[Federal Register Volume 60, Number 32 (Thursday, February 16, 1995)]
[Proposed Rules]
[Pages 9270-9279]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3670]



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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

RIN 3064-AB58


Assessments; New Assessment Rate Schedule for BIF Member 
Institutions

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Proposed Rule.

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SUMMARY: The Board of Directors (Board) of the Federal Deposit 
Insurance Corporation (FDIC) is proposing to amend its regulation on 
assessments to establish a new assessment rate schedule of 4-31 basis 
points for members of the Bank Insurance Fund (BIF) to apply to the 
semiannual period in which the reserve ratio of the BIF reaches the 
designated reserve ratio (DRR) of 1.25% of total estimated insured 
deposits and to semiannual periods thereafter. The Board is further 
proposing to amend the assessment risk classification framework to 
widen the existing assessment rate spread from 8 basis points to 27 
basis points.
    When the DRR is achieved, the Board is required to set rates to 
maintain the reserve ratio at the DRR. Based on current projections, 
the reserve ratio is expected to reach the DRR between May 1 and July 
31, 1995. Therefore, the Board is proposing to lower assessment rates 
to maintain the reserve ratio at the DRR and to maintain a risk-based 
assessment system. The Board is further proposing to amend the 
assessments regulation to establish a procedure for adjusting the 
proposed rate schedule semiannually as necessary to maintain the DRR at 
1.25%.

DATES: Written comments must be received by the FDIC on or before April 
17, 1995.

ADDRESSES: Written comments shall 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., 
Washington, DC, between 9 a.m. and 4:30 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: Christine Blair, Financial Economist, 
Division of Research (202) 898-3936; or Connie Brindle, Chief, 
Assessment Operations Section, Division of Finance, (703) 516-5553; or 
Lisa Stanley, Senior Counsel, Legal Division (202) 898-7494; 
[[Page 9271]] or Cristeena Naser, Attorney, Legal Division (202) 898-
3587, Federal Deposit Insurance Corporation, Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

I. Background

    At present, BIF members are assessed rates for FDIC insurance 
ranging from 23 basis points for the best risk classification to 31 
basis points for the riskiest classification. This assessment schedule 
is based on the requirements of section 7(b)(2)(E) of the Federal 
Deposit Insurance Act (FDI Act), 12 U.S.C. 1817(b)(2)(E). That 
provision was enacted as part of section 302 of the Federal Deposit 
Insurance Corporation Improvement Act of 1991 (FDICIA) (Pub. L. 102-
242, 105 Stat. 2236, 2345) which completely revised the assessment 
provisions of the FDI Act by requiring the FDIC to: (1) establish a 
system of risk-based assessments; (2) establish rates sufficient to 
provide revenue at least equivalent to that generated by an annual 23 
basis point rate until the BIF reserve ratio achieves the DRR of 1.25% 
of total estimated insured deposits; (3) when the reserve ratio remains 
below the DRR of 1.25%, set rates to achieve that ratio within one year 
or establish a recapitalization schedule to do so within 15 years; and 
(4) once the DRR is achieved, set rates to maintain the reserve ratio 
at the DRR.
    Based on the financial condition of the BIF, the Board has 
established two recapitalization schedules, most recently on May 25, 
1993, which estimated that the DRR would be achieved in the year 2002. 
58 FR 31150 (May 25, 1993). Once the DRR has been attained, the 
recapitalization schedule will no longer apply. Due to the health of 
the banking industry, current projections indicate that the BIF will 
recapitalize sometime between May 1 and July 31, 1995. Accordingly, the 
Board must implement the statutory provisions which will apply once the 
DRR is reached. In particular, because the mandate to collect at a 
minimum average rate of 23 basis points will no longer be operative, 
the Board must determine when and how much to lower assessments of BIF 
members.
    Following is a discussion of the statutory provisions which must be 
considered in determining how and when rates may be set, a proposed new 
assessment rate schedule, a method for applying the proposed rate in 
the semiannual period during which the DRR is achieved, and a process 
for adjusting that assessment schedule in future semiannual periods.

II. Statutory Framework for Setting Assessment Rates

A. Summary

    Section 7(b) of the FDI Act governs the Board's authority for 
setting assessment rates for members of the BIF. 12 U.S.C. 1817(b). The 
assessment rates the Board is authorized or required to set are 
dependent on whether the fund's reserve ratio has reached its DRR. The 
reserve ratio is the dollar amount of the BIF fund balance divided by 
the estimated insured deposits of BIF members. The Board must set 
semiannual assessments and the DRR for the BIF and the Savings 
Association Insurance Fund (SAIF) independently. FDI Act, section 
7(b)(2)(B).
    The DRR for the BIF currently is 1.25% of estimated insured 
deposits (i.e., $1.25 for each $100 of insured deposits), the minimum 
level permitted by the FDI Act. FDI Act, section 7(b)(2)(A)(iv). The 
Board may increase the DRR to such higher percentage as the Board 
determines to be justified for a particular year by circumstances 
raising a significant risk of substantial future losses to the fund. 
However, the Board is not authorized to decrease the DRR below 1.25%. 
Id.
    Section 7(b), among other things, directs the Board to:
    (1) establish a risk-based assessment system whereby an 
institution's assessment is based in part on the probability that the 
deposit insurance fund will incur a loss with respect to that 
institution [FDI Act, section 7(b)(1)(C)(i)]; and
    (2) set assessments, not less than $2000 annually per BIF member, 
to ``maintain'' the reserve ratio ``at'' 1.25% when that ratio has been 
achieved [FDI Act, section 7(b)(2)(A)(i)(I), (iii)].
    In the current economic environment, because of investment income 
alone, the reserve ratio may continue to grow beyond 1.25%. Moreover, a 
risk-based assessment system contemplates a range of rates such that 
even if the least risky institutions pay the lowest rate consistent 
with a meaningful risk-based assessment system, riskier institutions 
must pay a higher rate. While the Board must set rates to maintain fund 
reserves at the 1.25% DRR once that level is achieved, even with 
assessment rates as low as prudently possible the fund could continue 
to grow as a result of assessments paid by riskier institutions and 
investment income. The following sections address these statutory 
directives.

B. Directive: Set Rates To Maintain the Reserve Ratio at the DRR

    Pursuant to section 7(b)(2)(A)(i) of the FDI Act, the Board must 
set semiannual assessments to maintain the reserve ratio of the BIF at 
the DRR taking into consideration the following factors: (1) Expected 
operating expenses; (2) case resolution expenditures and income; (3) 
the effect of assessments on members' earnings and capital; and (4) any 
other factors the Board may deem appropriate. Section 7(b)(2)(A)(iii) 
limits the Board's discretion to set assessment rates by imposing a 
minimum semiannual assessment of $1,000 per BIF member. The directive 
to ``set rates to maintain the reserve ratio at the designated reserve 
ratio'' was enacted as part of the amendments to section 7 made by the 
FDIC Assessment Rate Act of 1990 (Assessment Rate Act). Public Law 101-
508, 104 Stat. 1388, 1388-14. The Assessment Rate Act is Subtitle A of 
Title II of the Omnibus Budget Reconciliation Act of 1990. While the 
phrase ``set assessments * * * to maintain the reserve ratio at the 
designated reserve ratio'' is not defined in the statute, the 
legislative history discussed below illuminates Congress' intentions.
    1. Interpretations of ``maintain  * * * at the DRR''.
    The Board is of the opinion that this phrase establishes the DRR as 
a target, a position supported both by the difficulty of managing the 
size of the reserve ratio as well as the statutory history. Changes in 
the reserve ratio are a function of the size of estimated insured 
deposits, investment earnings, assessment revenue (which, in turn, is a 
function of the risk profile of the industry and revenue received from 
the statutory minimum assessment), and revenue from corporate-owned and 
other assets, none of which is in the complete control of the FDIC. In 
addition, operating expenses and insurance losses to the fund will 
vary.
    The primary factors affecting the fund balance are assessment 
revenues, investment income, operating expenses and insurance losses 
resulting from bank failures. Assessment revenues depend upon deposit 
growth, and investment income depends upon interest rate movements as 
well as factors affecting the fund's investable balance. Deposit growth 
and interest rate movements in turn are related, but as the number and 
variety of financial instruments and financial management techniques 
expand that relationship becomes less predictable. Both deposit growth 
and interest rates have become more variable and, thus, less 
predictable [[Page 9272]] in recent years. Finally, bank failures and 
the resulting losses for the insurance fund historically have 
represented a major source of uncertainty in forecasting the fund 
balance. Failures can arise from developments in the global 
marketplace, smaller geographic markets, or specific product markets, 
and the failure rate is affected by numerous other factors. The 1980s 
offer strong evidence that changes in these determinants and their 
implications cannot, as a rule, be anticipated far in advance. The 
specific timing of failures is particularly difficult to project, even 
for short forecast horizons. Taken together, the above considerations 
indicate that the reserve ratio cannot be managed with sufficient 
precision to achieve a precise target consistently.
    Section 208 of the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 (FIRREA) amended section 7(b) of the FDI Act to 
establish a DRR and set the level at 1.25%. Public Law 101-73, 103 
Stat. 183, 206. Prior to FIRREA, beginning in 1980, the FDI Act 
required or authorized the Board to adjust the amount of assessment 
income transferred to the insurance fund, and thereby to increase or 
decrease the rebate amount, based on the actual reserve ratio of the 
fund within a range from 1.10 percent to 1.40 percent, with 1.25 
percent as the target. See discussion infra, Rebates.
    FIRREA also prescribed minimum annual assessment rates which could 
be increased from the scheduled levels, ``if necessary to restore the 
fund's ratio of reserves to insured deposits to its target level within 
a reasonable period of time.'' [Emphasis added.] H.R. Conf. Rep. No. 
222, 101st Cong., 1st Sess. 396 (1989). Thus, when the DRR was 
established, Congress appears to have considered the DRR as a target 
level.
    The view that the DRR is a target finds further support in Senate 
legislation which was considered when enacting the Assessment Rate Act. 
Section 1(a) of S. 3045, which was sponsored by then Senate Banking 
Committee Chairman Riegle and other members of the Senate Banking 
Committee, required the Board to ``maintain the reserve ratio at a 
level equal to the designated reserve ratio''. This language was almost 
identical to the comparable provision of S. 3093, the Administration 
bill, which ultimately was enacted. The section-by-section analysis of 
S. 3045 describes Section 1(a) as permitting

    * * * the FDIC to set the assessment rate at the level the FDIC 
determines to be appropriate: to maintain the Bank Insurance Fund's 
reserves at the target level (now $1.25 in reserves for each $100 in 
insured deposits, with the FDIC having the discretion under the 
current law to increase it to $1.50); or if the Fund's reserves are 
below the target level, to restore the reserves to the target level. 
The FDIC would have `a reasonable period of time' to restore the 
Fund's reserves to the target level. [Emphasis added.]

    The Senate banking committee clearly considered the DRR as a 
target.
    Finally, FDICIA section 104, Recapitalizing the Bank Insurance 
Fund, amended the assessment rate provisions of section 7(b)(1)(C) (in 
effect December 19, 1991 through December 31, 1993) as follows:

    If the reserve ratio of the Bank Insurance Fund equals or 
exceeds the fund's designated reserve ratio under subparagraph (B), 
the Board of Directors shall set semiannual assessment rates for 
members of that fund as appropriate to maintain the reserve ratio at 
the designated reserve ratio. [Emphasis added.]

    Thus Congress appears to have recognized that the reserve ratio 
would fluctuate around a target DRR.
    Treating the DRR as a target would necessarily include the concept 
of fluctuations above and below the target, thus incorporating into the 
rate-setting process a measure of economic reality. If the reserve 
ratio falls below 1.25% in a semiannual period, the Board could adjust 
the assessment schedule in the next semiannual period to restore the 
ratio. Section 7(b)(3)(A) of the FDI Act contemplates precisely that. 
That section provides that, after the DRR is achieved, if the reserve 
ratio falls below the DRR, the Board is required to set semiannual 
assessments sufficient to increase the reserve ratio to the DRR within 
one year or in accordance with a recapitalization schedule promulgated 
to restore the reserve ratio to the DRR within 15 years. Conversely, 
when the reserve ratio rises above the DRR for any semiannual period, 
the Board could adjust the assessment schedule downward to reflect the 
increase.
    Current projections show, however, that even if the assessment rate 
for risk classification 1A banks were as low as possible consistent 
with a meaningful risk-based assessment system, the fund may continue 
to grow as a result of the revenue from investment income. In such a 
case where the rates are set as low as possible consistent with a risk-
based assessment system and the fund nevertheless continues to grow, 
the Board considers that it will have complied with the statute because 
the Board will have set rates to maintain the reserve ratio at 1.25% in 
accordance with statutory requirements for a risk-based assessment 
system.
    Congress could not have understood that the reserve ratio can be 
maintained precisely at 1.25%. Under this interpretation, amounts in 
excess of that fixed point should be returned to the industry. However, 
as discussed above, the FDIC cannot completely control the factors that 
produce fluctuations in the level of the reserve ratio. Therefore, 
management of the reserve ratio is necessarily imprecise. In the 
current economic situation, the fund will likely grow beyond the DRR as 
a result of investment income alone. Thus, an interpretation which 
requires the FDIC to maintain the reserve ratio precisely at 1.25% 
would necessarily require a mechanism for providing assessment credits 
(known as rebates) to BIF members for amounts in excess of 1.25%. 
Putting aside issues of whether investment income, reserve corpus or 
both can be rebated, more importantly, the FDIC's authority in section 
7(d), 12 U.S.C. 1817(d), to provide assessment credits was deleted in 
FDICIA as being obsolete. See, section-by-section analysis of section 
212(e)(3) of S. 543 which became the language of section 302(a) of 
FDICIA at 138 Cong. Rec. S2073 (daily ed. February 21, 1992). See 
discussion infra, Rebates.
    The Board believes that viewing the DRR as a target is the correct 
position because (1) it reflects economic reality and the impossibility 
of maintaining the reserve ratio precisely at 1.25%; (2) it gives 
effect to other relevant requirements in the statute for a minimum 
assessment, a risk-based assessment system, and maintenance of the DRR; 
and 3) it better comports with Congressional intent as indicated by the 
legislative history and the fact that Congress eliminated the rebate 
authority of section 7(d).
    2. BIF Members shall pay a minimum semiannual assessment of $1,000.
    Section 302 of FDICIA completely revised section 7(b) of the FDI 
Act. The minimum assessment language was modified only to reflect the 
fact that rates are to apply semiannually and to combine separate 
provisions into a single provision applicable to both the BIF and SAIF 
as follows:

    The semiannual assessment for each member of a deposit insurance 
fund shall be not less than $1,000. FDI Act, section 
7(b)(2)(A)(iii).

    After FDICIA, BIF members must pay the greater of their risk-based 
rate or $2000 each year.

C. The FDIC Shall Establish a Risk-Based Assessment System

    In FDICIA, Congress completely restructured the basis upon which 
assessment rates are determined. Section 302(a) of FDICIA required the 
[[Page 9273]] FDIC to establish by January 1, 1994, a risk-based 
assessment system based on:
    (i) the probability that the deposit insurance fund will incur a 
loss with respect to the institution, taking into consideration the 
risks attributable to--
    (I) different categories and concentrations of assets;
    (II) different categories and concentrations of liabilities, both 
insured and uninsured, contingent and noncontingent;
    (III) any other factors the Corporation determines are relevant to 
assessing such probability;
    (ii) the likely amount of any such loss; and
    (iii) the revenue needs of the deposit insurance fund.
    Within the scope of these broad factors, FDIC was granted complete 
discretion to design a risk-based assessment system. See, i.e., S. Rep. 
No. 167, 102d Cong., 1st Sess., 57 (1991). One statutory restraint, 
however, is that the system must be designed so that as long as the BIF 
reserve ratio remains below the DRR, the total amount raised by 
semiannual assessments on members cannot be less than the total amount 
resulting from a flat rate of 23 basis points. FDI Act, section 
7(b)(2)(E). This provision currently applies, but will cease to be 
operative when the BIF meets the DRR. This provision may again become 
operative if the reserve ratio remains below the DRR at some future 
time. The Board interprets the minimum assessment provision of section 
7(b)(2)(E), which requires weighted average assessments of 23 basis 
points, as applying only when the reserve ratio remains below the DRR 
for at least a year.
    Any time the reserve ratio goes below the DRR, the Board must 
either set rates 1) to restore the reserve ratio within one year or 2) 
in accordance with a recapitalization schedule not to exceed fifteen 
years. FDI Act, section 7(b)(3)(A). Because the Board has the 
discretion to determine the rate necessary to restore the reserve ratio 
to the DRR within one year, it is reasonable to conclude that the 
minimum assessment provision (which mandates the Board to set rates 
sufficient to provide revenue equivalent to that generated by an annual 
flat rate of .0023) would not apply until the reserve ratio stays below 
the DRR for at least one year. Moreover, it is unlikely that Congress 
intended such a drastic result if the DRR falls slightly below the 
target DRR, when a small adjustment in the assessment schedule for the 
following semiannual period could bring the fund back up to the DRR. In 
such a case, if the minimum assessment provision applied, the result 
would be an enormous overcollection of assessment revenue which, as 
explained below, the FDIC lacks the authority to rebate.

D. Rebates

    It appears, based on the statutory framework and legislative 
history of section 7 of the FDI Act, that the FDIC has not had 
authority to provide rebates since the permanent risk-based assessment 
system took effect on January 1, 1994. Prior to FDICIA, two provisions 
of section 7 expressly addressed rebates or assessment credits, section 
7(d), Assessment Credits, and section 7(e), Refunds to Insured 
Depository Institutions.
    In section 302(e)(3) of FDICIA, Congress removed the assessment 
credit provisions of section 7(d) of the FDI Act and at the same time 
established a rate-setting scheme requiring the Board to set rates to 
maintain the reserve ratio at the DRR. Pub. L. 102-242, 105 Stat. 2236, 
2349. As is clear from the statutory history of assessment credits, 
such credits were intended as a means to provide flexibility to keep 
the fund balance from growing too large at a time when assessment rates 
were set in the statute and all institutions paid the same flat rate. 
See generally, S. Rep. No. 1269, 81st Cong., 2nd Sess. 1-2 (1950); 
Cong. Rec. H10648 et seq. (daily ed. July 19, 1950) (statement of Mr. 
McCormack); Federal Deposit Insurance Corporation, The First Fifty 
Years at 58-60, Wash., D.C. 1984. Because of the large number of bank 
failures in the mid-to-late 1980s, Congress gradually provided the FDIC 
with greater flexibility to determine the timing and amount of 
assessment rates. This culminated in the requirement in FDICIA that the 
FDIC implement a risk-based assessment system. FDICIA also provided the 
FDIC with the flexibility, after the DRR was reached, to set assessment 
rates to maintain the DRR.
1. Statutory History of Section 7(d)
    Section 7(d), 12 U.S.C. 1817(d), was enacted in the FDI Act in 
1950. Public Law 797, Ch. 967, 64 Stat. 873. At that time all banks 
paid a flat assessment rate of 0.83 percent. Due to favorable economic 
circumstances, the fund had built up excess reserves, but the FDIC 
lacked the authority to return the excess funds to the industry. 
Congress adopted an assessment credit formula to credit to insured 
banks 60 percent of the fund's net assessment income and to transfer 
the remaining 40 percent to the Corporation's surplus (Permanent 
Insurance Fund). ``The committee desires to emphasize that the formula 
thus provides a flexible method for granting a reduction in the 
assessments paid by banks in normal years, and in bad years provides 
for payment of the full assessment if needed. This should reasonably 
protect the insurance fund in years of extraordinary losses.'' H. Rep. 
No. 2564, 81st Cong. 2nd Sess. (1950) reprinted in 1950 U.S.C.C.S. 
3770. This formula returned net assessment revenues only; it did not 
extend to investment income.
    The percentage of net assessment income rebated to insured banks 
was modified from time to time as warranted given the constraints of a 
statutory flat assessment rate system. In the Consumer Checking Account 
Equity Act of 1980, enacted as part of the Depository Institutions 
Deregulation and Monetary Control Act of 1980, Public Law 96-221, 94 
Stat. 132, Congress tied the amount of the rebate to the status of the 
reserve ratio. If the reserve ratio was less than 1.10%, the amount 
transferred to the Corporation's capital account was required to be 
increased to an amount (not to exceed 50% of net assessment income) 
that would restore the ratio to at least 1.10%. If the reserve ratio 
exceeded 1.25%, the amount transferred to the capital account could be 
reduced by such amount that would keep the reserve ratio at not less 
than 1.25%; finally, if the reserve ratio exceeded 1.40%, the amount 
transferred to the capital account was required to be increased such 
that the reserve ratio would be not more than 1.40%. Id. at section 
308(d).
    In section 208 of FIRREA, Congress specified certain flat annual 
assessment rates to be in effect through 1991, but provided the FDIC 
with authority to increase those rates as needed to protect the BIF and 
to raise the DRR from 1.25% to a maximum of 1.50% as justified by 
circumstances raising a significant risk of substantial future losses. 
In the event the Board increased the DRR above 1.25%, it was required 
to establish supplemental reserves for that increased revenue, the 
income from which was to be distributed annually to BIF members through 
an Earnings Participation Account. (This was the first time Congress 
provided any mechanism for returning to the industry any investment 
income.) In addition, to the extent the supplemental reserves were not 
needed to satisfy the next year's projected DRR, those amounts were to 
be rebated. FIRREA, section 208(4). Congress also barred any assessment 
credits until the DRR was achieved. When forecasts indicated the DRR 
would be achieved in the following year, the Board was required to 
provide assessment credits for that following year equal to the lesser 
of: (1) the amount necessary to [[Page 9274]] reduce the BIF reserve 
ratio to the DRR; or (2) 100 percent of the net assessment income to be 
received in that following year. Id.
    In sections 2002 and 2003 of the Assessment Rate Act, Congress 
provided the FDIC with greater flexibility in both the timing and 
amount of assessment rates. It also eliminated the requirement that the 
investment income on the supplemental reserves be distributed annually 
to BIF members. Assessment Rate Act, section 2004. Because the Board 
did not increase the DRR above 1.25%, the provision authorizing 
Earnings Participation Accounts and supplemental reserves never became 
effective.
    In FDICIA, Congress provided for establishment of a risk-based 
assessment system that, after the DRR was achieved, would provide the 
FDIC with much greater flexibility to set assessment rates. In 1990, 
Congress had already provided the FDIC with the authority to adjust 
assessment rates upward to ensure that the BIF received sufficient 
revenue. In FDICIA, Congress intended that same rate adjustment 
authority to operate in lieu of providing assessment credits in the 
event that the established rates resulted in collection of excess 
assessment revenue. Therefore, Congress eliminated the assessment 
credit provisions of section 7(d) in their entirety as being obsolete 
because the ability to adjust rates would take the place of a rebate 
mechanism.
    The discussion of section 212(e)(3) in the Senate Report on S. 543 
(which became the language of section 302(a) of FDICIA) describes 
Congress' intent:

    Section 212(e)(3) replaces current section 7(d) with a new 
section 7(d) recodifying current section 7(b)(9). The deleted text, 
providing for assessment credits to insured depository institutions 
when deposit insurance fund reserve ratios exceed designated reserve 
ratios, is obsolete in light of the standards for establishing 
assessments set forth in new section 7(b)(2)(A)(i) [setting rates to 
maintain at the DRR]. Under section 7(b)(2)(A)(i), funds that, under 
current section 7(d), would have been rebated to insured depository 
institutions through assessment credits will now be rebated through 
reduced assessments.

138 Cong. Rec. S2073 (daily ed. Feb. 21, 1992).

    This position finds further support in the language of section 104 
of FDICIA (in effect December 19, 1991 through December 31, 1993) which 
required the Board to set rates to maintain the reserve ratio at the 
DRR when the reserve ratio equals or exceeds 1.25%. FDICIA, section 
104(a) amending section 7(b)(1)(C) of the FDI Act. Clearly, Congress 
contemplated a situation in which the reserve ratio would rise above 
the DRR, but nonetheless eliminated rebate authority. Thus, Congress 
appears to have intended the rate setting process to be the appropriate 
mechanism for adjustment.

2. Section 7(e) Does Not Provide Rebate Authority
    An argument has been raised that section 7(e), 12 U.S.C. 1817(e), 
authorizes the FDIC to provide rebates of fund assets to keep the 
reserve ratio at 1.25%. Section 7(e) was enacted in 1950 in the Federal 
Deposit Insurance Act, along with section 7(d), assessment credits. 
Section 7(e) has been amended only once--in FIRREA, by changing 
``insured bank'' to ``insured depository institution''.
    Section 7(e) provides that the FDIC:

    (1) may refund to an insured depository institution any payment 
of assessment in excess of the amount due to the Corporation or (2) 
may credit such excess toward the payment of the assessment next 
becoming due from such bank and upon succeeding assessments until 
the credit is exhausted.

    By its terms, the statutory language contemplates that such refunds 
or credits are to be made in respect of overpayments. The report 
accompanying the legislation describes section 7(e) as ``expressly 
authoriz[ing] the Corporation to refund any overpayments of assessments 
or to credit such overpayments on future assessments''. H. Rep. No. 
2564, 81st Cong., 2d Sess. (1950), reprinted in 1950 U.S.C.C.S. 3771. 
Because section 7(d) contained express authority to provide rebates, 
Congress appears to have intended in section 7(e) to provide the FDIC 
with alternative methods (refunds or credits) to correct computational 
errors or other forms of overpayments outside of the rebate context so 
that the FDIC could return funds which clearly did not belong to it.
    Because section 7(d) providing assessment credits was adopted as 
part of the same legislation, an interpretation that section 7(e) also 
provides the same authority would mean that the provisions were 
redundant. Rather, each provision has independent meaning and purpose 
if section 7(d) is interpreted to provide the substantive authority to 
provide rebates, while section 7(e) grants the FDIC the discretion to 
choose the method of refunding overpayments, i.e., by either providing 
an assessment credit or a refund check. Moreover, section 7(e) has 
never been interpreted as providing rebate authority precisely because 
until January 1, 1994 when the statutory risk-based assessment system 
became effective, that authority existed in section 7(d). Given the 
intent of the drafters as expressed in the section-by-section analysis 
of S. 543, that rebates will be provided through reduced assessment 
rates, an interpretation that section 7(e) provides rebate authority 
outside its historical context would seem to be contrary to 
Congressional intent.
    In sum, the Board believes that the better interpretation of the 
statute is that the FDIC has no authority to grant rebates and that to 
do so would be in violation of the statute and contrary to the 
legislative history. As discussed above, this position is based on:
    (1) the statutory history of sections 7(d) and (e); 2) the fact 
that Congress deleted the rebate authority in section 7(d); and (3) the 
legislative history indicating that Congress intended that lower rates 
would be the substitute for rebates.

III. Proposed Assessment Rate Schedule

    The Board proposes to set a new assessment rate schedule with a 
spread of 4 to 31 basis points (see Table 1). The Board further 
proposes to make adjustments to this schedule by an adjustment factor 
not to exceed 5 basis points.
    The following definitions are used in the proposal:
    Assessment Schedule: A set of rates based on the risk 
classification matrix with a spread of 27 basis points between the 
minimum rate which would apply to institutions classified as 1A and the 
maximum rate which would apply to institutions classified as 3C.
    Spread: The difference between the minimum and maximum rate in any 
given assessment schedule.
    Adjustment Factor: The maximum number of basis points or a fraction 
thereof by which the Board would be authorized to increase or decrease 
the proposed 4-31 basis point assessment schedule without going through 
the rulemaking process.

A. Statutory Factors

    As discussed in Section II, pursuant to sections 7(b)(1) and 
7(b)(2)(A)(ii), the Board is required to take into consideration the 
following factors when setting risk-based assessments: the probability 
of loss, the amount of such loss, 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. These factors are discussed below. [[Page 9275]] 
1. Risk-Based Assessment Schedule
    The fundamental goals of risk-based assessment rates are to reflect 
the risk posed to the insurance fund by insured institutions and to 
provide institutions with incentives to control risk taking. The 
maximum rate spread in the existing assessment rate matrix (see Table 
1) is 8 basis points. Institutions rated 1A pay an annual rate of 23 
basis points while institutions rated 3C pay 31 basis points. A concern 
is whether 8 basis points represents a sufficient spread for achieving 
these goals.
    In the FDIC's proposal for the current risk-based premium system, 
the Board sought comment on whether the assessment rate spread embodied 
in the existing system, i.e., 8 basis points, should be widened. Of the 
96 commenters addressing this issue, 75 favored a wider rate spread. In 
the final rule, the Board expressed its conviction that widening the 
rate spread was desirable in principle, but chose to retain the 
proposed rate spread. The Board expressed concern that widening the 
rate spread while keeping assessment revenue constant, might unduly 
burden the weaker institutions which would be subject to greatly 
increased rates. However, the Board retained the right to revisit the 
issue at some future date. 58 FR 34357 (June 25, 1993).
    The current assessment rate spread for BIF institutions has been 
criticized widely by bankers, banking scholars and regulators as overly 
narrow, and there is considerable empirical support for this criticism. 
Using a variety of methodologies and different sample periods, the vast 
majority of relevant studies of deposit insurance pricing have produced 
results that are consistent with the conclusion that the rate spread 
between healthy and troubled institutions should exceed 8 basis 
points.\1\ While the precise estimates vary, there is a clear consensus 
from this evidence that the rate spread should be widened.

    \1\For a representative sampling of academic studies on this 
issue, see Estimating the Value of Federal Deposit Insurance, The 
Office of Economic Analysis, Securities and Exchange Commission 
(1991); Berry K. Wilson, and Gerald R. Hanweck, A Solvency Approach 
to Deposit Insurance Pricing, Georgetown University and George Mason 
University (1992); Sarah Kendall and Mark Levonian, A Simple 
Approach to Better Deposit Insurance Pricing, Proceedings, 
Conference on Bank Structure and Competition, Federal Reserve Bank 
of Chicago (1991); R. Avery, G. Hanweck and M. Kwast, An Analysis of 
Risk-Based Deposit Insurance for Commercial Banks, Proceedings, 
Conference on Bank Structure and Competition, Federal Reserve Bank 
of Chicago (1985).
---------------------------------------------------------------------------

    FDIC research likewise suggests that a substantially larger spread 
would be necessary to establish an ``actuarially fair'' assessment rate 
system. Insurance premiums are actuarially fair when the discounted 
value of the premiums paid over the life of the insurance contract is 
expected to generate revenues that equal expected discounted costs to 
the insurer from claims made by the insured over the same period. A 
1994 FDIC study used a ``proportional hazards'' model to estimate the 
expected lifetime of banks that were in existence as of January 1, 
1993. The study estimated the actuarially fair premium that each bank 
must pay annually so that the cost of each bank failure to the FDIC 
would equal the revenue collected through insurance assessments. The 
estimates indicated a rate spread for 1A versus 3C institutions on the 
order of magnitude of 100 basis points.\2\

    \2\See, Gary S. Fissel Risk Measurement, Actuarially Fair 
Deposit Insurance Premiums and the FDIC's Risk-Related Premium 
System, FDIC Banking Review (1994), at 16-27, Table 5, Panel B. 
Single-copy subscriptions of this study are available to the public 
free of charge by writing to FDIC Banking Review, Office of 
Corporate Communications, Federal Deposit Insurance Corporation, 550 
17th Street, N.W., Washington, D.C. 20429.
---------------------------------------------------------------------------

    The Board is concerned also that rate differences between adjacent 
cells in the current matrix do not provide adequate incentives for 
institutions to improve their condition. Larger differences are 
consistent with historical variations in failure rates across cells of 
the matrix, viewed in connection with the preponderance of evidence 
regarding actuarially fair premiums.\3\ The precise magnitude of the 
differences is open to debate, given the sensitivity of any estimates 
to small changes in assumptions and to selection of the sample period. 
However, the Board believes that larger rate differences between 
adjacent cells of the matrix are warranted.

    \3\Id., at Tables 2 and 5.
---------------------------------------------------------------------------

    The Board believes that the assessment rate matrix should be 
adjusted in the direction of an actuarially fair rate structure, as 
described above. Consistent with the results of the relevant studies on 
this topic, regardless of the sample period selected, the Board 
believes at this time that the highest-rated institutions pose a small 
but positive risk to the insurance fund and that the spread between the 
highest- and lowest-rated institutions should be widened.
    The Board does not wish to adopt major changes in the assessment 
rate structure at this time. The proposed rate matrix retains the nine-
cell structure. As noted above, in the final rule adopting the current 
assessment rate schedule, the Board expressed its conviction that 
widening the rate spread was desirable but declined to do so because of 
the potential hardship for troubled institutions and possible 
additional losses for the insurance fund. The Board remains unwilling 
to increase the maximum rate other than by means of the adjustment 
factor discussed below, without further study regarding the proper 
insurance pricing structure for the industry.
    Accordingly, FDIC staff currently are undertaking a comprehensive 
reevaluation of the risk-based assessment rate matrix, and will present 
recommendations to the Board in the near future. Any proposed changes 
to the risk-based assessment rate structure that may result from this 
process will be addressed in a separate future notice of proposed 
rulemaking.
    In the interim, the Board believes that the proposed assessment 
schedule represents an equitable set of rate adjustments. It widens the 
rate spread between the lowest- and highest-rated institutions, 
consistent with the implications of the best empirical evidence on this 
issue and with the Board's previously stated conviction. Moreover, the 
rate differences between adjacent cells in the matrix are widened, 
providing additional incentive for weaker institutions to improve their 
condition and for all institutions to avoid excessive risk-taking. This 
is consistent with the Board's desire to create adequate incentives via 
the assessment rate structure to encourage behavior that will protect 
the deposit insurance fund against excessive losses.
2. Expected Operating Expenses and Case Resolution Expenses and Income
    Operating expenses are projected to be approximately $260 million 
for the second half of 1995 (See Table 2). Case resolution expenditures 
or ``insurance losses'' for the second half of 1995 are projected to be 
$130 million. If the 1994 loss experience of $70 million per semiannual 
period (estimated) continues in 1995, losses may be lower than the 
projected amount. Insurance losses in 1994 were less than one-quarter 
of the historical average, relative to insured deposits, and baseline 
assumptions indicate that losses will begin to revert toward the norm 
in 1996 (see Tables 2-4). See additional discussion of loss assumptions 
in Section III.B, below.
3. Impact on Earnings and Capital
    Because assessment rates for most BIF members will decline, the 
impact on earnings and capital will be positive. Lower assessment costs 
will reduce expenses by approximately $4.6 billion [[Page 9276]] per 
year. Based on the industry's year-end 1993 average tax rate of 31.5 
percent, there will be an after-tax impact on profits of approximately 
$3.15 billion per year. BIF members may pass some portion of the cost 
savings on to their customers through lower borrowing rates, lower 
service fees, and higher deposit rates. Their ability to do so will be 
affected by factors such as the level of competition faced by banks.
4. Other Factors--Consideration of the Impact on the SAIF of Decreased 
BIF Rates
    A question has been raised concerning whether the Board may take 
into consideration the impact on SAIF in setting BIF rates. Based on 
recent projections, the BIF is expected to recapitalize between May 1 
and July 31, 1995. By contrast, recent projections show that the SAIF 
will not recapitalize until 2002 because assessments to cover interest 
payments on bonds issued by the Financing Corporation (FICO) divert 
about $780 million per year, or about 45 percent of total SAIF 
assessment revenue. In addition, the SAIF assessment base has been 
shrinking since the SAIF was created in 1989. The FICO will continue to 
divert SAIF assessments for interest payments on FICO bonds until 2019 
when the bonds mature.
    Section 7(b)(2)(A)(ii) of the FDI Act requires the Board to 
consider certain factors in setting assessment rates, one of which is 
``any other factors that the Board of Directors may deem appropriate''. 
Section 7(b)(2)(B) of the FDI Act requires the Board to set semiannual 
assessments for members of each fund ``independently'' from semiannual 
assessments for members of the other insurance fund. Read together, 
these provisions do not specifically prohibit Board consideration of 
the impact of BIF rates on SAIF members as long as the rates are set 
independently.
    However, section 7(b)(2)(A)(i) requires the Board to set rates to 
maintain the BIF reserve ratio. If the Board were to take into 
consideration the impact on the SAIF when it set BIF rates and, as a 
result, the reserve ratio continued to increase in excess of the DRR, 
it might be considered a violation of the statute. By contrast, an 
increase in the reserve ratio due to revenue generated from the minimum 
assessments and maintaining a risk-based assessment system would not be 
a violation because those provisions are mandated by the statute.

B. Need for Decreased Rates

    As discussed in Section II, management of the reserve ratio is 
necessarily imprecise because the factors affecting this ratio cannot 
be predicted with certainty. Changes in the reserve ratio are primarily 
a function of assessment revenues, investment income, operating 
expenses and insurance losses resulting from bank failures.
    The BIF is expected to recapitalize between May 1 and July 31, 
1995. It is unlikely that the BIF will recapitalize prior to the second 
quarter of 1995 because, after declining from 1992 through mid-year 
1994, there are indications that insured deposits have begun to 
increase.
    Other than the revenues that may be necessary to achieve and 
maintain the DRR of 1.25% in the second half of 1995, projections 
indicate that the BIF will require little or no assessment income to 
cover losses and expenses for that period. Investment income is 
expected to approach $500 million for the second half of the year. As 
noted above, for the same period insurance losses are projected to be 
$130 million, and operating expenses are projected to be approximately 
$260 million. Thus, based on current projections, investment income 
alone should suffice to cover BIF obligations unrelated to the reserve 
ratio in the second half of 1995.
    The proposed assessment rate schedule is the current, nine-cell 
matrix with assessment rates ranging from 4 basis points per year for 
the highest-rated institutions to 31 basis points for the lowest-rated 
institution (see Table 1, Proposed Rate Schedule). For purposes of 
maintaining the reserve ratio at 1.25%, the relevant fact is that the 
estimated 4.5 basis point average assessment rate resulting from this 
matrix will produce approximately $1.1 billion of annual revenue for 
the BIF in the short run. If the proposed matrix takes effect at or 
near the beginning of the second semiannual period in 1995, the reserve 
ratio will reach nearly 1.3% by year-end, under current assumptions 
concerning insurance losses, operating expenses, insured deposit 
growth, and other relevant factors.
    However, the staff's baseline assumptions imply that an average 
assessment rate of 4 to 5 basis points is necessary to maintain the BIF 
reserve ratio at 1.25% over a 5-7 year horizon (see Tables 2-4). While 
the baseline assumptions for insurance losses may be characterized as 
relatively pessimistic given current economic conditions, it is 
important to recognize that such conditions are rare in the banking 
industry's recent history. For 1994, the ratio of insurance losses to 
estimated insured deposits was approximately one-half of 1 basis point 
(estimated). This ratio had not previously fallen below 1 basis point 
in any year since 1980, averaging 16 basis points for the 1981-93 
period and exceeding 30 basis points in three of those years. 
Therefore, the staff's baseline loss assumptions may be considered 
rather optimistic relative to recent historical experience.
    The proposed matrix would yield assessment revenue sufficient to 
finance losses equal to the 60-year annual average, nearly 4 basis 
points of estimated insured deposits, with a margin to absorb losses 
that moderately exceed the average. In view of the recent experience 
reviewed above, the staff believes this to be the minimum amount 
necessary to maintain the DRR consistently over the near-term future.
    Given the increasing degree of competition faced by insured 
institutions, the increasing opportunities for risk-taking as a result 
of rapid financial innovation, and the increased variability of 
interest rates as well as other prices due to the globalization of 
markets and other factors, the staff believes that the loss experience 
in the banking industry is unlikely to revert to pre-1980 norms. 
Rather, the average yearly loss ratio is likely to exceed the 60-year 
average going forward, with large year-to-year variability.
    Prudence requires that the Board be provided with the flexibility 
to adjust assessment rates in a timely manner in response to changing 
conditions. Accordingly, the Board proposes to increase or decrease the 
proposed assessment schedule by an adjustment factor of up to 5 basis 
points or fraction thereof. The adjustment factor is the maximum amount 
by which the Board could adjust the assessment rate schedule without 
going through an additional notice and comment rulemaking process. Such 
adjustments could only be made to the assessment schedule in its 
entirety, not to individual risk classification cells. Nor could the 
spread of 27 basis points be changed by means of the adjustment factor. 
Accordingly, by means of the adjustment factor, the Board could adjust 
the proposed assessment schedule of 4-31 basis points to a maximum 
assessment schedule of 9-36 basis points and a minimum assessment 
schedule of 0-27 basis points.
    This adjustment factor would provide the Board with the flexibility 
to raise a maximum additional $1.2-$1.4 billion in the near term 
without undertaking a rulemaking. An adjustment factor of 5 basis 
points appears modest when viewed historically, as the loss-to-insured 
deposits ratio has been quite variable; the standard deviation was 8.6 
basis points for the 1933-93 period and [[Page 9277]] 11.7 basis points 
for 1983-93. In view of the currently favorable banking environment, 
however, a 5 basis point adjustment factor should be sufficient to 
maintain the DRR in the short run.

IV. Application and Adjustment of Proposed Assessment Rate Schedule

A. Summary

    The proposal would establish (1) the manner in which the new 
schedule of assessment rates set forth in Section III, will be applied 
in the semiannual period during which the DRR is achieved, and (2) a 
process for adjusting the proposed rate schedule (within prescribed 
parameters) to maintain the reserve ratio at 1.25% without the 
necessity of notice and comment rulemaking procedures for each 
adjustment. In conformity with the statutory directives, the proposed 
assessment schedule would not become effective unless and until the DRR 
is, in fact, achieved. Once effective, however, the proposed rate would 
apply to the remainder of the semiannual period after the DRR is 
achieved and to semiannual periods thereafter.
    For semiannual periods after that period in which the DRR is 
achieved, the proposed rate would be adjusted semiannually up or down 
by the adjustment factor of up to and including 5 basis points as 
necessary to maintain the target DRR at 1.25%. The semiannual 
assessment schedule, and any adjustment thereto, would be adopted by 
the Board in a resolution which reflects consideration of the statutory 
factors upon which it is determined. The Board would announce the 
semiannual assessment schedule not later than 45 days prior to the 
November 30 and May 30 quarterly invoice dates, and the adjusted rates 
would first be reflected in those invoices.

B. Semiannual Period During Which DRR Is Achieved

    Section 7(b)(2)(E) provides that:

    The Corporation shall design the risk-based assessment system 
for any deposit insurance fund so that, if the *** reserve ratio of 
that fund remains below the designated reserve ratio, the total 
amount raised by semiannual assessments on members of that fund 
shall be not less than the total amount that would have been raised 
if--
    (i) section 7(b) as in effect on July 15, 1991 remained in 
effect; and
    (ii) the assessment rate in effect on July 15, 1991 [23 basis 
points] remained in effect.

    Based on the language of this section as well as its legislative 
history, the Board believes that it has no authority to decrease the 
assessment rates paid by BIF members until after the reserve ratio has, 
in fact, reached the DRR, regardless of projections for BIF 
recapitalization. Section 7(b)(2)(E) indicates that the Board may not 
lower BIF assessment rates in anticipation of meeting the DRR during 
the upcoming semiannual period. If the Board were to decrease the rates 
based on projections for BIF recapitalization, the reserve ratio would 
``remain'' below the DRR at the time of the Board's action and the 
minimum assessments provisions of section 7(b) would continue to apply.
    This interpretation is consistent with Congressional intent that 
the FDIC maintain a minimum assessment rate of 23 basis points for BIF 
members until the fund achieves its DRR. In connection with the Senate 
Banking Committee's consideration of whether to establish a maximum 
assessment for BIF members, the Committee stated, ``[t]he Committee is 
firm in its view that the 23 basis point premium rate now in effect 
[during the second semiannual period of 1991] should not be reduced 
until the BIF achieves its designated reserve ratio.'' [Emphasis 
added.] S. Rep. No. 167, 102d Cong., 1st Sess., 30 (1991). The 
Committee believed that, ``So long as BIF reserves remain insufficient 
to cover demands on the BIF as they arise, taxpayers will be at risk'' 
and passed a bill which ``encourages the FDIC to begin rebuilding the 
BIF by restricting the FDIC's discretion to delay recapitalization.'' 
Id. at 29.
    If section 7(b)(2)(E) were further interpreted to mean that the 
FDIC must wait to reduce BIF rates until the beginning of the 
semiannual period after the DRR was reached, the FDIC would have 
collected far in excess of the revenue required to maintain the reserve 
ratio at the DRR with no mechanism for rebating the excess amounts. 
This is particularly the case if the BIF recapitalizes early in the 
semiannual period, as is indicated by current projections. If this 
provision were interpreted in this manner, the vast majority of the 
assessment revenue collected would not be needed to maintain the BIF at 
the DRR.
    Although the Board must set semiannual assessments for BIF members, 
the FDI Act is silent as to when assessments must be announced or set 
and expressly allows the Board to prescribe the manner and time of 
assessment collections. See FDI Act, sections 7(b)(2)(A); 7(b)(3) and 
7(c)(2)(B).4 12 U.S.C. 1817(b)(2)(A); 1817(b)(3) and 
1817(c)(2)(B). Thus, the Board may set semiannual assessment rates to 
take effect after the DRR has been achieved.

    \4\Section 7(b)(1)(A) was amended in FDICIA to permit the FDIC 
to establish ``and, from time to time, adjust the assessment rates * 
* *''. FDICIA, section 104(b). This provision was in effect from 
December 19, 1991 until January 1, 1994 when the risk-based 
assessment provisions became operative.
---------------------------------------------------------------------------

    The reserve ratio is the dollar amount of the BIF fund balance 
divided by the estimated insured deposits of BIF members. Although data 
for the fund balance is accounted for on a monthly basis, the amount of 
estimated insured deposits is based on data from the quarterly reports 
of condition (call reports). Because current projections indicate that 
the BIF will recapitalize early in the July-December semiannual period, 
the amount of estimated insured deposits would be determined by the 
information on the June call reports which are due on July 30 (or for 
some institutions, August 14). Due to the customary time lag involved 
in verifying the information from the call reports, it is probable that 
the determination that the DRR has been achieved will not be made until 
mid-September. Moreover, because the fund balance is determined only on 
a monthly, rather than daily basis, the date on which the Board 
ascertains that the DRR has been attained must necessarily be the last 
day of the month.
    Because the Board cannot lower assessment rates until it is certain 
that the DRR has been attained, the May 30 quarterly invoice and, very 
likely, the August 30 quarterly invoice will reflect the pre-DRR rate 
of approximately 6 basis points (one-quarter of the annual assessment 
rate of 23 basis points). The June 30 direct debit of the amount 
specified on the May 30 invoice will proceed as planned. However, in 
the event it is determined that the DRR has been attained before the 
September 30 direct debit occurs, the Board proposes to promptly notify 
BIF members that the September 30 direct debit will be modified to 
reflect the new assessment rate.
    Because the proposed 4-31 basis point assessment rate would apply 
from the first day of the month after the DRR was achieved for the 
remainder of the semiannual period, it is likely that some BIF members 
will have overpaid their semiannual assessments. For example, if the 
DRR is determined to have been achieved on July 31 and the 4-31 basis 
point rate becomes effective on August 1, a portion of the assessment 
paid for the July-September quarter would constitute an overpayment. In 
such a case, pursuant to section 7(e) of the FDI Act, the FDIC is 
permitted to refund any assessment overpayment or to credit the 
overpayment toward the next assessment due until the overpayment amount 
is exhausted.
    Section 7(e) applies in the case of ``any payment in excess of the 
amount [[Page 9278]] due''. The FDIC has interpreted this provision to 
apply case-by-case to an overpayment by an individual institution 
caused by a computation error or revisions to the institution's 
reported assessment base. Because individual institutions would have 
overpaid the amount that actually was due once the proposed rate became 
effective, section 7(e) should also be applicable in this situation.
    On the other hand, if the DRR is not achieved, no action would be 
required because the existing collection process would simply remain in 
effect. In such a case, the September 30 direct debit of the amount 
specified on the August 30 quarterly invoices would go forward. If the 
DRR were to be reached, for example, on September 30, the proposed rate 
would nonetheless take effect at that point for the remainder of the 
July-December semiannual period.
    In the event the FDIC collects more assessment revenue from an 
institution than is required for the July-December semiannual period, a 
refund of the overpayment, with interest from the time the DRR is 
achieved, would be provided. The FDIC intends to provide any such 
refund electronically using the ACH facility, but may do so by check. 
The same routing transit numbers and accounts used for the direct debit 
collection would be used for electronic refunds.

C. Semiannual Periods After the DRR Is Achieved

    The 4-31 basis point assessment schedule would continue to apply to 
semiannual periods commencing with the semiannual period after the DRR 
has been achieved (presumably January 1996). However, to enable the 
Board to maintain the reserve ratio at the target DRR in future 
semiannual periods, the proposal would authorize the Board to adjust 
(by resolution) the proposed assessment schedule by an adjustment 
factor of up to and including 5 basis points or fraction thereof. By 
this means the Board proposes to limit its discretion to adjust rates 
within a range of 5 basis points. As noted above, such adjustments 
could only be made to the assessment schedule in its entirety, not to 
individual risk classification cells. Nor could the spread of 27 basis 
points be changed by means of the adjustment factor. Accordingly, by 
means of the adjustment factor, the Board could adjust the proposed 
assessment schedule of 4-31 basis points to a maximum assessment 
schedule of 9-36 basis points and a minimum assessment schedule of 0-27 
basis points. Thus, for example, if the rate for 1A banks was 4 basis 
points, no matter how many times the assessment schedule were adjusted 
up or down, the rate for 1A banks could never go above 9 basis points 
without going through the notice and comment rulemaking process. 
Finally, if financial conditions warranted a change beyond the maximum 
amount of the adjustment factor, the Board would make such adjustments 
through the notice and comment rulemaking process.
    The adjustment factor for any particular semiannual period would be 
determined by (1) the amount of assessment income necessary to maintain 
the reserve ratio at 1.25% (taking into account operating expenses and 
expected losses) and (2) the particular risk-based assessment schedule 
that would generate that amount considering the risk composition of the 
industry at the time. The Board proposes to adjust the assessment rate 
schedule every six months by the amount, up to and including the 
maximum adjustment factor of 5 basis points, necessary to maintain the 
reserve ratio at the DRR. Such adjustments will be adopted in a Board 
resolution that reflects consideration of the statutory factors. These 
include expected operating expenses, projected losses, the effect on 
BIF members' earnings and capital and any other factors the Board 
determines to be relevant to the BIF. The resolution will be adopted 
and announced at least 45 days prior to the invoice date for the first 
quarter of the semiannual period in which the rate will take effect 
(i.e., November 30 and May 30 invoice dates). Those invoices would then 
first reflect the adjusted assessment rate schedule.

V. Request for Comment

    The Board invites comments on all aspects of the proposal.

VI. Paperwork Reduction Act

    No collections of information pursuant to section 3504(h) of the 
Paperwork Reduction Act (44 U.S.C. 3501 et seq.) are contained in this 
notice. Consequently, no information has been submitted to the Office 
of Management and Budget for review.

VII. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) does not 
apply to a rule of particular applicability relating to rates, wages, 
corporate or financial structures or reorganizations thereof. Id. at 
601(2). Accordingly, the statute does not apply to the proposed changes 
in the assessment rate schedule, the structure of that schedule and 
future adjustments thereto. In any event, to the extent an 
institution's assessment is based on the amount of its domestic 
deposits, the primary purpose of the Regulatory Flexibility Act, that 
agencies' rules do not impose disproportionate burdens on small 
businesses, is fulfilled.

List of Subjects in 12 CFR Part 327

    Assessments, Bank deposit insurance, Banks, Banking, Financing 
Corporation, Savings associations.

    For the reasons stated in the preamble, the Board proposes to amend 
part 327, as amended at 59 FR 67153 effective April 1, 1995, of title 
12 of the Code of Federal Regulations as follows:

PART 327--ASSESSMENTS

    1. The authority citation for part 327 continues to read as 
follows:

    Authority: 12 U.S.C. 1441, 1441b, 1817-1819.

    2. Section 327.8 is amended by adding a new paragraph (i) to read 
as follows:


Sec. 327.8  Definitions.

* * * * *
    (i) As used in Sec. 327.9, the following terms have the following 
meanings:
    (1) Adjustment factor. The maximum number of basis points by which 
the Board may increase or decrease Rate Schedule 2 set forth in 
Sec. 327.9(a).
    (2) Assessment schedule. The set of rates based on the assessment 
risk classifications of Sec. 327.4(a) with a difference of 27 basis 
points between the minimum rate which applies to institutions 
classified as 1A and the maximum rate which applies to institutions 
classified as 3C.
    3. Section 327.9 is amended by revising paragraphs (a) and (b), by 
redesignating paragraph (c) as paragraph (e) and adding new paragraphs 
(c) and (d) to read as follows:


Sec. 327.9  Assessment rate schedules.

    (a) BIF members. Subject to Sec. 327.4(c), the annual assessment 
rate for each BIF member other than a bank specified in Sec. 327.31(a) 
shall be the rate in the Rate Schedules below applicable to the 
assessment risk classification assigned by the Corporation under 
Sec. 327.4(a) to that BIF member. Until the BIF designated reserve 
ratio of 1.25 percent is achieved, the rates set forth in Rate Schedule 
1 shall apply. After the BIF designated reserve ratio is achieved, the 
rates set forth in Rate Schedule 2 shall apply. The schedules utilize 
the group and subgroup designations specified in Sec. 327.4(a):

                                                                        
[[Page 9279]]                                                           
                             Rate Schedule 1                            
------------------------------------------------------------------------
                                                   Supervisory subgroup 
                  Capital group                  -----------------------
                                                     A       B       C  
------------------------------------------------------------------------
1...............................................      23      26      29
2...............................................      26      29      30
3...............................................      29      30      31
------------------------------------------------------------------------


                             Rate Schedule 2                            
------------------------------------------------------------------------
                                                   Supervisory subgroup 
                  Capital group                  -----------------------
                                                     A       B       C  
------------------------------------------------------------------------
1...............................................       4       7      21
2...............................................       7      14      28
3...............................................      14      28      31
------------------------------------------------------------------------

    (b) BIF recapitalization schedule. The following schedule indicates 
the stages by which the Corporation seeks to achieve the BIF designated 
reserve ratio of 1.25 percent. The schedule begins with the semiannual 
period ending December 31, 1991 and ends on the earlier of the 
semiannual period ending June 30, 2002 or the date on which the BIF 
designated reserve ratio is achieved:

------------------------------------------------------------------------
                                                                 Target 
                                                                reserve 
                      Semi-annual period                         ratio  
                                                               (percent)
------------------------------------------------------------------------
1991.2.......................................................      -0.36
1992.1.......................................................      -0.28
1992.2.......................................................      -0.01
1993.1.......................................................       0.03
1993.2.......................................................       0.06
1994.1.......................................................       0.08
1994.2.......................................................       0.09
1995.1.......................................................       0.15
1995.2.......................................................       0.21
1996.1.......................................................       0.28
1996.2.......................................................       0.34
1997.1.......................................................       0.42
1997.2.......................................................       0.50
1998.1.......................................................       0.59
1998.2.......................................................       0.67
1999.1.......................................................       0.76
1999.2.......................................................       0.85
2000.1.......................................................       0.94
2000.2.......................................................       1.03
2001.2.......................................................       1.12
2001.2.......................................................       1.21
2002.1.......................................................       1.25
------------------------------------------------------------------------

    (c) Rate adjustment; announcement--(1) Semiannual adjustment. The 
Board may increase or decrease Rate Schedule 2 set forth in paragraph 
(a) of this section semiannually by an adjustment factor of up to and 
including 5 basis points or fraction thereof as the Board deems 
necessary to maintain the reserve ratio at the BIF designated reserve 
ratio. In no case may such adjustment result in a negative assessment 
rate. The adjustment factor for any semiannual period shall be 
determined by:
    (i) The amount of assessment revenue necessary to maintain the 
reserve ratio at the designated reserve ratio; and
    (ii) The assessment schedule that would generate the amount of 
revenue in paragraph (c)(1)(i) of this section considering the risk 
profile of BIF members.
    (2) In determining the amount of assessment income in paragraph 
(c)(1)(i) of this section, the Board shall take into consideration the 
following:
    (i) Expected operating expenses;
    (ii) Case resolution expenditures and income;
    (iii) The effect of assessments on BIF members' earnings and 
capital; and
    (iv) Any other factors the Board may deem appropriate.
    (3) Announcement. The Board shall:
    (i) Adopt the semiannual assessment schedule and any adjustment 
thereto by means of a resolution reflecting consideration of the 
factors specified in paragraph (c)(2)(i) through (iv) of this section; 
and
    (ii) Announce the semiannual assessment schedule and any adjustment 
thereto not later than 45 days before the invoice date specified in 
Sec. 327.4(c) for the first quarter of the semiannual period for which 
the adjusted assessment schedule shall be effective.
    (d) Special provisions. The following provisions apply only for the 
first semiannual period after January 1, 1995 in which the BIF 
designated reserve ratio is achieved:
    (1) Notwithstanding the provisions of Sec. 327.3(c)(2) or 
Sec. 327.3(d)(2), the Corporation may modify the time of the direct 
debit of the assessment payment which next occurs after the Board 
determines that the designated reserve ratio has been achieved; and
    (2) Notwithstanding the provisions of Sec. 327.7(a)(3), if the 
designated reserve ratio is achieved at the end of a month which is not 
the end of a quarter and, as a result, an institution has overpaid its 
assessment, the Corporation shall provide interest on any such 
overpayment beginning on the date the designated reserve ratio was 
achieved.
* * * * *
    By order of the Board of Directors.

    Dated at Washington, D.C., this 31st day of January 1995.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Acting Executive Secretary.
[FR Doc. 95-3670 Filed 2-15-95; 8:45 am]
BILLING CODE 6714-01-P