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TESTIMONYfOF
%
L. W I L L I A M SEIDMAN
CHAIRMAN
FEDERAL DEPOSIT INSURANCE C O R P O R A T I O N
\
WASHINGTON, D.C.
ON
c
B R OKERED DEPOSITS
i
BEFORE THE
f[ou^xz.
SUBCO M M I T T E E ON G E N E R A L OVERSIGHT A N D INVESTIGATIONS
OF THE
_
COMMITTEE ON BANKING, FINANCE AND U R B A N AFFAIRS
U N I T E D STATES HOUSE OF REPRES E N T A T I V E S
(:
V.
11:00 a.m.
M a y 17, 1989 * .
R o o m 2128, R a y b u r n House Office Buil d i n g
G o o d morning,
Mr. Chairman and members of the Subcommittee.
It is a
A
pleasure to test i f y this morn i n g on the use of bro k e r e d deposits by
insured b a n k s and thrifts.
We appreciate the opportunity to discuss the
!provisions in the House and Senate savings and loan rescue bills that
would r e s t r i c t the use of brokered deposits by u n d e r c a p i t a l i z e d insured
financial institutions.
BACKGROUND
Brokered d e p o s i t s have had a controversial h i s t o r y over the pas t decade.
You m a y recall that a few years ago the FDIC opposed the use of insured
brokered d e p o s i t s to fund rapid and imprudent grow t h that was increasing
our costs in resolving bank failures.
The 1982 failure of the Penn Square
JJank in O k l a h o m a City was an example of the abuse that can occur through
the use of fully insured brokered deposits.
The FDIC a t t e m p t e d to address these abuses in M a r c h of 1984 by issuing a
regulation to limit insurance coverage on b r o k e r e d deposits to $100,000
per d e p o s i t b r o k e r per insured bank.
A f t e r legal challenge,
the courts
ruled th a t the FDIC lacked the authority to limit insurance coverage in
that manner.
About th e same time, we enhanced our abil i t y to control p o ssible abuses of
insured b r o k e r e d deposits by issuing a r e g u l a t i o n
below)
t h a t r e quired mont h l y
(now quarterly)
(described m o r e fully
r e p orting when the use of
insured b r o k e r e d deposits exceeded a t h r e s h o l d amount.
This regulation is
2
still b e i n g used to m o n i t o r growth thro u g h b r o k e r e d deposits.
(See
A t t a c h m e n t A for rep o r t i n g summaries u n d e r the regulation.)
In our view,
b r o k e r e d deposits have bo t h n e g a t i v e and p o s i t i v e aspects.
On the n e g a t i v e side, th e y have been u s e d to fund e x c e ssive g r o w t h and
imprudent,
even fraudulent,
loans or o t h e r investments.
Th i s has led to
th e failure of a n u m b e r of banks and has increased our costs in those
cases.
F r o m a failure r esolution standpoint,
the pres e n c e of long-term,
h i g h - c o s t b r o k e r e d d e posits in a failing b a n k tends to redu c e its
franchise value.
This m akes it more d i f f i c u l t to satisfy our cost test
for a r r a n g i n g a pur c h a s e and assumption t r a n s a c t i o n —
our preferred
m e t h o d of res o l v i n g failed banks.
On the p o s i t i v e side,
b r o k e r e d deposits can represent a v a l u a b l e liquidi/jj
m a n a g e m e n t tool for all financial institutions,
ones,
including undercapitalized
a nd in some m a r k e t s m a y even r e p r esent a low-cost funding option. In
th e c u r r e n t savings and loan situation,
the contro l l e d u se of brokered
d e p o s i t s h as be e n an important tool in h a n d l i n g some of t he liquidity
p r e s s u r e s th a t have arisen.
Without the us e of brok e r e d d e posits to allowj
c o n t i n u e d funding for liquidity purposes,
worse.
Consequently,
t he thrift crisis w o u l d be much
w e m u s t not foreclose t he u se of b r o k e r e d deposits
to u n d e r c a p i t a l i z e d institutions in all circumstances.
Brok e r e d deposits
s h o u l d b e d e n i e d to u n d e r c a p i t a l i z e d i n stitutions only w h e n u s e d as a
m e a n s to g r o w and not w h e n needed as a c o n t i n u e d source of liquidity.
)
3
In general,
w e do not find the use of bro k e r e d d e posits to be a major
problem in the b a n k i n g industry at this time.
This is in spite of the
fj^act that b r o k e r e d deposits usage has increased over the past several
years.
At t he end of Ma r c h of this ye a r 804 banks he l d approximately
$51.4 b i l l i o n in b r o k e r e d deposits,
1986
(See A t t a c h m e n t B ) .
58 percent,
$100,000,
up from $29.4 b i l l i o n at the end of
Of the $51.4 billion,
$29.6 billion,
or about
r e p r e s e n t wholesale deposits issued in amounts greater than
the b u l k of which are uninsured.
They are h e a v i l y concentrated
in the larger banks that would likely receive FDIC as s i s t a n c e in the event
of financial d i f f i c u l t i e s
billion,
or 42 percent,
(See A t t a c h m e n t C ) .
$21.8
represent retail bro k e r e d d e p o s i t s that are fully
covered b y depo s i t insurance.
$100,000,
The remainder,
These deposits include t h o s e under
and large deposits arranged by brokers and t h e n participated out
in fully-insured amounts of $100,000 or less.
4
In the past,
b r o k e r e d deposits m a y ha v e contr i b u t e d to pro b l e m s in the
t h r i f t industry.
Today,
however,
c o n tinued access to b r o k e r e d deposits bj
insolvent and u n h e a l t h y thrifts is v i t a l l y important to keep the problem
from gett i n g worse.
Bro k e r e d depo s i t s p r o v i d e t r oubled t hrifts w i t h an important source of
li q u i d i t y to fund t h e i r operations until a mo r e p e r m a n e n t solution to the
S & L p r o b l e m can be implemented.
Of the 390 F S L I C - i n s u r e d institutions
w i t h GAA P capital of b etween zero and t h r e e perc e n t at y e a r - e n d 1988,
n e a r l y one - t h i r d r e l i e d on some level of b r o k e r e d deposits.
a n o t h e r 364 thri f t s w i t h negative GA A P capital ratios,
on b r o k e r e d funds for necessary liquidity.
b r o k e r e d dep o s i t s u s e d industry-wide,
Thus,
Out of
44 p e r c e n t relied
of th e $71.6 billion of
40 perc e n t or $28.5 bill i o n provided
li q u i d i t y to m a r g i n a l l y solvent institutions or to i nstitutions with
jj
n e g a t i v e G A A P net worth.
T h e FDIC is c u r r e n t l y acting as c o n s e r v a t o r to 220 of t h e m o s t troubled
t h r i f t s w i t h t otal liabilities of about $100 billion.
of May,
As of the beginning
12 p e r c e n t of these liabilities wer e in the form of brokered
deposits.
Th e s e funds are used as a liquidity m a n a g e m e n t tool,
m e a n s of funding r e ckless growth.
not as a
P r o h ibitions on t he u s e of brokered
funds by u n d e r c a p i t a l i z e d thrifts c ould pose a serious p r o b l e m to the FDIC
or to the R e s o l u t i o n T rust Co r p o r a t i o n and h a m p e r th e o r d e r l y sale or
l i q u i d a t i o n of th e s e thrifts.
This typ e of liquidity co n s t r a i n t could
p o t e n t i a l l y add to the RTC's overall co s t of r e s o l v i n g t h e s e cases.
1
5
p T C R E G U L A T O R Y A P PROACH
Appropriate su p e r v i s i o n is the key to a deposit insurance system like ours
in w hich an insured institution's m a n a g e m e n t can o b ligate the credit of
the g o v e r n m e n t t h r o u g h the s olicitation and receipt of insured deposits.
The abil i t y to tap a national funding m a r k e t thro u g h bro k e r e d deposits
makes v i r t u a l l y u n l i m i t e d funds a v a i lable at any time w i t h o u t regard to a
financial i n stitution's condition or t he uses c o n t e m p l a t e d for the funds.
Thus,
it is the integrity and compet e n c e of b a n k management,
own capital and, m o s t importantly,
the bank's
t i m e l y and e f f e ctive supervision by the
regulatory au t h o r i t i e s that prot e c t the deposit insurance fund.
The FDIC p r e s e n t l y controls the receipt and use of b r o k e r e d deposits
|through r e p o r t i n g requirements and the supervisory process.
Data on the
total amou n t of b r o k e r e d deposits in all insured banks are obtained from
quarterly call reports.
Section 304.6 of the FDIC's regulations requires
each insured b a n k to file with the FDIC a special qua r t e r l y report
whenever t he total of the bank's fully-insured b r o k e r e d deposits and
fully-insured d i r e c t deposits of other dep o s i t o r y institutions exceeds
either its capital and reserves or five percent of its total deposits.
These reports are considered in the c ontext of o ther file information in
devising an a p p r o p r i a t e supervisory response.
W e also are in the process
of d e v e l o p i n g an off-site compu t e r i z e d system for m o n i t o r i n g rapid growth,
including g r o w t h t h a t results from t he receipt of b r o k e r e d deposits.
^As stated above,
t h e best w a y to control our e x posure as a result of
brokered d e p o s i t s and other types of funding —
such as bo r r o w i n g s —
is
6
thro u g h t i m e l y and effective supervision.
That is, b y m a k i n g sure those
funds are not u s e d or invested imprudently.
Thus,
t h e FDIC recently
p r o p o s e d for p u b l i c comment a rule requiring a d v a n c e noti c e by any bank
p l a n n i n g to g r o w rapidly through the use of b r o k e r e d deposits,
or other e x t r a o r d i n a r y funding means.
a t tached
borrowings
A copy of our p r o p o s e d rule is
(Attachment D ) .
U p o n rece i p t of such a notice, we intend to w o r k c l o s e l y with the
a p p r o p r i a t e s u p e r v i s o r y authorities to carefully e x a m i n e any reporting
i n s titution's p l a n n e d use of such funds.
Such a p r e - n o t i f i c a t i o n will
alert us to institutions that need special s u p e r v i s o r y attention and
enable us to w o r k wit h ban k m a n a g e m e n t to p r e v e n t risky,
imprudent loans and investments.
unwise and
By e l i minating s u b s tantial losses that
depl e t e a b a n k ' s capital we hope to p r e v e n t the t r a n s f e r of a
d i s p r o p o r t i o n a t e share of the risk of the enterp r i s e from the bank's
investors to t he FDIC as deposit insurer.
By the a d o p t i o n of this rule,
w e se e k to p r e v e n t the types of losses that e v e n t u a l l y could lead to
failures a nd losses to the FDIC insurance fund.
PROPOSED LEGISLATION
W e supp o r t the idea of giving the regulators t he a u t h o r i t y to regulate
b r o k e r e d deposits.
However, w e do n ot b elieve l e g i s l a t i n g specific
p r o h i b i t i o n s a g a i n s t or restrictions on b r o k e r e d d e p o s i t s is the best
approach.
Instead,
to further assu r e that there wil l b e appropriate
m o n i t o r i n g a nd super v i s i o n of the us e s of b r o k e r e d d e p o s i t s the Congress
should p r o v i d e t he FDIC wi t h the spe c i f i c a u t h o r i t y to regulate their
7
e.
Such legislation,
n o t just t r o u b l e d
u n sa fe
however,
should be applicable to all institutions,
ones, w h enever b r o k e r e d deposits are be i n g used in an
or u n s o u n d manner.
The brok e r e d d e p o s i t provisions in the House and Senate bills
and S. 774)
h a v e a couple of other weaknesses.
(H.R.
1278
They do not c over possible
risks a s s o c i a t e d w i t h excessive g r o w t h by healthy or " n o n t r o u b l e d ”
institutions.
And, most importantly,
they could result in reducing
liquidity to the t h rift industry just w h e n that liquidity is m o s t urgently
needed.
We also are c o n c e r n e d with the burd e n bo t h proposed bills,
if enacted,
would p lace on the FDIC by requiring a case-by-case a p p l i cations process
(§for exemp t i o n s from the limitations on b r okered deposits.
We w o u l d prefer
explicit a u t h o r i t y to provide general guidance through regulations,
as
well as to p r o c e s s requests for exceptions in individual cases.
In com p a r i n g the b ills that are b e f o r e the Senate and House,
version is th e m o r e acceptable of the two.
the House
The Senate bill w o u l d prohibit
any additions to or renewals of exi s t i n g brokered deposits.
On the other
hand, the H o u s e bill would p r ohibit only increases in t he amount of
brokered deposits.
The House v e r s i o n is p referable b e c a u s e it w o u l d at
least p e r m i t institutions to m a i n t a i n b r o k e r e d deposits at current
levels.
However,
even this m a y be o v e r l y restrictive,
respect to th e liquidity needs of t he t h rift industry.
p a r t i c u l a r l y with
8
Finally,
if enacted, we beli e v e there should b e a d e l a y e d effective date
for these provisions,
somewhere in the range of th r e e to six months. This
w o u l d a l l o w a f f e c t e d institutions to adjust t h e i r o p erations to the new
r equirements and, u n d e r our approach, w o u l d a l l o w ti m e to promulgate any
required regulations.
T h a n k y o u for inviting me to t e s t i f y on this imp o r t a n t and timely topic.
I w o u l d b e p l e a s e d to respond to any questions.
Attachments
Attachment A
BROKERED
DEPOSITS
F ROM
Insured
(000
F u l l y - In s u re d
Br oker ed
304.6
SECTION
O m it te d )
De p o s i t s
Nos.
N0 .
of
Rat i n gs
CAMEL
G r o u p ii n
Each
Banks
in
g
U n ra te d
0 f
Amount s
g
REPORTS1
Banks
1
or
2
3
4
o r
5
(New)
12-31 - 86
1 74
6 , 2 2 8 ,, 2 0 5
78
37
48
11
12-31 - 8 7
158
1 0 , 6 1 2 ,, 3 5 1
83
44
26
5
12-31 - 88
22 1
1 8 , 1 8 1 ,, 0 0 2
14 1
46
33
1
3 - 3 1 - 89
223
2 1 , 0 6 1 ,, 4 2 2
14 5
50
25
3
R e p o r t s requi red u n d e r FDIC R e g u l a t o n
d e p o s i t s and fui ly* i n s u r e d di r e c t d e p
t o t a l c a p i t a l and r e s e r v e o r fi v e per
1
This
<D
G
<d
u
•H
brokered
exceeds
TOTAL
BROKERED DEPOSITS
Insured Banks
(000 Omi t ted)
From
Call
Reports
Retai l
No.
of
Banks
Uh o l e s a l e
L e s s Than
$ 1 0 0 m1
GreaterThan
$ 100m‘
Total
12 - 3 1- 86
5 73
19 , 971,411
2,729,156
6,727,954
2 9 , 4 2 8 , ,52 1
12 - 3 1- 8 7
70 2
24 , 198,025
5,401,925
9,460,016
3 9 , 0 5 9 , ,966
1 2 - 3 1 • 88
83 7
34 , 9 1 1 , 0 0 4
8,670,134
16,130,503
5 9 , 7 1 1 , ,641
804 3
29 , 649,851
9,980,957
11,736,433
5 1 . 3 6 7 , ,241
3 - 3 1 - 89
1
2
3
Issued
Issued
shares
Prelimi
in
in
of
nar
d e n o m i n a t i o n s of $ 1 0 0 , 0 0 0 or l e s s .
denominations greater
than $100,000
and p a r t i c i p a t e d out
$ 1 0 0 , 0 0 0 or l e s s .
y
figures
b a s e d on r e p o r t s
f r o m a p p r o x i m a t e l y 94 p e r c e n t
by
the
broker
of
insured
in
banks.
Attachment C
BROKERED
(From
10 0 M
10 0M -
5 0 ON
500M -
1B
1B -
5B
TOTAL
1
P r e l j mi n a r y
f i gures
3 - 31-89
No. of
Banks
S i z e of Ba nk
in Ni l l i ons )
(Assets
Under
DEPOSITS
based
Call
BY
SIZE
Report'
OF
000
BANK
Omitted)
Wholesale
Tot a l
Retai l
3 66
143,142
741,204
884 ,34 6
2 26
392,948
1 , 837,408
2,230 ,356
53
411,196
1 , 862,725
2,273 ,921
1 18
7 , 795,804
9 , 060,987
16,856 , 791
64
2 3 . 810.492
9 , 39 0 , } 0 7
33.200 .799
827
3 2 , 553,582
on
reports
TOTAL
from
approxiimately
BROKERED
DEPOSITS
55,446 ,213
2 2 , 892,631
95
percent
of
i ns ur ed
bank
FDIC
A TTA C H M EN T D
Federal Deposit Insurance Corporation
Office of the Director
Division of Bank Supervision
Washington. DC 20429
BL-18-89
April 7, 1989
RAPID ASSET GROWTH
TO:
CHIEF EXECUTIVE OFFICERS
OF A L L INSURED BANKS
SUBJECT:
Proposed notice of intent to rapidly increase assets
The Board of Directors of the Federal Deposit Insurance Corporation is
requesting public and industry comment on a proposal to require advance
notice by any insured bank planning to use special funding programs such as
brokered deposits, out—of—area solicitations or borrowings to finance a rapid
expansion of its assets.
Under the proposal, advance notification in the quarterly Reports of
Condition and Income (Call Report) would be required of any institution
anticipating asset growth of nine percent or more during any consecutive
three months. Until the Call Report is modified to incorporate this notice,
affected institutions would be required to send a brief "letter" notice to
the FDIC. The proposed regulation also would require an insured bank to
report to the agency within seven days if its assets grew by more than nine
percent over three consecutive months without advance notice to the FDIC.
Most new banks and recently merged institutions would be excluded from the
reporting requirements, as would institutions where the growth is in line
with normal seasonal fluctuations.
If adopted, the proposal would replace a reporting requirement now applicable
to banks accepting significant amounts of brokered deposits and fully insured
deposits from other depository institutions. Under the existing regulation,
a bank must submit a letter report to the FDIC if insured deposits placed by
brokers or other depository institutions as of the end of a calendar quarter
exceed the bank's capital and reserves or five percent of total deposits.
Comments will be accepted on the proposed for 60 days after it is published
in the Federal Register. Comments should be sent to Hoyle L. Robinson,
Executive Secretary, FDIC, 550 17th Street, N.W., Washington, D.C. 20429. A
copy of the proposal is attached.
m
Paul G.Director
Distribution:
All insured banks
(Commercial and Savings)
F ed eral R egister / Vol. 54, No. 64 / W edn esday, A pril 5, 1989 / P roposed R ules
FEDERAL DEPOSIT INSURANCE
CORPORATION
8:30 a.m. and 5:00 p.m. on business days.
12 CFR Part 304
William G. Hrindac, Examination
Specialist Division of Bank Supervision,
(202) 896-6892, Federal Deposit
Insurance Corporation, 550 17th Street,
NW., Washington, DC 20429.
Form a, Instructions, and R eports
AGENCY: Federal
Deposit Insurance
Corporation ("FDIC” ).
a c t io n : Proposed rule.
SUMMARY: The
FDIC is proposing to
substitute for its current regulation on
reporting fully insured brokered deposits
and fully insured deposits placed
directly by other depository institutions
(12 CFR 304.6) a new requirement calling
for the reporting of planned rapid
growth by whatever means, including
the solicitation and acceptance of
brokered deposits and direct deposits by
other depository institutions.
Essentially, the new proposal would
require an insured bank to report by
means of a check-off question on its
Reports of Condition and Income any
intention to grow rapidly, that is, by
more than nine percent during the
following three months. Any bank
reporting an intention to grow that
rapidly would be prohibited from
implementing its plans for a period of 30
days from the submission of its Reports
of Condition and Income. As an interim
measure, unless and until a question
regarding planned rapid growth can be
included on the Reports of Condition
and Income, insured banks would be
required to report their intention to grow
rapidly by means of a letter or other
written communication mailed or
otherwise directed to the appropriate
FDIC regional director for bank
supervision. Moreover, whenever rapid
growth occurs that w as not planned and
covered by a prior notice given through
a Reports of Condition and Income
submission or separate letter or other
communication, the bank would be
required to report promptly the fact of
that growth to the appropriate FDIC
regional director for supervision.
d a t e s : Comments must be received by
June 5,1989.
A D D RESS: Send comments to Hoyle L
Robinson, Executive Secretary, Federal
Deposit Insurance Corporation, 550 17th
Street NW„ Washington. DC 20429.
Comments may be hand delivered to
Room 6092 on business days between
8:30 a jn . and 5:00 pjn. Comments may
also be inspected in Room 6092 between
FOR FURTHER INFORMATION CONTACT:
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The notice requirements contained in
the proposed regulation do not
constitute "collections of information"
for purposes of the Paperwork
Reduction Act (44 U.S.C. 3501 et seq.)
and therefore are not subject to the
Office of Management and Budget
(“OMB”) clearance provisions of that
Act. This is because the notice
requirements fall within the exception to
the definition of “information" set out in
$ 1320.7(j)(l) of OMB regulations
implementing the "collection of
information clearance" provisions of the
Act (5 CFR Part 1320). It is recognized,
however, that the notice requirements
do place an affirmative obligation on a
bank to notify the FDIC of its intended
action to grow rapidly or that rapid
growth has occurred. Any costs
associated with these notices would
appear, however, to be minimal. The
proposed regulation does not specify the
content of the written notices or require
the bank to provide any more specific
information beyond that indicated.
Regulatory Flexibility Act
The FDIC’s Board of Directors hereby
certifies that the proposed regulation
will not have a significant economic
impact on a substantial number of small
entities because it will simply require
occasional reporting by a relatively
small percentage of insured banks
regarding their intent to grow rapidly or
the fact that they have grown rapidly.
These types of communications have
alw ays been a routine part of the bank
supervisory process. Moreover, the
additional economic impact will be
more than offset by the elimination of
explicit reporting requirements calling
for the special compilation and periodic
reporting of data on fully insured
brokered deposits and direct deposits of
other depository institutions. Overall,
the net impact of the change may be a
significant reduction in the cost and
burden on small banks. Consequently,
the provisions of the Regulatory
13CS3
Flexibility Act relating to an initial and
final regulatory flexibility analysis (5
U.S.C. 603 and 604) are not applicable.
Discussion
A number of instances have
developed over the last few years where
insured banks have grown very rapidly
in a short period of time and have
concurrently developed serious asset
and/or other problems. In fact, some of
these institutions have failed very
quickly thereafter, even though these
same banks had operated satisfactorily
prior to the unwise growth.
Various mechanisms have been used
to fund that growth, including brokered
deposits, direct borrowings, use of
repurchase agreements, direct
solicitation of deposits throughout the
country by a "money desk" operation,
and simply paying above market rates.
The FDIC believes it necessary to
enhance its ability to monitor rapid
growth in time to apply appropriate
supervision.
Since a bank may obtain its funding
from a variety of sources in addition to
brokered deposits, the FDIC believes
that any effort to monitor and control
rapid growth in insured banks should
not focus solely or even principally on
brokered deposits. Instead, the focus
should be on rapid growth p erse as an
indication of the need for close
monitoring and supervisory oversight.
Moreover, in order to a sse ss its
insurance risk, the FDIC believes that,
insofar a s practical, it should receive as
much prior notice of anticipated rapid
growth a s possible in order to deter and
perhaps forestall imprudent loans and
investments before the fact rather than
attempting to control and limit abuses
and losses after the fact.
To this end, the FDIC proposes to
substitute in lieu of its current
requirements on quarterly reporting of
fully insured brokered deposits and fully
insured direct deposits of other
depository institutions (§ 304.6 of FDICs
regulations), a new section 304.6 that
essentially would require 30 days
advance written notification of an
insured bank's intent to grow rapidly,
i.e., by more than nine percent of assets
over any consecutive three-month
period. The notification would be Bled
as part of the bank's Reports of
Condition and Income submission by
means of a check-off question asking
whether the bank intended to grow
13694
F ed eral R egister / V o l 54, No. 64 / W edn esday, A pril 5, 1989 / P roposed R ules
rapidly during the following three
months. Until and unless such a
question is included on the Reports of
Condition and Income, a notice of intent
to grow rapidly would be given by letter
or other written communication directed
to the appropriate FDIC regional
director for supervison. No special
funding plan or arrangement designed to
rapidly increase the assets of a bank
could be implemented until 30 days
following written notice given either
through die submission of a Reports of
Condition and Income or a separate
letter or other written communication. A
written notification would also be
required within seven days whenever an
insured bank increased its assets by
more than nine percent during any
period unless the growth w as pursuant
to a previously reported notice of intent
to grow rapidly.
The proposed regulation makes clear
that the reporting requirements are not
intended to cover situations in which the
growth threshold is exceeded as a result
of normal growth expected of a new
bank during its first year of operation
(unless pursuant to a special funding
plan or arrangement for which notice
was not previously given), a merger or
consolidation, or seasonal changes in
deposit growth or lending and
repayment patterns customary for the
particular bank.
H The FDIC is also soliciting comment
on any other possible reporting scheme
designed to inform the FDIC in advance
of planned rapid growth in a more
efficient and less burdensome manner.
•
Confidential Treatment of Notices
All notices or other information
received in accordance with the
regulation outside the Reports of
Condition and Income will be treated as
confidential by the FDIC. It is the
agency's opinion based upon a review of
relevant case law that such notices or
other information will be exempt from
required public disclosure under the
Freedom of Information A c t The notices
or information will contain or constitute
confidential commercial or financial
information within the meaning of 5
U.S.C. 552(b)(4) and also fall within the
parameters of 5 U.S.C. 552(b)(8) which
exempts from public disclosure
information contained in or related to
examination, operating or condition
reports prepared for the use of the FDIC
or any other agency responsible for the
supervision of financial institutions.
Statutory Authority
In order to properly discharge its
supervisory responsibilities and to
adequately administer and protect the
deposit insurance fund, it is essential
that the FDIC have accurate, up-to-date
information regarding actions taken by
insured banks that may pose a threat to
bank safety and soundness and/or pose
a threat to the insurance fund. The
FDICs purpose in proposing a prior
notice requirement before an insured
bank may institute any special funding
plan and notice otherwise whenever
rapid growth occurs is to provide the
FDIC with a mechanism to obtain in a
timely fashion information that is
needed in order that the FDIC may
assess the risks posed to the insurance
fund, coordinate with other bank
regulatory authorities, prepare for and
schedule examinations of insured banks
when and where they are most needed,
and properly evaluate bank
management, current and future capital
and liquidity needs, etc. in light of plans
which may substantially alter the nature
of a bank’s balance sheet
The FD ICs action in proposing to
amend Part 304 of the FDIC's regulations
to provide for such notice is fully
consistent with the FDIC's purpose and
is authorized by sections 7 .8 ,9(Eighth),
and 10(b) of the Federal Deposit
Insurance Act (12 U.S.C. 1817,1818,
1819,1820(b)). Under section 9 of the FDI
Act the FDIC has broad general
authority to issue regulations “a s it may
deem necessary to carry out the
provisions of the [Federal Deposit
Insurance Act] or of any other law
which it has the responsibility of
administering or enforcing...........12
U.S.C. 1819(Tenth). It is settled that
binding legislative-type rules based on
general rulemaking authority may be
issued so long as the rules are
reasonably related to the purposes of
the enabling legislation containing the
general rulemaking authority. Mourning
v. Fam ily Publications Services, 411 U.S.
336,369 (1973) (quoting Thorpe v.
Housing Authority o f the City o f
Durham. 393 U.S. 269, 280-281 (I960)).
The preamble to the legislation placing
federal deposit insurance on a
permanent basis states that the Banking
Act of 1935 w as “ [t]o provide for the
sound, effective, and uninterrupted
operation of the banking system . . .“
Pub. L. No. 74-305,49 S ta t 684 (1935).
The clear goal of the FDI Act as
demonstrated by the express language
of the statute and its legislative history
is to protect the safety and soundness of
insured banks. In order to do so. the
FDIC must be fully informed of what
actions insured banks plan to take that
may present risks to their safety or
soundness and may ultimately endanger
the deposit insurance fund. The ability
of a federal bank regulatory agency to
adopt regulations in harmony with
safety and soundness concerns based
upon general rulemaking authority w as
judicially recognized long ago,
Continental Bank and Trust Company v.
W oodall. 239 F.2d 707,710 (10th Cir.),
cert, denied, 353 U.S. 909 (1957), and
recently reaffirmed by the D.C. Circuit in
a case involving a challenge to a
regulation by another federal insurer of
deposits, Lincoln Savings an d Loan
A ssociation v. Federal Home Loan Bank
Board. 856 F.2d 1558 (D.C. Cir. 1988).
A s the safety and soundness of the
deposit insurance fund is inextricably
connected with bank safety and
soundness, Federal D eposit Insurance
Corporation v. Citizens State Bank, 130
F.2d 102,104 n. 6 (8th Cir. 1942) and the
FDIC has a congressional mandate to
pay insured deposits whenever a bank
is closed “on account of inability to
meet the demands of its depositors" (12
U.S.C. 1821 (f)), the FDIC must preserve
the solvency of the insurance fund in
order to fulfill its mandate when called
upon. It is not surprising, therefore, that
the FDIC's authority to protect the
deposit insurance hind by the adoption
of substantial regulations applicable to
all insured banks has been judicially
recognized. N ational Council o f Savin gs
Institutions v. Federal D eposit
Insurance Corporation, 664 F. Supp. 572
(D.D.C. 1987). Furthermore, the FDIC is
authorized under section 8 of the FDI
Act (12 U.S.C. 1818) to initiate ceaseand-desist proceedings whenever a
bank is engaging in an unsafe or
unsound banking practice and to
terminate deposit insurance whenever a
bank is engaging in such practices or is
in an unsafe or unsound condition. The
FDIC is not confined to initiating
individual enforcement or termination
actions under section 8 but may, at its
discretion, adopt substantive regulations
defining what constitutes an unsafe or
unsound banking practice and what
circumstances will warrant the
termination of deposit insurance.
Fed eral R egister / Voi. 54, No. 64 / W ednesday, April 5, 1989 / Proposed Rules
Independent Bankers Association v.
Ueimann, 613 F. 2d 1161,1169 (D.C. Cir.
1979), ce rt denied, 449 U.S. 823 (1960).
As the FDIC is authorized to adopt
substantive regulations for the purpose
of protecting bank safety and soundness
and for the propose of protecting the
deposit insurance hind, the FDIC clearly
has the authority to adopt regulations
simply requiring that the FDIC receive
prior notice of a bank's plans to take
certain actions that may adversely
affect bank safety and soundness and
the deposit insurance fund.
§ 304.6
N otificatio n o f rapid grow th.
(a) Until and unless a question
regarding planned rapid growth is
included on the Reports of Condition
and Income filed by insured banks, an
insured bank may not undertake any
special funding plan or arrangement
designed to increase its assets by more
than nine percent during any
consecutive three-month period without
first notifying the appropriate FDIC
regional director for supervision in
writing at least 30 days in advance of
the implementation of the special
funding plan or arrangement For
Not only does it logically follow from
purposes of this requirement, a special
the above that the FDIC may require the
funding plan or arrangement is any
reports proposed herein, the FDIC is
effort to rapidly increase the assets of
expressly authorized to do so with
the
bank by any means. Such means
respect to insured state nonmember
may include, for example, borrowings,
banks. Section 7 of the FDI Act (12
solicitation and acceptance of deposits
U.S.C. 1817) provides that the FDIC may
from or through the intermediation of
collect reports of condition “ and such
brokers or affiliates, solicitation of
other reports as the Board [of Directors]
deposits outside the bank’s normal trade
may from time to time require." These
area, or paying rates on deposits that
reports are necessary in order that,
are higher than locally competing
among other things, the FDIC can
depository institutions. A notification
properly discharge its responsibility
tiled pursuant to this requirement need
under section 10(b) of the FDI Act (12
only state the bank's intention to grow
U.S.C. 1820 (b)) to schedule and
rapidly and shall be considered given on
undertake a special examination of an
the date post-marked or delivered to the
insured bank other than a state
FDIC regional office if by means other
nonmember bank when the FDIC has
than placement in the mails.
reason to believe that such examination
(b) In the event a question is included
is necessary to determine the condition
on the Report of Condition and Income
of the bank. It follows, therefore, based
asking whether the reporting bank
on section 0, that the FDIC has the
intends to grow rapidly, i.e., grow by
authority to require the reports from
more than nine percent during the
insured banks other than state
following three months, the bank would
nonmembers in order that it might fulfill
by check-mark indicate affirmatively
its responsibility to undertake such
that it plans to grow rapidly and the
examinations.
submission of its Report of Condition
Accordingly, for the reasons stated in
and Income shall satisfy the notification
this notice, and pursuant to the FDIC’s
requirement prescribed in paragraph (a)
authority under sections 7 ,8 ,9(Eighth),
of this section. The bank may not
and 10(b) of the Federal Deposit
implement its growth plans for 30 days
Insurance (12 U.S.C. 1817,1818,
following the date of submission of its
1819(Eighth), 1820(b)). the FDIC
Reports of Condition and Income. For
proposes to delete { 304.6 of its
this purpose, date of submission means
regulations (12 CFR 304.6) and substitute the date on which the Reports were
in lieu thereof the following new § 304.6.
mailed, transmitted electronically or by
fax machine to the FDIC or other federal
List of Subjects in 12 CFR Part 304
banking authority.
Banks, banking; Bank reports.
(c) In the event a question concerning
rapid growth is included on the Reports
Accordingly, the FDIC hereby
of Conditions and Income and an
proposes to amend Part 304 of Title 12
insured bank between tiling dates
Code o f Federal Regulations a s follows.
determines to grow rapidly, it may not
PART 304—FORMS, INSTRUCTIONS,
implement any special funding plan or
AND REPORTS
arrangement designed to achieve rapid
growth without first notifying the
1. The authority citation for Part 304
appropriate FDIC regional director for
continues to read as follows:
supervision in writing at least 30 days in
Authority: 5 U.S.C. 552.12 U.S.C. 1817.1818,
advance. The notice need only state the
1819.1820.
bank's intent to grow rapidly and shall
be considered given on the date post
2. It is proposed that § 304.6 be
marked or delivered to the FDIC
revised to read as follows:
13693
regional office if by means other than
placement in the mails.
(d) Unless rapid growth occurs
pursuant to a plan or arrangement for
which notice was previously given, an
insured bank shall notify the
appropriate FDIC regional director in
writing within seven days whenever its
assets increase by more than nine
percent during any consecutive threemonth period. The notice need only
report the fact of that growth and shall
be considered given on the date post
marked or delivered to the FDIC
regional office if by means other than
placement in the mails.
(e) The reporting requirements
prescribed in this section are not
intended to apply to situations in which
the growth threshold of nine percent
during any consecutive three-month
period is exceeded as a result of normal
growth expected of a newly chartered
bank during its first year of operation
(unless it has implemented a special
funding plan or arrangement for which
no prior notification has been given), a
merger or consolidation, or seasonal
changes in deposit growth or lending
and repayment patterns that are
customary for the particular bank.
(f) Additional information regarding
growth plans and activities may be
required from time to time through direct
inquiry.
By order of the Board of Directors.
Dated at Washington. DC this 21st day of
March 1989.
Federal Deposit Insurance Corporation.
Hoyle L Robinson,
Executive Secretary.
[FR D oc 89-8090 Filed 4-4-B9; 8:45 am)
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