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Designated Reserve Ratio
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327
Deposit Insurance Assessments – Designated Reserve Ratio
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Final rule.
EFFECTIVE DATE: January 1, 2007.
FOR FURTHER INFORMATION CONTACT:
The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) amends section 7(b)(3) of the Federal Deposit Insurance Act (the FDI Act) to eliminate the current fixed designated reserve ratio (DRR) of 1.25 percent.1 Section 2105 of the Reform Act directs the FDIC Board of Directors (Board) to set and publish annually a DRR for the Deposit Insurance Fund (DIF) within a range of 1.15 percent to 1.50 percent. 2 12 U.S.C. 1817(b)(3)(A), (B). Under section 2109(a)(1) of the Reform Act, the Board must prescribe final regulations setting the DRR after notice and opportunity for comment not later than 270 days after enactment of the Reform Act. 3
In setting the DRR for any year, section 2105(a) of the Reform Act, amending section 7(b)(3) of the FDI Act, directs the Board to consider the following factors:
II. The Final Rule
1. Risk of Losses to the DIF
So far this year no banks have failed. In addition, loss provisions anticipated for next year are expected to remain low. These estimates suggest that near-term losses to the insurance fund would not significantly alter the reserve ratio.
2. Economic Conditions Affecting FDIC-Insured Institutions
The condition of the banking industry remains strong. Earnings have set records each of the last five years, capital measures are still near historically high levels, and asset quality indicators remain solid. For the first half of 2006, the industry’s annualized return on assets (ROA) remained high at 1.34 percent. The aggregate equity-to-asset ratio was 10.27 percent as of June 30, 2006, and more than 99 percent of all insured institutions met or exceeded the requirements of the highest regulatory capital standards. The ratio of noncurrent loans to total loans is its lowest since institutions began reporting that data 23 years ago. No insured institutions have failed in over two years, extending the longest period without a failure since the creation of the FDIC in 1933. Therefore, banks and thrifts generally appear to be well positioned to withstand the financial stress that may arise from potential economic shocks in the next few years.
3. Prevent Sharp Swings in Assessment Rates
Strong insured deposit growth has contributed to a decline in the reserve ratio from 1.31 percent at year-end 2004 to 1.23 percent as of June 30, 2006. If recent robust insured deposit growth continues, there will be further downward pressure on the reserve ratio. This downward pressure could be offset by raising assessment rates; however, the availability of assessment credits will temporarily limit future revenue. Raising the reserve ratio to a DRR of 1.25 percent within a reasonably short time frame could require (depending upon insured deposit growth) a temporary, substantial increase in assessment rates, which would exhaust most of the credits rapidly. Increasing the reserve ratio more gradually could result in less substantial increases in rates.
4. Other Factors
a. Transition to a new assessment system
Furthermore, to provide institutions a transition to the new system, one-time assessment credits will be available to those institutions that contributed in earlier years to the build-up of the insurance funds. The application of these credits to assessments will limit assessment revenue in the near term. If insured deposit growth remains strong, this may place temporary downward pressure on the reserve ratio, which is expected to reverse itself once banks begin to use up their credits.
Finally, the FDIC will be changing to a system where the reserve ratio will be managed within a range from a system where a hard target for the reserve ratio applied.
b. Midpoint of the normal operating range for the reserve ratio
c. Historical experience
5. Role of the DRR
III. Comments on the Proposed Rule
One individual set out several arguments for setting the DRR at 1.50 percent, including:
Several commenters suggested that, if the DRR were set at 1.25 percent initially, or wherever it is set, the FDIC should increase the reserve ratio gradually over a period of no less than three years, or three to five years, in order to avoid unnecessary surges in assessment rates. More generally, the FDIC should take a slow and steady approach.
Several commenters viewed the DRR as useful only for guidance in setting assessments, suggesting that the DRR:
Three commenters sought greater analytical justification for setting the DRR at 1.25 percent, asserting that the FDIC’s rationale was:
IV. The Final Rule
The FDIC concludes that the best way to balance all of the statutory factors (including the “other factors” identified above) and to preserve the FDIC’s new flexibility to manage the DIF is to maintain the DRR at 1.25 percent. Several factors that the Board must (or may) consider – preventing sharp swings in assessment rates, the transitional nature of the assessment system, maintaining a DRR at the midpoint of the reserve ratio’s normal operating range, the historical experience with a DRR of 1.25 percent, as well as the intent of the new legislation to provide the FDIC with flexibility to manage the reserve ratio within a range – all support or are consistent with maintaining the current DRR of 1.25 percent.
Several commenters argued that the present good health of the industry argues in favor of a DRR lower than 1.25 percent. A goal of the Reform Act, however, is to allow the fund to rise when conditions are good so that it could decline when conditions are less favorable without the need to raise assessments sharply. In fact, the Reform Act directs the FDIC to consider allowing the DRR to increase under favorable economic conditions. Generally favorable economic conditions and the strong condition of the industry provide little justification for lowering the DRR.
Further, most of the comments seeking to have the DRR set lower than 1.25 percent appear to be concerned with the assessment rates that will be charged, and the resulting amount of assessments that will be collected, if the DRR is set at 1.25 percent. This issue will be addressed in the risk-based assessments final rule being presented to the FDIC Board of Directors along with this DRR final rule case.
How the FDIC will use the DRR may change over time. The FDIC views the role of the DRR as a signal of the level that the DIF should achieve; however, the FDIC does not expect the DIF to reach this level within the first year of the new system. As required by the Reform Act, the FDIC will determine the appropriate DRR annually. Section 2105 of the Reform Act, to be codified at 12 U.S.C. 1817(b)(3)(A).
V. Effective Date
VI. Paperwork Reduction Act
VII. Regulatory Flexibility Act
VIII. The Treasury and General Government Appropriations Act, 1999 – Assessment of Federal Regulations and Policies on Families
IX. Small Business Regulatory Enforcement Fairness Act
List of Subjects in 12 CFR Part 327
Bank deposit insurance, Banks, banking, Savings associations
For the reasons stated above, the Board of Directors of the Federal Deposit Insurance Corporation hereby amends part 327 of Title 12 of the Code of Federal Regulations as follows:
Part 327 – Assessments
Subpart A—In general
1. The authority citation for part 327 continues to read as follows: Authority: 12 U.S.C. 1441, 1441b, 1813, 1815, 1817-1819; Pub. L. 104-208, 110 Stat. 3009-479 (12 U.S.C. 1821).
2. In section 327.4 of subpart A, add paragraph (g) to read as follows:
§ 327.4(g) Designated reserve ratio
By order of the Board of Directors.
Dated at Washington, D.C. this 2nd day of November 2006.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
1 Section 2104 of the Reform Act, Pub. L. No. 109-171, 120 Stat. 9.
2 To be codified at 12 U.S.C. 1817(b)(3)(A)(i), (B).
3 Thereafter, any change to the DRR must be made by regulation after notice and opportunity for comment. Section 2105 of the Reform Act, to be codified at 12 U.S.C. 1817(b)(3)(A) (ii).
4 To be codified at 12 U.S.C. 1817(b)(3)(C). The Reform Act provides:
5 Any future change to the DRR shall be made by regulation after notice and opportunity for comment. In soliciting comment on any proposed change in the DRR, the FDIC must include in the published proposal a thorough analysis of the data and projections on which the proposal is based. Section 2105 of the Reform Act (to be codified at 12 U.S.C. 1817(b)(3)(D)).
6 Several other commenters also addressed the DRR, at least in passing, in comments directed to other FDIC rulemakings, particularly the rulemaking that proposed substantive improvements to the risk-based assessment system. 71 FR 41910 (July 24, 2006). All of the comments received that relate to the DRR have been considered in adopting this final rule and are available on the FDIC’s website at http://www.fdic.gov/regulations/laws/federal/index.html.
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