[Federal Register Volume 60, Number 158 (Wednesday, August 16, 1995)]
[Rules and Regulations]
[Pages 42741-42752]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20172]



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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327

RIN 3064-AB59


Assessments; Retention of Existent Assessment Rate Schedule for 
SAIF-Member Institutions

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

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SUMMARY: This final rule retains the existing assessment rate schedule 
applicable to members of the Savings Association Insurance Fund (SAIF). 
The effect of this final rule is that the SAIF assessment rates to be 
paid by depository institutions whose deposits are subject to 
assessment by the SAIF will continue to range from 23 cents per $100 of 
assessable deposits to 31 cents per $100 of assessable deposits, 
depending on risk classification.

EFFECTIVE DATE: This final rule becomes effective September 15, 1995.

FOR FURTHER INFORMATION CONTACT: James R. McFadyen, Senior Financial 
Analyst, Division of Research and Statistics, (202) 898-7027, or 
Valerie Jean Best, Counsel, Legal Division, (202) 898-3812, Federal 
Deposit Insurance Corporation, Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION: The Board of Directors of the FDIC (Board) 
is retaining the existing assessment rate 

[[Page 42742]]
schedule applicable to members of the SAIF. The order of discussion 
under this caption is as follows. The proposed rule to retain the 
existing assessment rate schedule for SAIF-member institutions is 
outlined in Section I. The final rule adopted by the Board through this 
rulemaking procedure is described in Section II. The statutory 
provisions governing SAIF assessment rates are summarized in Section 
III. Next, a detailed description of the problems confronting the SAIF 
is set forth in Section IV. The comment letters received in response to 
the proposed rule are analyzed under the caption ``Comment Summary'', 
and the FDIC's response to the comments is set forth under the caption 
``Adoption of Final Rule''.

Background

I. Introduction; The SAIF Assessment-Rate Proposal

    The Board has the legal authority to reduce SAIF assessment rates 
to a minimum average of 18 basis points until January 1, 1998. 
Beginning January 1, 1998, the minimum average rate must be 23 basis 
points until SAIF achieves its designated reserve ratio (DRR) of 1.25 
percent of estimated insured deposits. Based upon the results of its 
semiannual review of the capitalization of the SAIF and of the SAIF 
assessment rates, the Board was inclined to retain the existing 
assessment rate schedule applicable to SAIF-member institutions for the 
second semiannual assessment period of 1995 so that capitalization of 
the SAIF is accomplished as soon as possible.
    The FDIC wished to have the benefit of public comment before ending 
its review for the period, however. Therefore, on February 16, 1995, 
the Board published a proposed rule to retain the existing assessment 
rate schedule applicable to members of the SAIF.1 The Board 
requested comment on all aspects of the proposed rule. At the same 
time, the Board published a proposed rule to decrease the assessment 
rate schedule for members of the Bank Insurance Fund (BIF) to a range 
of 4-31 basis points, depending on risk classification, when the 
reserve ratio of the BIF attains the minimum DRR of 1.25 percent of 
estimated insured deposits.2

    \1\ 60 FR 9266 (Feb. 16, 1995).
    \2\ 60 FR 9270 (Feb. 16, 1995).
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    The Board held a hearing at FDIC headquarters in Washington, D.C. 
on March, 17, 1995 to provide opportunity for interested parties to 
express orally their views on the proposals to decrease assessment 
rates for members of the BIF while retaining the 23-31 basis point 
assessment schedule for members of the SAIF. Every person or 
organization that requested an opportunity to testify was accommodated.
    A total of twenty witnesses were heard by the full Board during the 
day-long hearing. They included the Savings Association Insurance Fund 
Industry Advisory Committee, the American Bankers Association, the 
Independent Bankers Association of America, America's Community 
Bankers, the National Association of Home Builders, several bank or 
thrift associations, individual bank and thrift executives, consumer 
organizations, a private sector attorney and an independent consultant. 
The written testimony of each witness as well as the hearing record 
were included in the FDIC's public comment file on the two proposals.
    The public comment period for both proposals expired on April 17, 
1995. The Board received a combined total of over 3,200 comment letters 
including testimony from the public hearing. After taking into account 
duplicate letters submitted by the same commenter, 2,891 comments were 
tabulated representing 2,310 individual BIF member respondents, 454 
individual SAIF member respondents, 61 trade associations and 66 other 
individuals/organizations. Comments concerning the BIF proposal are 
discussed in a separate final rule governing BIF assessment rates 
published elsewhere in this Federal Register.
    As detailed in the Comment Summary below, thrifts commenting on the 
SAIF proposal uniformly asked that the impending disparity between 
premiums assessed against the banking industry and the thrift industry 
be reduced or eliminated. A significant number of SAIF members stated, 
however, that a reduction in SAIF assessment rates to the minimum 
authorized by current law would not resolve the long-term challenges 
facing SAIF. They noted that, among other things, draws on the SAIF by 
the Financing Corporation (FICO) would continue to undermine the SAIF. 
Many of these commenters urged legislative action, stating that ``the 
Congress must act decisively to defuse the coming crisis of the SAIF''. 
The legislative initiatives suggested by the various commenters require 
Congressional action and were not part of the assessment-rate 
proposals. Nonetheless, these initiatives are included in the Comment 
Summary in an effort to present a complete review of the comments 
received by the FDIC and in recognition of the significant number of 
letters that offered comments on such initiatives.

II. Description of Final Rule

    After considering the comments received in response to the proposed 
rule and other relevant information, the Board has determined to retain 
the existing assessment rate schedule applicable to members of the 
SAIF. As a result of this action, the SAIF assessment rate to be paid 
by institutions whose deposits are subject to assessment by the SAIF 
will continue to range from 23 cents per $100 of assessable deposits to 
31 cents per $100 of assessable deposits, depending on risk 
classification.
    Despite the general good health of the thrift industry, the SAIF is 
not in good condition and its prospects are not favorable. The issues 
confronting the SAIF are discussed in detail under Section IV. To 
summarize, the SAIF is significantly undercapitalized. On March 31, 
1995, the SAIF had a balance of $2.2 billion, or about 31 cents in 
reserves for every $100 in insured deposits. An additional $6.6 billion 
would have been required on that date to fully capitalize the SAIF to 
its DRR of 1.25 percent of estimated insured deposits. At the current 
pace, and under reasonably optimistic assumptions, the SAIF would not 
reach the statutorily mandated DRR until at least the year 2002. 
Moreover, the SAIF became responsible for resolving failed thrifts on 
July 1, 1995. The failure of a single large SAIF-insured institution or 
several sizeable institutions or an economic downturn leading to higher 
than anticipated losses could render the fund insolvent. While the FDIC 
is not currently predicting such thrift failures, they are possible.
    The main source of income for the SAIF is assessments. A sizable 
portion of the SAIF's ongoing assessments is diverted to meet interest 
payments on obligations of the FICO. Reducing the minimum average rate 
to 18 basis points is presently projected to delay SAIF capitalization 
until 2005, and it would cause a FICO shortfall as early as 1996. 
Moreover, there will still be a significant differential between BIF 
and SAIF assessment rates even if the Board reduces the SAIF 
assessments to the minimum average allowed by statute.

III. Statutory Provisions Governing SAIF Assessment Rates

A. Section 7 of the Federal Deposit Insurance Act
    Section 7(b) of the Federal Deposit Insurance Act (FDI Act) governs 
the Board's authority for setting assessments for SAIF members. 12 
U.S.C. 1817(b). Section 7(b)(1)(A) and (C) require that the FDIC 
maintain a risk-based 

[[Page 42743]]
assessment system, setting assessments based on: (1) The probable risk 
to the fund posed by each insured depository institution taking into 
account different categories and concentrations of assets and 
liabilities and any other relevant factors; (2) the likely amount of 
any such loss; and (3) the revenue needs of the fund. Section 
7(b)(2)(A)(iii) further directs the Board to impose a minimum 
assessment on each institution not less than $1,000 semiannually. The 
Board must set semiannual assessments and the DRR for each deposit 
insurance fund independently. FDI Act section 7(b)(2)(B).
    In general, the Board must set semiannual assessments for SAIF 
members to maintain the reserve ratio at the DRR or, if the reserve 
ratio is less than the DRR, to increase the reserve ratio to the DRR. 
FDI Act section 7(b)(2)(A)(i). The reserve ratio is the dollar amount 
of the fund balance divided by estimated SAIF-insured deposits. The DRR 
for the SAIF is currently 1.25 percent of estimated insured deposits, 
the minimum level permitted by the FDI Act. In setting SAIF assessments 
to achieve and maintain the DRR, the Board must consider the SAIF's 
expected operating expenses, case resolution expenditures and income, 
the effect of assessments on members' earnings and capital, and any 
other factors that the Board may deem appropriate. FDI Act section 
7(b)(2)(D).
    Before January 1, 1998, if the SAIF remains below the DRR, the 
total amount raised by semiannual assessments on SAIF members may not 
be less than the amount that would have been raised if section 7(b) as 
in effect on July 15, 1991 remained in effect. See FDI Act section 
7(b)(2)(E) and (F). The minimum rate required by section 7(b) as then 
in effect was 0.18 percent.
    Beginning January 1, 1998, all minimum assessment provisions 
applicable to BIF members also apply to SAIF members. Under these 
provisions, if the SAIF remains below the DRR, the total amount raised 
by semiannual assessments on SAIF members may not be less than the 
amount that would have been raised by an assessment rate of 0.23 
percent. See FDI Act section 7(b)(2)(E).
    In setting semiannual assessments for members of the SAIF, 
beginning January 1, 1998, if the reserve ratio of the SAIF is less 
than the DRR, the Board must set semiannual assessments either, (a) at 
rates sufficient to increase the reserve ratio to the DRR within 1 year 
after setting the rates, or (b) in accordance with a schedule for 
recapitalization, adopted by regulation, that specifies target reserve 
ratios at semiannual intervals culminating in a reserve ratio that is 
equal to the DRR not later than 15 years after implementation of the 
schedule. FDI Act section 7(b)(3). Section 8(h) of the Resolution Trust 
Corporation Completion Act (RTCCA), Public. Law. No. 103-204, 107 Stat. 
2369, 2388, amended section 7(b)(3) to allow the Board, by regulation, 
to amend the SAIF capitalization schedule to extend the date by which 
the SAIF must be capitalized beyond the 15-year time limit to a date 
which the Board determines will, over time, maximize the amount of 
semiannual assessments received by the SAIF, net of insurance losses 
incurred. FDI Act section 7(b)(3)(C).
    Amounts assessed by the FICO against SAIF members must be 
subtracted from the amounts authorized to be assessed by the Board. FDI 
Act section 7(b)(2)(D).
    In order to achieve SAIF capitalization, the Board adopted a risk-
related assessment matrix in September 1992 (see Table 1) which has 
remained unchanged.

 Table 1.--SAIF-Member Assessment Rate Schedule for the First Semiannual
                        Assessment Period of 1995                       
                             [Basis points]                             
------------------------------------------------------------------------
                                                         Supervisory    
                                                           subgroup     
                   Capital group                    --------------------
                                                       A      B      C  
------------------------------------------------------------------------
 Well Capitalized..................................     23     26     29
 Adequately Capitalized............................     26     29     30
 Undercapitalized..................................     29     30     31
------------------------------------------------------------------------

B. Statutory Provisions Governing FICO Assessments
    FICO was originated by section 302 of the Competitive Equality 
Banking Act of 1987 (CEBA), Public Law 100-86, 101 Stat. 552, 585, 
which added section 21 to the Federal Home Loan Bank Act (FHLB Act).\3\ 
FICO's assessment authority derives from section 21(f) of the FHLB Act, 
12 U.S.C. 1441(f). As amended by section 512 of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), 
Public Law 101-73, 103 Stat. 183, 406, section 21(f) requires that FICO 
obtain funding for ``anticipated interest payments, issuance costs, and 
custodial fees'' on FICO obligations from the following sources, in 
descending priority order: (1) FICO assessments previously imposed on 
savings associations under pre-FIRREA funding provisions; (2) ``with 
the approval'' of the FDIC Board, assessments against SAIF member 
institutions; and (3) FSLIC Resolution Fund (FRF) receivership proceeds 
not needed for the Resolution Funding Corporation (REFCORP) Principal 
Fund.

    \3\ Title III of CEBA, entitled the Federal Savings and Loan 
Insurance Corporation Recapitalization Act of 1987, directed the 
Federal Home Loan Bank Board to charter FICO for the purpose of 
financing the recapitalization of the FSLIC by purchasing FSLIC 
securities (and, subsequently, securities issued by the FSLIC 
Resolution Fund as successor to FSLIC).
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    Under section 21(f)(2), FICO assessments against SAIF members are 
to be made in the same manner as FDIC insurance assessments under 
section 7 of the FDI Act. The amount of the FICO assessment--together 
with any amount assessed by REFCORP under section 21B of the FHLB Act--
must not exceed the insurance assessment amount authorized by section 
7.\4\ Section 21(f)(2) further provides that FICO ``shall have first 
priority to make the assessment'', and that the amount of the insurance 
assessment under section 7 is to be reduced by the amount of the FICO 
assessment. One important effect of the FICO assessment is to 
exacerbate any differential that may exist between BIF and SAIF 
assessment rates.

    \4\ The REFCORP Principal Fund is now fully funded and, 
accordingly, REFCORP's assessment authority has effectively 
terminated.
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IV. Problems Confronting the SAIF

A. Background: SAIF Assessment Rates
    As stated in the Board's proposal, in deciding against changes in 
the SAIF assessment rate, the Board has considered the SAIF's expected 
operating expenses, case resolution expenditures and income under a 
range of scenarios. The Board also has considered the effect of an 
increase in the assessment rate on SAIF members' earnings and capital. 
When first adopted, the assessment rate schedule yielded a weighted 
average rate of 25.9 basis points. With subsequent improvements in the 
industry and the migration of institutions to lower rates within the 
assessment matrix, the average rate has declined to 23.7 basis points 
(based on risk-based assessment categories as of July 1, 1995 and the 
assessment base as of March 31, 1995--see Table 2).

                                                                        

[[Page 42744]]
            Table 2.--SAIF Assessment Base Distribution Supervisory and Capital Ratings in Effect July 1, 1995 Deposits as of March 31, 1995            
                                                                      [In billions]                                                                     
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                                                                                                       Supervisory subgroup                             
                Capital group                                           --------------------------------------------------------------------------------
                                                                               A            A             B            B             C            C     
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Well Capitalized.............................  Number..................       1,553          85.9%         138            7.6          25           1.4%
                                               Base....................        $604.8        83.4%         $58.0         8.0%         $16.6         2.3%
Adequately Capitalized.......................  Number..................          25           1.4%          31           1.7%          26           1.4%
                                               Base....................         $17.4         2.4%         $18.3         2.5%          $6.9         1.0%
Under Capitalized............................  Number..................           0           0.0%           0           0.0%          10           0.6%
                                               Base....................          $0.2         0.0%          $0.0         0.0%          $3.4         0.5%
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``Number'' reflects the number of SAIF members; ``Base'' reflects the SAIF-assessable deposits of SAIF members and of BIF-member Oakar banks.           


    The primary source of funds for the SAIF is assessment revenue from 
SAIF-member institutions. Since the creation of the fund and through 
the end of 1992, however, all assessments from SAIF-member institutions 
were diverted to other needs as required by FIRREA.\5\ Only assessment 
revenue generated from BIF-member institutions that acquired SAIF-
insured deposits under section 5(d)(3) of the FDI Act (12 U.S.C. 
1815(d)(3)) (so-called ``Oakar'' banks) was deposited in the SAIF 
throughout this period.

    \5\ From 1989 through 1992, more than 90 percent of SAIF 
assessment revenue went to the FRF, the REFCORP and the FICO.
B. The SAIF is Significantly Undercapitalized
    SAIF-member assessment revenue began flowing into the SAIF on 
January 1, 1993. However, the FICO has a priority claim on SAIF-member 
assessments in order to service FICO bond obligations. Under existing 
statutory provisions, FICO has assessment authority through 2019, the 
maturity year of its last bond issuance. At a maximum of $793 million 
per year, the FICO draw is substantial, and is expected to represent 45 
percent of estimated assessment revenue for 1995, or 11 basis points of 
the average assessment rate of 23.7 basis points.\6\ The SAIF had a 
balance of $2.2 billion (unaudited) on March 31, 1995. With primary 
resolution responsibility residing with the Resolution Trust 
Corporation (RTC), there have been few demands on the SAIF. The SAIF 
assumed resolution responsibility for failed thrifts from the RTC on 
July 1, 1995, however. In addition to assessment revenue and investment 
income, there are other potential sources of funds for the SAIF as 
follows. First, the FDIC has a $30 billion line of credit available 
from the Department of the Treasury (Treasury) for deposit insurance 
purposes, which to date has not been utilized. FDI Act section 14(a). 
The SAIF would have to repay any amounts borrowed from the Treasury 
with premium revenues, however. The FDIC would have to provide the 
Treasury with a repayment schedule demonstrating that future premium 
revenue would be adequate to repay any amount borrowed plus interest. 
FDI Act section 14(c).

    \6\ The FICO has an annual call on up to the first $793 million 
in SAIF assessments until the year 2017, with decreasing calls for 
two additional years thereafter. With interest credited for early 
payment, the actual annual draw is expected to approximate $780 
million.
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    Next, the RTCCA authorized the appropriation of up to $8 billion in 
Treasury funds to pay for losses incurred by the SAIF during fiscal 
years 1994 through 1998, to the extent of the availability of 
appropriated funds. In addition, at any time before the end of the 2-
year period beginning on the date of the termination of the RTC, the 
Treasury is to provide out of funds appropriated to the RTC but not 
expended, such amounts as are needed by the SAIF and are not needed by 
the RTC. To obtain funds from either of these sources, however, certain 
certifications must be made to the Congress by the Chairman of the 
FDIC. FDI Act sections 11(a)(6)(D), (E) and (J). Among these, the 
Chairman must certify that the Board has determined that:

    (1) SAIF members are unable to pay additional semiannual 
assessments at the rates required to cover losses and to meet the 
repayment schedule for any amount borrowed from the Treasury for 
insurance purposes under the FDIC's line of credit without adversely 
affecting the SAIF members' ability to raise capital or to maintain 
the assessment base; and
    (2) An increase in assessment rates for SAIF members to cover 
losses or meet any repayment schedule could reasonably be expected 
to result in greater losses to the Government.

    It may require extremely grave conditions in the thrift industry in 
order for the FDIC to certify that raising SAIF assessments would 
result in increased losses to the Government. Moreover, these funds 
cannot be used to capitalize the fund--that is, to provide an insurance 
reserve, which was the original purpose of requiring a 1.25 reserve 
ratio.
    The RTC's resolution activities and the thrift industry's 
substantial reduction of troubled assets in recent years have resulted 
in a relatively sound industry as the SAIF assumes resolution 
responsibility. However, with a balance of $2.2 billion, the SAIF does 
not have a large cushion with which to absorb the costs of thrift 
failures. The FDIC has significantly reduced its projections of failed-
thrift assets for 1995 and 1996, but the failure of a single large 
institution or several sizeable institutions or an economic downturn 
leading to higher than anticipated losses could render the fund 
insolvent. The FDIC's loss projections for the SAIF are discussed in 
more detail below.
C. Condition and Performance of SAIF-Member Institutions \7\
    During the first quarter of 1995, SAIF-member institutions 
continued to improve asset quality and posted improved, though modest, 
earnings. SAIF members had a return on assets of 0.64 percent in the 
first quarter, up from 0.55 percent in the fourth quarter and 0.40 
percent in the first quarter of 1994, when a few of the largest thrifts 
incurred substantial restructuring charges. Earnings improvement over 
the fourth quarter was due to lower loss provisions (down 18 percent) 
and reduced noninterest expense (down 10 percent). This helped offset 
lower net interest income caused by a narrowing of the average net 
interest margin, which fell to 2.97 percent from 3.12 percent in the 
fourth quarter. Increased competition for deposits, particularly in the 
West Region, raised interest expense 

[[Page 42745]]
by 6.5 percent over the fourth quarter, while interest income was up 
only 1.7 percent.

    \7\ Excluding one RTC conservatorship and one self-liquidating 
savings institution.
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    Asset quality continued to improve in the first quarter, as 
noncurrent loans fell 4.2 percent from year-end 1994 and 28 percent 
from the level of a year ago. The inventory of foreclosed real estate 
fell even further, down 7.3 percent during the first quarter and 40 
percent over four quarters. Although loss reserves have declined 
slightly over the past year, the drop in noncurrent loans resulted in a 
coverage ratio of 84 cents for each dollar of noncurrent loans, about 
the same as in December and 10 cents higher than in March 1994. Most 
major balance sheet categories, including total assets, loans and 
deposits, showed small declines during the first three months of 1995, 
although equity capital grew slightly, raising the equity-to-assets 
ratio to 7.88 percent.
    As of March 31, 1995, there were 1,806 members of the SAIF, 
including 1,731 savings institutions and 75 commercial banks. On this 
date, there were 58 SAIF-member ``problem'' institutions with total 
assets of $32 billion, compared to 83 institutions with $63 billion a 
year earlier. No SAIF members failed during the first quarter of 1995.
    This discussion has focused on the improving condition of the SAIF-
member thrift industry, but any such discussion must mention the 
relatively weak economic conditions still confronting a large segment 
of the industry. Eighteen percent of all SAIF-insured deposits are 
concentrated in the nation's eight largest thrift institutions, all of 
which operate predominantly in California. This state, in general, has 
lagged behind most of the nation in recovering from the most recent 
recession, and many California thrifts have significant exposure in the 
weakest areas of southern California. Additionally, a few large 
institutions have suffered low earnings and still have relatively high 
levels of risk in their loan portfolios. Consequently, despite the 
improving health of the thrift industry, the SAIF still faces 
significant risk relative to the fund's current reserve level.
D. Impact of a Premium Differential
    In a separate rule-making on August 8, 1995, the Board adopted a 
final rule amending the FDIC's regulation on assessments to establish a 
new assessment rate schedule for institutions whose deposits are 
subject to assessment by the BIF. Under the new schedule, BIF 
assessment rates range from 4 to 31 basis points, compared to a range 
of 23 to 31 basis points under the former BIF schedule and the current 
SAIF schedule. Lower BIF rates were adopted because the BIF is believed 
to have recapitalized during the second quarter of 1995. Largely due to 
the FICO obligation, the SAIF is not expected to capitalize until 2002 
(this projection is discussed below), and SAIF assessment rates cannot 
be lowered below the statutory minimum of 18 basis points.
    Under the current BIF and SAIF assessment rate schedules, average 
SAIF rates are likely to remain about 20 basis points higher than 
average BIF rates for the next seven years, until the SAIF is 
capitalized. After capitalization, SAIF rates would continue to be at 
least 11 basis points higher until the FICO bonds mature in 2017 to 
2019, assuming the Board sets SAIF assessment rates to cover FICO's 
needs.
    If BIF members pass along their assessment savings to their 
customers, SAIF members may be forced to pay more for deposits or 
charge less for loans to remain competitive. For SAIF members, this 
could result in reduced earnings and an impaired ability to raise funds 
in the capital markets. Among the weakest thrifts, a 20-basis point 
differential could result in competitive pressures that cause 
additional failures. An analysis of over a five-year time span suggests 
that any such increase in failures attributable to an average 20-basis 
point differential is likely to be sufficiently small as to be 
manageable by the SAIF under current interest-rate and asset-quality 
conditions. Moreover, the analysis indicates that under harsher than 
assumed interest-rate and asset-quality conditions, these economic 
factors would have a significantly greater effect on SAIF-member 
failure rates than would an average 20-basis point premium 
differential.
    A separate analysis focused on BIF and SAIF members in the 3C 
assessment categories (undercapitalized/supervisory subgroup C) that 
will be paying 31 basis points. These weaker institutions will be 
competing with a large group of BIF members in category 1A (well 
capitalized/supervisory category A) that will be paying only 4 basis 
points. The analysis assumed that the 3C institutions would have to 
absorb the entire 27-basis point differential in the form of higher 
interest paid or lower interest earned. The result was that apart from 
institutions that have already been identified by the FDIC's 
supervisory staff as likely failures, the wider spread is likely to 
have a minimal impact in terms of additional failures.
    Nevertheless, the Board recognizes that a premium differential 
between BIF- and SAIF-insured institutions is likely to increase 
competitive pressures on thrifts and impede their ability to generate 
capital both internally and externally.\8\

    \8\ See ``The Condition of the BIF and the SAIF and Related 
Issues,'' Testimony of Ricki Helfer, Chairman, FDIC, before the 
Subcommittee on Financial Institutions and Consumer Credit, 
Committee on Banking and Financial Services, U.S. House of 
Representatives, Attachment C entitled ``Analysis of Issues 
Confronting the Savings Association Insurance Fund,'' March 23, 
1995.
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E. Assessment Rate Spread
    Under the SAIF assessment rate schedule there is a spread of 8 
basis points, from 23 basis points for institutions in category 1A to 
31 basis points for institutions in category 3C. Under the newly 
adopted BIF assessment schedule, the spread for BIF members was 
increased from 8 to 27 basis points. This was accomplished by dropping 
the minimum, most favorable rate from 23 to 4 basis points. Thus, the 
weakest BIF members will incur no additional deposit insurance cost. In 
order to apply a similar 27-basis point spread to SAIF members, it 
would be necessary to raise the highest SAIF assessment rate to 45 to 
50 basis points, based on a lowest rate of 18 to 23 basis points. 
Because 86 percent of SAIF members would continue to pay the lowest 
rate, the revenue benefit of a 27-basis point spread would be limited. 
However, analysis indicates that SAIF assessments ranging to 50 basis 
points, creating a premium differential of as much as 46 basis points, 
would greatly increase the expenses of SAIF members and likely would 
result in significant additional failures. While the Board recognizes 
that a spread of more than 8 basis points would better serve the goals 
of a risk-related premium system, given the minimum average of 18 basis 
points currently prescribed by law, a wider spread could only be 
implemented by raising rates for all but the strongest SAIF members, 
which likely would have adverse consequences for an undercapitalized 
SAIF. For these reasons, the Board chose to retain an assessment rate 
spread of 8 basis points for members of the SAIF.
F. The Ability of the SAIF to Fund FICO
    Under law, SAIF assessments paid by BIF-member Oakar banks are 
deposited in the SAIF and are not subject to FICO draws.\9\

    \9\ See Notice of FDIC General Counsel's Opinion No. 7, 60 FR 
7055 (Feb. 6, 1995).
    Further, SAIF assessments paid by any former savings association 
that: (i) Has converted from a savings association charter to a bank 
charter, and (ii) remains a SAIF member in accordance with section 
5(d)(2)(G) of the FDI Act (12 U.S.C. 1815(d)(2)(G)) (a 

[[Page 42746]]
so-called ``Sasser'' bank), are likewise not subject to assessment by 
FICO.10 On March 31, 1995, BIF-member Oakar banks held 26.8 
percent of the SAIF assessment base, and SAIF-member Sasser banks held 
an additional 7.2 percent (see Table 3).

    \10\ Id.

                          Table 3.--Percentage Distribution of the SAIF Assessment Base                         
----------------------------------------------------------------------------------------------------------------
                                                                      Not available to FICO                     
                                                  Available  ---------------------------------------    Total   
                                                   to FICO       Oakar        Sasser      Subtotal    (percent) 
                                                  (percent)    (percent)    (percent)    (percent)              
----------------------------------------------------------------------------------------------------------------
12/89..........................................         99.8          0.2          0.0          0.2        100.0
12/90..........................................         95.8          3.9          0.3          4.2        100.0
12/91..........................................         89.9          8.7          1.5         10.1        100.0
12/92..........................................         85.9         10.3          3.8         14.1        100.0
12/93..........................................         74.7         19.4          5.9         25.3        100.0
12/94..........................................         67.3         25.4          7.3         32.7        100.0
3/95...........................................         66.0         26.8          7.2         34.0        100.0
----------------------------------------------------------------------------------------------------------------

    While the pace of Oakar acquisitions slowed as RTC resolution 
activity wound down, Oakar acquisitions may continue and become an even 
greater proportion of the SAIF assessment base.11 This has the 
potential result of the SAIF having insufficient assessments to cover 
the FICO obligation at current assessment levels. The rate of Sasser 
conversions is difficult to predict and is partially dependent on state 
laws, but any future conversions would also decrease the proportion of 
SAIF assessment revenues available to FICO.

    \11\ SAIF-assessable deposits held by BIF-member Oakar banks 
will continue to grow at the same rate as the Oakar bank's overall 
deposit base. Under section 5(d)(3) of the FDI Act, as amended by 
the Federal Deposit Insurance Corporation Improvement Act of 1991 
(FDICIA), such deposits are adjusted annually by the acquiring 
institution's overall deposit growth rate (excluding the effects of 
mergers or acquisitions).
---------------------------------------------------------------------------

    In addition to the growth of the Oakar/Sasser portion of the SAIF 
assessment base, the ability of the SAIF to fund FICO interest payments 
will be adversely affected by an ongoing premium differential. A 
differential is likely to create powerful incentives for SAIF-insured 
institutions to minimize their premium costs by reducing their SAIF-
assessable deposits.12 This can be accomplished in a number of 
ways despite the current moratorium on the conversion of SAIF-insured 
deposits to BIF-insured deposits. SAIF-insured institutions could 
reduce their SAIF deposits by shifting their funding to nondeposit 
liabilities, such as Federal Home Loan Bank advances and reverse 
repurchase agreements. Institutions could also reduce their funding 
needs by securitizing assets or by changing business strategies, such 
as choosing to become a mortgage bank. Lastly, SAIF-insured 
institutions and their parent companies could structure affiliate 
relationships that would facilitate the migration of deposits from a 
SAIF-insured institution to a BIF-insured affiliate. At least a dozen 
organizations have already filed applications seeking to establish such 
affiliate relationships.

    \12\ ``The Condition of the SAIF and Related Issues,'' Testimony 
of Ricki Helfer, Chairman, FDIC, before the Committee on Banking, 
Housing, and Urban Affairs, U.S. Senate, Attachment A entitled ``The 
Immediacy of the Savings Association Insurance Fund Problem'', July 
28, 1995. ``The Condition of the SAIF and Related Issues,'' 
Testimony of Ricki Helfer, Chairman, FDIC, before the Subcommittee 
on Financial Institutions and Consumer Credit, Committee on Banking 
and Financial Services, U.S. House of Representatives, Attachment A 
entitled ``The Immediacy of the Savings Association Insurance Fund 
Problem,'' August 2, 1995.
---------------------------------------------------------------------------

    If a competitive imbalance attributable to a premium differential 
materializes, that is, if BIF members pass along their savings to their 
customers, a rapid acceleration in the shrinkage of the SAIF assessment 
base could begin soon thereafter. With two insurance funds providing 
essentially the same product at significantly different prices, it must 
be expected that purchasers will seek the lower price. Attempts to 
control this behavior through legislation or regulation are likely to 
be ineffective and may only result in companies finding less efficient 
means. A result of the expected shrinkage of the SAIF assessment base 
could be a default on FICO bonds. At current assessment rates, a SAIF 
assessment base of $328 billion is needed to generate sufficient 
assessment revenue to cover the FICO draw of up to $793 million per 
year. The FICO-available base, which excludes Oakar and Sasser 
deposits, was $478 billion on March 31, leaving a ``cushion'' of $150 
billion. This cushion could quickly be depleted if the strategies 
described above are successful, possibly causing a FICO default. A 
legislated reversal of the Oakar/Sasser exemption would only defer a 
FICO shortfall because the existence of a significant, prolonged 
premium differential is likely to result in continued erosion of the 
SAIF assessment base.
G. Failed-Asset Estimates for the SAIF
    Among the factors that affect the ability of the SAIF to capitalize 
and to meet the FICO assessment are the number of thrift failures and 
the dollar amount of failed assets going forward.
    Estimates of failed-institution assets are made by the FDIC's 
interdivisional Bank and Thrift Failure Working Group. In July 1995, 
the Working Group estimated failed thrift assets of $100 million for 
the second half of 1995, $2 billion for 1996 and $2 billion for the 
first half of 1997. The estimate of $100 million for the second half of 
1995 represented a sharp decline from the $3 billion estimated by the 
Working Group in November 1994. The $2 billion estimate for 1996 was 
unchanged. In the estimation process, failed assets for the first 
twelve months of the two-year period are based on the FDIC's projected 
failure of specific institutions. Estimates for the second twelve 
months are derived from the FDIC's longer-term loss experience. For 
loss projections beyond mid-year 1997, the assumed failed-asset rate 
for the SAIF was 22 basis points, or about $2 billion per year.
    In the FDIC's projections, banks and thrifts were assumed to face 
similar longer-run loss experience. The BIF's historical average 
failed-asset rate from 1974 to 1994 was about 45 basis points. However, 
a lower failure rate than the recent historical experience of the BIF 
was assumed because the thrift industry is relatively sound following 
the RTC's removal of failing institutions from the system, and the 
health and performance of the remaining SAIF members has improved 
markedly. As of March 31, 

[[Page 42747]]
1995, 86 percent of all SAIF-member institutions were in the best risk 
classification of the FDIC's risk-related premium matrix.
    One of the purposes of the FDICIA was to minimize losses to the 
insurance funds. FDICIA increased regulatory oversight and emphasized 
capital. Specifically, FDICIA requires the closing of failing 
institutions prior to the full depletion of their capital, limits 
riskier activities by institutions that are less than adequately 
capitalized, and establishes audit standards and statutory time frames 
for examinations. The law also requires the implementation of risk-
related assessments, which have provided effective incentives for 
institutions to achieve and maintain the highest capital and 
supervisory standards. In light of these provisions, the high levels of 
thrift failures and insurance losses experienced over the past decade 
must be tempered when considering the industry's near-term future 
performance.
H. Projections for the SAIF
    The FDIC currently projects that, under reasonably optimistic 
assumptions, the SAIF is not likely to reach the statutorily mandated 
DRR of 1.25 percent until 2002. Also, projections indicate the fund 
will not encounter problems meeting the FICO obligation through 2004. 
It is important to note that the baseline assumptions underlying these 
projections foresee shrinkage in the non-Oakar portion of the SAIF 
assessment base of 2 percent per year. If thrifts react aggressively to 
the premium differential and reduce their SAIF-assessable deposits, as 
discussed in Section IV.F, substantially greater shrinkage may occur. 
Under higher rates of shrinkage, the SAIF is likely to capitalize 
sooner than 2002 because a lower level of insured deposits would 
require a smaller fund to meet the DRR; however, FICO interest payments 
could soon be imperiled.
    As stated earlier, the Board has the authority to reduce SAIF 
assessment rates to a minimum average of 18 basis points until January 
1, 1998, at which time the average rate would rise to 23 basis points 
until capitalization occurs. Projections made under this scenario (and 
using the other baseline assumptions) indicate that the SAIF would 
capitalize in 2005, or three years later than under the existing rate 
schedule. Perhaps more importantly, reduction of the SAIF assessment 
rate to 18 basis points is expected to cause a FICO shortfall in 1996.

Comment Summary

I. Comments Regarding SAIF Assessment Rates

A. General Comments
    Approximately 111 commenters said that the SAIF rate should be 
decreased to 18 basis points; an additional 108 commenters urged that 
the differential between BIF members and SAIF members be limited to 5 
basis points, regardless of the rates prescribed. With regard to the 
potential 19 basis point differential between BIF-members and SAIF-
members, one large savings association stated:

    Such a differential is significant in a narrow margin business 
such as home mortgage lending, which is the primary business of most 
SAIF members. This differential when leveraged at 20 to 1 will 
result in the BIF members producing 4 percent greater returns on 
equity than the SAIF members for the same business.

    This savings association suggested that some SAIF members would try 
to overcome any disadvantage a differential may pose by reducing their 
costs, while others may attempt to increase revenue through potentially 
risky investments which could increase SAIF losses. Most commenters 
urging a reduction in SAIF rates were SAIF members.
    Many commenters did not offer comments concerning the particular 
rate at which the minimum SAIF assessment rate should be set. Rather, 
the vast majority of SAIF-affiliated commenters simply commented that a 
disparity between SAIF rates and BIF rates would harm the thrift 
industry and asked that the premium differential be reduced or 
eliminated: ``If disparity must exist, make it minimal''. These 
comments are discussed in more detail later in this summary.
    In contrast, approximately 67 commenters (64 BIF members, 2 SAIF 
members, 1 trade group, and 1 other) said that the SAIF assessment rate 
should not be decreased below the current minimum rate of 23 basis 
points. The following comment is typical of those who supported 
maintaining SAIF assessment rates at current levels: ``[T]he current 
level of assessments * * * has not posed problems for the capital or 
earnings of thrifts. Most thrifts are healthy today''.
    While expressing alarm as to the impending disparity, many SAIF-
members did not specifically oppose the proposed reduction in BIF 
rates. For example, one large savings association stated: ``[The 
savings association] supports the revised assessment schedule that is 
proposed for BIF members but believes that the effect of the resulting 
substantial SAIF/BIF premium differential could overwhelm the currently 
healthy savings institutions and render the SAIF insolvent''.
B. Impact of an Assessment Rate Differential
    Comments from SAIF-insured institutions focused on the competitive 
disadvantage inherent in the proposed premium differential. 
Approximately 133 commenters argued that capital will flow away from 
savings associations if a disparity in the rates were permitted; over 
300 argued that savings associations will be at a disadvantage 
competitively if rates were disparate; more than 90 commenters claimed 
that a disparity would mean fewer funds for home buyers. Over 80 
commenters argued that a rate disparity would cause the SAIF assessment 
base to shrink. One thrift expressed its concerns as follows:

    The impending disparity between BIF and SAIF deposit insurance 
premiums will bring about the gradual demise of the thrift industry. 
The significant competitive disadvantage to SAIF members will cause 
a natural migration of deposits to BIF-insured institutions and an 
erosion of the SAIF's premium assessment income. Lower profits will 
make it increasingly difficult for savings institutions to raise 
capital in the marketplace, eventually contributing to a rise in 
thrift failures. The SAIF will be faced with a dwindling deposit 
assessment base, fixed obligations to the FICO bond holders, and 
waning capitalization levels of its members.
* * * * *
    The thrift industry today is profitable, well-managed, and well-
capitalized. It provides consumer and financial services in more 
than 12,500 offices nationwide, and it employs 217,600 people. 
Thrifts specialize in home financing and hold $649 billion in 
mortgage loans and securities. The thrift industry plays an 
important role in the U.S. economy; it does not deserve the fate 
which awaits it if Congress does not promptly address the premium 
disparity issue.

    Many thrifts compared the proposed premium disparity to an 
additional 15 percent tax on thrifts' earnings. One letter said the 
differential would raise the effective tax rate for savings 
associations to 60 percent, compared to about 30 percent for banks and 
zero for credit unions. Another stated that thrifts would be hurt 
because depositors are almost solely focused on yields and would not 
hesitate to move their funds if their savings institutions could not 
pay competitive interest rates on deposits.
    Approximately 215 commenters argued that savings associations had a 
competitive advantage in the 1970s with the interest-rate advantage 
accorded 

[[Page 42748]]
thrifts under Regulation Q. They indicated that banks had been able to 
survive in such an environment of disparate rates and that savings 
associations should also be able to survive. Under such a differential, 
thrifts ``certainly did not get all of the deposit dollars and they 
certainly would not lose all of them now,'' stated one letter. Another 
claimed: ``Nineteen basis points is hardly an unbridgeable competitive 
gulf.'' A state trade association for bankers agreed that the premium 
differential would undoubtedly cause some savings associations 
competitive problems, but noted that banks and savings associations 
already compete with a number of financial firms that do not currently 
pay deposit premiums and cited credit unions as an example. A number of 
other letters also downplayed the competitive disadvantage of a premium 
disparity by arguing that thrifts already compete with nondeposit 
competitors such as securities firms, mutual funds, mortgage bankers, 
insurance companies and finance companies that do not pay any deposit-
insurance premium.
    Of particular interest were those comments submitted by holding 
companies that control both BIF-member banks and SAIF-member thrifts, 
as well as comments submitted by institutions that were obligated to 
pay assessments to BIF and SAIF as a result of participating in a 
transaction pursuant to the so-called ``Oakar'' provisions (12 U.S.C. 
1815(d)(3)). One holding company that owned both a BIF member and a 
SAIF member wrote:

    To the extent that the rate differential is a Government imposed 
cost, there is a significant advantage to the bank and a real 
disadvantage to the thrift that has nothing to do with the way 
either the bank or the thrift handles its own business or cares for 
the customer. This will be the effect of the disparity of premium 
rates, resulting in fewer thrifts to pay insurance premiums, 
potential FICO bond defaults and, in the end, a more expensive 
solution will be imposed to resolve a crisis much larger than at 
present, and banks will be forced to participate in the expense of 
solving that problem. Therefore, if we want to talk fairness, this 
is where fairness begins and ends: it is not fair to anyone to 
impose a more expensive solution later when much less is needed if 
we act now and can offer a quid pro quo to the banks for their 
participation.

    This holding company recommended that the Board champion 
legislation that would merge the funds but, at the same time, provide 
the banking industry with a quid pro quo for the additional cost that 
would be placed on it. It suggested that regulatory relief from the 
burdens of data gathering, retention and reporting could provide 
significant savings to offset what would otherwise be deposit insurance 
premium savings. It also suggested that the remaining RTC funds be used 
to capitalize the SAIF.
    A bank holding company that acquired failed thrifts from the RTC 
commented that a premium disparity would force its thrift to pay less 
interest to its depositors and/or increase the charge on borrowers, 
make it more difficult for its thrift to provide home loans or lend to 
small businesses, and threaten its thrift's ability to participate in 
low and moderate income housing programs. Another bank holding company 
with both bank and thrift subsidiaries commented that banks should not 
be forced to pay for FICO but that any remaining RTC funds should be 
used to reduce FICO obligations. Another such holding company suggested 
a 3-basis point surcharge on BIF members, dropping the SAIF rate to 15 
basis points and merging the funds when SAIF became fully capitalized.
C. Need for Immediate Action
    Many commenters suggested that if immediate steps were not taken to 
eliminate the impending disparity between SAIF and BIF rates, the 
ultimate cost to SAIF and FICO would be higher. One federally-chartered 
savings association wrote:

    The shrinkage of the deposit base of savings institutions since 
FIRREA has already called into question whether the business can 
recapitalize itself given the tax being imposed by the FICO 
obligation. The creation of a significant premium disparity will 
bring about new and ever creative ways to avoid or reduce the impact 
of the high cost alternative. I do not believe that the premium 
disparity will wreak widespread destruction over the savings 
institution industry. It will, however, cause the business to 
disappear and hasten the day of reckoning for the SAIF.

    A holding company stated:

    We believe that leaving solutions to these problems for another 
day will be most harmful to both banks and thrifts and to the 
country as a whole and certainly more expensive to resolve than if 
the issues are faced now and resolved.

    Many commenters suggested that if SAIF rates remained high, SAIF 
members would find other means to shift deposits out of SAIF. One 
holding company commented:

    [We believe that a] solution needs to be found and implemented 
at once, that delay is costly in solving this problem and that delay 
encourages business to channel its talent and resources towards 
``artificial restructuring'' such as Great Western's proposal (which 
makes business sense only because of the anticipated disparity in 
premium costs for deposit insurance), rather than towards true 
business reorganizations that have lasting value to the business and 
our nation as a whole.

    Approximately 293 institutions suggested that there was no 
immediate SAIF problem, implying that there was no urgent need to 
capitalize SAIF. For example, a trade association said: ``[T]he S&L 
industry and SAIF are in much better shape than anyone could have 
imagined only two years ago. The S&L industry is profitable and 
increasingly well capitalized''. It suggested that the SAIF situation 
be carefully monitored through Congressional oversight hearings and 
other mechanisms. One banker said: ``If and when the SAIF fund is in 
jeopardy or the FICO payment cannot be made, call us''. A few bankers 
suggested implementing the proposed assessments and waiting two years 
to see if, in fact, a differential materializes and whether it 
adversely impacts thrifts. However, it seems likely that some cost 
differential would materialize between banks and thrifts because, among 
bankers indicating a likely use for their premium savings, they most 
frequently mentioned paying higher interest on deposits and/or charging 
lower rates for loans. Other possible uses included augmenting capital 
to fund growth, technology updates and higher dividends to 
shareholders.
    A few bankers saw it as inevitable that some of the cleanup costs 
borne by thrifts will be shifted to the banking industry. ``My fellow 
bankers would probably hang me for even suggesting we pay,'' wrote one 
banker who recommended using excess RTC funds to reduce FICO by one-
half, adding 1 or 2 basis points to the proposed BIF rates to be used 
toward FICO and leaving SAIF rates at current levels until FICO is paid 
and SAIF capitalized. Another banker offered to pay an additional 1\1/
2\ to 2\1/2\ basis points toward SAIF and FICO if other financial 
service providers did the same. The taxation of credit unions was 
frequently mentioned as a potential source of funding.
    A number of BIF-affiliated commenters noted that the Board should 
not take into account a potential differential between BIF and SAIF 
when setting BIF assessment rates. A large trade association for 
bankers noted, however, that the Board is permitted to consider the 
effect of SAIF assessments on the earnings and capital of thrift 
members.

II. Suggested Legislative Initiatives

A. Summary
    As indicated above, SAIF members uniformly agreed that the 
impending disparity would harm their industry. Many commenters 
affiliated with SAIF-

[[Page 42749]]
members argued that the SAIF rate should be lowered to the statutory 
minimum average of 18 basis points, and others argued that the SAIF 
rate should be lowered to within 5 basis points of the BIF rates. A 
significant number of such commenters noted, however, that reducing or 
eliminating the disparity would not be a final solution, noting that 
FICO draws would continue to undermine SAIF. Some commenters predicted 
another insurance fund crisis which would ``cause irreparable damage to 
the entire industry which already has lost significant market share to 
less regulated non-bank competitors''. Many of these commenters urged 
legislative action. A thrift trade association wrote:

    The [FDIC] is charged with the management of both BIF and SAIF 
and with the responsibility of seeing to it that neither fund 
becomes a burden on the taxpayers of America. For this reason, it is 
incumbent on the FDIC board to promptly recommend to the Congress a 
course of action that will mitigate the effects of the premium 
differential and achieve competitive parity between all insured 
institutions as soon as possible.
B. ``Fairness'' Arguments
    In an apparent attempt to explain why SAIF members alone should not 
bear the burden of recapitalizing SAIF, approximately 159 commenters 
(10 BIF members, 134 SAIF members, 4 trade associations, and 11 other 
organizations/individuals) argued that savings associations in 
operation today were no more responsible than BIF members for the 
condition of SAIF. One holding company commented:

    While none of the existing thrifts today caused the S&L crisis 
of the last decade any more than did the banks, the banks were 
promised premium relief once BIF was adequately capitalized at 1.25 
percent. However, going forward, there is no moral issue about 
having deposit insurance available at the same rate to thrifts and 
to banks even though in the past failed thrifts cost much more than 
failed banks.

    Some commenters criticized earlier legislative policy concerning 
SAIF funding. One trade association for bankers wrote:

    In 1989 when SAIF was created, Congress authorized two types of 
supplemental funding from the Treasury--a backup funding for SAIF 
premiums and payments to maintain a minimum fund balance. The 
requirement under prior law was that the Treasury capitalize the 
SAIF at $8.8 billion by fiscal 1999. Treasury never requested these 
authorized funds. The RTC Completion Act repealed this 
authorization. But it is important to note that in 1989, the 
government promised to contribute $8.8 billion to the SAIF and then 
five years later reversed itself. This is unfair to the thrift 
industry.

    A thrift holding company added that FICO bonds were issued with 
non-callable provisions, which precluded refinancing of these 
obligations in the recent low interest rate environment. It argued: 
``We believe that this oversight in the FICO bond provisions and the 
lack of supplemental funding by the Treasury for the SAIF, support an 
argument that the recapitalization of the SAIF should be borne by the 
government and not SAIF members.''
    A large savings association referenced the additional payments from 
Treasury contemplated by FIRREA, and suggested that these ``safety net 
payments'' were intended to balance the additional burdens imposed on 
the thrift business by FIRREA (on top of the FICO burden imposed in 
1987). It described these added burdens to be ``confiscating the thrift 
industry's $2.5 billion investment in the retained earnings of the Home 
Loan Banks, diverting an added $3.1 billion in premiums to REFCORP and 
FRF, and requiring the Home Loan Banks each year to pay $300 million in 
interest on REFCORP bonds.'' The savings association argued that if the 
original FIRREA payments had been carried out, the Treasury would have 
paid $5.3 billion into SAIF over the five year period from fiscal year 
1993 through fiscal year 1997 and the fund would have reached its 
reserve target of 1.25 percent in early 1998 based on FDIC assumptions 
regarding future losses and deposit growth.
    Approximately 949 commenters (922 BIF members, 1 SAIF member, 12 
trade associations, and 14 other organizations/individuals) stated as a 
general principle that the banking industry should not pay for SAIF 
problems. Bankers stated that they solved their own problem by 
recapitalizing the BIF and did not cause the problems now confronting 
the SAIF. They were adamant about not using BIF funds to capitalize or 
otherwise assist the SAIF even though this was not part of the 
assessment rate proposals. ``The SAIF should paddle their own boat'', 
commented one banker, which succinctly expressed the views of others 
that SAIF members should continue to pay higher premiums until their 
fund is capitalized.
    Some bankers commented that banks and thrifts operate in separate 
industries, and there is no rationale for asking one to assist the 
other (``* * * no different than asking a cow man to bail out a broke 
sheep farmer under the guise that both raise livestock''). Others see 
banks and thrifts as competitors in the same industry and similarly see 
no reason to assist a competitor (``* * * like asking General Motors to 
bail out Chrysler''). A few letters contended that the banking industry 
has already paid dearly for the savings and loan crisis of the 1980s 
through an increased regulatory burden. A number of bankers cited 
higher interest rates paid by thrifts with which they compete, and a 
few letters included newspaper clippings of advertisements placed by 
thrifts. ``If they can afford to pay higher interest rates for 
deposits'', wrote one banker, ``they can afford to bear the burden to 
recapitalize SAIF''.
    Thrifts countered along the following lines: ``The simple fact is 
today's thrift institutions are now being punished for the savings and 
loan cleanup of the 1980s. While this may be emotionally gratifying for 
some, it makes little sense from an economic perspective''.
C. Use of RTC Funds
    Over 250 commenters (179 BIF members, 60 SAIF members, 9 trade 
associations, and 8 other organizations/individuals) urged that RTC 
funds be made available to SAIF for capitalization purposes; over 90 (9 
BIF members, 65 SAIF members, 9 trade associations, and 9 
organizations/individuals) urged that the RTC funds be made available 
to SAIF on a contingent basis to rescue SAIF from future losses.
    The solution most frequently recommended by thrifts (and their 
primary trade group) involved having the FICO burden shared 
proportionately by BIF and SAIF, using excess RTC funds to cover losses 
in institutions identified as problems as of year-end 1997 and reducing 
the SAIF differential to 5 basis points until the SAIF is capitalized. 
These measures would require Congressional action, but as an interim 
measure, the FDIC was urged to reduce the SAIF premium to 18 basis 
points, the minimum average SAIF rate allowed under current law. 
Variations on this proposal included lowering the DRR to 1 percent, 
although a few writers asked that this ratio be raised to as high as 
1.50 percent for BIF and SAIF.
D. One-time Special Assessment Against SAIF Members
    Approximately 11 BIF members and 10 SAIF members, as well as 2 
trade groups, urged that a one-time assessment be imposed against SAIF 
members. In opposition to such a proposal, one large thrift holding 
company asserted that the thrift industry had already paid sufficient 
deposit premiums since FIRREA to have capitalized the SAIF but of the 
$9.5 

[[Page 42750]]
billion in premiums paid, only $2.4 billion went into SAIF. It argued: 
``Any substantial up front assessment on thrifts is not only unfair, it 
is counterproductive in the sense that it could precipitate even grater 
losses to the insurance fund''. At the same time, however, it indicated 
that if its preferred method of recapitalizing SAIF--using RTC funds--
proved insufficient to reach the 1.25 percent ratio, a variety of means 
might be considered to fill the gap, including the use of borrowed 
funds, a ``one-time assessment or a temporarily higher premium''. It 
stated that such methods would have to be structured so as to minimize 
the impact on the earning capacity of the thrift business.\13\

    \13\ In conjunction with this proposal, it suggested that RTC be 
extended for two years to cover any failures of thrifts currently 
under its supervisory watch.
---------------------------------------------------------------------------

E. Merge the BIF and the SAIF
    Merging the BIF and the SAIF was frequently suggested 
(approximately 121 commenters, including approximately 6 trade groups) 
and was seen by some as inevitable and possibly less expensive today 
than ``four or five years down the road''. As one thrift executive 
wrote: ``The consumer views deposit insurance as coming from one 
source--backed by the U.S. Government''. A state trade association 
representing thrifts supported the merging of the two funds ``as the 
only solution that will assure that all institutions of equal risk 
profiles will pay the same premium for federal deposit insurance''.\14\

    \14\ In light of the political sensitivity to such a merger, 
this trade association wrote that it could support a package of 
changes which contained all of the following: (1) A sharing of the 
FICO obligation proportionately between BIF and SAIF; (2) Use of 
excess RTC funds as a backstop against near-term losses; and (3) A 
reasonable SAIF premium differential to be paid until such time as 
the SAIF reaches the mandated reserve ratio.
---------------------------------------------------------------------------

    One thrift holding company supporting merger of the funds if the 
remaining RTC funds were not available submitted the following comment:

    The original distinction between commercial banks and savings 
institutions has significantly blurred over the last decade * * *. 
In addition, most, if not all, of the tax and regulatory 
``advantages'' which benefitted savings institutions in the past 
have been eliminated or significantly curtailed. Likewise, the 
Federal Home Loan Bank system, which was an exclusive province of 
savings institutions, is now being embraced as a significant 
competitive benefit by an increasing number of commercial banks. Any 
portion of a weakened federal deposit insurance fund will have 
adverse consequences on the entire banking industry in the public's 
perception.

    Another thrift urged that the funds be merged with the FICO 
interest obligations to be borne by the new fund as a whole and noted:

    Effecting this merger will enable the government to keep its 
promise to the American people and will avoid using taxpayer funds 
either to capitalize the SAIF today, or to bail it out several years 
from now. If deposit insurance premiums for both banks and thrifts 
were kept at their current levels, a combined fund could reach full 
capitalization at 1.25% within approximately 20 months after the 
merger * * *. Thus banks and thrifts would experience very little 
delay in seeing their premiums reduced.

    A California savings association argued that even after SAIF is 
fully capitalized, the fund would be unsound because the SAIF has too 
much geographic concentration in California. It urged that the funds be 
merged to generate sufficient geographic spread.
    Some suggested that SAIF members could pay a one-time assessment 
(80 basis points was mentioned) to capitalize the SAIF prior to a 
merger of the funds. The premium differential could then be reduced to 
5 basis points or less or eliminated altogether. A savings banker 
suggested that thrifts be allowed to record the special assessment as a 
credit against the tax bad debt reserve in order to lessen the 
immediate impact on tax revenues. A variety of writers, including 
banks, thrifts and an industry watchdog group, questioned the need for 
a separate thrift charter once the funds have been merged.
    Over 775 commenters, including approximately 10 trade groups, 
argued against a merger of the insurance funds. Many of those opposing 
a merger of the funds essentially argued that the banking industry 
should not be required to participate in an economic solution which 
would benefit their competition. For example, a state trade association 
representing banks argued that ``for decades S&Ls enjoyed a lax 
regulatory environment, significant tax breaks, and a mandated 
competitive advantage''. It said: ``Asking banks to shoulder the 
bailout burden of a key competitor because a long time competitive 
advantage will be reversed is unfair and inappropriate, particularly 
when banks are not responsible for the problems of the thrifts''.
    One large trade association opposing a merger of the funds wrote: 
``The looming premium differential will prompt thrifts to continue to 
look for loopholes to leave SAIF, further exacerbating the SAIF/FICO 
problem. However, merging the funds or delaying the banks' premium 
reduction is not the answer''. This trade association expressed support 
for using the remaining authorized and appropriated funds for the RTC 
to capitalize the SAIF and/or defease the FICO bond obligation. It 
suggested various ways to use the remaining RTC monies for SAIF/FICO, 
such as: (1) Transferring the remaining RTC funds to SAIF, leaving the 
principle intact, but investing the funds so as to generate sufficient 
interest earnings to pay FICO bond interest of up to $793 million; (2) 
using the remaining RTC funds to capitalize SAIF, which they claimed 
would leave ample funds to address the FICO problem; (3) using the RTC 
funds only to defease the FICO obligation thereby enabling SAIF to 
capitalize at the current assessment rates by 1998.
F. FICO Issues
    Over 200 commenters urged that BIF members share in FICO 
assessments, with the majority of these urging that BIF members share 
proportionately. Over 200 commenters urged that RTC funds be used to 
defease FICO and a few commenters urged that the $8 billion from RTCCA 
be used as well. Over 70 commenters urged that premiums paid by Oakar 
and Sasser institutions should be used for FICO bond interest payments. 
It was recognized, however, that such a change in the law would be of 
limited benefit to SAIF. A large banking trade group commented:

    Using Oakar and Sasser premiums for FICO bond interest, however, 
would slow the recapitalization of the SAIF. To address this 
problem, the Congress could also extend the recapitalization 
schedule of SAIF, giving FDIC more leeway to reduce SAIF premiums.

    One large thrift suggested that if the FICO burden were spread over 
all SAIF and BIF members equally, the cost would be approximately 2 
basis points per institution. It suggested that bank deposit premiums 
should not be increased to absorb such an additional cost. Rather, the 
FICO charge should be deducted from any BIF premium paid. In contrast, 
a bank trade group argued: ``Such payments would merely protect FICO 
bondholders. * * * Tapping BIF funds for uses other than protection of 
BIF depositors would set a very dangerous precedent''.
G. Other Approaches
    Other recommended alternatives included reducing BIF rates to 15 
basis points and putting the excess assessment in a ``secondary 
reserve'' account, such as existed under FSLIC at one time, which would 
pay interest to BIF members but would also be used to defray SAIF 
expenses; transferring the net worth of mutual thrifts to SAIF; and 
merging the SAIF with the credit union insurance fund.

[[Page 42751]]


III. Miscellaneous Comments

A. Spread From 23 Basis Points to 31 Basis Points
    The Board received few comments in response to its question as to 
whether the current spread of 8 basis points from the lowest to the 
highest assessment rates should be retained for SAIF members.
B. Transactions Which Would Have the Effect of Allowing Deposits to 
Shift From One Insurance Fund to the Other
    Over 300 BIF-member institutions and 6 trade associations commented 
that steps should be taken to prohibit transactions which would have 
the effect of allowing deposits to shift from the SAIF to the BIF, 
thereby depleting the SAIF. Approximately 42 BIF-member institutions 
stated that exit and entrance fees should be assessed against 
transactions which would have the effect of allowing deposits to shift 
from the SAIF to the BIF (assuming that such transactions were not 
otherwise subject to exit and entrance fees). A bank trade group 
commented that, among other options for recapitalizing SAIF, policy 
makers should consider prohibiting thrifts from chartering banks for 
the purpose of exiting SAIF; declaring such institutions to be Sasser 
institutions that remain SAIF-insured; or requiring such institutions 
to pay the equivalent of exit/entrance fees and continue contributing 
to FICO.
    Thrifts and their trade associations, however, noted that when 
significant costs are involved on an ongoing basis, institutions and 
their advisors would spend their time, energy and talent to find ways 
to avoid these ongoing costs and noted that this could leave Oakar 
banks and slow-moving thrifts without any relief. They suggested that 
methods already existed whereby depositors at a thrift could be 
encouraged to move their deposits to an existing bank affiliate while 
the thrift would service the deposits (i.e., agent branches).
C. Comments Regarding Oakar Transactions
    Seven BIF-members contended that the SAIF-assessable deposits held 
by BIF-member Oakar banks should be assessed at a lower rate than that 
imposed against SAIF member institutions (apparently to reflect the 
fact that FICO's assessment authority does not extend to such banks). 
Other commenters want banks and holding companies that acquired SAIF-
insured institutions, and thereby benefited from the savings and loan 
bailout to continue to be liable to SAIF (although this is already the 
case because these acquirers pay SAIF premiums on the acquired 
deposits).

Adoption of Final Rule

    As indicated above, the FDIC has determined to retain the existing 
assessment rate schedule applicable to members of the SAIF. The Board 
fully understands and appreciates the concerns raised in the comment 
letters concerning the impending rate differential. Most of the 
solutions suggested by SAIF-affiliated commenters require Congressional 
action, however, and are beyond the scope of this rulemaking procedure. 
Nonetheless, the FDIC agrees with these commenters that the 
difficulties facing the SAIF can only be addressed comprehensively 
through Congressional action. Therefore, after extensive analysis of 
the relevant issues, the FDIC has informed Congress of the FDIC's 
strong support for a proposal developed on an interagency basis for 
resolving the problems of the SAIF.15

    \15\ The Condition of the SAIF and Related Issues, Testimony of 
Ricki Helfer, Chairman, FDIC, before the Committee on Banking, 
Housing, and Urban Affairs, U.S. Senate, July 28, 1995. The 
Condition of the SAIF and Related Issues, Testimony of Ricki Helfer, 
Chairman, FDIC, before the Subcommittee on Financial Institutions 
and Consumer Credit, Committee on Banking and Financial Services, 
U.S. House of Representatives, August 2, 1995.
---------------------------------------------------------------------------

    The proposal has three components to address the immediate, 
pressing financial problems of the SAIF: (1) The SAIF would be 
capitalized through a special up-front cash assessment on SAIF 
deposits; (2) the responsibility for the FICO payments would be spread 
proportionally over all FDIC-insured institutions; and (3) the BIF and 
the SAIF would be merged as soon as practicable, after a number of 
additional issues related to the merger are resolved. In addition to 
the three components of the proposal, the FDIC and the Office of Thrift 
Supervision also recommend making unspent RTC funds available as a kind 
of reinsurance policy against extraordinary, unanticipated SAIF losses 
to limit the potential future costs to taxpayers from the existing full 
faith and credit guarantee of the U.S. Government that the SAIF enjoys. 
This proposal is further explained in the Testimony of Ricki Helfer, 
Chairman, FDIC, on The Condition of the SAIF and Related Issues, before 
the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, July 
28, 1995, and before the Subcommittee on Financial Institutions and 
Consumer Credit, Committee on Banking and Financial Services, U.S. 
House of Representatives, August 2, 1995. The proposal is consistent 
with many of the suggestions made by commenters in response to this 
final rule.
    The FDIC further recognizes that a differential is likely to 
increase competitive pressures and impede thrifts' ability to generate 
capital both internally and externally. At this time, however, the FDIC 
must decline to reduce the minimum average SAIF assessment rate to 18 
basis points. As detailed in Sections II and IV above, the SAIF is 
grossly undercapitalized. At the end of the first quarter of 1995, the 
SAIF had a balance of $2.2 billion, or only 0.31 percent of insured 
deposits. That balance was less than 7 percent of the assets of SAIF-
insured ``problem'' institutions. At the current pace, and under 
reasonably optimistic assumptions, the SAIF is unlikely to reach the 
minimum reserve ratio of 1.25 percent until the year 2002. Even though 
the SAIF is grossly undercapitalized, a sizable portion of the SAIF's 
ongoing assessments is, by law, diverted to meet interest payments on 
obligations of the FICO. On July 1 the SAIF assumed responsibility from 
the RTC for paying the costs arising from any new failures of thrift 
institutions. These problems are exacerbated by several additional 
factors, including the shrinkage of the SAIF assessment base since the 
SAIF was created in 1989. Given the fund's relatively low balance and 
the transfer of resolution authority from the RTC to the SAIF on July 
1, the FDIC believes that the SAIF must be built as quickly as possible 
to its mandated reserve level.
    Having determined not to reduce the SAIF rate to the statutory 
minimum average of 18 basis points, one other way to maintain parity 
between SAIF members and BIF members would be to retain the BIF 
assessment rate schedule at 23-31 basis points. Few SAIF-affiliated 
commenters specifically urged such action, however. In contrast to the 
SAIF, the $23.2 billion BIF balance at the end of the first quarter was 
1.22 percent of BIF-insured deposits and 70 percent of the assets of 
BIF-insured ``problem'' institutions. The BIF probably reached the 1.25 
minimum reserve ratio during the second quarter of this year, although 
the FDIC cannot confirm this fact until the Call Reports for the second 
quarter have been received and analyzed. For the reasons set forth in 
the BIF rule published elsewhere in this Federal Register, the FDIC has 
determined to establish a new assessment rate schedule of 4 to 31 basis 
points for BIF members.
Paperwork Reduction Act

    No collection of information pursuant to section 3504(h) of the 
Paperwork 

[[Page 42752]]
Reduction Act of 1980 (44 U.S.C. 3501 et seq.) are contained in this 
proposed rule. Consequently, no information has been submitted to the 
Office of Management and Budget (OMB) for review.

Regulatory Flexibility Analysis

    The Board hereby certifies that the final rule would 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.). This final rule will not necessitate the development of 
sophisticated recordkeeping or reporting systems by small institutions 
nor will small institutions need to seek out the expertise of 
specialized accountants, lawyers, or managers to comply with this final 
rule. Therefore, the provisions of that Act regarding an initial and 
final regulatory flexibility analysis (Id. at 603 and 604) do not apply 
here.

Riegle Community Development and Regulatory Improvement Act of 1994

    Section 302(b) of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (RCDRIA), 12 U.S.C. 4802(b), requires that all 
new regulations and amendments to regulations prescribed by a Federal 
banking agency which impose additional reporting, disclosures, or other 
new requirements on insured depository institutions shall take effect 
on the first day of a calendar quarter. This provision was designed to 
assist institutions by establishing a consistent date for complying 
with new regulations so that institutions would be more regularly 
informed of new rules and be able to effectuate necessary training, 
software, and other operational modifications in an orderly manner. 
However, this final rule does not impose such additional or new 
regulatory requirements, rather it retains the existing assessment rate 
schedule for SAIF-member institutions. The FDIC has therefore 
determined that section 302 of RCDRIA does not apply to this final 
rule.

List of Subjects in 12 CFR Part 327

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

    For the reasons set forth in the preamble, a portion of part 327 of 
title 12 of the Code of Federal Regulations is republished as set forth 
below:

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. Paragraph (d)(1) of Sec. 327.9 as redesignated from paragraph 
(c)(1) elsewhere in this issue of the Federal Register is republished 
for the convenience of the reader as set forth below:


Sec. 327.9  Assessment rate schedules.

* * * * *
    (d) SAIF members. (1) Subject to Sec. 327.4(c), the annual 
assessment rate for each SAIF member shall be the rate designated in 
the following schedule applicable to the assessment risk classification 
assigned by the Corporation under Sec. 327.4(a) to that SAIF member 
(the schedule utilizes the group and subgroup designations specified in 
Sec. 327.4(a)):

                                Schedule                                
------------------------------------------------------------------------
                                                         Supervisory    
                                                           subgroup     
                   Capital group                    --------------------
                                                       A      B      C  
------------------------------------------------------------------------
1..................................................     23     26     29
2..................................................     26     29     30
3..................................................     29     30     31
------------------------------------------------------------------------

* * * * *
    By the order of the Board of Directors.

    Dated at Washington, D.C., this 8th day of August, 1995.

Federal Deposit Insurance Corporation.
Jerry L. Langley,
Executive Secretary.
[FR Doc. 95-20172 Filed 8-15-95; 8:45 am]
BILLING CODE 6714-01-P