FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 360

RIN 3064ÄAB24

Receivership Rules

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Final rule.

SUMMARY: The Board of Directors (Board) of the Federal Deposit Insurance
Corporation (FDIC) is issuing a regulation required by section 141 of the FDIC
Improvement Act of 1991 (FDICIA) on the least-cost resolution of failed and
failing depository institutions insured by the FDIC. The intended effect of
this rule is to comply with the statutory requirement of prescribing
regulations on the prohibition against increasing losses to the insurance
funds by protecting uninsured depositors and non-depositor creditors of
insured depository institutions.

EFFECTIVE DATE: January 21, 1994.

FOR FURTHER INFORMATION CONTACT: Gail Patelunas, Assistant Director, Division
of Resolutions (202/898Ä6779), Sean Forbush, Resolution Specialist, Division
of Resolutions (202/898Ä8506), David Gearin, Senior Counsel, Legal Division
(202/898Ä3621), Ruth R. Amberg, Senior Counsel, Legal Division (202/898Ä3736)
or Joseph A. DiNuzzo, Counsel, Legal Division (202/898Ä7349), Federal Deposit
Insurance Corporation, Washington, D.C., 20429.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

No collections of information pursuant to section 3504(h) of the Paperwork
Reduction Act (44 U.S.C. 3501 et seq.) are contained in this notice.
Consequently, no information has been submitted to the Office of Management
and Budget for review.

Regulatory Flexibility Act

The Board hereby certifies that the final rule will not have a significant
economic impact on a substantial number of small entities within the meaning
of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). It will not impose
burdens on depository institutions of any size and will not have the type of
economic impact addressed by the Act. Accordingly, the Act's requirements
regarding an initial and final regulatory flexibility analysis (Id. at 603 &
604) are not applicable here.

Background

Section 141 of FDICIA (Pub. L. 102Ä242, 105 Stat. 2236 (1991)) amended section
13(c) of the Federal Deposit Insurance Act (12 U.S.C. 1823(c)) to, among other
things, require that the assistance provided by the FDIC under section 13(c)
of the FDI Act be "necessary'' to meet the FDIC's obligation to provide
insurance coverage for insured deposits in a failed or failing institution and
that the resolution be the "least costly'' to the deposit insurance fund of
"all possible methods'' of meeting that obligation. This least-cost resolution
requirement, set forth in section 13(c)(4)(A) of the FDI Act, became effective
immediately upon the enactment of FDICIA on December 19, 1991.1

®1¯ The FDICIA amendments to the FDI Act created a "systemic risk'' exception
to the cost-test requirements of sections 13(c)(4) (A) and (E) of the FDI Act
which may be invoked only if the Secretary of the Treasury, acting in
consultation with the President and on the recommendation of two-thirds of the
members of the Board and the Board of Governors of the Federal Reserve System,
determines that the transaction is necessary to avoid "serious adverse effects
on economic conditions or financial stability''. Costs of such a transaction
are to be recovered through special assessments on insured institutions on a
broad deposit base which includes foreign deposits. 12 U.S.C. 1823(c)(4)(G).
This provision has not been invoked to date.

Section 141 also amended section 13(c) of the FDI Act to prohibit the FDIC
from taking any direct or indirect action after December 31, 1994 (or such
earlier time as the FDIC determines to be appropriate), with regard to any
insured depository institution, that would have the effect of increasing
losses to either the Bank Insurance Fund or the Savings Association Insurance
Fund by protecting depositors for more than the insured portion of their
deposits or creditors other than depositors. 12 U.S.C. 1823(c)(4)(E) (section
13(c)(4)(E)).2

®2¯  See also section 11 of the recently enacted Resolution Trust Corporation
Completion Act which makes clear that the deposit insurance funds may not be
used to benefit shareholders of failing insured depository institutions.

Section 13(c)(4)(E) requires that the FDIC prescribe regulations to implement
the requirement no later than January 1, 1994, and that the regulations become
effective no later than January 1, 1995. A proposed rule to comply with the
regulation-issuance requirement of section 13(c)(4)(E) was published in the
Federal Register on October 25, 1993 (58 FR 55027). A discussion of the
comments received on the proposed rule is provided below.

FDICIA's least-cost resolution requirements arose from a congressional effort
to stem insurance fund losses and to instill depositor discipline in the
banking industry. Prior to the passage of FDICIA, the FDIC could pursue any
resolution alternative as long as it was less costly than liquidating the
institution. Thus, when faced with several proposals that satisfied the cost
test, the FDIC could have selected, for policy reasons (such as minimizing
community disruption), a more expensive proposal than the least cost
resolution. In many cases effected prior to the enactment of FDICIA, the
resolutions involved an acquiring institution's assumption of both insured and
uninsured deposits and resulted in no losses for uninsured depositors. Of the
124 banks closed in 1991, approximately 16 percent of the failures involved a
loss for uninsured depositors.

Since the enactment of FDICIA, the FDIC has adhered to the least-cost
requirements of FDICIA. In resolving institutions, the FDIC typically solicits
bids for both total deposits and insured deposits only, evaluating all bids
received and selecting the least costly. Therefore, in cases where the
uninsured deposits are passed to the assuming institution, it is because that
particular resolution represented the least costly of all possible resolution
alternatives.

During 1992, the FDIC resolved 120 bank failures and provided open bank
assistance to two institutions in danger of failing. Uninsured depositors were
made whole in 50 percent of the 1992 failures. For the first eight months of
1993, only 4 of the 34 bank failures have resulted in uninsured depositors
being made whole.

The Final Rule

The final rule adds a new section to Part 360 of the FDIC's regulations
stating the prohibition in section 13(c)(4)(E) of the FDI Act on taking any
action under section 13(c) of the FDI Act that would have the effect of
increasing losses to any insurance fund by protecting uninsured depositors or
non-depositor creditors of a failed or failing depository institution. In
addition, the final rule references the systemic risk exception to the
prohibition.

The final rule also includes the provision of section 13(c)(4)(E) of the FDI
Act which makes clear that the prohibition shall not be construed as
prohibiting the FDIC from engaging in purchase and assumption transactions
under which uninsured deposits may be acquired so long as the loss to the
insurance fund on those uninsured deposits is less than if the institution had
been liquidated and the insured deposits were paid. Since section 13(c)(4)(A)
and its least-cost rule of comparison will continue in effect after the
implementation of section 13(c)(4)(E), the question may arise how these two
provisions interrelate.

The FDIC believes that by complying with the more general least-cost
requirements of section 13(c)(4)(A) of the FDI Act, it also has complied fully
with the prohibition of section 13(c)(4)(E). Under the latter provision, the
FDIC is prohibited from protecting uninsured deposits and creditors other than
depositors only if doing so "would have the effect of increasing losses to any
insurance fund''. In the FDIC's view, the more general least cost requirements
of section 13(c)(4)(A) already prohibit the FDIC from protecting creditors
other than insured depositors if it would have the effect of increasing,
rather than decreasing, losses to the applicable deposit insurance fund.
Consequently, it is the FDIC's view that section 13(c)(4)(E) is subsumed in
the more general least cost provisions of section 13(c)(4)(A) and has no
independent operative effect.

Because the FDIC currently complies with the least cost requirements of
section 13(c) (as imposed by section 141 of FDICIA), the Board is making the
final rule effective thirty days after its publication in the Federal
Register.3 As noted above, section 13(c)(4)(E) requires that the final rule be
prescribed no later than January 1, 1994. The effective date satisfies the
requirement in section 13(c)(4)(E) that the FDIC regulations on that provision
take effect no later than January 1, 1995.

®3¯  A thirty-day delayed effective date complies with the general rulemaking
requirements of the Administrative Procedure Act. 5 U.S.C. 553(d).

Comments on the Proposed Rule

As noted above, the proposed rule was published in the Federal Register on
October 25, 1993. The FDIC received five comments on the proposal. Two of the
comments (one from a bank and one from an industry trade group) expressed full
support for the proposed rule, one noting that "losses to the insurance funds
should not be increased by protecting uninsured depositors and non-depositor
creditors of insured depository institutions''.

A comment from a savings association questioned whether the implementation of
section 141 of FDICIA will "save taxpayers' money''. The comment noted that
the "lack of confidence created by the law will cause additional losses to the
insurance funds from the failure of more insured institutions'' and suggested
that the FDIC consider the macroeconomic effect of the proposed rule as well
as the root causes of insurance fund losses. The Board notes that experience
to date does not suggest that additional failures have been caused by
implementing the least-cost requirements. Moreover, as noted above, the FDIC
is required by statute to issue the final rule to implement the least-cost
resolution requirements of section 141.

Another commenter, which is in the business of providing services to insured
depository institutions, expressed concern that the final rule could be
construed to supersede the recently enacted national depositor preference
statute (Pub. L. 103Ä66, 107 Stat. 312 (August 10, 1993)) or other related
law. As noted in the preamble to the proposed rule, the national depositor
preference statute does not affect the operation of the final rule. The
depositor preference statute and implementing regulations (58 FR 43069, August
13, 1993) establish certain priorities for distributing amounts realized from
the liquidation or other resolution of FDIC-insured institutions. The final
rule does not apply to the administration and distribution of receivership
assets, which are governed by the depositor preference statute and regulations
and other applicable law. As the commenter suggested, the final rule has been
modified to indicate more explicitly that it relates to corporate actions
affecting only the deposit insurance funds, and does not apply to receivership
actions.

A comment from an industry trade group urged that the FDIC develop a
standardized process for resolving failing banks that does not cover losses
uninsured depositors would otherwise absorb in a bank or thrift failure. It
suggested that, in the bidding process, the FDIC require bidders to explicitly
price their offers to assume the uninsured deposits. As noted above, since the
enactment of FDICIA, the FDIC routinely offers bidders the option of assuming
all deposits or only the insured deposits, but does not require a bidder to
bid both ways.4 Whether a bidder is interested in bidding on both insured
deposits and all deposits largely depends on the attractiveness of the deposit
structure at each failing bank. Thus, a bidder may not want to bid both ways
because it may not be interested in both options. Requiring that bids be
submitted on each basis, therefore, may discourage otherwise interested
bidders.

®4¯  Certain circumstances preclude the ability to provide options for
assuming the uninsured portion of deposits, such as time constraints that do
not permit an estimation of the losses imbedded in the failing bank's asset
base.

The comment suggested, as an alternative approach, that the FDIC only accept
bids for insured deposits and, if the acquirer wanted the uninsured portion,
the acquirer would agree to reimburse the FDIC fully for the losses that this
portion of deposits would otherwise absorb. The Board believes that such an
approach would not be cost-effective. The amount of work involved for this
process would be substantial because a full claim process would be necessary
in each failure and the amount to be recouped would not be determined for some
years.

Finally, this commenter also recommended that the FDIC adopt a mechanism such
as the final settlement payment which Congress authorized in FDICIA, or other
procedure, to ensure consistent treatment of uninsured depositors in
resolutions. The FDICIA final settlement payment mechanism entails the
application of a formula reflecting an average of the FDIC's receivership
recovery experience. The Board notes that such an approach raises complex
issues because other provisions of the FDI Act appear to contemplate
distributions being made from the assets of a particular receivership estate.

The final rule incorporates no substantive changes to the proposed rule.

List of Subjects in 12 CFR Part 360

Savings and loan associations.

The Board of Directors of the Federal Deposit Insurance Corporation hereby
amends part 360 of chapter III of title 12 of the Code of Federal Regulations
as follows:

PART 360 RESOLUTION AND RECEIVERSHIP RULES

1. The heading of Part 360 is revised to read as set forth above.

2. The authority citation for Part 360 is revised to read as follows:

Authority: Sec. 401(h), Pub. L. 101Ä73, 103 Stat. 357; 12 U.S.C. 1821(d)(11),
1823(c)(4).

 360.1 through 360.3

 [Redesignated as  360.2 through 360.4]

3. Sections 360.1, 360.2 and 360.3 are redesignated as  360.2, 360.3 and
360.4, respectively, and a new  360.1 is added to read as follows:

 360.1 Least-cost resolution.

(a) General rule. Except as provided in section 13(c)(4)(G) of the FDI Act (12
U.S.C. 1823 (c)(4)(G)), the FDIC shall not take any action, directly or
indirectly, under sections 13(c), 13(d), 13(f), 13(h) or 13(k) of the FDI Act
(12 U.S.C. 1823 (c), (d), (f), (h) or (k)) with respect to any insured
depository institution that would have the effect of increasing losses to any
insurance fund by protecting:

(1) Depositors for more than the insured portion of their deposits (determined
without regard to whether such institution is liquidated); or

(2) Creditors other than depositors.

(b) Purchase and assumption transactions. Subject to the requirement of
section 13(c)(4)(A) of the FDI Act (12 U.S.C. 13(c)(4)(A)), paragraph (a) of
this section shall not be construed as prohibiting the FDIC from allowing any
person who acquires any assets or assumes any liabilities of any insured
depository institution, for which the FDIC has been appointed conservator or
receiver, to acquire uninsured deposit liabilities of such institution as long
as the applicable insurance fund does not incur any loss with respect to such
uninsured deposit liabilities in an amount greater than the loss which would
have been incurred with respect to such liabilities if the institution had
been liquidated.

By order of the Board of Directors.

Dated at Washington, DC, this 14th day of December, 1993.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Deputy Executive Secretary.

[FR Doc. 93Ä31197 Filed 12Ä21Ä93; 8:45 am]

BILLING CODE 6714Ä01ÄP