(5)(D). 
Any remaining portion is to be treated as an unsecured claim. This 
marginally reduces the FDIC's exposure by restricting secured 
claimholders' recoveries to the market value of the pledged assets, but 
by no means eliminates the exposure.
    If the assessment base were expanded to include secured 
liabilities, a better measure of these liabilities would be necessary. 
While rough estimates of secured liabilities are obtainable, an 
institution's secured, non-deposit borrowings cannot at present be 
readily determined from data available in the institution's Report of 
Condition. As a result, if the assessment base were defined to include 
non-deposit secured liabilities, additional data (and additional 
recordkeeping) would probably be required.
    Commenters are requested to provide an evaluation of this option 
for defining the assessment base, in terms of the following criteria 
discussed in section III of this Notice:

20. Fairness
21. Measurability
22. Relation to Risk
23. Non-Avoidability
24. Recordkeeping Burden
25. Any other criteria suggested by the commenter.

    Commenters are also requested to respond to the following specific 
question regarding this option:
    26. Identify other advantages or disadvantages of this option for 
defining the assessment base.

D. Expanded Base: Foreign Deposits

    Under this option, the assessment base would equal, in general 
terms, total adjusted domestic deposits plus foreign deposits. Despite 
the fact that obligations payable only outside the United States and 
certain other limited areas (including ``foreign deposits'') are not 
covered by federal deposit insurance, they have sometimes been 
protected in the past by federal failure-resolution policies. Since 
virtually all foreign deposits are held by large banks and since large-
bank failures historically have been handled in a way that protected 
most depositors, it has been argued that these deposits should be 
assessed. Those who support this argument believe that assessing 
foreign deposits would help to equalize a perceived inequality in 
treatment between large and small depository institutions.
    However, recent changes in the failure-resolution process have 
eroded this argument. Under FDICIA, protection of uninsured deposits, 
including foreign deposits, is permitted only in cases where a least-
cost determination warrants such protection or where the systemic-risk 
exception is triggered. In cases falling within the systemic-risk 
exception (which are expected to be quite rare), FDICIA requires 
special assessments on the members of the affected insurance fund to 
cover the costs of protecting any uninsured deposits. (The statute 
requires the special assessment without reference to the fund's 
resources; thus, whether or not foreign deposits are included in the 
assessment base is totally irrelevant to the applicability of the 
special assessment, which is apparently intended to be imposed on all 
members of the affected fund.)
    Another possible argument for assessing foreign deposits is to 
offset any losses resulting from a foreign government's seizure of 
failed U.S. institutions' assets located within the jurisdiction of 
that foreign government. While the possible seizure of assets by a host 
country is a risk that should not be overlooked, neither should it be 
exaggerated. In the event of such a failure, it is not clear who would 
control the liquidation of foreign-branch assets.
    Increased costs associated with assessing foreign deposits could 
reduce the ability of U.S. depository institutions to compete in 
foreign and international markets and could adversely affect their 
ability to promote exports from the United States. There is reason to 
believe that assessment of foreign deposits would cause many depository 
institutions to convert their foreign offices to subsidiary depository 
institutions, thus perhaps substantially reducing the amount of foreign 
deposits subject to assessment.
    Moreover, many would argue that if foreign deposits are assessed, 
they should also be insured. At present, federal statute explicitly 
precludes the insurance coverage of foreign deposits. A change in this 
situation would require Congressional action and would raise a variety 
of issues, including the reaction of foreign governments to U.S. 
depository institutions offering insured deposits in competition with 
that country's domestic depository institutions.
    Commenters are requested to provide an evaluation of this option 
for defining the assessment base, in terms of the criteria discussed in 
section III of this Notice:

27. Fairness
28. Measurability
29. Relation to Risk
30. Non-Avoidability
31. Recordkeeping Burden
32. Any other criteria suggested by the commenter.

    Commenters are also requested to respond to the following specific 
question regarding this option:

33. Identify other advantages or disadvantages of this option for 
defining the assessment base.

E. Expanded Base: Total Liabilities

    Under this option, the assessment base would equal total 
liabilities (domestic and foreign).\3\ An argument can be made for an 
assessment-base definition that is based on all of an institution's 
funding sources (e.g., total liabilities, not including capital) as 
opposed to deposits alone. As an institution encounters difficulties, a 
``flight to quality'' often occurs, with uninsured depositors and 
unsecured creditors leaving the institution. In turn, fewer depositors 
and other creditors are actually unprotected, or face losses, at the 
time of failure. As a result, as assets are liquidated to fund the 
withdrawal of uninsured deposits, this flight to quality reduces the 
amount of unpledged assets that are available for settling claims, 
which increases the FDIC's resolution costs. This argues for assessing 
institutions' liabilities that are protected directly by deposit 
insurance (insured deposits), as well as indirectly (uninsured deposits 
and secured liabilities), in the event of a failure.
---------------------------------------------------------------------------

    \3\To the extent this option includes foreign deposits, the 
observations made in the preceding discussion of such deposits also 
apply to this option.
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    FDIC experience with depository institution failures supports the 
premise that all types of an institution's liabilities are used to fund 
the activities that cause depository institution failures and, thereby, 
produce losses for the FDIC. Given this situation, it has been 
suggested that all of a depository institution's liabilities should be 
assessed by the FDIC. This would also remove any artificial incentives 
for institutions to favor certain types of liabilities (e.g., non-
deposits) over other types of liabilities (e.g., deposits) for purposes 
of assessment avoidance.
    Commenters are requested to provide an evaluation of this option 
for defining the assessment base, in terms of the following criteria 
discussed in section III of this Notice:

34. Fairness
35. Measurability
36. Relation to Risk
37. Non-Avoidability
38. Recordkeeping Burden
39. Any other criteria suggested by the commenter.

    Commenters are also requested to respond to the following specific 
question regarding this option:

40. Identify any other advantages or disadvantages of this option for 
defining the assessment base.

F. Insured Deposits Only

    Under this option, the assessment base would equal insured deposits 
only. To the extent that protection of obligees in the event of an 
institution failure is limited to insured deposits, this definition 
would provide a balance between protection and assessment. However, to 
the extent non-insurance protection is given to non-insured 
liabilities, that balance is undermined.
    The potential risk to the FDIC from non-insured liabilities of a 
depository institution, such as secured borrowings, would be 
disregarded under this option. In addition, other protected 
obligations, such as uninsured deposits potentially sheltered by 
depositor preference, would not be assessed. With regard to uninsured 
deposits, one might argue that the protection they receive is provided 
at no cost or risk to the deposit insurance funds, and that such a risk 
comes only from insured deposits and secured liabilities. Others might 
argue that they all fall within the scope of the protection provided by 
the ``federal safety net'' and that such protection should somehow be 
taken into account in determining an institution's deposit insurance 
premiums.
    Whatever the merits of these arguments might be, coming up with a 
timely and accurate figure for only that portion of an institution's 
deposits that actually would be covered by deposit insurance were the 
institution to fail may pose significant reporting problems. For 
example, concerns have been expressed regarding the difficulty of 
compiling data that accurately distinguish between insured and 
uninsured deposits.
    At present, the Reports of Condition require data indicating the 
total amount of the institution's deposits and its uninsured deposits. 
However, the report formula for computing uninsured deposits results in 
estimated amounts and may not be sufficiently precise for purposes of 
determining an institution's assessment base. Providing an acceptable 
level of precision may require an institution to increase its data 
collection and analysis efforts, resulting in increased regulatory 
burden.
    Commenters are requested to provide an evaluation of this option 
for defining the assessment base, in terms of the following criteria 
discussed in section III of this Notice:

41. Fairness
42. Measurability
43. Relation to Risk
44. Non-Avoidability
45. Recordkeeping Burden
46. Any other criteria suggested by the commenter.

    Commenters are also requested to respond to the following specific 
questions regarding this option:
    47. In order to alleviate any additional reporting burden 
associated with reporting precise amounts of insured deposits under 
this option, would it be desirable to develop a ``proxy'' for insured 
deposits for assessment purposes? If so, what would be an acceptable 
method of approximation?
    48. Identify other advantages or disadvantages of this option for 
defining the assessment base.

G. Assessment Base of Total Assets

    Under this option, the assessment base would equal an institution's 
total assets. Conceptually, an argument can be made for charging 
premiums against those items which pose a risk of loss to the deposit 
insurance funds, such as an institution's assets.
    An assessment base defined in terms of assets might be more easily 
understood and less prone to manipulation for assessment-avoidance 
purposes than liability-based measures. Based on Report of Condition 
data, it could be easily measured and perhaps more predictable than a 
deposit-based definition. It also would insulate the assessment base 
from liability-structure decisions of the institution, creating an 
assessment base that is neutral with respect to an institution's 
liabilities. Because all assets would be included in the base, this 
definition also could reduce the risk of assessment avoidance.
    While conceptually appealing, this approach would be a substantial 
departure from tradition, and there would be no direct relationship 
between those items assessed and those items insured.
    Commenters are requested to provide an evaluation of this option 
for defining the assessment base, in terms of the following criteria 
discussed earlier in section III of this Notice:

49. Fairness
50. Measurability
51. Relation to Risk
52. Non-Avoidability
53. Recordkeeping Burden
54. Any other criteria suggested by the commenter.

    Commenters are also requested to respond to the following specific 
questions regarding this option:
    55. As discussed in this section, there can be advantages to an 
assessment base founded on assets. However, given that numerically, 
total liabilities is equivalent to total assets, net of equity, what 
would be the advantages and disadvantages of using total assets, net of 
equity, instead of total liabilities, to define the assessment base?
    56. Would an assessment base defined in terms of assets be more 
reflective of risk to the deposit insurance funds, and, if so, how?
    57. Identify other advantages or disadvantages of this option for 
defining the assessment base.

V. Miscellaneous Requests for Comment

    In addition to the comments requested elsewhere in this Notice, 
response to the following questions is invited:
    58. Should the assessment base be calculated using daily average 
data for the quarter (total dollars for the quarter divided by the 
number of days in the quarter), rather than ``as-of'' quarter-end data? 
What are the advantages and disadvantages of each of these approaches? 
Are there preferable alternative approaches, and if so, what are they 
and what are their advantages and disadvantages?
    59. If daily averages over the quarter were used, what additional 
recordkeeping would be necessary for the institution? (Please describe 
and quantify.)
    60. To what extent, if any, should off-balance-sheet items be 
factored into the assessment base?
    61. If the assessment base is redefined, is there a need for a 
transition period from application of the existing base to application 
of the new base? If so, how should the transition period be implemented 
and how long should it be?
    62. Should there be an assessment base for large institutions and a 
different assessment base for small institutions? If so, what should 
the respective assessment bases be? How should ``large institution'' 
and ``small institution'' be defined for this purpose?
    63. What are the implications (if any) of a change in the 
assessment base on the ability of insured depository institutions to 
innovate and to keep up with changes in the marketplace?
    64. Since there are varying degrees of protection for different 
types of claims resulting from a depository institution failure, would 
``fairness'' require that there be some mechanism in the assessment 
system for adjusting assessments to correspond to the degree of 
protection provided? If so, what should that mechanism be?
    65. Are there other desirable options for defining the assessment 
base, including modifications to the options presented in this Notice? 
If so, identify and explain the options and describe their advantages 
and disadvantages.
    66. What would be the impact of a change in the definition of the 
assessment base on competition within the United States? Describe the 
impact on domestic competition relative to the assessment base options 
discussed in section IV and any additional options suggested by the 
commenter.
    67. What would be the impact of a change in the definition of the 
assessment base on global competition, particularly with regard to 
foreign deposits? Describe the impact on global competition relative to 
the assessment base options discussed in section IV and any additional 
options suggested by the commenter.
    68. Please provide any other comments regarding the assessment 
base.

    By order of the Board of Directors.

    Dated at Washington, D.C., this 27th day of September, 1994.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Acting Executive Secretary.
[FR Doc. 94-24607 Filed 10-4-94; 8:45 am]
BILLING CODE 6714-01-P