Assessments, 69270-69282 [06-9267]

Agencies

• FEDERAL DEPOSIT INSURANCE CORPORATION

[Federal Register Volume 71, Number 230 (Thursday, November 30, 2006)]
[Rules and Regulations]
[Pages 69270-69282]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-9267]



[[Page 69269]]

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Part III





Federal Deposit Insurance Corporation





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12 CFR Part 327



Deposit Insurance Assessments; Final Rules

Federal Register / Vol. 71, No. 230 / Thursday, November 30, 2006 / 
Rules and Regulations

[[Page 69270]]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

RIN-3064-AD03


Assessments

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

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SUMMARY: The FDIC is improving and modernizing its operational systems 
for deposit insurance assessments in 12 CFR Part 327 to make the 
deposit insurance assessment system react more quickly and more 
accurately to changes in institutions' risk profiles and to ameliorate 
several causes for complaint by insured depository institutions. Under 
the amendments set out in this final rule, deposit insurance 
assessments will be collected after each quarter ends--which will allow 
for consideration of more current information than under the prior 
rule. Ratings changes will become effective when the rating change is 
transmitted to the institution. Although the FDIC will retain the 
existing assessment base as applied in practice with only minor 
modifications, the computation of institutions' assessment bases will 
change in the following significant ways: institutions with $1 billion 
or more in assets will determine their assessment bases using average 
daily deposit balances; existing smaller institutions will have the 
option of using average daily deposits to determine their assessment 
bases; and the float deductions used to determine the assessment base 
will be eliminated. In addition, the rules governing assessments of 
institutions that go out of business will be simpler; newly insured 
institutions will be assessed for the assessment period in which they 
become insured; prepayment and double payment options will be 
eliminated; institutions will have 90 days from each quarterly 
certified statement invoice to file requests for review of their risk 
assignment and requests for revision of the computation of their 
quarterly assessment payment; and the rules governing quarterly 
certified statement invoices will be adjusted for a quarterly 
assessment system and for a three-year retention period rather than the 
former five-year period.

DATES: This final rule will become effective on January 1, 2007.

FOR FURTHER INFORMATION CONTACT: Munsell W. St. Clair, Senior Policy 
Analyst, Division of Insurance and Research, (202) 898-8967; Donna M. 
Saulnier, Senior Assessment Policy Specialist, Division of Finance, 
(703) 562-6167; or Christopher Bellotto, Counsel, Legal Division, (202) 
898-3801.

SUPPLEMENTARY INFORMATION:

I. Background

    On May 18, 2006, the FDIC published in the Federal Register, for a 
60-day comment period, a notice of proposed rulemaking and request for 
comment on proposed amendments to 12 CFR 327 (71 FR 28790). The comment 
period was extended for 30 additional days (71 FR 36718) and expired on 
August 16, 2006. The FDIC received six comment letters--five from trade 
organizations and one from a depository institution.\1\ Four of the 
commenters generally supported all of the FDIC's proposals; of those 
four, three suggested modifications to the provisions governing the use 
of average daily balances in determining assessment bases. Two 
commenters opposed elimination of the float deductions; three others 
opposed eliminating the deductions, but only where deposit bases are 
calculated using quarter-end balances. The following is a discussion of 
the amendments to Sec. Sec.  327.1 through 327.8 and the comments 
received.
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    \1\ The trade organizations were: the American Bankers 
Association, the Independent Community Bankers of America, the 
Association for Financial Professionals, the New York Bankers 
Association, and America's Community Bankers; the depository 
institution was Capital One Financial Corp.
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    Prior to passage of the Federal Deposit Insurance Reform Act of 
2005 and the Federal Deposit Insurance Reform Conforming Amendments Act 
of 2005 (collectively, the Reform Act),\2\ the FDIC was statutorily 
required to set assessments semiannually. The FDIC did so by setting 
assessment rates and assigning institutions to risk classes prior to 
each semiannual assessment period. The semiannual assessment was 
collected in two installments, one near the start of the semiannual 
period and the other three months into the period, so that, in 
practice, assessment collection was accomplished prospectively every 
quarter.
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    \2\ Federal Deposit Insurance Reform Act of 2005, Public Law 
109-171, 120 Stat. 9; Federal Deposit Insurance Conforming 
Amendments Act of 2005, Public Law 109-173, 119 Stat. 3601.
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    Provisions in the Reform Act removed longstanding constraints on 
the deposit insurance assessment system and granted the FDIC discretion 
to revamp and improve the manner in which assessments are determined 
and collected from insured depository institutions. The FDIC was vested 
with discretion to set assessment rates, classify institutions for 
risk-based assessment purposes and collect assessments within a system 
and on a schedule designed to track more accurately the degree of risk 
to the deposit insurance fund posed by depository institutions. The 
Reform Act also eliminated any requirement that the assessment system 
be semiannual.
    The FDIC's experience with the risk-based system over the past 13 
years, and with approaches and arguments made by institutions that have 
filed requests for review with the FDIC's Division of Insurance and 
Research (DIR) and subsequent appeals to the FDIC's Assessment Appeals 
Committee (AAC), prompted some of the proposed revisions made to the 
FDIC's deposit insurance assessment system. For example, many appeals 
to the AAC involved assertions by insured institutions that the FDIC's 
system did not take into account their improved condition quickly 
enough. The final rules will ensure that assessment rates reflect 
changes in an institution's risk profile much nearer to the time the 
changes occur. The standard float deductions will be eliminated because 
they appear to be obsolete and arbitrary, and because actual float 
appears to be small and decreasing as the result of legal, 
technological, and payment system changes. The revisions will enhance 
the assessment process for institutions and should eliminate many of 
the bases for requests and appeals. The amendments to the FDIC's 
operational processes governing assessments affect 12 CFR 327.1 through 
12 CFR 327.8.\3\ These sections detail the procedures governing deposit 
insurance assessment and collection as well as calculation of the 
assessment base.
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    \3\ Pursuant to the Section 2109 of the Reform Act, current 
assessment regulations remain in effect until the effective date of 
new regulations. Section 2109(a)(5) of the Reform Act requires the 
FDIC, within 270 days of enactment, to prescribe final regulations, 
after notice and opportunity for comment, providing for assessments 
under section 7(b) of the Federal Deposit Insurance Act. Section 
2109 also requires the FDIC to prescribe, within 270 days, rules on 
the designated reserve ratio, changes to deposit insurance coverage, 
the one-time assessment credit, and dividends. A final rule on 
deposit insurance coverage was published on September 12, 2006. 71 
FR 53547. Final rules on the one-time assessment credit and 
dividends were published on October 18, 2006. 71 FR 61374 and 71 FR 
61385. The FDIC is publishing final rulemakings on the designated 
reserve ratio and on risk based assessments in the same issue of the 
Federal Register as this final rule.

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[[Page 69271]]

II. The Final Rule

A. Assessments Collected After Each Quarterly Assessment Period

    Under the existing system, assessments are collected from insured 
institutions on a semiannual basis in two installments. The first 
collection is made at the beginning of the semiannual period; the 
second collection is made in the middle of the semiannual period.\4\ 
Under the final rule, assessments will be collected after each 
quarterly period being insured. The assessment for each quarter will be 
due approximately at the end of the following quarter, on the specified 
payment date.\5\ The chart below shows the new assessment process.
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    \4\ In December of 1994, the FDIC modified the procedure for 
collecting deposit insurance assessments, changing from semiannual 
to quarterly collection.
    \5\ Adjustments to prior period invoices will continue to be 
reflected in invoices for later periods.

----------------------------------------------------------------------------------------------------------------
                                    Date of capital
      Calendar year quarter          evaluation *      Assessment base *     Invoice date        Payment date
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1...............................  March 31, 2007....  March 31, 2007....  June 15, 2007.....  June 30, 2007.
2...............................  June 30, 2007.....  June 30, 2007.....  September 15, 2007  September 30,
                                                                                               2007.
3...............................  September 30, 2007  September 30, 2007  December 15, 2007.  December 30, 2007.
4...............................  December 31, 2007.  December 31, 2007.  March 15, 2008....  March 30, 2008.
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* That is, the date of the report of condition on which the capital evaluation and assessment base are
  determined.

    Collecting quarterly assessments after each assessment period was 
expressly supported by five commenters and opposed by none. One 
commenter, a trade group, stated ``[t]his should help banks better 
manage their risk positions and expected premiums during the quarter 
for which they will be assessed.'' Similarly, another trade group 
observed that ``banks should be able to predict at the end of each 
quarter what their assessment will be for that quarter.'' In line with 
the comments received, the FDIC believes quarterly assessment 
collection after the period being insured will markedly improve the 
responsiveness and accuracy of the assessment system.
    The final rule will take effect January 1, 2007. The last deposit 
insurance collection under the existing system (made on September 30, 
2006, in the middle of the semiannual period before the new system 
becomes effective) represents payment for insurance coverage through 
December 31, 2006. The first deposit insurance collection under the new 
system (made on June 30, 2007, at the end of the second quarter under 
the new system) will represent payment for insurance coverage from 
January 1 through March 31, 2007. No deposit insurance assessments will 
be based upon September 30 or December 31, 2006 reported assessment 
bases. However, institutions will continue to make the scheduled 
quarterly Financing Corporation (``FICO'') payments on January 2, 2007 
(or on the alternate payment date, December 30, 2006) and March 30, 
2007, using, respectively, these two reported assessment bases. No 
changes to the way FICO payments are charged or collected are being 
made.\6\ FICO collections will continue during the transition period to 
the new assessment system and will not be affected by the FDIC's new 
rules, except to the extent that the definition and computation of 
assessment bases has changed. Language has been added to the regulatory 
text to make this clear (12 CFR 327.3(a)(3)). The date of the 
assessment base on which FICO payments are based will not change. Any 
effect on the reserve ratio of transitioning to collecting assessments 
after each quarterly period will be minimal. Consistent with the 
concepts of generally accepted accounting principles, the FDIC will 
recognize assessment revenue in advance of receipt based on a reliable 
estimate.
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    \6\ Pursuant to statute and a memorandum of understanding with 
the Financing Corporation, the FDIC collects FICO assessments from 
insured depository institutions based upon quarterly report dates. 
See 12 U.S.C. 1441(f)(2). FICO payments represent funds remitted to 
FICO to ensure sufficient funding to distribute interest payments 
for the outstanding FICO obligations.
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    Invoices will continue to be presented using FDICconnect, and 
institutions will continue to be required to designate and fund deposit 
accounts from which the FDIC can make direct debits. Invoices will, as 
at present, be made available on FDICconnect no later than 15 days 
prior to the payment date. However, the payment dates themselves, in 
relation to the coverage period, will shift. Collections will be made 
at or near the end of the following quarter (i.e., June 30, September 
30, December 30, and March 30). In this way, the proposed assessment 
system will synchronize the insurance coverage period with the 
reporting dates and the institutions' risk assignments.\7\
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    \7\ The existing regulations refer to an institution's ``risk 
classification,'' that is, one of the nine classifications in the 
nine-cell matrix, 1A, 2A, and so forth. Under the final rule, an 
institution's ``risk assignment'' (see 12 CFR 327.4(a)) includes 
assignment to Risk Category I, II, III, or IV, and, within Risk 
Category I, assignment to an assessment rate or rates.
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    The FDIC will set assessment rates for each risk category no later 
than 30 days before the date of the invoice for the quarter, which will 
give the FDIC's Board of Directors the option of setting rates before 
the beginning of a quarter or after its completion. The final rule will 
provide the FDIC with flexibility to set final rates for the first 
quarter of a year at any time up to May 16 of that year (30 days before 
the June 15 invoice date). However, the FDIC will not necessarily need 
to continually reconsider or update assessment rates. Once set, rates 
will remain in effect until changed by the FDIC's Board. Institutions 
will have at least 45 days notice of the applicable rates before 
assessment payments are due.

B. Ratings Changes Effective When Transmitted

    Under the present system, an insured institution retains its 
supervisory and capital group ratings throughout a semiannual period. 
Any change is reflected in the next semiannual period; in this way, an 
examination can remain the basis for an institution's assessment rating 
long after newer information has become available.
    The FDIC proposed that changes to an institution's supervisory 
rating be reflected as of the date the examination or targeted 
examination began; if no such date existed, then an institution's 
supervisory rating would have changed as of the date the institution 
was notified of its rating change by its primary federal regulator (or 
state authority). In either case, if the FDIC, after taking into 
account other information that could affect the rating, did not agree 
with the classification implied by the examination, then the 
institution's rating would change as of the date that the FDIC 
determined that the change in the supervisory rating occurred.
    Five commenters supported making ratings changes effective when 
they occur; no one opposed. One of the

[[Page 69272]]

supporters, a trade group, suggested that in all cases the change be 
implemented ``when the bank is notified of a change, not the date an 
examination begins * * * .''
    The FDIC has decided to adopt the suggested approach. Under the 
final rule, changes to an institution's supervisory rating will be 
reflected as of the date that the rating change is transmitted to the 
institution. However, if the FDIC disagrees with the CAMELS composite 
rating assigned by an institution's primary federal regulator, and 
assigns a different composite rating, the supervisory change will be 
effective for assessment purposes as of the date that the FDIC assigns 
a rating. Disagreements of this type between the FDIC and the other 
federal regulators have been rare.
    Using the transmittal date as the effective date for supervisory 
changes has a number of benefits. First, additional research after 
publication of the NPR in May revealed that the federal banking 
agencies do not all define and record an examination start date the 
same way.\8\ If the start date were used to determine ratings changes 
for supervisory purposes, similarly situated institutions could be 
treated differently, simply because they have different primary federal 
regulators. This result could have been unfair to a large number of 
institutions. Second, using the start date would have potentially 
produced ratings changes in many prior quarters, with adjustments to 
prior assessments paid. By contrast, the final rule should result in 
far fewer alterations to earlier assessments, allowing greater finality 
in assessments and enabling institutions to better plan their finances. 
Several commenters recommended notifying institutions in advance of a 
ratings change. While the final rule does not provide for advance 
notification, institutions will receive notice contemporaneously with a 
change. Third, the final rule is simpler and more uniform than the 
proposed rule and produces a more cohesive system. The effective date 
of a ratings change will be defined in the same way for all 
institutions, large and small. This result comports with the opinions 
of several commenters who recommended that the risk differentiation and 
assessment system be made simpler and more cohesive. Fourth, as stated, 
the trade group specifically recommended that in all cases the 
effective date for recognition of a change in supervisory rating should 
be when the bank is notified of a change.\9\
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    \8\ For example, while the Board of Governors of the Federal 
Reserve System and the Office of Thrift Supervision (OTS) define and 
record as the start date the date that an examiner arrives at an 
institution to begin the bulk of examination activity, the Office of 
the Comptroller of the Currency does not. Rather, for the OCC the 
start date represents the date that examination activity begins 
based on an activity plan. This date bears no consistent relation to 
the date that an examiner arrives at an institution.
    \9\ The FDIC received no other comments specifically directed to 
this issue.
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    Accordingly, under the final rule, supervisory ratings changes will 
become effective as of the date the institution is notified of its 
rating change by its primary federal regulator or state authority, 
assuming that the FDIC, after taking into account other information 
that could affect the rating, agrees with the assignment implied by the 
examination, or it will change as of the date that the FDIC determines 
that the change in the supervisory rating occurs.

C. Modifications to the Assessment Base

    At present, an institution's assessment base is principally derived 
from total domestic deposits. The current definition of the assessment 
base is detailed in 12 CFR 327.5. Generally, the definition is deposit 
liabilities as defined by section 3(l) of the Federal Deposit Insurance 
Act (FDI Act) (12 U.S.C. 1813(l)) with some adjustments. However, 
because the total deposits that institutions report in their reports of 
condition do not coincide with the section 3(l) definition, 
institutions report several adjustments elsewhere in their reports of 
condition; these adjustments are used to determine the assessment base.
    For example, banks are specifically instructed to exclude 
uninvested trust funds from deposit liabilities as reported on Schedule 
RC-E of their Reports of Condition and Income (Call Reports). However, 
these funds are considered deposits as defined by section 3(l) of the 
FDI Act and are therefore included in the assessment base. Line item 3 
on Schedule RC-O of the Call Report was included to facilitate 
reporting these funds. For this line item and for the many others, 
banks simply report the amount of each item that was excluded from the 
RC-E calculation. Other line items require the restoration of amounts 
that were netted for reporting purposes on Schedule RC-E. For example, 
when banks were instructed to file Call Reports in accordance with 
Generally Accepted Accounting Principles, they were permitted to offset 
deposit liabilities against assets in certain circumstances. In order 
to comply with the statutory definition of deposits, lines 12a and 12b 
were added to Schedule RC-O to recapture those amounts.
    The final rule will retain the current assessment base as applied 
in practice with minor modifications. The reworded definition will 
operate in concert with a proposed simplification of the associated 
reporting requirements on insured institutions' reports of 
condition.\10\ The assessment base definition will continue to be 
deposit liabilities as defined by section 3(l) of the FDI Act with 
enumerated allowable adjustments. These adjustments will include drafts 
drawn on other depository institutions that meet the definition of 
deposits per section 3(l) of the FDI Act, but are specifically excluded 
from reporting requirements in section 7(a)(4) of the FDI Act (12 
U.S.C. 1817(a)(4)). Similarly, although depository institution 
investment contracts meet the definition of deposits as defined by 
section 3(l) of the FDI Act, they are presently excluded from the 
assessment base under 12 CFR 327.5 and will continue to be excluded, as 
will pass-through reserves. Certain reciprocal bank balances will also 
be excluded. In addition, hypothecated deposits will be excluded.
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    \10\ At present, 26 items are required in the Reports of 
Condition and Income (Call Reports) to determine a bank's assessment 
base, and 11 items are required in the Thrift Financial Report 
(TFRs) to determine a thrift's assessment base. Under the final 
rule, changes to the way the assessment base is reported should 
reduce these items to between two and six, depending, in part, on 
whether an institution reports average daily balances. Essentially, 
instead of starting with deposits as reported in the report of 
condition and making adjustments, banks will start with a balance 
that approximates the statutory definition of deposits. The FDIC 
believes that this balance is typically found within most insured 
institutions' deposit systems. In this way, institutions will be 
required to track far fewer adjustments. In any case, no additional 
burden will result for insured institutions since the items required 
to be reported will remain essentially the same under the new 
regulatory definition. The changes to reporting requirements should 
also allow institutions to report daily average deposits more 
easily, since they will not have to track and average adjustment 
items separately. As now, the Call Report and TFR instructions will 
continue to specify the items required to meet the requirements of 
section 3(l) of the FDI Act for reporting purposes. The FDIC has 
proposed appropriate changes to reports of condition, to become 
effective March 31, 2007, and is coordinating with the Federal 
Financial Institutions Examination Council (FFIEC) on the necessary 
changes to the reports of condition.
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    Unposted debits will not reduce the assessment base and unposted 
credits will be excluded from the definition of the assessment base for 
institutions that report average daily balances because these debits 
and credits are captured in the next day's deposits (and thus reflected 
in the averages). For consistency, and because they should not 
materially affect assessment bases, unposted debits will not reduce the 
assessment base and unposted credits

[[Page 69273]]

will also be excluded from the definition of the assessment base for 
institutions that report quarter-end balances.
    The current definition of the assessment base, in 12 CFR 327.5, has 
been driven by reporting requirements that have evolved over time. 
These requirements have changed because of the evolving reporting needs 
of all of the federal regulators. As a result, the FDIC's regulatory 
definition of the assessment base has required periodic updates when 
reporting requirements in reports of condition are changed for other 
purposes.\11\ By rewording the definition of the assessment base to 
deposit liabilities as defined by section 3(l) of the FDI Act with 
allowable exclusions, the FDIC will no longer be required to update its 
regulation periodically in response to outside factors. Two commenters 
generally supported the minor modifications the FDIC is making to the 
definition of assessment base; no commenters opposed them.
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    \11\ In fact, the regulatory definition has not kept pace with 
these reporting changes. In practice, however, the assessment base 
is calculated as if the regulatory definition had kept pace.
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D. Average Daily Deposit Balance for Institutions With Assets of $1 
Billion or More

    Currently, an insured institution's assessment base is computed 
using quarter-end deposit balances. Most schedules of the Call Report 
and the TFR are based on quarter-end data, but there are drawbacks to 
using quarter-end balances for assessment determinations. Under the 
current system, deposits at quarter-end are used as a proxy for 
deposits for an entire quarter, but balances on a single day in a 
quarter may not accurately reflect an institution's typical deposit 
level. For example, if an institution receives an unusually large 
deposit at the end of a quarter and holds it only briefly, the 
institution's assessment base and deposit insurance assessment may 
increase disproportionately to the amount of deposits it typically 
holds. A misdirected wire transfer received at the end of a quarter can 
create a similar result. Using quarter-end balances creates incentives 
to temporarily reduce deposit levels at the end of a quarter for the 
sole purpose of avoiding assessments. Institutions of various sizes 
have raised these issues with the FDIC.
    Under the final rule, instead of using quarter-end deposits, 
certain institutions will use average daily balances over the quarter, 
which will give a more accurate depiction of an institution's deposits. 
When combined with other operational changes to the assessment system, 
the use of average daily balances will provide a more realistic and 
timely depiction of actual events. The FDIC's proposal to use average 
daily balances was supported by all six commenters; however, three of 
those six suggested that the use of average daily balances be mandatory 
only for institutions of $1 billion or more in assets rather than $300 
million as proposed. For example, one trade group suggested the higher 
cutoff because ``the FDIC and other federal bank regulators use $1 
billion in assets as the cutoff in other Call Report requirements and 
for other regulatory purposes.'' Similarly, another trade group urged 
the higher cutoff because ``[t]his increase would be consistent with 
other FDIC regulations and reporting requirements * * * and would 
affect only a very small proportion of insured deposits.'' In addition, 
a third trade group urged the $1 billion cutoff ``to not impose 
unnecessary paperwork burden on smaller institutions and to be 
consistent with the $1 billion threshold for other FDIC regulations * * 
*.'' After consideration of these comments, the FDIC has changed the 
final rule to incorporate the higher cutoff amount.
    Institutions do not at present report average daily balances on 
Call Reports and TFRs. Reporting average assessment bases will 
therefore necessitate changes to Call Reports and TFRs requiring the 
approval of the FFIEC and time to implement. Until these changes to the 
Call Report and TFR are made, institutions will continue to determine 
assessment bases using quarter-end balances.
    Under the final rule, for one year after the necessary changes to 
the Call Report and TFR have been made, each existing institution will 
have the option of continuing to use quarter-end balances to determine 
its assessment base. Thereafter, institutions with $1 billion or more 
in assets will be required to report average daily balances. To avoid 
burdening smaller institutions, which might have to modify their 
accounting and reporting systems, existing institutions with less than 
$1 billion in assets will have the option of continuing to use quarter-
end balances to determine their assessment bases.\12\
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    \12\ In those instances where a parent bank or savings 
association files its Call Report or TFR on a consolidated basis by 
including a subsidiary bank(s) or savings association(s), the 
assessment bases for all institutions included in the consolidated 
reporting must be reported separately on an unconsolidated basis so 
that assessment bases can be determined separately for each 
institution.
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    If its assessment base is growing, an institution will pay smaller 
assessments if it reports daily averages rather than quarter-end 
balances, all else equal. Nevertheless, a smaller institution that 
elects to report quarter-end balances may continue to do so, so long as 
its assets, as reported in its Call Report or TFR, do not equal or 
exceed $1 billion in two consecutive reports. Otherwise, the 
institution will be required to begin reporting average daily balances 
for the quarter that begins six months after the end of the quarter in 
which the institution reported that its assets equaled or exceeded $1 
billion for the second consecutive time. An institution with less than 
$1 billion in assets may switch from reporting quarter-end balances to 
reporting average daily balances for an upcoming quarter. Any 
institution, once having begun to report average daily balances, either 
voluntarily or because required to, may not switch back to reporting 
quarter-end balances.
    Finally, one commenter, a trade group, urged that the $1 billion 
cutoff apply to newly insured institutions because those institutions 
``should not be treated differently in the assessment base 
calculation'' and because ``having the option to file using quarter-end 
balances is important as some banks believe the cost of the more 
involved General Ledger systems is excessive.'' The FDIC believes that 
systems likely to be in place in newly insured institutions can 
generate average daily balances and will therefore impose no additional 
costs in doing so. In addition, this approach will encourage the 
transition to average daily balances throughout the industry, which 
will improve the accuracy of institutions' assessment base 
calculations. Accordingly, under the final rule, any institution that 
becomes insured after the necessary modifications to the Call Report 
and TFR have been made will be required to report average daily 
balances for assessment purposes.

E. Float Deductions Eliminated

    The largest overall adjustments to the current assessment base are 
deductions for float, deposits reported as such for assessment purposes 
that were created by deposits of cash items (checks) for which the 
institution has not itself received credit or payment. The current 
float deductions are 16\2/3\ percent for demand deposits and 1 percent 
for time and savings deposits. Under the final rule, the float 
deductions will be eliminated.

[[Page 69274]]

    Two basic rationales existed for allowing institutions to deduct 
float. First, without float deductions, institutions would be assessed 
for balances created by deposits of checks for which they had not 
actually been paid. Second, crediting an uncollected cash item (a 
check) to a deposit account can temporarily create double counting in 
the aggregate assessment base--once at the insured institution that 
credited the cash item to the deposit account, and again at the payee 
insured institution on which the cash item is drawn. Deducting float 
from deposits when calculating the assessment base reduced this double 
counting.
    Before 1960, institutions computed actual float and deducted it 
from deposits when computing their assessment bases. This proved to be 
onerous at the time. In 1960, Congress by statute established the 
standardized float deductions in an effort to simplify and streamline 
the assessment base calculation. Section 7(b) of the FDI Act defined 
the deposit insurance assessment base until passage of the Federal 
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), which 
removed the statutory definition.\13\ In its proposal, the FDIC sought 
comment on whether to eliminate the float deductions, whether to allow 
the deduction of actual float, or whether to retain the present 
standardized float deductions.
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    \13\ Since FDICIA, the FDIC's regulations alone defined the 
assessment base. The current definition, at 12 CFR 327.5, generally 
tracks the former statutory definition.
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    All six commenters addressed the float issue. Two opposed 
elimination of the float deductions. One supported retaining the 
standard float deductions and ``if necessary, modifying them to 
recognize reduction in float due to technology advances'' but opposed 
requiring banks to deduct actual float. Another urged the adoption of 
``rules that allow for the deduction of actual float--base assessments 
on collected balances'' and opposed eliminating the standard float 
deductions because that would ``increase in the premiums that corporate 
depositors pay.'' Three other commenters generally supported 
elimination of the float deductions, but urged retention of the 
deductions for quarter-end filers, as opposed to institutions reporting 
average daily balances. A trade group noted that while float has 
declined, it has not gone away, and without the float deductions for 
quarter-end filers ``the assessment base using quarter-end balances 
would be greater than appropriate and, therefore, the premium assessed 
would be higher than appropriate.'' Two of the trade groups suggested 
revising the current float deductions for quarter-end filers and 
allowing such institutions to continue their use.
    The FDIC has decided to eliminate the float deductions for all 
institutions on the grounds that, based on available information, the 
standard float deductions appear to be obsolete. Actual float appears 
to be small and decreasing as the result of legal, technological, and 
payment systems changes. The basis for the percentages in the 
standardized deductions chosen by Congress is not clear. However, even 
if the percentages were a realistic approximation of average bank float 
when they were selected over 40 years ago, legal, technological, and 
payment systems changes--such as Check 21--that have accelerated check 
clearing should have reduced float, everything else being equal, and 
made the existing standard float deductions obsolete.\14\ Consequently, 
the current standardized float deductions probably do not reflect real 
float for most institutions. In addition, cash items in the process of 
collection as a percent of domestic deposits for commercial banks with 
total assets greater than or equal to $300 million has been decreasing. 
Over the long term, the ratio of cash items in the process of 
collection to total domestic deposits has fallen significantly. Cash 
items in the process of collection can be viewed as a rough 
approximation of actual float.
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    \14\ Congress enacted Public Law 108-100, the Check Clearing for 
the 21st Century Act (Check 21), on October 28, 2004. Check 21 
allows banks to electronically transfer check images instead of 
physically transferring paper checks. The Federal Reserve Board, 
What You Should Know About Your Checks, https://
www.federalreserve.gov/pubs/check21/shouldknow.htm (updated Feb. 16, 
2005). As a result, the transmission and processing of electronic 
checks can be done faster than transferring paper checks through the 
clearing process. A recent Federal Reserve payment survey indicates 
that, for the first time, bank-to-bank electronic payments have 
exceeded payments by check. Treasury and Risk Management, Just 
Another Step Along the Way to a Checkless Economy, 
www.treasuryandrisk.com, September 2005. With Check 21, the volume 
of paper checks processed is expected to continue to decline with 
more payments processed electronically resulting in a smaller float.
---------------------------------------------------------------------------

    Eliminating the float deductions will favor some institutions over 
others. Institutions with larger percentages of time and savings 
deposits will see smaller increases in their assessment bases; 
conversely, those with larger percentages of demand deposits will see 
greater increases in their assessment bases. However, eliminating the 
float deductions will only minimally affect the relative distribution 
of the aggregate assessment base among institutions of different asset 
sizes and between banks and thrifts (although it will have a greater 
effect on the assessment bases of some individual institutions). While 
eliminating the float deductions will increase assessment bases and 
affect the distribution of the assessment burden among institutions, it 
should not, in itself, increase assessments. The assessment rates that 
the FDIC will set in the new pricing system will take into account the 
elimination of the float deductions.
    The FDIC has decided not to deduct actual float to arrive at the 
assessment base for a number of reasons. Deducting actual float would 
require that institutions report actual float; and institutions that 
determine their assessment base using average daily balances would be 
required to report average daily float. This would necessitate a new 
information requirement for float data.\15\ Before 1960, institutions 
computed actual float and deducted it from deposits when computing 
their assessment bases. Because this proved to be onerous at one time, 
Congress established the standardized float deductions by statute. 
Asking institutions again to report actual float could create 
significant regulatory burden, which the FDIC has decided to avoid.
---------------------------------------------------------------------------

    \15\ Despite one commenter's suggestion, the Call Report item 
``Cash items in process of collection'' could not be used to 
determine the actual float deduction for individual institutions. 
Because ``Cash items in process of collection'' contains items other 
than float, it may overstate actual float. For a few institutions, 
``Cash items in process of collection,'' exceeds the institutions' 
assessment bases. (These institutions' ``Cash items'' are not 
included in the approximation of actual float in the text.) 
Conversely, given the small size of the ``Cash items in process of 
collection'' reported by many institutions, this item may understate 
float at some institutions.
---------------------------------------------------------------------------

    Finally, the FDIC does not agree with the suggestion that the float 
deductions (or revised or adjusted float deductions) be retained for 
institutions reporting quarter-end balances, as three commenters urged. 
It is not clear that reporting quarter-end balances would result in a 
larger than appropriate assessment than reporting average daily 
balances, as one commenter suggested. Moreover, allowing standardized 
deductions for institutions that report quarter-end balances could 
provide institutions with incentives for retaining the quarter-end 
balance method. The FDIC believes that institutions will generally 
benefit from reporting average daily balances and believes the 
assessment system should generally be structured to encourage the bulk 
of institutions with less than $1 billion in assets to opt to use 
average daily

[[Page 69275]]

balances in reporting their assessment bases.

F. Terminating Transfer Rule Modified

    At present, complex rules apply to terminating transfers \16\ to 
ensure that the assessment of a terminating institution is paid. 
Determining and collecting assessments after the end of each quarter 
and using average daily assessment bases make these complex rules 
largely obsolete. An acquiring institution (or institutions) will 
remain liable for the quarterly assessment(s) owed by a terminating 
institution; the assessment base of the terminating institution will be 
zero for the remainder of the quarter after the terminating transfer.
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    \16\ Generally speaking, a terminating transfer occurs when an 
institution assumes another institution's liability for deposits--
often through merger or consolidation--when the terminating 
institution essentially goes out of business. Neither the assumption 
of liability for deposits from the estate of a failed institution 
nor a transaction in which the FDIC contributes its own resources in 
order to induce a surviving institution to assume liabilities of a 
terminating institution is a terminating transfer.
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    The terminating transfer provision in the final rule will deal with 
a few remaining situations. If the terminating institution does not 
file a report of condition for the quarter prior to the quarter in 
which the terminating transfer occurred, calculation of its quarterly 
certified statement invoices for those quarters will be based on its 
assessment base from its most recently filed report of condition. For 
the quarter before the terminating transfer occurs, the terminating 
institution's assessment will be determined using its most recent rate; 
for the quarter in which the terminating transfer occurs, the 
acquirer's rate will apply, but the calculation will be different 
depending upon whether the acquiring institution reports its assessment 
base using average daily balances or quarter-end balances.
    Under the final rule, once institutions begin reporting average 
daily deposits, the average assessment base of the acquiring 
institution will properly reflect the terminating transfer and will 
increase after the terminating transfer. When this happens, the 
terminating institution's assessment for the quarter in which the 
terminating transfer occurs will be reduced by the percentage of the 
quarter remaining after the terminating transfer and calculated at the 
acquirer's rate.
    Three of the six commenters generally supported these changes to 
the terminating transfer rule, and none opposed them.
    Under the final rule, an acquiring institution that reports 
quarter-end balances will have its assessment for the quarter in which 
the terminating transfer occurred calculated slightly differently from 
the language in the proposal. Because the acquiring institution is not 
averaging its assessment base, its assessment for the quarter in which 
the terminating transfer occurs will be its assessment base (which will 
include the acquired deposits) calculated at its assessment rate. Thus, 
for example, an institution that reports quarter-end balances might 
acquire another institution by merger one month (one-third of the way) 
into a quarter. Since the acquiring institution's assessment base for 
that quarter will include the acquired deposits, application of the 
acquirer's rate to that base will obviate the need to assess the 
terminating institution separately for that quarter. The final rule has 
been revised from the proposed rule to reflect this simpler calculation 
for acquiring institutions that use quarter-end balances.

G. Newly Insured Institutions Assessed for the Quarter in Which They 
Become Insured

    At present, a newly insured institution is not liable for 
assessments for the semiannual period in which it becomes insured, but 
is liable for assessments for the following semiannual period. The 
institution's assessment base as of the day before the following 
semiannual period begins is deemed to be its assessment base for the 
entire semiannual period. These special rules were needed because 
assessments were based upon assessment bases that an institution 
reported in the past. Under the existing rules, a newly insured 
institution reports an assessment base at the end of the quarter in 
which it becomes insured but that assessment base is not used to 
calculate its assessment until the following semiannual period. 
Further, if an institution becomes insured in the second half of a 
semiannual period, it has no reported assessment base on which to 
calculate the first installment of its premium for the next semiannual 
period.
    Under the final rules, each quarterly assessment will be based upon 
the assessment base that an institution reports at the end of that 
quarter. Since a newly insured institution will have reported an 
assessment base (using average daily balances) for the quarter in which 
it becomes insured, its assessment will be computed in the same manner 
as all other institutions. Three commenters generally supported 
elimination of the special rules for newly insured institutions, and 
none opposed it.

H. Ninety Days Each Quarter To File a Request for Review or Request for 
Revision

    The current deadline for an institution to request a review of its 
assessment risk classification is 90 days from the invoice date for the 
first quarterly installment of a semiannual period. Under the final 
rule, each quarterly assessment will be separately computed. 
Consequently, the final rule will provide institutions with 90 days 
from the date of each quarterly certified statement invoice to file a 
request for review from its risk assignment. Institutions will also 
have 90 days from the date of any subsequent invoice that adjusted the 
assessment of an earlier assessment period to request a review. The 
final rule clarifies that an institution with between $5 billion and 
$10 billion in assets may request review if the FDIC denies its request 
to be assessed as a large bank; in addition, institutions may request 
review of an FDIC determination that they are new.\17\
---------------------------------------------------------------------------

    \17\ 12 CFR 327.9(d)(6) and (7). See the FDIC's final rulemaking 
regarding risk based assessments published in this issue of the 
Federal Register.
---------------------------------------------------------------------------

    A parallel amendment will allow requests for revision of an 
institution's quarterly assessment payment computation to be filed 
within 90 days of the quarterly assessment invoice for which revision 
is requested (rather than the present 60 days). Three commenters 
generally supported these changes to the rules; none opposed them.

I. Conforming Changes to the Certified Statement Rules

    The Reform Act eliminated the requirement that the deposit 
insurance assessment system be semiannual and provided a new three-year 
statute of limitations for assessments. Accordingly, the FDIC has 
revised the provisions of 12 CFR 327.2 to clarify that the certified 
statement is the quarterly certified statement invoice and to provide 
for the retention of the quarterly certified statement invoice by 
insured institutions for three years, rather than five years under the 
prior law. Three commenters generally supported these changes; none 
opposed them.

J. Prepayment and Double Payment Options Eliminated

    When the present assessment system was proposed more than 10 years 
ago, the original quarterly dates for payment of assessments were: 
March 30; June 30;

[[Page 69276]]

September 30; and December 30. The FDIC recognized that the December 
1995 collection date could present a one-time problem for institutions 
using cash-basis accounting, since these institutions would, in effect, 
be paying assessments for five quarters in 1995. The FDIC believed that 
few institutions would be adversely affected. Soon after the new system 
was adopted, however, the FDIC began to receive information that more 
institutions than had originally been identified would be adversely 
affected by the December collection date. As a result, the FDIC amended 
the regulation in 1995 to move the collection date to January 2, but 
allowed institutions to elect to pay on December 30, thus establishing 
the prepayment date.
    The prepayment option is eliminated under the final rule. With 
implementation of the new assessment system, a transition period will 
be created in which institutions will not be subject to collection of 
deposit insurance assessments after the September 30, 2006 payment date 
until June 30, 2007. Consequently, reestablishing the original December 
30 payment date should have no adverse consequences for institutions 
that use cash-basis accounting. No institution would make more than 
four insurance payments in calendar year 2006; those using the December 
30, 2005 payment date would make only three payments in 2006. All 
institutions would make four payments annually thereafter. This change 
will keep all assessment payments within each calendar year.\18\
---------------------------------------------------------------------------

    \18\ The allowance for payment on the following business day--
should January 2 fall on a non-business day--is eliminated as well.
---------------------------------------------------------------------------

    In addition, insured institutions presently have the regulatory 
option of making double payments on any payment date except January 2. 
Under the final rule, this option is also eliminated. The double 
payment option originated in the 1995 amendment, when the payment date 
was modified from December 30, 1995 to January 2, 1996. The double 
payment option was adopted to provide cash-basis institutions the 
opportunity to pay the full amount of their semiannual assessment 
premium on December 30 so as to have the complete benefit of this 
modification. The transition period from September 30, 2006 to June 30, 
2007 and four payments annually beginning in 2007 should eliminate the 
need for the double payment option, since the FDIC will no longer be 
charging semiannual premiums.
    The final rule also makes clear that scheduled quarterly FICO 
payments will be collected from all institutions on January 2, 2007, 
and March 30, 2007, based upon, respectively, their September 30, 2006 
and December 31, 2006 reported assessment bases (see 12 CFR 
327.3(a)(3)). Institutions that elect to do so, however, will still be 
able to make prepayment of their first quarter 2007 FICO payment on 
December 30, 2006, as provided for under the existing rules at 12 CFR 
327.3(c)(3). Institutions that do not choose this prepayment option 
will make their first quarter 2007 FICO payment on January 2, 2007, as 
the final rule will provide.

III. Regulatory Analysis and Procedure

A. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act (GLBA), 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 proposed rules requested comments 
on how the rules might be changed to reflect the requirements of GLBA. 
No GLBA comments were received.

B. 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. See 5 U.S.C. 603, 
604, 605. 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. 5 
U.S.C. 601. The final rule provides operational procedures governing 
assessments and relates directly to the rates imposed on insured 
depository institutions for deposit insurance, by providing for the 
determination of assessment bases to which the rates will apply and 
providing the operational processes required for deposit insurance 
assessments. Consequently, no regulatory flexibility analysis is 
required. Nonetheless, the FDIC is voluntarily undertaking a regulatory 
flexibility analysis of the final rule.
    The provisions dealing with determining assessment bases using 
average daily balances include an opt-out for insured institutions with 
assets of less than $1 billion, which would permit small institutions 
under the RFA (i.e., those with $165 million or less in assets) to 
continue (as they do now) reporting quarter-end balances. Newly insured 
institutions with $165 million or less in assets, however, will be 
required to report average daily balances. For the period from 2001 
through 2005, the average number of small institutions that became 
insured each year was approximately 126. Most small, newly insured 
institutions will ordinarily implement systems permitting calculation 
of average daily balances and, therefore, will not be significantly 
burdened by this requirement.
    Similarly, elimination of the float deduction in calculating 
assessment bases will not have a significant economic impact on a 
substantial number of small ($165 million in assets or less) insured 
depository institutions within the meaning of the RFA. Based on 
December 31, 2005 reports of condition, small institutions represented 
5.09 percent of the total assessment base, with large institutions 
(i.e., those with more than $165 million in assets) representing 94.91 
percent. Without the existing float deduction, those percentages would 
have been 5.14 and 94.86, respectively, a change of only 0.05 percent. 
By way of example, if a flat 2 basis point annual charge had been 
assessed on the December 31, 2005 assessment base without the float 
deduction (i.e., with the float deduction added back to the assessment 
base), the amount collected would have been approximately $1.267 
billion. To collect the same amount from the industry on the same 
assessment base, but allowing the float deduction, approximately a 2.05 
basis point charge would have been required, since the assessment base 
would have been smaller. The average difference in assessment charged a 
small institution for one year if the float deduction were eliminated 
(charging 2 basis points) versus allowing the float deduction (charging 
2.05 basis points) would be about $110. The actual increase in 
assessments charged small institutions for one year if the float 
deduction were eliminated (charging 2 basis points) versus allowing the 
float deduction (charging 2.05 basis points) would be greater than or 
equal to $1,000 for only 38 out of 5,362 small institutions as of 
December 31, 2005.\19\ The largest resulting increase for any small 
institution would be about $2,500.
---------------------------------------------------------------------------

    \19\ Of the 8,832 insured depository institutions, there were 
5,362 small insured depository institutions (i.e., those with $165 
million or less in assets) as of December 31, 2005.
---------------------------------------------------------------------------

    Moreover, the final rule will not have a significant economic 
impact on a

[[Page 69277]]

substantial number of small institutions within the meaning of those 
terms as used in the RFA. The final rule sets out the operational 
format for the FDIC's assessment system for the collection of deposit 
insurance assessments. Most of the processes within this proposed 
regulation are analogous to existing FDIC assessment processes; 
variances occur largely in timing, not in the processes themselves; no 
additional reporting requirements or record retention requirements are 
created by the proposed rules.
    Comments were sought regarding any information about the likely 
quantitative effects of the proposal on small insured depository 
institutions; no comments were received.

C. Paperwork Reduction Act

    No collections of information pursuant to the Paperwork Reduction 
Act (44 U.S.C. 3501 et seq.) are contained in the final rule. Any 
paperwork created as the result of the conversion to reporting average 
daily assessment balances will be submitted to the Office of Management 
and Budget (OMB) for review and approval as an adjustment to the 
Consolidated Reports of Condition and Income (Call Reports), an 
existing collection of information approved by OMB under Control No. 
3064-0052.

D. 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 
(Public Law 105-277, 112 Stat. 2681).

E. 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 Fairness Act of 
1996 (SBREFA) (5 U.S.C. 801 et seq.). As required by SBREFA, the FDIC 
will file the appropriate reports with Congress and the Government 
Accountability 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 hereby amends part 
327 of chapter III of title 12 of the Code of Federal Regulations as 
follows:

PART 327--ASSESSMENTS

0
1. The authority citation for part 327 is revised 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. Revise Sec. Sec.  327.1 through 327.8 of Subpart A to read as 
follows:


Sec.  327.1  Purpose and scope.

    (a) Scope. This part 327 applies to any insured depository 
institution, including any insured branch of a foreign bank.
    (b) Purpose. (1) Except as specified in paragraph (b)(2) of this 
section, this part 327 sets forth the rules for:
    (i) The time and manner of filing certified statements by insured 
depository institutions;
    (ii) The time and manner of payment of assessments by such 
institutions;
    (iii) The payment of assessments by depository institutions whose 
insured status has terminated;
    (iv) The classification of depository institutions for risk; and
    (v) The processes for review of assessments.
    (2) Deductions from the assessment base of an insured branch of a 
foreign bank are stated in subpart B part 347 of this chapter.


Sec.  327.2  Certified statements.

    (a) Required. (1) The certified statement shall also be known as 
the quarterly certified statement invoice. Each insured depository 
institution shall file and certify its quarterly certified statement 
invoice in the manner and form set forth in this section.
    (2) The quarterly certified statement invoice shall reflect the 
institution's risk assignment, assessment base, assessment computation, 
and assessment amount, for each quarterly assessment period.
    (b) Availability and access. (1) The Corporation shall make 
available to each insured depository institution via the FDIC's e-
business Web site FDICconnect a quarterly certified statement invoice 
each assessment period.
    (2) Insured depository institutions shall access their quarterly 
certified statement invoices via FDICconnect, unless the FDIC provides 
notice to insured depository institutions of a successor system. In the 
event of a contingency, the FDIC may employ an alternative means of 
delivering the quarterly certified statement invoices. A quarterly 
certified statement invoice delivered by any alternative means will be 
treated as if it had been downloaded from FDICconnect.
    (3) Institutions that do not have Internet access may request a 
renewable one-year exemption from the requirement that quarterly 
certified statement invoices be accessed through FDICconnect. Any 
exemption request must be submitted in writing to the Manager of the 
Assessments Section.
    (4) Each assessment period, the FDIC will provide courtesy e-mail 
notification to insured depository institutions indicating that new 
quarterly certified statement invoices are available and may be 
accessed on FDICconnect. E-mail notification will be sent to all 
individuals with FDICconnect access to quarterly certified statement 
invoices.
    (5) E-mail notification may be used by the FDIC to communicate with 
insured depository institutions regarding quarterly certified statement 
invoices and other assessment-related matters.
    (c) Review by institution. The president of each insured depository 
institution, or such other officer as the institution's president or 
board of directors or trustees may designate, shall review the 
information shown on each quarterly certified statement invoice.
    (d) Retention by institution. If the appropriate officer of the 
insured depository institution agrees that, to the best of his or her 
knowledge and belief, the information shown on the quarterly certified 
statement invoice is true, correct, and complete and in accordance with 
the Federal Deposit Insurance Act and the regulations issued under it, 
the institution shall pay the amount specified on the quarterly 
certified statement invoice and shall retain it in the institution's 
files for three years as specified in section 7(b)(4) of the Federal 
Deposit Insurance Act.
    (e) Amendment by institution. If the appropriate officer of the 
insured depository institution determines that, to the best of his or 
her knowledge and belief, the information shown on the quarterly 
certified statement invoice is not true, correct, and complete and in 
accordance with the Federal Deposit Insurance Act and the regulations 
issued under it, the institution shall pay the amount specified on the 
quarterly certified statement invoice, and may:
    (1) Amend its report of condition, or other similar report, to 
correct any data believed to be inaccurate on the quarterly certified 
statement invoice; amendments to such reports timely filed under 
section 7(g) of the Federal Deposit

[[Page 69278]]

Insurance Act but not permitted to be