[Federal Register Volume 59, Number 193 (Thursday, October 6, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24606]


[[Page Unknown]]

[Federal Register: October 6, 1994]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 304

RIN 3064-AB33

 

Forms, Instructions, and Reports

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rescission of rule.

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SUMMARY: On April 5, 1994, the FDIC published for comment a proposal to 
rescind a section of its regulations on notification of rapid growth. 
The FDIC is publishing herewith a final rule to rescind this section.
    The section, known as the ``rapid growth rule,'' 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 any 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 (which would include insured brokered deposits); the 
solicitation of fully insured deposits outside a bank's normal trade 
area; or secured borrowings, including repurchase agreements.
    This rescission is intended to lessen the regulatory burden on 
banks which are currently also required to comply 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.

EFFECTIVE DATE: November 7, 1994.

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 (which would include 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 et seq. and 325.101 
et seq. With the rescission of the rapid growth rule, the brokered 
deposit and prompt corrective action regulations are now the principal 
means by which rapid growth will be regulated. 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 satisfied without the rapid growth rule.
    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 other funding 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 9 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 (which would 
include insured brokered deposits); (2) the solicitation of fully 
insured deposits outside a bank's normal trade area (this category 
would also include some 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, the Financial Institutions Reform, Recovery, and Enforcement 
Act of 1989 (FIRREA) and the Federal Deposit Insurance Corporation 
Improvement Act of 1991 (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 et seq. and 
325.101 et seq., 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 considered 
whether there was 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 dialogue 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 FDIC felt that the rapid 
growth rule is no longer necessary given the existence of those other 
two regulations. For this reason, the FDIC proposed (59 FR 15869, April 
5, 1994) that the rapid growth rule be rescinded. This action would 
ease the regulatory burden on those institutions now subject to all 
three rules.
    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 is 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. With 
rescission of the rapid growth rule, some of the rapid growth resulting 
from rapid growth rule activities will 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 will be 
controlled or prohibited by the brokered deposit rule, and some will 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 was sought on whether the rescission of the rapid growth rule 
would create a regulatory gap that would have harmful effects on 
banking.

Public Comment

    The FDIC received only four comment letters on the proposal, three 
from banking trade associations and one from the parent company of 
several insured banks. All four comment letters enthusiastically 
supported the rescission of the rapid growth rule.
    One commenter acknowledged that the rescission would create a 
regulatory gap--in that neither the brokered deposit rule nor the 
prompt corrective action rule limits the activities of well-capitalized 
institutions--but the same commenter believed that this gap would not 
pose a significant supervisory risk due to the FDIC's system of Call 
Reports and its Growth Monitoring System. A second commenter echoed 
these sentiments, adding that rescission would reduce an unnecessary 
regulatory burden. The third commenter opined that rescission of the 
rapid growth rule would have no negative impact on the banking system; 
on the contrary, rescission would remove unnecessary reporting burdens 
and marketing restrictions. The fourth commenter added that, given the 
trend toward consolidation in the banking industry, most institutions 
will soon be so big that fewer and fewer of them will ever achieve the 
percentage of rapid growth necessary to trigger the rapid growth rule.
    After considering these comments and staff analysis of the issues 
noted above, the FDIC has decided to rescind the rapid growth rule. (In 
rescinding the rapid growth rule, 12 CFR 304.6, the FDIC 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.)

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 under Control Number 
3064-0074, 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 will result in a saving of 1,625 
burden hours a year.

Regulatory Flexibility Act

    The FDIC's Board of Directors has concluded that the final rule 
will not impose a significant economic hardship on small institutions. 
The rule does not establish any recordkeeping or reporting requirements 
that necessitate the expertise of specialized accountants, lawyers or 
managers. The rule 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 
final rule 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 amends 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 entry in the table for Sec. 304.6 is removed.

    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. 94-24606 Filed 10-5-94; 8:45 am]
BILLING CODE 6714-01-P