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FIL-40-96 Attachment

[Federal Register: May 24, 1996 (Volume 61, Number 102)]

[Rules and Regulations]

[Page 26078-26082]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]



 

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FEDERAL DEPOSIT INSURANCE CORPORATION


 

12 CFR Part 327


 

Assessments; Continuation of Adjusted Rate Schedule for BIF-

Assessable Deposits


 

AGENCY: Federal Deposit Insurance Corporation (FDIC).


 

ACTION: Continuation of adjusted rate schedule.


 

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SUMMARY: On May 14, 1996, the Board of Directors of the FDIC (Board)

adopted a resolution to continue in effect the current downward

adjustment to the assessment rate schedule applicable to deposits

assessable by the Bank Insurance Fund (BIF). The continuation of the

downward adjustment will apply to the semiannual assessment period

beginning July 1, 1996. As a result, the BIF assessment rates will

continue to range from 0 to 27 basis points. This rate schedule will

result in an estimated average annual assessment rate of approximately

0.29 basis points; the estimated annual revenue produced by this rate

schedule will be $72 million.


 

EFFECTIVE DATE: July 1, 1996, through December 31, 1996.


 

FOR FURTHER INFORMATION CONTACT: Frederick S. Carns, Assistant

Director, Division of Insurance, (202) 898-3930; Christine E. Blair,

Financial Economist, Division of Research and Statistics,


 

[[Page 26079]]


 

(202) 898-3936; James R. McFadyen, Senior Financial Analyst, Division

of Research and Statistics, (202) 898-7027; Christopher L. Hencke,

Counsel, Legal Division, (202) 898-8839; Federal Deposit Insurance

Corporation, 550 17th Street, N.W., Washington, D.C., 20429.


 

SUPPLEMENTARY INFORMATION:


 

I. Continuation of Adjustment to Rate Schedule 2


 

Section 7(b) of the Federal Deposit Insurance Act, 12 U.S.C.

1817(b), provides that the Board shall set semiannual assessments for

insured depository institutions. On August 8, 1995, the Board adopted a

new assessment rate schedule for deposits subject to assessment by the

BIF. 60 FR 42680 (August 16, 1995). The new schedule was codified as

Rate Schedule 2 at 12 CFR 327.9(a). This schedule provided for an

assessment-rate range of 4 to 31 basis points and became effective

retroactively on June 1, 1995, the beginning of the month following the

month in which the BIF reached its designated reserve ratio (DRR) of

1.25 percent of total estimated insured deposits.

In adopting Rate Schedule 2, the Board also amended the FDIC's

assessment regulations to permit the Board to make limited adjustments

to the schedule without notice-and-comment rulemaking. Any such

adjustments can be made as the Board deems necessary to maintain the

BIF reserve ratio at the DRR and can be accomplished by Board

resolution. Under this provision, codified at 12 CFR 327.9(b), any such

adjustment must not exceed an increase or decrease of 5 basis points

and must be uniform across the rate schedule.

The amount of an adjustment adopted by the Board under 12 CFR

327.9(b) is to be determined by the following considerations: (1) the

amount of assessment revenue necessary to maintain the reserve ratio at

the DRR; and (2) the assessment schedule that would generate such

amount of assessment revenue considering the risk profile of BIF

members. In determining the relevant amount of assessment revenue, the

Board is to consider BIF's expected operating expenses, case resolution

expenditures and income, the effect of assessments on BIF members'

earnings and capital, and any other factors the Board may deem

appropriate.

Having considered all of these factors, the Board decided on

November 14, 1995, to adopt an adjustment factor of 4 basis points for

the semiannual assessment period beginning January 1, 1996, with a

resulting adjusted schedule ranging from 0 to 27 basis points. 60 FR

63400 (December 11, 1995). The Board has now decided to adopt the same

adjustments to Rate Schedule 2 for the upcoming semiannual period from

July 1, 1996 to December 31, 1996. The adjusted rate schedule is set

forth below.


 

BIF Rate Schedule as Adjusted for the Second Semiannual Period of 1996

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

Supervisory subgroup

Capital group --------------------------

A B C

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

1............................................ \1\ 0 3 17

2............................................ 3 10 24

3............................................ 10 24 27

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

\1\ Subject to a statutory minimum assessment of $1,000 per semiannual

period (which also applies to all other assessment risk

classifications).


 

The basis for the Board's decision is discussed below.


 

II. Basis for the Adjustment


 

A. Maintaining at the Designated Reserve Ratio


 

In adopting a rate adjustment under 12 CFR 327.9(b), as mentioned

above, the Board must consider the following: (1) the amount of

assessment revenue necessary to maintain the reserve ratio at the DRR;

and (2) the assessment schedule that would generate such amount of

assessment revenue considering the risk profile of BIF members.

The BIF reserve ratio stood at 1.30 percent as of December 31,

1995, the latest date for which complete data are available. Assuming

that insured deposit growth during the first half of 1996 falls within

the range of 2 percent shrinkage to 6 percent growth annually, and

assuming that insurance losses remain moderate as expected, the BIF

ratio will range from 1.29 to 1.34 percent at midyear 1996 (Table 1).

For the second half of 1996, insurance losses and operating

expenses are expected to total under $350 million, while assessments

plus investment income will exceed $650 million.

Insured deposit growth for 1996 is subject to considerable

uncertainty, as recent experience has been mixed. From 1991 through

early 1995, the growth rate of BIF-insured deposits was essentially

zero but, for the year ending in December 1995, BIF-insured deposits

grew by 3 percent, with much of this growth occurring in the fourth

quarter. In light of the 1995 experience, as well as considerable

volatility in deposit growth experienced during the 1980s, the FDIC

must consider the possibility that BIF-insured deposits could grow at a

6 percent annual rate throughout 1996.

Table 1 indicates the year-end 1996 range for the BIF reserve

ratio, assuming a 6 percent upper bound for annual deposit growth in

1996 and assuming that the values of other variables affecting the

reserve ratio in the second semiannual period will fall within their

historical ranges. While the lower bound on the year-end BIF reserve

ratio is below the 1.25 percent target, this presumes an unexpected

increase in insurance losses/provisions of $600 million. Such an

increase is consistent with the historical experience of the FDIC, but

it must be viewed as a remote possibility in light of the current

economic environment and the near-term outlook.

The stronger possibility is that insured-deposit growth rates could

exceed forecasts based upon historical experience. While the 6 percent

upper bound for deposit growth included in Table 1 is high relative to

the experience of the 1990s, the FDIC cannot rule out such a rate of

growth in response to the dramatic reductions in BIF assessment rates

that were effected in the second half of 1995.

Moreover, given the prospect of a continuing, large premium

differential between the insurance funds, there is a realistic

possibility of substantial deposit migration from the SAIF to the BIF.

Though the law imposes constraints on at least some forms of deposit-

shifting from one fund to another, such constraints may be countered by

adaptations in the marketplace. The relatively low rate of migration to

date is not likely to be indicative of the rate to be expected going

forward, given that many market participants may have delayed any plans

to migrate deposits in anticipation of a legislative solution. In the

absence of a legislative solution to date, the FDIC believes that there

is a realistic possibility of a significant increase in deposit

migration. However, the precise timing and ultimate magnitude of any

increase is uncertain.

For illustration, Table 2 examines the impact on the year-end BIF

reserve ratio of alternative deposit migration rates during the second

semiannual period of 1996. Columns 2 through 4 of the table indicate

the impact of deposit migration rates under three different assumptions

concerning ``normal'' growth of BIF-insured deposits (growth that is

not due to migration) for 1996. For example, the ratios in the third

column are derived under the assumption that normal deposit growth is 2

percent for 1996 (full year); assuming also that no deposit migration

occurs during the year, the


 

[[Page 26080]]


 

year-end BIF ratio would be 1.32 percent (the assumed values for all

nondeposit factors affecting the reserve ratio are constant across

columns 2-4). Table 2 indicates that, in general, each 5 percent

increase in the annual rate of migration during the second half of 1996

(to a maximum annual rate of 30 percent) would reduce the year-end 1996

BIF ratio by approximately 1 basis point. If 30 percent annual

migration in the second half of 1996 were to occur along with 6 percent

``normal'' growth of BIF-insured deposits, the BIF ratio at year end

would be 1.23 percent under the assumptions of Table 2.

Given the uncertainties reviewed above, the possibility of a large

increase in BIF-insured deposit growth during 1996 should be considered

seriously. Despite this concern, it is the judgment of the Board that

BIF assessment rates should not be changed at this time; rather,

deposit flows and trends in deposit growth rates should be closely

monitored in preparation for future decisions regarding BIF assessment

rates.

In summary, for the reasons discussed above, the Board believes

that the assessment schedule for the current semiannual period will

generate the revenue necessary to maintain the reserve ratio at the DRR

in the next semiannual period.


 

B. The Long-Term Outlook


 

The Board believes that an important consideration in setting rates

is the long-term revenue needs of the BIF. A balance should exist

between long-term BIF revenues and long-term BIF expenses (where

expenses include monies needed to prevent dilution due to deposit

growth). In August of 1995, the FDIC determined that an effective

average BIF assessment rate of 4 to 5 basis points would be appropriate

to achieve such balance. This determination was based on a thorough

historical analysis of FDIC experience and consideration of recently

enacted statutory provisions that may moderate deposit insurance losses

going forward. 60 FR 42680 (August 16, 1995).

The Board has not altered its view that, in setting rates, it

should look beyond the immediate time frame in estimating the revenue

needs of the BIF. Moreover, the Board continues to believe that an

average annual assessment rate of 4 to 5 basis points would be

appropriate to achieve a long-term balance between BIF revenues and

expenses. As discussed in the preceding section, however, the current

balance in the BIF also is directly relevant to determining the

appropriate assessment level. In light of the favorable existing

conditions and outlook for the next several months, it is anticipated

that the current rate structure (with an assessment rate of zero for

the least-risky institutions) will provide adequate assessment revenue

over the near term to maintain the BIF reserve ratio at or above the

target ratio of 1.25 percent.


 

C. Other Considerations


 

In continuing the current adjustments to the assessment rate

schedule, the Board has considered the effect on members' earnings and

capital. In light of the fact that these adjustments represent a

reduction in the rates set forth in Rate Schedule 2, the Board does not

believe that the schedule will produce unwarranted adverse effects on

members. Indeed, the rate for many institutions will be zero (with a

minimum semiannual assessment of $1,000 mandated by the Federal Deposit

Insurance Act).

Another consideration is the statutory requirement under the

Federal Deposit Insurance Act for a risk-based assessment system. To be

effective, this system must incorporate a range of rates that provides

an incentive for institutions to control risk-taking behavior while at

the same time covering the long-term costs of the obligations borne by

the deposit insurer. In the judgment of the Board, these goals will be

achieved for the upcoming semiannual period by retaining the current

spread of 27 basis points between the highest- and lowest-rated

institutions.

For the reasons discussed above, the Board has decided to continue

in effect the current adjustment to the BIF assessment rate schedule

with a range of 0 to 27 basis points for the semiannual period from

July 1, 1996 through December 31, 1996.


 

By order of the Board of Directors.


 

Dated at Washington, DC, this 14th day of May, 1996.


 

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Deputy Executive Secretary.


 

BILLING CODE 6714-01-P


 

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[GRAPHIC] [TIFF OMITTED] TR24MY96.107




 

[[Page 26082]]


 

[GRAPHIC] [TIFF OMITTED] TR24MY96.108



 

[FR Doc. 96-12885 Filed 5-23-96; 8:45 am]

BILLING CODE 6714-01-C

Last Updated: March 24, 2024