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6140 Federal Register / Vol. 62, No. 28 / Tuesday, February 11, 1997 / Proposed Rules5(d)(2) of the FDI Act (12 U.S.C.1815(d))(section 5(d)(2)).Section 5(d)(2) applies to conversionsof depository institutions from onedeposit insurance fund to the other. Inrelevant part, it provides that: (1)Institutions may not engage in a‘‘conversion transaction’’ without theFDIC’s prior approval; and (2)institutions that engage in an insurancefundconversion must pay prescribedentrance and exit fees. Until recently,with certain specified exceptions,depository institutions were prohibitedby section 5(d)(2) from engaging inconversion transactions. 12 U.S.C.1815(d)(2)(A)(ii). The statute specified,however, that the ‘‘conversionmoratorium’’ would expire when SAIFreached or exceeded its DRR. BecauseSAIF recently reached its DRR, theconversion moratorium no longerapplies; therefore, an institution mayconvert from one fund to another aslong as the FDIC approves theconversion and the institution pays theprescribed entrance and exit fees.The requirement in section 5(d)(2)that converting institutions pay entranceand exit fees underscores the need toimpose entrance and exit fees under thedeposit migration statute: If insureddepository institutions were permittedto shift deposits from a SAIF-insuredinstitution to a BIF-insured institutionoutside the scope of section 5(d)(2),then—but for the existence of thedeposit shifting statute—they would beable to evade the entrance and exit feesimposed by section 5(d)(2) for such fundconversions. The FDIC interprets thedeposit shifting statute, therefore, inpart, to be intended to preserve theintegrity of the fee-paymentrequirements in section 5(d)(2). Indeed,as indicated above, the deposit shiftingstatue specifies that one of the‘‘appropriate actions’’ the agencies maytake to prevent deposit shifting is the‘‘imposition of entrance and exit fees asif such transaction qualified as aconversion transaction pursuant tosection 5(d).’’C. Explanation of the Proposed RuleThe proposed rule is intended tointerpret and implement the depositshifting statute. The proposed ruleconsists of two basic provisions. Thefirst would reiterate the requirement inthe deposit shifting statute that thefederal banking agencies denyapplications and object to notices filedwith them by depository institutions ordepository institution holdingcompanies if the agency determines thatthe transaction for which theapplication or notice is filed is for thepurpose of evading assessmentsimposed on insured depositoryinstitutions with respect to SAIFassessabledeposits. The secondprovision of the proposed rule wouldestablish a presumption under whichentrance and exit fees would beimposed upon depository institutionsfor deposits that are shifted from SAIFassessabledeposits to BIF-assessabledeposits within the contemplation ofthe deposit shifting statute.1. ApplicationsAs noted, the proposed rule reiteratesthe statutory requirement that thefederal banking agencies denyapplications or object to notices if thetransaction for which the application ornotice is filed is for the purpose ofevading SAIF assessments. Theproposed regulation is drafted toencompass any type of application ornotice that might involve depositshifting. It is anticipated that therespective agency would determine thepurpose of the application or noticefrom the materials submitted by thedepository institution or holdingcompany. For example, certain types ofapplications require the filing of abusiness plan which describes thecorporate strategy for and objective ofthe proposed transaction. If the agency’sreview of the business plan indicatesthat the purpose of a proposedtransaction is to shift deposits in orderto evade SAIF assessments, then theagency would deny the application. If abusiness plan is not required to be filedwith an application that might raise aconcern about deposit shifting, then thereviewing agency would otherwisedetermine, based on a review of thematerials provided with the applicationand other available information,whether the underlying purpose of theapplication is to shift deposits withinthe contemplation of the depositshifting statute. All such applicationdeterminations would be made on acase-by-case basis within the agency’sdiscretion. It is also likely that theagencies would condition applicationapprovals on compliance with therequirements of the deposit shiftingstatute.2. Entrance and Exit Fees for DepositShiftingThe proposed rule would establish apresumption under which entrance andexit fees would be imposed upondepository institutions that engage indeposit shifting for the purpose ofevading SAIF assessments. The amountsof the entrance and exit fees would bethose prescribed in part 312 of theFDIC’s regulations (12 CFR part 312).Under the proposed rule the FDICwould use a rebuttable-presumptionapproach to determine whetherdepository institutions have engaged indeposit shifting and, therefore, must payentrance and exit fees. To implementthis approach the FDIC would identifyall bank holding companies and savingsand loan holding companies with bothBIF- and SAIF-member subsidiaries anddetermine each holding company’saggregate average percentage of BIF andSAIF deposits for a period of time priorto the enactment of the deposit shiftingstatute on September 30, 1996. TheFDIC would then compare that averageto the percentage of each such holdingcompany’s BIF and SAIF deposits foreach quarter subsequent to theenactment of the deposit shiftingstatute. The FDIC would determinewhether any increase in the holdingcompany’s percentage of BIF depositsand decrease in its percentage of SAIFdeposits exceeded a normal rangerelative to the holding company’shistorical average and industry averages.If the FDIC determines, on a holdingcompany-by-holding-companybasis,that a BIF-insured institution’s increasein BIF-assessable deposits and decreasein SAIF-assessable deposits is above thenormal range and is not attributable tofactors other than deposit shifting, then,after consulting with each institution’sprimary federal regulator (where theFDIC is not the institution’s primaryfederal regulator) the FDIC would applythe rebuttable presumption that theincrease in BIF-assessable depositsresulted from deposit shiftingencouraged or facilitated by theapplicable depository institutions ortheir holding company for the purposeof evading SAIF assessments. 22 To determine whether a holding companyshould be subject to further scrutiny under theproposed rule, the FDIC would compute an averageratio of BIF-insured deposits to total deposits for allnon-Oakar affiliates of the holding company as ofthe fourth quarter of 1994. This value would becomputed as the average ratio of BIF-insureddeposits for the period from the third quarter of1989 to the fourth quarter of 1994, or the averageratio of BIF-insured deposits from the last quarterthat the holding company acquired or sold a non-Oakar affiliate through the fourth quarter of 1994.The average ratio would then be subtracted from theratio of BIF-insured deposits to total deposits ineach quarter of 1995 and subsequent years to yieldan adjusted BIF-insured deposit ratio. The adjustedratio for each holding company would be dividedby the standard deviation of adjusted ratios of BIFinsureddeposits for all holding companies for theentire period beginning with the first quarter of1995. The resulting value is compared with thevalue 1.65. If it exceeds 1.65, and assuming that theadjusted ratio is a normal random variable, therewould be less than a 5 percent chance that thechange in the BIF-insured deposit ratio is a randomevent. Holding companies for which the adjustedratio of BIF-insured deposits divided by thestandard deviation of adjusted ratios for all holdingcompanies after 1994 exceeded 1.65 would besubject to further scrutiny under the proposed rule.