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FDIC Federal Register Citations
[Federal Register: November 30, 2006 (Volume 71, Number 230)]
[Rules and Regulations]
[Page 69323-69326]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30no06-10]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327
RIN 3064-AD02
Deposit Insurance Assessments--Designated Reserve Ratio
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Final rule.
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SUMMARY: Under the Federal Deposit Insurance Reform Act of 2005, the
Federal Deposit Insurance Corporation (FDIC) must by regulation set the
Designated Reserve Ratio (DRR) for the Deposit Insurance Fund (DIF)
within a range of 1.15 percent to 1.50 percent. In this rulemaking, the
FDIC establishes the DRR for the DIF at 1.25 percent.
DATES: Effective Date: January 1, 2007.
FOR FURTHER INFORMATION CONTACT: Munsell St. Clair, Senior Policy
Analyst, Division of Insurance and Research, (202) 898-8967; or
Christopher Bellotto, Counsel, Legal Division, (202) 898-3801, Federal
Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC
20429.
SUPPLEMENTARY INFORMATION:
I. Background
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\
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\1\ Section 2104 of the Reform Act, Public Law 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).
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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:
(1) The risk of losses to the DIF in the current and future years,
including historic experience and potential and estimated losses from
insured depository institutions.
(2) Economic conditions generally affecting insured depository
institutions. (In general, the Board should consider allowing the DRR
to increase during more favorable economic conditions and decrease
during less favorable conditions.)
(3) That sharp swings in assessment rates for insured depository
institutions should be prevented.
(4) Other factors as the Board may deem appropriate, consistent
with the requirements of the Reform Act.\4\The
[[Page 69324]]
DRR may not exceed 1.50 percent nor be less than 1.15 percent.\5\
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\4\ To be codified at 12 U.S.C. 1817(b)(3)(C). The Reform Act
provides:
(C) FACTORS--In designating a reserve ratio for any year, the
Board of Directors shall--
(i) take into account the risk of losses to the Deposit
Insurance Fund in such year and future years, including historic
experience and potential and estimated losses from insured
depository institutions;
(ii) take into account economic conditions generally affecting
insured depository institutions so as to allow the designated
reserve ratio to increase during more favorable economic conditions
and to decrease during less favorable economic conditions,
notwithstanding the increased risks of loss that may exist during
such less favorable conditions, as determined to be appropriate by
the Board of Directors;
(iii) seek to prevent sharp swings in the assessment rates for
insured depository institutions; and
(iv) take into account such other factors as the Board of
Directors may determine to be appropriate, consistent with the
requirements of this subparagraph.
Section 2105 of the Reform Act (to be codified at 12 U.S.C.
1817(b)(3)(C)).
\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)).
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II. The Final Rule
Statutory Analysis
In July 2006, the FDIC published a proposed rule that would set the
DRR at 1.25 percent. In its proposal, the FDIC analyzed the statutory
factors that must be considered in setting the DRR. The FDIC also
identified three ``other factors'' that it considered.
1. Risk of Losses to the DIF
In the proposal, the FDIC's best estimate of potential loss
provisions for 2006 related to future failures was $93 million. The
FDIC also considered economic stress events and their potential
implications for losses to the insurance fund by running several two-
year stress event simulations. The results of each simulation, which
were derived from historical stress events, demonstrate that banks are
well positioned to withstand a significant degree of financial
adversity. In no case did the stress simulation results raise any
significant concerns.
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
U.S. economic growth appears to be moderating in the second half of
2006. Consensus estimates of U.S. economic growth are in the 2.0 to 2.5
percent range for the second half of 2006, compared to growth of 3.2
percent reported for 2005. While the cumulative effects of higher
interest rates, higher energy prices and slower home price appreciation
are expected to slow consumer spending, exports and nonresidential
investment appear poised to make up a larger portion of net growth in
the economy. This rebalancing of economic activity should be consistent
with stability in the outlook for bank credit quality, and problem loan
ratios are likely to move up modestly over time from today's historic
low levels. Possible exceptions to this generally positive credit
outlook include certain subsectors of residential real estate loan
portfolios, where higher interest rates and a leveling off of home
price increases could contribute to a higher incidence of credit
distress.
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
The Reform Act directs the FDIC's Board to consider preventing
sharp swings in assessment rates for insured depository institutions.
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
The FDIC's Board also considered certain ``other factors'' in its
decision to propose setting the DRR at 1.25 percent.
a. Transition to a new aassessment system. The FDIC noted that the
assessment system is about to undergo significant change. Once proposed
risk-based assessment regulations are finalized and become effective,
all insured institutions will pay deposit insurance assessments
regardless of the level of the reserve ratio. These proposed
regulations also will change how the FDIC differentiates among insured
institutions for risk in assigning assessment rates.
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.
The Reform Act authorizes the Board to set the DRR at no less than 1.15
percent and no greater than 1.50 percent. The FDIC must adopt a
restoration plan when the reserve ratio falls below 1.15 percent. When
the reserve ratio exceeds 1.35 percent, the Reform Act generally
requires the FDIC to begin to pay dividends. Because there is no
requirement to achieve a specific reserve ratio within a given time
frame, these provisions in effect establish a normal operating range
for the reserve ratio of 1.15 percent to 1.35 percent within which the
Board has considerable discretion to manage the size of the insurance
fund. The FDIC noted that the current DRR of 1.25 percent is the
midpoint of the normal operating range.
c. Historical experience. The FDIC also observed that historical
experience with a DRR of 1.25 percent indicates that it has worked well
under varying economic conditions in ensuring an adequate insurance
fund and maintaining a sound deposit insurance system and concluded
that more experience with managing the fund under the new framework
established by the Reform Act will be of benefit in
[[Page 69325]]
determining whether the DRR should be raised or lowered from 1.25
percent.
5. Role of the DRR
The FDIC also noted that the manner in which the FDIC's Board
evaluates the statutory factors may depend on its view of the role of
the DRR, which may change over time. The FDIC identified two potential
general roles for the DRR: a signal of the reserve ratio that the Board
would like the fund to achieve; and a signal of the Board's expectation
of the change in the reserve ratio under the assessment rate schedule
adopted by the Board.
III. Comments on the Proposed Rule
The FDIC received 16 comments directly addressed to the proposed
rule for setting the DRR.\6\ These comments generally fell into several
main groups: the DRR should be set at the low end of the range; the DRR
should be raised gradually over time; the reserve ratio should be
raised gradually; the DRR should not be set at the minimum of the
range; the DRR should be a rough guide to the DIF reserve ratio; and
further economic rationale should be provided for setting the DRR at
1.25.
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\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 Web site at http://www.fdic.gov/regulations/laws/federal/index.html
.
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One individual set out several arguments for setting the DRR at
1.50 percent, including:
Greater risk in the banking industry;
Strong insured deposit growth;
Inadequacy of a 1.25 percent DRR as evidenced by the FDIC
fund falling from 1.24 percent in 1981 to a negative number in 1991;
and
The number of times the reserve ratio has been above 1.50
percent during the FDIC's history.
Several other commenters suggested setting the DRR below 1.25
percent. Arguments in support of this suggestion included:
A lower ratio would provide the industry with time to
recapitalize the fund without facing sharp swings in assessment rates,
particularly for those institutions which will not have credits;
The FDIC is unrealistic in its optimism about the economy,
and Congress expected the FDIC to set the DRR at the lower end of the
range when institutions generally would face difficulty making
payments, such as in difficult economic times, while setting the DRR
higher when the economy was good and payments could be made more
easily;
The banking industry is financially healthy;
The risk of fund losses is low, at least in part due to
prompt corrective action requirements and other new supervisory and
enforcement tools that enhance safety and soundness;
Congress intended for the FDIC to determine an appropriate
level for the DRR annually, rather than allowing the reserve ratio to
meet the DRR over a period of a few years;
The number of bank failures has been low;
hardship on new growth institutions would be lessened; and
The risk to the industry is lower now than in 1991 when
Congress set the DRR at 1.25.
Other commenters suggested that increases in the DRR be phased in
gradually:
Starting with a DRR of 1.20 percent and phasing in an
increase to 1.25 percent over a five-year period; and
Allowing an initial drift toward 1.15 percent, with a
phased-in move to 1.25 percent over time.
One comment from a banking industry trade group, however, stated
that ``it would not be prudent'' to set the target at the minimum of
1.15 percent.
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:
Is a very rough guide to a long-run equilibrium for the
reserve ratio, and not a primary driver of premiums in the short-run;
Should be analyzed each year to determine whether it is
reasonable given the actual risk of loss to the DIF;
Should not be viewed as requiring the imposition of higher
assessments, but rather the FDIC should consider economic factors and
the condition of the banking industry generally to determine whether to
lower the DRR or whether it will be restored through deposit base
changes, growth in investment earnings, low levels of expected
failures, and similar factors.
Three commenters sought greater analytical justification for
setting the DRR at 1.25 percent, asserting that the FDIC's rationale
was:
Unclear;
Not sufficiently explained, requesting more thorough
analysis within two years; and
Not justified based on actual risk and market conditions.
IV. The Final Rule
The FDIC believes that the statutory analysis conducted in the
proposed rulemaking is correct. Based upon that analysis, and for the
reasons that follow, the FDIC has determined to set the DRR at 1.25
percent.\7\
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\7\ The final rule adds paragraph (g) of 327.4 (Subpart A) to
the revised part 327 as set forth in the final rule on Operational
Changes to Assessments (RIN 3064-AD03) published elsewhere in this
issue of the Federal Register.
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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,
[[Page 69326]]
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
The final rule setting the DRR at 1.25 percent will become
effective on January 1, 2007.
VI. Paperwork Reduction Act
The proposed rule will set the Designated Reserve Ratio for the
Deposit Insurance Fund. It will not involve any new collections of
information pursuant to the Paperwork Reduction Act (44 U.S.C. 3501 et
seq.). Consequently, no information has been submitted to the Office of
Management and Budget for review.
VII. Regulatory Flexibility Act
Pursuant to 5 U.S.C. 605(b), the FDIC certifies that the final rule
will not have a significant economic impact on a substantial number of
small businesses (i.e., insured depository institutions with $165
million or less in assets) within the meaning of the Regulatory
Flexibility Act (RFA) (5 U.S.C. 601, et seq.). The final rule sets the
Designated Reserve Ratio (DRR) at 1.25 percent, which is unchanged from
the present Designated Reserve Ratio. Under the Federal Deposit
Insurance Reform Act of 2005, the DRR provides no trigger for
assessment determinations, recapitalization of the insurance fund,
assessment credit use, or dividends. Consequently, retaining the DRR at
1.25 percent will not have a significant economic impact on a
substantial number of small insured institutions. No comments were
received concerning the proposal's RFA certification.
VIII. 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).
IX. Small Business Regulatory Enforcement Fairness Act
The Office of Management and Budget has determined that the final
rule is not a ``major rule'' within the meaning of the relevant
sections of the Small Business Regulatory Enforcement Fairness Act of
1996 (SBREFA) (5 U.S.C. 801, et seq.). As required by SBFERA, 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.
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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
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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.
Subpart A--In General
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2. In Sec. 327.4 of subpart A, add paragraph (g) to read as follows:
Sec. 327.4 Assessment rates.
* * * * *
(g) Designated reserve ratio. The designated reserve ratio for the
Deposit Insurance Fund is 1.25 percent.
By order of the Board of Directors.
Dated at Washington, DC this 2nd day of November 2006.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 06-9203 Filed 11-29-06; 8:45 am]
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