Risk Based Assessments, 78155-78162 [E8-30222]
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Federal Register / Vol. 73, No. 246 / Monday, December 22, 2008 / Rules and Regulations
2. Revise § 345.12(u)(1) to read as
follows:
■
§ 345.12
*
*
Definitions.
*
*
*
(u) Small bank—(1) Definition. Small
bank means a bank that, as of December
31 of either of the prior two calendar
years, had assets of less than $1.109
billion. Intermediate small bank means
a small bank with assets of at least $277
million as of December 31 of both of the
prior two calendar years and less than
$1.109 billion as of December 31 of
either of the prior two calendar years.
*
*
*
*
*
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: December 11, 2008.
By the Office of Thrift Supervision.
John M. Reich,
Director.
[FR Doc. E8–30433 Filed 12–19–08; 8:45 am]
BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P;
6720–01–P
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 327
Department of the Treasury
RIN 3064–AD35
Office of Thrift Supervision
Risk Based Assessments
12 CFR Chapter V
For the reasons discussed in the joint
preamble, 12 CFR part 563e is amended
as follows:
■
PART 563e—COMMUNITY
REINVESTMENT
1. The authority citation for part 563e
continues to read as follows:
■
Authority: 12 U.S.C. 1462a, 1463, 1464,
1467a, 1814, 1816, 1828(c), and 2901 through
2907.
2. Revise § 563e.12(u)(1) to read as
follows:
■
§ 563e.12
Definitions.
*
*
*
*
*
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(u) Small savings association—(1)
Definition. Small savings association
means a savings association that, as of
December 31 of either of the prior two
calendar years, had assets of less than
$1.109 billion. Intermediate small
savings association means a small
savings association with assets of at
least $277 million as of December 31 of
both of the prior two calendar years and
less than $1.109 billion as of December
31 of either of the prior two calendar
years.
*
*
*
*
*
Dated: December 16, 2008.
Julie L. Williams,
First Senior Deputy Comptroller and Chief
Counsel.
By order of the Board of Governors of the
Federal Reserve System.
Dated: December 16, 2008.
Robert deV. Frierson,
Deputy Secretary of the Board.
By order of the Board of Directors.
Dated at Washington, DC, this 16th day of
December, 2008.
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AGENCY: Federal Deposit Insurance
Corporation (FDIC).
ACTION: Final rule.
SUMMARY: The FDIC is amending our
regulations to increase risk-based
assessment rates effective for the first
quarter 2009 assessment period. This is
in accordance with the Restoration plan
for the DIF published on October 16,
2008, in the Federal Register.
DATES: The final rule will become
effective on January 1, 2009.
FOR FURTHER INFORMATION CONTACT:
Matthew Green, Chief, Fund Analysis
and Pricing Section, Division of
Insurance and Research, (202) 898–
3670; and Christopher Bellotto, Counsel,
Legal Division, (202) 898–3801.
SUPPLEMENTARY INFORMATION:
I. Background: Restoration Plan and
Proposed Rule
Recent failures of FDIC-insured
institutions caused the reserve ratio of
the Deposit Insurance Fund (DIF) to
decline from 1.19 percent as of March
30, 2008, to 1.01 percent as of June 30
and 0.76 percent as of September 30.
The FDIC expects a higher rate of
institution failures in the next few years
compared to recent years, leading to a
further decline in the reserve ratio.
Because the fund reserve ratio fell below
1.15 percent as of June 30 and was
expected to remain below 1.15 percent,
the Reform Act required the FDIC to
establish and implement a Restoration
Plan to restore the reserve ratio to at
least 1.15 percent within five years.
On October 7, 2008, the FDIC
established a Restoration Plan for the
DIF, published on October 16 (see 73 FR
61598). In the FDIC’s view, restoring the
reserve ratio to at least 1.15 percent
within five years requires an increase in
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78155
assessment rates. Since the current rates
are already three basis points above the
existing base rate schedule, a new
rulemaking was required. Consequently,
the FDIC Board of Directors adopted,
also on October 7, 2008, a notice of
proposed rulemaking with request for
comments on revisions to the FDIC’s
assessment regulations (12 CFR part
327).1 The rulemaking proposed that,
effective January 1, 2009, current
assessment rates would increase
uniformly by 7 basis points for the first
quarter 2009 assessment period.
Effective April 1, 2009, the rulemaking
proposed to alter the way in which the
FDIC’s risk-based assessment system
differentiates for risk and set new
deposit insurance assessment rates. Also
effective on April 1, 2009, the proposal
would make technical and other
changes to the rules governing the riskbased assessment system. The proposed
rule was published concurrently with
the Restoration Plan on October 16,
2008 (see 73 FR 61560), with a comment
period scheduled to end on November
17, 2008.
On November 7, 2008, the FDIC Board
approved an extension of the comment
period until December 17, 2008, on the
parts of the proposed rulemaking that
would become effective on April 1,
2009. The comment period for the
proposed 7 basis point rate increase for
the first quarter of 2009, with its
separate proposed effective date of
January 1, 2009, was not extended and
expired on November 17, 2008.
This final rule will implement a
uniform increase to current rates for the
first quarter 2009 assessment period
only. The FDIC will issue another final
rule early in 2009, to be effective April
1, 2009, to change the way that the
FDIC’s assessment system differentiates
for risk, to set new assessment rates
beginning with the second quarter of
2009, and make certain technical and
other changes to the assessment rules.
II. The Final Rule: Assessment Rate
Schedule for the First Quarter of 2009
The final rule raises the current rates
uniformly by 7 basis points for the
quarterly assessment period beginning
January 1, 2009 only. The higher
assessments would be reflected in the
fund balance as of March 31, 2009, and
collected on June 30, 2009. Rates for the
first quarter of 2009 are shown in Table
1 as follows:
1 At the same meeting, the Board set the
Designated Reserve Ratio of the DIF at 1.25 percent
for 2009.
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Federal Register / Vol. 73, No. 246 / Monday, December 22, 2008 / Rules and Regulations
TABLE 1—ASSESSMENT RATES FOR THE FIRST QUARTER OF 2009
Risk category
I*
II
14
IV
35
50
Maximum
12
III
17
Minimum
Annual Rates (in basis points) .................................................................
* Rates for institutions that do not pay the minimum or maximum rate would vary between these rates.
III. Factors Considered in Setting First
Quarter 2009 Assessment Rates
Summary
The FDIC expects that the economic
downturn and continuing troubles in
the housing and construction sectors,
financial markets, and commercial real
estate will prolong the challenging
operating environment that banks and
thrifts face. Losses experienced by many
large institutions in recent quarters are
likely to spread to a growing number of
small institutions. The percentage of the
industry that is unprofitable is expected
to remain high, primarily due to asset
quality problems. These troubles lead
the FDIC to project an increase in
failures and higher losses to the
insurance fund compared to recent
years. The insurance fund balance and
reserve ratio are likely to decline further
before increased assessment revenue
can begin to offset the effects of higher
losses.
Since the October proposed
rulemaking, the FDIC has updated its
projections through the first quarter of
2009 of losses and other factors affecting
the reserve ratio. The FDIC bases its
updated near-term loss projections on
analysis of specific troubled
institutions, analysis of recent and
expected loss rates given failure, as well
as the stress analyses of the effects of
housing price declines and an economic
slowdown underlying the projections
included in the October proposed
rulemaking.
The FDIC also assumes that insured
deposits would increase at an annual
rate between 5 and 6 percent through
March of next year. (Insured deposits
include only those under the basic limit
of $100,000 and $250,000 for retirement
accounts.) 2 For the four quarters ending
September 30, 2008, insured deposits
rose 7.1 percent. Over the 5-year period
ending in September, insured deposits
rose at an average annual rate of 5.9
percent.
Table 2 shows projected reserve ratios
for the fourth quarter of 2008 and first
quarter of 2009 for alternative insured
deposit growth assumptions. At 5 or 6
percent insured deposit growth, the
reserve ratio would fall from 0.76
percent in the third quarter of 2008 to
0.61 percent at the end of the year. It
would rise slightly to 0.63 percent
(assuming 5 percent insured deposit
growth) or 0.62 percent (with 6 percent
growth) in the first quarter of 2009 due
to the increase in assessment rates
adopted in the final rule. In the absence
of the rate increase, the reserve ratio
would end the first quarter at 0.60
percent (with 5 or 6 percent insured
deposit growth).
TABLE 2—PROJECTED RESERVE RATIOS
[September 30, 2008 reserve ratio = 0.76 percent]
Annualized insured deposit growth *
Quarter ending
4%
12/31/2008 .......................................................................................................
3/31/2009 (without rate increase) ....................................................................
3/31/2009 (with 7 b.p. rate increase) ..............................................................
5%
0.61%
0.60%
0.63%
6%
0.61%
0.60%
0.63%
0.61%
0.60%
0.62%
7%
0.60%
0.59%
0.62%
* Assumes assessable (domestic) and insured deposits increase at the same rate. Estimated insured deposits do not include those resulting
from the temporary coverage limit increase to $250,000 under the Emergency Economic Stabilization Act of 2008, or those non-interest bearing
transaction deposits covered by the Temporary Liquidity Guarantee Program.
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The rates adopted in the final rule for
the first quarter of 2009 will raise almost
as much assessment revenue as the rates
that would become effective beginning
April 1, 2009 under the October
proposed rulemaking. Combining the
updated near-term projections above
with the longer-term projections
included in the October proposed
rulemaking and the proposed
assessment rates effective April 1, the
FDIC expects that the reserve ratio will
reach 0.69 percent by the end of 2009.
By the end of 2013—the last year of the
Restoration Plan—the reserve ratio is
projected to reach 1.21 percent,
allowing for a margin for error in
achieving the 1.15 percent threshold if
the FDIC’s assumptions do not hold.3
However, the FDIC will update its
longer-term projections for the
insurance fund before adopting a final
rule on assessment rates and risk-based
pricing changes that would take effect in
the second quarter of next year.
The FDIC recognizes that there is
considerable uncertainty about its
projections for losses and insured
deposit growth, and that changes in
assumptions about these and other
factors could lead to different
assessment revenue needs and rates.
Under the terms of the Restoration Plan,
the FDIC must update its projections for
the insurance fund balance and reserve
ratio at least semiannually while the
plan is in effect and adjust rates as
necessary. In the event that losses
2 Estimated insured deposits do not include those
resulting from the temporary coverage limit
increase to $250,000 under the Emergency
Economic Stabilization Act of 2008, or those noninterest bearing transaction deposits covered by the
Temporary Liquidity Guarantee Program.
3 In the October proposed rulemaking, the FDIC’s
best estimate of the cost of failures over the six
years from 2008 through 2013 was about $40 billion
and its projected 2013 ending reserve ratio was 1.26
percent. Combining updated near-term loss
estimates with the longer term forecasts from
October, total failures costs for 2008–13 are now
projected to exceed $42 billion, contributing to a
lower projected reserve ratio for 2013.
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Federal Register / Vol. 73, No. 246 / Monday, December 22, 2008 / Rules and Regulations
exceed the FDIC’s best estimate or
insured deposit growth is more rapid
than expected, the Board will be able to
adjust assessment rates.
Analysis
In setting assessment rates, the FDIC’s
Board of Directors has considered the
following factors as required by statute:
(i) The estimated operating expenses
of the Deposit Insurance Fund.
(ii) The estimated case resolution
expenses and income of the Deposit
Insurance Fund.
(iii) The projected effects of the
payment of assessments on the capital
and earnings of insured depository
institutions.
(iv) The risk factors and other factors
taken into account pursuant to section
7(b)(1) of the Federal Deposit Insurance
Act (12 U.S.C. 1817(b)(1)) under the
risk-based assessment system, including
the requirement under section 7(b)(1)(A)
of the Federal Deposit Insurance Act (12
U.S.C. 1817(b)(1)(A)) to maintain a riskbased system.
(v) Other factors the Board of
Directors has determined to be
appropriate.4
The factors considered in setting
assessment rates are discussed in more
detail below.
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Case Resolution Expenses (Insurance
Fund Losses)
A higher rate of failures is likely to
cause the insurance fund balance and
reserve ratio to decline at least through
the end of 2008 before increased
assessment revenue can begin to offset
the effects of increased losses. The
economic downturn and continuing
troubles in the housing and construction
sectors, financial markets, and
commercial real estate will prolong the
challenging operating environment that
banks and thrifts face going into 2009.
Losses experienced by many large
institutions in recent quarters are likely
to spread to a growing number of small
4 Section 2104 of the Reform Act (amending
section 7(b)(2) of the Federal Deposit Insurance Act,
12 U.S.C. 1817(b)(2)(B)). The risk factors referred to
in factor (iv) include:
(i) The probability that the Deposit Insurance
Fund will incur a loss with respect to the
institution, taking into consideration the risks
attributable to—
(I) Different categories and concentrations of
assets;
(II) Different categories and concentrations of
liabilities, both insured and uninsured, contingent
and noncontingent; and
(III) Any other factors the Corporation determines
are relevant to assessing such probability;
(ii) The likely amount of any such loss; and
(iii) The revenue needs of the Deposit Insurance
Fund.
Section 7(b)(1)(C) of the Federal Deposit
Insurance Act (12 U.S.C. 1817(b)(1)(C)).
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institutions. The percentage of the
industry that is unprofitable is expected
to remain high, primarily due to asset
quality problems.
The FDIC’s updated near-term
projections relied heavily on
supervisory analysis of specific troubled
institutions. Recent and expected loss
rates given failure and stress analyses of
the effects of housing price declines and
an economic slowdown in specific
geographic areas on loan losses and
bank capital also served as a basis for
insurance fund loss projections.
The FDIC estimates that failures in all
of 2008 will cost the insurance fund
$18.9 billion. After taking into account
a projected year-end 2008 contingent
loss reserve for anticipated failures,
insurance fund loss provisions for 2008
are currently projected to total $30.4
billion.5 For the fourth quarter, failures
are expected to cost $4.8 billion and loss
provisions are estimated at $7.7 billion.6
The fund is also projected to incur
another $1.1 billion in loss provisions
during the first quarter of next year.
Before considering the final rule on
changes to risk-based pricing rules and
assessment rates beginning the second
quarter of 2009, the FDIC will update its
long-term stress analyses and other
factors and assumptions underlying its
projections of losses in 2009 and over
the five-year Restoration Plan horizon.
Operating Expenses and Investment
Income
Operating expenses are projected to
average close to $300 million per
quarter in the fourth quarter of 2008 and
first quarter of 2009.
The FDIC projects that its investment
contributions (investment income and
realized gains on the sale of securities,
plus or minus unrealized gains or losses
on available-for-sale securities) will
average $309 million per quarter in the
fourth quarter of this year and first
quarter of next year. The FDIC is
investing new funds in overnight
investments and short-term Treasury
bills to accommodate increased bank
failure activity. The FDIC generally
expects that these investments will earn
lower rates than the longer-term
securities that they are replacing,
5 The $30.4 billion 2008 loss provision is derived
by adding $18.9 billion for the cost of failures, $11.5
billion for the contingent loss reserve, and another
$0.1 billion adjustment for failures in earlier years,
then subtracting the $0.1 billion year-end 2007
contingent loss reserve.
6 The $7.7 billion fourth quarter loss provision is
derived by adding $4.8 billion for the cost of
failures, $11.5 billion for the contingent loss
reserve, and another $3.1 billion adjustment for
failures occurring prior to the fourth quarter, then
subtracting the $11.7 billion third quarter
contingent loss reserve.
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particularly given the consensus
forecast of a near-term decline in
Treasury rates, and will therefore result
in less interest income to the fund.7
Assessment Revenue, Credit Use, and
the Distribution of Assessments
The FDIC expects that assessment
revenue in 2008 will total about $3.0
billion: $4.4 billion in gross assessments
charged less $1.4 billion in credits used.
Fourth quarter revenue is projected at
about $1.0 billion. By the end of 2008,
the projections indicate that only 4
percent of the original $4.7 billion in
credits awarded will be remaining.
Under the statutory provisions
governing the Restoration Plan, the
FDIC has the authority to restrict credit
use while the plan is in effect, providing
that institutions may still apply credits
against their assessments equal to the
lesser of their assessment or 3 basis
points.8 The FDIC concluded not to
restrict credit use in the Restoration
Plan. The FDIC projects that the amount
of credits remaining at the time that the
proposed new rates go into effect will be
very small and that their continued use
would have very little effect on the
assessment rates necessary to meet the
requirements of the plan.9
The FDIC projects that the 7 basis
point uniform increase in rates adopted
in the final rule for the first quarter of
2009 will result in first quarter
assessment revenue of just over $2.3
billion, about $1.2 billion more than in
the absence of a rate increase. The FDIC
derived its assessment revenue
projections by assigning each insured
institution to an assessment rate based
on the current rate schedule for the
fourth quarter and the rate schedule
adopted in the final rule for the first
quarter of next year. It then adjusted
each institution’s assessment for any
remaining credits. For the fourth quarter
of 2008, the FDIC estimated an industry
average rate of approximately 6.4 basis
points, increasing to approximately 13.4
basis points in the first quarter of 2009.
Estimated Insured Deposits
The FDIC believes that it is reasonable
to plan for annual insured deposit
growth of between 5 and 6 percent
through the first quarter of next year.
Over the 12 months ending September
30, 2008, estimated insured deposits
7 Projections of interest rates are based on
consideration of December Blue Chip Financial
Forecasts.
8 Section 7(b)(3)(E)(iv) of the Federal Deposit
Insurance Act (12 U.S.C. 1817(b)(3)(E)(iv)).
9 For 2008, 2009 and 2010, credits may not offset
more than 90 percent of an institution’s assessment.
Section 7(e)(3)(D)(ii) of the Federal Deposit
Insurance Act (12 U.S.C. 1817(e)(3)(D)(ii)).
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Federal Register / Vol. 73, No. 246 / Monday, December 22, 2008 / Rules and Regulations
increased by 7.1 percent.10 However,
the most recent 5- and 10-year averages
are about 6 percent and 5 percent,
respectively. Chart 1 depicts insured
deposit growth rates since 1992.
Projections of insured deposits are
subject to considerable uncertainty.
Insured deposit growth over the near
term could continue to rise at the more
rapid pace observed in the third quarter
(1.8 percent, or 7.2 percent annualized)
due to a ‘‘flight to quality’’ attributable
to financial and economic uncertainties.
On the other hand, as the experience of
the late 1980s and early 1990s
demonstrated, lower overall growth in
the banking industry and the economy
could depress rates of growth of total
domestic and insured deposits. As Table
2 shows, differences in annualized
growth rates of insured deposits over
the next couple of quarters will have
little effect on the projected reserve ratio
as of March 31, 2009.
Projected Fund Balances, Insured
Deposits, and Reserve Ratios
Assuming annualized insured deposit
growth of 5 percent through March of
next year, projections of fund income,
expenses, and losses, the fund balance,
estimated insured deposits, and the
reserve ratio are shown below in Table
3.
TABLE 3—PROJECTED FUND BALANCE, ESTIMATED INSURED DEPOSITS, AND RESERVE RATIO UNDER THE RATES
ADOPTED IN THE FINAL RULE ASSUMING 5 PERCENT ANNUAL INSURED DEPOSIT GROWTH
[$ in billions]
4th Qtr 2008
Beginning Fund Balance .........................................................................................................................................
Plus: Net Assessment Revenue ..............................................................................................................................
Plus: Investment Income .........................................................................................................................................
Less: Loss Provisions ..............................................................................................................................................
Less: Operating Expenses ......................................................................................................................................
Ending Fund Balance ..............................................................................................................................................
Estimated Insured Deposits .....................................................................................................................................
Ending Reserve Ratio ..............................................................................................................................................
34.6
1.0
0.3
7.7
0.3
28.0
4,599.5
0.61%
1st Qtr 2009
28.0
2.3
0.3
1.1
0.3
29.1
4,656.0
0.63%
10 Estimated insured deposits do not include
those resulting from the temporary coverage limit
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increase to $250,000 under the Emergency
Economic Stabilization Act of 2008, or those non-
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interest bearing transaction deposits covered by the
Temporary Liquidity Guarantee Program.
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er22de08.010</GPH>
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Note: Components of fund balance changes may not sum to totals due to rounding.
Federal Register / Vol. 73, No. 246 / Monday, December 22, 2008 / Rules and Regulations
Effect on Capital and Earnings
Appendix 1 contains an analysis of
the effect of proposed rates on the
capital and earnings of insured
institutions. Given the assumptions in
the analysis, for the industry as a whole,
projected total assessments in the first
quarter of 2009 would result in capital
that would be 0.12 percent lower than
if the FDIC did not charge assessments
and 0.04 percent lower than if current
assessment rates remained in effect. The
proposed assessments would cause 3
institutions whose equity-to-assets ratio
would have exceeded 4 percent in the
absence of assessments to fall below that
percentage and 2 institutions to fall
below 2 percent. The proposed increase
in assessments would cause 1
institution whose equity-to-assets ratio
would have exceeded 4 percent under
current assessments to fall below that
threshold and no institutions to fall
below 2 percent equity-to-assets.
For profitable institutions,
assessments in the first quarter of 2009
would result in pre-tax income that
would be 5.9 percent lower than if the
FDIC did not charge assessments and
3.4 percent lower than if current
assessment rates remained in effect. For
unprofitable institutions, assessments
would result in pre-tax losses that
would be 4.4 percent higher than if the
FDIC did not charge assessments and 2
percent higher than if current
assessment rates remained in effect.
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IV. Comments Received on the Proposal
The FDIC received comments from
three nationwide industry trade groups
and a few banks that specifically
addressed the 7 basis point increase in
assessment rates for the first quarter of
2009. The FDIC also received many
comments from banks and others
concerning rates for all of 2009 and
beyond. Several of them also discussed
proposed changes to risk-based pricing
methods beginning in the second
quarter of 2009.
One of the nationwide industry trade
groups criticized the magnitude of the
first quarter increase and expressed
concern about the pace at which the
FDIC would restore the insurance fund.
It argued that the proposed assessment
rates are too high—especially in the
early stages of the Restoration Plan—
and questioned why the FDIC does not
take advantage of the flexibility that
Congress provided to extend the
restoration period beyond five years
under ‘‘extraordinary circumstances.’’
The trade group argued that the FDIC’s
invocation of its systemic risk authority
to provide additional guarantees on
non-interest bearing transaction
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deposits and senior unsecured debt is
evidence of ‘‘extraordinary
circumstances.’’ The group believes that
high premiums would restrain credit
and run counter to other government
efforts designed to stimulate lending. It
urged the FDIC to implement a longer
recapitalization period, such as six or
seven years, and to rely on lower
insured deposit growth assumptions to
achieve a more moderate increase in
rates. The comment letter recommended
that the FDIC consider phasing in higher
assessment rates and argued that it was
counter-intuitive for the proposed
minimum rate in the first quarter (12
basis points) to be higher than the
proposed minimum rate in the second
quarter (10 basis points initially and as
low as 8 basis points after adjustments).
Another nationwide industry trade
group commenting on the first quarter
2009 rate increase urged the FDIC to
adopt a more modest increase in
assessment rates and to use its
‘‘extraordinary circumstances’’ authority
to extend the restoration period to at
least seven years. The comment
expressed the view that a smaller rate
increase would keep additional funds in
local communities for lending to small
businesses and consumers during the
current period of economic stress.
A third nationwide industry trade
group estimated that the proposed 7
basis point assessment rate increase
would reduce the banking industry’s
pre-tax income by 7 percent or more at
a time when the industry needs to build
its capital. It requested that the FDIC
and other bank regulators take steps to
reduce losses to the DIF from insured
institution failures. To the extent that
such efforts to reduce losses succeeded,
the FDIC should develop a revised plan
incorporating lower assessment rates.
One bank specifically discussing the
first quarter 2009 proposed assessment
rates described the measure as ‘‘illtimed,’’ given current pressures on
banks’ capital and profitability, and
urged the FDIC to implement a more
modest increase. Another expressed
concern that the increase would make it
more difficult for safe and well-managed
institutions to meet local credit needs.
As noted before, many comments
received from banks and others
pertained to the proposed increase in
rates for all of 2009 and beyond (as well
as proposed changes to risk-based
pricing methods). Two comment letters
supported the proposed changes to the
assessment system, including the
increase in premiums. Many
commenters made similar points to
those of the three industry trade groups.
Several comments from banks and from
state trade groups opposed any
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significant increase in assessment rates
in the short term because many
institutions are struggling to maintain
adequate levels of capital and
profitability. Several commenters urged
the FDIC to withdraw the proposed rule
and delay increasing assessment rates
and overhauling the assessment system
until the end of 2009. They argued that
the delay would allow time for a
thorough evaluation of the effectiveness
of measures recently taken by the
Federal government to restore stability
to the banking system. One comment
asserted that the proposed Restoration
Plan penalizes safe and well-run
community banks and urged the FDIC to
require the largest banks to recapitalize
the DIF. Finally, several comments
urged the FDIC to invoke its
‘‘extraordinary circumstances’’ authority
to extend the time period to rebuild the
DIF from five to at least ten years. By
lengthening the restoration period, the
FDIC could keep assessments at a more
moderate level, thereby reducing the
burden on institutions during stressful
periods.
The FDIC agrees with comments that
significant increases in deposit
insurance premium rates in times of
economic and financial stress are not
desirable. Indeed, the FDIC sought for
several years legislative reforms that
would allow it to charge every insured
institution a risk-based premium
regardless of the level of the reserve
ratio, and to have the ability to let the
fund rise under good economic
conditions in order to have room to
decline under adverse conditions
without needing to sharply increase
premium rates. The reforms sought by
the FDIC became law in February 2006,
and most of the implementing
regulations became effective at the start
of 2007. However, the one-time
assessment credits granted to over 80
percent of the industry did not enable
the fund to earn significant new revenue
last year, resulting in only a 1 basis
point increase in the reserve ratio
during all of 2007. Thus, the insurance
fund was unable to increase sufficiently
to prevent the increase in failures this
year from causing the reserve ratio to
fall below the 1.15 percent lower bound
established by Congress. While Congress
gave the FDIC new flexibility to manage
the fund, it prescribed limits on how
much the reserve ratio could decline,
requiring the FDIC to implement a
Restoration Plan to increase the fund to
at least 1.15 percent generally within
five years. In the FDIC’s view, higher
premiums are necessary to meet this
statutory requirement.
As the trade groups and many other
commenters noted, the law does allow
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Federal Register / Vol. 73, No. 246 / Monday, December 22, 2008 / Rules and Regulations
FDIC to take longer than five years for
the reserve ratio to reach 1.15 percent
FDIC due to ‘‘extraordinary
circumstances.’’ The FDIC recognizes
the current severe strains on banks and
the financial system. The FDIC’s
Temporary Liquidity Guarantee Program
(TLGP) is part of a coordinated effort by
the government—including the Treasury
Department’s Troubled Assets Relief
Program (TARP) and the Federal
Reserve’s Commercial Paper Funding
Facility—to stabilize the financial
system and provide much needed
liquidity. However, in the FDIC’s view,
it would be premature to conclude at
this time that extraordinary
circumstances should warrant extending
the Restoration Plan horizon beyond
five years. There is considerable
uncertainty about future insurance fund
losses and insured deposit growth.
Under the Restoration Plan published in
October, the FDIC will update its
projections at least semiannually while
the plan is in effect and adjust rates as
necessary. As the FDIC updates its
projections to account for changing
conditions, it could also determine
whether it is appropriate to adjust the
time frame for reaching the 1.15 percent
target due to extraordinary
circumstances.
While higher deposit insurance
premiums next year will result in lower
industry earnings than would otherwise
be the case, the FDIC believes that the
coordinated efforts by the Treasury,
Federal Reserve, and FDIC to expand
banking system liquidity will help
enable banks to increase lending to
communities and businesses.
Finally, if Congress did not enact the
reforms in 2006 that FDIC had sought,
the FDIC would have to increase the
reserve ratio to 1.25 percent within one
year or charge an average rate on
assessable deposits of at least 23 basis
points. Banks and thrifts, in fact, did
pay a minimum of 23 basis points in the
early 1990s to rebuild the insurance
funds.11 The first quarter 2009 rates
adopted in the final rule are
significantly lower—most banks will be
charged an annual rate between 12 and
14 basis points.
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V. Effective Date
The final rule will take effect January
1, 2009, for the assessment for the first
quarter of 2009.
11 The insurance funds were the Bank Insurance
Fund and Savings Association Insurance Fund. The
funds were merged in 2006.
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VI. Regulatory Analysis and Procedure
A. Administrative Procedure Act
The final rule setting assessment rates
for the first assessment period of 2009
will become effective on January 1,
2009. In this regard, the FDIC invokes
the good cause exception to the
requirements in the Administrative
Procedure Act that, once finalized, a
rulemaking must have a delayed
effective date of thirty days from the
publication date.12 The FDIC has
determined that good cause exists for
waiving the customary 30-day delayed
effective date.
Recent failures of FDIC-insured
institutions caused the reserve ratio of
the DIF to decline from 1.19 percent as
of March 31, 2008, to 0.76 percent as of
September 30, 2008. Furthermore, the
FDIC expects a higher rate of institution
failures in the next few years compared
to recent years, leading to a further
decline in the reserve ratio. Under these
circumstances, the FDIC is required by
statute to establish and implement a
restoration plan to restore the reserve
ratio to no less than 1.15 percent within
five years. In light of the current reserve
ratio, the continuing unusual and
exigent circumstances in the banking
system, and the statutory requirements,
restoring the reserve ratio to at least 1.15
percent within five years requires an
increase in assessment rates, including
an increase in the assessment rates for
the first quarter of 2009. For these
reasons, the FDIC finds that good cause
exists to justify a January 1, 2009
effective date.
B. Solicitation of Comments on Use of
Plain Language
Section 722 of the Gramm-LeachBliley Act, Public Law 106–102, 113
Stat. 1338, 1471 (Nov. 12, 1999),
requires the federal banking agencies to
use plain language in all proposed and
final rules published after January 1,
2000. The FDIC invited comments on
how to make this proposal easier to
understand and received one response.
The comment (which did not
distinguish between the provisions
effective January 1, 2009, and those
effective April 1, 2009) stated that the
proposal was too complicated and
should have included an executive
summary in bullet point format.
C. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
requires that each federal agency either
certify that a proposed rule would not,
if adopted in final form, have a
significant economic impact on a
12 5
PO 00000
U.S.C. 553(d)(3).
Frm 00012
Fmt 4700
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substantial number of small entities or
prepare an initial regulatory flexibility
analysis of the proposal and publish the
analysis for comment.13 Certain types of
rules, such as rules of particular
applicability relating to rates or
corporate or financial structures, or
practices relating to such rates or
structures, are expressly excluded from
the definition of ‘‘rule’’ for purposes of
the RFA.14 The final rule relates directly
to the rates imposed on insured
depository institutions for deposit
insurance. Nevertheless, the FDIC
voluntarily undertook a regulatory
flexibility analysis to aid the public in
commenting upon the small business
impact of the proposed rule. The initial
regulatory flexibility analysis was
published in the Federal Register (73
FR 61560) on October 16, 2008. Public
comment was invited. The FDIC
received no comments on the initial
regulatory flexibility analysis regarding
the 7 basis point increase in assessment
rates proposed for the first quarter of
2009 only.
As of September 30, 2008, of the 8,384
insured commercial banks and savings
institutions, there were 4,753 small
insured depository institutions as that
term is defined for purposes of the RFA
(i.e., those with $165 million or less in
assets).15
The FDIC’s total assessment needs are
driven by the statutory requirement that
the FDIC adopt a Restoration Plan that
provides that the fund reserve ratio
reach at least 1.15 percent within five
years (absent extraordinary
circumstances) and by the FDIC’s
aggregate insurance losses, expenses,
investment income, and insured deposit
growth, among other factors. Under the
final rule, each institution’s existing rate
for the first quarter of 2009 is increased
uniformly by 7 basis points to help meet
FDIC assessment revenue needs. Apart
from the uniform increase in rates on all
institutions to help meet the FDIC’s total
revenue needs, the final rule makes no
other changes in rates for any insured
institution, including small insured
depository institutions. The final rule
increasing assessment rates uniformly
by 7 basis points across the board for all
institutions, including small institutions
for RFA purposes, does not alter the
present distribution of assessment rates.
The final rule does not directly
impose any ‘‘reporting’’ or
‘‘recordkeeping’’ requirements within
the meaning of the Paperwork
13 See
5 U.S.C. 603, 604 and 605.
U.S.C. 601
15 Throughout this regulatory flexibility analysis
(unlike the rest of the notice of proposed
rulemaking), a ‘‘small institution’’ refers to an
institution with assets of $165 million or less.
14 5
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Federal Register / Vol. 73, No. 246 / Monday, December 22, 2008 / Rules and Regulations
Reduction Act. The compliance
requirements for the proposed rule
would not exceed existing compliance
requirements for the present system of
FDIC deposit insurance assessments,
which, in any event, are governed by
separate regulations.
The FDIC is unaware of any
duplicative, overlapping or conflicting
federal rules.
D. Paperwork Reduction Act
No collections of information
pursuant to the Paperwork Reduction
Act (44 U.S.C. 3501 et seq.) are
contained in the proposed rule.
E. The Treasury and General
Government Appropriations Act, 1999—
Assessment of Federal Regulations and
Policies on Families
The FDIC has determined that the
final rule will not affect family wellbeing within the meaning of section 654
of the Treasury and General
Government Appropriations Act,
enacted as part of the Omnibus
Consolidated and Emergency
Supplemental Appropriations Act of
1999 (Pub.L. 105–277, 112 Stat. 2681).
F. Small Business Regulatory
Enforcement Fairness Act
78161
For the reasons set forth in the
preamble, the FDIC proposes to amend
chapter III of title 12 of the Code of
Federal Regulations as follows:
■
PART 327—ASSESSMENTS
1. The authority citation for part 327
continues to read as follows:
■
The Office of Management and Budget
has determined that the final rule is not
a ‘‘major rule’’ within the meaning of
the relevant sections of the Small
Business Regulatory Enforcement Act of
1996 (SBREFA) Public Law No. 110–28
(1996). As required by law, the FDIC
will file the appropriate reports with
Congress and the General Accounting
Office so that the final rule may be
reviewed.
List of Subjects in 12 CFR Part 327
Bank deposit insurance, Banks,
banking, Savings associations.
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.
2. In § 327.10 add a new paragraph (d)
to read as follows:
■
§ 327.10
Assessment rate schedules.
*
*
*
*
*
(d) Assessment Rate Schedule for
First Assessment Period of 2009. The
annual assessment rate for an insured
depository institution for the assessment
period beginning January 1, 2009 and
ending March 31, 2009, shall be the rate
prescribed in the following schedule:
Risk category
I*
II
Minimum
Annual Rates (in basis points) .................................................................
* Rates
IV
12
14
17
35
50
for institutions that do not pay the minimum or maximum rate will vary between these rates.
(1) Risk Category I Rate Schedule. The
annual assessment rates for all
institutions in Risk Category I shall
range from 12 to 14 basis points.
(2) Risk Category II, III, and IV Rate
Schedule. The annual assessment rates
for Risk Categories II, III, and IV shall be
17, 35, and 50 basis points respectively.
(3) All institutions in any one risk
category, other than Risk Category I, will
be charged the same assessment rate.
Note: This Appendix will not appear in
the Code of Federal Regulations.
Appendix 1—Analysis of the Projected
Effects of the Payment of Assessments
on the Capital and Earnings of Insured
Depository Institutions
mstockstill on PROD1PC66 with RULES
III
Maximum
I. Introduction
This analysis estimates the effect of the
deposit insurance assessments adopted in the
final rule for the first quarter of 2009 on the
equity capital and profitability of all insured
institutions. The analysis assumes that each
institution’s pre-tax, pre-assessment income
in the first quarter is equivalent to one fourth
of the amount reported over the four quarters
ending in September 2008. Each institution’s
rate under the rate schedule is based on data
as of September 30, 2008.16 In addition, the
16 For purposes of this analysis, the assessment
base (like income) is not assumed to increase, but
is assumed to remain at September 2008 levels.
Income is defined as income before taxes,
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16:38 Dec 19, 2008
Jkt 217001
projected use of one-time credits authorized
under the Reform Act is taken into
consideration in determining the effective
assessment for an institution.
II. Analysis of the Projected Effects on
Capital and Earnings
While deposit insurance assessment rates
generally will result in reduced institution
profitability and capitalization compared to
the absence of assessments, the reduction
will not necessarily equal the full amount of
the assessment. Two factors can mitigate the
effect of assessments on institutions’ profits
and capital. First, a portion of the assessment
may be transferred to customers in the form
of higher borrowing rates, increased service
fees and lower deposit interest rates. Since
information is not readily available on the
extent to which institutions are able to share
assessment costs with their customers,
however, this analysis assumes that
institutions bear the full after-tax cost of the
assessment. Second, deposit insurance
assessments are a tax-deductible operating
expense; therefore, the assessment expense
can lower taxable income. This analysis
considers the effective after-tax cost of
extraordinary items, and deposit insurance
assessments. Assessments are adjusted for the use
of one-time credits, and all income statement items
used in this analysis were adjusted for the effect of
mergers. Institutions for which four quarters of
earnings data were unavailable, including insured
branches of foreign banks, were excluded from this
analysis.
PO 00000
Frm 00013
Fmt 4700
Sfmt 4700
assessments in calculating the effect on
capital.17
An institution’s earnings retention and
dividend policies also influence the extent to
which assessments affect equity levels. If an
institution maintains the same dollar amount
of dividends when it pays a deposit
insurance assessment as when it does not,
equity (retained earnings) will be less by the
full amount of the after-tax cost of the
assessment. This analysis instead assumes
that an institution will maintain its dividend
rate (that is, dividends as a fraction of net
income) unchanged from the weighted
average rate reported over the four quarters
ending September 30, 2008. In the event that
the ratio of equity to assets falls below 4
percent, however, this assumption is
modified such that an institution retains the
amount necessary to achieve a 4 percent
minimum and distributes any remaining
funds according to the dividend payout rate.
The equity capital of insured institutions
as of September 30, 2008 was $1.304 trillion.
Based on the assumptions for earnings
described above, March 31, 2009 equity
capital is projected to equal $1.302 trillion
under the rates adopted in the final rule. In
the absence of an assessment, total equity
would be an estimated $1.6 billion higher.
Alternatively, total equity would be an
estimated $0.6 billion higher if current rates
remained in effect.
17 The analysis does not incorporate any tax
effects from an operating loss carry forward or carry
back.
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Federal Register / Vol. 73, No. 246 / Monday, December 22, 2008 / Rules and Regulations
On an industry weighted average basis,
projected total assessments through the end
of the first quarter of 2009 would result in
capital that is 0.1 percent less than in the
absence of assessments and 0.04 percent less
than if the current rates remained in effect.
The analysis indicates that assessments
would cause 3 institutions whose equity-toassets ratio would have exceeded 4 percent
in the absence of assessments to fall below
that percentage and 2 institutions to have
below 2 percent equity-to-assets that
otherwise would not have. Alternatively,
compared to current assessments, the
increase in assessments would cause one
institution whose equity-to-assets ratio
would otherwise have exceeded 4 percent to
fall below that threshold and no institutions
to fall below 2 percent equity-to-assets.
The effect of assessments on institution
income is measured by deposit insurance
assessments as a percent of income before
assessments, taxes, and extraordinary items
(hereafter referred to as ‘‘income’’). This
income measure is used in order to eliminate
the potentially transitory effects of
extraordinary items and taxes on
profitability. For profitable institutions, the
median projected reduction in income
relative to the absence of assessments is 8.3
percent, while the weighted average
reduction for the same institutions is 5.9
percent. For unprofitable institutions,
assessments would increase losses by 4.4
percent. When compared to current rates
(rather than the absence of assessments), the
weighted average reduction in income for
profitable institutions is 3.4 percent, while
the increase in losses for unprofitable
institutions is 2 percent.
By order of the Board of Directors.
Dated at Washington, DC, this 16th day of
October 2008.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. E8–30222 Filed 12–19–08; 8:45 am]
BILLING CODE 6714–01–P
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 371
RIN 3064–AD30
Recordkeeping Requirements for
Qualified Financial Contracts
AGENCY: Federal Deposit Insurance
Corporation (FDIC).
ACTION: Final rule.
mstockstill on PROD1PC66 with RULES
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Jkt 217001
I. Background
QFCs are certain financial contracts
that have been defined in the Federal
Deposit Insurance Act (FDI Act) and
receive special treatment by the FDIC in
the event of the failure of an insured
depository institution (institution). The
special treatment of QFCs after the
FDIC’s appointment as receiver or
conservator for a failed institution
initially was codified in the FDI Act as
part of the Financial Institutions
Reform, Recovery, and Enforcement Act
of 1989 (FIRREA) 1 and places certain
restrictions on the FDIC as receiver 2 for
a failed institution that held QFCs.
The FDI Act identifies QFCs using the
statutory definition of five specific
financial contracts. This statutory list of
QFCs consists of securities contracts,
commodity contracts, forward contracts,
repurchase agreements, and swap
agreements.3 The FDIC also may define
other similar agreements as QFCs by
rule or order.4 In addition, a master
agreement that governs any contracts in
these five categories is treated as a
QFC,5 as are security agreements that
ensure the performance of a contract
from the five enumerated categories.6
Under the FDI Act and other U.S.
insolvency statutes, a party to QFCs
with the insolvent entity can exercise its
contractual right to terminate QFCs and
offset or net out any amounts due
between the parties and apply any
pledged collateral for payment.7 Under
the Bankruptcy Code, this right is
immediate upon initiation of
bankruptcy proceedings, while under
the FDI Act, counterparties cannot
exercise this contractual right until after
5 p.m. (Eastern Time) on the business
day following the appointment of the
FDIC as receiver.8 By contrast, parties to
most other contracts with insured
institutions cannot terminate the
contracts based upon the appointment
of the FDIC as receiver.9 The special
rights granted by the FDI Act to QFC
counterparties are designed to protect
the stability of the financial system and
to reduce the potential for cascading
interrelated defaults.
If QFC counterparties were unable to
terminate and liquidate their positions
in a timely manner after the failure of
the institution, they would be exposed
to market risks and uncertainty
regarding the ultimate resolution of
QFCs. Absent the ability to terminate a
QFC in a timely manner when the
counterparty becomes insolvent (which
may include exercising rights to offset
positions, net payments, and use
collateral to cover amounts due), the
potential for fluctuation in the value of
the QFCs from changes in interest rates
and other market factors may create
market uncertainty that could lead to
broader market disruptions.
Consequently, while the Bankruptcy
3 12
U.S.C. 1821(e)(8)(D)(ii)–(vi).
U.S.C. 1821(e)(8)(D)(i). The FDIC has
provided clarifying definitions for repurchase
agreements and swap agreements in 12 CFR 360.5.
5 12 U.S.C. 1821(e)(8)(D)(ii)(XI), (iii)(IX), (iv)(IV),
(v)(V), and (vi)(V).
6 12 U.S.C. 1821(e)(8)(D)(ii)(XII), (iii)(X), (iv)(V),
(v)(VI), and (vi)(VI).
7 12 U.S.C. 1821(e)(8); 11 U.S.C. 555 (securities
contracts), 556 (commodities and forward
contracts), 559 (repurchase agreements), 560 (swap
agreements), and 561 (master netting agreements).
8 See 12 U.S.C. 1821(e)(10)(B).
9 12 U.S.C. 1821(e)(13).
4 12
The FDIC is adopting a final
rule establishing recordkeeping
requirements for qualified financial
contracts (QFCs) held by insured
depository institutions in a troubled
condition as defined in this rule. The
appendix to the rule requires an
institution in a troubled condition, upon
written notification by the FDIC, to
SUMMARY:
produce immediately at the close of
processing of the institution’s business
day, for a period provided in the
notification, the electronic files for
certain position level and counterparty
level data; electronic or written lists of
QFC counterparty and portfolio location
identifiers, certain affiliates of the
institution and the institution’s
counterparties to QFC transactions,
contact information and organizational
charts for key personnel involved in
QFC activities, and contact information
for vendors for such activities; and
copies of key agreements and related
documents for each QFC.
DATES: This final rule is effective
January 21, 2009.
FOR FURTHER INFORMATION CONTACT: R.
Penfield Starke, Counsel, Litigation and
Resolutions Branch, Legal Division,
(703) 562–2422 or RStarke@FDIC.gov;
Michael B. Phillips, Counsel,
Supervision and Legislation Branch,
Legal Division, (202) 898–3581 or
MPhillips@FDIC.gov; Craig C. Rice,
Senior Capital Markets Specialist,
Division of Resolutions and
Receiverships, (202) 898–3501 or
Crrice@FDIC.gov; Marc Steckel, Section
Chief, Capital Markets Branch, Division
of Supervision and Consumer
Protection, (202) 898–3618 or
MSteckel@FDIC.gov; Steve Burton,
Section Chief, Division of Insurance and
Research, (202) 898–3539 or
Sburton@FDIC.gov, Federal Deposit
Insurance Corporation, 550 17th Street,
NW., Washington, DC.
SUPPLEMENTARY INFORMATION:
1 Public Law No. 101–73, 103 Stat. 514 (August
9, 1989).
2 Most of the restrictions applicable to the
treatment of QFCs by an FDIC receiver also apply
to the FDIC in its conservatorship capacity. See
U.S.C. 1821(e)(8), (9), (10), and (11). While the
treatment of QFCs by an FDIC conservator is not
identical to the treatment of QFCs in a receivership,
see 12 U.S.C. 1821(e)(8)(E) and (10)(B)(i) and (ii), for
purposes of this preamble we intend reference to
the FDIC in its receivership capacity to include its
role as conservator under this statutory authority.
PO 00000
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22DER1
]]>Agencies
[Federal Register Volume 73, Number 246 (Monday, December 22, 2008)]
[Rules and Regulations]
[Pages 78155-78162]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-30222]
=======================================================================
-----------------------------------------------------------------------
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327
RIN 3064-AD35
Risk Based Assessments
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The FDIC is amending our regulations to increase risk-based
assessment rates effective for the first quarter 2009 assessment
period. This is in accordance with the Restoration plan for the DIF
published on October 16, 2008, in the Federal Register.
DATES: The final rule will become effective on January 1, 2009.
FOR FURTHER INFORMATION CONTACT: Matthew Green, Chief, Fund Analysis
and Pricing Section, Division of Insurance and Research, (202) 898-
3670; and Christopher Bellotto, Counsel, Legal Division, (202) 898-
3801.
SUPPLEMENTARY INFORMATION:
I. Background: Restoration Plan and Proposed Rule
Recent failures of FDIC-insured institutions caused the reserve
ratio of the Deposit Insurance Fund (DIF) to decline from 1.19 percent
as of March 30, 2008, to 1.01 percent as of June 30 and 0.76 percent as
of September 30. The FDIC expects a higher rate of institution failures
in the next few years compared to recent years, leading to a further
decline in the reserve ratio. Because the fund reserve ratio fell below
1.15 percent as of June 30 and was expected to remain below 1.15
percent, the Reform Act required the FDIC to establish and implement a
Restoration Plan to restore the reserve ratio to at least 1.15 percent
within five years.
On October 7, 2008, the FDIC established a Restoration Plan for the
DIF, published on October 16 (see 73 FR 61598). In the FDIC's view,
restoring the reserve ratio to at least 1.15 percent within five years
requires an increase in assessment rates. Since the current rates are
already three basis points above the existing base rate schedule, a new
rulemaking was required. Consequently, the FDIC Board of Directors
adopted, also on October 7, 2008, a notice of proposed rulemaking with
request for comments on revisions to the FDIC's assessment regulations
(12 CFR part 327).\1\ The rulemaking proposed that, effective January
1, 2009, current assessment rates would increase uniformly by 7 basis
points for the first quarter 2009 assessment period. Effective April 1,
2009, the rulemaking proposed to alter the way in which the FDIC's
risk-based assessment system differentiates for risk and set new
deposit insurance assessment rates. Also effective on April 1, 2009,
the proposal would make technical and other changes to the rules
governing the risk-based assessment system. The proposed rule was
published concurrently with the Restoration Plan on October 16, 2008
(see 73 FR 61560), with a comment period scheduled to end on November
17, 2008.
---------------------------------------------------------------------------
\1\ At the same meeting, the Board set the Designated Reserve
Ratio of the DIF at 1.25 percent for 2009.
---------------------------------------------------------------------------
On November 7, 2008, the FDIC Board approved an extension of the
comment period until December 17, 2008, on the parts of the proposed
rulemaking that would become effective on April 1, 2009. The comment
period for the proposed 7 basis point rate increase for the first
quarter of 2009, with its separate proposed effective date of January
1, 2009, was not extended and expired on November 17, 2008.
This final rule will implement a uniform increase to current rates
for the first quarter 2009 assessment period only. The FDIC will issue
another final rule early in 2009, to be effective April 1, 2009, to
change the way that the FDIC's assessment system differentiates for
risk, to set new assessment rates beginning with the second quarter of
2009, and make certain technical and other changes to the assessment
rules.
II. The Final Rule: Assessment Rate Schedule for the First Quarter of
2009
The final rule raises the current rates uniformly by 7 basis points
for the quarterly assessment period beginning January 1, 2009 only. The
higher assessments would be reflected in the fund balance as of March
31, 2009, and collected on June 30, 2009. Rates for the first quarter
of 2009 are shown in Table 1 as follows:
[[Page 78156]]
Table 1--Assessment Rates for the First Quarter of 2009
----------------------------------------------------------------------------------------------------------------
Risk category
---------------------------------------------------------------------
I *
---------------------------- II III IV
Minimum Maximum
----------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points)........... 12 14 17 35 50
----------------------------------------------------------------------------------------------------------------
* Rates for institutions that do not pay the minimum or maximum rate would vary between these rates.
III. Factors Considered in Setting First Quarter 2009 Assessment Rates
Summary
The FDIC expects that the economic downturn and continuing troubles
in the housing and construction sectors, financial markets, and
commercial real estate will prolong the challenging operating
environment that banks and thrifts face. Losses experienced by many
large institutions in recent quarters are likely to spread to a growing
number of small institutions. The percentage of the industry that is
unprofitable is expected to remain high, primarily due to asset quality
problems. These troubles lead the FDIC to project an increase in
failures and higher losses to the insurance fund compared to recent
years. The insurance fund balance and reserve ratio are likely to
decline further before increased assessment revenue can begin to offset
the effects of higher losses.
Since the October proposed rulemaking, the FDIC has updated its
projections through the first quarter of 2009 of losses and other
factors affecting the reserve ratio. The FDIC bases its updated near-
term loss projections on analysis of specific troubled institutions,
analysis of recent and expected loss rates given failure, as well as
the stress analyses of the effects of housing price declines and an
economic slowdown underlying the projections included in the October
proposed rulemaking.
The FDIC also assumes that insured deposits would increase at an
annual rate between 5 and 6 percent through March of next year.
(Insured deposits include only those under the basic limit of $100,000
and $250,000 for retirement accounts.) \2\ For the four quarters ending
September 30, 2008, insured deposits rose 7.1 percent. Over the 5-year
period ending in September, insured deposits rose at an average annual
rate of 5.9 percent.
---------------------------------------------------------------------------
\2\ Estimated insured deposits do not include those resulting
from the temporary coverage limit increase to $250,000 under the
Emergency Economic Stabilization Act of 2008, or those non-interest
bearing transaction deposits covered by the Temporary Liquidity
Guarantee Program.
---------------------------------------------------------------------------
Table 2 shows projected reserve ratios for the fourth quarter of
2008 and first quarter of 2009 for alternative insured deposit growth
assumptions. At 5 or 6 percent insured deposit growth, the reserve
ratio would fall from 0.76 percent in the third quarter of 2008 to 0.61
percent at the end of the year. It would rise slightly to 0.63 percent
(assuming 5 percent insured deposit growth) or 0.62 percent (with 6
percent growth) in the first quarter of 2009 due to the increase in
assessment rates adopted in the final rule. In the absence of the rate
increase, the reserve ratio would end the first quarter at 0.60 percent
(with 5 or 6 percent insured deposit growth).
Table 2--Projected Reserve Ratios
[September 30, 2008 reserve ratio = 0.76 percent]
----------------------------------------------------------------------------------------------------------------
Annualized insured deposit growth *
Quarter ending ---------------------------------------------------------------
4% 5% 6% 7%
----------------------------------------------------------------------------------------------------------------
12/31/2008..................................... 0.61% 0.61% 0.61% 0.60%
3/31/2009 (without rate increase).............. 0.60% 0.60% 0.60% 0.59%
3/31/2009 (with 7 b.p. rate increase).......... 0.63% 0.63% 0.62% 0.62%
----------------------------------------------------------------------------------------------------------------
* Assumes assessable (domestic) and insured deposits increase at the same rate. Estimated insured deposits do
not include those resulting from the temporary coverage limit increase to $250,000 under the Emergency
Economic Stabilization Act of 2008, or those non-interest bearing transaction deposits covered by the
Temporary Liquidity Guarantee Program.
The rates adopted in the final rule for the first quarter of 2009
will raise almost as much assessment revenue as the rates that would
become effective beginning April 1, 2009 under the October proposed
rulemaking. Combining the updated near-term projections above with the
longer-term projections included in the October proposed rulemaking and
the proposed assessment rates effective April 1, the FDIC expects that
the reserve ratio will reach 0.69 percent by the end of 2009. By the
end of 2013--the last year of the Restoration Plan--the reserve ratio
is projected to reach 1.21 percent, allowing for a margin for error in
achieving the 1.15 percent threshold if the FDIC's assumptions do not
hold.\3\ However, the FDIC will update its longer-term projections for
the insurance fund before adopting a final rule on assessment rates and
risk-based pricing changes that would take effect in the second quarter
of next year.
---------------------------------------------------------------------------
\3\ In the October proposed rulemaking, the FDIC's best estimate
of the cost of failures over the six years from 2008 through 2013
was about $40 billion and its projected 2013 ending reserve ratio
was 1.26 percent. Combining updated near-term loss estimates with
the longer term forecasts from October, total failures costs for
2008-13 are now projected to exceed $42 billion, contributing to a
lower projected reserve ratio for 2013.
---------------------------------------------------------------------------
The FDIC recognizes that there is considerable uncertainty about
its projections for losses and insured deposit growth, and that changes
in assumptions about these and other factors could lead to different
assessment revenue needs and rates. Under the terms of the Restoration
Plan, the FDIC must update its projections for the insurance fund
balance and reserve ratio at least semiannually while the plan is in
effect and adjust rates as necessary. In the event that losses
[[Page 78157]]
exceed the FDIC's best estimate or insured deposit growth is more rapid
than expected, the Board will be able to adjust assessment rates.
Analysis
In setting assessment rates, the FDIC's Board of Directors has
considered the following factors as required by statute:
(i) The estimated operating expenses of the Deposit Insurance Fund.
(ii) The estimated case resolution expenses and income of the
Deposit Insurance Fund.
(iii) The projected effects of the payment of assessments on the
capital and earnings of insured depository institutions.
(iv) The risk factors and other factors taken into account pursuant
to section 7(b)(1) of the Federal Deposit Insurance Act (12 U.S.C.
1817(b)(1)) under the risk-based assessment system, including the
requirement under section 7(b)(1)(A) of the Federal Deposit Insurance
Act (12 U.S.C. 1817(b)(1)(A)) to maintain a risk-based system.
(v) Other factors the Board of Directors has determined to be
appropriate.\4\
---------------------------------------------------------------------------
\4\ Section 2104 of the Reform Act (amending section 7(b)(2) of
the Federal Deposit Insurance Act, 12 U.S.C. 1817(b)(2)(B)). The
risk factors referred to in factor (iv) include:
(i) The probability that the Deposit Insurance Fund will incur a
loss with respect to the institution, taking into consideration the
risks attributable to--
(I) Different categories and concentrations of assets;
(II) Different categories and concentrations of liabilities,
both insured and uninsured, contingent and noncontingent; and
(III) Any other factors the Corporation determines are relevant
to assessing such probability;
(ii) The likely amount of any such loss; and
(iii) The revenue needs of the Deposit Insurance Fund.
Section 7(b)(1)(C) of the Federal Deposit Insurance Act (12
U.S.C. 1817(b)(1)(C)).
---------------------------------------------------------------------------
The factors considered in setting assessment rates are discussed in
more detail below.
Case Resolution Expenses (Insurance Fund Losses)
A higher rate of failures is likely to cause the insurance fund
balance and reserve ratio to decline at least through the end of 2008
before increased assessment revenue can begin to offset the effects of
increased losses. The economic downturn and continuing troubles in the
housing and construction sectors, financial markets, and commercial
real estate will prolong the challenging operating environment that
banks and thrifts face going into 2009. Losses experienced by many
large institutions in recent quarters are likely to spread to a growing
number of small institutions. The percentage of the industry that is
unprofitable is expected to remain high, primarily due to asset quality
problems.
The FDIC's updated near-term projections relied heavily on
supervisory analysis of specific troubled institutions. Recent and
expected loss rates given failure and stress analyses of the effects of
housing price declines and an economic slowdown in specific geographic
areas on loan losses and bank capital also served as a basis for
insurance fund loss projections.
The FDIC estimates that failures in all of 2008 will cost the
insurance fund $18.9 billion. After taking into account a projected
year-end 2008 contingent loss reserve for anticipated failures,
insurance fund loss provisions for 2008 are currently projected to
total $30.4 billion.\5\ For the fourth quarter, failures are expected
to cost $4.8 billion and loss provisions are estimated at $7.7
billion.\6\ The fund is also projected to incur another $1.1 billion in
loss provisions during the first quarter of next year.
---------------------------------------------------------------------------
\5\ The $30.4 billion 2008 loss provision is derived by adding
$18.9 billion for the cost of failures, $11.5 billion for the
contingent loss reserve, and another $0.1 billion adjustment for
failures in earlier years, then subtracting the $0.1 billion year-
end 2007 contingent loss reserve.
\6\ The $7.7 billion fourth quarter loss provision is derived by
adding $4.8 billion for the cost of failures, $11.5 billion for the
contingent loss reserve, and another $3.1 billion adjustment for
failures occurring prior to the fourth quarter, then subtracting the
$11.7 billion third quarter contingent loss reserve.
---------------------------------------------------------------------------
Before considering the final rule on changes to risk-based pricing
rules and assessment rates beginning the second quarter of 2009, the
FDIC will update its long-term stress analyses and other factors and
assumptions underlying its projections of losses in 2009 and over the
five-year Restoration Plan horizon.
Operating Expenses and Investment Income
Operating expenses are projected to average close to $300 million
per quarter in the fourth quarter of 2008 and first quarter of 2009.
The FDIC projects that its investment contributions (investment
income and realized gains on the sale of securities, plus or minus
unrealized gains or losses on available-for-sale securities) will
average $309 million per quarter in the fourth quarter of this year and
first quarter of next year. The FDIC is investing new funds in
overnight investments and short-term Treasury bills to accommodate
increased bank failure activity. The FDIC generally expects that these
investments will earn lower rates than the longer-term securities that
they are replacing, particularly given the consensus forecast of a
near-term decline in Treasury rates, and will therefore result in less
interest income to the fund.\7\
---------------------------------------------------------------------------
\7\ Projections of interest rates are based on consideration of
December Blue Chip Financial Forecasts.
---------------------------------------------------------------------------
Assessment Revenue, Credit Use, and the Distribution of Assessments
The FDIC expects that assessment revenue in 2008 will total about
$3.0 billion: $4.4 billion in gross assessments charged less $1.4
billion in credits used. Fourth quarter revenue is projected at about
$1.0 billion. By the end of 2008, the projections indicate that only 4
percent of the original $4.7 billion in credits awarded will be
remaining. Under the statutory provisions governing the Restoration
Plan, the FDIC has the authority to restrict credit use while the plan
is in effect, providing that institutions may still apply credits
against their assessments equal to the lesser of their assessment or 3
basis points.\8\ The FDIC concluded not to restrict credit use in the
Restoration Plan. The FDIC projects that the amount of credits
remaining at the time that the proposed new rates go into effect will
be very small and that their continued use would have very little
effect on the assessment rates necessary to meet the requirements of
the plan.\9\
---------------------------------------------------------------------------
\8\ Section 7(b)(3)(E)(iv) of the Federal Deposit Insurance Act
(12 U.S.C. 1817(b)(3)(E)(iv)).
\9\ For 2008, 2009 and 2010, credits may not offset more than 90
percent of an institution's assessment. Section 7(e)(3)(D)(ii) of
the Federal Deposit Insurance Act (12 U.S.C. 1817(e)(3)(D)(ii)).
---------------------------------------------------------------------------
The FDIC projects that the 7 basis point uniform increase in rates
adopted in the final rule for the first quarter of 2009 will result in
first quarter assessment revenue of just over $2.3 billion, about $1.2
billion more than in the absence of a rate increase. The FDIC derived
its assessment revenue projections by assigning each insured
institution to an assessment rate based on the current rate schedule
for the fourth quarter and the rate schedule adopted in the final rule
for the first quarter of next year. It then adjusted each institution's
assessment for any remaining credits. For the fourth quarter of 2008,
the FDIC estimated an industry average rate of approximately 6.4 basis
points, increasing to approximately 13.4 basis points in the first
quarter of 2009.
Estimated Insured Deposits
The FDIC believes that it is reasonable to plan for annual insured
deposit growth of between 5 and 6 percent through the first quarter of
next year. Over the 12 months ending September 30, 2008, estimated
insured deposits
[[Page 78158]]
increased by 7.1 percent.\10\ However, the most recent 5- and 10-year
averages are about 6 percent and 5 percent, respectively. Chart 1
depicts insured deposit growth rates since 1992.
---------------------------------------------------------------------------
\10\ Estimated insured deposits do not include those resulting
from the temporary coverage limit increase to $250,000 under the
Emergency Economic Stabilization Act of 2008, or those non-interest
bearing transaction deposits covered by the Temporary Liquidity
Guarantee Program.
[GRAPHIC] [TIFF OMITTED] TR22DE08.010
Projections of insured deposits are subject to considerable
uncertainty. Insured deposit growth over the near term could continue
to rise at the more rapid pace observed in the third quarter (1.8
percent, or 7.2 percent annualized) due to a ``flight to quality''
attributable to financial and economic uncertainties. On the other
hand, as the experience of the late 1980s and early 1990s demonstrated,
lower overall growth in the banking industry and the economy could
depress rates of growth of total domestic and insured deposits. As
Table 2 shows, differences in annualized growth rates of insured
deposits over the next couple of quarters will have little effect on
the projected reserve ratio as of March 31, 2009.
Projected Fund Balances, Insured Deposits, and Reserve Ratios
Assuming annualized insured deposit growth of 5 percent through
March of next year, projections of fund income, expenses, and losses,
the fund balance, estimated insured deposits, and the reserve ratio are
shown below in Table 3.
Table 3--Projected Fund Balance, Estimated Insured Deposits, and Reserve Ratio Under the Rates Adopted in the
Final Rule Assuming 5 Percent Annual Insured Deposit Growth
[$ in billions]
----------------------------------------------------------------------------------------------------------------
4th Qtr 2008 1st Qtr 2009
--------------------------------------------------------------------------------------------------
Beginning Fund Balance............................................ 34.6 28.0
Plus: Net Assessment Revenue...................................... 1.0 2.3
Plus: Investment Income........................................... 0.3 0.3
Less: Loss Provisions............................................. 7.7 1.1
Less: Operating Expenses.......................................... 0.3 0.3
Ending Fund Balance............................................... 28.0 29.1
Estimated Insured Deposits........................................ 4,599.5 4,656.0
Ending Reserve Ratio.............................................. 0.61% 0.63%
----------------------------------------------------------------------------------------------------------------
Note: Components of fund balance changes may not sum to totals due to rounding.
[[Page 78159]]
Effect on Capital and Earnings
Appendix 1 contains an analysis of the effect of proposed rates on
the capital and earnings of insured institutions. Given the assumptions
in the analysis, for the industry as a whole, projected total
assessments in the first quarter of 2009 would result in capital that
would be 0.12 percent lower than if the FDIC did not charge assessments
and 0.04 percent lower than if current assessment rates remained in
effect. The proposed assessments would cause 3 institutions whose
equity-to-assets ratio would have exceeded 4 percent in the absence of
assessments to fall below that percentage and 2 institutions to fall
below 2 percent. The proposed increase in assessments would cause 1
institution whose equity-to-assets ratio would have exceeded 4 percent
under current assessments to fall below that threshold and no
institutions to fall below 2 percent equity-to-assets.
For profitable institutions, assessments in the first quarter of
2009 would result in pre-tax income that would be 5.9 percent lower
than if the FDIC did not charge assessments and 3.4 percent lower than
if current assessment rates remained in effect. For unprofitable
institutions, assessments would result in pre-tax losses that would be
4.4 percent higher than if the FDIC did not charge assessments and 2
percent higher than if current assessment rates remained in effect.
IV. Comments Received on the Proposal
The FDIC received comments from three nationwide industry trade
groups and a few banks that specifically addressed the 7 basis point
increase in assessment rates for the first quarter of 2009. The FDIC
also received many comments from banks and others concerning rates for
all of 2009 and beyond. Several of them also discussed proposed changes
to risk-based pricing methods beginning in the second quarter of 2009.
One of the nationwide industry trade groups criticized the
magnitude of the first quarter increase and expressed concern about the
pace at which the FDIC would restore the insurance fund. It argued that
the proposed assessment rates are too high--especially in the early
stages of the Restoration Plan--and questioned why the FDIC does not
take advantage of the flexibility that Congress provided to extend the
restoration period beyond five years under ``extraordinary
circumstances.'' The trade group argued that the FDIC's invocation of
its systemic risk authority to provide additional guarantees on non-
interest bearing transaction deposits and senior unsecured debt is
evidence of ``extraordinary circumstances.'' The group believes that
high premiums would restrain credit and run counter to other government
efforts designed to stimulate lending. It urged the FDIC to implement a
longer recapitalization period, such as six or seven years, and to rely
on lower insured deposit growth assumptions to achieve a more moderate
increase in rates. The comment letter recommended that the FDIC
consider phasing in higher assessment rates and argued that it was
counter-intuitive for the proposed minimum rate in the first quarter
(12 basis points) to be higher than the proposed minimum rate in the
second quarter (10 basis points initially and as low as 8 basis points
after adjustments).
Another nationwide industry trade group commenting on the first
quarter 2009 rate increase urged the FDIC to adopt a more modest
increase in assessment rates and to use its ``extraordinary
circumstances'' authority to extend the restoration period to at least
seven years. The comment expressed the view that a smaller rate
increase would keep additional funds in local communities for lending
to small businesses and consumers during the current period of economic
stress.
A third nationwide industry trade group estimated that the proposed
7 basis point assessment rate increase would reduce the banking
industry's pre-tax income by 7 percent or more at a time when the
industry needs to build its capital. It requested that the FDIC and
other bank regulators take steps to reduce losses to the DIF from
insured institution failures. To the extent that such efforts to reduce
losses succeeded, the FDIC should develop a revised plan incorporating
lower assessment rates.
One bank specifically discussing the first quarter 2009 proposed
assessment rates described the measure as ``ill-timed,'' given current
pressures on banks' capital and profitability, and urged the FDIC to
implement a more modest increase. Another expressed concern that the
increase would make it more difficult for safe and well-managed
institutions to meet local credit needs.
As noted before, many comments received from banks and others
pertained to the proposed increase in rates for all of 2009 and beyond
(as well as proposed changes to risk-based pricing methods). Two
comment letters supported the proposed changes to the assessment
system, including the increase in premiums. Many commenters made
similar points to those of the three industry trade groups. Several
comments from banks and from state trade groups opposed any significant
increase in assessment rates in the short term because many
institutions are struggling to maintain adequate levels of capital and
profitability. Several commenters urged the FDIC to withdraw the
proposed rule and delay increasing assessment rates and overhauling the
assessment system until the end of 2009. They argued that the delay
would allow time for a thorough evaluation of the effectiveness of
measures recently taken by the Federal government to restore stability
to the banking system. One comment asserted that the proposed
Restoration Plan penalizes safe and well-run community banks and urged
the FDIC to require the largest banks to recapitalize the DIF. Finally,
several comments urged the FDIC to invoke its ``extraordinary
circumstances'' authority to extend the time period to rebuild the DIF
from five to at least ten years. By lengthening the restoration period,
the FDIC could keep assessments at a more moderate level, thereby
reducing the burden on institutions during stressful periods.
The FDIC agrees with comments that significant increases in deposit
insurance premium rates in times of economic and financial stress are
not desirable. Indeed, the FDIC sought for several years legislative
reforms that would allow it to charge every insured institution a risk-
based premium regardless of the level of the reserve ratio, and to have
the ability to let the fund rise under good economic conditions in
order to have room to decline under adverse conditions without needing
to sharply increase premium rates. The reforms sought by the FDIC
became law in February 2006, and most of the implementing regulations
became effective at the start of 2007. However, the one-time assessment
credits granted to over 80 percent of the industry did not enable the
fund to earn significant new revenue last year, resulting in only a 1
basis point increase in the reserve ratio during all of 2007. Thus, the
insurance fund was unable to increase sufficiently to prevent the
increase in failures this year from causing the reserve ratio to fall
below the 1.15 percent lower bound established by Congress. While
Congress gave the FDIC new flexibility to manage the fund, it
prescribed limits on how much the reserve ratio could decline,
requiring the FDIC to implement a Restoration Plan to increase the fund
to at least 1.15 percent generally within five years. In the FDIC's
view, higher premiums are necessary to meet this statutory requirement.
As the trade groups and many other commenters noted, the law does
allow
[[Page 78160]]
FDIC to take longer than five years for the reserve ratio to reach 1.15
percent FDIC due to ``extraordinary circumstances.'' The FDIC
recognizes the current severe strains on banks and the financial
system. The FDIC's Temporary Liquidity Guarantee Program (TLGP) is part
of a coordinated effort by the government--including the Treasury
Department's Troubled Assets Relief Program (TARP) and the Federal
Reserve's Commercial Paper Funding Facility--to stabilize the financial
system and provide much needed liquidity. However, in the FDIC's view,
it would be premature to conclude at this time that extraordinary
circumstances should warrant extending the Restoration Plan horizon
beyond five years. There is considerable uncertainty about future
insurance fund losses and insured deposit growth. Under the Restoration
Plan published in October, the FDIC will update its projections at
least semiannually while the plan is in effect and adjust rates as
necessary. As the FDIC updates its projections to account for changing
conditions, it could also determine whether it is appropriate to adjust
the time frame for reaching the 1.15 percent target due to
extraordinary circumstances.
While higher deposit insurance premiums next year will result in
lower industry earnings than would otherwise be the case, the FDIC
believes that the coordinated efforts by the Treasury, Federal Reserve,
and FDIC to expand banking system liquidity will help enable banks to
increase lending to communities and businesses.
Finally, if Congress did not enact the reforms in 2006 that FDIC
had sought, the FDIC would have to increase the reserve ratio to 1.25
percent within one year or charge an average rate on assessable
deposits of at least 23 basis points. Banks and thrifts, in fact, did
pay a minimum of 23 basis points in the early 1990s to rebuild the
insurance funds.\11\ The first quarter 2009 rates adopted in the final
rule are significantly lower--most banks will be charged an annual rate
between 12 and 14 basis points.
---------------------------------------------------------------------------
\11\ The insurance funds were the Bank Insurance Fund and
Savings Association Insurance Fund. The funds were merged in 2006.
---------------------------------------------------------------------------
V. Effective Date
The final rule will take effect January 1, 2009, for the assessment
for the first quarter of 2009.
VI. Regulatory Analysis and Procedure
A. Administrative Procedure Act
The final rule setting assessment rates for the first assessment
period of 2009 will become effective on January 1, 2009. In this
regard, the FDIC invokes the good cause exception to the requirements
in the Administrative Procedure Act that, once finalized, a rulemaking
must have a delayed effective date of thirty days from the publication
date.\12\ The FDIC has determined that good cause exists for waiving
the customary 30-day delayed effective date.
---------------------------------------------------------------------------
\12\ 5 U.S.C. 553(d)(3).
---------------------------------------------------------------------------
Recent failures of FDIC-insured institutions caused the reserve
ratio of the DIF to decline from 1.19 percent as of March 31, 2008, to
0.76 percent as of September 30, 2008. Furthermore, the FDIC expects a
higher rate of institution failures in the next few years compared to
recent years, leading to a further decline in the reserve ratio. Under
these circumstances, the FDIC is required by statute to establish and
implement a restoration plan to restore the reserve ratio to no less
than 1.15 percent within five years. In light of the current reserve
ratio, the continuing unusual and exigent circumstances in the banking
system, and the statutory requirements, restoring the reserve ratio to
at least 1.15 percent within five years requires an increase in
assessment rates, including an increase in the assessment rates for the
first quarter of 2009. For these reasons, the FDIC finds that good
cause exists to justify a January 1, 2009 effective date.
B. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 113
Stat. 1338, 1471 (Nov. 12, 1999), requires the federal banking agencies
to use plain language in all proposed and final rules published after
January 1, 2000. The FDIC invited comments on how to make this proposal
easier to understand and received one response. The comment (which did
not distinguish between the provisions effective January 1, 2009, and
those effective April 1, 2009) stated that the proposal was too
complicated and should have included an executive summary in bullet
point format.
C. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires that each federal
agency either certify that a proposed rule would not, if adopted in
final form, have a significant economic impact on a substantial number
of small entities or prepare an initial regulatory flexibility analysis
of the proposal and publish the analysis for comment.\13\ Certain types
of rules, such as rules of particular applicability relating to rates
or corporate or financial structures, or practices relating to such
rates or structures, are expressly excluded from the definition of
``rule'' for purposes of the RFA.\14\ The final rule relates directly
to the rates imposed on insured depository institutions for deposit
insurance. Nevertheless, the FDIC voluntarily undertook a regulatory
flexibility analysis to aid the public in commenting upon the small
business impact of the proposed rule. The initial regulatory
flexibility analysis was published in the Federal Register (73 FR
61560) on October 16, 2008. Public comment was invited. The FDIC
received no comments on the initial regulatory flexibility analysis
regarding the 7 basis point increase in assessment rates proposed for
the first quarter of 2009 only.
---------------------------------------------------------------------------
\13\ See 5 U.S.C. 603, 604 and 605.
\14\ 5 U.S.C. 601
---------------------------------------------------------------------------
As of September 30, 2008, of the 8,384 insured commercial banks and
savings institutions, there were 4,753 small insured depository
institutions as that term is defined for purposes of the RFA (i.e.,
those with $165 million or less in assets).\15\
---------------------------------------------------------------------------
\15\ Throughout this regulatory flexibility analysis (unlike the
rest of the notice of proposed rulemaking), a ``small institution''
refers to an institution with assets of $165 million or less.
---------------------------------------------------------------------------
The FDIC's total assessment needs are driven by the statutory
requirement that the FDIC adopt a Restoration Plan that provides that
the fund reserve ratio reach at least 1.15 percent within five years
(absent extraordinary circumstances) and by the FDIC's aggregate
insurance losses, expenses, investment income, and insured deposit
growth, among other factors. Under the final rule, each institution's
existing rate for the first quarter of 2009 is increased uniformly by 7
basis points to help meet FDIC assessment revenue needs. Apart from the
uniform increase in rates on all institutions to help meet the FDIC's
total revenue needs, the final rule makes no other changes in rates for
any insured institution, including small insured depository
institutions. The final rule increasing assessment rates uniformly by 7
basis points across the board for all institutions, including small
institutions for RFA purposes, does not alter the present distribution
of assessment rates.
The final rule does not directly impose any ``reporting'' or
``recordkeeping'' requirements within the meaning of the Paperwork
[[Page 78161]]
Reduction Act. The compliance requirements for the proposed rule would
not exceed existing compliance requirements for the present system of
FDIC deposit insurance assessments, which, in any event, are governed
by separate regulations.
The FDIC is unaware of any duplicative, overlapping or conflicting
federal rules.
D. Paperwork Reduction Act
No collections of information pursuant to the Paperwork Reduction
Act (44 U.S.C. 3501 et seq.) are contained in the proposed rule.
E. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
The FDIC has determined that the final rule will not affect family
well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, enacted as part of the Omnibus
Consolidated and Emergency Supplemental Appropriations Act of 1999
(Pub.L. 105-277, 112 Stat. 2681).
F. Small Business Regulatory Enforcement Fairness Act
The Office of Management and Budget has determined that the final
rule is not a ``major rule'' within the meaning of the relevant
sections of the Small Business Regulatory Enforcement Act of 1996
(SBREFA) Public Law No. 110-28 (1996). As required by law, the FDIC
will file the appropriate reports with Congress and the General
Accounting Office so that the final rule may be reviewed.
List of Subjects in 12 CFR Part 327
Bank deposit insurance, Banks, banking, Savings associations.
0
For the reasons set forth in the preamble, the FDIC proposes to amend
chapter III of title 12 of the Code of Federal Regulations as follows:
PART 327--ASSESSMENTS
0
1. The authority citation for part 327 continues to read as follows:
Authority: 12 U.S.C. 1441, 1813, 1815, 1817-1819, 1821; Sec.
2101-2109, Pub. L. 109-171, 120 Stat. 9-21, and Sec. 3, Pub. L. 109-
173, 119 Stat. 3605.
0
2. In Sec. 327.10 add a new paragraph (d) to read as follows:
Sec. 327.10 Assessment rate schedules.
* * * * *
(d) Assessment Rate Schedule for First Assessment Period of 2009.
The annual assessment rate for an insured depository institution for
the assessment period beginning January 1, 2009 and ending March 31,
2009, shall be the rate prescribed in the following schedule:
----------------------------------------------------------------------------------------------------------------
Risk category
----------------------------------------------------------------
I *
-------------------------- II III IV
Minimum Maximum
----------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points)................. 12 14 17 35 50
----------------------------------------------------------------------------------------------------------------
\*\ Rates for institutions that do not pay the minimum or maximum rate will vary between these rates.
(1) Risk Category I Rate Schedule. The annual assessment rates for
all institutions in Risk Category I shall range from 12 to 14 basis
points.
(2) Risk Category II, III, and IV Rate Schedule. The annual
assessment rates for Risk Categories II, III, and IV shall be 17, 35,
and 50 basis points respectively.
(3) All institutions in any one risk category, other than Risk
Category I, will be charged the same assessment rate.
Note: This Appendix will not appear in the Code of Federal
Regulations.
Appendix 1--Analysis of the Projected Effects of the Payment of
Assessments on the Capital and Earnings of Insured Depository
Institutions
I. Introduction
This analysis estimates the effect of the deposit insurance
assessments adopted in the final rule for the first quarter of 2009
on the equity capital and profitability of all insured institutions.
The analysis assumes that each institution's pre-tax, pre-assessment
income in the first quarter is equivalent to one fourth of the
amount reported over the four quarters ending in September 2008.
Each institution's rate under the rate schedule is based on data as
of September 30, 2008.\16\ In addition, the projected use of one-
time credits authorized under the Reform Act is taken into
consideration in determining the effective assessment for an
institution.
---------------------------------------------------------------------------
\16\ For purposes of this analysis, the assessment base (like
income) is not assumed to increase, but is assumed to remain at
September 2008 levels. Income is defined as income before taxes,
extraordinary items, and deposit insurance assessments. Assessments
are adjusted for the use of one-time credits, and all income
statement items used in this analysis were adjusted for the effect
of mergers. Institutions for which four quarters of earnings data
were unavailable, including insured branches of foreign banks, were
excluded from this analysis.
---------------------------------------------------------------------------
II. Analysis of the Projected Effects on Capital and Earnings
While deposit insurance assessment rates generally will result
in reduced institution profitability and capitalization compared to
the absence of assessments, the reduction will not necessarily equal
the full amount of the assessment. Two factors can mitigate the
effect of assessments on institutions' profits and capital. First, a
portion of the assessment may be transferred to customers in the
form of higher borrowing rates, increased service fees and lower
deposit interest rates. Since information is not readily available
on the extent to which institutions are able to share assessment
costs with their customers, however, this analysis assumes that
institutions bear the full after-tax cost of the assessment. Second,
deposit insurance assessments are a tax-deductible operating
expense; therefore, the assessment expense can lower taxable income.
This analysis considers the effective after-tax cost of assessments
in calculating the effect on capital.\17\
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\17\ The analysis does not incorporate any tax effects from an
operating loss carry forward or carry back.
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An institution's earnings retention and dividend policies also
influence the extent to which assessments affect equity levels. If
an institution maintains the same dollar amount of dividends when it
pays a deposit insurance assessment as when it does not, equity
(retained earnings) will be less by the full amount of the after-tax
cost of the assessment. This analysis instead assumes that an
institution will maintain its dividend rate (that is, dividends as a
fraction of net income) unchanged from the weighted average rate
reported over the four quarters ending September 30, 2008. In the
event that the ratio of equity to assets falls below 4 percent,
however, this assumption is modified such that an institution
retains the amount necessary to achieve a 4 percent minimum and
distributes any remaining funds according to the dividend payout
rate.
The equity capital of insured institutions as of September 30,
2008 was $1.304 trillion. Based on the assumptions for earnings
described above, March 31, 2009 equity capital is projected to equal
$1.302 trillion under the rates adopted in the final rule. In the
absence of an assessment, total equity would be an estimated $1.6
billion higher. Alternatively, total equity would be an estimated
$0.6 billion higher if current rates remained in effect.
[[Page 78162]]
On an industry weighted average basis, projected total
assessments through the end of the first quarter of 2009 would
result in capital that is 0.1 percent less than in the absence of
assessments and 0.04 percent less than if the current rates remained
in effect. The analysis indicates that assessments would cause 3
institutions whose equity-to-assets ratio would have exceeded 4
percent in the absence of assessments to fall below that percentage
and 2 institutions to have below 2 percent equity-to-assets that
otherwise would not have. Alternatively, compared to current
assessments, the increase in assessments would cause one institution
whose equity-to-assets ratio would otherwise have exceeded 4 percent
to fall below that threshold and no institutions to fall below 2
percent equity-to-assets.
The effect of assessments on institution income is measured by
deposit insurance assessments as a percent of income before
assessments, taxes, and extraordinary items (hereafter referred to
as ``income''). This income measure is used in order to eliminate
the potentially transitory effects of extraordinary items and taxes
on profitability. For profitable institutions, the median projected
reduction in income relative to the absence of assessments is 8.3
percent, while the weighted average reduction for the same
institutions is 5.9 percent. For unprofitable institutions,
assessments would increase losses by 4.4 percent. When compared to
current rates (rather than the absence of assessments), the weighted
average reduction in income for profitable institutions is 3.4
percent, while the increase in losses for unprofitable institutions
is 2 percent.
By order of the Board of Directors.
Dated at Washington, DC, this 16th day of October 2008.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. E8-30222 Filed 12-19-08; 8:45 am]
BILLING CODE 6714-01-P
