Federal Register, Volume 60 Issue 158 (Wednesday, August 16, 1995)

[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}}}}}}