[Federal Register Volume 60, Number 237 (Monday, December 11, 1995)]
[Rules and Regulations]
[Pages 63405-63411]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28720]



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[[Page 63406]]



FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327


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

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Confirmation of assessment rate.

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SUMMARY: On November 14, 1995, the Board of Directors of the FDIC 
(Board) adopted a resolution to retain the existing assessment rate 
schedule applicable to members of the Savings Association Insurance 
Fund (SAIF) for the first semiannual assessment period of 1996. As a 
result of this action, the SAIF assessment rate 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: January 1, 1996, through June 30, 1996.

FOR FURTHER INFORMATION CONTACT: James R. McFadyen, Senior Financial 
Analyst, Division of Research and Statistics, (202) 898-7027; Claude A. 
Rollin, Senior Counsel, Legal Division, (202) 898-3985; or Valerie Jean 
Best, Counsel, Legal Division, (202) 898-3812; Federal Deposit 
Insurance Corporation, Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

I. Summary

    Based upon the results of its semiannual review of the 
capitalization of the SAIF and of the SAIF assessment rates, the Board 
has determined to retain the existing assessment rate schedule 
applicable to SAIF-member institutions for the first semiannual 
assessment period of 1996 so that capitalization of the SAIF is 
accomplished as soon as possible. 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 it remains significantly undercapitalized. On 
June 30, 1995, the SAIF had a balance of $2.6 billion, or about 37 
cents in reserves for every $100 in insured deposits. An additional 
$6.3 billion would have been required on that date to fully capitalize 
the SAIF to its designated reserve ratio (DRR) of 1.25 percent of 
estimated insured deposits. As of September 30, 1995, the SAIF balance 
had grown to $3.1 billion, although the reserve ratio for that date 
cannot be determined until insured deposits as of September 30 become 
available in December. At the current pace, and under reasonably 
optimistic assumptions, the SAIF would not reach the statutorily 
mandated DRR until at least the year 2002. 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 (up to $793 million annually) 
is diverted to meet interest payments on obligations of the Financing 
Corporation (FICO). Reducing assessment rates to the lowest minimum 
average rate permitted by law--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 assessment rates of the Bank Insurance Fund (BIF) 
and the SAIF even if the Board reduces the SAIF assessments to the 
minimum average allowed by statute.

II. 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 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).
    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).
    The Board thus 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, however, the minimum average rate must be 23 
basis points until SAIF achieves its DRR of 1.25 percent.
    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), Pub. L. 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 

[[Page 63407]]
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 Second 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), Pub. L. No. 100-86, 101 Stat. 552, 585, 
which added section 21 to the Federal Home Loan Bank Act (FHLB Act).\1\ 
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), 
Pub. L. No. 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.

    \1\ 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 
7.2 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 premium differential that may exist between BIF and SAIF 
assessment rates.

    \2\ The REFCORP Principal Fund is now fully funded and, 
accordingly, REFCORP's assessment authority has effectively 
terminated.
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III. Problems Confronting the SAIF

A. Background: SAIF Assessment Rates

    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 June 30, 
1995--see Table 2).

 Table 2.--SAIF Assessment Base Distribution Supervisory and Capital Ratings in Effect July 1, 1995 Deposits as 
                                                of June 30, 1995                                                
                                                  [In billions]                                                 
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----------------------------------------------------------------------------------------------------------------
                                                                                                                
(5)Supervisory subgroup                                                                                         
                                            --------------------------------------------------------------------
        Capital group                                                                                           
(1)A                                                                                                            
(1)B                                                                                                            
(1)C                                                                                                            
----------------------------------------------------------------------------------------------------------------
Well capitalized............  Number.......     1,529        86.1%       137         7.7%        24         1.4%
                              Base.........      $611.1       83.6       $58.4        8.0       $17.0        2.3
Adequately capitalized......  Number.......        22          1.2        30          1.7        26          1.5
                              Base.........       $16.6        2.3       $18.3        2.5        $6.8        0.9
Under-capitalized...........  Number.......         0          0.0         0          0.0         7          0.4
                              Base.........        $0.2        0.0        $0.0        0.0        $2.1       0.3 
----------------------------------------------------------------------------------------------------------------
``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.3 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.

    \3\ From 1989 through 1992, more than 90 percent of SAIF 
assessment revenue went to the FRF, the REFCORP and the FICO.
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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, 

[[Page 63408]]
or 11 basis points of the average assessment rate of 23.7 basis 
points.4 The SAIF had a balance of $3.1 billion (unaudited) on 
September 30, 1995. With primary responsibility for resolving failed 
thrift institutions residing with the Resolution Trust Corporation 
(RTC) until June 30, 1995, there were few demands on the SAIF. The SAIF 
assumed resolution responsibility for failed thrifts from the RTC on 
July 1, 1995.

    \4\ 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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    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, on which no 
draws have been made to date. FDI Act section 14(a). The SAIF would be 
required to repay any amounts borrowed from the Treasury with revenues 
from deposit insurance premiums. As a condition of borrowing, the FDIC 
would be required 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).
    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 assumed resolution 
responsibility. However, with a balance of $3.1 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 the next two years, 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 5

    \5\ Excluding one self-liquidating savings institution and RTC 
conservatorships. The final RTC conservatorship was resolved during 
the second quarter, prior to June 30.
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    SAIF members earned $1.4 billion in the second quarter of 1995, 
compared to $1.2 billion in the first quarter. Average returns on 
assets (0.73 percent) and equity (9.23 percent) both increased from 
first-quarter levels, but SAIF members' average returns remain well 
below those of BIF members (1.14 percent ROA and 14.25 percent ROE). 
Despite a slight rise in loss provisions (up 1 percent), asset quality 
remains strong. Noncurrent loans and foreclosed real estate both 
declined from first-quarter levels, reducing the ratio of troubled 
assets to total assets from 1.18 percent to 1.12 percent. Reserve 
coverage of noncurrent loans improved slightly, from 84 cents for each 
dollar of noncurrent loans to 85 cents, and the equity-to-assets ratio 
also rose, from 7.88 percent on March 31 to 8.02 percent on June 30. 
SAIF members were slightly less reliant on deposits, which comprised 
77.9 percent of their liabilities on June 30, down from 78.2 percent in 
the first quarter.
    As of June 30, 1995, there were 1,774 members of the SAIF, 
including 1,696 savings institutions and 78 commercial banks. On this 
date, there were 54 SAIF-member ``problem'' institutions with total 
assets of $30 billion, compared to 73 institutions with $59 billion a 
year earlier. Two SAIF-member thrifts, with total assets of $456 
million, failed during the first half of 1995. No SAIF members have 
failed since July 1, when the SAIF assumed resolution responsibility 
from the RTC.
    A discussion of the improving condition of the SAIF-member thrift 
industry must be tempered by the higher risks the SAIF faces relative 
to the BIF. The SAIF has fewer members among which to spread risk and 
also has greater risks from geographic and product concentrations. The 
eight largest holders of SAIF-insured deposits, with a combined 18.5 
percent of such deposits, all operate predominantly in California. By 
contrast, the eight largest holders of BIF-insured deposits operate in 
five different states and hold 10 percent of all BIF-insured deposits. 
The assets of SAIF members are heavily concentrated in residential real 
estate, largely due to statutory requirements that must be met to 
realize certain income tax benefits. While these investments entail 
relatively little credit risk, SAIF members generally are more exposed 
to interest-rate risk than BIF members.

D. Impact of a Premium Differential

    The BIF achieved its statutorily required minimum reserve ratio of 
1.25 percent during the second quarter of 1995, enabling the Board to 
lower BIF assessment rates. On August 8, 1995, the Board adopted an 
assessment rate schedule for the BIF ranging from 4 to 31 basis points, 
compared to a range of 23 to 31 basis points under the earlier BIF 
schedule and the current SAIF schedule. The Board has decided to 
decrease BIF rates further, to a range of 0 to 27 basis points, based 
on the continuing strength of the commercial banking industry and low 
near-term loss expectations. A notice concerning the BIF assessment 
rate schedule is published elsewhere in this Federal Register.
    Under the current BIF and SAIF assessment rate schedules, average 
SAIF rates are 23 basis points higher than average BIF rates. It is 
likely that for the next seven years SAIF rates will remain 
significantly higher than BIF rates, until the SAIF is capitalized. 
After capitalization, SAIF rates will 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 most of their assessment savings to their customers, SAIF 
members may be forced to pay more for deposits or charge less for 

[[Page 63409]]
loans to remain competitive. For SAIF members, this could result in 
reduced earnings and an impaired ability to raise funds in the capital 
markets. An analysis of a five-year time span suggests that any 
increase in failures attributable solely to an average 23-basis point 
differential is likely to be sufficiently small as to be manageable by 
the SAIF under current interest-rate and asset-quality conditions. The 
analysis also 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 a 
23-basis point premium differential by itself. Among the weakest SAIF 
members, the differential could be as high as 31 basis points, possibly 
resulting in competitive pressures that cause additional failures. 
However, analysis showed 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.6 The Board recognizes that 
an ongoing premium disparity of 23 basis points provides powerful 
incentives to reduce SAIF-assessable deposits. This could be readily 
accomplished in a number of ways, with implications both for the 
ability of SAIF members to fund FICO interest payments, discussed in 
the following section, and for the structural soundness of the SAIF. A 
sharp decline in membership and the assessment base would also render 
the SAIF less effective as a loss-spreading mechanism for insurance 
purposes by exacerbating the concentration risks the fund already 
faces.

    \6\ 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. 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.7 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 so-called ``Sasser'' bank), are 
likewise not subject to assessment by FICO.8 On June 30, 1995, 
BIF-member Oakar banks held 27.8 percent of the SAIF assessment base, 
and SAIF-member Sasser banks held an additional 7.5 percent (see Table 
3).

    \7\ See Notice of FDIC General Counsel's Opinion No. 7, 60 FR 
7055 (Feb. 6, 1995).
    \8\ Id.

                          Table 3.--Percentage Distribution of the SAIF Assessment Base                         
----------------------------------------------------------------------------------------------------------------
                                                                               Not available to FICO            
                                                       Available -----------------------------------------------
                                                        to FICO      Oakar      Sasser     Subtotal      Total  
----------------------------------------------------------------------------------------------------------------
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
6/95................................................        64.7        27.8         7.5        35.3       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.9 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.

    \9\ 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 the premium differential. Despite the 
current moratorium on the transfer of deposits between funds, many 
alternatives are available to SAIF-insured institutions seeking to 
reduce their SAIF-assessable deposits.10 These institutions could 
decrease their SAIF assessments by shifting their funding to nondeposit 
liabilities, such as Federal Home Loan Bank advances and reverse 
repurchase agreements; 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 facilitate the ``migration'' of deposits 
from a SAIF-insured institution to a BIF-insured affiliate. At least a 
dozen large organizations have already filed applications seeking to 
establish affiliate relationships for this apparent purpose. Moreover, 
more than 100 bank and thrift holding companies with both BIF- and 
SAIF-member affiliates already have the means in place.

    \10\ 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.
---------------------------------------------------------------------------

    These strategies to reduce reliance on SAIF-insured deposits could 
rapidly deplete the SAIF assessment base to the point where the 
assessment base is not large enough to generate sufficient revenue to 
cover the FICO obligation. This would occur with a 20 percent reduction 
in the current SAIF assessment base, and it is not unreasonable to 
expect a decline of that magnitude. 

[[Page 63410]]

    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 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.

F. 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 September 
1995, the Working Group estimated failed thrift assets of $50 million 
for the fourth quarter of 1995, $1 billion for 1996 and $4.5 billion 
for the first nine months of 1997. For loss projections beyond 
September 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 June 30, 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 Federal Deposit Insurance Corporation 
Improvement Act of 1991 (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.

G. 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.E, substantially 
greater shrinkage may occur. Under higher rates of shrinkage, the SAIF 
is likely to capitalize prior to 2002 because a lower level of insured 
deposits would require a smaller fund to meet the DRR; however, FICO 
interest payments could be jeopardized within a year or two.
    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.

IV. Suggested Legislative Initiatives

    Congress is considering a number of legislative proposals to 
resolve the difficulties facing the SAIF. Most of these proposals are 
intended to bring about the capitalization of the SAIF early in 1996 
and expand the assessment base for the FICO obligation. Pending 
enactment of a comprehensive, legislative resolution to the 
difficulties facing the SAIF, however, the FDIC must comply with 
current statutory mandates.
    As discussed above, the law provides that if the reserve ratio is 
less than the DRR, the Board must set semiannual assessments for SAIF 
members to increase the reserve ratio to the DRR. FDI Act section 
7(b)(2)(A)(i). In setting SAIF assessments to achieve and maintain the 
current DRR of 1.25 percent, 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). Given the uncertainty underlying the current legislative 
process and the range of possible solutions, it would be inappropriate 
to base the assessment rate for the first semiannual period of 1996 on 
what Congress may or may not do. Should legislation affecting the SAIF 
finally be enacted, the FDIC will promptly consider its impact and take 
any action deemed necessary or appropriate regarding assessment rates 
in accordance with the new legislative mandates.

V. Board Resolution

    For the reasons outlined above, the Board has adopted a Resolution 
to retain the existing assessment rate schedule applicable to SAIF-
member institutions for the first semiannual assessment period of 1996. 
The text of the Resolution is set out below.

Resolution

    Whereas, section 7(b) of the Federal Deposit Insurance Act (``FDI 
Act'') requires the Board of Directors (``Board'') of the Federal 
Deposit Insurance Corporation (``FDIC'') to establish by regulation a 
risk-based assessment system; and
    Whereas, section 7(b) of the FDI Act requires the Board to set 
semiannual assessments for Savings Association Insurance Fund 
(``SAIF'') members to maintain the reserve ratio of SAIF at the 
designated reserve ratio (``DRR'') or, if the reserve ratio is less 
than the DRR, to increase the reserve ratio to the DRR; and
    Whereas, the DRR for the SAIF is currently 1.25 percent of 
estimated insured deposits, the minimum level permitted by the FDI Act; 
and
    Whereas, section 7(b) further requires that, in setting SAIF 
assessments to achieve and maintain the reserve ratio of SAIF at the 
DRR, the Board consider the following factors: (1) Expected operating 
expenses; (2) case resolution expenditures and income; (3) the effect 
of assessments on members' earnings and capital; and (4) any other 
factors the Board may deem appropriate; and
    Whereas, the Board has considered the factors specified in the FDI 
Act, as reflected in the attached Federal Register notice document; and
    Whereas, Part 327 of the rules and regulations of the FDIC, 12 
C.F.R. Part 327, entitled ``Assessments,'' prescribes 

[[Page 63411]]
the rules governing the assessment of institutions insured by the FDIC; 
and
    Whereas, paragraph 327.9(c)(1) of title 12 of the C.F.R. prescribes 
the assessment rate schedule applicable to members insured by the SAIF; 
and
    Whereas, based upon its semiannual review of the SAIF 
capitalization schedule and assessment rates for SAIF-insured 
institutions, the Board finds that it is appropriate to retain the 
existing assessment rate schedule applicable to members of the SAIF 
with the result 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.
    Now, therefore, be it resolved, that the existing assessment rate 
schedule applicable to members of the SAIF shall be retained for the 
first semiannual assessment period of 1996 from January 1, 1996, 
through June 30, 1996.
    Be it further resolved, that the Board hereby directs the Executive 
Secretary, or his designee, to cause the aforementioned Federal 
Register notice document to be published in the Federal Register in a 
form and manner satisfactory to the Executive Secretary, or his 
designee, and the General Counsel, or his designee.

    By the order of the Board of Directors.

    Dated at Washington, D.C., this 14th day of November, 1995.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Deputy Executive Secretary.
[FR Doc. 95-28720 Filed 12-8-95; 8:45 am]
BILLING CODE 6714-01-P