[Federal Register Volume 73, Number 246 (Monday, December 22, 2008)]
[Rules and Regulations]
[Pages 78155-78162]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-30222]


=======================================================================
-----------------------------------------------------------------------

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

RIN 3064-AD35


Risk Based Assessments

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

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

SUMMARY: The FDIC is amending our regulations to increase risk-based 
assessment rates effective for the first quarter 2009 assessment 
period. This is in accordance with the Restoration plan for the DIF 
published on October 16, 2008, in the Federal Register.

DATES: The final rule will become effective on January 1, 2009.

FOR FURTHER INFORMATION CONTACT: Matthew Green, Chief, Fund Analysis 
and Pricing Section, Division of Insurance and Research, (202) 898-
3670; and Christopher Bellotto, Counsel, Legal Division, (202) 898-
3801.

SUPPLEMENTARY INFORMATION: 

I. Background: Restoration Plan and Proposed Rule

    Recent failures of FDIC-insured institutions caused the reserve 
ratio of the Deposit Insurance Fund (DIF) to decline from 1.19 percent 
as of March 30, 2008, to 1.01 percent as of June 30 and 0.76 percent as 
of September 30. The FDIC expects a higher rate of institution failures 
in the next few years compared to recent years, leading to a further 
decline in the reserve ratio. Because the fund reserve ratio fell below 
1.15 percent as of June 30 and was expected to remain below 1.15 
percent, the Reform Act required the FDIC to establish and implement a 
Restoration Plan to restore the reserve ratio to at least 1.15 percent 
within five years.
    On October 7, 2008, the FDIC established a Restoration Plan for the 
DIF, published on October 16 (see 73 FR 61598). In the FDIC's view, 
restoring the reserve ratio to at least 1.15 percent within five years 
requires an increase in assessment rates. Since the current rates are 
already three basis points above the existing base rate schedule, a new 
rulemaking was required. Consequently, the FDIC Board of Directors 
adopted, also on October 7, 2008, a notice of proposed rulemaking with 
request for comments on revisions to the FDIC's assessment regulations 
(12 CFR part 327).\1\ The rulemaking proposed that, effective January 
1, 2009, current assessment rates would increase uniformly by 7 basis 
points for the first quarter 2009 assessment period. Effective April 1, 
2009, the rulemaking proposed to alter the way in which the FDIC's 
risk-based assessment system differentiates for risk and set new 
deposit insurance assessment rates. Also effective on April 1, 2009, 
the proposal would make technical and other changes to the rules 
governing the risk-based assessment system. The proposed rule was 
published concurrently with the Restoration Plan on October 16, 2008 
(see 73 FR 61560), with a comment period scheduled to end on November 
17, 2008.
---------------------------------------------------------------------------

    \1\ At the same meeting, the Board set the Designated Reserve 
Ratio of the DIF at 1.25 percent for 2009.
---------------------------------------------------------------------------

    On November 7, 2008, the FDIC Board approved an extension of the 
comment period until December 17, 2008, on the parts of the proposed 
rulemaking that would become effective on April 1, 2009. The comment 
period for the proposed 7 basis point rate increase for the first 
quarter of 2009, with its separate proposed effective date of January 
1, 2009, was not extended and expired on November 17, 2008.
    This final rule will implement a uniform increase to current rates 
for the first quarter 2009 assessment period only. The FDIC will issue 
another final rule early in 2009, to be effective April 1, 2009, to 
change the way that the FDIC's assessment system differentiates for 
risk, to set new assessment rates beginning with the second quarter of 
2009, and make certain technical and other changes to the assessment 
rules.

II. The Final Rule: Assessment Rate Schedule for the First Quarter of 
2009

    The final rule raises the current rates uniformly by 7 basis points 
for the quarterly assessment period beginning January 1, 2009 only. The 
higher assessments would be reflected in the fund balance as of March 
31, 2009, and collected on June 30, 2009. Rates for the first quarter 
of 2009 are shown in Table 1 as follows:

[[Page 78156]]



                             Table 1--Assessment Rates for the First Quarter of 2009
----------------------------------------------------------------------------------------------------------------
                                                                        Risk category
                                           ---------------------------------------------------------------------
                                                        I *
                                           ----------------------------      II            III           IV
                                               Minimum       Maximum
----------------------------------------------------------------------------------------------------------------
 Annual Rates (in basis points)...........           12            14            17            35            50
----------------------------------------------------------------------------------------------------------------
* Rates for institutions that do not pay the minimum or maximum rate would vary between these rates.

III. Factors Considered in Setting First Quarter 2009 Assessment Rates

Summary

    The FDIC expects that the economic downturn and continuing troubles 
in the housing and construction sectors, financial markets, and 
commercial real estate will prolong the challenging operating 
environment that banks and thrifts face. Losses experienced by many 
large institutions in recent quarters are likely to spread to a growing 
number of small institutions. The percentage of the industry that is 
unprofitable is expected to remain high, primarily due to asset quality 
problems. These troubles lead the FDIC to project an increase in 
failures and higher losses to the insurance fund compared to recent 
years. The insurance fund balance and reserve ratio are likely to 
decline further before increased assessment revenue can begin to offset 
the effects of higher losses.
    Since the October proposed rulemaking, the FDIC has updated its 
projections through the first quarter of 2009 of losses and other 
factors affecting the reserve ratio. The FDIC bases its updated near-
term loss projections on analysis of specific troubled institutions, 
analysis of recent and expected loss rates given failure, as well as 
the stress analyses of the effects of housing price declines and an 
economic slowdown underlying the projections included in the October 
proposed rulemaking.
    The FDIC also assumes that insured deposits would increase at an 
annual rate between 5 and 6 percent through March of next year. 
(Insured deposits include only those under the basic limit of $100,000 
and $250,000 for retirement accounts.) \2\ For the four quarters ending 
September 30, 2008, insured deposits rose 7.1 percent. Over the 5-year 
period ending in September, insured deposits rose at an average annual 
rate of 5.9 percent.
---------------------------------------------------------------------------

    \2\ Estimated insured deposits do not include those resulting 
from the temporary coverage limit increase to $250,000 under the 
Emergency Economic Stabilization Act of 2008, or those non-interest 
bearing transaction deposits covered by the Temporary Liquidity 
Guarantee Program.
---------------------------------------------------------------------------

    Table 2 shows projected reserve ratios for the fourth quarter of 
2008 and first quarter of 2009 for alternative insured deposit growth 
assumptions. At 5 or 6 percent insured deposit growth, the reserve 
ratio would fall from 0.76 percent in the third quarter of 2008 to 0.61 
percent at the end of the year. It would rise slightly to 0.63 percent 
(assuming 5 percent insured deposit growth) or 0.62 percent (with 6 
percent growth) in the first quarter of 2009 due to the increase in 
assessment rates adopted in the final rule. In the absence of the rate 
increase, the reserve ratio would end the first quarter at 0.60 percent 
(with 5 or 6 percent insured deposit growth).

                                        Table 2--Projected Reserve Ratios
                                [September 30, 2008 reserve ratio = 0.76 percent]
----------------------------------------------------------------------------------------------------------------
                                                                Annualized insured deposit growth *
                 Quarter ending                  ---------------------------------------------------------------
                                                        4%              5%              6%              7%
----------------------------------------------------------------------------------------------------------------
 12/31/2008.....................................           0.61%           0.61%           0.61%           0.60%
 3/31/2009 (without rate increase)..............           0.60%           0.60%           0.60%           0.59%
 3/31/2009 (with 7 b.p. rate increase)..........           0.63%           0.63%           0.62%           0.62%
----------------------------------------------------------------------------------------------------------------
* Assumes assessable (domestic) and insured deposits increase at the same rate. Estimated insured deposits do
  not include those resulting from the temporary coverage limit increase to $250,000 under the Emergency
  Economic Stabilization Act of 2008, or those non-interest bearing transaction deposits covered by the
  Temporary Liquidity Guarantee Program.

    The rates adopted in the final rule for the first quarter of 2009 
will raise almost as much assessment revenue as the rates that would 
become effective beginning April 1, 2009 under the October proposed 
rulemaking. Combining the updated near-term projections above with the 
longer-term projections included in the October proposed rulemaking and 
the proposed assessment rates effective April 1, the FDIC expects that 
the reserve ratio will reach 0.69 percent by the end of 2009. By the 
end of 2013--the last year of the Restoration Plan--the reserve ratio 
is projected to reach 1.21 percent, allowing for a margin for error in 
achieving the 1.15 percent threshold if the FDIC's assumptions do not 
hold.\3\ However, the FDIC will update its longer-term projections for 
the insurance fund before adopting a final rule on assessment rates and 
risk-based pricing changes that would take effect in the second quarter 
of next year.
---------------------------------------------------------------------------

    \3\ In the October proposed rulemaking, the FDIC's best estimate 
of the cost of failures over the six years from 2008 through 2013 
was about $40 billion and its projected 2013 ending reserve ratio 
was 1.26 percent. Combining updated near-term loss estimates with 
the longer term forecasts from October, total failures costs for 
2008-13 are now projected to exceed $42 billion, contributing to a 
lower projected reserve ratio for 2013.
---------------------------------------------------------------------------

    The FDIC recognizes that there is considerable uncertainty about 
its projections for losses and insured deposit growth, and that changes 
in assumptions about these and other factors could lead to different 
assessment revenue needs and rates. Under the terms of the Restoration 
Plan, the FDIC must update its projections for the insurance fund 
balance and reserve ratio at least semiannually while the plan is in 
effect and adjust rates as necessary. In the event that losses

[[Page 78157]]

exceed the FDIC's best estimate or insured deposit growth is more rapid 
than expected, the Board will be able to adjust assessment rates.

Analysis

    In setting assessment rates, the FDIC's Board of Directors has 
considered the following factors as required by statute:
    (i) The estimated operating expenses of the Deposit Insurance Fund.
    (ii) The estimated case resolution expenses and income of the 
Deposit Insurance Fund.
    (iii) The projected effects of the payment of assessments on the 
capital and earnings of insured depository institutions.
    (iv) The risk factors and other factors taken into account pursuant 
to section 7(b)(1) of the Federal Deposit Insurance Act (12 U.S.C. 
1817(b)(1)) under the risk-based assessment system, including the 
requirement under section 7(b)(1)(A) of the Federal Deposit Insurance 
Act (12 U.S.C. 1817(b)(1)(A)) to maintain a risk-based system.
    (v) Other factors the Board of Directors has determined to be 
appropriate.\4\
---------------------------------------------------------------------------

    \4\ Section 2104 of the Reform Act (amending section 7(b)(2) of 
the Federal Deposit Insurance Act, 12 U.S.C. 1817(b)(2)(B)). The 
risk factors referred to in factor (iv) include:
    (i) The probability that the Deposit Insurance Fund will incur a 
loss with respect to the institution, taking into consideration the 
risks attributable to--
    (I) Different categories and concentrations of assets;
    (II) Different categories and concentrations of liabilities, 
both insured and uninsured, contingent and noncontingent; and
    (III) Any other factors the Corporation determines are relevant 
to assessing such probability;
    (ii) The likely amount of any such loss; and
    (iii) The revenue needs of the Deposit Insurance Fund.
    Section 7(b)(1)(C) of the Federal Deposit Insurance Act (12 
U.S.C. 1817(b)(1)(C)).
---------------------------------------------------------------------------

    The factors considered in setting assessment rates are discussed in 
more detail below.
Case Resolution Expenses (Insurance Fund Losses)
    A higher rate of failures is likely to cause the insurance fund 
balance and reserve ratio to decline at least through the end of 2008 
before increased assessment revenue can begin to offset the effects of 
increased losses. The economic downturn and continuing troubles in the 
housing and construction sectors, financial markets, and commercial 
real estate will prolong the challenging operating environment that 
banks and thrifts face going into 2009. Losses experienced by many 
large institutions in recent quarters are likely to spread to a growing 
number of small institutions. The percentage of the industry that is 
unprofitable is expected to remain high, primarily due to asset quality 
problems.
    The FDIC's updated near-term projections relied heavily on 
supervisory analysis of specific troubled institutions. Recent and 
expected loss rates given failure and stress analyses of the effects of 
housing price declines and an economic slowdown in specific geographic 
areas on loan losses and bank capital also served as a basis for 
insurance fund loss projections.
    The FDIC estimates that failures in all of 2008 will cost the 
insurance fund $18.9 billion. After taking into account a projected 
year-end 2008 contingent loss reserve for anticipated failures, 
insurance fund loss provisions for 2008 are currently projected to 
total $30.4 billion.\5\ For the fourth quarter, failures are expected 
to cost $4.8 billion and loss provisions are estimated at $7.7 
billion.\6\ The fund is also projected to incur another $1.1 billion in 
loss provisions during the first quarter of next year.
---------------------------------------------------------------------------

    \5\ The $30.4 billion 2008 loss provision is derived by adding 
$18.9 billion for the cost of failures, $11.5 billion for the 
contingent loss reserve, and another $0.1 billion adjustment for 
failures in earlier years, then subtracting the $0.1 billion year-
end 2007 contingent loss reserve.
    \6\ The $7.7 billion fourth quarter loss provision is derived by 
adding $4.8 billion for the cost of failures, $11.5 billion for the 
contingent loss reserve, and another $3.1 billion adjustment for 
failures occurring prior to the fourth quarter, then subtracting the 
$11.7 billion third quarter contingent loss reserve.
---------------------------------------------------------------------------

    Before considering the final rule on changes to risk-based pricing 
rules and assessment rates beginning the second quarter of 2009, the 
FDIC will update its long-term stress analyses and other factors and 
assumptions underlying its projections of losses in 2009 and over the 
five-year Restoration Plan horizon.
Operating Expenses and Investment Income
    Operating expenses are projected to average close to $300 million 
per quarter in the fourth quarter of 2008 and first quarter of 2009.
    The FDIC projects that its investment contributions (investment 
income and realized gains on the sale of securities, plus or minus 
unrealized gains or losses on available-for-sale securities) will 
average $309 million per quarter in the fourth quarter of this year and 
first quarter of next year. The FDIC is investing new funds in 
overnight investments and short-term Treasury bills to accommodate 
increased bank failure activity. The FDIC generally expects that these 
investments will earn lower rates than the longer-term securities that 
they are replacing, particularly given the consensus forecast of a 
near-term decline in Treasury rates, and will therefore result in less 
interest income to the fund.\7\
---------------------------------------------------------------------------

    \7\ Projections of interest rates are based on consideration of 
December Blue Chip Financial Forecasts.
---------------------------------------------------------------------------

Assessment Revenue, Credit Use, and the Distribution of Assessments
    The FDIC expects that assessment revenue in 2008 will total about 
$3.0 billion: $4.4 billion in gross assessments charged less $1.4 
billion in credits used. Fourth quarter revenue is projected at about 
$1.0 billion. By the end of 2008, the projections indicate that only 4 
percent of the original $4.7 billion in credits awarded will be 
remaining. Under the statutory provisions governing the Restoration 
Plan, the FDIC has the authority to restrict credit use while the plan 
is in effect, providing that institutions may still apply credits 
against their assessments equal to the lesser of their assessment or 3 
basis points.\8\ The FDIC concluded not to restrict credit use in the 
Restoration Plan. The FDIC projects that the amount of credits 
remaining at the time that the proposed new rates go into effect will 
be very small and that their continued use would have very little 
effect on the assessment rates necessary to meet the requirements of 
the plan.\9\
---------------------------------------------------------------------------

    \8\ Section 7(b)(3)(E)(iv) of the Federal Deposit Insurance Act 
(12 U.S.C. 1817(b)(3)(E)(iv)).
    \9\ For 2008, 2009 and 2010, credits may not offset more than 90 
percent of an institution's assessment. Section 7(e)(3)(D)(ii) of 
the Federal Deposit Insurance Act (12 U.S.C. 1817(e)(3)(D)(ii)).
---------------------------------------------------------------------------

    The FDIC projects that the 7 basis point uniform increase in rates 
adopted in the final rule for the first quarter of 2009 will result in 
first quarter assessment revenue of just over $2.3 billion, about $1.2 
billion more than in the absence of a rate increase. The FDIC derived 
its assessment revenue projections by assigning each insured 
institution to an assessment rate based on the current rate schedule 
for the fourth quarter and the rate schedule adopted in the final rule 
for the first quarter of next year. It then adjusted each institution's 
assessment for any remaining credits. For the fourth quarter of 2008, 
the FDIC estimated an industry average rate of approximately 6.4 basis 
points, increasing to approximately 13.4 basis points in the first 
quarter of 2009.

Estimated Insured Deposits

    The FDIC believes that it is reasonable to plan for annual insured 
deposit growth of between 5 and 6 percent through the first quarter of 
next year. Over the 12 months ending September 30, 2008, estimated 
insured deposits

[[Page 78158]]

increased by 7.1 percent.\10\ However, the most recent 5- and 10-year 
averages are about 6 percent and 5 percent, respectively. Chart 1 
depicts insured deposit growth rates since 1992.
---------------------------------------------------------------------------

    \10\ Estimated insured deposits do not include those resulting 
from the temporary coverage limit increase to $250,000 under the 
Emergency Economic Stabilization Act of 2008, or those non-interest 
bearing transaction deposits covered by the Temporary Liquidity 
Guarantee Program.
[GRAPHIC] [TIFF OMITTED] TR22DE08.010

    Projections of insured deposits are subject to considerable 
uncertainty. Insured deposit growth over the near term could continue 
to rise at the more rapid pace observed in the third quarter (1.8 
percent, or 7.2 percent annualized) due to a ``flight to quality'' 
attributable to financial and economic uncertainties. On the other 
hand, as the experience of the late 1980s and early 1990s demonstrated, 
lower overall growth in the banking industry and the economy could 
depress rates of growth of total domestic and insured deposits. As 
Table 2 shows, differences in annualized growth rates of insured 
deposits over the next couple of quarters will have little effect on 
the projected reserve ratio as of March 31, 2009.
Projected Fund Balances, Insured Deposits, and Reserve Ratios
    Assuming annualized insured deposit growth of 5 percent through 
March of next year, projections of fund income, expenses, and losses, 
the fund balance, estimated insured deposits, and the reserve ratio are 
shown below in Table 3.

  Table 3--Projected Fund Balance, Estimated Insured Deposits, and Reserve Ratio Under the Rates Adopted in the
                           Final Rule Assuming 5 Percent Annual Insured Deposit Growth
                                                 [$ in billions]
----------------------------------------------------------------------------------------------------------------
                                                                     4th Qtr 2008    1st Qtr 2009
--------------------------------------------------------------------------------------------------
Beginning Fund Balance............................................            34.6            28.0
Plus: Net Assessment Revenue......................................             1.0             2.3
Plus: Investment Income...........................................             0.3             0.3
Less: Loss Provisions.............................................             7.7             1.1
Less: Operating Expenses..........................................             0.3             0.3
Ending Fund Balance...............................................            28.0            29.1
Estimated Insured Deposits........................................         4,599.5         4,656.0
Ending Reserve Ratio..............................................           0.61%          0.63%
----------------------------------------------------------------------------------------------------------------
Note: Components of fund balance changes may not sum to totals due to rounding.


[[Page 78159]]

Effect on Capital and Earnings
    Appendix 1 contains an analysis of the effect of proposed rates on 
the capital and earnings of insured institutions. Given the assumptions 
in the analysis, for the industry as a whole, projected total 
assessments in the first quarter of 2009 would result in capital that 
would be 0.12 percent lower than if the FDIC did not charge assessments 
and 0.04 percent lower than if current assessment rates remained in 
effect. The proposed assessments would cause 3 institutions whose 
equity-to-assets ratio would have exceeded 4 percent in the absence of 
assessments to fall below that percentage and 2 institutions to fall 
below 2 percent. The proposed increase in assessments would cause 1 
institution whose equity-to-assets ratio would have exceeded 4 percent 
under current assessments to fall below that threshold and no 
institutions to fall below 2 percent equity-to-assets.
    For profitable institutions, assessments in the first quarter of 
2009 would result in pre-tax income that would be 5.9 percent lower 
than if the FDIC did not charge assessments and 3.4 percent lower than 
if current assessment rates remained in effect. For unprofitable 
institutions, assessments would result in pre-tax losses that would be 
4.4 percent higher than if the FDIC did not charge assessments and 2 
percent higher than if current assessment rates remained in effect.

IV. Comments Received on the Proposal

    The FDIC received comments from three nationwide industry trade 
groups and a few banks that specifically addressed the 7 basis point 
increase in assessment rates for the first quarter of 2009. The FDIC 
also received many comments from banks and others concerning rates for 
all of 2009 and beyond. Several of them also discussed proposed changes 
to risk-based pricing methods beginning in the second quarter of 2009.
    One of the nationwide industry trade groups criticized the 
magnitude of the first quarter increase and expressed concern about the 
pace at which the FDIC would restore the insurance fund. It argued that 
the proposed assessment rates are too high--especially in the early 
stages of the Restoration Plan--and questioned why the FDIC does not 
take advantage of the flexibility that Congress provided to extend the 
restoration period beyond five years under ``extraordinary 
circumstances.'' The trade group argued that the FDIC's invocation of 
its systemic risk authority to provide additional guarantees on non-
interest bearing transaction deposits and senior unsecured debt is 
evidence of ``extraordinary circumstances.'' The group believes that 
high premiums would restrain credit and run counter to other government 
efforts designed to stimulate lending. It urged the FDIC to implement a 
longer recapitalization period, such as six or seven years, and to rely 
on lower insured deposit growth assumptions to achieve a more moderate 
increase in rates. The comment letter recommended that the FDIC 
consider phasing in higher assessment rates and argued that it was 
counter-intuitive for the proposed minimum rate in the first quarter 
(12 basis points) to be higher than the proposed minimum rate in the 
second quarter (10 basis points initially and as low as 8 basis points 
after adjustments).
    Another nationwide industry trade group commenting on the first 
quarter 2009 rate increase urged the FDIC to adopt a more modest 
increase in assessment rates and to use its ``extraordinary 
circumstances'' authority to extend the restoration period to at least 
seven years. The comment expressed the view that a smaller rate 
increase would keep additional funds in local communities for lending 
to small businesses and consumers during the current period of economic 
stress.
    A third nationwide industry trade group estimated that the proposed 
7 basis point assessment rate increase would reduce the banking 
industry's pre-tax income by 7 percent or more at a time when the 
industry needs to build its capital. It requested that the FDIC and 
other bank regulators take steps to reduce losses to the DIF from 
insured institution failures. To the extent that such efforts to reduce 
losses succeeded, the FDIC should develop a revised plan incorporating 
lower assessment rates.
    One bank specifically discussing the first quarter 2009 proposed 
assessment rates described the measure as ``ill-timed,'' given current 
pressures on banks' capital and profitability, and urged the FDIC to 
implement a more modest increase. Another expressed concern that the 
increase would make it more difficult for safe and well-managed 
institutions to meet local credit needs.
    As noted before, many comments received from banks and others 
pertained to the proposed increase in rates for all of 2009 and beyond 
(as well as proposed changes to risk-based pricing methods). Two 
comment letters supported the proposed changes to the assessment 
system, including the increase in premiums. Many commenters made 
similar points to those of the three industry trade groups. Several 
comments from banks and from state trade groups opposed any significant 
increase in assessment rates in the short term because many 
institutions are struggling to maintain adequate levels of capital and 
profitability. Several commenters urged the FDIC to withdraw the 
proposed rule and delay increasing assessment rates and overhauling the 
assessment system until the end of 2009. They argued that the delay 
would allow time for a thorough evaluation of the effectiveness of 
measures recently taken by the Federal government to restore stability 
to the banking system. One comment asserted that the proposed 
Restoration Plan penalizes safe and well-run community banks and urged 
the FDIC to require the largest banks to recapitalize the DIF. Finally, 
several comments urged the FDIC to invoke its ``extraordinary 
circumstances'' authority to extend the time period to rebuild the DIF 
from five to at least ten years. By lengthening the restoration period, 
the FDIC could keep assessments at a more moderate level, thereby 
reducing the burden on institutions during stressful periods.
    The FDIC agrees with comments that significant increases in deposit 
insurance premium rates in times of economic and financial stress are 
not desirable. Indeed, the FDIC sought for several years legislative 
reforms that would allow it to charge every insured institution a risk-
based premium regardless of the level of the reserve ratio, and to have 
the ability to let the fund rise under good economic conditions in 
order to have room to decline under adverse conditions without needing 
to sharply increase premium rates. The reforms sought by the FDIC 
became law in February 2006, and most of the implementing regulations 
became effective at the start of 2007. However, the one-time assessment 
credits granted to over 80 percent of the industry did not enable the 
fund to earn significant new revenue last year, resulting in only a 1 
basis point increase in the reserve ratio during all of 2007. Thus, the 
insurance fund was unable to increase sufficiently to prevent the 
increase in failures this year from causing the reserve ratio to fall 
below the 1.15 percent lower bound established by Congress. While 
Congress gave the FDIC new flexibility to manage the fund, it 
prescribed limits on how much the reserve ratio could decline, 
requiring the FDIC to implement a Restoration Plan to increase the fund 
to at least 1.15 percent generally within five years. In the FDIC's 
view, higher premiums are necessary to meet this statutory requirement.
    As the trade groups and many other commenters noted, the law does 
allow

[[Page 78160]]

FDIC to take longer than five years for the reserve ratio to reach 1.15 
percent FDIC due to ``extraordinary circumstances.'' The FDIC 
recognizes the current severe strains on banks and the financial 
system. The FDIC's Temporary Liquidity Guarantee Program (TLGP) is part 
of a coordinated effort by the government--including the Treasury 
Department's Troubled Assets Relief Program (TARP) and the Federal 
Reserve's Commercial Paper Funding Facility--to stabilize the financial 
system and provide much needed liquidity. However, in the FDIC's view, 
it would be premature to conclude at this time that extraordinary 
circumstances should warrant extending the Restoration Plan horizon 
beyond five years. There is considerable uncertainty about future 
insurance fund losses and insured deposit growth. Under the Restoration 
Plan published in October, the FDIC will update its projections at 
least semiannually while the plan is in effect and adjust rates as 
necessary. As the FDIC updates its projections to account for changing 
conditions, it could also determine whether it is appropriate to adjust 
the time frame for reaching the 1.15 percent target due to 
extraordinary circumstances.
    While higher deposit insurance premiums next year will result in 
lower industry earnings than would otherwise be the case, the FDIC 
believes that the coordinated efforts by the Treasury, Federal Reserve, 
and FDIC to expand banking system liquidity will help enable banks to 
increase lending to communities and businesses.
    Finally, if Congress did not enact the reforms in 2006 that FDIC 
had sought, the FDIC would have to increase the reserve ratio to 1.25 
percent within one year or charge an average rate on assessable 
deposits of at least 23 basis points. Banks and thrifts, in fact, did 
pay a minimum of 23 basis points in the early 1990s to rebuild the 
insurance funds.\11\ The first quarter 2009 rates adopted in the final 
rule are significantly lower--most banks will be charged an annual rate 
between 12 and 14 basis points.
---------------------------------------------------------------------------

    \11\ The insurance funds were the Bank Insurance Fund and 
Savings Association Insurance Fund. The funds were merged in 2006.
---------------------------------------------------------------------------

V. Effective Date

    The final rule will take effect January 1, 2009, for the assessment 
for the first quarter of 2009.

VI. Regulatory Analysis and Procedure

A. Administrative Procedure Act

    The final rule setting assessment rates for the first assessment 
period of 2009 will become effective on January 1, 2009. In this 
regard, the FDIC invokes the good cause exception to the requirements 
in the Administrative Procedure Act that, once finalized, a rulemaking 
must have a delayed effective date of thirty days from the publication 
date.\12\ The FDIC has determined that good cause exists for waiving 
the customary 30-day delayed effective date.
---------------------------------------------------------------------------

    \12\ 5 U.S.C. 553(d)(3).
---------------------------------------------------------------------------

    Recent failures of FDIC-insured institutions caused the reserve 
ratio of the DIF to decline from 1.19 percent as of March 31, 2008, to 
0.76 percent as of September 30, 2008. Furthermore, the FDIC expects a 
higher rate of institution failures in the next few years compared to 
recent years, leading to a further decline in the reserve ratio. Under 
these circumstances, the FDIC is required by statute to establish and 
implement a restoration plan to restore the reserve ratio to no less 
than 1.15 percent within five years. In light of the current reserve 
ratio, the continuing unusual and exigent circumstances in the banking 
system, and the statutory requirements, restoring the reserve ratio to 
at least 1.15 percent within five years requires an increase in 
assessment rates, including an increase in the assessment rates for the 
first quarter of 2009. For these reasons, the FDIC finds that good 
cause exists to justify a January 1, 2009 effective date.

B. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 113 
Stat. 1338, 1471 (Nov. 12, 1999), requires the federal banking agencies 
to use plain language in all proposed and final rules published after 
January 1, 2000. The FDIC invited comments on how to make this proposal 
easier to understand and received one response. The comment (which did 
not distinguish between the provisions effective January 1, 2009, and 
those effective April 1, 2009) stated that the proposal was too 
complicated and should have included an executive summary in bullet 
point format.

C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires that each federal 
agency either certify that a proposed rule would not, if adopted in 
final form, have a significant economic impact on a substantial number 
of small entities or prepare an initial regulatory flexibility analysis 
of the proposal and publish the analysis for comment.\13\ Certain types 
of rules, such as rules of particular applicability relating to rates 
or corporate or financial structures, or practices relating to such 
rates or structures, are expressly excluded from the definition of 
``rule'' for purposes of the RFA.\14\ The final rule relates directly 
to the rates imposed on insured depository institutions for deposit 
insurance. Nevertheless, the FDIC voluntarily undertook a regulatory 
flexibility analysis to aid the public in commenting upon the small 
business impact of the proposed rule. The initial regulatory 
flexibility analysis was published in the Federal Register (73 FR 
61560) on October 16, 2008. Public comment was invited. The FDIC 
received no comments on the initial regulatory flexibility analysis 
regarding the 7 basis point increase in assessment rates proposed for 
the first quarter of 2009 only.
---------------------------------------------------------------------------

    \13\ See 5 U.S.C. 603, 604 and 605.
    \14\ 5 U.S.C. 601
---------------------------------------------------------------------------

    As of September 30, 2008, of the 8,384 insured commercial banks and 
savings institutions, there were 4,753 small insured depository 
institutions as that term is defined for purposes of the RFA (i.e., 
those with $165 million or less in assets).\15\
---------------------------------------------------------------------------

    \15\ Throughout this regulatory flexibility analysis (unlike the 
rest of the notice of proposed rulemaking), a ``small institution'' 
refers to an institution with assets of $165 million or less.
---------------------------------------------------------------------------

    The FDIC's total assessment needs are driven by the statutory 
requirement that the FDIC adopt a Restoration Plan that provides that 
the fund reserve ratio reach at least 1.15 percent within five years 
(absent extraordinary circumstances) and by the FDIC's aggregate 
insurance losses, expenses, investment income, and insured deposit 
growth, among other factors. Under the final rule, each institution's 
existing rate for the first quarter of 2009 is increased uniformly by 7 
basis points to help meet FDIC assessment revenue needs. Apart from the 
uniform increase in rates on all institutions to help meet the FDIC's 
total revenue needs, the final rule makes no other changes in rates for 
any insured institution, including small insured depository 
institutions. The final rule increasing assessment rates uniformly by 7 
basis points across the board for all institutions, including small 
institutions for RFA purposes, does not alter the present distribution 
of assessment rates.
    The final rule does not directly impose any ``reporting'' or 
``recordkeeping'' requirements within the meaning of the Paperwork

[[Page 78161]]

Reduction Act. The compliance requirements for the proposed rule would 
not exceed existing compliance requirements for the present system of 
FDIC deposit insurance assessments, which, in any event, are governed 
by separate regulations.
    The FDIC is unaware of any duplicative, overlapping or conflicting 
federal rules.

D. Paperwork Reduction Act

    No collections of information pursuant to the Paperwork Reduction 
Act (44 U.S.C. 3501 et seq.) are contained in the proposed rule.

E. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The FDIC has determined that the final rule will not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, enacted as part of the Omnibus 
Consolidated and Emergency Supplemental Appropriations Act of 1999 
(Pub.L. 105-277, 112 Stat. 2681).

F. Small Business Regulatory Enforcement Fairness Act

    The Office of Management and Budget has determined that the final 
rule is not a ``major rule'' within the meaning of the relevant 
sections of the Small Business Regulatory Enforcement Act of 1996 
(SBREFA) Public Law No. 110-28 (1996). As required by law, the FDIC 
will file the appropriate reports with Congress and the General 
Accounting Office so that the final rule may be reviewed.

List of Subjects in 12 CFR Part 327

    Bank deposit insurance, Banks, banking, Savings associations.

0
For the reasons set forth in the preamble, the FDIC proposes to amend 
chapter III of title 12 of the Code of Federal Regulations as follows:

PART 327--ASSESSMENTS

0
1. The authority citation for part 327 continues to read as follows:

    Authority: 12 U.S.C. 1441, 1813, 1815, 1817-1819, 1821; Sec. 
2101-2109, Pub. L. 109-171, 120 Stat. 9-21, and Sec. 3, Pub. L. 109-
173, 119 Stat. 3605.

0
2. In Sec.  327.10 add a new paragraph (d) to read as follows:


Sec.  327.10  Assessment rate schedules.

* * * * *
    (d) Assessment Rate Schedule for First Assessment Period of 2009. 
The annual assessment rate for an insured depository institution for 
the assessment period beginning January 1, 2009 and ending March 31, 
2009, shall be the rate prescribed in the following schedule:

----------------------------------------------------------------------------------------------------------------
                                                                          Risk category
                                                ----------------------------------------------------------------
                                                            I *
                                                --------------------------      II          III           IV
                                                   Minimum      Maximum
----------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points).................           12           14           17           35           50
----------------------------------------------------------------------------------------------------------------
\*\ Rates for institutions that do not pay the minimum or maximum rate will vary between these rates.

    (1) Risk Category I Rate Schedule. The annual assessment rates for 
all institutions in Risk Category I shall range from 12 to 14 basis 
points.
    (2) Risk Category II, III, and IV Rate Schedule. The annual 
assessment rates for Risk Categories II, III, and IV shall be 17, 35, 
and 50 basis points respectively.
    (3) All institutions in any one risk category, other than Risk 
Category I, will be charged the same assessment rate.

     Note: This Appendix will not appear in the Code of Federal 
Regulations.

Appendix 1--Analysis of the Projected Effects of the Payment of 
Assessments on the Capital and Earnings of Insured Depository 
Institutions

I. Introduction

    This analysis estimates the effect of the deposit insurance 
assessments adopted in the final rule for the first quarter of 2009 
on the equity capital and profitability of all insured institutions. 
The analysis assumes that each institution's pre-tax, pre-assessment 
income in the first quarter is equivalent to one fourth of the 
amount reported over the four quarters ending in September 2008. 
Each institution's rate under the rate schedule is based on data as 
of September 30, 2008.\16\ In addition, the projected use of one-
time credits authorized under the Reform Act is taken into 
consideration in determining the effective assessment for an 
institution.
---------------------------------------------------------------------------

    \16\ For purposes of this analysis, the assessment base (like 
income) is not assumed to increase, but is assumed to remain at 
September 2008 levels. Income is defined as income before taxes, 
extraordinary items, and deposit insurance assessments. Assessments 
are adjusted for the use of one-time credits, and all income 
statement items used in this analysis were adjusted for the effect 
of mergers. Institutions for which four quarters of earnings data 
were unavailable, including insured branches of foreign banks, were 
excluded from this analysis.
---------------------------------------------------------------------------

II. Analysis of the Projected Effects on Capital and Earnings

    While deposit insurance assessment rates generally will result 
in reduced institution profitability and capitalization compared to 
the absence of assessments, the reduction will not necessarily equal 
the full amount of the assessment. Two factors can mitigate the 
effect of assessments on institutions' profits and capital. First, a 
portion of the assessment may be transferred to customers in the 
form of higher borrowing rates, increased service fees and lower 
deposit interest rates. Since information is not readily available 
on the extent to which institutions are able to share assessment 
costs with their customers, however, this analysis assumes that 
institutions bear the full after-tax cost of the assessment. Second, 
deposit insurance assessments are a tax-deductible operating 
expense; therefore, the assessment expense can lower taxable income. 
This analysis considers the effective after-tax cost of assessments 
in calculating the effect on capital.\17\
---------------------------------------------------------------------------

    \17\ The analysis does not incorporate any tax effects from an 
operating loss carry forward or carry back.
---------------------------------------------------------------------------

    An institution's earnings retention and dividend policies also 
influence the extent to which assessments affect equity levels. If 
an institution maintains the same dollar amount of dividends when it 
pays a deposit insurance assessment as when it does not, equity 
(retained earnings) will be less by the full amount of the after-tax 
cost of the assessment. This analysis instead assumes that an 
institution will maintain its dividend rate (that is, dividends as a 
fraction of net income) unchanged from the weighted average rate 
reported over the four quarters ending September 30, 2008. In the 
event that the ratio of equity to assets falls below 4 percent, 
however, this assumption is modified such that an institution 
retains the amount necessary to achieve a 4 percent minimum and 
distributes any remaining funds according to the dividend payout 
rate.
    The equity capital of insured institutions as of September 30, 
2008 was $1.304 trillion. Based on the assumptions for earnings 
described above, March 31, 2009 equity capital is projected to equal 
$1.302 trillion under the rates adopted in the final rule. In the 
absence of an assessment, total equity would be an estimated $1.6 
billion higher. Alternatively, total equity would be an estimated 
$0.6 billion higher if current rates remained in effect.

[[Page 78162]]

    On an industry weighted average basis, projected total 
assessments through the end of the first quarter of 2009 would 
result in capital that is 0.1 percent less than in the absence of 
assessments and 0.04 percent less than if the current rates remained 
in effect. The analysis indicates that assessments would cause 3 
institutions whose equity-to-assets ratio would have exceeded 4 
percent in the absence of assessments to fall below that percentage 
and 2 institutions to have below 2 percent equity-to-assets that 
otherwise would not have. Alternatively, compared to current 
assessments, the increase in assessments would cause one institution 
whose equity-to-assets ratio would otherwise have exceeded 4 percent 
to fall below that threshold and no institutions to fall below 2 
percent equity-to-assets.
    The effect of assessments on institution income is measured by 
deposit insurance assessments as a percent of income before 
assessments, taxes, and extraordinary items (hereafter referred to 
as ``income''). This income measure is used in order to eliminate 
the potentially transitory effects of extraordinary items and taxes 
on profitability. For profitable institutions, the median projected 
reduction in income relative to the absence of assessments is 8.3 
percent, while the weighted average reduction for the same 
institutions is 5.9 percent. For unprofitable institutions, 
assessments would increase losses by 4.4 percent. When compared to 
current rates (rather than the absence of assessments), the weighted 
average reduction in income for profitable institutions is 3.4 
percent, while the increase in losses for unprofitable institutions 
is 2 percent.

    By order of the Board of Directors.

    Dated at Washington, DC, this 16th day of October 2008.
Federal Deposit Insurance Corporation.

Robert E. Feldman,
Executive Secretary.
[FR Doc. E8-30222 Filed 12-19-08; 8:45 am]
BILLING CODE 6714-01-P