[Federal Register Volume 62, Number 28 (Tuesday, February 11, 1997)]
[Proposed Rules]
[Pages 6139-6142]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-3306]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 312

RIN 3064-AC01


Prevention of Deposit Shifting

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Proposed rule.

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SUMMARY: The proposed rule would implement a new statute to prevent the 
shifting of deposits insured under the Savings Association Insurance 
Fund (SAIF) to deposits insured under the Bank Insurance Fund (BIF) for 
the purpose of evading the assessment rates applicable to SAIF 
deposits.

DATES: Written comments must be received by the FDIC on or before April 
14, 1997.

ADDRESSES: Written comments are to be addressed to the Office of the 
Executive Secretary, Federal Deposit Insurance Corporation, 550 17th 
Street, NW., Washington, DC 20429. Comments may be hand-delivered to 
Room F-402, 1776 F Street, NW., Washington, DC 20429, on business days 
between 8:30 a.m. and 5 p.m. (FAX number: (202) 898-3838; Internet 
address: [email protected]). Comments will be available for inspection 
in the FDIC Public Information Center, room 100, 801 17th Street, NW., 
Washington, DC, between 9:00 a.m. and 5:00 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: Joseph A. DiNuzzo, Counsel, (202) 898-
7349; Richard J. Osterman, Senior Counsel, (202) 898-3523, Legal 
Division; or George Hanc, Associate Director, Division of Research and 
Statistics, (202) 898-8719, Federal Deposit Insurance Corporation, 
Washington, DC 20429.
SUPPLEMENTARY INFORMATION:

I. The Proposed Rule

A. The Funds Act and the Deposit Shifting Statute

    The Deposit Insurance Funds Act of 1996 (Funds Act) was enacted as 
part of the Economic Growth and Regulatory Paperwork Reduction Act of 
1996, Public Law 104-208, 110 Stat. 3009 et seq., sections 2701-2711, 
and became effective September 30, 1996. The Funds Act provides for the 
capitalization of the SAIF through a special assessment on all 
depository institutions that hold SAIF-assessable deposits. Pursuant to 
this requirement, the FDIC recently issued a final rule imposing a 
special assessment on institutions holding SAIF-assessable deposits in 
an amount sufficient to increase the SAIF reserve ratio (SAIF reserve 
ratio) to the designated reserve ratio (DRR) of 1.25 percent as of 
October 1, 1996. 61 FR 53834 (Oct. 16, 1996), to be codified at 12 CFR 
327.41.
    Another provision of the Funds Act, entitled ``Prohibition on 
Deposit Shifting'' (deposit shifting statute), requires the Comptroller 
of the Currency, the Board of Directors of the FDIC, the Board of 
Governors of the Federal Reserve System, and the Director of the Office 
of Thrift Supervision (federal banking agencies) to take ``appropriate 
actions'' to prevent insured depository institutions and holding 
companies from ``facilitating or encouraging'' the shifting of deposits 
from SAIF-assessable deposits to BIF-assessable deposits for the 
purpose of evading the assessments applicable to SAIF-assessable 
deposits.1 Funds Act, section 2703(d). The ``appropriate actions'' 
suggested in the deposit shifting statute are: denial of applications, 
enforcement actions and the imposition of entrance and exit fees.
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    \1\ Although currently the range of risk-based assessments for 
BIF-assessable and SAIF-assessable deposits is the same, a higher 
assessment payable to the Financing Corporation must be paid on 
SAIF-assessable deposits. Thus, the overall assessment is higher for 
SAIF-assessable deposits than for BIF-assessable deposits.
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    The statute also specifies that its provisions shall not be 
construed to prohibit conduct or activity by any insured depository 
institution that is undertaken in the ``ordinary course of business'' 
and is not directed towards depositors of an insured depository 
institution affiliate of the insured institution.
    The statute authorizes the FDIC to issue regulations, including 
regulations defining terms used in the statute, to prevent the shifting 
of deposits. The deposit shifting statute terminates on the earlier of 
December 31, 1999, or the date on which the last savings association 
ceases to exist.

B. Need for a Regulation on Deposit Shifting

    The issuance of a regulation would provide guidance to the industry 
on the meaning and impact of the deposit shifting statute. This is 
particularly important in light of the relationship of the deposit 
shifting statute to section

[[Page 6140]]

5(d)(2) of the FDI Act (12 U.S.C. 1815(d))(section 5(d)(2)).
    Section 5(d)(2) applies to conversions of depository institutions 
from one deposit insurance fund to the other. In relevant part, it 
provides that: (1) Institutions may not engage in a ``conversion 
transaction'' without the FDIC's prior approval; and (2) institutions 
that engage in an insurance-fund conversion must pay prescribed 
entrance and exit fees. Until recently, with certain specified 
exceptions, depository institutions were prohibited by section 5(d)(2) 
from engaging in conversion transactions. 12 U.S.C. 1815(d)(2)(A)(ii). 
The statute specified, however, that the ``conversion moratorium'' 
would expire when SAIF reached or exceeded its DRR. Because SAIF 
recently reached its DRR, the conversion moratorium no longer applies; 
therefore, an institution may convert from one fund to another as long 
as the FDIC approves the conversion and the institution pays the 
prescribed entrance and exit fees.
    The requirement in section 5(d)(2) that converting institutions pay 
entrance and exit fees underscores the need to impose entrance and exit 
fees under the deposit migration statute: If insured depository 
institutions were permitted to shift deposits from a SAIF-insured 
institution to a BIF-insured institution outside the scope of section 
5(d)(2), then--but for the existence of the deposit shifting statute--
they would be able to evade the entrance and exit fees imposed by 
section 5(d)(2) for such fund conversions. The FDIC interprets the 
deposit shifting statute, therefore, in part, to be intended to 
preserve the integrity of the fee-payment requirements in section 
5(d)(2). Indeed, as indicated above, the deposit shifting statue 
specifies that one of the ``appropriate actions'' the agencies may take 
to prevent deposit shifting is the ``imposition of entrance and exit 
fees as if such transaction qualified as a conversion transaction 
pursuant to section 5(d).''

C. Explanation of the Proposed Rule

    The proposed rule is intended to interpret and implement the 
deposit shifting statute. The proposed rule consists of two basic 
provisions. The first would reiterate the requirement in the deposit 
shifting statute that the federal banking agencies deny applications 
and object to notices filed with them by depository institutions or 
depository institution holding companies if the agency determines that 
the transaction for which the application or notice is filed is for the 
purpose of evading assessments imposed on insured depository 
institutions with respect to SAIF-assessable deposits. The second 
provision of the proposed rule would establish a presumption under 
which entrance and exit fees would be imposed upon depository 
institutions for deposits that are shifted from SAIF-assessable 
deposits to BIF-assessable deposits within the contemplation of the 
deposit shifting statute.
1. Applications
    As noted, the proposed rule reiterates the statutory requirement 
that the federal banking agencies deny applications or object to 
notices if the transaction for which the application or notice is filed 
is for the purpose of evading SAIF assessments. The proposed regulation 
is drafted to encompass any type of application or notice that might 
involve deposit shifting. It is anticipated that the respective agency 
would determine the purpose of the application or notice from the 
materials submitted by the depository institution or holding company. 
For example, certain types of applications require the filing of a 
business plan which describes the corporate strategy for and objective 
of the proposed transaction. If the agency's review of the business 
plan indicates that the purpose of a proposed transaction is to shift 
deposits in order to evade SAIF assessments, then the agency would deny 
the application. If a business plan is not required to be filed with an 
application that might raise a concern about deposit shifting, then the 
reviewing agency would otherwise determine, based on a review of the 
materials provided with the application and other available 
information, whether the underlying purpose of the application is to 
shift deposits within the contemplation of the deposit shifting 
statute. All such application determinations would be made on a case-
by-case basis within the agency's discretion. It is also likely that 
the agencies would condition application approvals on compliance with 
the requirements of the deposit shifting statute.
2. Entrance and Exit Fees for Deposit Shifting
    The proposed rule would establish a presumption under which 
entrance and exit fees would be imposed upon depository institutions 
that engage in deposit shifting for the purpose of evading SAIF 
assessments. The amounts of the entrance and exit fees would be those 
prescribed in part 312 of the FDIC's regulations (12 CFR part 312). 
Under the proposed rule the FDIC would use a rebuttable-presumption 
approach to determine whether depository institutions have engaged in 
deposit shifting and, therefore, must pay entrance and exit fees. To 
implement this approach the FDIC would identify all bank holding 
companies and savings and loan holding companies with both BIF- and 
SAIF-member subsidiaries and determine each holding company's aggregate 
average percentage of BIF and SAIF deposits for a period of time prior 
to the enactment of the deposit shifting statute on September 30, 1996. 
The FDIC would then compare that average to the percentage of each such 
holding company's BIF and SAIF deposits for each quarter subsequent to 
the enactment of the deposit shifting statute. The FDIC would determine 
whether any increase in the holding company's percentage of BIF 
deposits and decrease in its percentage of SAIF deposits exceeded a 
normal range relative to the holding company's historical average and 
industry averages.
    If the FDIC determines, on a holding-company-by-holding-company 
basis, that a BIF-insured institution's increase in BIF-assessable 
deposits and decrease in SAIF-assessable deposits is above the normal 
range and is not attributable to factors other than deposit shifting, 
then, after consulting with each institution's primary federal 
regulator (where the FDIC is not the institution's primary federal 
regulator) the FDIC would apply the rebuttable presumption that the 
increase in BIF-assessable deposits resulted from deposit shifting 
encouraged or facilitated by the applicable depository institutions or 
their holding company for the purpose of evading SAIF 
assessments.2
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    \2\ To determine whether a holding company should be subject to 
further scrutiny under the proposed rule, the FDIC would compute an 
average ratio of BIF-insured deposits to total deposits for all non-
Oakar affiliates of the holding company as of the fourth quarter of 
1994. This value would be computed as the average ratio of BIF-
insured deposits for the period from the third quarter of 1989 to 
the fourth quarter of 1994, or the average ratio of BIF-insured 
deposits from the last quarter that the holding company acquired or 
sold a non-Oakar affiliate through the fourth quarter of 1994. The 
average ratio would then be subtracted from the ratio of BIF-insured 
deposits to total deposits in each quarter of 1995 and subsequent 
years to yield an adjusted BIF-insured deposit ratio. The adjusted 
ratio for each holding company would be divided by the standard 
deviation of adjusted ratios of BIF-insured deposits for all holding 
companies for the entire period beginning with the first quarter of 
1995. The resulting value is compared with the value 1.65. If it 
exceeds 1.65, and assuming that the adjusted ratio is a normal 
random variable, there would be less than a 5 percent chance that 
the change in the BIF-insured deposit ratio is a random event. 
Holding companies for which the adjusted ratio of BIF-insured 
deposits divided by the standard deviation of adjusted ratios for 
all holding companies after 1994 exceeded 1.65 would be subject to 
further scrutiny under the proposed rule.

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[[Page 6141]]

    The FDIC would have 90 days after the report date (currently the 
end of a calendar quarter) as of which the applicable quarterly 
Consolidated Report of Condition and Income or Thrift Financial Report 
(financial reports) of affiliated BIF-member and SAIF-member depository 
institutions must be filed in which to notify the institutions of the 
FDIC's determination and the intended imposition of the entrance and 
exit fees. The depository institutions would then have 30 days from the 
date of the FDIC's notification to provide to the FDIC information and 
materials to demonstrate that the increase in BIF-assessable deposits 
was attributable to factors other than deposit shifting encouraged or 
facilitated by the depository institutions or their holding company. 
Mergers, acquisitions and changes in market conditions would be among 
the types of factors that may be sufficient to rebut the presumption of 
intentional deposit shifting.
    The FDIC would review the materials and information submitted, 
consult with the institutions' primary federal regulator(s) (if other 
than the FDIC), determine whether the entrance and exit fees should be 
imposed and, within 60 days of receiving the institutions' materials 
and information, notify the institutions of the FDIC's determination. 
If the determination is that fees must be paid, then the institutions 
would be required to remit payment to the FDIC within 15 days of the 
notice. The institutions then would have 30 days after such payment is 
made to appeal the determination to the FDIC.
    The details of the procedures for submitting materials and 
information to attempt to rebut the presumption of deposit shifting 
would be provided in writing to depository institutions when they are 
informed of the FDIC's intention to impose such fees.

D. Effective Date

    The FDIC's review of financial reports for purposes of the possible 
imposition of entrance and exit fees under the proposed rule would 
begin with the reports filed as of the end of the first full quarter 
following the effective date of the final rule on deposit shifting. 
Concurrent with this rulemaking effort, the FDIC is considering what, 
if any, action it should take to impose the deposit shifting statute 
for the period between the enactment date of the deposit shifting 
statute (i.e., September 30, 1996) and the effective date of the final 
rule on deposit shifting. Any such action would be on a case-by-case 
basis in consultation with the institutions' primary federal 
regulator(s), if other than the FDIC.

E. Rationale for the Proposed Rule

    The FDIC believes, preliminarily, that the proposed rule is the 
most effective means of enforcing the requirements of the deposit 
shifting statute without imposing an undue burden on depository 
institutions. A regulation attempting to restrict and control 
depository institutions' conduct and activities, including advertising, 
would be difficult to design, implement and enforce. Moreover, such 
restrictions and controls might impose a significant regulatory burden 
on the industry. In addition, FDIC efforts to control and restrict 
advertising by depository institutions might raise First Amendment 
commercial free speech issues.
    The FDIC believes, preliminarily, that the approach used in the 
proposed rule strikes the proper balance of enforcing the law and 
limiting the regulatory burden on depository institutions.

II. Request for Public Comment

    The FDIC is hereby requesting comment during a 60-day comment 
period on all aspects of this proposed rule. Specifically, comments are 
requested on alternate means of implementing and enforcing the deposit 
shifting statute. For example, could and should the statute be applied 
on a case-by-case basis without an implementing regulation? And, if 
applied on a case-by-case basis, what factors should be considered in 
determining whether prohibited deposit shifting has occurred? More 
specifically, what depository institution conduct and activities should 
the FDIC interpret as encouraging or facilitating deposit shifting?
    Comments also are specifically requested on the meaning of the rule 
of construction provided in the deposit shifting statute that the 
statute shall not be construed as prohibiting conduct or activity 
``undertaken in the ordinary course of business * * * and * * * not 
directed towards the depositors of an insured depository institution 
affiliate * * *.'' The FDIC would have to interpret that rule of 
construction in considering whether to impose entrance and exit fees 
upon depository institutions.

III. 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 proposed rule. Consequently, no information has been submitted 
to the Office of Management and Budget for review.

IV. Regulatory Flexibility Act

    The FDIC estimates that, currently, there are 135 bank holding 
companies and savings and loan holding companies that own both BIF-
member and SAIF-member affiliates. Those holding companies, in turn, 
own approximately 870 banks and thrifts, of which about 250 have assets 
of $100 million or less. Based on the FDIC's calculations and 
projections, an insubstantial number of those 250 institutions would be 
subject to the rebuttable presumption and other provisions of this 
proposed rule. Thus, the Board hereby certifies that the proposed rule 
would not have a significant economic impact on a substantial number of 
small entities 3 within the meaning of the Regulatory Flexibility 
Act (5 U.S.C. 601 et seq.). Therefore, the provisions of that Act 
regarding an initial and final regulatory flexibility analysis (Id. at 
603 & 604) do not apply here.
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    \3\ The definition of ``small business entity'' derives from the 
definition of a ``small business concern.'' Part 121 of the Small 
Business Administration's rules and regulations (13 CFR part 121) 
provides that any national bank or commercial bank, savings 
association, or credit union with assets of $100 million or less 
qualifies as a small business concern.
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List of Subjects in 12 CFR Part 312

    Bank deposit insurance, Savings associations.

    The Board of Directors of the Federal Deposit Insurance Corporation 
hereby proposes to amend part 312 of title 12 of the Code of Federal 
Regulations as follows:

PART 312--ASSESSMENT OF FEES UPON ENTRANCE TO OR EXIT FROM THE BANK 
INSURANCE FUND OR THE SAVINGS ASSOCIATION INSURANCE FUND AND 
TREATMENT OF APPLICATIONS AND NOTICES AND THE IMPOSITION OF 
ENTRANCE AND EXIT FEES IN CONNECTION WITH DEPOSIT SHIFTING

    1. The part heading of Part 312 is revised to read as set forth 
above.
    2. The authority citation for Part 312 is revised to read as 
follows:

    Authority: 12 U.S.C. 1815(d), 1819.

    3. Section 312.11 is added to read as follows:


Sec. 312.11  Deposit shifting.

    (a) Purpose and scope. The purpose of this section is to implement 
section 2703(d) of Public Law 104-208 which became effective on 
September 30, 1996 (110 Stat. 3009 et seq.). This section applies to 
all insured depository

[[Page 6142]]

institutions and depository institution holding companies.
    (b) Applications and notices. Applications and notices filed by an 
insured depository institution, a proposed or newly organized insured 
depository institution or a depository institution holding company 
shall be denied or objected to, respectively, by the appropriate 
federal banking agency if the agency determines, in its discretion, 
that the proposed transaction for which the application or notice is 
filed is for the purpose of evading assessments imposed on the 
applicable insured depository institutions with respect to SAIF-
assessable deposits under section 7(b) of the Act and section 21(f)(2) 
of the Federal Home Loan Bank Act (12 U.S.C. 1441(f)(2)).
    (c) Imposition of entrance and exit fees. (1) A depository 
institution that encourages or facilitates the shifting of deposits 
from SAIF-assessable deposits to BIF-assessable deposits (as defined in 
section 21(k) of the Federal Home Loan Bank Act (12 U.S.C. 1441(k)) for 
the purpose of evading SAIF assessments shall pay entrance and exit 
fees, as provided for in Secs. 312.1 through 312.10, as if such deposit 
shifting constituted a ``conversion transaction'' under section 5(d) of 
the Act (12 U.S.C. 1815(d)).
    (2) Subject to the FDIC's determination based on the methodology 
indicated in paragraph (c)(3) of this section, an abnormal increase in 
a depository institution's BIF-assessable deposits and a commensurate 
decrease in SAIF-assessable deposits of an affiliate of that depository 
institution within the same calendar quarter shall be presumed to be 
the result of deposit shifting for the purpose of evading SAIF 
assessments. The entrance and exit fees to be imposed under paragraph 
(c)(1) of this section shall apply to the dollar amount of the deposits 
shifted unless, pursuant to paragraph (c)(5) of this section, the 
affiliated depository institutions rebut the presumption that the 
increase in BIF-assessable deposits and the commensurate decrease in 
SAIF-assessable deposits resulted from deposit shifting between the 
affiliated institutions.
    (3) For purposes of this section, the FDIC shall obtain deposit 
data from quarterly Consolidated Reports of Condition and Income filed 
by insured depository institutions with the FDIC and from Thrift 
Financial Reports filed by insured savings associations with the Office 
of Thrift Supervision, starting with the reports filed for the period 
ending [on the last day of the first full calendar quarter after the 
effective date of the final rule on deposit shifting].
    (4) The FDIC, in its discretion, will determine whether to presume 
that the increase in an institution's BIF-assessable deposits and the 
commensurate decrease in the affiliated institution's SAIF-assessable 
deposits resulted from deposit shifting intended to evade SAIF 
assessments by using statistical averages and trends for the applicable 
affiliated depository institutions and industry averages and trends, 
and other information available to the FDIC. In determining whether to 
apply the rebuttable presumption, the FDIC will consult with the 
appropriate federal banking agency(ies) in cases where the FDIC is not 
the appropriate federal banking agency.
    (5) A depository institution will be deemed to have rebutted the 
presumption of deposit shifting if it provides to the FDIC information 
and materials that the FDIC, in its discretion, determines demonstrate 
that the increase in BIF-assessable deposits and the commensurate 
decrease in SAIF-assessable deposits resulted from factors other than 
efforts by the depository institutions or their holding company to 
encourage or facilitate the shifting of deposits for the purpose of 
evading SAIF assessments.
    (6) The FDIC shall notify, in writing, the applicable depository 
institutions of the intended imposition of entrance and exit fees 
within 90 days after the report date of the Consolidated Reports of 
Condition and Thrift Financial Reports from which the FDIC determines 
to apply the rebuttable presumption under paragraph (c)(4) of this 
section. The depository institutions shall have 30 days from the date 
of issuance of such notification to provide materials and information 
to the FDIC to rebut the aforementioned presumption. The FDIC shall 
within 60 days of the receipt of the materials and information consult 
with the appropriate federal banking agency(ies), if the FDIC is not 
the appropriate federal banking agency, and determine and notify the 
depository institutions whether they must pay entrance and exit fees 
for deposit shifting. If the FDIC indicates in such notice that the 
depository institutions must pay entrance and exit fees, those fees 
shall be paid within 15 days of the receipt of such notice. Within 30 
days of the payment of the fees to the FDIC, the depository 
institution(s) may request a review of the determination by the FDIC. 
The details of the procedures for submitting materials and information 
to attempt to rebut the presumption of deposit shifting will be 
provided in writing to the depository institutions as part of the 
initial notice of the intended imposition of entrance and exit fees.
    (d) Termination date. The provisions of this section shall 
terminate on the earlier of December 31, 1999 or the date as of which 
the last savings association ceases to exist.

    By the order of the Board of Directors.

    Dated at Washington, D.C., this 4th day of February, 1997.

Federal Deposit Insurance Corporation.
Jerry L. Langley,
Executive Secretary.
[FR Doc. 97-3306 Filed 2-10-97; 8:45 am]
BILLING CODE 6714-01-P