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Deposit Insurance Assessment Appeals: Guidelines & Decisions
AAC-99-05 (February 29,
Decision In a letter dated May 26, 1999, the Director of the FDIC’s Division of
Finance (“DOF”) denied the Bank’s request to adjust its AADAs. The Director
concluded that the request would be contrary to the statute as interpreted
by the Board of Directors of the FDIC (“Board”) in the 1996 AADA regulation
and that the public had received adequate notice of the revision in the
method for computing AADAs. X is appealing that decision.2
In a letter dated May 26, 1999, the Director of the FDIC’s Division of Finance (“DOF”) denied the Bank’s request to adjust its AADAs. The Director concluded that the request would be contrary to the statute as interpreted by the Board of Directors of the FDIC (“Board”) in the 1996 AADA regulation and that the public had received adequate notice of the revision in the method for computing AADAs. X is appealing that decision.2
Under the Oakar Amendment, a BIF-insured institution that acquires deposits from a SAIF-insured institution is treated as a hybrid institution required to pay deposit insurance assessments to both its primary and secondary insurance funds.3 The “primary fund” is the deposit insurance fund of which the institution is a member.4 The “secondary fund” is the insurance fund that is not the member’s primary fund.5 For example, a “BIF Oakar” is a member of the BIF, but a portion of its assessment base is allocated to the SAIF. The portion so allocated is equal to the institution’s AADA, which is computed and adjusted over time pursuant to the statutory formula contained in the Oakar Amendment. The assessments on that portion are assessed at the SAIF rate and are paid into the SAIF; the assessments on the remainder of the assessment base are assessed at the BIF rate and are paid into the BIF.6 Also, FDIC losses resulting from the failure of an Oakar institution are shared, pro rata, by BIF and SAIF.7 The AADA is the means by which an Oakar institution’s deposits are allocated for assessment and fund loss-allocation purposes.
When the Oakar Amendment was enacted in 1989,8 the FDIC developed a program to administer its provisions and developed a procedure to calculate AADAs. In an interpretative rulemaking proceeding in 19969 (“AADA Regulation”), the FDIC overhauled its procedures for attributing deposits to the two insurance funds and for computing the growth of the amounts so attributed, with the goal of correcting weaknesses and deficiencies. The changes were expressly intended to apply prospectively.10
B. The AADA Statute and Implementation Thereof.
(C) Determination of adjusted attributable deposit amount.
Clause (i) of paragraph (C) says that the first component of an Oakar institution’s AADA for any semiannual period is the amount of secondary-fund deposits that the institution has acquired at the time of the transaction. Clause (iii) says that another component of the AADA is a growth increment, the amount of which is computed by measuring the institution’s overall growth during the “preceding semiannual period.” But Clause (iii) also specifies that no growth increment is to be included as part of the AADA when the increment is computed with respect to a semiannual period “beginning before the date of” the transaction.
Here the semiannual period in question – the one for which the assessment is due – is July/December, 1997. The “preceding semiannual period” – the one with respect to which a growth increment would be computed – is the January/June 1997, period. The start of this period predates the transactions of June 26, 1997. Accordingly, Clause (iii) on its face indicates no growth increment is to be computed with respect to this period. The July/December AADAs should therefore have the same value as the initial AADAs.
Despite the plain language of Clause (iii), the Bank contends that its July/December AADAs should include an increment of growth, and that the increment should reflect the Bank’s overall growth during the January/June 1997, period. The Bank does not rely on the express language of Clause (iii), but rather on language found in a note in the guidelines (“Guidelines”) that accompanied a FDIC-supplied AADA Growth Worksheet form (“Worksheet”).12 The FDIC provided these materials to BIF-member Oakar banks in years prior to 1997 when a growth computation should have been made. In those years Oakar banks were required to compute their own AADAs and report them in their quarterly reports of condition and income. The FDIC provided the material in order to help Oakar banks make the necessary calculations.
2. The AADA Growth Calculation.
The type of seller affected the period in which the AADA could be adjusted. If the seller was a SAIF member, then the period in which the AADA could not be adjusted was the period of the Oakar transaction. If the seller was an existing Oakar institution, then the AADA from that Oakar transaction represented the re-transfer of SAIF-insured deposits from one BIF-member bank to another. The buyer was viewed as “standing in the shoes” of the Oakar seller, and the buyer’s AADA was a mere “continuation” of the seller’s pre-existing AADA. The prohibition against growing the AADA in the period of acquisition applied to the original Oakar transaction, and not to the period in which the AADA was re-transferred.
The pre-1997 Worksheet was designed for Oakar banks eligible to make an adjustment to their AADAs. The Worksheet and the Guidelines applied the “no growth in the period of acquisition” concept to the original Oakar transaction and allowed for “continuation” AADA that was eligible for growth in its own right. The Worksheet included the eligible AADA that was acquired from an existing Oakar institution with any previous AADA of the acquiring bank in the total AADA that was subject to the growth adjustment. This treatment reflected the concept that the buyer “stood in the shoes” of the Oakar seller. Thus, the “continuation” AADA was augmented by a growth increment in the period it was re-transferred, just as the seller’s pre-existing AADA would have been so augmented.
C. The AADA Regulation
As noted above, in the 1996 AADA Regulation the FDIC overhauled the AADA procedures, prospectively, to correct weaknesses and deficiencies in FDIC’s procedures for attributing deposits to the two insurance funds and for computing the growth of the amounts so attributed. The FDIC rulemaking expressly addressed, in numerous places in both the proposed and final rules, how the FDIC intended to treat all AADAs in the future. The regulation noted that the statute did not address the treatment of AADA acquired from an existing Oakar institution. The rulemaking presented FDIC’s policy on the AADA allocation and growth treatment, including the concept of negative AADA growth and the limits the FDIC would place on that concept. The rulemaking specifically invited comments on determining the initial AADAs in all cases and on all other points raised or options described in the proposed rule.
In the preamble and continuing through each aspect of the AADA Regulation, the FDIC emphasized the treatment to be afforded all AADAs prospectively. The treatment included:
For example, the Board stated:
The Board did not suggest in any way that these rules might only apply to some Oakar transactions and not to others. In particular, the Board did not suggest or imply that there might be an exception to this rule for the case of “continuation” transfers.
The AADA Regulation also made several other important changes in the computation of AADAs. The Board eliminated the “annual cycle” method of computing AADA growth, declaring that growth was to be measured on a quarterly basis.16 The Board eliminated the AADA Growth Worksheet (and Guidelines) in which the “continuation” AADA concept was embodied. The Board also transferred the burden of computing AADAs under the policies prescribed by the revised AADA Regulation from the Oakar institutions to the FDIC.
The revised AADA Regulation prescribed that the FDIC would compute the AADAs in the future based on Oakar institutions supplying three data elements on the quarterly report of condition. Those elements were:
There was no requirement to segregate the deposits acquired between those acquired from a member of the “other” deposit insurance fund (a normal Oakar transaction) and those acquired from an existing Oakar bank (“continuation” AADA). Without the separation of the deposit acquired between the two different sources, it is impossible to apply the “continuation” methodology. The proposed rulemaking specifically requested comments on FDIC computing AADAs based on the information provided.17 Under the proposed rulemaking, all AADAs from every Oakar transaction had to be treated in the same manner.
In light of these changes, the staff did not publish revisions to the AADA Growth Worksheet or to the Guidelines. The Board eliminated them. The basis for the “continuation” treatment of AADAs generated in the acquisition of existing Oakar banks was not compatible with the board’s interpretation of the AADA statute in the AADA Regulation. The “continuation” methodology for computing AADAs was changed to treat all AADAs the same as provided by the revised AADA Regulation.
The invoices emanating from the revised AADA Regulation reflected each institution’s AADA and how it was computed, and the amount of the resulting assessment. The invoices showed that AADAs were calculated in accordance with the Board’s statements in the AADA Regulation, and not in accordance with the “continuation” treatment. The invoices did not expressly call attention to the fact that any methodology had been changed.
The 1996 rulemaking also codified the concept of negative AADA. The Board adopted that concept for sound and appropriate reasons. But the Board also stated that it did not consider itself to be bound to apply the negative AADA growth concept “beyond reasonable limits” particularly in the case of bulk transfers of deposits.18
D. The X Transactions
The Bank is a member of the BIF. In June 1997, the Bank acquired four affiliated institutions (“Sellers”). Each of the Sellers held deposits insured by the SAIF. Only one of the Sellers was a SAIF member, however. The other three Sellers were already Oakar banks in their own right (i.e., they belonged to the BIF but held SAIF-insured deposits). The Bank’s appeal deals only with the three transactions involving the Oakar banks. The Bank acquired the Sellers under the authority of the Oakar Amendment. Accordingly, each acquisition was an Oakar transaction, and generated an AADA for the Bank.19 The four AADAs that were generated in the June 1997 transactions were used to determine the Bank’s assessments for the next semiannual period (July/December, 1997) and following periods.
In each of these periods, the Bank was subject to assessment by two entities: The FDIC and FICO. The Bank’s request for refund of assessments is for the assessments paid to the FICO. In each semiannual period, there are two FICO rates: one to be applied against an institution’s BIF-assessable deposits, and the other (five times higher through December 1999) to be applied against the institution’s SAIF-assessable deposits. The Bank paid approximately $5.7 million to FICO over the course of the three semiannual periods at issue. The Bank claims that its FICO assessments were too high because the FDIC overstated the amount of the Bank’s SAIF-insured deposits. Should the Bank prevail, then any future assessment by either the BIF or the SAIF would be impacted by the revised assessment base.
The Bank’s appeal focuses on the three AADAs that were generated in the transactions involving the Oakar-bank Sellers. The initial value of each AADA – that is, its value on the date it was generated, namely, June 26, 1997 – was equal to the volume of SAIF-insured deposits that the bank acquired from the relevant Seller on that date.
The Bank’s SAIF assessment for the following semiannual period (July/December, 1997) was based on the AADAs generated in these transactions. The substantive question in this appeal is whether the AADAs used to compute that assessment (“July/December AADAs”) should be equal in value to the initial AADAs, or whether they should include a growth increment: that is, an extra component that would reflect the growth (or shrinkage) of the Bank’s overall deposit-base during the semiannual period in which the acquisition transaction took place (January/June, 1997).20
The FDIC did not include a growth increment in the July/December AADAs. The Bank contends that the FDIC should have done so. By including the acquisitions of the affiliated Oakar institutions in the growth computation, the adjustment component would have been a negative 121 percent. If the component were applied to the Bank’s July/December AADAs, the result would have eliminated the AADAs altogether and the Bank would have paid approximately $2 million less in assessments to FICO.
The Bank believes that the negative 121 percent deposit growth it experienced during the period it acquired the four affiliated banks eliminated the AADA resulting from the three merged Oakar banks. It contends that the pre-1997 Worksheet and Guidelines constituted a formal and well-established interpretation of Clause (iii) of the Oakar Amendment on the part of the FDIC and, therefore, amounted to a “rule” within the meaning of the Administrative Procedure Act (“APA”). It also asserts that the interpretation is a “legislative” rule that cannot be changed without notice-and-comment rulemaking. The Bank makes two main claims to support its arguments: that the FDIC did not expressly discuss the “continuation” principle in the AADA Regulation and therefore did not repudiate it; and that, even if the FDIC meant to repudiate the “continuation” principle, the repudiation was unsuccessful because the FDIC did not provide notice and opportunity for public comment on this point in the AADA Regulation.
1. Growth in the Period of Acquisition.
Upon review, the Committee concludes that the Bank is seeking to grow the AADA in the period it merged four affiliated banks. Such treatment is inconsistent with the Board’s interpretation of the AADA statute and, thus, the 1996 AADA Regulation.
The Committee also concludes that the concept of a “continuation” AADA is not compatible with paragraph (C)(iii) of the Oakar Amendment as interpreted by the Board’s 1996 revision to the AADA Regulations. The Committee finds that the Board formally articulated the treatment that would be afforded to AADAs and specified that no growth increment was to be computed for an AADA with respect to the assessment period in which the AADA was generated. The Board did not suggest or imply that “continuation” AADAs might be an exception to this rule. The 1996 rulemaking prescribed the treatment to be afforded institutions prospectively. The Committee believes that there was ample notice of an opportunity to comment on the treatment intended by the Board for the allocation of deposits insured by the secondary deposit insurance fund and for the computation of growth of AADAs. Accordingly, the “continuation” concept cannot be used to determine the value of the AADAs generated in the X transactions after the effective date of the 1996 AADA rulemaking.
2. The 1996 Rulemaking.
The Bank contends that the FDIC’s pre-1997 practice of allowing “continuation” AADAs amounted to a “rule” within the meaning of the APA, and could not be changed without notice-and-comment rulemaking because it amounted to a “legislative” rule. The Bank points to the written material provided by the FDIC – the note contained in the Guidelines – to support the proposition that the “continuation” concept qualified as a “rule.” The note in the Guidelines directed the inclusion of the AADA acquired from an existing Oakar bank during the current period to be part of the AADA (if that AADA itself was eligible for growth) to be adjusted for growth.
The interpretative 1996 rulemaking was intended to correct prospectively weaknesses revealed in the FDIC’s procedures for allocating deposits between the two deposit insurance funds and for computing the growth of the amounts so attributed.
The Committee concludes that a note contained in a guide to aid in the completion of a form intended to assist institutions in calculating their AADA was merely a note and not the equivalent of an FDIC rule. The AADA Growth Worksheet and the Guidelines were ministerial in nature and did not themselves purport to state or interpret agency policy. The Worksheet and Guidelines neither identified the “continuation” concept nor explained the rationale for it. They served no more purpose than to provide assistance to institutions in computing their AADAs.
The Bank contends that the FDIC did not expressly discuss the “continuation” principle in the AADA Regulation and, therefore, did not repudiate it; and that, even if the FDIC meant to repudiate the “continuation” principle, the repudiation was unsuccessful because the FDIC did not provide notice and opportunity for public comment on this point in the AADA Regulation.
The Committee finds that the Board did not expressly discuss “continuation” AADAs in the 1996 AADA Rulemaking. However, the Committee also finds that the Board stated throughout the text of the proposed and final rulemaking notices the intended treatment to be afforded AADAs in the future. Repeatedly, the Board provided in the rulemaking that new AADAs were not subject to growth or shrinkage in the period in which they were acquired. At no time did the Board state or imply that this principle was less than uniform. In particular, the Board did not state or imply that some new AADAs might be exempted from this principle, or that the fund-membership of the seller might make a difference in how a new AADA was treated.
In keeping with their limited purposes, the materials were neither detailed nor exhaustive. For example, the Worksheet and Guidelines did not address the case in which a buyer acquired only part of a seller’s secondary-fund deposits.21 Buyers were left to themselves to make any adjustments needed to apply the AADA Growth Worksheet to special situations.22 The staff provided oral advice where necessary. In short, the AADA Growth Worksheet and the Guidelines had no higher standing than informal advice.
In the preamble to the proposed version of the AADA Regulation, the Board noted that several AADAs could be treated as a single, composite AADA:
In proposing to assume the administrative chore of computing AADAs, the Board said:
When discussing the Board’s then-prevailing view that an AADA had a constant value throughout a semiannual period, and proposing to replace it with the notion that an AADA had two quarterly components, the Board carefully noted that newly generated AADAs would not be subject to growth:
In discussing the principles for determining the initial value of a newly generated AADA, the Board declared:
As part of this discussion, the Board noted that the Oakar Amendment did not contemplate a transaction in which the seller was an Oakar institution in its own right. The Board specified that “[t]he proposed rule would make it clear that the nominal-amount rule applies to all Oakar transactions.”27 The Board specifically asked for public comment on this point.28
The preamble to the final version of the AADA Regulation repeated much of the language of the preamble of the proposed rule. But the Board made certain changes to the preamble that have the effect of highlighting the point at issue here. The changes made it clear that the Board explicitly embraced the principle that each new AADA remained constant from the date the AADA was generated through the end of the semiannual period. For example, when introducing the concept of the AADA, the Board said:
The preamble to the final rule, like the preamble to the proposed rule, remarked that an Oakar institution could have several AADAs treated on a composite basis and, in particular, repeated the following sentence:
When discussing the quarterly-growth concept for AADAs (as opposed to holding the value of an AADA constant throughout the semiannual period), the FDIC observed:
Finally, in adopting the interpretive rule regarding the value of an initial AADA, the Board declared:
The discussion of the initial value of the AADA in the final rule repeats the wording in the proposed rule and concludes that the nominal-amount principle applies to all deposit-transfer transactions in which the buyer acquires secondary-fund deposits.33
The AADA Regulation also indicated in another way that newly generated AADAs were not subject to growth. The AADA Regulation provided that the FDIC would absorb the obligation and expense of computing AADAs in the future. The FDIC said that, in order for it to be able to carry out this task, an Oakar institution’s quarterly call report would have to contain the following three pieces of information: total deposits acquired during the quarter; secondary-fund deposits acquired in the quarter; and total deposits sold in the quarter.34
The FDIC did not ask for, and acquiring Oakar institutions were not required to provide, any information about the source of acquired secondary-fund deposits. Accordingly, the FDIC intended – and manifestly could not do otherwise – to treat the deposits acquired from a member of the opposite fund and deposits acquired from a member of the same fund in the same manner. The AADA Regulation’s procedures made it impossible for the FDIC to make a separate identification of the AADAs that would previously have been given “continuation” treatment.
Finally, after the Board adopted the AADA Regulation, the FDIC sent out assessment invoices to all insured institutions. Each invoice showed the amount that the institution was obliged to pay to the FDIC. In the case of an Oakar institution, the invoice was accompanied by a worksheet showing how the AADA was determined. These invoices made it clear that new AADAs were not subject to growth. The worksheets did not make any special provision for AADAs generated in “continuation” transfers.
Given these facts, the Committee rejects the Bank’s basic claim that the FDIC failed to give the public adequate notice that AADAs generated in Oakar-seller transactions would be computed in accordance with the general rules for computing AADAs, and would no longer be computed in accordance with the “continuation” procedures. The Board gave ample notice of this proposition and the policies and treatment regarding assessment of Oakar institutions in the adoption of the Assessment Regulation.
3. Other Findings.
The Board recognized negative growth of an AADA as a general proposition in the 1996 AADA Rulemaking. However, the Board stated that the FDIC would not extend the negative growth concept beyond reasonable limits and, in particular, the Board did not believe that it must extend the negative growth concept to include a decrease that was attributable to a bulk transfer of deposits.
Under the Bank’s interpretation of negative AADA growth, a negative 121% AADA adjustment would be applied to the AADA from the three merged affiliated banks. This would eliminate that AADA three days after the merger was accomplished. Thus, the Bank would cease to be an Oakar institution with regard to the merged BIF Oakar banks in the period of acquisition.
The Committee believes that this would be an unreasonable application of the negative growth concept and rejects the Bank’s interpretation of negative growth.
The Committee also notes that the treatment sought by the Bank does not comply with the FDI Act. The bank seeks to effect a transfer of deposit insurance responsibility from the Savings Associations Insurance Fund to the Bank Insurance Fund. The statute pertaining to the determination of the AADA provides that it cannot be construed as authorizing transactions that result in the transfer of deposit insurance from one fund to the other.
* * *
For the reasons discussed herein, under authority delegated by the Board
of Directors of the Federal Deposit Insurance Corporation, the Committee
denies X’s appeal.
2 The Board has delegated to the Assessment Appeals Committee the authority to consider and decide insurance assessment appeals.
3 12 U.S.C. § 1815(d)(3).
4 12 C.F.R. § 327.8(j).
5 Id. At 327.8(k).
6 12 U.S.C. § 1821(a)(5)-(6)
8 The Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. 101-73, 103 Stat.183 (1989).
9The proposed rule was published at 61 Fed. Reg. 34751 (July 3, 1996). The final rule was published at 61 Fed. Reg. 64960 (Dec. 10, 1996).
10 61 Fed. Reg. 64960 at 64980.
11 12 U.S.C. § 1815(d)(3)(C) (emphasis added); see also 12 C.F.R. § 327.32(a)(3).
12 The materials in question pertain to Oakar transactions in which the acquiring or resulting institution is a member of the BIF. The AADA Growth Worksheet is entitled BIF Oakar Transaction Worksheet for Computing Annual Deposit Growth Rate for Adjusted Attributable Deposit Amounts (AADA); the Guidelines are entitled Guidelines for Preparing the FDIC BIF Oakar Transaction Worksheet for Computing Annual Deposit Growth Rate for Adjusted Attributable Deposit Amounts. The FDIC had an equivalent worksheet and guidelines for SAIF Oakar transactions.
13 61 Fed. Reg. 64960 at 64961.
14 Id. at 64980.
15 Id. at 64978.
16 Id. at 64967-64977.
17 61 Fed. Reg. 34751 at 34764.
18 61 Fed. Reg. 64960 at 64978.
19 In earlier correspondence with the FDIC, the Bank asserted that the acquisitions of the Oakar banks were not Oakar transactions, and did not generate AADAs, on the grounds that the Bank and the acquired institutions belonged to the same fund (the BIF). That issue has now been resolved. The Court of Appeals for the Fourth Circuit has ruled that the Oakar Amendment can apply to a transaction in which a BIF-member bank acquires the deposits of a BIF-member Oakar institution. Branch Banking & Trust Co. v. FDIC, 172 F.3d 317 (4th. Cir. 1999).
20 Because the three AADAs were all generated at the same time, they grow (or shrink) at the same rate. They may therefore be treated as a single composite AADA for purposes of this appeal. 61 Fed. Reg. 64960 at 64961, n.1.
21 The flaw is most apparent in the context of second-half “continuation” transfers. The Instructions call for the buyer to report the full amount of the seller’s June 30 AADA as its own in its Line 7 amount, even through the buyer did not acquire the full amount of the seller’s SAIF-insured deposits.
22 In addition, as described above, neither the AADA Growth Worksheet nor the Instructions directed buyers to omit from Line 9 any amounts recorded on Line 7.
23 61 Fed. Reg. 34751, n. 1 (emphasis added).
24 Id. at 34752 (emphasis added).
25 Id. at 34755 (emphasis added).
26 Id. at 34761 (emphasis added).
28 Id. at 34764.
29 61 Fed. Reg. 64960 at 64961 (emphasis added).
30 Id., n.1 (emphasis added).
31 Id.. at 64967 (emphasis added).
32 Id. at 64978 (emphasis added).
33 Id. at 64979.
34 Id. 64964.
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