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1996 Annual Report


Condition of the FDIC's Funds

The FDIC administers two deposit insurance funds—the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). The FDIC also manages a third fund, the FSLIC Resolution Fund (FRF), which fulfills the obligations of the former Federal Savings and Loan Insurance Corporation (FSLIC). The FRF assumed responsibility for the Resolution Trust Corporation’s (RTC) assets and obligations on January 1, 1996. For more information about the three funds, click here.

The major development of the year was the passage of legislation to put the SAIF on sound footing, as described below.

Deposit Insurance Funds Act of 1996

With the recapitalization of the BIF in May 1995, the FDIC Board of Directors lowered the assessment rates for BIF-assessable deposits, creating a significant disparity in the assessment rates paid to the BIF and the SAIF. This disparity created incentives for institutions to move deposits from the SAIF to the BIF, which in turn raised the question of whether a shrinking SAIF-assessable deposit base could continue paying the interest on Financing Corporation (FICO) debt and also capitalize the SAIF.

Fund Balance

To address the financial problems of the SAIF, Congress passed the Deposit Insurance Funds Act of 1996 (DIFA), which became law on September 30, 1996. The DIFA required the FDIC to impose a one-time special assessment to capitalize the SAIF on October 1, 1996, at the statutorily required Designated Reserve Ratio (DRR) of 1.25 percent of insured deposits. The FDIC Board set the special assessment at 65.7 cents per $100 of SAIF-assessable deposits. With the SAIF fully capitalized, the Board approved a reduction in SAIF assessment rates effective October 1,1996.

The DIFA also eliminated the $1,000 minimum semiannual assessment and separated the FICO assessment from the SAIF assessment. The amount that the FICO assesses on the deposits of individual institutions is now added to the amount institutions pay for deposit insurance according to the FDIC’s risk-related assessment rate schedules. At the same time, the new law expanded the FICO assessment base to include all FDIC-insured institutions, beginning January 1,1997. The DIFA specified that the FICO rate for BIF-assessable deposits be one-fifth the rate for SAIF-assessable deposits until the insurance funds are merged, or the end of 1999, whichever occurs first. The FICO assessment will then be shared pro rata by all insured institutions. The FICO assessment rates for the first semiannual period of 1997 were approved by the FDIC Board on December 11, 1996, at an annual rate of 1.30 cents per $100 of BIF-assessable deposits and 6.48 cents per $100 of SAIF-assessable deposits. For more information about the new law, click here.

Bank Insurance Fund

With banks experiencing another record-breaking year of profitability and only a handful of bank failures, 1996 was another positive year for the BIF. These favorable conditions enabled the FDIC Board to set the lowest average assessment rate in the history of FDIC insurance, with the average 1996 annual BIF assessment rate being 0.2 cents per $100 of assessable deposits, down from 12 cents per $100 in 1995. In recent years, the BIF has climbed steadily from a negative balance of $7 billion in 1991 to $26.9 billion in 1996, its third consecutive record year-end high. The 1996 year-end balance represents a 5.5 percent increase over the 1995 balance of $25.5 billion. The reserve ratio increased from 1.30 to 1.34 percent of insured deposits during 1996.

BIF-insured deposits grew by 2.8 percent in 1996. In the first half of the year, deposits increased by less than 1 percent (annualized), but jumped by 5.1 percent (annualized) during the second half. About half of the growth in the second half of the year was due to a provision of the DIFA concerning certain “Oakar” institutions (institutions that are members of one insurance fund, but hold deposits insured by the other fund). The new law caused some SAIF-assessable deposits held by these institutions to become BIF-assessable deposits. The strong deposit growth in the second half of 1996 slowed the increase in the reserve ratio for the year.

For the first semiannual assessment period of 1996, the Board lowered the rates from a range of four to 31 cents annually per $100 of assessable deposits, to a range of 0 to 27 cents per $100. With this drop in the rate schedule, the highest-rated institutions (93.4 percent of BIF-insured institutions) paid only the $1,000 minimum assessment for the first semiannual assessment period of 1996. Depending on their risk classification, other institutions paid between three and 27 cents per $100 of assessable deposits. The Board approved the same rate schedule for the second semiannual period of 1996, when 94.4 percent of BIF-insured institutions were in the lowest-risk category. The FDIC collected the fourth-quarter assessment before the DIFA eliminated the minimum assessment. As a result, the FDIC refunded $4.4 million of revenue collected, plus interest.

For the first time since 1986, interest on U.S. Treasury obligations ($1.3 billion) surpassed assessment revenue ($73 million) as the primary source of revenue fueling the BIF’s growth. This was a direct result of the lowered assessment rate schedule and the concentration of institutions in the lowest-risk category. Interest income was 77 percent of total BIF revenue, while assessment revenue was only four percent.

Bank failures continued to be minimal, with only five BIF-insured failures in 1996 and failed-bank assets totaling $183 million. One failure was an Oakar institution, which had a portion of its deposits insured by the SAIF. In 1995, six BIF-insured banks with $753 million in assets failed. Estimated insurance losses in 1996 were $43 million, the lowest since 1980 when 11 banks failed with insurance losses totaling $31 million. Estimated losses from 1995 BIF failures were $104 million.

Investments in U.S. Treasury obligations continued to be the main components of the BIF’s total assets, at 81 percent, rising slightly from 79 percent during the previous year. The BIF’s financial position continued to improve as cash and investments at year-end were 53 times the BIF’s total liabilities, up from 30 times the BIF’s total liabilities in 1995.

Savings Association Insurance Fund

With the special assessment adding $4.5 billion to the SAIF on October 1, the fund ended the year with a balance of $8.9 billion, a 165 percent rise over the $3.4 billion balance at year-end 1995. The SAIF’s reserve ratio grew from .47 percent to 1.30 percent of insured deposits during 1996. Insured deposits shrank by 4.0 percent during 1996; without the Oakar provision in the DIFA noted previously, insured deposits would only have shrunk by 0.7 percent.

Insurance Fund Reserve Ratios

With the SAIF fully capitalized, the Board voted on December 11 to lower the fund’s annual assessment rates from a range of 23 to 31 cents per $100 of assessable deposits, to a range of 0 to 27 cents per $100. Based on year-end 1996 deposit data, this insurance premium reduction is expected to save the industry more than $1.6 billion a year. Because the SAIF became fully capitalized on October 1, 1996, the FDIC refunded the fourth quarter payments that had been made under the old rate schedule, less the amounts payable to FICO and needed to maintain the risk-based assessment system. To that end, the Board established a dual set of rates for the final quarter of 1996. The Board set an interim rate schedule of 18 to 27 cents per $100 of assessable deposits for SAIF-member savings associations in the fourth quarter. The SAIF-assessable deposits of “Sasser” institutions (savings associations that converted to a bank charter, but remained members of the SAIF) and BIF-member Oakar institutions were not subject to the FICO assessment during 1996. Accordingly, the Board applied the new 1997 rates to these institutions from October 1,1996, forward. These rates ranged from 0 to 27 cents per $100 of assessable deposits.

Apart from the special assessment, the SAIF realized $727 million in net assessment income in 1996. Interest income for 1996 was only $254 million (five percent of total revenue), but is likely to rise significantly as the SAIF earns interest on its newly capitalized fund balance. As in 1995, failures continued to be a minimal expense in 1996. Only one SAIF-insured institution failed, with an estimated loss to the SAIF of $14 million.

FSLIC Resolution Fund

The FRF was established by law in 1989 to assume the remaining assets and obligations of the former FSLIC arising from thrift failures before January 1, 1989. Congress placed this new fund under the management of the FDIC when it abolished the FSLIC on August 9, 1989.

Congress authorized $827 million in appropriations to the FRF in fiscal year 1995, of which $636 million was still available at calendar year-end 1996. The FRF only uses appropriated funds when other sources of funds are insufficient. During 1996, funds generated from asset collections and interest income provided sufficient funding so that appropriated funds were not needed.

The FRF assumed responsibility for all RTC assets and obligations on January 1, 1996. As the FRF’s manager, the FDIC will sell the remaining assets and settle the obligations of the RTC as it has done for the FSLIC. RTC assets in liquidation totaled $4.4 billion at year-end 1996, down from $7.7 billion at year-end 1995. The FRF also manages the reserves set aside to support the sale of securities collateralized by RTC assets. These “credit enhancement reserves” dropped from $6.8 billion in 1995 to $5.8 billion. Borrowings from the Federal Financing Bank declined from $10.5 billion to $4.6 billion as of year-end 1996.


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