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Financial Institution Letters


[Federal Register: July 3, 1996 (Volume 61, Number 129)]
[Notices]               
[Page 34814-34817]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]

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FEDERAL DEPOSIT INSURANCE CORPORATION

 
Statement of Policy on Assistance to Operating Insured Depository 
Institutions

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Policy statement; Notice of opportunity for comment.

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SUMMARY: The statement of policy would revise the FDIC's Statement of 
Policy on Assistance to Operating Insured Depository Institutions, 
which was published in the Federal Register on December 18, 1992 (the 
1992 Policy Statement) (see, 57 FR 60203 (December 18, 1992)). As 
required by section 303(a) of the Riegle Community Development and 
Regulatory Improvement Act of 1994 (the RCDRIA), the FDIC is conducting 
a systematic review of its regulations and statements of policy to 
identify and revise regulations and statements of policy that might be 
inefficient, cause unnecessary burden, or contain outmoded, 
duplicative, or inconsistent provisions (see, 60 FR 62345 (December 6, 
1995)). The FDIC has reviewed the 1992 Policy Statement and has 
concluded that it should be revised. This revised statement of policy 
would replace the 1992 Policy Statement.
    The statement of policy would (i) reflect the statutory ``sunset'' 
of the Resolution Trust Corporation on December 31, 1995, by deleting 
references to the Resolution Trust Corporation's statutory authority; 
(ii) incorporate the requirements of section 11 of the Resolution Trust 
Corporation Completion Act, P.L. 103-204, section 11 (1993), which 
revised section 11(a)(4) of the Federal Deposit Insurance Act, as 
amended (the FDI Act), 12 U.S.C. 1821(a)(4), to prohibit, with certain 
exceptions, the use of funds from the Bank Insurance Fund or the 
Savings Association Insurance Fund to benefit shareholders of a failed 
or failing insured depository institution; thus, the statement of 
policy would impact the treatment of shareholders with regard to FDIC 
assistance under section 13(c) of the FDI Act to an operating insured 
depository institution prior to the appointment of a conservator or 
receiver for that institution; (iii) provide that any depository 
institution subsidiary of a holding company may be included when 
considering what entities may contribute resources in connection with a 
proposal for FDIC assistance; and (iv) generally streamline the 
retained provisions of the 1992 Policy Statement, in pertinent part by 
removing certain detailed discussions of section 13(k)(5) of the FDI 
Act and various provisions added to the FDI Act by the Federal Deposit 
Insurance Corporation Improvement Act of 1991.

DATES: Written comments must be received on or before August 2, 1996.

ADDRESSES: Written comments should be addressed to the Office of the 
Executive Secretary, FDIC, 550 17th Street, N.W., Washington, D.C. 
20429.

[[Page 34815]]

Comments may be hand delivered to Room F-402, 1776 F Street, N.W., 
Washington, D.C. 20439, on business days between 8:30 a.m. and 5:00 
p.m. Comments may be sent through facsimile to: (202) 898-3838 or by 
the Internet to: comments@fdic.gov. Comments will be available for 
inspection at the FDIC Public Information Center, room 100, 801 17th 
Street, N.W., Washington, D.C. between 9:00 a.m. and 4:30 p.m. on 
business days.

FOR FURTHER INFORMATION CONTACT: Gail L. Patelunas, Acting Director, 
Division of Resolutions, (202) 898-6779; Sean C. Forbush, Resolutions 
Specialist, Division of Resolutions, (202) 898-8506; Barbara I. Taft, 
Assistant General Counsel, Legal Division, (202) 736-0183; Michael B. 
Phillips, Counsel, Legal Division, (202) 736-0186, Federal Deposit 
Insurance Corporation, 550 17th Street, N.W., Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The statement of policy does not require any collections of 
paperwork pursuant to section 3504(h) of the Paperwork Reduction Act, 
44 U.S.C. 3501 et seq. Accordingly, no information has been submitted 
to the Office of Management and Budget for review.

Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, 5 
U.S.C. 601 et seq., it is certified that the statement of policy will 
not have a significant economic impact on a substantial number of small 
entities. In addition, the statement of policy will not impose 
regulatory compliance requirements on depository institutions of any 
size.
    The text of the statement of policy follows:

FDIC Statement Of Policy on Assistance to Operating Insured Depository 
Institutions

I. Introduction

A. General Statutory Requirements

    Section 13(c) of the Federal Deposit Insurance Act, as amended (the 
FDI Act), authorizes the Federal Deposit Insurance Corporation (the 
FDIC) to provide assistance to operating insured institutions (open 
assistance) (1) to prevent the ``default'' of insured institutions or 
to assist acquisitions of insured institutions that are ``in danger of 
default,'' 1 or (2) if severe financial conditions exist that 
threaten the stability of a significant number of insured institutions 
or of insured institutions possessing significant financial resources, 
to lessen the risk to the FDIC posed by such insured institutions under 
such threat of instability.
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    \1\ The terms ``default'' and ``in danger of default'' are 
defined in section 3(x) of the FDI Act, 12 U.S.C. 1813(x).
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    In order for the FDIC to provide assistance to an operating insured 
institution, the FDIC must determine that the assistance meets the 
least-cost test set forth in section 13(c) of the FDI Act. That section 
provides that the assistance (1) must be necessary to meet the 
obligation of the FDIC to provide insurance coverage for the insured 
deposits in such institution, and (2) must be the least costly to the 
deposit insurance fund of all possible methods for meeting that 
obligation.2
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    \2\ See section 13(c)(4)(A)(ii) of the FDI Act, 12 U.S.C. 
1823(c)(4)(A)(ii).
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    The FDIC has the authority to provide to an operating insured 
institution assistance that does not meet the least-cost test only if 
the Secretary of the Treasury (in consultation with the President and 
upon the written recommendations of two-thirds of the Board of 
Directors of the FDIC and two-thirds of the Board of Governors of the 
Federal Reserve System) determines that the FDIC's compliance with the 
least-cost test would have adverse effects on economic conditions or 
financial stability and the assistance to the operating insured 
institution would avoid or mitigate such adverse effects (the 
``Systemic Risk Exception'').3
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    \3\ See section 13(c)(4)(G) of the FDI Act, 12 U.S.C. 
1823(c)(4)(G).
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    The FDIC may consider providing financial assistance under section 
13(c) to an operating insured institution before the appointment of a 
conservator or receiver only if the FDIC determines that (1) grounds 
for the appointment of a conservator or receiver exist or likely will 
exist in the future unless the institution's capital levels are 
increased,4 and (2) it is unlikely that the institution can meet 
all currently applicable capital standards without assistance.5 In 
addition, before the FDIC may provide assistance to an operating 
insured institution, (1) the appropriate Federal banking agency 6 
and the FDIC must determine that, for such period of time as the agency 
or the FDIC considers to be relevant, the institution's management has 
been competent and has complied with applicable laws, rules, and 
supervisory directives and orders,7 and (2) the FDIC must 
determine that the institution's management did not engage in any 
insider dealing, speculative practice, or other abusive activity.8 
Any determination made by the FDIC to provide assistance to an 
operating insured institution under section 13(c) must be made in 
writing and published in the Federal Register.9
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    \4\ See section 13(c)(8)(A)(i)(I) of the FDI Act, 12 U.S.C. 
1823(c)(8)(A)(i)(I).
    \5\ See section 13(c)(8)(A)(i)(II) of the FDI Act, 12 U.S.C. 
1823(c)(8)(A)(i)(II).
    \6\ ``Appropriate Federal banking agency'' is defined at 12 
U.S.C. 1813(q), in part, to mean: (1) the Comptroller of the 
Currency, in the case of a national bank; (2) the Board of Governors 
of the Federal Reserve System, in the case of a state member insured 
bank; (3) the FDIC, in the case of a state nonmember insured bank; 
and (4) the Director of the Office of Thrift Supervision, in the 
case of any savings association.
    \7\ See section 13(c)(8)(A)(ii)(I) of the FDI Act, 12 U.S.C. 
1823(c)(8)(A)(ii)(I).
    \8\ See section 13(c)(8)(A)(ii)(II) of the FDI Act, 12 U.S.C. 
1823(c)(8)(A)(ii)(II).
    \9\ See section 13(c)(8)(B) of the FDI Act, 12 U.S.C. 
1823(c)(8)(B).
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    SAIF-insured institutions submitting proposals for assistance under 
section 13(k)(5) of the FDI Act also must meet the criteria contained 
in that statutory provision.10
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    \10\ Assistance proposals with respect to SAIF-insured 
institutions under section 13(k)(5) that do not meet all nine of the 
criteria in that statutory provision may be submitted to the FDIC 
for consideration under section 13(c) of the FDI Act. Section 
13(k)(5) applies only to SAIF-insured institutions located in 
``economically depressed regions,'' and only if those institutions 
have certain types of problems pre-dating the enactment of the 
Financial Institutions Reform, Recovery, and Enforcement Act of 
1989. The nine criteria for proposals submitted under section 
13(k)(5) of the FDI Act are listed in subsections (k)(5)(A)(i) (I)-
(III) and (A)(ii) (I)-(VI) of section 13 of the FDI Act, 12 U.S.C. 
1823(k)(5)(A)(i) (I)-(III) and (A)(ii) (I)-(VI).
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B. Timing Considerations

    As section 13(c)(4) of the FDI Act requires the FDIC to select the 
resolution alternative that involves the least cost to the relevant 
deposit insurance fund, any open assistance proposal must be evaluated 
on a competitive basis with other available resolution alternatives. 
Because of the cost savings inherent in FDIC-assisted transactions 
involving the appointment of a receiver for an institution, it may be 
difficult for an open assistance proposal to be more cost effective 
than an available closed institution resolution.11 Therefore, an 
open assistance proposal, to be acceptable, generally must be submitted 
substantially before grounds exist for the appointment of a receiver 
for the institution. Moreover, because of the complexity of many 
transactional

[[Page 34816]]

structures involving open assistance, the time required to negotiate 
terms acceptable to all parties and to obtain necessary regulatory and 
shareholder approvals, and the ``prompt corrective action'' mandates of 
Section 38 of the FDI Act,12 the FDIC encourages submission of 
proposals for open assistance well before grounds exist for the 
institution's closure. In general, this timing consideration will 
require the board of directors of the insured institution to make the 
difficult business judgment that the institution is likely to fail and 
that the balance of their responsibilities, including those to 
depositors as well as shareholders, compels the board to seek FDIC 
assistance, and to make that judgment before it is certain that the 
institution will fail.
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    \11\ Among the cost advantages favoring a resolution transaction 
following the appointment of a receiver for an institution are the 
effect of the receivership on the contingent liabilities of the 
failed institution, the potential for uninsured depositors and other 
unsecured creditors to share in the loss incurred on the institution 
and the ability of the FDIC as receiver to repudiate burdensome 
contracts.
    \12\ See section 38(h)(3) of the FDI Act, 12 U.S.C. 1831o(h)(3).
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II. Treatment of Shareholders Under Section 11(a)(4) of the FDI Act

    Section 11(a)(4) of the FDI Act states, in pertinent part:
    Notwithstanding any provision of law other than section 13(c)(4)(G) 
[of the FDI Act], the Bank Insurance Fund and the Savings Association 
Insurance Fund shall not be used in any manner to benefit any 
shareholder of--
    (i) Any insured depository institution for which the [FDIC] or the 
[RTC] has been appointed conservator or receiver, in connection with 
any type of resolution by the [FDIC] or the [RTC];
    (ii) Any other insured depository institution in default or in 
danger of default, in connection with any type of resolution by the 
[FDIC] or the [RTC]; or
    (iii) Any insured depository institution, in connection with the 
provision of assistance under this section or section 13 with respect 
to such institution, except that this clause shall not prohibit any 
assistance to any insured depository institution that is not in 
default, or that is not in danger of default, that is acquiring (as 
defined in section 13(f)(8)(B) [of the FDI Act]) another insured 
depository institution.13
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    \13\ See 12 U.S.C. 1821(a)(4).
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    As the scope of the language of section 11(a)(4) and related 
legislative history with respect to the limitation on the use of the 
relevant deposit insurance fund for assistance under section 13(c) of 
the FDI Act is not clearly delineated,14 the FDIC will determine, 
on a case-by-case basis, the application of section 11(a)(4) to any 
proposal for assistance.
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    \14\ See the Report of the House Committee on Banking, Finance 
and Urban Affairs, H.R. Rep. No. 103, 103d Cong., 1st Sess., Part 1, 
at 32 (1993) and the Conference Report accompanying the RTC 
Completion Act, H.R. Rep. No. 380, 103d Cong., 1st Sess. at 55 
(1993).
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III. Criteria for the FDIC's Consideration of Proposals for Assistance 
to an Operating Insured Institution

    A proposal for assistance to an operating insured institution will 
be evaluated pursuant to the following criteria:

A. Prerequisites for Open Assistance

    Criterion 1. The FDIC must determine that grounds for the 
appointment of a conservator or receiver exist or likely will exist in 
the future unless the insured institution's capital levels are 
increased.15
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    \15\ This criterion is mandatory. See section 13(c)(8)(A) of the 
FDI Act, 12 U.S.C. 1823(c)(8)(A).
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    Criterion 2. The FDIC must determine that it is unlikely that the 
insured institution can meet all currently applicable capital standards 
without assistance.16
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    \16\ This criterion is mandatory. See section 13(c)(8)(A) of the 
FDI Act, 12 U.S.C. 1823(c)(8)(A).
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B. Financial Criteria for Open Assistance

    Criterion 3. The cost of the proposal for open assistance to the 
FDIC must be determined to be the least-costly alternative 
available.17 In order to ensure that the proposal is the least 
costly alternative, the FDIC will, in many cases, also seek proposals 
for resolving the insured institution on a closed basis.
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    \17\ This criterion is mandatory unless the Secretary of the 
Treasury makes a systemic risk determination. See section 13(c)(4) 
(A) and (G) of the FDI Act, 12 U.S.C. 1823(c)(4) (A) and (G). 
Resolution alternatives must be evaluated on a present-value basis, 
using a realistic discount rate. See section 13(c)(4)(B) of the FDI 
Act, 12 U.S.C. 1823(c)(4)(B). This cost determination is premised on 
evaluating all possible resolution alternatives and must be made as 
of the date the FDIC determines to provide section 13(c) assistance. 
See section 13(c)(4)(C) of the FDI Act, 12 U.S.C. 1823(c)(4)(C). In 
calculating the cost of such assistance, the FDIC must treat any tax 
revenues that the U.S. Treasury would forego as a result of an 
assistance transaction, to the extent they are reasonably 
determinable, as revenues foregone by the applicable deposit 
insurance fund.
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    Criterion 4. The proposal must provide for sufficient tangible 
capitalization, including capital infusions from outside private 
investment sources, to meet the regulatory capital standards of the 
appropriate Federal banking agency.18
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    \18\ The regulatory capital requirements of the respective 
Federal banking agencies are stated in: (1) For the Office of the 
Comptroller of the Currency, 12 CFR Part 3; (2) for the Board of 
Governors of the Federal Reserve System, 12 CFR Part 225; (3) for 
the FDIC, 12 CFR Part 325; and (4) for the Office of Thrift 
Supervision, 12 CFR Part 567.
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    Criterion 5. The amount of the assistance and the new capital 
injected from outside sources must provide for a reasonable assurance 
of the future viability of the insured institution.19
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    \19\ Viability may be demonstrated by pro forma projections 
based on reasonable assumptions regarding the use of the assistance, 
earnings, reserve levels, asset quality trends, anticipated 
dividends, and capital levels and needs. The viability projections 
will be reviewed closely by the FDIC for the reasonableness of 
assumptions. In addition, under normal circumstances, enough new 
capital should come from outside private sources to represent a vote 
of confidence in the viability of the assisted institution. By 
contrast, as an example, a de minimus investment which gave the 
investor an option on the whole institution would not represent a 
market validation of the assurance of viability.
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    Criterion 6. Applicants must establish quantitative limits on all 
financial items in the proposal. For example, if applicants request 
indemnification from the FDIC for certain contingent liabilities, the 
proposal must include ceilings on the FDIC's financial exposure.

C. Competition

    Criterion 7. The FDIC will consider the proposal within a 
competitive context which provides for the solicitation by the FDIC of 
interest from qualified entities.20
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    \ 20\ The FDIC has determined that under 12 U.S.C. 1823(c)(4), 
in order to demonstrate that the least costly resolution was 
selected, an assistance transaction generally cannot be the result 
of a single party negotiation, but rather must be the result of a 
competitive process.
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D. FDIC Financial Contribution and Repayment and Repayment

    Criterion 8. The FDIC will consider, on a case-by-case basis, 
whether the proposal shall provide the FDIC with an equity or other 
financial interest in the resulting institution.21
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    \ 21\ Under 12 U.S.C. 1823(c)(5), the FDIC is prohibited from 
purchasing the voting or common stock of an insured institution. 
However, this restriction does not preclude the acceptance by the 
FDIC of non-voting preferred stock, warrants, or other forms of 
equity or equity-equivalent arrangements.
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    Criterion 9. It is preferable that the proposal for FDIC assistance 
provide for repayment of such assistance in whole or in part.

E. Impact on Shareholders and Creditors

    Criterion 10. Unless the Systemic Risk Exception in section 
13(c)(4)(G) of the FDI Act is applicable, FDIC assistance may not be 
used in any manner to benefit any preexisting shareholder of the 
insured institution, as determined by the FDIC on a case-by-case basis. 
In any event, any remaining ownership interest of such shareholders 
shall be subordinate to the FDIC's right to receive reimbursement for 
any

[[Page 34817]]

assistance provided. Preexisting debtholders of the insured institution 
shall make substantial concessions.

F. Due Diligence

    Criterion 11. Applicants must consent to unrestricted on-site due 
diligence reviews by the FDIC (or its agents) and FDIC-monitored, on-
site due diligence reviews by all potential qualified acquirers as 
determined by the FDIC (after consultation with the appropriate Federal 
banking agency).

G. Acquisition Within a Holding Company Structure

    Criterion 12. The proposal must ensure that the assistance will 
benefit the insured institution and the FDIC and not be diverted to 
other purposes. If the insured institution is a subsidiary of a holding 
company, the proposal should be structured so that FDIC assistance is 
not provided to the holding company, except where compelling reasons 
require it, and then only when the holding company acts as a conduit to 
immediately provide the entire amount of assistance to the insured 
institution.22
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    \22\ See section 13(c)(3) of the FDI Act, 12 U.S.C. 1823(c)(3).
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    Criterion 13. If the insured institution is a subsidiary of a 
holding company, the proposal should be structured so that available 
resources from the holding company and its other depository institution 
subsidiaries and/or nondepository subsidiaries are used to make a 
significant contribution toward minimizing the financial exposure of 
the FDIC.

H. Assets

    Criterion 14. The FDIC may consider, in appropriate circumstances, 
the acquisition of, or loss-sharing, gain-sharing and other incentive 
arrangements with respect to, distressed assets.

I. Supervisory Concerns With Respect to Management

    Criterion 15. The appropriate Federal banking agency and the FDIC 
must determine that, during such period of time preceding the date of 
such determination as the agency or the FDIC considers to be relevant, 
management of the insured institution was competent and complied with 
applicable laws, rules, and supervisory directives and orders. In no 
event will such determination, for assistance transaction purposes, 
estop or impair the FDIC or the appropriate Federal banking agency from 
pursuing any enforcement, civil or criminal remedies or redress against 
any person.23
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    \23\ This criterion is mandatory. See section 13(c)(8)(A) of the 
FDI Act, 12 U.S.C. 1823(c)(8)(A). The FDIC interprets section 
13(c)(8)(A)(ii) of the FDI Act that the management criterion applies 
to the management of the resulting institution, including any 
management retained from the predecessor institution, but not 
including predecessor management that is not retained. This 
interpretation is based on the relevant statutory provisions and 
their legislative history and reconciles the management criteria of 
section 13(c)(8)(A)(ii) with the statutory mandate of minimizing the 
cost of resolutions and with Congress' desire to encourage early 
resolutions.
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    Criterion 16. The FDIC must determine that the management of the 
resulting institution did not engage in any insider dealing, 
speculative practice, or other abusive activity.24
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    \24\ This criterion is mandatory. See section 13(c)(8)(A) of the 
FDI Act, 12 U.S.C. 1823(c)(8)(A).
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    Criterion 17. The proposal must provide for adequate managerial 
resources. Continued service of any directors or senior ranking 
officers who served in a policy-making role at the insured institution, 
as may be determined by the FDIC, will be subject to approval by the 
FDIC.
    Criterion 18. Any renegotiation or termination of management 
contracts is to be completed prior to the granting of assistance. 
Further, the FDIC may review and object to any or all parts of any 
compensation arrangements (including termination clauses) covering 
these individuals during the period assistance is outstanding.25 
In general, the failure to terminate a particular management contract 
prior to the granting of assistance will not stop the FDIC or the 
appropriate Federal banking agency from subsequently pursuing any 
enforcement, civil, or criminal remedies or redress against any person 
by reason of such contract, unless there is a written statement 
explicitly waiving such rights that is signed by an authorized official 
of the FDIC and the appropriate Federal banking agency. Notwithstanding 
the foregoing, any such waiver must take into consideration the 
requirements of 12 CFR part 359.
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    \25\ In addition, under section 18(k)(1) of the FDI Act, the 
FDIC may ``prohibit or limit, by regulation or order, any golden 
parachute payment or indemnification payment.'' See 12 U.S.C. 
1828(k)(1). The terms ``golden parachute payment'' and 
``indemnification payment'' are defined in 12 U.S.C. 1828(k)(4) and 
(5)(A), respectively. See also the FDIC's regulations at 12 CFR part 
359, which implement section 18(k)(1).
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J. Fee Arrangements

    Criterion 19. All fee arrangements with attorneys, investment 
bankers, accountants, consultants, and other advisors and agents 
incident to an open assistance proposal must be disclosed to the FDIC 
and will be evaluated in determining the cost of the assistance. 
Excessive fees must be avoided.

IV. Other Information

    Any proposal requesting assistance to prevent the closing of an 
insured institution should be addressed to the appropriate FDIC 
regional offices of the Division of Supervision and the Division of 
Resolutions and should provide the amount, terms, and conditions of the 
assistance requested, as well as the details of the financial support 
to be provided. This information must be presented in sufficient detail 
to permit the FDIC to estimate the maximum cost that will be incurred 
as a result of the proposal and to determine the extent to which the 
proposal satisfies the criteria of this policy statement.
    The proposal must include, with respect to the management 
determinations set forth in Criteria 15, 16, 17 and 18 in Part III, 
information about proposed management of the insured institution or the 
resulting institution, as applicable. Specifically, the proposal must 
identify all individuals who would exercise significant influence over, 
or participate in, major policy-making decisions of the insured 
institution or the resulting institution, without regard to title, 
salary or compensation. This list would include, without limitation, 
all directors, the chief executive officer, chief managing official (in 
an insured state branch of a foreign bank), chief operating officer, 
chief financial officer, chief lending officer and chief investment 
officer.
    Copies of the proposal also should be provided to (1) the Director 
of the Division of Supervision, FDIC, 550 17th Street, N.W., 
Washington, D.C. 20429, (2) the Director of the Division of 
Resolutions, FDIC, 550 17th Street, N.W., Washington, D.C. 20429, (3) 
the insured institution's chartering authority, and, (4) if approvals 
under the Bank Holding Company Act are required, the appropriate 
Federal Reserve Bank.

    By Order of the Board of Directors. Dated at Washington, D.C., 
this 17th day of June, 1996.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Deputy Executive Secretary.
[FR Doc. 96-16904 Filed 7-2-96; 8:45 am]
BILLING CODE 6714-01-P


Last Updated 10/5/2011 communications@fdic.gov