[Federal Register Volume 61, Number 248 (Tuesday, December 24, 1996)]
[Rules and Regulations]
[Pages 67687-67698]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32113]



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  Federal Register / Vol. 61, No. 248 / Tuesday, December 24, 1996 / 
Rules and Regulations  

[[Page 67687]]



FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

RIN 3064-AB59


Assessments

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The FDIC is lowering the rates on assessments paid to the 
Savings Association Insurance Fund (SAIF), and widening the spread of 
the rates, in order to avoid collecting more than needed to maintain 
the SAIF's capitalization at 1.25 percent of aggregate insured 
deposits, and to improve the effectiveness of the risk-based assessment 
system.
    The final rule establishes a base assessment schedule for the SAIF 
with rates ranging from 4 to 31 basis points, and an adjusted 
assessment schedule that reduces these rates by 4 basis points. In 
general, effective SAIF rates range from 0 to 27 basis points as of 
October 1, 1996. The final rule also prescribes a special interim 
schedule of rates ranging from 18 to 27 basis points for SAIF-member 
savings associations for just the last quarter of 1996, reflecting the 
fact that assessments paid to the Financing Corporation (FICO) are 
included in the SAIF rates for these institutions during that interval. 
Excess assessments collected under the prior assessment schedule will 
be refunded or credited, with interest.
    The final rule establishes a procedure for making limited 
adjustments to the base assessment rates, both for the SAIF and for the 
Bank Insurance Fund (BIF), by rulemaking without notice and comment.
    The final rule clarifies and corrects certain provisions without 
making substantive changes.

EFFECTIVE DATE: December 11, 1996.

FOR FURTHER INFORMATION CONTACT: Stephen Ledbetter, Chief, Assessments 
Evaluation Section, Division of Insurance (202) 898-8658; Allan Long, 
Assistant Director, Division of Finance, (202) 416-6991; James 
McFadyen, Senior Financial Analyst, (202) 898-7027; Christine Blair, 
Financial Economist, (202) 898-3936, Division of Research and 
Statistics; Richard Osterman, Senior Counsel, (202) 898-3523; Jules 
Bernard, Counsel, (202) 898-3731, Legal Division, Federal Deposit 
Insurance Corporation, Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

I. The Final Rule

A. Background

    Under the prior assessment schedule, SAIF rates have ranged from 23 
basis points for institutions in the best assessment risk 
classification to 31 basis points for institutions in the least 
favorable one. This schedule has implemented the risk-based assessment 
program required by section 7 of the Federal Deposit Insurance (FDI 
Act), 12 U.S.C. 1817. The schedule has been designed to increase the 
reserve ratio of the SAIF--the ratio of the SAIF's net worth to 
aggregate SAIF-insured deposits, see id. 1817(l)(7)--to the designated 
reserve ratio (DRR).\1\
---------------------------------------------------------------------------

    \1\ The DRR is a target ratio that has a fixed value for each 
year. The value is either 1.25 percent or such higher percentage as 
the Board determines to be justified for that year by circumstances 
raising a significant risk of substantial future losses to the Fund. 
Id. 1817(b)(2)(A)(iv). The Board has not altered the statutory DRR 
for either fund.
---------------------------------------------------------------------------

    The SAIF has never received the full amount of the revenues that 
the SAIF rates have generated, however. The SAIF did not receive any 
revenues at all from its creation in 1989 through the end of 1992: all 
such revenues were diverted to other needs. Revenues have begun to flow 
into the SAIF after January 1, 1993, but still not at the full amounts. 
Certain SAIF-assessable institutions--namely, SAIF-member savings 
associations--have been required to pay assessments to the FICO in 
order to enable the FICO to pay the interest on its bonds. The amounts 
that these institutions have paid to the FICO have served to reduce the 
amounts that the institutions have paid to the SAIF. At $793 million 
per year, the FICO draw has been substantial. It has contributed to the 
slow growth in the SAIF reserve ratio, which has only increased from 
.28 percent to .47 percent during 1995.
    Moreover, the assessment rates for the BIF were much lower than the 
comparable rates for the SAIF, because the BIF's reserve ratio had 
already reached the DRR. The disparity created incentives for 
institutions to move deposits from SAIF-insured status to BIF-insured 
status, and raised the question of whether a shrinking SAIF-assessable 
deposit base could continue both to service the interest on FICO debt 
and to capitalize the SAIF.
    In response to these circumstances, Congress adopted the Deposit 
Insurance Funds Act of 1996 (Funds Act), Public Law 104-208, sections 
2701-2711, 110 Stat. 3009 et seq. (Sept. 30, 1996). The Funds Act 
called for the FDIC to impose a one-time special assessment on SAIF-
assessable deposits to raise the SAIF's reserve ratio to the DRR as of 
October 1, 1996. Id. section 2702. The FDIC carried out this mandate. 
See 61 FR 53834 (Oct. 16, 1996). The Funds Act also ended the link 
between the amounts assessed by the FICO and the amounts authorized to 
be assessed by the SAIF, effective January 1, 1997.

B. Statutory Framework for Setting Assessment Rates

    Section 7(b)(1) of the FDI Act, 12 U.S.C. 1817(b)(1), requires the 
Board to establish a risk-based assessment system for all insured 
institutions. Id. 1817(b)(1)(A).
    The Board must set semiannual assessments for each institution 
based on the following factors: (1) The probability that the 
institution will cause a loss to the BIF or to the SAIF, (2) the likely 
amount of the loss, and (3) the revenue needs of the appropriate fund. 
Id. 1817(b)(1)(C).
    Section 7(b)(2)(A) sets forth the requirement that the FDIC's 
assessments must be designed to maintain each fund's reserve ratio at 
the DRR or, if the fund's reserve ratio is below that level, to lift 
the ratio to the DRR. Section 7(b)(2)(A)(i) states this requirement as 
a mandate to the Board to set assessments that are sufficient to 
achieve the appropriate goal. Id. 1817(b)(2)(A)(i). Section 
7(b)(2)(A)(iii), as amended by section 2708(b) of the Funds Act, states 
this requirement as a limitation on the amounts to be collected: The 
Board may not collect more for a fund than is needed to fulfill the 
appropriate goal. Id. 1817(b)(2)(A)(iii).

[[Page 67688]]

    Whether a fund is capitalized at the DRR or otherwise, the Board 
may set higher rates for institutions that exhibit weakness or are not 
well capitalized. Id. 1817(b)(2)(A)(v).
    In setting semiannual assessments for an insurance fund, the Board 
must consider the following factors: (1) The fund's expected operating 
expenses; (2) the fund's case resolution expenditures and income; (3) 
the effect of assessments on the earnings and capital of fund members; 
and (4) any other factors that the Board deems appropriate. Id. 
1817(b)(2)(A)(ii).
    Through the end of 1996, the FICO draw serves to reduce the amounts 
that the FDIC assesses against SAIF-member savings associations. Id. 
1441(f)(2) & 1817(b)(2)(D).\2\ Thereafter, the FICO assessments are 
independent of and in addition to those of the FDIC. Funds Act section 
2703 (a) and (c). But the FICO still must assess institutions in the 
same manner as the FDIC does, and the FDIC still must approve the 
FICO's assessments. 12 U.S.C. 1441(f)(2).
---------------------------------------------------------------------------

    \2\ Section 21(f)(2) of the Federal Home Loan Bank Act, 12 
U.S.C. 1441(f)(2), provides that amounts assessed by the FICO reduce 
the amounts authorized to be assessed by the FDIC for the SAIF. 
Section 7(b)(2)(D) of the FDI Act, id. 1817(b)(2)(D), states a 
parallel requirement. Section 2703 of the Funds Act repeals both 
provisions. Section 2703(a) repeals section 21(f)(2); section 
2703(b) repeals section 7(b)(2)(B).
    The repeals are not simultaneous--at least, not on their face. 
Section 2703(c)(1) sets an effective date for section 2703(a) of 
January 1, 1997. Section 2703(c) does not mention section 2703(b). 
Accordingly, section 2703(b) is--apparently--effective upon passage 
of the Funds Act. If so, section 7(b)(2)(D) has been repealed since 
September 30, 1996. A repeal of section 7(b)(2)(D) would have no 
practical consequence, as section 21(f)(2) remains in effect through 
the end of 1996.
    The FDIC takes the view, however, that section 2703(c)(1) 
contains a drafting error in this regard. Section 2703(c)(1) says it 
applies to section 2703(a) and to section 2703(c)--that is, to 
itself. The FDIC considers that the self-reference makes no sense, 
and that a reference to subsection (b) was intended. Accordingly, 
the FDIC interprets the Funds Act to repeal section 7(b)(2)(D) on 
January 1, 1997, in concert with the repeal of the Federal Home Loan 
Bank Act's parallel provisions.
---------------------------------------------------------------------------

    Finally, through the end of 1998, the assessment rate for a SAIF 
member may not be less than the assessment rate for a BIF member that 
poses a comparable risk to the deposit insurance fund. Id. 
1817(b)(2)(E).

C. The Base and Adjusted Assessment Schedules for the SAIF

1. Overview
    The SAIF's reserve ratio has been well below the DRR. The SAIF 
rates have been designed to increase the SAIF's capitalization to the 
DRR. In accordance with the Funds Act, however, the FDIC has 
capitalized the SAIF at the DRR as of October 1, 1996. The FDIC is 
therefore lowering the SAIF rates as of that date. See id. 
1817(b)(2)(A)(iii) and (v).
    The FDIC is retaining the 9-cell framework for SAIF assessment 
rates, but is replacing the prior set of rates with a new and lower 
rate-schedule, entitled the SAIF Base Assessment Schedule. The SAIF 
Base Assessment Schedule sets forth a permanent set of rates that will 
remain in place until changed through notice-and-comment rulemaking 
proceedings. The SAIF Base Assessment Schedule is adopted as of October 
1, 1996. The SAIF Base Assessment Schedule is as follows:

                      SAIF Base Assessment Schedule                     
------------------------------------------------------------------------
                                                Supervisory subgroup    
               Capital group               -----------------------------
                                                A         B         C   
------------------------------------------------------------------------
1.........................................         4         7        21
2.........................................         7        14        28
3.........................................        14        28        31
------------------------------------------------------------------------

    The FDIC is also making an immediate adjustment to the rates set 
forth in the SAIF Base Assessment Schedule. The adjustment, like the 
SAIF Base Assessment Schedule, is adopted as of October 1, 1996. The 
adjusted rates are the ones that are effective.
    The adjustment is two-fold:
--The FDIC is making a general adjustment to the SAIF Base Assessment 
Schedule that lowers the rates therein by 4 basis points for all 
institutions other than SAIF-member savings associations. This 
adjustment is temporary, but indefinite: the FDIC expects to review it 
every semiannual period, but will not necessarily modify it, nor will 
the adjustment automatically terminate on its own.
--The FDIC is making a special adjustment to the SAIF Base Assessment 
Schedule that replaces the rates therein with a special interim set of 
rates just for SAIF-member savings associations, but only for the 
fourth calendar quarter of 1996. Thereafter these institutions pay the 
same SAIF rates as the others.

    The SAIF Adjusted Assessment Schedule sets forth both sets of 
adjusted rates. The rates on the right in each risk classification 
category apply to SAIF-member savings associations during the last 
calendar quarter of 1996. The rates on the left in each risk 
classification category apply to all other SAIF-assessable institutions 
during that quarter, and to all SAIF-assessable institutions on and 
after January 1, 1997:

                    SAIF Adjusted Assessment Schedule                   
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------
                                                                        
(5)Supervisory subgroup                                                 
                                               -------------------------
                  Capital group                                         
(1)A                                                                    
(1)B                                                                    
(1)C                                                                    
------------------------------------------------------------------------
1.............................................   0   18    3  21  17  24
2.............................................   3   21   10  24  24  25
3.............................................  10   24   24  25  27  27
------------------------------------------------------------------------

    The rates on the left in each risk classification category--those 
that represent the SAIF base rates as modified by the 4-basis- point 
adjustment--may be amended from time to time within certain limits by 
rulemaking without notice-and-comment procedures.
    The FDIC has published these rates as a proposed rule, 61 FR 53867 
(Oct. 16, 1996), and has received comments from 13 entities and 
organizations. Comments have come from three holding-company 
organizations (including their affiliates), six savings banks, and four 
trade groups. In addition, FDIC staff has conducted a briefing for 
members of the Savings Association Insurance Fund Industry Advisory 
Committee.
2. The SAIF Base Assessment Schedule
    a. The Rate-Spread. Risk-based assessment rates have two purposes: 
To reflect the risk posed to each insurance fund by individual 
institutions, and to provide institutions with proper incentives to 
control risk-taking. The FDIC believes that a 27-basis-point rate-
spread serves these purposes.
    The FDIC has considered the comparative merits of a rate-spread of 
8 basis points. In December, 1992, when the BIF and SAIF were both 
below the DRR, and assessment revenues were designed to build up the 
capitalization of both funds, the FDIC proposed to establish risk-based 
premium matrices of 23 to 31 basis points for each fund. The Board 
asked for comment on whether the proposed assessment rate spread of 8 
basis points should be widened. See 57 FR 62502 (Dec. 31, 1992). 
Ninety-six commenters addressed this issue; 75 of them favored a wider 
rate spread. In the final rule, the Board expressed its conviction that 
widening the rate spread was desirable in principle, but chose to 
implement the 8-basis point rate spread. The Board expressed concern 
that widening the spread while keeping assessment revenue constant 
might unduly burden the weaker institutions that would be subject to 
greatly increased rates. See 58 FR 34357, 34361 (June 25, 1993).
    Bankers, banking scholars and regulators have all criticized the 8-
basis point rate-spread as being unduly

[[Page 67689]]

narrow. There is considerable empirical support for this criticism. 
Using a variety of methodologies and different sample periods, the vast 
majority of relevant studies of deposit-insurance pricing have produced 
results that are consistent with the conclusion that the rate-spread 
between healthy and troubled institutions should exceed 8 basis points. 
The precise estimates vary; but there is a clear consensus from this 
evidence that the rate-spread should be widened.3
---------------------------------------------------------------------------

     3  The FDIC's research also suggests that a substantially 
larger spread is necessary to establish an ``actuarially fair'' 
assessment rate system. See Gary S. Fissel, ``Risk Measurement, 
Actuarially Fair Deposit Insurance Premiums and the FDIC's Risk- 
Related Premium System'', FDIC Banking Review 16-27, Table 5, Panel 
B (1994).
---------------------------------------------------------------------------

    There also is a concern that rate differences between adjacent 
cells in the current matrix do not provide adequate incentives for 
institutions to improve their condition. Larger differences are 
consistent with historical variations in failure rates across cells of 
the matrix, as seen in the following table:

             Table 1.--Historical Thrift Failure Rates by Cell          
                              [1988-1993*]                              
------------------------------------------------------------------------
                                  Supervisory risk subgroup        Not  
                              ---------------------------------   rated 
  Tangible capital category                                      (as of 
                                   A          B          C       12/31/ 
                                                                   87)  
------------------------------------------------------------------------
1. Well:                                                                
    Thrifts..................  1,189....  172......  21.......  25      
    Failures.................  43.......  28.......  9........  5       
    Failure rate.............  2.9%.....  16.3%....  42.9%....  20.0%   
2. Adequate:                                                            
    Thrifts..................  215......  73.......  14.......  1       
    Failures.................  26.......  20.......  7........  0       
    Failure rate.............  12.1%....  27.4%....  50.0%....  0.0%    
3. Under:                                                               
    Thrifts..................  460......  389......  541......  37      
    Failures.................  134......  205......  447......  35      
    Failure rate.............  29.1%....  52.7%....  82.6%....  94.6%   
------------------------------------------------------------------------
Average failure rate: 30.6%.                                            
* Percentage of thrifts in cell at year-end 1987 that failed during 1988-
  1993. These figures reflect different examination policies and        
  procedures than exist today. In particular, examinations may have been
  relatively infrequent for some institutions during this period.       

    The precise magnitude of the proper rate differences is open to 
debate, given the sensitivity of estimates to small changes in 
assumptions and to the selection of the sample periods. But the 
evidence indicates that larger rate differences between adjacent cells 
of the risk-based assessment matrix are warranted.
    Because of concern for the impact of a wider spread on weaker SAIF-
insured institutions, the FDIC has performed analyses on increasing the 
spread from 8 to 27 basis points and has found that, apart from 
institutions already recognized as likely failures, the wider spread is 
expected to have a minimal impact in terms of additional failures. The 
FDIC is therefore adopting a 27-basis point spread for members of the 
SAIF.
    Two trade groups express support for the rate-spread in the SAIF 
Base Assessment Schedule, but without providing any extensive analysis. 
No commenter opposes it.
    b. The Rates. The FDIC recognizes that, in setting deposit 
insurance premiums, the risk of adverse events that may occur beyond 
the immediate semiannual assessment period must be considered, in order 
to spread risk over time and to moderate the cyclical effects of 
insurance losses on insured institutions. A strict ``pay-as-you- go'' 
insurance system--one that attempts only to balance revenue and expense 
over the current assessment period--can result in rate volatility that 
would adversely impact weak institutions in periods of economic stress, 
increasing the risk of loss to the fund. Historical evidence shows that 
in peak loss years, pay-as- you-go rates would substantially exceed the 
rates required to balance revenues and expenses over the longer term.
    The FDIC believes that, for the purpose of estimating future losses 
for the thrift industry, the industry's loss experience in the 1980s is 
not especially informative. The insurance losses associated with 
thrifts far exceeded insurance losses from banks during this period 
both in dollars and, to an even greater extent, as a percentage of the 
size of the industry. The losses prompted Congress to adopt a number of 
legislative reforms that have the effect of placing thrifts in a 
regulatory context that resembles that of the banks much more closely. 
The FDIC has replaced the Federal Savings and Loan Insurance 
Corporation (FSLIC) as insurer for the thrift industry. The Office of 
Thrift Supervision, an office within the Department of the Treasury, 
has replaced the Federal Home Loan Bank Board as the supervisor for 
thrift institutions. Thrifts are now subject to stronger capital 
standards, which are set at the same levels as required of banks. 
Thrifts, like banks, now pay assessments based on risk. The losses 
generated in thrift failures are limited by the same safeguards as 
those that apply to bank failures--notably, the early-closure rule of 
the prompt corrective action statute, the cross-guarantees among 
affiliates, the least-cost resolution requirement, and the depositor-
preference statute. In view of these changes in the regulatory and 
insurance environment for thrifts, the failure experience of commercial 
banks is likely to be more illuminating for the purpose of estimating 
future thrift losses than is the experience of the thrifts themselves.
    The FDIC has recently analyzed its historical loss experience with 
banks, and has considered the likely effect of recently enacted 
statutory provisions that are expected to moderate deposit insurance 
losses going forward. The FDIC has concluded that average assessment 
rates of 4 to 5 basis points

[[Page 67690]]

are appropriate to achieve a long-run balance between BIF revenues and 
expenses. See 60 FR 42680 (Aug. 16, 1995). These rates reflect the 
experience of the FDIC during the period from 1950 to 1980. From 1980 
through 1994, rates in the range of 10 to 13 basis points would have 
been required to balance revenues and expenses: but for banks as well 
as thrifts, failures during this period were attributable to 
extraordinary conditions brought on by volatile interest rates, 
ineffective supervision and real estate values that first soared and 
then collapsed. While regulators still may not have the ability to 
foresee a real estate collapse or other severe economic adversities, 
the statutory and regulatory safeguards now in place are likely to 
limit losses to the funds under such extreme conditions. Accordingly, 
average assessment rates in the range of 4 to 5 basis points are 
thought to be adequate to balance long-range revenues and expenses for 
the BIF.
    The FDIC considers that this range is an appropriate benchmark for 
SAIF rates as well. From 1950 to 1980, the rates paid by FSLIC-insured 
thrifts were about twice the effective rate paid by FDIC-insured banks, 
reflecting higher annual rates of deposit growth for thrifts and a 
somewhat higher loss experience for the FSLIC.4 But differences 
between the banking and thrift industries are less significant today 
than they were in the period from 1950 to 1980; thrifts generally are 
better protected than they were from the effects of interest-rate 
swings; regulatory and accounting standards are more exacting; and 
deposits have generally declined since 1989. The FDIC recognizes that 
structural weaknesses of the SAIF, including a relatively small 
membership base and geographic and product concentrations, suggest that 
the appropriate SAIF assessment rate to achieve a long-range balance 
may be higher than the BIF rate. Lacking a compelling empirical basis 
for determining different assessment structures for the two industries, 
however, the FDIC currently expects that average assessment rates of 4 
to 5 basis points will likely result in a long-range balance of 
revenues and expenses for the SAIF as well as for the BIF.
---------------------------------------------------------------------------

     4  See James R. Barth, John J. Feid, Gabriel Riedel and M. 
Hampton Tunis, Alternative Federal Deposit Insurance Schemes, Office 
of Policy and Economic Research, Federal Home Loan Bank Board 
(January 1989), at 12-20.
---------------------------------------------------------------------------

    The vast majority of institutions qualify for the highest 
assessment risk classification, and pay assessments at the most 
favorable rate; conversely, the most favorable rate generates the vast 
majority of the revenues that the insurance funds receive. For the 
SAIF's average assessment rates to yield 4 to 5 basis points, the most 
favorable rate for the SAIF Base Assessment Schedule is set at 4 basis 
points; the other rates in the schedule are set in accordance with the 
rate-spreads described above.
    Until January 1, 1999, SAIF rates may not be lower than the BIF 
rates for institutions that pose comparable risks to their funds. 12 
U.S.C. 1817(b)(2)(E)(iii). Accordingly, the rates in the SAIF Base 
Assessment Schedule are no lower than the permanent (or base) BIF rates 
set forth in Rate Schedule 2.5 See id. 327.9(a).
---------------------------------------------------------------------------

     5  The final rule redesignates Rate Schedule 2 as the BIF 
Base Assessment Schedule.
---------------------------------------------------------------------------

    The SAIF Base Assessment Schedule (see I.C.1. above) applies to all 
institutions as of October 1, 1996. As discussed below, however, the 
rates set forth in the SAIF Base Assessment Schedule are not the rates 
that are actually effective as of that date.
    Two trade groups and one savings bank express support for the rates 
in the SAIF Base Assessment Schedule. No commenter opposes the rates.
3. The SAIF Adjusted Assessment Schedule
a. The General 4-Basis-Point Adjustment
    The Board is making a general adjustment to the rates in the SAIF 
Base Assessment Schedule that lowers each such rate by 4 basis points. 
The adjusted rates range from 0 to 27 basis points, which yield an 
average rate of 0.6 basis points (annualized) and an estimated reserve 
ratio of 1.27 percent at midyear 1997, under moderate conditions.6 
The adjusted rates are effective as of October 1, 1996, for all 
institutions other than SAIF-member savings associations. On January 1, 
1997, the adjusted rates are effective for all institutions.
---------------------------------------------------------------------------

     6  While the appropriate long-term average assessment 
rates are 4 to 5 basis points (as discussed above), the analysis 
summarized in Table 2 indicates that, under current conditions, 
these rates would likely result in a reserve ratio well in excess of 
1.25 percent. With no significant receivership activity and a very 
liquid fund, investment earnings presently are more than adequate to 
maintain the DRR.
---------------------------------------------------------------------------

    In setting these rates, the FDIC has considered the SAIF's expected 
operating expenses and revenues, its case resolution expenditures and 
income, and the effect of the new rates on the earnings and capital of 
SAIF members. See id. 1817(b)(2)(A)(ii).
    Expected operating expenses and revenues of the SAIF. Table 2 shows 
the projected SAIF reserve ratio on June 30, 1997, under pessimistic, 
optimistic and moderate conditions. The pessimistic conditions combine 
relatively high loss provisions, high deposit growth and low investment 
earnings; the optimistic conditions combine zero loss provisions, 
negative deposit growth and high investment earnings.
    Table 2 indicates that, under pessimistic conditions, an assessment 
rate range of 4 to 31 basis points falls just short of maintaining the 
DRR of 1.25 percent. But under moderate conditions, which can be viewed 
as more likely than either the pessimistic or optimistic scenarios, 
rates of 0 to 27 basis points result in a SAIF reserve ratio of 1.27 
percent:

     Table 2.--SAIF Assessment Rates and Reserve Ratio Under Varying    
                               Conditions                               
------------------------------------------------------------------------
              Conditions               Pessimistic  Optimistic  Moderate
------------------------------------------------------------------------
Deposit growth rate (%)..............       4.0         -2.0        2.0 
Loss provisions ($M).................       270            0         50 
Investment rate (%)..................       5.2          6.2        5.7 
------------------------------------------------------------------------


------------------------------------------------------------------------
        Assessment rates (bp)           Estimated reserve ratio (%) June
--------------------------------------              30, 1997            
                                      ----------------------------------
           Range              Average  Pessimistic  Optimistic  Moderate
------------------------------------------------------------------------
4 to 31....................       4.7      1.24         1.36       1.30 
2 to 29....................       2.7      1.23         1.34       1.28 
0 to 27....................       0.7      1.21         1.33       1.27 
------------------------------------------------------------------------

    Following is a discussion of each of the main variables affecting 
the estimated reserve ratio:
    Yield on investments: After having been capitalized on October 1, 
1996, the SAIF's balance stood at approximately $8.6 billion. The SAIF 
is very liquid, not having had any significant receivership activity. 
Although FDIC policy limits the proportion of investments with 
maturities beyond five years, a fully capitalized SAIF will have 
significant investment earnings. Short-term interest rates have been 
generally stable in 1996, and the FDIC's recent investment yield of 5.7 
percent may be a reasonable approximation for the expected yield 
through the first half of 1997. The investment rates utilized in Table 
2 range from 5.2 percent to 6.2 percent, or 50 basis points on either 
side of the recent experience. Estimated annual operating expenses are 
assumed to be $40 million, the same as in 1995.7
---------------------------------------------------------------------------

    \7\ The FDIC presently is addressing the allocation of operating 
expenses between the BIF and the SAIF. A likely outcome is that the 
proportion of expenses borne by the SAIF will increase.

---------------------------------------------------------------------------

[[Page 67691]]

    Growth of SAIF-insured deposits: For the 12 months ending December 
31, 1995, SAIF-insured deposits increased 2.5 percent, reversing a 
long-term decline that began with the inception of the SAIF in 1989. 
But insured deposit growth slowed in the first six months of 1996 to an 
annual rate of 0.3 percent. The FDIC regards an annual growth rate of 
2.5 percent as near the high end of the possible range of deposit 
growth for the near future. Accordingly, the FDIC's analysis uses a 
range of insured deposit growth from -2 percent to 4 percent 
(annualized).
    Provisions for loss: The FDIC has already established a reserve for 
losses within the SAIF, and has accordingly reduced SAIF's reported net 
worth by the amount of the reserve.8 This reserve represents the 
estimated loss for institutions that, absent some favorable event, are 
likely to fail within 18 months. That projection is subject to 
considerable uncertainty.
---------------------------------------------------------------------------

     8  The SAIF loss reserve was $114 million on June 30, 
1996.
---------------------------------------------------------------------------

    The optimistic scenario assumes the existing reserve is adequate. 
Table 2 shows an additional loss provision of zero under this scenario.
    The pessimistic scenario has an additional loss provision of $270 
million. This scenario represents the long-range failure rate for SAIF-
insured institutions, which is estimated to be 22 basis points per year 
of total assets (or slightly more than $2 billion in failed assets per 
year). The pessimistic scenario is not a worst-case scenario. But given 
the currently favorable economic conditions and the relative health of 
the thrift industry, deterioration in the industry would have to be 
sudden and sharp for the SAIF to require additional loss reserves at 
the long-term rate.
    The moderate scenario reflects the fact that the FDIC has 
identified a few SAIF members as possible failures by year-end 1997 but 
has not yet established loss reserves for them. If loss reserves were 
established for these thrifts in 1996, the cost to the SAIF would be 
about $50 million.
    The SAIF's case resolution expenditures and income. As noted above, 
the SAIF has no significant receivership activity. Accordingly, case 
resolution expenditures and income are negligible.
    SAIF members' earnings and capital. The final rule reduces 
assessment rates for all institutions that pay assessments to the SAIF, 
and therefore has a beneficial impact on all such institutions' 
earnings and capital.
    Thrifts had record earnings and a return on assets above one 
percent in each of the first two quarters of 1996. Nearly 98 percent of 
all SAIF members are well capitalized. The assets of ``problem'' SAIF 
members fell to $7 billion as of June 30, down from over $200 billion 
at the end of 1991. Only one SAIF member has failed in 1996.
    The commercial banking industry, which owns one-fourth of the SAIF 
assessment base, is even stronger. Based on net income for the first 
half of 1996, the banking industry is expected to have record annual 
earnings for the fifth consecutive year.
    Three commenters--2 trade groups and a savings bank--express 
support for the 4-basis-point adjustment to the rates in the SAIF Base 
Assessment Schedule. No commenter opposes the adjusted rates.
b. The Interim Schedule for SAIF-Member Savings Associations
    The FDIC is prescribing a special interim rate-schedule for SAIF-
member savings associations for the final quarter of 1996. The interim 
schedule generally retains the relationships among the assessment-risk 
categories in the prior SAIF assessment schedule, but reduces each rate 
in the schedule by 5 basis points. There is one exception: the rate for 
institutions in the highest-risk category is only reduced by 4 basis 
points, in order to comply with section 7(b)(2)(E) of the FDI Act. 
These interim rates do not generate revenue for the SAIF that is in 
excess of the amount needed to maintain the SAIF's reserve ratio at the 
DRR. Accordingly, the interim rates do not violate the prohibition 
stated in section 7(b)(2)(A)(iii) of the FDI Act. Nor are the interim 
rates set so high as to impose an unreasonable burden on the SAIF-
member savings associations.
    The special interim rate-schedule is needed because SAIF-member 
savings associations are subject to a special requirement: they (and 
only they) must pay FICO assessments for the final quarter of 1996. See 
``Treatment of Assessments Paid by `Oakar' Banks and `Sasser' Banks on 
SAIF-Insured Deposits, General Counsel's Opinion No. 7'', 60 FR 7059 
(Feb. 6, 1995).9 This special requirement prevents the FDIC from 
establishing a single rate-schedule for all SAIF-assessable 
institutions. If the SAIF-member savings associations were to pay at 
the general rates (as adjusted), the FICO draw would absorb all the 
amounts assessed on them, and the SAIF would not be compensated for the 
risks they pose. On the other hand, if all institutions were to pay 
assessments at the special interim rates, the SAIF would receive 
revenues far in excess of the amounts needed to preserve the SAIF's 
reserve ratio at the DRR.
---------------------------------------------------------------------------

    \9\ A prior version of the Funds Act, which was contained in the 
``Balanced Budget Act of 1995'' (H.R. 2491) but vetoed by the 
President on December 6, 1995, would have required pro rata sharing 
of the FICO payments by savings associations and banks essentially 
immediately, as that provision would have been effective January 1, 
1996. Later on, however, Congress altered the effective date for the 
FICO sharing provision to apply to semiannual periods beginning 
after December 31, 1996. By implication, banks do not share in the 
FICO assessment payments prior to that date.
---------------------------------------------------------------------------

    Eleven commenters--five savings banks, two holding companies, and 
all four trade groups--expressly consider the interim schedule. One 
trade group endorses it. The other 10 commenters oppose it.
    Five savings banks and two trade groups object to the interim 
schedule's effects. Four savings banks and both trade groups contend 
that the interim schedule is improper because the institutions that are 
subject to it must pay different (and higher) rates than other 
comparable institutions must pay. Two savings banks assert that, having 
paid a special assessment to capitalize the SAIF as of October 1, 1996, 
they should not have to sustain the burden of paying a FICO assessment 
for the fourth quarter of 1996. While the FDIC recognizes that the 
special interim rate-schedule has a disparate impact, the FDIC does not 
agree that the interim rate-schedule is therefore discriminatory or 
otherwise improper. The disparate impact merely reflects the different 
statutory obligations that these institutions have with respect to the 
FICO.
    In essence, the FDIC's reduced rate-schedules--both for SAIF-member 
savings associations and for other institutions--serve to return the 
amounts that institutions have paid to the SAIF for the fourth quarter 
of 1996. In the case of SAIF-member savings associations, however, 
those amounts have been reduced by the FICO draw. The FICO draw is not 
subject to refund: accordingly, SAIF-member savings associations 
experience less of a reduction in rates than do other institutions.
    Seven commenters--three trade organizations, two holding companies 
and two savings banks--expressly challenge the FDIC's authority to 
adopt the special interim rate-schedule. They contend that, when an 
insurance fund's reserve ratio is at the DRR, the FDIC cannot impose 
assessments with respect

[[Page 67692]]

to the fund. They recognize, as they must, that any sums assessed by 
the FICO against SAIF-member savings associations will serve to reduce 
the amounts that the SAIF is authorized to assess against those 
institutions during the final quarter of 1996. But they assert that 
SAIF is not authorized to impose any assessments for that quarter, and 
that accordingly there are no revenues to be directed to the FICO.
    The FDIC does not agree. The FDIC considers that section 
7(b)(2)(A)(ii)(IV) of the FDI Act, 12 U.S.C. 1817(b)(2)(A)(ii)(IV), 
provides ample authority for the special interim rate-schedule. Section 
7(b)(2)(A)(ii)(IV) says that, when setting assessments for the purpose 
of maintaining a fund's reserve ratio at the DRR, the Board may--
indeed, must--consider ``any other factors'' that it may deem 
appropriate. The FICO draw is just such a factor. SAIF-member savings 
associations must pay assessments at rates that are high enough to 
cover the full amount of the FICO draw: otherwise the rates would not 
generate any revenues for the SAIF at all. Moreover, every rate--even 
the lowest rate--must be high enough to cover each SAIF-member savings 
association's pro-rata share of the FICO draw. Otherwise institutions 
in less-favorable risk classifications would bear a disproportionately 
large share of the FICO draw. One consequence would be to deform the 
structure of the assessment-rate schedule, because the spread between 
the most-favorable rate and the other rates would be increased. Another 
consequence would be to impose an extra measure of risk on the SAIF, 
because the weaker institutions would have to sustain the burden of 
paying higher rates. The FDIC considers that these consequences would 
adversely affect its risk-based assessment program. More basically, the 
FDIC considers that section 7(b)(2)(A)(ii)(IV) gives the FDIC the 
necessary authority to consider and deal with these effects in 
constructing the SAIF rate-schedule.
    The FDIC further considers that the legal interpretation espoused 
by the opponents contravenes the clear intent of Congress. The Federal 
Home Loan Bank Act makes it clear that the FDIC's assessment procedures 
govern the FICO's assessments. Id. 1441(f)(2). Both the Federal Home 
Loan Bank Act and the FDI Act also make it clear that the FICO is to 
receive (as a general matter) the full amount it needs from the 
revenues generated by means of those procedures, while the SAIF is to 
receive the residual amount of the revenues after the FICO draw has 
been subtracted from them. See id. and 1817(b)(2)(D). The clear 
expectation is that the FDIC will assess--and has full authority to 
assess--amounts that are sufficient to cover the FICO draw.
    By contrast, the interpretation offered by the opponents leads to a 
result that is, in the FDIC's view, untenable: namely, that Congress 
intended to fund the FICO only intermittently. The FDI Act has, since 
1989, instructed the FDIC to set semiannual assessments ``to maintain 
the reserve ratio of a fund at the designated reserve ratio''. Under 
the opponents' view, that language prevents the FDIC from setting rates 
sufficient to cover the FICO draw--and effectively cuts off the FICO's 
power to assess SAIF-member savings associations--whenever the SAIF is 
capitalized at the DRR. At the same time, however, the SAIF's reserve 
ratio can be expected to fluctuate: indeed, Congress has expressly 
provided for that possibility. The opponents' view thus implies a stop-
and-go funding plan for the FICO, in which the FICO's access to SAIF 
assessments depends on the current status of the SAIF's capitalization. 
The FDIC declines to adopt this view.
    More generally, the FDIC considers that the Funds Act expresses 
Congress' intention to revise the existing relationship between the 
FICO and the SAIF, but not until the start of 1997. See Funds Act 
section 2703(a). The FDIC considers that Congress has intended to 
preserve the existing relationship through the end of 1996.
    As a final note, the opponents say their view is not unreasonable 
because, if the FICO has no access to assessments paid by SAIF-member 
savings associations (or to any other source of funding) during the 
final quarter of 1996, the exit fees now held in escrow by the Treasury 
Department are available to pay the interest on the FICO's bonds. The 
FDIC does not agree that the escrowed funds are available for this 
purpose. These funds are to be paid to the FICO only if the Secretary 
of the Treasury determines that the FICO has exhausted all other 
sources of funding for its interest payments, and orders that the fees 
be so paid. Id. 1815(d)(2)(E)(i)(II); see 12 CFR 312.5(d) and 312.8(f). 
The Secretary has not made such a determination or issued such an 
order.
    Moreover, it is apparent that the FICO has no current need for 
these funds. The FICO has collected its assessments for the second 
semiannual period of 1996, and is entitled to retain them. The SAIF-
rate reductions merely serve the purpose of returning to each 
institution the amount that the FDIC has collected from that 
institution for the SAIF in excess of the amount needed to maintain the 
SAIF at the DRR during the final quarter of 1996, while preserving 
appropriate risk-based rates for all such institutions. Seen from this 
standpoint, the SAIF-rate reductions have no effect on the FICO 
assessments or on the FICO's financial condition.
    Conversely, the escrowed exit fees may not be released to the SAIF 
until the FDIC and the Secretary of the Treasury determine that it is 
not necessary to reserve the funds for the payment of interest on the 
FICO bonds. See 12 CFR 312.5(e) and 312.8(g). No such determination has 
been made. On the contrary, the FDIC considers that the exit-fee 
reserve serves to protect against the possibility of an interim short-
fall during the period in which the FICO's assessment procedures are 
converted from those currently in effect to those prescribed for 1997 
and thereafter by the Funds Act. Accordingly, the funds in the exit-fee 
reserve are required for other purposes: they cannot replace the FICO 
assessments due from SAIF-member savings associations for the final 
quarter of 1996.

D. The BIF Assessment Schedules

    The final rule publishes the rates that currently apply to BIF 
members without change, except insofar as changes have been made by the 
Funds Act. The final rule does not make any change of substance to the 
FDIC's assessment regulation with respect to BIF rates.
1. The BIF Base Assessment Schedule
    The FDIC's assessment regulation has presented the base rates for 
the BIF-assessable institutions in Rate Schedule 2. The final rule 
retains these base rates, and redesignates them as the BIF Base 
Assessment Schedule. The BIF Base Assessment Schedule is as follows:

                      BIF Base Assessment Schedule                      
------------------------------------------------------------------------
                                                Supervisory subgroup    
               Capital group               -----------------------------
                                                A         B         C   
------------------------------------------------------------------------
1.........................................         4         7        21
2.........................................         7        14        28
3.........................................        14        28        31
------------------------------------------------------------------------

2. The BIF Adjusted Assessment Schedule
    In addition, the final rule sets forth the effective BIF rates for 
the second semiannual period of 1996 and the first semiannual period of 
1997. These rates have been prescribed by the Board in resolutions 
dated May 14 and November 26, 1996, which were issued pursuant to the 
procedures in effect prior to the adoption of the final rule. See 61 FR 
26078 (May 24, 1996) and id. 64609

[[Page 67693]]

(Dec. 6, 1996). The final rule presents the adjusted rates in the BIF 
Adjusted Assessment Schedule, as follows:

                    BIF Adjusted Assessment Schedule                    
------------------------------------------------------------------------
                                                Supervisory subgroup    
               Capital group               -----------------------------
                                                A         B         C   
------------------------------------------------------------------------
1.........................................         0         3        17
2.........................................         3        10        24
3.........................................        10        24        27
------------------------------------------------------------------------

    These adjusted rates will terminate at the end of June, 1997. The 
final rule indicates that, upon termination of the adjusted rates, the 
rates in the BIF Base Assessment Schedule will apply to BIF members and 
other BIF-assessable institutions. The Board may adjust the rates in 
the BIF Base Assessment Schedule pursuant to the procedures herein 
adopted, however (see I.E. below).
    The Funds Act has eliminated the minimum assessment required by 
statute. Funds Act section 2708(b). The FDIC's regulations have not 
stated that requirement, and the FDIC is not now retaining it. 
Accordingly, neither the BIF Base Assessment Schedule nor the adjusted 
rate-schedule refers to minimum assessments.

E. Procedure for Adjusting the Base Assessment Schedules

1. In General
    Section 327.9(b) sets forth a procedure under which the Board may 
increase or decrease the BIF Base Assessment Schedule without engaging 
in separate notice-and-comment rulemaking proceedings for each 
adjustment. 12 CFR 327.9(b).
    The allowable adjustments are subject to strict limits. No 
adjustment may, when aggregated with prior adjustments, cause the 
adjusted BIF rates to deviate ``over time'' by more than 5 basis points 
from those set forth in Rate Schedule 2, which is the permanent or base 
rate-schedule for the BIF. An adjustment may not result in a negative 
assessment rate. No one adjustment may constitute an increase or 
decrease of more than 5 basis points. See id. 327.9(b)(1).
    The Board is modifying and clarifying this process somewhat, and 
extending it to SAIF rates as well. The final rule does not change the 
limits on allowable adjustments, but clarifies the following two 
points.
    First, the Board may not, without notice-and-comment rulemaking, 
establish an adjusted assessment schedule for a fund in which the 
adjusted rates differ by more than 5 basis points at any time from the 
base assessment schedule for that fund. For example, if the rate for 1A 
SAIF members in the SAIF Base Assessment Schedule were 4 basis points, 
the adjusted rate for 1A SAIF members may never rise above 9 basis 
points without a new notice-and-comment rulemaking proceeding.
    Second, the Board may not reduce the rates in either base 
assessment schedule any more than those rates have already been 
lowered, because in that event the lowest rate in the schedule would be 
less than zero. The final rule makes it clear that zero serves as a 
lower bound on the most favorable rate, and prevents the other rates 
from being adjusted by the full 5 basis points.
2. Procedure
    The final rule alters the formal mechanism by which the Board makes 
adjustments to the base assessment schedules.
    The prior regulation called for the Board to adopt the semiannual 
assessment schedule and any adjustment thereto by means of a 
resolution, a procedure that does not require public notice or comment. 
12 CFR 327.9(b)(3). Under the final rule, the Board adopts the new 
assessment schedule pursuant to a rulemaking proceeding, but still 
without public notice and comment.
    Consistent with the current rule, the final rule provides that an 
adjustment to the base assessment schedule may not be applied only to 
selected risk classifications, but rather must be applied to each cell 
in the schedule uniformly. The differences between the respective cells 
in the rate-schedule therefore remain constant. Similarly, adjustments 
neither expand nor contract the spread between the lowest- and highest-
risk classifications.
    The adjustment for any particular semiannual period is determined 
by: (1) The amount of assessment income necessary to maintain the SAIF 
reserve ratio at 1.25 percent (taking into account operating expenses 
and expected losses and the statutory mandate for the risk-based 
assessment system); and (2) the particular risk-based assessment 
schedule that would generate that amount considering the risk 
composition of the industry at the time. The Board expects to adjust 
the assessment schedule every six months by the amount (if any), up to 
and including the maximum adjustment of 5 basis points, necessary to 
maintain the reserve ratio at the DRR.
    Such adjustments will be adopted in a regulation that reflects 
consideration of the following statutory factors: (1) Expected 
operating expenses; (2) projected losses; (3) the effect on SAIF 
members' earnings and capital; and (4) any other factors the Board 
determines to be relevant. The regulation will be adopted and announced 
at least 15 days prior to the date the invoice is provided for the 
first quarter of the semiannual period for which the adjusted rate-
schedule is to take effect.
    If the amount of the adjustment under consideration by the FDIC 
would result in an adjusted schedule exceeding the 5 basis-point 
maximum, then the Board would initiate a notice-and-comment rulemaking 
proceeding.
    As discussed in more detail in the preamble to the final rule in 
which the FDIC established the adjustment procedure for BIF rates, the 
FDIC fully recognizes and understands the concern for the possibility 
of assessment rate increases without the benefit of full notice-and-
comment rulemaking. See 60 FR 42680, 42739-42740 (Aug. 16, 1995). 
Nevertheless, for the reasons given below, the FDIC considers that 
notice and public participation with respect to an adjustment would 
generally be ``impracticable, unnecessary, or contrary to the public 
interest'' within the meaning of 5 U.S.C. 553(b). Furthermore, the FDIC 
considers that for the same reasons it has ``good cause'' within the 
meaning of id. 553(d) to make any such rule effective immediately, and 
not after a 30-day delay.
    Section 7(b)(2)(A)(i) of the FDI Act declares that the FDIC ``shall 
set rates when necessary, and only to the extent necessary'' to 
maintain each fund's reserve ratio at the DRR, or to raise a fund's 
reserve ratio to that level (although the Board may set higher rates 
for institutions that exhibit weakness or are not well capitalized, see 
id. 1817(b)(2)(A)(v)). Section 7(b)(2)(A)(iii) of the FDI Act restates 
the substance of this mandate in a different way: the FDIC ``shall not 
set assessment rates in excess of the amount needed'' for those 
purposes. These twin commands require the FDIC to monitor the size of 
each fund, the amount of deposits that each fund insures, and the 
relationship between them. Section 7(b)(2)(A) requires the FDIC to set 
``semiannual assessments''. Accordingly, the FDIC evaluates the 
assessment schedules every six months.
    Notice-and-comment rulemaking procedures are ``unnecessary'' as a 
general rule because institutions are already on notice with respect to 
the benchmark rates that are set forth in the base assessment 
schedules, with respect to the need for making semiannual

[[Page 67694]]

adjustments to the rates, and with respect to the maximum amount of any 
such adjustments. Moreover, the adjustments are limited: The FDIC may 
not change a current assessment schedule by more than 5 basis points, 
or deviate from the base assessment schedule by more than 5 basis 
points.
    Notice-and-comment rulemaking procedures also are generally 
``unnecessary'' because they would not generate additional information 
that is relevant to the rate-setting process. The institutions already 
provide part of the needed information in their quarterly reports of 
condition. The remainder of the needed information is data that the 
FDIC generates internally: e.g., The current balance and expected 
operating expenses of each fund, and each fund's case resolution 
expenditures and income.
    Finally, notice-and-comment rulemaking procedures are also 
generally ``impracticable'' and ``contrary to the public interest'' in 
this context because they are not compatible with the need to make 
frequent small adjustments to the assessment rates in order to maintain 
the funds' reserve ratios at the DRR. The FDIC must use data that is as 
current as possible to generate an assessment schedule that complies 
with the statutory standards. Notice-and-comment rulemaking procedures 
entail considerable delay. Such delay could force the FDIC to use out-
of-date information to compute the amount of revenue needed and to 
produce an appropriate assessment schedule. Using out-of-date 
information could cause the FDIC to set rates for a fund that were 
higher or lower than necessary to achieve the fund's target DRR.
    For these reasons, the FDIC has determined that any adjustment to 
the base assessment schedule may be adopted as a final rule without 
notice and public procedure thereon. Any such final rule will be 
adopted at least 15 days before the invoice date for the first payment 
of a semiannual period (and 45 days before the collection date for that 
payment). The adjusted assessment schedule will be published in the 
Federal Register as an appendix to subpart A of part 327.
    Two trade groups endorse the adjustment procedure; one of them 
specifically supports the 5-basis-point limit on adjustments. No 
commenters opposed the procedure.

F. Institutions That ``Exhibit Weaknesses'' or Are ``Not Well 
Capitalized''

    Although the FDIC may not generally collect assessments in excess 
of the amounts necessary to maintain an insurance fund's reserve ratio 
at the DRR (or to raise the fund's reserve ratio to the DRR), the FDIC 
may continue to collect assessments from institutions ``that exhibit 
financial, operational, or compliance weaknesses ranging from 
moderately severe to unsatisfactory, or that are not well capitalized 
as defined in [FDI Act] section 38''. Id. 1817(b)(2)(A)(v). In setting 
adjusted BIF rates for the first semiannual period of 1997, the FDIC 
has interpreted this clause in a manner that is consistent with the 
existing framework of the risk-based assessment program. 61 FR 64609 
(Dec. 6, 1996). The FDIC has now determined to formalize this 
interpretation in part 327 of its rules and regulations. No commenters 
addressed this aspect of the final rule.
    ``Financial, operational, or compliance weaknesses''. For 
assessment purposes, the FDIC classifies each institution into one of 
three supervisory subgroups:

Subgroup A--Financially sound institutions with only a few minor 
weaknesses. 12 CFR 327.4(a)(2)(i).
Subgroup B--Institutions that demonstrate weaknesses which, if not 
corrected, could result in significant deterioration of the institution 
and increased loss to the BIF or SAIF. Id. 327.4(a)(2)(ii).
Subgroup C--Institutions that pose a substantial probability of loss to 
the BIF or SAIF unless effective corrective action is taken. Id. 
327.4(a)(2)(iii).

    When Congress adopted the Funds Act, Congress was aware that the 
FDIC already had these standards and definitions in place, and that the 
FDIC already used them for the purpose of imposing risk-based 
assessments. Moreover, the standards and definitions focus on 
institutions' financial and operational activities, and with their 
compliance with laws and regulations. The FDIC accordingly believes 
that it is reasonable and appropriate--and consistent with the intent 
of Congress--to apply these standards and definitions in determining 
whether an institution ``exhibit[s] * * * weaknesses ranging from 
moderately severe to unsatisfactory'' for assessment purposes.
    The FDIC considers that if an institution's weaknesses are so 
severe that ``if not corrected, [they] could result in significant 
deterioration of the institution and increased loss to the BIF or 
SAIF'', the weaknesses may properly be characterized as ``moderately 
severe''. The FDIC further considers that if the weaknesses ``pose a 
substantial probability of loss to the BIF or SAIF unless effective 
corrective action is taken'', they may properly be regarded as 
``unsatisfactory''. The FDIC is therefore interpreting section 
7(b)(2)(A)(v) to include any institution that is classified in 
supervisory subgroup B or C.
    ``Not well capitalized''. Section 7(b)(2)(A)(v) also authorizes the 
FDIC to set higher rates for institutions ``that are not well 
capitalized as defined in [FDI Act] section 38''. Section 38 of the FDI 
Act, 12 U.S.C. 1831o, defines a ``well capitalized'' institution as one 
that ``significantly exceeds the required minimum level for each 
relevant capital measure''. 12 U.S.C. 1831o(b)(1)(A).
    Section 38 requires each agency to specify the relevant capital 
measure at which insured depository institution is well capitalized. 
Id. 1831o(c)(2). The FDIC has done so in subpart B of part 325 of its 
regulations, 12 CFR part 325 (``Capital Maintenance''). See id. 
325.103(b)(1). But subpart B--and therefore its definition of ``well 
capitalized''--only applies to state nonmember banks and to insured 
state branches of foreign banks for which the FDIC is the appropriate 
federal banking agency. Id. 325.101(c).
    The FDIC also defines the term ``well capitalized'' in part 327. 
See id. 327.4(a)(1)(i). Here the FDIC does so for the broader purpose 
of implementing a risk-based assessment system: accordingly, part 327's 
definition applies to all insured institutions.
    While the two definitions employ the same numerical ratios, part 
325's definition also includes an extra criterion: an institution may 
not be ``subject to any written agreement, order, capital directive, or 
prompt corrective action directive * * * to meet and maintain a 
specific capital level for any capital measure''. Id. 325.103(b)(1)(v). 
Within the context of the assessment regulation, this kind of 
consideration helps to determine an institution's supervisory subgroup, 
but not its capital category. Accordingly, the FDIC considers that it 
is not appropriate to apply that criterion for the purpose of 
determining whether an institution is ``well capitalized'' for 
assessment purposes. The FDIC therefore is applying part 327's current 
definition of ``well capitalized'' for the purpose of interpreting 
section 7(b)(2)(A)(v) of the FDI Act.

G. Transitional Matters

1. Refunds
    The FDIC has already collected the second quarterly payments for 
the current semiannual period (July-December 1996). These payments were 
computed at the rates in effect prior to

[[Page 67695]]

passage of the Funds Act and prior to adoption of the final rule.
    Both the SAIF Adjusted Assessment Schedule and the interim rate-
schedule for SAIF-member savings associations are effective as of 
October 1, 1996. In addition, Congress has repealed the minimum 
assessment rate for all institutions. The final rule therefore provides 
for a refund or credit of any excess amounts collected for the BIF or 
the SAIF for the final quarter of 1996. Interest will accrue on the 
excess amounts as of October 1, 1996.
    The excess amounts will be refunded or credited in one or more 
installments. The refunds and credits will be made according to the 
procedures applicable to regular quarterly payments.
2. Capital Ratios
    The FDIC recognizes that payment of the special assessment could 
negatively impact the capital ratings of some institutions, affecting 
their risk classification under the risk-based assessment system. The 
risk classification for the first semiannual assessment period of 1997 
is based on an institution's capital as of June 30, 1996, and is 
unaffected by payment of the special assessment. But the risk 
classification for the second semiannual assessment period of 1997 is 
based on an institution's capital as of December 30, 1996, and 
therefore reflects payment of the special assessment.
    The FDIC has determined that, for purposes of assigning an 
institution's risk classification under the risk-based assessment 
system for the second semiannual period of calendar year 1997 only, the 
FDIC will calculate the institution's capital as if the special 
assessment had not been paid, while taking into account other capital 
fluctuations. The chief basis for this determination is that the 
special assessment is a one-time cost that is extraordinary in 
character: It neither derives from nor necessarily implies the presence 
of any adverse conditions or any procedural or managerial weaknesses in 
the institution. The FDIC has therefore concluded that, taken in 
isolation, the effect of the special assessment on an institution does 
not automatically represent an increase in the insurance risk that the 
institution poses to the SAIF as measured by the institution's capital.
    The FDIC recognizes, however, that for some institutions the cost 
of the special assessment could have a more lasting effect. 
Accordingly, the FDIC is only calculating capital in this manner one 
time. All subsequent calculations will reflect all costs incurred by an 
institution.
    The FDIC wishes to emphasize the point that it is excluding the 
special assessment from the capital calculation only for assessment 
purposes, and not for supervisory or regulatory purposes. For example, 
the exclusion does not come into play for the purpose of determining 
the adequacy of an institution's capital under the prompt corrective 
action statute, section 38 of the FDI Act, 12 U.S.C. 1831o. Part 325 of 
the FDIC's regulations, 12 CFR part 325 (Capital Maintenance), 
implements section 38 and sets capital ratios equivalent to those found 
in part 327. The ratios computed pursuant to part 325 will not reflect 
the exclusion allowed under part 327. If the ratios indicate that 
supervisory action may be warranted in a particular case, the FDIC will 
inquire further into the condition of the institution, and determine 
the supervisory action that is appropriate. Similarly, the exclusion 
does not come into play when determining whether an institution is 
``well capitalized'' within the meaning of section 29 of the FDI Act, 
12 U.S.C. 1831f, which sets minimum capital requirements for 
institutions that accept brokered deposits.
    Two trade groups express support for the one-time relief in 
computing capital ratios. One of the two suggests that the FDIC should 
provide relief of this kind during the first semiannual period of 1998 
on a case-by-case basis. The FDIC believes that such an extension is 
unwarranted, and would be imprudent. If an institution's capital ratios 
continued to be impaired for so long an interval, there would be no 
basis for allowing such relief, as the institution's financial 
condition would present an increased and on-going risk to the SAIF.
3. Deadlines
    a. Invoices. The FDIC must generally issue invoices not less than 
30 days prior to the collection date. 12 CFR 327.3(c)(1). A shorter 
interval is warranted in this case in order to afford time for notice 
and comment on the final rule, however. The final rule allows the FDIC 
to delay issuing the invoices for the first quarterly payment for the 
first semiannual period of 1997, which is the first payment under the 
new schedule.
    b. Announcement of the Adjusted Rates. The assessment regulation 
has provided that, when the Board adopts an adjustment to the base 
rates by resolution, the Board must announce the adjustment and the new 
rate-schedule at least 15 days before the invoice date for the first 
payment of the semiannual period to which the rates will apply. For the 
reasons given above with respect to the invoice date, the Board has 
determined that it is appropriate to relax this requirement with 
respect to the rates for the first semiannual period of 1997.

H. Effective date

    The final rule is effective immediately upon adoption. The FDIC 
considers that an immediate effective date is both necessary and 
appropriate because the FDIC must issue invoices reflecting the new 
lower rates, in order that institutions may know the amounts they are 
to pay for the first quarter of 1997. By making the rule effective 
immediately, the FDIC can issue the invoices as promptly as possible.

I. Technical Adjustments

    The final rule updates, clarifies, and corrects various references 
in part 327. For example, Sec. 327.4(a) refers to Sec. 327.9(a) and to 
Sec. 327.9(c); the final rule replaces the references with a single 
reference to Sec. 327.9. Section 327.4(c) speaks of institutions for 
which either the FDIC or the Resolution Trust Corporation (RTC) has 
been appointed conservator; the final rule eliminates the reference to 
the RTC, and speaks instead of institutions for which the FDIC either 
has been appointed or serves as conservator. The final rule removes the 
definitions for ``adjustment factor'' and ``assessment schedule'', 
which are found in Sec. 327.8(i), on the ground they are not needed. 
The final rule deletes certain obsolete provisions relating to the BIF 
after the BIF achieved its DRR.

II. Paperwork Reduction Act

    No collections of information pursuant to section 3504(h) of the 
Paperwork Reduction Act of 1980 (44 U.S.C. 3501 et seq.) are contained 
in this rule. Consequently, no information has been submitted to the 
Office of Management and Budget (OMB) for review.

III. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., does 
not apply to the rule. The RFA's definition of the term ``rule'' 
excludes ``a rule of particular applicability relating to rates'. Id. 
601(2). The FDIC considers that the rule is governed by this exclusion.
    In addition, the legislative history of the RFA indicates that its 
requirements are inappropriate to this proceeding. The RFA focuses on 
the ``impact'' that a rule will have on small entities. The legislative 
history shows that the ``impact'' at issue is a differential impact--
that is, an impact that places a disproportionate burden on small 
businesses:


[[Page 67696]]


    Uniform regulations applicable to all entities without regard to 
size or capability of compliance have often had a disproportionate 
adverse effect on small concerns. The bill, therefore, is designed 
to encourage agencies to tailor their rules to the size and nature 
of those to be regulated whenever this is consistent with the 
underlying statute authorizing the rule.
    126 Cong. Rec. 21453 (1980) (``Description of Major Issues and 
Section-by-Section Analysis of Substitute for S. 299'').

    The final rule does not impose a uniform cost or requirement on all 
institutions regardless of size. Rather, it imposes an assessment that 
is directly proportional to each institution's size. Nor does the rule 
cause an affected institution to incur any ancillary costs of 
compliance (such as the need to develop new recordkeeping or reporting 
systems, to seek out the expertise of specialized accountants, lawyers, 
or managers) that might cause disproportionate harm to small entities. 
As a result, the purposes and objectives of the RFA are not affected, 
and an initial regulatory flexibility analysis is not required.

IV. Riegle Community Development and Regulatory Improvement Act

    Section 302(b) of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (Riegle Act) requires that, as a general rule, 
new and amended regulations that impose additional reporting, 
disclosure, or other new requirements on insured depository 
institutions shall take effect on the first day of a calendar quarter. 
See 12 U.S.C. 4802(b). This restriction is inapplicable because the 
final rule would not impose such additional or new requirements. 
Nevertheless, the final rule takes effect on January 1, 1997, in 
conformity with the Riegle Act.

V. Congressional Review

    As a general matter, when an agency adopts a final rule, the agency 
must submit to each House of Congress and to the Comptroller General a 
report containing a copy of the rule, a general statement relating to 
the rule, and the rule's proposed effective date. 5 U.S.C. 801(a)(1). 
The term ``rule'' excludes ``any rule of particular applicability, 
including a rule that approves or prescribes for the future rates'', 
however. Id. 804(3). The final rule is governed by this exclusion, 
because the final rule sets assessment rates and relates to the 
computations associated with assessment rates. Accordingly, the 
reporting requirement of id. 801(a)(1), and the more general 
requirements of id. sections 801-808, do not apply.

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, the Board of Directors 
of the Federal Deposit Insurance Corporation is amending part 327 of 
title 12 of the Code of Federal Regulations as follows:

PART 327--ASSESSMENTS

    1. The authority citation for part 327 continues to read as 
follows:

    Authority: 12 U.S.C. 1441, 1441b, 1813, 1815, 1817-1819; Deposit 
Insurance Funds Act of 1996, Pub. L. 104-208, 110 Stat. 3009 et seq.

    2. Section 327.3 is amended by revising the first sentence of 
paragraph (c)(1) to read as follows:


Sec. 327.3  Payment of semiannual assessments.

* * * * *
    (c) First-quarterly payment--(1) Invoice. Except in the case of 
invoices for the first quarterly payment for the first semiannual 
period of 1997, no later than 30 days prior to the payment date 
specified in paragraph (c)(2) of this section, the Corporation will 
provide to each insured depository institution an invoice showing the 
amount of the assessment payment due from the institution for the first 
quarter of the upcoming semiannual period, and the computation of that 
amount. * * *
* * * * *
    3. Section 327.4 is amended by revising the first sentence of 
paragraph (a) introductory text, paragraph (a)(1)(i)(A), paragraph 
(a)(1)(ii)(A), and paragraph (c) to read as follows:


Sec. 327.4  Annual assessment rate.

    (a) Assessment risk classification. For the purpose of determining 
the annual assessment rate for insured depository institutions under 
Sec. 327.9, each insured depository institution will be assigned an 
``assessment risk classification''. * * *
    (1) * * *
    (i) * * *
    (A) Except as provided in paragraph (a)(1)(i)(B) of this section, 
this group consists of institutions satisfying each of the following 
capital ratio standards: Total risk-based ratio, 10.0 percent or 
greater; Tier 1 risk-based ratio, 6.0 percent or greater; and Tier 1 
leverage ratio, 5.0 or greater. New insured depository institutions 
coming into existence after the report date specified in paragraph 
(a)(1) of this section will be included in this group for the first 
semiannual period for which they are required to pay assessments. For 
the purpose of computing the ratios referred to in this paragraph 
(a)(1)(i)(A) for the second semiannual period of 1997, each such ratio 
shall be computed for an institution as if the institution had retained 
the funds that the institution disbursed in payment of the special 
assessment prescribed by Sec. 329.41(a).
* * * * *
    (ii) * * *
    (A) Except as provided in paragraph (a)(1)(ii)(B) of this section, 
this group consists of institutions that do not satisfy the standards 
of ``well capitalized'' under this paragraph but which satisfy each of 
the following capital ratio standards: Total risk-based ratio, 8.0 
percent or greater; Tier 1 risk-based ratio, 4.0 percent or greater; 
and Tier 1 leverage ratio, 4.0 percent or greater. For the purpose of 
computing the ratios referred to in this paragraph (a)(1)(ii)(A) for 
the second semiannual period of 1997, each such ratio shall be computed 
for an institution as if the institution had retained the funds that 
the institution disbursed in payment of the special assessment 
prescribed by Sec. 327.41(a).
* * * * *
    (c) Classification for certain types of institutions. The annual 
assessment rate applicable to institutions that are bridge banks under 
12 U.S.C. 1821(n) and to institutions for which the Corporation has 
been appointed or serves as conservator shall in all cases be the rate 
applicable to the classification designated as ``2A'' in the 
appropriate assessment schedule prescribed pursuant to Sec. 327.9.
* * * * *


Sec. 327.8  [Amended]

    4. Section 327.8 is amended by removing and reserving paragraph 
(i).
    5. Section 327.9 is revised to read as follows:


Sec. 327.9  Assessment schedules.

    (a) Base assessment schedules--(1) In general. Subject to 
Sec. 327.4(c) and subpart B of this part, the base annual assessment 
rate for an insured depository institution shall be the rate prescribed 
in the appropriate base assessment schedule set forth in paragraph 
(a)(2) of this section applicable to the assessment risk classification 
assigned by the Corporation under Sec. 327.4(a) to that institution. 
Each base assessment schedule utilizes the group and subgroup 
designations specified in Sec. 327.4(a). An institution shall pay 
assessments at the rate specified in the appropriate base assessment 
schedule except as provided in paragraph (b) of this section.

[[Page 67697]]

    (2) Assessment schedules--(i) Base rates for BIF members. The 
following base assessment schedule applies with respect to assessments 
paid to the BIF by BIF members and by other institutions that are 
required to make payments to the BIF pursuant to subpart B of this 
part:

                      BIF Base Assessment Schedule                      
------------------------------------------------------------------------
                                                Supervisory subgroup    
               Capital group               -----------------------------
                                                A         B         C   
------------------------------------------------------------------------
1.........................................         4         7        21
2.........................................         7        14        28
3.........................................        14        28        31
------------------------------------------------------------------------

    (ii) Base rates for SAIF members. The following base assessment 
schedule applies with respect to assessments paid to the SAIF by SAIF 
members and by other institutions that are required to make payments to 
the SAIF pursuant to subpart B of this part:

                      SAIF Base Assessment Schedule                     
------------------------------------------------------------------------
                                                Supervisory subgroup    
               Capital group               -----------------------------
                                                A         B         C   
------------------------------------------------------------------------
1.........................................         4         7        21
2.........................................         7        14        28
3.........................................        14        28        31
------------------------------------------------------------------------

    (b) Adjusted assessment schedules--(1) In general. Institutions 
shall pay semiannual assessments at the rates specified in this 
paragraph (b) whenever such rates have been prescribed by the Board.
    (2) Adjusted rates for BIF members. (i) The Board has adjusted the 
BIF Base Assessment Schedule by reducing each rate therein by 4 basis 
points for the second semiannual period of 1996 and for the first 
semiannual period of 1997 by resolution of the Board of Directors of 
the Corporation. Accordingly, the following adjusted assessment 
schedule applies to BIF members for those two semiannual periods:

                    BIF Adjusted Assessment Schedule                    
------------------------------------------------------------------------
                                                Supervisory subgroup    
               Capital group               -----------------------------
                                                A         B         C   
------------------------------------------------------------------------
1.........................................         0         3        17
2.........................................         3        10        24
3.........................................        10        24        27
------------------------------------------------------------------------

    (ii) The rates set forth in paragraph (b)(2)(i) of this section 
shall terminate at the end of the first semiannual period of 1997.
    (3) SAIF members--(i) General reduction. Except as provided in 
paragraph (b)(3)(ii) of this section, the Board has adjusted the SAIF 
Base Assessment Schedule as of October 1, 1996, by reducing the rates 
therein by 4 basis points. The adjusted rates are presented to the left 
in each risk classification category in the schedule shown in paragraph 
(b)(3)(iii) of this section.
    (ii) Interim assessment schedule for SAIF-member savings 
associations. From October 1, 1996, through December 31, 1996, savings 
associations that are members of the SAIF shall pay assessments 
according to the schedule in effect for such institutions on September 
30, 1996, except that each rate in the schedule other than the rate for 
institutions in assessment risk classification 3C shall be reduced by 5 
basis points (0.05 percent), and the rate for institutions in 
assessment risk classification 3C shall be reduced by 4 basis points 
(0.04 percent). No rate prescribed under this paragraph (b)(3)(ii) 
shall be applied for the purpose of Sec. 327.32(a)(2)(i). The rates 
specified by this paragraph (b)(3)(ii) are presented to the right in 
each risk classification category in the schedule shown in paragraph 
(b)(3)(iii) of this section.
    (iii) Adjusted rates for SAIF members. The following schedule sets 
forth to the left in each risk classification category the adjusted 
rate schedule that applies to SAIF members generally on and after 
October 1, 1996, in accordance with paragraph (b)(3)(i) of this 
section, and also sets forth to the right in each risk classification 
category the rates that apply to savings associations that are members 
of the SAIF from October 1, 1996, through December 31, 1996, in 
accordance with paragraph (b)(3)(ii) of this section:

                    SAIF Adjusted Assessment Schedule                   
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------
                                                                        
(5) Supervisory subgroup                                                
                                                 -----------------------
                  Capital group                                         
(1)A                                                                    
(1)B                                                                    
(1)C                                                                    
------------------------------------------------------------------------
1...............................................   0  18   3  21  17  24
2...............................................   3  21  10  24  24  25
3...............................................  10  24  24  25  27  27
------------------------------------------------------------------------

    (c) Rate adjustments; procedures--(1) Semiannual adjustments. The 
Board may increase or decrease the BIF Base Assessment Schedule set 
forth in paragraph (a)(2)(i) of this section or the SAIF Base 
Assessment Schedule set forth in paragraph (a)(2)(ii) of this section 
up to a maximum increase of 5 basis points or a fraction thereof or a 
maximum decrease of 5 basis points or a fraction thereof (after 
aggregating increases and decreases), as the Board deems necessary to 
maintain the reserve ratio of an insurance fund at the designated 
reserve ratio for that fund. Any such adjustment shall apply uniformly 
to each rate in the base assessment schedule. In no case may such 
adjustments result in an assessment rate that is mathematically less 
than zero or in a rate schedule for an insurance fund that, at any 
time, is more than 5 basis points above or below the base assessment 
schedule for that fund, nor may any one such adjustment constitute an 
increase or decrease of more than 5 basis points. The adjustment for 
any semiannual period for a fund shall be determined by:
    (i) The amount of assessment revenue necessary to maintain the 
reserve ratio at the designated reserve ratio; and
    (ii) The assessment schedule that would generate the amount of 
revenue in paragraph (c)(1)(i) of this section considering the risk 
profile of the institutions required to pay assessments to the fund.
    (2) Amount of revenue. In determining the amount of assessment 
revenue in paragraph (c)(1)(i) of this section, the Board shall take 
into consideration the following:
    (i) Expected operating expenses of the insurance fund;
    (ii) Case resolution expenditures and income of the insurance fund;
    (iii) The effect of assessments on the earnings and capital of the 
institutions paying assessments to the insurance fund; and
    (iv) Any other factors the Board may deem appropriate.
    (3) Adjustment procedure. Any adjustment adopted by the Board 
pursuant to this paragraph (c) will be adopted by rulemaking. 
Nevertheless, because the Corporation is generally required by statute 
to set assessment rates as necessary (and only to the extent necessary) 
to maintain or attain the target designated reserve ratio, and because 
the Corporation must do so in the face of constantly changing 
conditions, and because the purpose of the adjustment procedure is to 
permit the Corporation to act expeditiously and frequently to maintain 
or attain the designated reserve ratio in an environment of constant 
change, but within set parameters not exceeding 5 basis points, without 
the delays associated with full notice-and-comment rulemaking, the 
Corporation has determined that it is ordinarily impracticable, 
unnecessary and not in the public interest to follow the procedure for 
notice and public comment in such a rulemaking, and that accordingly 
notice and public procedure thereon are not required as provided in

[[Page 67698]]

5 U.S.C. 553(b). For the same reasons, the Corporation has determined 
that the requirement of a 30-day delayed effective date is not required 
under 5 U.S.C. 553(d). Any adjustment adopted by the Board pursuant to 
a rulemaking specified in this paragraph (c) will be reflected in an 
adjusted assessment schedule set forth in paragraph (b)(2) or (b)(3) of 
this section, as appropriate.
    (4) Announcement. Except with respect to assessments for the first 
semiannual period of 1997, the Board shall announce the semiannual 
assessment schedule and the amount and basis for any adjustment thereto 
not later than 15 days before the invoice date specified in 
Sec. 327.3(c) for the first quarter of the semiannual period for which 
the adjustment shall be effective.
    (d) Refunds or credits of certain assessments. If the amount paid 
by an institution for the regular semiannual assessment for the second 
semiannual period of 1996 exceeds, as a result of the reduction in the 
rate schedule for a portion of that semiannual period, the amount due 
from the institution for that semiannual period, the Corporation will 
refund or credit any such excess payment and will provide interest on 
the excess payment in accordance with the provisions of Sec. 327.7. 
Notwithstanding Sec. 327.7(a)(3)(ii), such interest will accrue 
beginning as of October 1, 1996.
    6. A new Sec. 327.10 is added to subpart A to read as follows:


Sec. 327.10  Interpretive rule: section 7(b)(2)(A)(v).

    This interpretive rule explains certain phrases used in section 
7(b)(2)(A)(v) of the Federal Deposit Insurance Act, 12 U.S.C. 
1817(b)(2)(A)(v).
    (a) An institution classified in supervisory subgroup B or C 
pursuant to Sec. 327.4(a)(2) exhibits ``financial, operational, or 
compliance weaknesses ranging from moderately severe to 
unsatisfactory'' within the meaning of such section 7(b)(2)(A)(v).
    (b) An institution classified in capital group 2 or 3 pursuant to 
Sec. 327.4(a)(1) is ``not well capitalized'' within the meaning of such 
section 7(b)(2)(A)(v).

    By order of the Board of Directors.

    Dated at Washington, D.C., this 11th day of December 1996.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Deputy Executive Secretary.
[FR Doc. 96-32113 Filed 12-23-96; 8:45 am]
BILLING CODE 6714-01-P