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TESTIMONY OF
WILLIAM TAYLOR
CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C.
ON
THE CONDITION OF THE SAVINGS ASSOCIATION INSURANCE FUND
BEFORE THE
JUL 3 1
COMMITTEE ON BANKING, FINANCE AND
URBAN AFFAIRS
FEDERAL DEPOSIT INSURANCE CORPORATION
U.S. HOUSE OF REPRESENTATIVES
wltrUKAJIU«
10:00 A.M.
JULY 2, 1992
ROOM 2128, RAYBURN HOUSE OFFICE BUILDING
Mr. Chairman and members of the Committee, I appreciate the
opportunity to testify today on the condition of the Savings
Association Insurance Fund.
My presentation will cover the
current condition of the Savings Association Insurance Fund, the
outlook for the Fund, and the proposed increase in assessment
rates for all Savings Association Insurance Fund-member
institutions.
BACKGROUND
The Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) abolished the Federal Savings
and Loan Insurance Corporation (FSLIC) and the Federal Home Loan
Bank Board (FHLBB).
Their functions were transferred to the
Federal Deposit Insurance Corporation (FDIC), the Office of
Thrift Supervision (OTS), the Federal Housing Finance Board and
the Resolution Trust Corporation (RTC).
Under. FIRREA, the FDIC
became the administrator of two separate and distinct insurance
funds: the Bank Insurance Fund (formerly the Deposit Insurance
Fund) which insures the deposits of all Bank Insurance
Fund-member banks, and the Savings Association Insurance Fund
(SAIF) which insures the deposits of all member savings
associations (formerly a function of the FSLIC).
Both insurance
funds are maintained separately to carry out their respective
legislative mandates, with no commingling of assets or
liabilities.
The FSLIC Resolution Fund, a third separate fund
under FDIC management, and the RTC replaced the FSLIC in case
2
resolution activities.
The FSLIC Resolution Fund is funded
through congressional appropriations, asset sales, and
assessment income from SAIF-member premiums (through calendar
year 1992).
The FSLIC Resolution Fund will complete the
resolution of all thrifts that failed or were assisted before
January 1, 1989; the RTC will resolve all troubled thrift cases
that occur from January 1, 1989 through September 30, 1993,
after which the Savings Association Insurance Fund will begin
resolving cases.
Current Condition of the Savings Association Insurance Fund
Attachment 1 is the 1991 audited financial statement for
SAIF.
The Fund's income and expenses have been limited during
the interim period in which the RTC is responsible for the
clean-up of non-viable thrifts.
SAIF-member assessment revenue
totaled about $1.8 billion in 1991; however, all assessment
revenue from SAIF-member institutions is collected by the
Federal Home Loan Bank of Des Moines and diverted to the
Financing Corporation (FICO) and the FSLIC Resolution Fund.
Currently, only assessment income generated from Bank Insurance
Fund-member institutions that acquired thrifts under section
5(d)(3) of the Federal Deposit Insurance Act, is deposited in
the SAIF.
For 1991, this assessment income was approximately
$87 million.
3
As mentioned above, the RTC is expected to cover the
caseload of thrifts requiring federal intervention, and
therefore cover the losses resulting from such resolutions
through September 30, 1993.
Additionally, for 1991 and through
September 30, 1992, administrative and supervisory expenses
incurred by the SAIF are the funding responsibility of the FSLIC
Resolution Fund.
Consequently, there are limited demands on the
SAIF throughout this time period.
The Savings Association Insurance Fund balance will end
1992 in a positive position due to the inflow of assessments
from conversion transactions under section 5(d)(3) of the FDI
Act.
Total assessment revenue will approximate $200 million
until year-end 1992.
While the FSLIC Resolution Fund's claim on
SAIF expires at year-end, the Financing Corporation's draw as a
means of funding the interest payments on FICO bonds will
continue until the year 2017.
This will impede the Fund's
growth toward the designated reserve ratio targets.
The Outlook for the Savings Association Insurance Fund
The recently disclosed first quarter 1992 profitability
results for the thrift industry are encouraging, particularly
given the gloom of the past decade.
However, the thrift
industry overhang, caused by the lack of funding for the RTC,
4
gives us concern.
Lacking adequate funds, the RTC is unable to
meet the responsibilities assigned to it under FIRREA.
This
will make it difficult, if not impossible, for the Office of
Thrift Supervision (OTS) to deliver even a relatively clean
thrift industry to the FDIC in October 1993.
FIRREA envisioned SAIF as a new fund —
As you know,
unburdened by the record
failures assigned to the RTC for resolution.
Even if all thrift institutions identified as non-viable by
the OTS are placed into conservatorship with the RTC by the time
the SAIF assumes resolution authority on October 1, 1993, future
developments cannot always be foreseen.
Tremendous uncertainty
exists concerning expected thrift failure rates.
The only
certainty regarding future thrift failures is that there will be
insurance losses to the SAIF.
As a consequence, near term
insurance losses resulting from resolutions of failed
institutions may place an immediate demand on the SAIF beginning
October 1993.
Therefore, by not providing funding for the RTC
now, the inevitable is just delayed to a later date.
Going forward, assessment revenue will be the primary
source of funding for the SAIF.
Although average annual total
assessment revenue is projected to be approximately $2.6 billion
for 1993 through 1997, the obligation to the Financing
Corporation will continue to draw approximately $800 million
annually, leaving the fund with an annual net of approximately
5
$1.8 billion.
Given the outlook for demands on the Fund,
assessment revenue alone will be insufficient to meet these
needs.
In addition to assessment revenue, there are, however,
other prescribed funding sources for the SAIF.
To ensure
sufficient capital for the Fund, two types of Treasury
supplements were mandated by FIRREA:
revenue supplements,
intended to ensure annual revenue of $2 billion from assessments
for fiscal years 1993 through 2000, and net worth supplements,
to ensure that the fund maintains a minimum net worth balance.
FIRREA, as amended, requires that the minimum net worth begins
at at least a zero balance for the year beginning October 1,
1991, and increases to $8.8 billion for the fiscal year
beginning October 1, 1999.
Neither of these two sources of
funding from the Treasury has been utilized yet.
Both
supplements are scheduled to require action as a budget item for
fiscal year 1993, but were not requested in the Administration's
budget for 1992 or 1993.
FIRREA also authorizes the SAIF to obtain working capital
by borrowing funds from the Federal Financing Bank, the
Treasury, and the Federal Home Loan Bank.
Finally, FIRREA
allows for discretionary payments to be made to the SAIF by the
Resolution Trust Corporation, but this seems highly improbable
given the lack of funding currently available to the RTC.
6
Section 211 of FIRREA established a designated reserve
ratio for the SAIF of 1.25 percent of insured deposits.
The
Omnibus Budget Reconciliation Act of 1990 specified that the
reserve ratio be achieved within a reasonable amount of time.
As noted above, the SAIF is currently well below the designated
reserve ratio.
Based on the level of year-end 1991 insured
deposits, the Fund would need approximately $9.5 billion to meet
the designated reserve ratio.
To illustrate what it will take
to meet the ratio, given that the Financing Corporation will
continue to draw roughly $800 million annually from SAIF-member
assessment income, it would take eight years for the Fund to
recapitalize if the only source of revenue were assessments at
the current assessment rate of 23 basis points, and if there
were no insurance losses to the fund.
Unfortunately, even under the most optimistic
circumstances, SAIF-insured institutions will continue to fail,
after the FDIC assumes resolution responsibility for failed
thrifts on October 1, 1993.
It is uncertain what the demands on
the Fund will be at that time, and as a result, it is unclear
when the designated reserve ratio will be reached.
Proposed Premium Increase
In May 1992, the FDIC's Board of Directors voted to propose
7
an increase in the SAIF assessment from the current 23 cents to
28 cents per $100 of assessable deposits, effective January 1,
1993.
Our proposed regulation is found in Attachment 2.
increase in the premium is proposed for two reasons.
The
First, as
explained earlier in my testimony, while FIRREA established the
mandated 1.25 percent reserve ratio, the Omnibus Budget
Reconciliation Act of 1990 specified that this recapitalization
be achieved within a reasonable amount of time.
Since the FDIC
is ultimately responsible for insuring an $800 billion thrift
industry, we need at least $10 billion in income to eventually
reach the 1.25 percent target reserve ratio.
While the exact
time permitted for recapitalization is not stated, the FDIC
intends to set assessment rates in order to reach that goal as
soon as feasible without unduly burdening the thrift industry or
causing credit crunch problems.
The reduction of assessment revenue available to the SAIF
as a result of the Financing Corporation's continuing draw on
the Fund increases the length of time required to recapitalize
the SAIF.
Although the statute requires the Treasury to provide
sufficient funding for the SAIF, the FDIC views that statutory
8
obligation as contingent upon the thrift industry's inability to
recapitalize its insurance fund.
Mr. Chairman, the FDIC is prepared to begin resolving
failed SAIF-insured thrifts beginning on October 1, 1993.
It is
our hope, that by virtue of continued RTC funding, we will
inherit responsibility for insuring the deposits of a healthy
thrift industry.
This will ease the transition from RTC to FDIC
and greatly reduce the need for taxpayer funds to operate and
recapitalize the SAIF.
ATTACHMENT
]
FEDERAL DEPOSIT INSURANCE CORPORATION
SAVINGS ASSOCIATION INSURANCE FUND
STATEMENTS OF FINANCIAL POSITION
(dollars In thousands)
D ecem ber 31
1991
1990
Assets
Cash and cash equivalents, including restricted amounts
of $56,119 for 1991 and $12,964 for 1990 (Note 3)
56,681
$ 16,535
Entrance and exit fees receivable, net (Note 4)
91,015
49,384
Due from the FSUC Resolution Fund (Note 11)
109,561
17,010
745
626
258,002
83,555
3.428
4,100
$
Other assets
Liabilities and the Fund Balance
Accounts payable, accrued and other liabilities
20.723
Due to the Bank Insurance Fund (Note 5)
24,151
4,100
146,693
62.454
87.158
17.001
$ 258,002
$ 83,555
Total Liabilities
SAIF-member exit fees and investment proceeds
held in reserve (Note 4)
Fund Balance
The accompanying notes are an integral part of these financial statements.
_____ :SL.
FEDERAL DEPOSIT INSURANCE CORPORATION
SAVINGS ASSOCIATION INSURANCE FUND
STATEMENTS OF INCOME AND THE FUND BALANCE
(dollars in thousands)
For ths Year Ended
Decem ber 31
1991
1990
Revenue
Assessments earned (Note 11)
$87,964
$ 16,999
Entrance fee revenue (Note 4)
8
-0-
Interest income
"
-0-
_ _ g Jm
90,880
16,999
Expenses and Losses
Administrative expenses
Provision for losses (Note 5)
Interest expense (Note 5)
42,362
20,114
609
___ 63.085
Net Incom e (Loss) before Funding Transfer
56,088
-0-
______
56.088
27,795
(39,089)
___ 42.362
_ -5&Q8S
Net Incom e
70,157
16,999
Fund Balance - Beginning
17.001
_______ 2
$ 87,158
$ 17,001
Funding Transfer from the FSUC Resolution Fund (Note 1)
Fund Balance - Ending
The accompanying notes are an integral part of these financial statements.
FEDERAL DEPOSIT INSURANCE CORPORATION
SAVINGS ASSOCIATION INSURANCE FUND
STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the Year Ended
Decem ber 31
1991
1990
Cash Flows From Operating Activities
Cash inflows from:
Administrative expenses funded by the FSUC
Resolution Fund (Note 1)
Entrance and exit fee collections (Note 4)
Interest on U.S. Treasury obligations
$
40.650
40.868
2,207
$
-043.579
120
___ 52.399
40,146
16,535
Cash and Cash Equivalents - Beginning
___ 18.535
______ d t
Cash and Cash Equivalents - Ending
$
Cash outflows for:
Transition assessment payment transferred to the FSUC
Resolution Fund (Note 6)
Administrative expenses (Note 1)
Net Cash Provided By Operating Activities (Note 10)
The accompanying notes are an integral part of these financial statements.
56,681
$
56.088
12,961
5
16,535
NOTES TO THE SAVINGS ASSOCIATION INSURANCE FUND
FINANCIAL STATEMENTS
DECEMBER 31, 1991 and 1990
1. Legislative History and Reform
The Financial institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) was enacted to reform,
recapitalize and consolidate the federal deposit insurance system. FIRREA designated the Federal Deposit
Insurance Corporation (FDIC) as administrator of the Bank Insurance Fund (BIF), which insures the deposits
of all BIF-member institutions (normally commercial banks), and the Savings Association Insurance Fund
(SAIF), which insures the deposits of all SAIF-member institutions (normally thrifts). Both insurance funds
are maintained separately to carry out their respective mandates. The FDIC also administers the FSLIC
Resolution Fund (FRF) which is responsible for winding up the affairs of the former Federal Savings and
Loan Insurance Corporation (FSUC).
FIRREA created the Resolution Trust Corporation (RTC), which manages and resolves all thrifts previously
insured by the FSUC for which a conservator or receiver Is appointed during the period January 1, 1989
through August 8,1992. The Resolution Trust Corporation Refinancing, Restructuring and Improvement Act
of 1991 (1991 RTC Act) extended the RTC’s general resolution authority through September 30,1993, and
beyond that date for those institutions previously placed under RTC control.
The Resolution Funding Corporation (REFCORP) was established by FIRREA to provide funds to the RTC
for use in the thrift industry bailout. The Financing Corporation (FICO), established under the Competitive
Equality Banking Act of 1987, is a mixed-ownership government corporation whose sole purpose was to
function as a financing vehicle for the FSUC. However, effective December 12, 1991, as provided by the
Resolution Trust Corporation Thrift Depositor Protection Reform Act of 1991, the FICO’s authority to issue
obligations as a means of financing for the FRF was terminated.
The Omnibus Budget Reconciliation Act of 1990 removed caps on assessment rate increases and allowed
for semiannual rate increases. In addition, this Act permitted the FDIC, on behalf of the BIF and SAIF, to
borrow from the Federal Financing Bank (FFB) on terms and conditions determined by the FFB.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (1991 Act) was enacted to further
strengthen the FDIC. The FDIC’s authority to borrow from the U.S. Treasury was increased from $5 billion
to $30 billion. However, the FDIC cannot Incur any additional obligation for the BIF or the SAIF If the
amount of obligations in the respective Fund would exceed the sum of: 1) its cash and cash equivalents;
2) the amount equal to 90 percent of the fair-market value of its other assets; and 3) its portion of the total
amount authorized to be borrowed from the U.S. Treasury (excluding FFB borrowings).
As required by the 1991 Act, U.S. Treasury borrowings are to be repaid from assessment revenues. The
FDIC must provide the U.S. Treasury a repayment schedule demonstrating that future assessment revenues
are adequate to repay principal borrowed and pay interest due. In addition, the FDIC now has authority to
increase assessment rates more frequently than semiannually and impose emergency special assessments
as necessary to ensure that funds are available for these payments.
1
Operations of the SAIF. The primary purpose of the SAIF is to Insure the deposits and to protect the
depositors of insured savings associations. In this capacity, the SAIF currently has financial responsibility
fo r 1) all federally insured depository institutions that became members of the SAIF after August 8,1989,
for which RTC does not have resolution authority; and 2) all deposits insured by the SAIF which are held
by BIF-member banks (so called "Oakar" banks, created pursuant to the "Oakar amendment“ provisions
found in Section 5(d)(3) of the FDI Act). After September 30,1993, SAIF will assume financial responsibility
for all SAIF-member depository institutions which had not previously been placed under the RTC’s control.
The “Oakar amendment" provisions referred to above allow, with approval of the appropriate federal
regulatory authority, any Insured depository institution to merge, consolidate, or transfer the assets and
liabilities of an acquired institution(s) without changing insurance coverage for the acquired deposits. Such
acquired deposits continue to be either SAIF-insured deposits and assessed at the SAIF assessment rate
or BIF-insured deposits and assessed at the BIF assessment rate. In addition, any losses resulting from the
failure of these institutions are to be allocated between the BIF and SAIF based on the respective dollar
amounts of the institution's BIF-insured and SAIF-insured deposits.
The SAIF is funded from the following sources: 1) Reimbursement by the FRF of administrative and
supervisory expenses incurred between August 9, 1989 and September 30, 1992. These expenses have
priority over other obligations of the FRF and funding is provided as expenses are recognized by the SAIF;
2) SAIF member assessments from "Oakar“ banks; 3) SAIF assessments that are not required for the FICO,
the REFCORP, or the FRF; 4) U.S. Treasury payments for the amount, If any, needed to supplement
assessment revenue to reach a $2 billion level for each of the fiscal years 1993 through 2000; 5) U.S.
Treasury payments for any additional amounts that may be necessary to ensure that the SAIF has a
statutory specified minimum net worth for each of the fiscal years 1992 through 2000; 6) discretionary
payments by the RTC; 7) Federal Home Loan Bank borrowings; and 8) U.S. Treasury and FFB borrowings.
2. Sum m ary of Significant Accounting Policiea
Assessment Revenue Recognition. FIRREA directed that the FICO, the REFCORP and the FRF have priority
over the SAIF for receiving and utilizing SAIF-member assessments to ensure availability of funds for specific
operational activities. Accordingly, the SAIF recognizes as assessment revenue only that portion of SAIFmember assessments not required by the FICO, the REFCORP or the FRF. Assessments on SAIF-insured
deposits by "Oakar" banks are retained in the SAIF and, thus, are not subject to draws by the FICO, the
REFCORP or the FRF (see Note 11).
Litigation Losses. The SAIF includes in current period expenses the change In the estimated loss from
litigation against the SAIF. The FDIC Legal Division recommends these estimated losses on a case-by-case
basis. As of December 31,1991 and 1990, no litigation was pending against the SAIF.
Cost Allocations Among Funds. Operating expenses (including personnel, administrative and other indirect
expenses) not directly charged to each Fund under the FDIC’s management are allocated on the basis of
the relative degree to which the expenses were incurred by the Funds.
The cost of furniture, fixtures and equipment purchased by the FDIC on behalf of the three Funds under its
administration is allocated among these Funds on a pro rata basis. The SAIF expenses Its share of these
allocated costs at the time of acquisition because capitalizing these expenditures would not be costbeneficial to the SAIF.
Related Parties. The nature of related parties and descriptions of related party transactions are disclosed
throughout the financial statements and footnotes.
Restatement. A restatement was made to the 1990 financial statements regarding assessments paid on SAIF
deposits by "Oakar" banks (see Note 11).
Reclassifications. Reclassifications have been made in the 1990 Financial Statements to conform to the
presentation used in 1991.
2
3.
Cash and Cash Equivalents
The SAIF considers cash equivalents to be short-term, highly liquid investments with original maturities of
three months or less. Cash and cash equivalents as of December 31 consisted of the following (in
thousands of dollars):
1991
Cash
Cash equivalents
1990
$
491
56.190
$ 56,681
$
6,241
- 10.294
$ 16,535
SAIF exit fees collected plus interest (See Note 4) comprise substantially all of the cash and cash equivalent
balances and may only be used to meet SAIF’s potential obligation to the FICO.
4. Entrance and Exit Fees
The SAIF will receive entrance and exit fees for conversion transactions in which an insured depository
Institution converts from the BIF to the SAIF (resulting in an entrance fee) or from the SAIF to the BIF
(resulting in an exit fee). Interim regulations approved by the FDIC Board of Directors and published in the
Federal Register on March 21,1990, directed that exit fees paid to SAIF be held in a reserve account until
the FDIC and the Secretary of the Treasury determine that It is no longer necessary to reserve such funds
for the payment of interest on obligations previously issued by the FICO. It is the FDIC’s policy to invest
exit fee collections in overnight Treasury securities and hold the proceeds in reserve pending determination
of ownership.
The SAIF records entrance fees as revenue after the BIF-to-SAIF conversion transaction is consummated.
However, due to the requirement that SAIF exit fees be held in a reserve account, thereby restricting the
SAIPs use of such proceeds, the SAIF does not recognize exit fees, nor any Interest earned, as revenue.
Instead, the SAIF recognizes the consummation of a SAlF-to-BIF conversion transaction by establishing a
receivable from the institution and an identical reserve account to recognize the potential payment to the
FICO. As exit fee proceeds are received, the receivable is reduced while the reserve remains pending the
determination of funding requirements for interest payments on the FICO’s obligations.
Within specified parameters, the interim regulations allow an acquiring institution to pay its entrance/exit fees
due, interest free, in equal annual installments over a period of not more than five years. When an institution
elects such a payment plan, the SAIF records the entrance or exit fee receivable at its present value. The
discount rates (current value of funds) for 1991 and 1990 was 8% and 9%, respectively.
Entrance and Exit Fees Receivable as of December 31 consisted of the following (in thousands of dollars):
1991
Entrance Fees Receivable
Entrance Fees Collected
Exit Fees Receivable
Exit Fees Collected
Unamortized Discount
$
10
( 10)
159,510
(53,358)
.-Q 5 ,1 3 7 )
$
91,015
3
1990
$
2
(2)
$
71,525
(12,991)
(9.150)
49,384
5. O u t to the Bank Insurance Fund
On September 19.1991, Southeast Bank, N.A., Miami, Florida which held deposits insured by BIF and SAIF
pursuant to the “Oakar amendment” provisions (as explained in Note 1), was closed by its chartering
authority. The BIF, which provided the funds and administers the resolution of Southeast Bank, N. A., has
estimated the loss for the failure of Southeast Bank, N A , and its affiliate Southeast Bank of West Florida,
Pensacola, at $178 million, of which SAIF has responsibility for $21 mOlion (its allocated share of the loss
incurred). Accordingly, the SAIF has established a payable to the BIF for its estimated transaction cost.
In addition, interest will accrue on the SAIF’s obligation based on the quarterly FFB borrowing rate. During
1991 this rate ranged between 4.7% and 5.9%.
6. Assessments
Assessment Rate. The rate set for 1991 is 0.23 percent (23 cents per $100 of domestic deposits). Based
on the present and projected status of the SAIF, and anticipated expenses and revenue for the next year,
the ratio of the deposit insurance fund to insured deposits is not expected to exceed the current designated
reserve ratio of 1.25 percent.
Transition Assessment In September 1989, the FDIC allowed for a one-time transition assessment against
SAIF members. A portion of this special assessment was claimed by the FICO for debt servicing needs and
the remaining amount was allocated to the FRF. The $120,000 in interest remaining to be transferred to the
FRF as of December 31,1989, was paid in 1990.
Secondary Reserve Offset. The FDI Act authorizes Insured savings associations to offset against any
assessment premiums their pro rata share of amounts that were previously part of the FSUC’s "Secondary
Reserve". The secondary reserve represented premium prepayments that Insured savings institutions were
required by law to deposit with the FSUC during the period 1961 through 1973 to quickly increase FSUC’s
Insurance reserves to absorb losses if the regular assessments were insufficient The allowable offset is
limited to a maximum of 20 percent of an institution’s remaining pro rata share for any calendar year
beginning before 1993. After calendar year 1992, there is no limitation on the remaining offset amount.
The Secondary Reserve offset serves to reduce the gross SAIF-member assessments due (excluding
assessments from "Oakar" banks), thereby reducing the assessment premiums available to the FICO, the
REFCORP, the FRF and the SAIF. The remaining Secondary Reserve balance was $297,761,164 and
$359,121,134 at year end 1991 and 1990, respectively.
1991 and 1990 assessments against SAIF members and “Oakar' banks were as follows (in thousands of
dollars):
1991
SAIF assessments collected from SAIF members
(net of Secondary Reserve offset and other
adjustments/credits of $72,992 and $101,152
in 1991 and 1990)
SAIF assessments earned from "Oakar" banks
Total assessment earned from SAIF
members and "Oakar" banks
Less: FICO assessment
REFCORP assessment
Funds recognized by the FRF
Funds owed to the SAIF
1990
$ 1,795,227
$ 1,811,443
____87.964
____ 1&929
1.883,191
1,828.442
(756,700)
-0-
(738,200)
(1,061,495)
(1.038.5271
<11.748)
87,964
16,999
4
r
7. P tn tio n Benefits, Savings Plans and Accrued Annual Leave
Eligible FDIC employees (i.e., all permanent and temporary employees with an appointment exceeding one
year) are covered by either the Civil Service Retirement System (CSRS) or the Federal Employee Retirement
System (FERS). The CSRS is a defined benefit plan integrated with the social security system in certain
cases. Plan benefits are determined on the basis of years of creditable service and compensation levels.
The CSRS-covered employees can also participate in a federally sponsored tax-deferred savings plan
available to provide additional retirement benefits. The FERS is a three part plan consisting of a basic
defined benefit plan which provides benefits based on years of creditable service and compensation levels,
social security benefits and a tax-deferred savings plan. Further, automatic and matching employer
contributions are provided up to specified amounts under the FERS. Eligible employees may participate
In an FDIC sponsored tax-deferred savings plan with matching contributions. The SAIF pays the employer’s
portion of the related costs.
The SAIPs allocated share of pension benefits and savings plans expenses as of December 31,1991 and
1990 consisted of the following (in thousands of dollars):
1991
Civfl Service Retirement System
Federa) Employee Retirement System (Basic Benefits)
FDIC Savings Pian
Federai Thrift Savings Plan
$
771
1,303
754
___ m
$ 3 ,1 4 6
1990
$
840
1,187
735
____256
$ 3,018
The liability to employees for accrued annual leave is approximately $1,305,000 and $1.610,000 at December
31,1991 and 1990, respectively.
Although the SAIF contributes a portion of pension benefits for eligible employees, it does not account for
the assets of either retirement system, nor does it have actuarial data with respect to accumulated plan
benefits or the unfunded liability relative to eligible employees. These amounts are reported and accounted
for by the U.S. Office of Personnel Management.
5
8. FDIC Health, Dental and U fa Insurance Plana lo r Retirees
The FDIC provides certain health, dental and life insurance coverage for its eligible retirees. Eligible retirees
are those who have elected the FDIC’s health and/or life insurance program and are entitled to an
immediate annuity. The health insurance coverage is a comprehensive fee-for-service program underwritten
by Blue Cross/Blue Shield of the National Capital Area, with hospital coverage and a major medical wrap
around; the dental care is underwritten by Connecticut General Insurance Company. The FDIC makes the
same contributions for retirees as those for active employees. The FDIC benefit programs are fully insured.
Effective January 1, 1991, the funding mechanism was changed to a "minimum premium funding
arrangement”. Fixed costs and expenses for claims are paid as incurred. Premiums are deposited for
claims incurred but not reported. The premiums are held by the FDIC.
The life insurance program is underwritten by Metropolitan Life insurance Company. The program provides
for basic coverage at no cost and allows converting optional coverages to direct-pay plans with Metropolitan
Life. The FDIC does not make any contributions towards annuitants’ basic life insurance coverage; this
charge is built into rates for active employees.
The SAlFs allocated share of retiree benefits provided as of December 31 are as follows (in thousands of
dollars):
Health premiums paid
Dentai premiums paid
1991
1990
$27
1
$41
4
The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 106,
(Employers' Accounting for Postretirement Benefits Other Than Pensions), which the FDIC is required to
adopt by 1993. The standard requires companies to recognize postretirement benefits during the years
employees are working and earning benefits for retirement. Resulting estimated expenses will be allocated
to the SAIF based on the relative degree to which expenses were incurred. Although the impact of the
FDIC’s adoption of the standard cannot reasonably be estimated at this time, the standard may increase
reported administrative costs and expenses of the SAIF.
9. Com m itm ents
The SAIF is currently sharing in the FDIC's lease of office space. The SAIF’s lease commitments for office
space total $1,976,000 for future years. The agreements contain escalation clauses resulting in adjustments,
usually on an annual basis. The SAIFs recognized leased space expense of approximately $1,668,325 and
$3,383,000 for the years ended December 31,1991 and 1990, respectively.
The SA IFs allocated share of leased space fees for future years, which are committed per contractual
agreement, are as follows On thousands of dollars):
J9S 2
$684
1993
1994
1SE&
1996
$ 552
$391
$208
$141
6
10. Supplem entary Inform ation Relating to the Statem ents of Cash Flows
Reconciliation of net income to net cash provided by operating activities for the year ended December 31.
1991 and 1990 (in thousands of dollars):
1991
$
Net Income
70,157
1990
$
16,999
Adjustments to reconcile net income to
net cash provided by operating activities:
Increase in amount due from the FSUC Resolution Fund
Increase in entrance and exit fees receivable
Decrease (increase) in other assets
Increase (decrease) in accounts payable, accrued
and other liabilities
increase in amount due to the Bank Insurance Fund
Increase in exit fees and investment proceeds held in reserve
Net cash provided by operating activities
$
(92,551)
(41,630)
(119)
(17,010)
(46,231)
1,527
(673)
20,723
84.239
1,947
-059.303
40,146
$
16,535
11. Subsequent Event
On March 27,1992, the FDIC’s Legal Division rendered the opinion that, under FIRREA, assessments paid
on SAIF-insured deposits by "Oskar* banks must be retained in the SAIF, and, thus, are not subject to draws
by the FICO, the REFCORP or the FRF. As FIRREA became effective in August 1989, the financial
statements for 1990 have been restated. FRF received the assessments paid on SAIF-insured deposits in
1990 and 1991, therefore the effect of this restatement was to establish a receivable from FRF and to
recognize assessment revenue of $17 million in 1990. Additionally, in 1991, the receivable from FRF was
increased by $91 million and assessment revenue of $88 million and interest revenue of $3 million were
recognized. In April 1992, SAIF received $108 million from the FRF for the 1991 principal and interest
receivables.
7
Federal Register / Vol. 57, No. 99 / Thursday, May 21, 1992 / Proposed Rules
c
and would drop by shout $2,872
million—to approximately $272.8
billion—if the average risk-related rate
were 0.28 percent.7
For these projections, it wa 9 assumed
that banks' dividend rates remained
unchanged from those reported in
December 1991. However, if a bank's
projected equity capital was 4 percent or
less, the bank was assumed to retain all
earnings. It was further assumed that
the only source of new capital would be
additions to retained earings.
Consequently, under an average riskrelated rate of 0.28 percent the $5,765
million in increased assessment costs
projected over the next five years
resulted in a $2,872 million decline in
capital and a $1,582 million total
reduction in dividends. The remaining
portion of the assessment costs were
offset by the tax benefit of deducting
assessment expenses from taxable
income.
Equally important to these overall
reductions in industry capital is the
distribution of these reductions across
banks. Projections of individual banks'
tangible capitalization through 1996
indicated a small increase in the number
of poorly capitalized banks under the
proposed assessment rates. During 1996.
an average risk-related assessment of
0.28 percent was projected to raise the
nu
number of poorly capitalized banks—
ose with less than 3 percent tangible
ipital—by 28 banks (with average
m
”
ai
tangible
assets of $325 million).
Long-term changes in p ro fita b ility . If
higher assessments result in a long-term
reduction in bank profitability, capital
will flow out of the banking industry, by
way of lower retained earnings and a
reduction in new stock offerings. If the
flight of capital is substantial, it would
result in shrinkage of the industry and
have implications for credit availability.
In order to assess the impact of higher
assessments upon bank profitability,
estimates were made of the changes in
returns on the book value of equity
capital which might result under an
average risk-related assessment rate of
0.28 percent. Specifically, banks’ 1991
returns on book value equity capital
were adjusted to reflect the increase in
operating costs (after-taxes) which
might result from increased assessment
Tates. These adjustments assumed that
1 These projections may also be stated in terms of
the ratio of tangible capital to tangible assets. As of
year-end 1991. the tangible capital ratio for B1Finsured banks was 6.45 percent. The projected yearend 1996 tangible capital ratio under a uniform-rate
assessment of 0 23 percent was 7.17 percent.
Projected industry 1996 tangible capital ratios under
average risk-related assessment rate of 0.28
lent was lower, however, at 7.10 percent.
•
21627
banks would bear the full after-tax cost
Authority: 12 USC 1441,1441b. 1817-19.
of (he assessment increase.
2.
Section 327.13(c) is revised to read
The analysis indicates that an
as
follows:
increase in the BIF assessment rate to
an average risk-related rate of 0.28
$ 327.13 Payment of assessment
«
♦
#
«
*
percent W'ould reduce bank profitability
slightly. Estimates presented in Table 2
(c) Assessment rate. (1) The annual
(below) show that approximately 76.3
assessment rate for each BIF member
percent of BIF-insured banks, with 60
shall be, for the semiannual periods of
percent of industry assets, experienced
calendar year 1992.0.23 percent; and
at 0 to 5 percent reduction in their return
(2) The (annual or average)
on equity. In addition, 12.1 percent of
assessment rate for BIF members, shall
BIF-insured banks with 18.3 percent of
be, for the first semiannual period of
industry assets were estimated to incur
calendar year 1993 and for subsequent
a 5 to 10 percent reductio.n in return on
semiannual
periods, 0.28 percent.
equity. The median percentage change
By order of the Board of Directors.
in return on equity was —2.56 percent.
While it is difficult to estimate the
Dated at Washington, DC. this 12th day of
May. 1992.
final impact upon industry capital, a
moderate amount of industry shrinkage
Federal Deposit Insurance Corporation.
(relative to a situation without higher
Hoyle L. Robinson,
assessments) may result. Consolidation
Executive Secretary.
in the banking industry can occur,
however, without increased bank
JFR Doc. 92-11887 Filed 5-20-92; 8 45 am)
failures. Indeed, the results of this
BILUNG CODE «714-01-M
analysis indicate that the impact of the
proposed assessment rate increase upon
bank earnings and capital will not be so 12 CFR Part 327
severe as to result in a substantial
increase in bank failures.
RIN 3064-AA96
Table
2.—P e r c e n t a g e
turn
on
E q u it y
Pro po sed
m ent
0.28
C h a n g e s in R e
B a sed
upo n
R is k - R e l a t e d
S ch ed ule
Av erag e
the
As s e s s
R ate
of
P ercen t
(BlF-lnsured Banks.
Percentage change in
ROE •
S Millions]
Number
Assessments
agency : Federal
Deposit Insurance
Corporation.
ac tio n : Proposed rule.
sum m ary : The
Assets
Below - 5 0 % ..................
- 2 5 % to - 5 0 % ............
- 1 5 % to - 2 5 % ______
- 1 0 % to - 1 5 % .............
- 5 % to - 1 0 % _______
0% to - 5 % ......................
Missing d ata......................
272
263
389
465
1,484
9,378
37
$209,822
161,723
265.931
147,751
665,279
2.179.311
4,495
All......................... .......
12,288
3.634,312
* The percentage change m ROE was defined as
the adjusted ROE minus the ongmal ROE. divided by
the original ROE. <ROE-ROE)/ROE
IV . Comment P eriod
The Board hereby requests comments
on the proposed rule. Interested persons
are invited to submit written comments
during a sixty-day comment period.
List of Subjects in 12 CFR Part 327
Assessments; Bank deposit insurance;
Financing Corporation; Savings
associations.
For the reasons stated above, the
Board proposes to amend part 327 of
title 12 of the Code of Federal
Regulations as follows:
1.
The authority citation for part 327
continues to read as follows:
Board of Directors
("Board"of the Federal Deposit
Insurance Corporation C'FDIC") is
proposing to amend part 327 of its
regulations. 12 CFR part 327 ("part 327"),
to increase the deposit insurance
assessments to be paid by Savings
Association Insurance Fund ("SA IF')
members during the first semiannual
period of calendar year 1993 and
thereafter. The intended effect of this
proposed rule is to recapitalize the SAIF
within q reasonable period of time.
dates : Written comments must be
received by the FDIC on or before July
20.1992.
addresses : Written comments shall be
addressed to the Office of the Executive
Secretary, Federal Deposit Insurance
Corporation, 550—17th Street, NW.,
Washington, DC. 20429. Comments may
be hand-delivered to room F-400.1776 F
Street, NW., Washington, DC 20429, on
business days between 8:30 a.m. and 5
p.m.
for further in fo rm a tio n contact :
William R. Watson, Director, Division of
Research and Statistics, Federal Deposit
Insurance Corporation, 550 Seventeenth
St., NW., Washington, DC, 20429, (202)
898-3946.
21628
Federal Register / Vol. 57, No. 99 / Thursday. May 21, 1992 / Proposed Rules
SUPPLEMENTARY INFORMATION:
assessment system pursuant to which
the assessment rate applicable to a
SAIF
member would depend on the riskNo collections of information pursuant
related assessment classification
to section 3504(h) of the Paperwork
assigned to that institution by the FDIC.
Reduction Act (44 U.S.C. 3504(h)) are
The proposed transitional risk-related
contained in the proposed rule.
assessment system is addressed in a
Consequently, no information has been
separate
notice of proposed rulemaking
submitted to the Office of Management
contained elsewhere in this issue of the
and Budget for review.
Federal Register (“Proposed
Regulatory Flexibility Act
Transitional Risk-Related Assessment
Regulation”).
The Regulatory Flexibility Act (5
In accordance with the following
U.S.C 601-612) does not apply to the
discussion, the Board is proposing to
publication of “a rule of particular
increase the current SAIF member
applicability relating to rates.” Id. at
assessment rate to 0.28 percent per
601(2). Accordingly, the Act’s
annum, effective for the first semiannual
requirements relating to an initial and
period of 1993 and thereafter. If the
final regulatory flexibility analysis [Id.
Board does not adopt a transitional riskat 603 & 604) are not applicable here.
related assessment system to become
Moreover, in connection with the
current uniform-rate deposit assessment effective January 1,1993, then the
assessment rate proposed herein would
system (/. e., one in which the same
be a uniform rate applicable to all SAIF
assessment rate applies to all insured
members. If the Board adopts a
depository institutions), the primary
purpose of the Regulatory Flexibility Act transitional risk-related assessment
system to become effective at the same
is fulfilled as a matter of course, in that
time as the proposed rate increase, then
each institution's assessment is geared
the increased assessment rate proposed
to the institution's size (as measured
herein would be the target average
generally by domestic deposits).
assessment rate applicable to SAIF
Thus, the Board hereby certifies that
members.1 As explained in the Proposed
the proposed increase in the deposit
assessment rate, if adopted in final form Transitional Risk-Related Assessment
Regulation, the actual assessment rate
and applied to the current uniform-rate
to be paid by each SAIF member would
asssessment system, would not have a
be based on the institution's risk-related
significant economic impact on a
classification and may deviate by
substantial number of small entities
certain specified gradations from the
within the meaning of the Act.
average assessment rate.
Also, as discussed below,
concurrently with the publication of this
B. Designated Reserve Ratio
proposal, the FDIC has proposed for
comment a transitional risk-related
Section 7(b) of the FDI Act (12 U.S.C.
deposit insurance system. That proposal 1817(b)), as implemented by part 327,
is addressed elsewhere in this issue of
requires that all FDIC-insured
the Federal Register as a separate notice depository institutions pay to the FDIC
of proposed rulemaking. As discussed in semiannual assessments based on the
that proposal, the Board has determined types and dollar amounts of deposits
that the proposed transitional riskheld at such institutions.
related assessment system, if adopted in
Section 7(b) also states that “(tjhe
final form, also would not have a
assessment rate for Savings Association
significant economic impact on a
Insurance Fund members shall be the
substantial number of small entities
greater of 0.15 percent or such rate as
within the meaning of the Act.
the [FDIC] Board of Directors, in its sole
The Proposed Rule
discretion, determines to be
appropriate—(I) to maintain the reserve
7. Background fo r the Proposed SA IF
ratio
at the designated reserve ratio: of
Assessment Rate Increase
(II) if the reserve ratio is less than the
A. Related Proposed Transition From a
designated reserve ratio, to increase the
Uniform-Rate to a Risk-Based
reserve ratio to the designated reserve
Assessment System
Paperwork Reduction Act
The assessment rate paid by SAIF
members presently is 0.23 percent per
annum. Under the current uniform-rate
system, all SAIF members calculate and
pay their assessments based on the
same rate. As discussed below,
concurrently with the publication of this
proposed rule, the Board also has
proposed a transitional risk-related
' Civen • risk-related premium schedule (<>•
provided in the Proposed Transitional Risk-Related
Assessment Regulation), the actual average
assessment rate would depend on the distribution of
savings associations by risk-related classification.
Because this distribution would be subject to
change over time, the actual average assessment
rate may deviate slightly from the target assessment
rate. The target average assessment rate will
hereinafter be referred to as the “average
assessment rate.“
ratio within a reasonable period of
time.” Id. at 1817(b)(l)(D)(i).
In addition, section 7(b)(l)(D)(iv) of
the FDI Act provides that from January
1.1991. through December 31.1993. “the
assessment rate shall not be less than
* * * 0.23 percent." Id. at
1817(b)(l)(D)(iv). Title II of the Omnibus
Budget Reconciliation Act of 1990 (Pub.
L 101-508,104 Stat. 1388)
(“Reconciliation Act”) amended the
former version of this provision to,
among other things, “eliminate the
ceilings” on SAIF assessment rates.
Prior to the enactment of the
Reconciliation Act, specific statutory
ceilings existed on SAIF assessment
rates, including the 23 basis-point ceiling
from January 1.1991 through December
31,1993. The Reconciliation Act
empowered the Board to set the SAIF
assessment rate above those former
ceilings if the chosen rate would
increase the SAIF reserve ratio to the
“designated reserve ratio writhin a
reasonable period of time,” subject to
the Board's consideration of the factors
identified in section 7(b)(l)(D)(ii) of the
FDI Act.
The SAIF'S designated reserve ratio
(''Designated Reserve Ratio") is 1.25
percent of estimated insured deposits.
Id. at 1817(b)(1)(B). SAIF’S current
reserve ratio (“Actual Reserve Ratio”) is
approximately zero. In accordance with
the following discussion, the Board is
proposing to increase the SAIF member
assessment rate from 0.23 percent to 0.28
percent for the first half of calendar 1993
and thereafter.
II. Proposed T ra n sitio n a l Risk-Based
Assessment System
Section 302(a) of the FDIC
Improvement Act amended section 7(b)
of the FDI Act to require that the FDIC
establish a risk-based assessment
system, applicable to members of both
SAIF and the Bank Insurance Fund, to
become effective no later than January
1.1994. Section 302(f) of the FDIC
Improvement Act authorized the FDIC to
“promulgate regulations governing the
transition from the assessment system ir
effect * * * to (a risk-based assessment
system].“ As noted above, concurrently
with the publication of this proposed
rule, the Board also has issued for
comment the Proposed Transitional
Risk-Related Assessment Regulation. As
also noted above, if such a transitional
step toward implementing a risk-based
assessment system becomes effective on
January 1.1993, it is anticipated that, on
an industry-wide basis, the average
assessment rate (as distinguished from
the uniform rate) paid by SAIF members
would be 0.28 percent, the rate proposed
herein.
I l l Factors C onsidered in the Proposed
S A IF Assessment Rate Increase
Under section 7(b) of the FDI Act the
Board is required to consider the
following factors in setting the SAIF
assessment rate: The SA IFs expected
operating expenses, case resolution
expenditures, and income; the effect of
the assessment rate on SAIF members’
earnings and capital; and such other
factors as the Board deems appropriate.
Id. at 1817(b)(l)(D)(ii). The following is a
discussion of those factors.
A. Need for the Increase
c
As noted above, the Designated
Reserve Ratio is currently set by statute
at 1.25 percent of estimated insured
deposits. The Actual Reserve Ratio is
significantly below that level. As of
December 31.1991. the SAIF balance
was approximately zero. As noted
above. Section 7(b) requires that the
SAIF reserve ratio be increased to equal
the Designated Reserve Ratio within a
reasonable period of time.
Under section 21 of the Federal Home
Loan Bank ("FHLB") A ct the Financing
Corporation (“FICO") has a claim on
SAIF assessment income to fund the
interest payments on bonds issued by
pICO. Id. at 1441(f).* At present,
satisfying this claim requires
approximately 40 percent of the FDIC’s
SAIF assessment income.
Section llA (b) of the FDI Act [Id. at
1821a(b)) requires that “to the extent
funds are needed.” the sources of funds
for the FSLIC Resolution Fund (‘‘F R F ’)
shall, during the period beginning on the
date of enactment of the Financial
Institutions Reform, Recovery, and
Enforcement Act of 1989 (Pub. L 101-73,
103 S ta t 183) (“FIRREA”) on December
31,1992,* include amounts assessed
•
* FICO w as established by the Competitive
Equality Banking Act of 1987 (Pub. L No. 100-66.101
Stat. 552 (1987)) (“CEBA") for the purpose of
providing funds to the FSLIC Resolution Fund.
Assessments on SAIF members is one source of
funding for certain of FICO's financial obligations.
See section 21 of the FHLB Act. (12 VJS.C. 1441L
Section 7(b)(1)(E) of the FOI Act (12 U.S.C.
1817(b)(1)(E)) states that **{n]otwithstanding any
other provision of this paragraph, amounts assessed
by the Financing Corporation and the Funding
Corporation under sections 21 and 21B of the
Federal Home Loan Bank Act against (SA1FJ
members, shall be subtracted from the amounts
authorized to be assessed by the Corporation under
this paragraph."
• This date was extended from December 31.1991
to December 31.1992 by section 202 of the
^ J t w l u t i o n Trust Corporation Refinancing,
^ ^ w stru ctu rin g . and Improvement Act of 1991. Public
102-233.105 S ta t 1701.
against SAIF members by the FDIC
pursuant to section 7 of the FDI Act that
are not required by FICO or the
Resolution Funding Corporation
(“REFCORP”).« Id. at 1821a(b).
Through 1992. FICO and FRF will
continue to claim all SAIF assessment
income, except assessments paid on
SAIF deposits by banks that have
engaged in a transaction under section
5(d)(3) of the FDI Act (Id. at 1815(d))
("Oakar Amendment Banks”).
Consequently, the only assessment
income to be added to SAIF prior to the
beginning of 1993 will be the
assessments paid by Oakar Amendment
Banks on approximately $60 billion in
SAIF deposits. At that time, SAIF will
need approximately $9.5 billion to meet
the Designated Reserve Ratio, given an
estimated insured deposit base of $760
billion as of year-end 1991.
To achieve this balance in one year
solely through industry contribution
would require a special assessment rate
of approximately 1.20 percent. This
solution is not recommended, due to its
possible adverse effects on the thrift
industry.
In order to examine the issue of
recapitalization over a period of time,
staff developed projections for the SAIF
balance based solely on assessments
from SAIF-member institutions.
Although certain Treasury payments are
mandated by statute to supplement the
SAIF,* the Board believes that Congress
imposed such conditional obligations on
the Treasury (and thus, the taxpayer) in
order to provide a back-up in the event
that the SAIF-insured industry was
incapable of fulfilling its obligation to
recapitalize the SAIF. Furthermore,
appropriations for these supplemental
funds have yet to be made, and the
likelihood and timing of such
appropriations is uncertain, particularly
given that funding for continued
operations of the Resolution Trust
Corporation (“RTC”) is currently
« Section 2lB(e)(7) of the F H I J Act requires that
SAIF assessment income be used, if necessary, to
fund REFCORP'b "principal fund." Id. at 144lb(e)(7).
Because REFCORP's principal fund is fully funded.
SAIF assessment income is no longer required for
REFCORP purposes.
• Section 11(a)(8) of the FDI Act (12 U.S.C.
1821(a)(6)) requires that the Secretary of the
Treasury make available funds to supplement SAIF
in 2 ways: First, as revenue supplements to SAIF
annual assessments net of FICO contributions to
ensure annual revenues of $2 billion for each of the
fiscal years 1993 through 2000. and second, as
payments to maintain the net worth of the SAIF
according to a designated schedule starting at So for
the beginning of Fiscal Y ear 1992 through $ 8 4
billion for the beginning of Fiscal Year 2000. The
Treasury net worth payments are limited to $2
billion in each of the fiscal years 1992 and 1993 and
a cumulative total of $18 billion, and payments are
suspended once the fund reaches the Designated
Reserve Ratio of 1 4 5 percent.
uncertain. Consequently, staff
projections are based solely on
contributions from the thrift industry,
and do not consider potential Treasury
contributions.
The length of time necessary for SAIF
to reach the Designated Reserve Ratio
depends on the performance of the thrift
industry, which is uncertain for several
reasons. First, despite recent
improvements in aggregate thrift
industry profitability, there is evidence
that the industry is becoming
increasingly bipolar with respect to
capital adequacy. Second, the recovery
of real estate markets nationwide will
affect the number and timing of future
thrift failures. Third, there is uncertainty
surrounding the long-term competitive
ability of thrifts. Finally, it is not clear
what the 6tate of the thrift industry will
be once SAIF resumes resolution
responsibility on October 1,1993*
The long-term condition of the SAIF
depends directly on the number, size
and timing of future thrift failures, the
costs of resolving failures, and the
amount of assessment income provided
by thrifts. Given a set of assumptions
about these factors, it is relatively
straightforward to project the SAIF over
a multi-year period. However, analysis
based on a single set of assumptions
ignores the considerable uncertainty
surrounding these factors.
To deal with this uncertainty, the
FDIC staff examined a range of values
for failed thrift assets, resolution costs,
total failed thrift assets resolved by the
RTC (as opposed to SAIF), and deposit
growth. For each of these factors, the
assumptions range from what was
considered to be reasonably optimistic
to reasonably pessimistic values. For
each value, the staff assigned a
probability based on historical
relationships and the informed judgment
of staff rather than on explicit statistical
techniques applied to historical data.
The assumptions and probabilities for
each factor are summarized below in
Table 1.
For analytical purposes, staff
projected the SAIr over a fifteen-year
As amended by section 103 of the Resolution
Trust Corporation Refinancing. Restructuring, and
Improvement Act of 1991 (Pub. L 102-233.105 Stat
1761). section 21A(b)(3) of the FHLB Act (Id. at
1441a(b)(3) requires, in relevant part, that the
Resolution Trust Corporation resolve savings
associations (including those insured by the FSIJC
prior to the date of enactment of FIRREA) for which
a conservator or receiver is appointed after
December 31.1988 and before October 1 . 1993. In
gcntrsL the SAIF will be responsible for savings
association failures that occur on or after October 1.
21630
/ Vol» 57, No. 99 / Thursday, May 21, 1992 / Proposed Rules
period under numerous scenarios.7 Each
scenario represented a combination of
the values for each of the factors and
was assigned a probability based on the
combination of probabilities for each of
the factors. Staff performed this exercise
for different assessment rates ranging,
from 23 to 35 basis points over the next
15 years.
would meet the designated ratio for a
given assessment level within 15 years.
As indicated in Table 2 (below), under
the indicated assumptions and
probabilities, the major results of
analysis are the following. If
assessments were maintained at an
average of 23 basis points for the next 15
years, there would be only a 15 percent
I. Failed Thrift Assets, Billions of Dollars chance that the SAIF would meet the
Designated Reserve Ratio within 15
(1992-1995)
years. If assessments were an average
rate of 27 basis points, there would be a
T a b l e 1.—A s s u m p t i o n s f o r SAIF
37 percent chance that the fund would
P r o je c t io n s
reach the Designated Reserve Ratio. At
1
30 basis points, it would be more likely
Probability
1992
1293
1994
1995
Total
(percent)
than not that the goal will be met. At
higher levels, there is a greater margin of
25
15
5
5
50
15 comfort that the Designated Reserve
50
35
10
5
100
20
Ratio would be achieved. At 32 basis
50
50
30
20
150
30
60
60
50
30
200
20 points there would be a 65 percent
70
70
60
50
250
15 chance of reaching the target, while the
probability would rise to 79 percent at
Assumes that SAIF assumes resolution responsi
35 basis points.
bility on October 1 , 1992.
Given the current assessment rate of
0.23 and a range of possible variables
II. Failed Thrift Assets (1996-2006)
affecting the thrift industry, there would
be a 15 percent chance of reaching the
Probability
Percent of total assets
Designated Reserve Ratio within 15
(percent)
years based on contributions from SAIF
0 .2 ........ ..................................
30 members. The Board believes that this is
0 .4 ................................
45 not consistent with the statutory
0 6 ......................................
18 requirement to achieve 1.25 percent
0 . 9 ..............................
5 within a reasonable amount of time.
1 .2 .................................................
2
T a b l e 2 .— S u m m a r y S t a t is t ic s b y
III. Ratio of Resolution Costs to Failed
Thrift Assets
Assessm en t R ate
Assessment rate
Patio (percent)
Probability
(percent)
1 4 .......................
1 7 ......................
2 0 ......................................
25
50
25
—
IV. Deposit Growth
Rate (percent)
Probability
(percent)
6 .............................................
2 ................................................
- 2 ............................................
The analysis identified the scenarios
under which the SAIF would reach the
designated ratio of 1.25 percent of
insured deposits by year-end 2006. By
adding the probabilities assigned to
each scenario, staff calculated the
subjective probability that the fund
* The staff chose a fifteen-year period solely for
analytical purposes. As noted in the text, the
statutory requirement for attaining the Designated
Reserve Ratio is “within a reasonable period of
time.“
40
40
20
2 3 ...........................................
2 4 .......................................
2 5 .................................. ....
2 6 .................................. ......
2 7 .................................
2 8 .......................................n
2 9 ............................................
3 0 ................................... ...........
3 1 ................................... !S „
3 2 ...............................................
3 3 ................................................
3 4 ......................... ..................
3 5 ............................................
Probability that
SAIF reaches
1.25%
15 0%
33.6%
55.3%
6 5 0%
*
Thus, in essence, there are two
reasons for increasing the SAIF member
assessment rate. First, under reasonable
assumptions, a 0.23 percent assessment
rate has an unlikely probability of
achieving a 1.25 percent reserve ratio
within 15 years. The Board believes that
this is not consistent with the statutory
requirement to achieve the Designated
Reserve Ratio “within a reasonable
period of time.” Second, given the
uncertainty regarding the industry, it is
prudent to ensure that SAIF grows
toward its Designated Reserve Ratio as
soon as reasonably possible, subject to
the statutory considerations discussed
below. In order to do so, the Board is
proposing to increase the average
i
assessment rate to 0.28 percent starting"
with the first semiannual period of 1993.
In light of the aforesaid uncertainties,
the Board anticipates that it will
reconsider the adequacy and
appropriateness of the SAIF assessment
rate as conditions warrant.
B. Impact on Industry Capital and
Earnings
1.
In g en eral Increases in deposit
insurance assessment rates necessarily
add to insured thrifts* operating costs.
These cost increases will have a
measurable effect upon thrifts’
profitability and capitalization. FDIC
staff analyzed the impact of the
proposed assessment rate increases on
thrift industry capital and earnings.
Several assumptions guided the
analysis. To start, increases in deposit
insurance assessment expenses do not
necessarily lead to equally
proportionate declines in thrift profits.
There are at least two factors which can
reduce the adverse impact of increased
assessments upon thrifts’ profits and
capital.
First, some portion of the assessment
increase may be passed along to
customers in the form of higher
i
borrowing rates, increased service fees, I
and lower deposit rates. The extent of
cost sharing will be dependent upon the
level of competition faced by thrifts;
those facing little competition should be
able to pass a larger portion of the
increase in assessment costs on to
customers than would thrifts facing
greater competition. For the purposes of
this analysis, it was assumed that thrifts
would not pass on any of the
assessment increase to customers.
Second, deposit insurance
assessments are a tax-deductible
operating expense for thrifts. Therefore,
the increase in assessment expenses can
be used to lower taxable income,
thereby reducing the effective after-tax
cost of SAIF assessments.*
The impact of the proposed
assessment increase upon thrifts’ book
capital is also dependent upon
assumptions about dividend policies
and new capital issues. If thrifts
• In event ■ thrift is incurring losses before
assessment costs, the additional assessment
expense may be used to offset prior-period or future
income (loss carry back or loss carry forward),
thereby reducing taxes. For simplicity, this analysis
assumed no loss carry forward nor loss carry back.
This assumption results in a more conservative
estimate of the tax benefits from higher
assessments. In addition, the average tax rate paid
by a thrift in 1991 was assumed to apply in future
periods for the purposes of projecting thrift profits.
c
maintain dividend levels despite the
industry. To address this shortcoming, a expect however, that thrifts earning
increase in operating costs, book capital second analysis was performed that
near zero returns on equity will, in time,
will decline by the full amount of the
analyzed the potential long-term
either fail or move toward higher levels
after-tax cost of the assessment borne
implications of reductions in thrift
of profitability. For these reasons, one
by thrifts (assuming no new capital
profitability, which involved an analysis should focus on the impact on the
issues). That is to say, if dividends are
of changes in return on equity.
majority of thrifts’ profitability when
not reduced, increased operating costs
If
investors
felt
the
reductions
in
analyzing
Tables 3 and 4 (below).
will be reflected in lower retained
profitability were long term, several
2.
A lte rn a tive analyses. The following
earnings.
results can be anticipated. First stock
are alternative impact analyses with one
Furthermore, for the projections
market prices on thrift equity would fall based on the proposed increase in the
presented here, it is assumed that the
uniform assessment rate to 0.28 percent
thrifts average dividend rates remained as investors revise estimates of
anticipated earnings. Consequently, any and the other based on the Board’s
unchanged horn those reported for
thrift/thnft holding company attempting adoption of a transitional risk-related
calendar year 1991.• However, if a
to raise capital through new issues could assessment system with an average
thrift’s projected post-dividend tangible
assessment rate of 0.28 percent.
receive less in invested capital.
capital was 2 percent or less, the thrift
Assuming no other significant changes
a. Im pact analysis based on a uniform
was assumed to pay dividends up to an
assessment rate o f 0.28 percent—
amount that would allow it to remain at in thrift earnings or risk, share prices
2 percent tangible capital. Dividends
Projected c a p ita l and earnings: short
would have to fall in proportion to the
term im pact, for purposes of this
were not included in the projections
decline in returns in order to maintain
analysis, FDIC staff developed short
unless post-dividend capitalization was
market value based profit rates (returns
greater than 2 percent
term projections on “core group" thrift
on market value of equity). Second,
To provide meaningful results from an shareholders might also have less
earnings and capital between 1992 and
impact analysis, the FDIC deemed it
1995 under the assumptions concerning
incentive to reinvest capital within the
necessary to analyze the effect of the
cost-sharing, tax deductibility and
thnft, given the reduced profitability.
proposed insurance assessment increase Reduced retention rates will result in
dividend rates described above. The
on the institutions that will compose the less growth in book capital over time,
analysis used 1991 data on net income,
thrift industry following the completion
compared to an economy without higher dividends and tax rates as the basis for
of the RTC’s mandated resolution
these projections. To test the sensitivity
SAIF assessment rates.
responsibilities. To accomplish this, the
of the results from the projection
While it is difficult to estimate the
projections estimated the reduction in
analysis to the use of 1991 as the
final impact upon industry capital, a
net income and capital for the “core
benchmark for thrift Industry returns,
moderate amount of industry shrinkage
group" of 1,897 thrifts holding $721
the staff repeated the analysis using
due to a flight of capital (relative to a
billion in assets. These institutions were
1990 data on the same institutions.1*
situation
without
higher
assessments)
identified using the Office of Thrift
The tangible capitalization of all
may result and credit availability may
Supervision ("OTS") Regulatory
SAIF-insured thrifts as of December 31,
be
impacted.
Consolidation
in
the
thrift
Monitoring System ("RMS") and
1991 was approximately $38.7
industry can occur, however, without
upervisory evaluations.10
billion.1* An assessment rate of 0.28
increased
thrift
failures.
Indeed,
the
FDIC staff used two approaches to
percent, commencing with the first 1993
results from both analyses discussed
assess the impact of the proposed
semiannual assessment, would raise an
below
indicate
that
the
impact
of
the
increases in deposit insurance
additional $347.5 million annually, just
proposed assessment rate increases
assessment rates on SAIF-insured
under 0.9 percent of fourth-quarter 1991
thrifts. The first approach was to project upon the core group of thrifts’ earnings
industry tangible capital.
and capital would not result in a
thrift earnings and capital through 1995
FDIC staff estimates that by year-end
under two deposit insurance assessment substantial increase in thrift failures.
1995 the core thrift industry tangible
In interpreting the results of the long
rates: The present rate of 0.23 percent
capitalization would be just over $55.3
term impact analysis, one point must be billion if the 0.23 percent rate remains in
and the proposed rate (uniform and
noted. Under both the uniform rate and
average) of 0.28 percent Such
place. If the rate is raised to 0.28
projections make it possible to consider the transitional risk-related average
percent, industry tangible capital would
rate, the staffs long-term profitability
the impact of increased assessment
fall to approximately $54.8 billion,
analyses revealed a number of thrifts
costs in light of individual thrifts’
representing an 1.0 percent reduction.
projected earnings and tax status. Short which had large estimated changes in
Under this scenario, core industry net
return on equity due to the proposed
term projections, however, will not
income would fall over the period by
capture die full impact such cost
assessment increases. This occured
$0.62 billion, approximately 3.5 percent
because at any point there are a number of the pre-increase net income of $18.0
increases may have upon the thrift
of thrifts earning near zero profits (or
billion.
very small losses). In these situations,
• For institution« paying more than 100 percent of
An assessment increase to 0.28 is
1991 net income in dividends the average rate eet to
moderate increases in the assessment
projected
to raise the number of thinly
percent of net income for the purpose of the
rate (for example, 5 to 7 basis points)
capitalized core thrifts by 2 institutions,
projection«.
will result in large percentage changes
defined as those with less than 2 percent
10 This core group is an estimate of the
in profitability.11 It is reasonable to
Institutions that will not be placed into
tangible capital, through 1995. The
clilit'
conservatorship or otherwise be resolved before
October 1.1993. the statutory deadline for the R TCs
acceptance of failed savings associations. The core
group is composed of SAIF-insured thrifts that are
not in one of the following categories:
conservatorship, insolvent. RMS-TV. RMS-DL
Critically Undercapitalized or Potentially Critically
-Undercapitalized or lowest composite supervisory
fing-
* * To •** this, consider the example of a thrift
with a S percent equity capital and a 1 percent
return on equity. In addition, assume that the thrift
had an average tax rate of 25 percent and had
assessable deposits equal to SO percent of thrift
«ssets. In this situation, a 7 basis point Increase in
the assessment rate would result in an 84 percent
reduction in return on equity.
** For *his core group of thrifts, the post-tax
return on average assets (*'ROAA“J was
approximately 33 percent greater in 1991 than it was
in 1990. On average, the institutions with the lowest
capital-to-asset ratios showed the greatest increase
in ROAA over this time period.
, '* Tangible capital is reported on a consolidated
basis. The number includes RTC conservatorships.
21632
Federal Register / Vol. 57, No. 99 / Thursday, May 21, 1992 / Proposed Rules
number of core thrifts holding more than
3 percent tangible capital is projected to
decrease by 1 institution.
S e n s itiv ity o f the earnings and c a p ita l
projections to 1991 return data. As
Using 1991 return on equity ("ROE")
as the benchmark, a 5 basis point ("bp")
increase in the insurance premium from
23 to 28bp would be expected to lower
the average institution’s ROE by less
than 5 percent. A total of 1,151 thrifts
holding $511 billion in assets would
have their ROEs reduced by less than 5
percent. An additional 492 institutions
with $142 billion in assets would suffer a
reduction in ROE of between 5 and 10
percent. The remaining 254 institutions
with $68 billion in assets would have
their ROE reduced by more than 10
percent. These results are presented in
Table 3 (below).
indicated above, there was considerable
improvement in the return on average
assets ("ROAA") for the SAIF-insured
thrift industry between 1990 and 1991.
This improvement may be attributable
to various factors, including the
advantageous interest rate environment,
the resolution of marginally solvent
competitors and increased capital levels
for the industry.14
To test the sensitivity of the results to
reduced thrift operating margins, staff
repeated the projections using the
T a b l e 3 .— P e r c e n t a g e C h a n g e s in R e
ROAAs for the core thrifts in 1990. Using
t u r n o n E q u i t y A s s o c i a t e d W it h a
1990 ROAA as the benchmark return,
0.28 P e r c e n t A s s e s s m e n t R a t e
FDIC staff estimates that by year-end
[SAIF-lnsured Thrifts, S Millions)
1995 the core thrift industry tangible
capitalization would be just over $50.7
change in
Asset
Number
billion if the 0.23 percent rate remains in Percentage
ROE |
place, and would decline to
approximately $50.1 billion if the rate is
$6,906
30
Below - 50% * ................
raised to 0.28 percent. This would
5,632
25% to - 50% * .........
32
26.637
81
- 1 5 % to - 2 5 % .............
reduce core industry capital by
11 1
29,352
- 1 0 % to - 1 5 % ............
approximately 1.1 percent. Under this
141.854
492
- 5 % to - 1 0 % ...............
scenario, core thrift industry net income 0%
510,687
1,151
10 - 5 % ......................
would fall over the period by $0.68
37
4.495
Missmg d ata......................
billion, approximately 5.3 percent of the
1,897
721,069
All............................ ..
pre-increase net income of $12.4 billion.
By the end of 1995, an assessment
1 The percentage change in ROE was defined as
the adjusted ROE minus the original ROE. divided by
increase to 0.28 is projected to raise the
the absolute value of the original ROE, (ROE -ROE)
number of thinly capitalized core thrifts
/abs(ROE).
2 As noted above, thrifts with near zero earnings
by 5 institutions. The number of core
will experience a large percentage change m return
thrifts with more than 3 percent tangible on equity.
capital is projected to decrease by 12
3 id.
institutions.
b. Im pact analysis based on a
Long-term changes in p ro fita b ility . In
tra n s itio n a l risk-re la te d assessment
order to assess the long-term impact of
system —Im pact on th rift c a p ita l and
higher assessments on thrift
profitability, estimates were made of the earnings. As noted above, it is unlikely
that thrifts would be able to pass on the
changes in returns on the book value of
customers the proposed assessment
equity capital which might result under
increase. This assumption is even more
an assessment rate of 0.28 percent.
Specifically, thrifts' 1991 returns on book applicable under a risk-based premium
structure that under a uniform premium
value equity capital were adjusted to
structure. Under a risk-based structure,
reflect the increase in operating costs
thrifts face enhanced intra-industry
(after-taxes) which might result from
competition. Institutions paying higher
increased assessment rates.14
premiums face additional competition
from those institutions paying lower
14 Another factor that may influence ROAA ia
any deviation from a normal level of reserving for
loan losses. However, the ratio of average loan loss
provisions on interest bearing assets to assets did
not change significantly between 1990 and 1991 for
most core institutions.
'* A simple expression can be derived to show
how these factors will affect profitability.
(1.) R O A'=[RO A— (Rate Increase) * (Assessment
Base/A ssets) * (1—T)J
Where:
R O A '* adjusted return on assets, reflecting an
increased assessment rate
R O A * thrift's original return on assets (net
incom e/assets)
Rate Increase « n e w assessment rate—old
assessment rate
T * thrift’s average tax rate
The resulting impact on the return on equity w ill
vary with thrifts' financial leverage.
( 2 ) ROE «(R O E ) * (assets/equity)
Equation two states that the adjusted return on
equity (ROE') is the product of the adjusted return
on assets (ROA’) and the equity multiplier (assets/
equity).
Data on individual thrifts' 1991 average tax rates
were used to adjust for the tax deductibility of
assessments. In the event a thrift incurred losses in
1991 and/or received a tax credit, its tax rate was
set to zero. Although thrifts' earnings and hence
capitalization will be reduced with higher
assessments, for the purposes of this analysis, the
adjusted ROEs were estimated using year-end 1991
assets-to-equity ratios in equation 2.
premiums, further reducing the thrift's
ability to pass on costs to customers.
Projected c a p ita l and earnings: short- ^
term im pact. Consistent with the
approach used for the uniform rate
^
analysis discussed above, for purposes
for this analysis, FDIC staff also
developed short-term projections on
thrift earnings and capital between 1992
and 1995 under the deposit insurance
premiums and assumptions described
above. The analysis used 1991 data on
net income, dividends and tax rates as
the basis for these projections.
Based upon the proposed average
assessment rate of 0.28, FDIC staff
estimates that by year-end 1995 the core
thrift industry tangible capitalization
would be just over $55.3 billion if the
0.23 percent rate remains in place. If the
average rate is raised to 0.28 percent,
industry tangible capital would fall to
approximately $54.9 billion, representing
an 0.8 percent reduction. Under this
scenario, core industry net income
would fall over the period by $0.52
billion, approximately 2.9 percent of the
pre-increase net income of $18.0 billion.
An average assessment rate 0.28 is
projected to raise the number of thinly
capitalized core thrifts by 2 institutions,
defined as those with less than 2 percent
tangible capital, through 1995. The
number of core thrifts holding more than^
3 percent tangible capital is projected t o ^
decrease by 3 institutions.
S e n s itiv ity o f the earnings and c a p ita l
projections to 1991 return data.
Consistent with the approach used for
the uniform assessment rate analysis
discussed above, to test the sensitivity
of the thrift industry’s 1991 ROAA
results to reduced thrift operating
margins, staff repeated the projections
using the ROAAs for the core thrifts in
1990. Using 1990 ROAA as the
benchmark return, FDIC staff estimates
that by year-end 1995 the core thrift
industry tangible capitalization would
be just over $50.7 billion if the 0.23
percent rate remains in place, and
would decline to approximately $50.2
billion if the average rate is raised to
0.28 percent. This would reduce core
industry capital by approximately 1.0
percent. Under this scenario, core thrift
industry net income would fall over the
period by $0.55 billion, approximately
4.4 percent of the pre-increase net
income of $12.4 billion.
By the end of 1995, an average
assessment increase to 0.28 is projected
to raise the number of thinly capitalized
core thrifts by 5 institutions. The number
of core thrifts with more than 3 percent
tangible capital is projected to decrease
by 10 institutions.
Federal Register / V ol 57, No. 99 / Thursday, May 21, 1992 / Proposed Rules
Long-term changes in p ro fita b ility .
Using 1991 ROE as the benchmark, a
5pb increase in the average insurance
premium from 23 to 28bp would be
expected to lower the average
institution's ROE by less than 5 percent.
A total of 1,377 thrifts holding $510
billion in assets would have their ROEs
reduced by less than 5 percent. An
additional 275 institutions with $114
billion in assets would suffer a reduction
in ROE of between 5 and 10 percent. The
remaining 245 institutions with $97
billion in assets would have their ROE
reduced by more than 10 percent. These
results are presented in Table 4 (below).
IV . Comment Period
The Board hereby requests comments
on the proposed rule. Interested persons
are invited to submit written comments
during a sixty-day comment period.
List of Subjects in 12 CFR Part 327
Assessments; Bank deposit insurance;
Financing Corporation; Savings
associations.
For the reasons stated above, the
Board of Directors of the Federal
Deposit Insurance Corporation proposes
to amend part 327 of title 12 of the Code
of Federal Regulations as follows;
1. The authority citation for part 327
continues to read as follows:
Authority: 12 U.S.C. 1441,1441b, 1817-19.
T able 4.—Percentage Changes in R e
turn on Equity A ssociated W ith a
0.28 Percent A ssessment Rate
[SAIF-Jnsured Thrifts. $ Millions]
Percentage change In
ROE«
Number
Assets
1 ----------- 1—
Below —SOW • .............
- 2 5 % to - 5 0 % * ____
- 1 5 % to - 2 5 % ______
-1 0 % t o -1 5 %
-5 % t o -1 0 %
0% to - 5 %
„
Missmg d ata__________
All..................
34
39
73
99
275
1.377
37
$7,554
14,775
26.674
46.537
113 533
509 696
1.897
721.069
_______________ ________
m m
1 The percentage change in ROE was defined as
the adjusted ROE minus the original ROE. divided by
the absolute value of the original ROE: (ROE1- ROE)'
abs(ROE).
* As noted above, thrifts with near zero earnings
will experience a large percentage change m return
on equity.
* id
2. Section 327.23(d) is revised to read
as follows:
{ 327.23 Mannar of payment
%
•
#
•
•
(d) Assessment rate. (1) The annual
assessment rate for each SAIF member
shall be, for the semiannual periods of
calendar year 1992,0.23 percent; and
(2) The (annual or average)
assessment rate for SAIF members shall
be. for the first semiannual period of
calendar year 1993. and for subsequent
semiannual periods. 0.28 percent.
By order of the Board of Directors.
Dated at Washington. DC, this 12th day of
May. 1992.
Federal Deposit Insurance Corporation.
Hoyle L Robinson,
Executive Secretary.
(FR Doc. 92-11888 Filed 5-20-92; 8:45 am)
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