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Deposit Insurance Assessment Appeals: Guidelines & Decisions AAC-99-04 (September 27, 1999)
Decision
Background
Under the Oakar Amendment2
a BIF-insured institution that acquires
deposits from a SAIF-insured institution is treated as a hybrid institution
required to pay deposit insurance assessments to both its primary and
secondary insurance funds. The primary fund is the deposit insurance fund
of which the institution is a member.3
The secondary fund is the insurance
fund that is not the members primary fund4
For example, a BIF Oakar, is a
member of the BIF but a portion of its assessment base is also allocated to
the SAIF. The portion so allocated is equal to the institutions AADA, which
is computed and adjusted over time pursuant to the statutory formula
contained in the Oakar Amendment. The assessments on that portion are paid
into the SAIF; the assessments on the remainder of the assessment base are
paid into the BIF.5
Also, FDIC losses resulting from the failure of an Oakar
institution are shared, pro rata, by BIF and SAIF.6
The AADA is the means by
which an Oakar institutions deposits are allocated for assessment and fund
loss-allocation purposes. When the Oakar Amendment was enacted in 19897
the FDIC developed a program
to administer its provisions and developed a procedure to calculate AADAs.
From the enactment of the Oakar Amendment in 1989 through the implementation
of the Quarterly growth computation in 1997,8
the FDIC calculated an Oakar
institutions AADA growth adjustment on an annual basis.
9 The two Z bank subsidiaries, X and Y are BIF members. X acquired a SAIF-member
institution in the first half of 1993 and Y acquired a SAIF-member
institution in the first half of 1994. Thus, they are both Oakar (BIF-member)
banks. X (as of December 31, 1994) and Y (as of December 31, 1995) filed
their first Growth Worksheets for their respective AADAs.
10 In October 1997,
Parent for the first time requested that the FDIC correct those Worksheets
because the Banks had not made adjustments for the first year. In a letter dated March 16, 1998, the Deputy Director of DOF denied
Parents request, explaining that X had properly filed its first Growth
Worksheet as of December 31, 1994, and Y had properly filed its first Growth
Worksheet as of December 31, 1995. Parent is appealing that decision to this
Committee,11 asserting that the
Parent Banks should have been permitted to
adjust their AADAs as of the end of the years in which they engaged in Oakar
transactions.
Discussion X acquired a SAIF-member institution in February 1993. The semiannual
period beginning before the date of the acquisition was the period January
1, 1993 through June 30, 1993. Parent contends that, by the plain language
of the statute, the second semiannual period of 1993 is not excluded from
the growth calculation; thus, when X calculated its AADA for purposes of the
assessment due in January 1994, it should have been allowed to include a
growth amount with respect to the second semiannual period of 1993. Parent
makes a parallel argument for Y with respect to the secondary fund deposits
it acquired in February 1994. Parent also contends that the FDIC treated the Z Banks differently from
similarly situated banks without justification. It cites an example where
banks that had engaged in Oakar transactions (during the first half of 1993
through 1996) were permitted to apply a growth adjustment to new AADAs as
well as to their pre-existing AADAs.
B. Analysis of Parents Arguments As explained above, during the periods involved in this appeal, an
institutions first AADA growth adjustment was based on the annual rate of
growth of deposits, measured from the beginning to the end of the first full
calendar year following the year in which the Oakar transaction occurred.
This practice was fully compliant with the statutory requirement excluding
the period of acquisition from the calculation of the first AADA growth
adjustment. Using X as an example, the FDICs interpretation measured Xs
annual rate of growth of deposits from December 31, 1993, to December 31,
1994, and applied its negative five percent adjustment to the December 31,
1994, AADA. In contrast, under Parents interpretation, Xs AADA would have
been adjusted one year earlier, based on deposit growth measured from
December 31, 1992 (a date prior to the February 22, 1993, Oakar transaction)
to December 31, 1993. The annual rate of deposit growth for that period was
negative 165 percent. Multiplying the initial AADA (determined at the time
of the transaction) by negative 165 percent would have entirely eliminated
Xs December 31, 1993, AADA. Similarly, Parent, believes that Ys December 31, 1994, AADA should have
been adjusted by the rate of change in its deposit base measured from
December 31, 1993 (before the Oakar transaction date of February 17, 1994)
to December 31, 1994. The annual rate of deposit growth for this period was
negative 104 percent. Again, multiplying the initial AADA by negative 104
percent would have entirely eliminated Ys December 31, 1994, AADA.
Accordingly, under Parents theory, the Z Banks would both have ceased to be
Oakar institutions in December of the year in which they became Oakar
institutions; that is, they would have wiped out their assessment liability
to the SAIF. The Committee believes this result would, first, be incompatible with the
basis structure and purpose of the Oakar Amendment. Second, it violates a
fundamental principle of the Oakar Amendment: To ensure that cross-fund
acquisitions do not result in the transfer, from one insurance fund to the
other, of responsibility for insuring acquired deposits (without payment of
the required entrance and exit fees). Third, application of the Parent
methodology, when coupled with negative growth, would yield unreasonable
results. Parent requests that the annual growth rate for X be measured from
December 31, 1992, to December 31, 1993. Such a measurement would include
the original Oakar transaction itself, which occurred on February 22, 1993.
Applying this growth rate percentage would be contrary to the statutory
mandate that excludes the application of any deposit growth occurring in the
period of acquisition.13
The AADA growth process established by Congress
refers to the semiannual cycle for computing assessments. The Oakar
Amendment excludes the impact of acquisitions from the growth computation in
two ways: (a) The statutory growth formula excludes deposits acquired
through a merger or acquisition when determining the annual deposit growth
rate to be used to adjust the AADA; and (b) the statutory language prohibits
the application of the deposit growth percentage to the AADA reported for
the period within which the transaction takes place. From the beginning, however, the FDIC determined that an annual cycle to
compute AADAs was permissible under the statute and provided certain
important benefits over a rigid adherence to the semiannual framework.
14 The
FDIC ensured that the central features of the AADA computation excluding
the increase due to the Oakar transaction itself and measuring growth on a
post-transaction basis were retained. Parents approach, by contrast,
would insert the Oakar transaction into the heart of the growth computation.
Thus, to accept Parents request would violate the plain statutory language
that describes the growth computation. Also, Congress intended that mergers and acquisitions not result in a
transfer of deposit insurance from one fund to the other without the payment
of entrance and exit fees.15
If Parent were to adjust its initial AADAs in the year in which the
transactions occurred, it would effectively violate one of the conditions of
the Oakar transaction approval. Section 5(d)(3)(E)(ii) of the FDI Act
16 states
that one of the conditions for approval of an Oakar transaction is that the
transaction not result in the transfer of any deposit insurance from one
insurance fund to the other insurance fund. Parent seeks to calculate and to
apply growth in the year in which the initial transactions occurred,
effectively transferring deposits from the SAIF to the BIF without payment
of the required entrance and exit fees. Indeed, under Parents
interpretation the Z Banks would have transferred all acquired deposits
without payment of entrance and exit fees and would have ceased to be Oakar
institutions in December of the years in which they became Oakar
institutions. Finally, Parents interpretation, when coupled with negative growth,
would yield anomalous results. Using X as an example, the proposed process
would result in an annual growth rate of negative 165 percent. By measuring
the annual growth rate in the year of acquisition, the calculation would be
comparing the total deposit run-off of the acquisition(s) to the total
deposit base of the buyers original or pre-merger institution (rather than
to the deposit base of the buyer after the merger has been consummated). The
result produces the anomaly of a negative growth rate that exceeds 100
percent, and the clearly non-existent concept of a negative AADA.
17 Through
the rulemaking process in 1996, the FDIC Board has recognized negative
growth of an AADAs as a general proposition. As part of that rulemaking,
however, the Board also stated that the FDIC would not extend the negative
growth concept beyond reasonable limits.18
Parent request violates both the
express language and the fundamental intent of the statute and applies
negative AADA growth beyond reasonable limits. For the foregoing reasons, the Committee has determined that the
treatment of the Z Banks, with regard to their first AADA growth
adjustments, was appropriate and in keeping with the Oakar Amendment.
2. Alleged Disparate Treatment
Such a growth adjustment to the new AADA was erroneous and, as explained
above, contrary to the statutory prohibition against adjusting the AADA in
the period of acquisition. Upon review, the Committee believes the FDICs
AADA Growth Worksheet form and corresponding instructions were misleading
and resulted in the incorrect reporting. Moreover, in audits conducted at
the time staff did not realize that the Worksheet form effectively allowed
for AADA growth in the period of acquisition for existing Oakar institutions
and, in some cases, advised institutions to follow the Growth Worksheet form
and to include new AADA in the growth computation. The Committee acknowledges the error involved in allowing existing Oakar
institutions to adjust new AADA in the period of acquisition. Accordingly,
the staff is reviewing, in the normal course of agency business, the options
for dealing with that error. The circumstances in which existing Oakar
institutions erroneously applied growth to their AADAs, however, do not
match the facts involved in this appeal. The Z Banks were not existing Oakar
institutions that added new AADA to existing AADA and adjusted the combined
amount in the period of acquisition of the new AADA. Both Z Banks were BIF-member
institutions that acquired their initial AADAs in the transactions subject
to this appeal. Thus, the Parent Oakar transactions are similar to the 876
Oakar transactions for which the institutions reported their newly acquired
AADAs correctly, without any adjustment for growth in the period of
acquisition. The Parent Oakar acquisitions are not similar to the 133 Oakar
acquisitions by existing Oakar institutions for which the institutions
erroneously adjusted their AADAs. In the Committees judgment, Parent has
simply discovered an error in the FDICs implementation of the AADA growth
procedures and requests, through this appeal, that the error be applied to
their institutions. Specifically, Parent has requested that X and Y be allowed to apply an
annual growth increment to the applicable AADAs computed as of December 31
of the year in which the transactions occurred. As discussed above, during
the time periods at issue, Oakar institutions were not permitted to apply
the annual growth increment in that manner. That other institutions, which
engaged in Oakar transactions dissimilar to the Parent transactions, were
erroneously permitted to do so does not entitle Parent to do so. * * * For the reasons discussed herein, under authority delegated by the Board
of Directors of the Federal Deposit Insurance Corporation, the Committee
denies Parents appeal.
1
12 U.S.C. 1815(d)(3).
The FDIC has previously interpreted the phrase annual rate to mean a This procedure has a weakness. An Oakar institutions AADA has tended The Board concluded that the quarterly approach is permissible under the
statute, and is preferable to any approach that relies on a yearly interval
to determine growth in the AADA. Id. At 64977. The Board specified in the
rulemaking, however, that the new AADA procedures would be applied on a
purely prospective basis. They come into play only for the purpose of
computing future AADAs. Id. At 64980.
10 During this period Oakar institutions prepared and filed
annual Growth Worksheets with the FDIC. Since 1997 the FDIC has calculated
institutions AADAs, based on information in quarterly reports of condition.
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