[Federal Register Volume 61, Number 236 (Friday, December 6, 1996)]
[Rules and Regulations]
[Pages 64609-64613]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30906]


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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 November 26, 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 January 1, 1997. As a result, the BIF assessment rates will 
continue to range from 0 to 27 basis points. The only difference 
between the existing adjustment and the continuing adjustment adopted 
by the Board is that the continuing schedule will no longer include a 
reference to a minimum assessment amount. This change results from 
recent legislation that eliminates a statutorily-imposed minimum 
assessment amount. With this modification, the adjusted rate schedule 
will result in an estimated average annual assessment rate of 
approximately 0.17 basis points; the estimated annual revenue produced 
by this rate schedule will be $43 million. In connection with the 
elimination of the mandatory assessment amount, the Board has also 
decided to refund minimum assessment payments made to BIF with respect 
to that portion of the current semiannual assessment period remaining 
after enactment of the amending legislation.

EFFECTIVE DATE: January 1, 1997, through June 30, 1997.

FOR FURTHER INFORMATION CONTACT: Steven Ledbetter, Chief, Assessment 
Evaluation Section, Division of Insurance, (202) 898-8658; James R. 
McFadyen, Senior Financial Analyst, Division of Research and 
Statistics, (202) 898-7027; Martha Coulter, Counsel, Legal Division, 
(202) 898-7348; Federal Deposit Insurance Corporation, 550 17th Street, 
N.W., Washington, D.C., 20429.

SUPPLEMENTARY INFORMATION:

I. Introduction

    This announcement pertains to deposit insurance assessments to be 
paid for the semiannual assessment period beginning January 1, 1997, by 
insured depository institutions on deposits assessable by the Bank 
Insurance Fund (BIF). Invoices reflecting these assessments will be 
sent to BIF member institutions around December 11, 1996.1
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     1 Normally, invoices are sent approximately one month prior to 
collection date, which would be December 3 for the January 2 
collection date. However, in this instance the invoices are being 
delayed approximately one week in order to permit the FDIC to 
include any reduction in Savings Association Insurance Fund (SAIF) 
rates adopted by the Board in early December for the upcoming 
semiannual assessment period. The Board has decided to delay all 
invoices, not just invoices for SAIF-member institutions, because of 
the large number of BIF members with SAIF-assessable deposits and 
SAIF members with BIF-assessable deposits. The Board is concerned 
that sending bifurcated invoices approximately one week apart would 
result in significant confusion and additional burden for such 
institutions that can be avoided by a delayed, combined invoice.
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    These invoices will also bill for assessments to be paid to the 
Financing Corporation (FICO). As a result of recently-enacted 
legislation, BIF-assessable deposits are now also subject to assessment 
by FICO. As it has in the past, the FDIC will continue to collect FICO 
assessments on FICO's behalf.
    In providing for the FICO-assessability of BIF-assessable deposits, 
section 2703 of the Deposit Insurance Funds Act of 1996 (DIFA) 2 
further provided that the assessments imposed by FICO on insured 
depository institutions with respect to BIF-assessable deposits will be 
at a rate equal to one-fifth the assessment rate applicable to deposits 
assessable by the Savings Association Insurance Fund (SAIF). Thus, the 
upcoming FDIC assessment invoice is expected to reflect a FICO rate for 
BIF-assessable deposits of approximately 1.3 basis points, which is 
one-fifth the FICO rate of approximately 6.4 basis points anticipated 
for SAIF-assessable deposits.
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     2 DIFA is Subtitle G of Title II of Pub. L. 104-208, which 
was enacted on September 30, 1996.
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    The remainder of this announcement pertains solely to deposit 
insurance assessments and does not further address FICO assessments.

II. Continuation of Adjustment to BIF 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 deposit insurance 
assessments for insured depository institutions. On August 8, 1995, the 
Board adopted a new assessment rate schedule for deposits subject to 
assessment by 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 continued the same adjustment for 
the semiannual period beginning July 1, 1996. 61 FR 26078 (May 24, 
1996).
    Until now, the adjusted schedule has included a reference to a 
statutory requirement in section 7(b)(2)(A)(iii) of the Federal Deposit 
Insurance Act, 12 U.S.C. 1817(b)(2)(A)(iii), that each insured 
depository institution pay a minimum assessment amount of $2,000 
annually. However, that requirement

[[Page 64610]]

recently has been eliminated by section 2708 of DIFA, which replaced it 
with a new section 7(b)(2)(A)(iii). The new provision requires that, 
with respect to institutions posing the least risk to the deposit 
insurance fund,3 semiannual assessments not be set to exceed the 
amount needed to maintain the reserve ratio of BIF at the designated 
reserve ratio, which is currently set at 1.25 percent of total 
estimated insured deposits.
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     3 New section 7(b)(2)(A)(iii) provides that the FDIC may 
set assessments in excess of the amount needed to maintain or 
achieve the DRR with respect to insured depository institutions that 
exhibit financial, operational, or compliance weaknesses ranging 
from moderately severe to unsatisfactory, or are not well 
capitalized as that term in defined in section 38 of the Federal 
Deposit Insurance Act, 12 U.S.C. 1831o. The Board has determined 
that, for purposes of the existing rate structure comprised of the 
current nine risk classifications, this language should be read as 
permitting the FDIC to set assessments in excess of the amount 
needed to maintain or achieve the DRR with respect to institutions 
other than those with an assessment risk classification of 1A.
    This reading of new section 7(b)(2)(A)(iii) was proposed by the 
Board and published for public comment in the pending SAIF- rate 
rulemaking proceeding, 61 FR 53867, 53872 (October 16, 1996). The 
comment period for that rulemaking has now closed, with no opposing 
comments having been received as to this interpretation. A 
discussion of the Board's determination to adopt regulations 
reflecting this interpretation will be included in the Federal 
Register notice announcing the Board's decision regarding SAIF 
rates.
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    In light of this change, and for the reasons discussed below, the 
Board has decided to continue the same adjustments to Rate Schedule 2 
for the upcoming semiannual period beginning January 1, 1997, with the 
exception that the reference in the adjusted rate schedule to a minimum 
assessment amount has been eliminated. The adjusted rate schedule is 
set forth below.

  BIF Rate Schedule as Adjusted for the First Semiannual Period of 1997 
------------------------------------------------------------------------
                                                         Supervisory    
                                                           subgroup     
                   Capital group                    --------------------
                                                       A      B      C  
------------------------------------------------------------------------
1..................................................      0      3     17
2..................................................      3     10     24
3..................................................     10     24     27
------------------------------------------------------------------------

    In addition to continuing the adjusted rate schedule, the Board has 
also decided to refund to BIF member institutions any minimum 
assessment amount they paid to BIF for the September 30, 1996, 
quarterly assessment collection. Although the Board believes that it 
has the authority to retain these payments and to implement the 
elimination of the minimum assessment requirement beginning with the 
upcoming semiannual period, it has decided on a different approach.
    The Board has decided that the more appropriate action is to refund 
that portion of the minimum assessment that corresponds with the 
portion of the current semiannual period remaining after the September 
30, 1996, enactment of the statute--that is, the quarter beginning 
October 1, 1996. The Board believes that this approach promotes the 
intent reflected in new section 7(b)(2)(A)(iii) to assess the least 
risky institutions no more than necessary to maintain the BIF 
designated reserve ratio.
    Affected institutions will be contacted with further information 
regarding the refund, which is expected to occur by means of an ACH 
credit on or about January 2, 1997. The majority of BIF members can 
expect to receive a refund of $500 plus interest.

III. 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 June 30, 1996, 
the latest date for which complete data are available. The recent 
strong performance of the industry and consequent growth of the BIF 
reserve ratio, and the outlook for the reserve ratio over the near 
term, have persuaded the Board to continue the existing adjusted rate 
schedule for the first semiannual period of 1997. Following is an 
analysis of the potential effect of changes in the fund balance and the 
rate of insured deposit growth on the reserve ratio through June 30, 
1997.
1. Fund Balance
    The adjusted BIF balance was $25.888 billion on June 30, 1996 
(Table 2, see note 4). Changes in the balance are largely determined by 
changes in insurance losses and interest income.
    Insurance Losses. Insurance losses are comprised of two components: 
A contingent liability for future failures and an allowance for losses 
on institutions that have already failed. Using current staff estimates 
of failed assets through June 30, 1997, and a 20 percent loss rate on 
assets, the change in the contingent liability for future failures is 
estimated to be between $100 million (lower bound) and $300 million 
(upper bound) for the twelve months ending June 30, 1997 4.
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     4 In internal discussions, the FDIC staff has recently 
projected assets of failed BIF institutions to be between $200-
$1,050 million through the first half of 1997. Table 1 assumes a 20% 
loss rate on these assets (staff assumption for institutions with 
less than $500 million in assets), rounded to the nearest $100 
million, and assumes that all of these losses are in addition to the 
amount of the current reserve.
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    The estimated recovery value of closed banks was $4.26 billion as 
of September 30, 1996. While annual changes in the allowance for losses 
as a percentage of the estimated net recovery value of closed banks 
have been as high as 13 percent and as low as -16 percent over the last 
five years, the change in 1994 was -5.75 percent and +10.2 percent in 
1995. Proforma statements for December 31, 1996, project an increase in 
the allowance for losses for closed banks of $195 million from June 30, 
1996. This is a +5 percent variance for the second semiannual period of 
1996, which is consistent with the range of -5 percent to +10 percent 
assumed for purposes of this analysis. Table 1 elaborates on these two 
components.
    Interest Income. Interest income on BIF's investment portfolio 
averaged $103 million a month for the first six months of 1996. 
Assuming relatively stable interest rates (i.e. between 5.7 percent and 
6.2 percent) through the first semiannual period of 1997, interest 
income is projected to be between $1.210 billion and $1.316 billion for 
the twelve months ending June 30, 1997. Table 2 summarizes the effects 
on the fund balance of the lower bound and upper bound ranges assumed 
for interest income and insurance losses.
2. Insured Deposits
    Recent experience with respect to insured deposit growth has been 
mixed. While the total amount of BIF-insured deposits has remained 
essentially unchanged since 1991, there has been substantial volatility 
historically. Since 1985, annual growth has been as high as 8.7 percent 
and annual shrinkage as much as 2 percent (see Figure 1). The recent 
trend has been towards growth; over the last two years there have been 
only two quarters when insured deposits have shrunk and then only 
slightly (.01 percent and .03 percent). It should also be noted that 
the amount of BIF-insured deposits reported for the third quarter may 
reflect extraordinary growth due to the results of deposit- shifting 
strategies implemented by

[[Page 64611]]

SAIF-insured institutions prior to enactment of DIFA. In light of this 
evidence and the experience over the last five years, the FDIC believes 
that BIF-insured deposits are likely to experience a growth rate in the 
range of -2 percent to +5 percent between June 1996 and June 1997.
3. BIF Reserve Ratio
    Based on the projected BIF balance and the growth of the insured 
deposit base, the FDIC projects that the BIF reserve ratio will be 
within the range of 1.25 to 1.38 at June 30, 1997 (Table 3). The lower 
bound estimate, which produces a 5 basis point decrease below the June 
30, 1996, ratio, reflects an assumed increase in the insured deposit 
base (-6 basis points) with a small offset from an increase in the fund 
balance (+1 basis point). The large increase in interest income and the 
effect on the fund balance were mitigated by increased insurance 
losses. The upper bound estimate, which produces an 8 basis point 
increase above the June 30, 1996, ratio, reflects an assumed shrinkage 
of the insured deposit base (+3 basis points) and a large increase in 
the BIF balance (+5 basis points). In this projection, the impact of 
the increase in interest income was accentuated by the decrease in 
insurance losses.
    In light of recent trends and current conditions in the banking 
industry, the FDIC's view is that the lower-bound scenario is not 
likely to be realized. If this were to occur, however, the current rate 
schedule still would be sufficient to maintain the target DRR through 
midyear 1997.

B. Other Considerations

1. Risk-Based Assessment System
    The adjusted rate schedule retains the current spread of 27 basis 
points between the highest- and lowest-rated institutions, as well as 
the rate spreads among other cells in the assessment rate matrix. The 
Board has previously determined that, relative to the rate spreads in 
the assessment rate schedule in effect prior to June 1, 1995--which 
ranged from 23 to 31 basis points, with a resulting maximum spread of 8 
basis points--the current rate spreads provide greater incentives for 
weaker institutions to improve their condition and for all institutions 
to avoid excessive risk-taking, consistent with the goals of risk-based 
assessments. The current rate spreads also provide greater consistency 
with the historical variation in bank failure rates across cells of the 
assessment rate matrix.
    The continued adjusted rate schedule, which ranges from 0 to 27 
basis points, appears in Table 4 along with supplemental data. Table 5 
summarizes the distribution of institutions across the risk-based 
assessment matrix. Estimated annual assessment revenue from this 
schedule is expected to be $43 million, and the average annual 
assessment rate is estimated to be 0.17 basis points.
2. Impact on Bank Earnings and Capital
    The estimated annual revenue from the existing rate schedule is $43 
million. In deciding to continue this schedule, the Board has 
considered the impact on bank earnings and capital and found no 
unwarranted adverse effects.
3. Long-Term Outlook
    In the past, the Board has expressed the view that an important 
consideration in setting rates is the long-term revenue needs of BIF. 
The Board has previously indicated a belief that 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 a balance. This determination was based on a thorough 
historical analysis of FDIC experience and consideration of statutory 
changes in the past few years that may moderate deposit insurance 
losses going forward. 60 FR 42680 (August 16, 1995).
    While the latest available data indicate the continuation of slow 
growth rates for BIF-insured deposits and minimal BIF insurance losses, 
there is no clear indication that these developments represent long-
term trends. Thus, it could be concluded that an effective average 
assessment rate of 4 to 5 basis points is still needed to achieve long-
term balance.
    However, under the existing statutory scheme, the current balance 
in the BIF also is directly relevant to determining the appropriate 
assessment schedule for the first semiannual assessment period of 1997. 
Moreover, in light of the favorable current conditions and the outlook 
for the next several months, it is anticipated that continuation of the 
existing rate structure will provide adequate assessment revenue over 
the near term to prevent BIF from falling below a reserve ratio of 1.25 
percent.
    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 
beginning January 1, 1997.

    By order of the Board of Directors.

    Dated at Washington, D.C., this 26th day of November, 1996.

Federal Deposit Insurance Corporation
Jerry L. Langley,
Executive Secretary.

Table 1.--Changes in Contingent Liabilities and Allowance for Losses \1\
                             [$ in millions]                            
------------------------------------------------------------------------
                                                        Lower     Upper 
                                                        bound     bound 
------------------------------------------------------------------------
Contingent Liability for Future Cases \2\...........     $100      $300 
Allowance for Losses: Closed Banks \3\..............    ($200)     $400 
                                                     -------------------
    Total Provision for Losses......................    ($100)    $700  
------------------------------------------------------------------------
\1\ Both projections assume a continuation of current economic          
  conditions during 1997.                                               
\2\ The June 30, 1996 BIF balance includes a $100 million reserve for   
  institutions already identified as anticipated failures.              
\3\ Assumes a range of -5% to 10% of the net recovery value of closed   
  banks ($4.26 billion as of 9/30/96).                                  


                         Table 2.--Fund Balance                         
                             [$ in millions]                            
------------------------------------------------------------------------
                                                        Lower     Upper 
                                                        bound     bound 
------------------------------------------------------------------------
Revenue:                                                                
  Assessments \1\...................................       $43      $43 
  Interest Income \2\...............................     1,210    1,316 
                                                     -------------------
    Total revenue...................................     1,253    1,359 
                                                     -------------------
Expenses & Losses:                                                      
  Operating Expenses \3\............................       450      450 
  Provision for Losses..............................       700     (100)
                                                     -------------------
    Total Expenses & Losses.........................     1,150      350 
                                                     -------------------
Net Income..........................................       103    1,009 
Fund Balance--6/30/96 \4\...........................    25,888   25,888 
Fund Balance--6/30/97...............................    25,991  26,897  
------------------------------------------------------------------------
\1\ Assuming the current assessment rate schedule through June 30, 1997,
  assessment income is expected to be $43 million for the twelve months 
  from June 30, 1996 to June 30, 1997.                                  
\2\ Interest rates are 5.7% (lower bound) and 6.2% (upper bound).       
\3\ Operating expenses were approximately $38 million a month for the   
  first six months of 1996. Operating expenses are expected to remain   
  the same through June 30, 1997. The savings from corporate downsizing 
  is offset by a higher allocation of overhead expenses to corporate, a 
  result of fewer receiverships.                                        
\4\ BIF balance increased by $60 million to reflect the fact that two   
  institutions are no longer likely failures; FDIC expects to reverse   
  the related reserves in the 4th quarter, 1996.                        

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[GRAPHIC] [TIFF OMITTED] TR06DE96.000


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                     Table 3.--Projected BIF Ratios                     
                             [$ in millions]                            
------------------------------------------------------------------------
                                                                June 30,
                                                                 1996   
------------------------------------------------------------------------
Adjusted Fund Balance \1\..................................      $25,888
Estimated Insured Deposits \2\.............................    1,986,578
Adjusted BIF Ratio \1\.....................................         1.30
------------------------------------------------------------------------


                                                                        
                                                     Lower       Upper  
                                                   bound \3\   bound \4\
                                                   June 30,    June 30, 
                                                     1997        1997   
------------------------------------------------------------------------
Projected Fund Balance..........................     $25,991     $26,897
Estimated Insured Deposits......................   2,085,907   1,946,846
Estimated BIF Ratio.............................        1.25        1.38
------------------------------------------------------------------------
\1\ The BIF balance includes the $60 million reserve reversal for two   
  institutions.                                                         
\2\ As a result of the DIFA, the SAIF insured deposits of certain Oakar 
  institutions have been decreased by $28.2 billion and their BIF       
  insured deposits have been increased by the same amount. Estimated    
  insured deposits as of 6/30/96 have thus been adjusted by this amount.
\3\ The lower bound refers to the scenario of lower interest income     
  (interest rate: 5.7%), higher insurance losses ($700 million) and a   
  higher insured deposit growth rate (+5%).                             
\4\ The upper bound refers to the scenario of higher interest income    
  (interest rate: 6.2%), a reduction in insurance losses (-$100 million)
  and a shrinkage of the insured deposit base (-2%).                    


   Table 4.--Assessment Rate Schedule First Semiannual 1997 Assessment  
                     Period BIF-Insured Institutions                    
------------------------------------------------------------------------
                                                    Supervisory risk    
                                                       subgroups        
                Capital group                 --------------------------
                                               Group A  Group B  Group C
                                                 (bp)     (bp)     (bp) 
------------------------------------------------------------------------
Well.........................................        0        3       17
Adequate.....................................        3       10       24
Under........................................       10       24       27
------------------------------------------------------------------------


    Table 5.--BIF Assessment Base Distribution \1\; Deposits as of June 30, 1996 \2\; Supervisory and Capital   
                                         Ratings in Effect July 1, 1996                                         
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(5)Supervisory risk subgroups                                                                                   
                                            --------------------------------------------------------------------
               Capital group                                                                                    
(1) A                                                                                                           
(1) B                                                                                                           
(1) C                                                                                                           
----------------------------------------------------------------------------------------------------------------
Well:                                                    (percent)              (percent)              (percent)
    Number.................................     9,538         94.4       368          3.6        59          0.6
    Base ($ billion).......................     2,415.7       96.8        35.9        1.4         3.8        0.2
Adequate:                                                                                                       
    Number.................................        73          0.7        19          0.2        17          0.2
    Base ($ billion).......................        32.6        1.3         2.4        0.1         1.5        0.1
Under:                                                                                                          
    Number.................................         6          0.1         1          0.0        18          0.2
    Base ($ billion).......................         0.5        0.0         0.3        0.0         1.7        0.1
----------------------------------------------------------------------------------------------------------------
Estimated annual assessment revenue \3\: $43 million.                                                           
Assessment Base: $2,494 billion.                                                                                
Average annual assessment rate (bp) \3\: 0.17 basis points.                                                     
----------------------------------------------------------------------------------------------------------------
\1\ ``Number'' reflects the number of BIF members and SAIF-member Oakar institutions; ``Base'' reflects the BIF-
  assessable deposits of BIF members and SAIF-member Oakar institutions.                                        
\2\ Figures do not reflect the adjusted attributable deposit amount reduction for certain BIF-member Oakars,    
  effective 9/30/96.                                                                                            
\3\ Assumes a refund of $500 with interest, for BIF 1A institutions and no $1,000 minimum semiannual BIF        
  assessment in 1997.                                                                                           

[FR Doc. 96-30906 Filed 12-5-96; 8:45 am]
BILLING CODE 6714-01-P