[Federal Register Volume 61, Number 102 (Friday, May 24, 1996)]
[Rules and Regulations]
[Pages 26078-26082]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12885]



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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327


Assessments; Continuation of Adjusted Rate Schedule for BIF-
Assessable Deposits

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Continuation of adjusted rate schedule.

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SUMMARY: On May 14, 1996, the Board of Directors of the FDIC (Board) 
adopted a resolution to continue in effect the current downward 
adjustment to the assessment rate schedule applicable to deposits 
assessable by the Bank Insurance Fund (BIF). The continuation of the 
downward adjustment will apply to the semiannual assessment period 
beginning July 1, 1996. As a result, the BIF assessment rates will 
continue to range from 0 to 27 basis points. This rate schedule will 
result in an estimated average annual assessment rate of approximately 
0.29 basis points; the estimated annual revenue produced by this rate 
schedule will be $72 million.

EFFECTIVE DATE: July 1, 1996, through December 31, 1996.

FOR FURTHER INFORMATION CONTACT: Frederick S. Carns, Assistant 
Director, Division of Insurance, (202) 898-3930; Christine E. Blair, 
Financial Economist, Division of Research and Statistics,

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(202) 898-3936; James R. McFadyen, Senior Financial Analyst, Division 
of Research and Statistics, (202) 898-7027; Christopher L. Hencke, 
Counsel, Legal Division, (202) 898-8839; Federal Deposit Insurance 
Corporation, 550 17th Street, N.W., Washington, D.C., 20429.

SUPPLEMENTARY INFORMATION:

I. Continuation of Adjustment to Rate Schedule 2

    Section 7(b) of the Federal Deposit Insurance Act, 12 U.S.C. 
1817(b), provides that the Board shall set semiannual assessments for 
insured depository institutions. On August 8, 1995, the Board adopted a 
new assessment rate schedule for deposits subject to assessment by the 
BIF. 60 FR 42680 (August 16, 1995). The new schedule was codified as 
Rate Schedule 2 at 12 CFR 327.9(a). This schedule provided for an 
assessment-rate range of 4 to 31 basis points and became effective 
retroactively on June 1, 1995, the beginning of the month following the 
month in which the BIF reached its designated reserve ratio (DRR) of 
1.25 percent of total estimated insured deposits.
    In adopting Rate Schedule 2, the Board also amended the FDIC's 
assessment regulations to permit the Board to make limited adjustments 
to the schedule without notice-and-comment rulemaking. Any such 
adjustments can be made as the Board deems necessary to maintain the 
BIF reserve ratio at the DRR and can be accomplished by Board 
resolution. Under this provision, codified at 12 CFR 327.9(b), any such 
adjustment must not exceed an increase or decrease of 5 basis points 
and must be uniform across the rate schedule.
    The amount of an adjustment adopted by the Board under 12 CFR 
327.9(b) is to be determined by the following considerations: (1) the 
amount of assessment revenue necessary to maintain the reserve ratio at 
the DRR; and (2) the assessment schedule that would generate such 
amount of assessment revenue considering the risk profile of BIF 
members. In determining the relevant amount of assessment revenue, the 
Board is to consider BIF's expected operating expenses, case resolution 
expenditures and income, the effect of assessments on BIF members' 
earnings and capital, and any other factors the Board may deem 
appropriate.
    Having considered all of these factors, the Board decided on 
November 14, 1995, to adopt an adjustment factor of 4 basis points for 
the semiannual assessment period beginning January 1, 1996, with a 
resulting adjusted schedule ranging from 0 to 27 basis points. 60 FR 
63400 (December 11, 1995). The Board has now decided to adopt the same 
adjustments to Rate Schedule 2 for the upcoming semiannual period from 
July 1, 1996 to December 31, 1996. The adjusted rate schedule is set 
forth below.

 BIF Rate Schedule as Adjusted for the Second Semiannual Period of 1996 
------------------------------------------------------------------------
                                                  Supervisory subgroup  
                Capital group                 --------------------------
                                                  A        B        C   
------------------------------------------------------------------------
1............................................    \1\ 0        3       17
2............................................        3       10       24
3............................................       10       24      27 
------------------------------------------------------------------------
\1\ Subject to a statutory minimum assessment of $1,000 per semiannual  
  period (which also applies to all other assessment risk               
  classifications).                                                     

    The basis for the Board's decision is discussed below.

II. Basis for the Adjustment

A. Maintaining at the Designated Reserve Ratio

    In adopting a rate adjustment under 12 CFR 327.9(b), as mentioned 
above, the Board must consider the following: (1) the amount of 
assessment revenue necessary to maintain the reserve ratio at the DRR; 
and (2) the assessment schedule that would generate such amount of 
assessment revenue considering the risk profile of BIF members.
    The BIF reserve ratio stood at 1.30 percent as of December 31, 
1995, the latest date for which complete data are available. Assuming 
that insured deposit growth during the first half of 1996 falls within 
the range of 2 percent shrinkage to 6 percent growth annually, and 
assuming that insurance losses remain moderate as expected, the BIF 
ratio will range from 1.29 to 1.34 percent at midyear 1996 (Table 1).
    For the second half of 1996, insurance losses and operating 
expenses are expected to total under $350 million, while assessments 
plus investment income will exceed $650 million.
    Insured deposit growth for 1996 is subject to considerable 
uncertainty, as recent experience has been mixed. From 1991 through 
early 1995, the growth rate of BIF-insured deposits was essentially 
zero but, for the year ending in December 1995, BIF-insured deposits 
grew by 3 percent, with much of this growth occurring in the fourth 
quarter. In light of the 1995 experience, as well as considerable 
volatility in deposit growth experienced during the 1980s, the FDIC 
must consider the possibility that BIF-insured deposits could grow at a 
6 percent annual rate throughout 1996.
    Table 1 indicates the year-end 1996 range for the BIF reserve 
ratio, assuming a 6 percent upper bound for annual deposit growth in 
1996 and assuming that the values of other variables affecting the 
reserve ratio in the second semiannual period will fall within their 
historical ranges. While the lower bound on the year-end BIF reserve 
ratio is below the 1.25 percent target, this presumes an unexpected 
increase in insurance losses/provisions of $600 million. Such an 
increase is consistent with the historical experience of the FDIC, but 
it must be viewed as a remote possibility in light of the current 
economic environment and the near-term outlook.
    The stronger possibility is that insured-deposit growth rates could 
exceed forecasts based upon historical experience. While the 6 percent 
upper bound for deposit growth included in Table 1 is high relative to 
the experience of the 1990s, the FDIC cannot rule out such a rate of 
growth in response to the dramatic reductions in BIF assessment rates 
that were effected in the second half of 1995.
    Moreover, given the prospect of a continuing, large premium 
differential between the insurance funds, there is a realistic 
possibility of substantial deposit migration from the SAIF to the BIF. 
Though the law imposes constraints on at least some forms of deposit-
shifting from one fund to another, such constraints may be countered by 
adaptations in the marketplace. The relatively low rate of migration to 
date is not likely to be indicative of the rate to be expected going 
forward, given that many market participants may have delayed any plans 
to migrate deposits in anticipation of a legislative solution. In the 
absence of a legislative solution to date, the FDIC believes that there 
is a realistic possibility of a significant increase in deposit 
migration. However, the precise timing and ultimate magnitude of any 
increase is uncertain.
    For illustration, Table 2 examines the impact on the year-end BIF 
reserve ratio of alternative deposit migration rates during the second 
semiannual period of 1996. Columns 2 through 4 of the table indicate 
the impact of deposit migration rates under three different assumptions 
concerning ``normal'' growth of BIF-insured deposits (growth that is 
not due to migration) for 1996. For example, the ratios in the third 
column are derived under the assumption that normal deposit growth is 2 
percent for 1996 (full year); assuming also that no deposit migration 
occurs during the year, the

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year-end BIF ratio would be 1.32 percent (the assumed values for all 
nondeposit factors affecting the reserve ratio are constant across 
columns 2-4). Table 2 indicates that, in general, each 5 percent 
increase in the annual rate of migration during the second half of 1996 
(to a maximum annual rate of 30 percent) would reduce the year-end 1996 
BIF ratio by approximately 1 basis point. If 30 percent annual 
migration in the second half of 1996 were to occur along with 6 percent 
``normal'' growth of BIF-insured deposits, the BIF ratio at year end 
would be 1.23 percent under the assumptions of Table 2.
    Given the uncertainties reviewed above, the possibility of a large 
increase in BIF-insured deposit growth during 1996 should be considered 
seriously. Despite this concern, it is the judgment of the Board that 
BIF assessment rates should not be changed at this time; rather, 
deposit flows and trends in deposit growth rates should be closely 
monitored in preparation for future decisions regarding BIF assessment 
rates.
    In summary, for the reasons discussed above, the Board believes 
that the assessment schedule for the current semiannual period will 
generate the revenue necessary to maintain the reserve ratio at the DRR 
in the next semiannual period.

B. The Long-Term Outlook

    The Board believes that an important consideration in setting rates 
is the long-term revenue needs of the BIF. A balance should exist 
between long-term BIF revenues and long-term BIF expenses (where 
expenses include monies needed to prevent dilution due to deposit 
growth). In August of 1995, the FDIC determined that an effective 
average BIF assessment rate of 4 to 5 basis points would be appropriate 
to achieve such balance. This determination was based on a thorough 
historical analysis of FDIC experience and consideration of recently 
enacted statutory provisions that may moderate deposit insurance losses 
going forward. 60 FR 42680 (August 16, 1995).
    The Board has not altered its view that, in setting rates, it 
should look beyond the immediate time frame in estimating the revenue 
needs of the BIF. Moreover, the Board continues to believe that an 
average annual assessment rate of 4 to 5 basis points would be 
appropriate to achieve a long-term balance between BIF revenues and 
expenses. As discussed in the preceding section, however, the current 
balance in the BIF also is directly relevant to determining the 
appropriate assessment level. In light of the favorable existing 
conditions and outlook for the next several months, it is anticipated 
that the current rate structure (with an assessment rate of zero for 
the least-risky institutions) will provide adequate assessment revenue 
over the near term to maintain the BIF reserve ratio at or above the 
target ratio of 1.25 percent.

C. Other Considerations

    In continuing the current adjustments to the assessment rate 
schedule, the Board has considered the effect on members' earnings and 
capital. In light of the fact that these adjustments represent a 
reduction in the rates set forth in Rate Schedule 2, the Board does not 
believe that the schedule will produce unwarranted adverse effects on 
members. Indeed, the rate for many institutions will be zero (with a 
minimum semiannual assessment of $1,000 mandated by the Federal Deposit 
Insurance Act).
    Another consideration is the statutory requirement under the 
Federal Deposit Insurance Act for a risk-based assessment system. To be 
effective, this system must incorporate a range of rates that provides 
an incentive for institutions to control risk-taking behavior while at 
the same time covering the long-term costs of the obligations borne by 
the deposit insurer. In the judgment of the Board, these goals will be 
achieved for the upcoming semiannual period by retaining the current 
spread of 27 basis points between the highest- and lowest-rated 
institutions.
    For the reasons discussed above, the Board has decided to continue 
in effect the current adjustment to the BIF assessment rate schedule 
with a range of 0 to 27 basis points for the semiannual period from 
July 1, 1996 through December 31, 1996.

    By order of the Board of Directors.

    Dated at Washington, DC, this 14th day of May, 1996.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Deputy Executive Secretary.

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[FR Doc. 96-12885 Filed 5-23-96; 8:45 am]
BILLING CODE 6714-01-C