[Federal Register Volume 73, Number 201 (Thursday, October 16, 2008)]
[Proposed Rules]
[Pages 61560-61597]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-24186]
[[Page 61559]]
-----------------------------------------------------------------------
Part V
Federal Deposit Insurance Corporation
-----------------------------------------------------------------------
12 CFR Part 327
Assessments; Proposed Rule; Establishment of FDIC Restoration Plan;
Notice
Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 /
Proposed Rules
[[Page 61560]]
-----------------------------------------------------------------------
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327
RIN 3064-AD35
Assessments
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Notice of proposed rulemaking and request for comment.
-----------------------------------------------------------------------
SUMMARY: The FDIC is proposing to amend 12 CFR part 327 to: Alter the
way in which it differentiates for risk in the risk-based assessment
system; revise deposit insurance assessment rates, including base
assessment rates; and make technical and other changes to the rules
governing the risk-based assessment system.
DATES: Comments must be received on or before November 17, 2008.
ADDRESSES: You may submit comments, identified by RIN number, by any of
the following methods:
Agency Web Site: http://www.fdic.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on
the Agency Web Site.
E-mail: [email protected]. Include the RIN number in the
subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
Hand Delivery/Courier: Guard station at the rear of the
550 17th Street Building (located on F Street) on business days between
7 a.m. and 5 p.m.
Instructions: All submissions received must include the agency name
and RIN for this rulemaking. All comments received will be posted
without change to http://www.fdic.gov/regulations/laws/federal/propose.html including any personal information provided.
FOR FURTHER INFORMATION CONTACT: Munsell W. St. Clair, Chief, Banking
and Regulatory Policy Section, Division of Insurance and Research,
(202) 898-8967; and Christopher Bellotto, Counsel, Legal Division,
(202) 898-3801.
SUPPLEMENTARY INFORMATION:
I. Background
The Reform Act
On February 8, 2006, the President signed the Federal Deposit
Insurance Reform Act of 2005 into law; on February 15, 2006, he signed
the Federal Deposit Insurance Reform Conforming Amendments Act of 2005
(collectively, the Reform Act).\1\ The Reform Act enacted the bulk of
the recommendations made by the FDIC in 2001.\2\ The Reform Act, among
other things, required that the FDIC, ``prescribe final regulations,
after notice and opportunity for comment * * * providing for
assessments under section 7(b) of the Federal Deposit Insurance Act, as
amended * * *,'' thus giving the FDIC, through its rulemaking
authority, the opportunity to better price deposit insurance for
risk.\3\
---------------------------------------------------------------------------
\1\ Federal Deposit Insurance Reform Act of 2005, Public Law
109-171, 120 Stat. 9; Federal Deposit Insurance Conforming
Amendments Act of 2005, Public Law 109-173, 119 Stat. 3601.
\2\ After a year long review of the deposit insurance system,
the FDIC made several recommendations to Congress to reform the
deposit insurance system. See http://www.fdic.gov/deposit/insurance/initiative/direcommendations.html for details.
\3\ Section 2109(a)(5) of the Reform Act. Section 7(b) of the
Federal Deposit Insurance Act (12 U.S.C. 1817(b)).
---------------------------------------------------------------------------
The Federal Deposit Insurance Act, as amended by the Reform Act,
continues to require that the assessment system be risk-based and
allows the FDIC to define risk broadly. It defines a risk-based system
as one based on an institution's probability of causing a loss to the
deposit insurance fund due to the composition and concentration of the
institution's assets and liabilities, the amount of loss given failure,
and revenue needs of the Deposit Insurance Fund (the fund or DIF).\4\
---------------------------------------------------------------------------
\4\ 12 Section 7(b)(1)(C) of the Federal Deposit Insurance Act
(12 U.S.C. 1817(b)(1)(C)). The Reform Act merged the former Bank
Insurance Fund and Savings Association Insurance Fund into the
Deposit Insurance Fund.
---------------------------------------------------------------------------
Before passage of the Reform Act, the deposit insurance funds'
target reserve ratio--the designated reserve ratio (DRR)--was generally
set at 1.25 percent. Under the Reform Act, however, the FDIC may set
the DRR within a range of 1.15 percent to 1.50 percent of estimated
insured deposits. If the reserve ratio drops below 1.15 percent--or if
the FDIC expects it to do so within six months--the FDIC must, within
90 days, establish and implement a plan to restore the DIF to 1.15
percent within five years (absent extraordinary circumstances).\5\
---------------------------------------------------------------------------
\5\ Section 7(b)(3)(E) of the Federal Deposit Insurance Act (12
U.S.C. 1817(b)(3)(E)).
---------------------------------------------------------------------------
The FDIC may restrict the use of assessment credits during any
period that a restoration plan is in effect. By statute, however,
institutions may apply credits towards any assessment imposed, for any
assessment period, in an amount equal to the lesser of (1) the amount
of the assessment, or (2) the amount equal to three basis points of the
institution's assessment base.\6\
---------------------------------------------------------------------------
\6\ Section 7(b)(3)(E)(iii) of the Federal Deposit Insurance Act
(12 U.S.C. 1817(b)(E)(iii)).
---------------------------------------------------------------------------
The Reform Act also restored to the FDIC's Board of Directors the
discretion to price deposit insurance according to risk for all insured
institutions regardless of the level of the fund reserve ratio.\7\
---------------------------------------------------------------------------
\7\ The Reform Act eliminated the prohibition against charging
well-managed and well-capitalized institutions when the deposit
insurance fund is at or above, and is expected to remain at or
above, the designated reserve ratio (DRR). This prohibition was
included as part of the Deposit Insurance Funds Act of 1996. Public
Law 104-208, 110 Stat. 3009, 3009-479. However, while the Reform Act
allows the DRR to be set between 1.15 percent and 1.50 percent, it
also generally requires dividends of one-half of any amount in the
fund in excess of the amount required to maintain the reserve ratio
at 1.35 percent when the insurance fund reserve ratio exceeds 1.35
percent at the end of any year. The Board can suspend these
dividends under certain circumstances. The Reform Act also requires
dividends of all of the amount in excess of the amount needed to
maintain the reserve ratio at 1.50 when the insurance fund reserve
ratio exceeds 1.50 percent at the end of any year. 12 U.S.C.
1817(e)(2).
---------------------------------------------------------------------------
The Reform Act left in place the existing statutory provision
allowing the FDIC to ``establish separate risk-based assessment systems
for large and small members of the Deposit Insurance Fund.'' \8\ Under
the Reform Act, however, separate systems are subject to a new
requirement that ``[n]o insured depository institution shall be barred
from the lowest-risk category solely because of size.'' \9\
---------------------------------------------------------------------------
\8\ Section 7(b)(1)(D) of the Federal Deposit Insurance Act (12
U.S.C. 1817(b)(1)(D)).
\9\ Section 2104(a)(2) of the Reform Act amending Section
7(b)(2)(D) of the Federal Deposit Insurance Act (12 U.S.C.
1817(b)(2)(D)).
---------------------------------------------------------------------------
The 2006 Assessments Rule
Overview
On November 30, 2006, the FDIC published in the Federal Register a
final rule on the risk-based assessment system (the 2006 assessments
rule).\10\ The rule became effective on January 1, 2007.
---------------------------------------------------------------------------
\10\ 71 FR 69282. The FDIC also adopted several other final
rules implementing the Reform Act, including a final rule on
operational changes to part 327. 71 FR 69270.
---------------------------------------------------------------------------
The 2006 assessments rule created four risk categories and named
them Risk Categories I, II, III and IV. These four categories are based
on two criteria: capital levels and supervisory ratings. Three capital
groups--well capitalized, adequately capitalized, and
undercapitalized--are based on the leverage ratio and risk-based
capital ratios for regulatory capital purposes. Three supervisory
groups, termed A, B, and C, are based upon the FDIC's consideration of
evaluations provided by the institution's primary federal
[[Page 61561]]
regulator and other information the FDIC deems relevant.\11\ Group A
consists of financially sound institutions with only a few minor
weaknesses; Group B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant
deterioration of the institution and increased risk of loss to the
insurance fund; and Group C consists of institutions that pose a
substantial probability of loss to the insurance fund unless effective
corrective action is taken.\12\ Under the 2006 assessments rule, an
institution's capital and supervisory groups determine its risk
category as set forth in Table 1 below. (Risk categories appear in
Roman numerals.)
---------------------------------------------------------------------------
\11\ The term ``primary federal regulator'' is synonymous with
the statutory term ``appropriate federal banking agency.'' Section
3(q) of the Federal Deposit Insurance Act (12 U.S.C. 1813(q)).
\12\ The capital groups and the supervisory groups have been in
effect since 1993. In practice, the supervisory group evaluations
are generally based on an institution's composite CAMELS rating, a
rating assigned by the institution's supervisor at the end of a bank
examination, with 1 being the best rating and 5 being the lowest.
CAMELS is an acronym for component ratings assigned in a bank
examination: Capital adequacy, Asset quality, Management, Earnings,
Liquidity, and Sensitivity to market risk. A composite CAMELS rating
combines these component ratings, which also range from 1 (best) to
5 (worst). Generally speaking, institutions with a CAMELS rating of
1 or 2 are put in supervisory group A, those with a CAMELS rating of
3 are put in group B, and those with a CAMELS rating of 4 or 5 are
put in group C.
Table 1--Determination of Risk Category
----------------------------------------------------------------------------------------------------------------
Supervisory group
Capital category -----------------------------------------------------------------------------
A B C
----------------------------------------------------------------------------------------------------------------
Well Capitalized.................. I
Adequately Capitalized............ II III
Undercapitalized.................. III IV
----------------------------------------------------------------------------------------------------------------
The 2006 assessments rule established the following base rate
schedule and allowed the FDIC Board to adjust rates uniformly from one
quarter to the next up to three basis points above or below the base
schedule, provided that no single change from one quarter to the next
can exceed three basis points.\13\ Base assessment rates within Risk
Category I vary from 2 to 4 basis points, as set forth in Table 2
below.
---------------------------------------------------------------------------
\13\ The Board cannot adjust rates more than 2 basis points
below the base rate schedule because rates cannot be less than zero.
Table 2--Current Base Assessment Rates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Risk category
------------------------------------------------------------------------------------
I*
---------------------------------- II III IV
Minimum Maximum
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points)..................................... 2 4 7 25 40
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Rates for institutions that do not pay the minimum or maximum rate vary between these rates.
The 2006 assessments rule set actual rates beginning January 1, 2007,
as set out in Table 3 below.
Table 3--Current Assessment Rates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Risk category
------------------------------------------------------------------------------------
I*
---------------------------------- II III IV
Minimum Maximum
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points)..................................... 5 7 10 28 43
--------------------------------------------------------------------------------------------------------------------------------------------------------
*Rates for institutions that do not pay the minimum or maximum rate vary between these rates.
These rates remain in effect. Any increase in rates above the actual
rates in effect requires a new notice-and-comment rulemaking.
Risk Category I
Within Risk Category I, the 2006 assessments rule charges those
institutions that pose the least risk a minimum assessment rate and
those that pose the greatest risk a maximum assessment rate two basis
points higher than the minimum rate. The rule charges other
institutions within Risk Category I a rate that varies incrementally by
institution between the minimum and maximum.
Within Risk Category I, the 2006 assessments rule combines
supervisory ratings with other risk measures to further differentiate
risk and determine assessment rates. The financial ratios method
determines the assessment rates for most institutions in Risk Category
I using a combination of weighted CAMELS component ratings and the
following financial ratios:
The Tier 1 Leverage Ratio;
Loans past due 30-89 days/gross assets;
Nonperforming assets/gross assets;
Net loan charge-offs/gross assets; and
[[Page 61562]]
Net income before taxes/risk-weighted assets.
The weighted CAMELS components and financial ratios are multiplied by
statistically derived pricing multipliers and the products, along with
a uniform amount applicable to all institutions subject to the
financial ratios method, are summed to derive the assessment rate under
the base rate schedule. If the rate derived is below the minimum for
Risk Category I, however, the institution will pay the minimum
assessment rate for the risk category; if the rate derived is above the
maximum rate for Risk Category I, then the institution will pay the
maximum rate for the risk category.
The multipliers and uniform amount were derived in such a way to
ensure that, as of June 30, 2006, 45 percent of small Risk Category I
institutions (other than institutions less than 5 years old) would have
been charged the minimum rate and approximately 5 percent would have
been charged the maximum rate. While the FDIC has not changed the
multipliers and uniform amount since adoption of the 2006 assessments
rule, the percentages of institutions that have been charged the
minimum and maximum rates have changed over time as institutions'
CAMELS component ratings and financial ratios have changed. Based upon
June 30, 2008 data, approximately 28 percent of small Risk Category I
institutions (other than institutions less than 5 years old) were
charged the minimum rate and approximately 19 percent were charged the
maximum rate.
The debt issuer rating method determines the assessment rate for
large institutions that have a long-term debt issuer rating.\14\ Long-
term debt issuer ratings are converted to numerical values between 1
and 3 and averaged. The weighted average of an institution's CAMELS
components and the average converted value of its long-term debt issuer
ratings are multiplied by a common multiplier and added to a uniform
amount applicable to all institutions subject to the supervisory and
debt ratings method to derive the assessment rate under the base rate
schedule. Again, if the rate derived is below the minimum for Risk
Category I, the institution will pay the minimum assessment rate for
the risk category; if the rate derived is above the maximum for Risk
Category I, then the institution will pay the maximum rate for the risk
category.
---------------------------------------------------------------------------
\14\ The final rule defined a large institution as an
institution (other than an insured branch of a foreign bank) that
has $10 billion or more in assets as of December 31, 2006 (although
an institution with at least $5 billion in assets may also request
treatment as a large institution). If, after December 31, 2006, an
institution classified as small reports assets of $10 billion or
more in its reports of condition for four consecutive quarters, the
FDIC will reclassify the institution as large beginning the
following quarter. If, after December 31, 2006, an institution
classified as large reports assets of less than $10 billion in its
reports of condition for four consecutive quarters, the FDIC will
reclassify the institution as small beginning the following quarter.
12 CFR 327.8(g) and (h) and 327.9(d)(6).
---------------------------------------------------------------------------
The multipliers and uniform amount were derived in such a way to
ensure that, as of June 30, 2006, about 45 percent of Risk Category I
large institutions (other than institutions less than 5 years old)
would have been charged the minimum rate and approximately 5 percent
would have been charged the maximum rate. These percentages have
changed little from quarter to quarter thereafter even though industry
conditions have changed. Based upon June 30, 2008, data, and ignoring
the large bank adjustment (described below), approximately 45 percent
of Risk Category I large institutions (other than institutions less
than 5 years old) were charged the minimum rate and approximately 11
percent were charged the maximum rate.
Assessment rates for insured branches of foreign banks in Risk
Category I are determined using ROCA components.\15\
---------------------------------------------------------------------------
\15\ ROCA stands for Risk Management, Operational Controls,
Compliance, and Asset Quality. Like CAMELS components, ROCA
component ratings range from 1 (best rating) to a 5 rating (worst
rating). Risk Category 1 insured branches of foreign banks generally
have a ROCA composite rating of 1 or 2 and component ratings ranging
from 1 to 3.
---------------------------------------------------------------------------
For any Risk Category I large institution or insured branch of a
foreign bank, initial assessment rate determinations may be modified up
to half a basis point upon review of additional relevant information
(the large bank adjustment).\16\
---------------------------------------------------------------------------
\16\ The FDIC has issued additional Guidelines for Large
Institutions and Insured Foreign Branches in Risk Category I (the
large bank guidelines) governing the large bank adjustment. 72 FR
27122 (May 14, 2007).
---------------------------------------------------------------------------
With certain exceptions, beginning in 2010, the 2006 assessments
rule charges new institutions (those established for less than five
years) in Risk Category I, regardless of size, the maximum rate
applicable to Risk Category I institutions. Until then, new
institutions are treated like all others, except that a well-
capitalized institution that has not yet received CAMELS component
ratings is assessed at one basis point above the minimum rate
applicable to Risk Category I institutions until it receives CAMELS
component ratings.
The Need for a Restoration Plan
As part of a separate rulemaking in November 2006, the FDIC also
set the DRR at 1.25 percent, effective January 1, 2007. In November
2007, the Board voted to maintain the DRR at 1.25 percent for 2008.\17\
In November 2006, the FDIC projected that the assessment rate schedule
established by the 2006 assessments rule would raise the reserve ratio
from 1.23 percent at the end of the second quarter of 2006 to 1.25
percent by 2009.\18\ At the time, insured institution failures were at
historic lows (no insured institution had failed in almost two-and-a-
half years prior to the rulemaking, the longest period in the FDIC's
history without a failure) and industry returns on assets (ROAs) were
near all time highs. The FDIC's projection assumed the continued
strength of the industry. By March 2008, the condition of the industry
had deteriorated, and FDIC projected higher insurance losses compared
to recent years. However, even with this increase in projected failures
and losses, the reserve ratio was still estimated to reach the Board's
target of 1.25 percent in 2009. Therefore, the Board voted in March
2008 to maintain the existing assessment rate schedule.
---------------------------------------------------------------------------
\17\ 71 FR 69325 (Nov. 30, 2006) and 72 FR 65576 (Nov. 21,
2007).
\18\ Beginning in 2007, assessment rates ranged between 5 and 43
cents per $100 in assessable deposits. When setting the rate
schedule, the FDIC projects future changes to the fund balance from
losses, operating expenses, assessment and investment revenue, as
well as the outlook for insured deposit growth. Since the final rule
was issued, the Board has opted to leave rates unchanged.
---------------------------------------------------------------------------
Recent failures, as well as deterioration in banking and economic
conditions, however, have significantly increased the fund's loss
provisions, resulting in a decline in the reserve ratio. As of June 30,
2008, the reserve ratio stood at 1.01 percent, 18 basis points below
the reserve ratio as of March 31, 2008. The FDIC expects a higher rate
of insured institution failures in the next few years compared to
recent years; thus, the reserve ratio may continue to decline. Because
the reserve ratio has fallen below 1.15 percent and is expected to
remain below 1.15 percent, the FDIC must establish and implement a
restoration plan to restore the reserve ratio to 1.15 percent. Absent
extraordinary circumstances, the reserve ratio must be restored to 1.15
percent within five years. The FDIC has adopted a restoration plan (the
Restoration Plan), the critical component of which is this notice of
proposed rulemaking (NPR).\19\ To fulfill
[[Page 61563]]
the requirements of the Restoration Plan, the FDIC must increase the
assessment rates it currently charges. Since the current rates are
already 3 basis points uniformly above the base rate schedule
established in the 2006 assessments rule, a new rulemaking is required.
The FDIC is also proposing other changes to the assessment system,
primarily to ensure that riskier institutions will bear a greater share
of the proposed increase in assessments.
---------------------------------------------------------------------------
\19\ On October 7, 2008, the FDIC established and implemented
the Restoration Plan, which is being published in the Federal
Register as a companion to this NPR. To determine whether the
reserve ratio has returned to the statutory range within five years,
the FDIC will rely on the December 31, 2013 reserve ratio, which is
the first date after October 7, 2013 for which the reserve ratio
will be known.
---------------------------------------------------------------------------
II. Overview of the Proposal
In this notice of proposed rulemaking, the FDIC proposes to improve
the way the assessment system differentiates risk among insured
institutions by drawing upon measures of risk that were not included
when the FDIC first revised its assessment system pursuant to the
Reform Act. The FDIC believes that the proposal will make the
assessment system more sensitive to risk. The proposal should also make
the risk-based assessment system fairer, by limiting the subsidization
of riskier institutions by safer ones. In addition, the FDIC proposes
to change assessment rates, including base assessment rates, to raise
assessment revenue required under the Restoration Plan.
The FDIC's proposals are set out in detail in ensuing sections, but
are briefly summarized here. These changes, except for the proposed
rate increase for the first quarter of 2009, which is discussed below,
would take effect April 1, 2009.
Risk Category I
The FDIC proposes to introduce a new financial ratio into the
financial ratios method. This new ratio would capture brokered deposits
(in excess of 10 percent of domestic deposits) that are used to fund
rapid asset growth. In addition, the FDIC proposes to update the
uniform amount and the pricing multipliers for the weighted average
CAMELS rating and financial ratios.
The FDIC proposes that the assessment rate for a large institution
with a long-term debt issuer rating be determined using a combination
of the institution's weighted average CAMELS component rating, its
long-term debt issuer ratings (converted to numbers and averaged) and
the financial ratios method assessment rate, each equally weighted. The
new method would be known as the large bank method.
Under the proposal, the financial ratios method or the large bank
method, whichever is applicable, would determine a Risk Category I
institution's initial base assessment rate. The FDIC proposes to
broaden the spread between minimum and maximum initial base assessment
rates in Risk Category I from the current 2 basis points to an initial
range of 4 basis points and to adjust the percentage of institutions
subject to these initial minimum and maximum rates.
Adjustments
Under the proposal, an institution's total base assessment rate
could vary from the initial base rate as the result of possible
adjustments. The FDIC proposes to increase the maximum possible Risk
Category I large bank adjustment from one-half basis point to one basis
point. Any such adjustment up or down would be made before any other
adjustment and would be subject to certain limits, which are described
in detail below.
The FDIC proposes to lower an institution's base assessment rate
based upon its ratio of long-term unsecured debt and, for small
institutions, certain amounts of Tier 1 capital to domestic deposits
(the unsecured debt adjustment).\20\ Any decrease in base assessment
rates would be limited to two basis points.
---------------------------------------------------------------------------
\20\ Long-term unsecured debt includes senior unsecured and
subordinated debt.
---------------------------------------------------------------------------
The FDIC proposes to raise an institution's base assessment rate
based upon its ratio of secured liabilities to domestic deposits (the
secured liability adjustment). An institution's ratio of secured
liabilities to domestic deposits (if greater than 15 percent), would
increase its assessment rate, but the resulting base assessment rate
after any such increase could be no more than 50 percent greater than
it was before the adjustment. The secured liability adjustment would be
made after any large bank adjustment or unsecured debt adjustment.
An institution in Risk Category II, III or IV would be subject to
the unsecured debt adjustment and secured liability adjustment. In
addition, the FDIC proposes a final adjustment for brokered deposits
(the brokered deposit adjustment) for institutions in these risk
categories. An institution's ratio of brokered deposits to domestic
deposits (if greater than 10 percent) would increase its assessment
rate, but any increase would be limited to no more than 10 basis
points.
Insured Branches of Foreign Banks
The FDIC proposes to make conforming changes to the pricing
multipliers and uniform amount for insured branches of foreign banks in
Risk Category I. The insured branch of a foreign bank's initial base
assessment rate would be subject to any large bank adjustment, but not
to the unsecured debt adjustment or secured liability adjustment.
New Institutions
The FDIC also proposes to make conforming changes in the treatment
of new insured depository institutions.\21\ For assessment periods
beginning on or after January 1, 2010, any new institutions in Risk
Category I would be assessed at the maximum initial base assessment
rate applicable to Risk Category I institutions, as under the current
rule.
---------------------------------------------------------------------------
\21\ Subject to exceptions, a new insured depository institution
is a bank or thrift that has not been chartered for at least five
years as of the last day of any quarter for which it is being
assessed. 12 CFR 327.8(l)
---------------------------------------------------------------------------
Effective for assessment periods beginning before January 1, 2010,
until a Risk Category I new institution received CAMELS component
ratings, it would have an initial base assessment rate that was two
basis points above the minimum initial base assessment rate applicable
to Risk Category I institutions, rather than one basis point above the
minimum rate, as under the current rule. All other new institutions in
Risk Category I would be treated as are established institutions,
except as provided in the next paragraph.
Either before or after January 1, 2010: No new institution,
regardless of risk category, would be subject to the unsecured debt
adjustment; any new institution, regardless of risk category, would be
subject to the secured liability adjustment; and a new institution in
Risk Categories II, III or IV would be subject to the brokered deposit
adjustment. After January 1, 2010, no new institution in Risk Category
I would be subject to the large bank adjustment.
Assessment Rates
To implement the proposed changes to risk-based assessments
described above and to raise sufficient revenue to ensure that the
goals of the Restoration Plan are accomplished within 5 years as
required by statute, initial base assessment rates would be as set
forth in Table 4 below.
[[Page 61564]]
Table 4--Proposed Initial Base Assessment Rates
----------------------------------------------------------------------------------------------------------------
Risk category
---------------------------------------------------------------
I*
---------------------------- II III IV
Minimum Maximum
----------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points).................. 10 14 20 30 45
----------------------------------------------------------------------------------------------------------------
* Initial base rates that were not the minimum or maximum rate would vary between these rates.
After applying all possible adjustments, minimum and maximum total
base assessment rates for each risk category would be as set out in
Table 5 below.
Table 5--Total Base Assessment Rates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Risk category I Risk category II Risk category III Risk category IV
--------------------------------------------------------------------------------------------------------------------------------------------------------
Initial base assessment rate........ 10-14...................... 20......................... 30......................... 45
Unsecured debt adjustment........... -2-0....................... -2-0....................... -2-0....................... -2-0
Secured liability adjustment........ 0-7........................ 0-10....................... 0-15....................... 0-22.5
Brokered deposit adjustment......... ........................... 0-10....................... 0-10....................... 0-10
-------------------------------------------------------------------------------------------------------------------
Total base assessment rate...... 8-21.0..................... 18-40.0.................... 28-55.0.................... 43-77.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Total base rates that were not the minimum or maximum rate would vary between these
rates.
The FDIC proposes that these rates and other revisions to the
assessment rules take effect for the quarter beginning April 1, 2009,
and be reflected in the fund balance as of June 30, 2009, and
assessments due September 30, 2009. However, at the time of the
issuance of the final rule the FDIC may need to set a higher base rate
schedule based on information available at that time, including any
intervening institution failures and updated failure and loss
projections. A higher base rate schedule may also be necessary because
of changes to the proposal in the final rule, if these changes have the
overall effect of changing revenue for a given rate schedule.
The proposed rule would continue to allow the FDIC Board to adopt
actual rates that were higher or lower than total base assessment rates
without the necessity of further notice and comment rulemaking,
provided that: (1) The Board could not increase or decrease rates from
one quarter to the next by more than three basis points without further
notice-and-comment rulemaking; and (2) cumulative increases and
decreases could not be more than three basis points higher or lower
than the total base rates without further notice-and-comment
rulemaking.
The FDIC also proposes to raise the current rates uniformly by
seven basis points for the assessment for the quarter beginning January
1, 2009, which would be reflected in the fund balance as of March 31,
2009, and assessments due June 30, 2009. Rates for the first quarter of
2009 only would be as follows:
Table 6--Proposed Assessment Rates for the First Quarter of 2009
----------------------------------------------------------------------------------------------------------------
Risk category
---------------------------------------------------------------
I\*\
---------------------------- II III IV
Minimum Maximum
----------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points).................. 12 14 17 35 50
----------------------------------------------------------------------------------------------------------------
\*\Rates for institutions that did not pay the minimum or maximum rate would vary between these rates.
The proposed rates for the first quarter of 2009 would raise almost as
much assessment revenue as under the rates proposed beginning April 1,
2009. Data and system requirements do not make it feasible to adopt the
proposed changes to the risk-based assessment system discussed in
previous paragraphs until the second quarter of 2009.
Technical and Other Changes
The FDIC also proposes to make technical changes and one minor non-
technical change to existing assessment rules. These changes, which
would be effective April 1, 2009, are detailed below.
III. Risk Category I: Financial Ratios Method
Brokered Deposits and Asset Growth
The FDIC stated in the 2006 assessments rule that it:
[M]ay conclude that additional or alternative financial
measures, ratios or other risk factors should be used to determine
risk-based assessments or that a new method of differentiating for
risk should be used. In any of these events, changes would be made
through notice-and-comment rulemaking.\22\
---------------------------------------------------------------------------
\22\ 71 FR 69,282, 69,290.
The FDIC has reached such a conclusion and proposes to add a new
financial measure to the financial ratios method. This new financial
measure, the adjusted brokered deposit ratio, would measure the extent
to which
[[Page 61565]]
brokered deposits are funding rapid asset growth. The adjusted brokered
deposit ratio would affect only those established Risk Category I
institutions whose total assets were more than 20 percent greater than
they had been four years previously, after adjusting for mergers and
acquisitions, and whose brokered deposits made up more than 10 percent
of domestic deposits.23 24 Generally speaking, the greater
an institution's asset growth and the greater its percentage of
brokered deposits, the greater would be the increase in its initial
base assessment rate.
---------------------------------------------------------------------------
\23\ Generally, an established institution is a bank or thrift
that has been chartered for at least five years as of the last day
of any quarter for which it is being assessed. 12 CFR 327.8(m).
\24\ An institution that four years previously had filed no
report of condition or had reported no assets would be treated as
having no growth unless it was a participant in a merger or
acquisition (either as the acquiring or acquired institution) with
an institution that had reported assets four years previously.
---------------------------------------------------------------------------
If an institution's ratio of brokered deposits to domestic deposits
were 10 percent or less or if the institution's asset growth over the
previous four years were less than 20 percent, the adjusted brokered
deposit ratio would be zero and would have no effect on the
institution's assessment rate. If an institution's ratio of brokered
deposits to domestic deposits exceeded 10 percent and its asset growth
over the previous four years were more than 40 percent, the adjusted
brokered deposit ratio would equal the institution's ratio of brokered
deposits to domestic deposits less the 10 percent threshold. If an
institution's ratio of brokered deposits to domestic deposits exceeded
10 percent but its asset growth over the previous four years were
between 20 percent and 40 percent, the adjusted brokered deposit ratio
would be equal to a gradually increasing fraction of the ratio of
brokered deposits to domestic deposits (minus the 10 percent
threshold), so that small increases in asset growth rates would lead to
only small increases in assessment rates. Overall asset growth rates of
20 to 40 percent would be transformed into a fraction between 0 and 1
by multiplying an amount equal to the overall rate of growth minus 20
percent by 5 and expressing the result as a number rather than as a
percentage (so that, for example, 5 times 10 percent would equal
0.500).\25\ The adjusted brokered deposit ratio would never be less
than zero. Appendix A contains a detailed mathematical definition of
the ratio. Table 7 gives examples of how the adjusted brokered deposit
ratio would be determined.
---------------------------------------------------------------------------
\25\ The ratio of brokered deposits to domestic deposits and
four-year asset growth rate would remain unrounded (to the extent of
computer capabilities) when calculating the adjusted brokered
deposit ratio. The adjusted brokered deposit ratio itself (expressed
as a percentage) would be rounded to three digits after the decimal
point prior to being used to calculate the assessment rate.
Table 7--Adjusted Brokered Deposit Ratio
--------------------------------------------------------------------------------------------------------------------------------------------------------
A B C D E F
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ratio of brokered
deposits to domestic Adjusted brokered
Ratio of brokered deposits minus 10 Cumulative asset Asset growth rate deposit ratio
Example deposits to percent threshold growth rate over factor (Column C times
domestic deposits (Column B minus 10 four years column E)
percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1......................................... 5.0% 0.0% 5.0% .................... 0.0%
2......................................... 15.0% 5.0% 5.0% .................... 0.0%
3......................................... 5.0% 0.0% 25.0% 0.250 0.0%
4......................................... 35.0% 25.0% 30.0% 0.500 12.5%
5......................................... 25.0% 15.0% 50.0% 1.000 15.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
In Examples 1, 2 and 3, either the institution has a ratio of
brokered deposits to domestic deposits that is less than 10 percent
(Column B) or its four-year asset growth rate is less than 20 percent
(Column D). Consequently, the adjusted brokered deposit ratio is zero
(Column F). In Example 4, the institution has a ratio of brokered
deposits to domestic deposits of 35 percent (Column B), which, after
subtracting the 10 percent threshold, leaves 25 percent (Column C). Its
assets are 30 percent greater than they were four years previously
(Column D), so the fraction applied to obtain the adjusted brokered
deposit ratio is 0.5 (Column E) (calculated as 5 [middot] (30 percent-
20 percent, with the result expressed as a number rather than as a
percentage)). Its adjusted brokered deposit ratio is, therefore, 12.5
percent (Column F) (which is 0.5 times 25 percent). In Example 5, the
institution has a lower ratio of brokered deposits to domestic deposits
(25 percent in Column B) than in Example 4 (35 percent). However, its
adjusted brokered deposit ratio (15 percent in Column F) is larger than
in Example 4 (12.5 percent) because its assets are more than 40 percent
greater than they were four years previously (Column D). Therefore, its
adjusted brokered deposit ratio is equal to its brokered deposit to
domestic deposit ratio of 25 percent minus the 10 percent threshold
(Column F).
The FDIC is proposing this new risk measure for a couple of
reasons. A number of costly institution failures, including some recent
failures, have experienced rapid asset growth before failure and have
funded this growth through brokered deposits. Moreover, statistical
analysis reveals a significant correlation between rapid asset growth
funded by brokered deposits and the probability of an institution's
being downgraded from a CAMELS composite 1 or 2 rating to a CAMELS
composite 3, 4 or 5 rating within a year. A significant correlation is
the standard the FDIC used when it adopted the financial ratios method
in the 2006 assessments rule.
The proposed rule would adopt the definition of brokered deposit in
Section 29 of the Federal Deposit Insurance Act (12 U.S.C. 1831f),
which is the definition used in banks' quarterly Reports of Condition
and Income (Call Reports) and thrifts' quarterly Thrift Financial
Reports (TFRs). The FDIC is proposing that all brokered deposits be
included in an institution's ratio of brokered deposits to domestic
deposits used to determine its adjusted brokered deposit ratio,
including brokered deposits that consist of balances swept into an
insured institution by another institution, such as balances swept from
a brokerage account. At present, it would be impossible to exclude
these deposits, since institutions do not separately report them in the
Call
[[Page 61566]]
Report or TFR. Moreover, sweep programs may be structured so that swept
balances are not brokered deposits.\26\ Nevertheless, the FDIC is
particularly interested in comments on whether brokered deposits that
consist of swept balances should be excluded from the ratio and, if so,
how they should be excluded.
---------------------------------------------------------------------------
\26\ For example, a swept deposit may not be a brokered deposit
if: (1) Balances are swept for the primary purposes of facilitating
customers' purchase and sale of securities, rather than the
placement of funds with depository institutions; (2) swept amounts
do not exceed 10 percent of the brokerage's cash management account
and retirement account assets; and (3) fees are paid on a per
customer or account basis, rather than size of account basis, and
are for administrative services, rather than for placement of
deposits. Are Funds Held in ``Cash Management Accounts'' Viewed as
Brokered Deposits by the FDIC? (FDIC Advisory Opinion 05-02 Feb. 3,
2005).
---------------------------------------------------------------------------
The proposed definition of brokered deposits would also include
amounts an institution receives through a network that divides large
deposits and places them at more than one institution to ensure that
the deposit is fully insured, even where the institution accepts these
deposits only on a reciprocal basis, such that, for any deposit
received, the institution places the same amount (but held by a
different depositor) with another institution through the network. At
present, it would again be impossible to exclude these deposits, since
institutions do not separately report them in the Call Report or TFR.
The FDIC is also particularly interested in comments on whether these
deposits should be excluded from the ratio and, if so, how they should
be excluded.
The proposed definition would exclude amounts not defined as a
brokered deposit by statute. Thus, many high cost deposits would be
excluded from the definition, potentially including those received
through listing services or the Internet. At present, it would be
impossible to include these deposits, since institutions do not
separately report them in the Call Report or TFR. Nevertheless, the
FDIC is particularly interested in comments on whether these deposits
should be included in the definition of brokered deposits for purposes
of the adjusted brokered deposit ratio and, if so, how they should be
included.
Pricing Multipliers and the Uniform Amount
The FDIC also proposes to recalculate the uniform amount and the
pricing multipliers for the weighted average CAMELS component rating
and financial ratios. The existing uniform amount and pricing
multipliers were derived from a statistical estimate of the probability
that an institution will be downgraded to CAMELS 3, 4 or 5 at its next
examination using data from the end of the years 1984 to 2004.\27\
These probabilities were then converted to pricing multipliers for each
risk measure. The proposed new pricing multipliers were derived using
essentially the same statistical techniques, but based upon data from
the end of the years 1988 to 2006.\28\ The proposed new pricing
multipliers are set out in Table 8 below.
---------------------------------------------------------------------------
\27\ Data on downgrades to CAMELS 3, 4 or 5 is from the years
1985 to 2005. The ``S'' component rating was first assigned in 1997.
Because the statistical analysis relies on data from before 1997,
the ``S'' component rating was excluded from the analysis.
\28\ For the adjusted brokered deposit ratio, assets at the end
of each year are compared to assets at the end of the year four
years earlier, so assets at the end of 1988, for example, are
compared to assets at the end of 1984.
Table 8--Proposed New Pricing Multipliers
------------------------------------------------------------------------
Pricing
Risk measures* multipliers**
------------------------------------------------------------------------
Tier 1 Leverage Ratio.................................... (0.056)
Loans Past Due 30--89 Days/Gross Assets.................. 0.576
Nonperforming Assets/Gross Assets........................ 1.073
Net Loan Charge-Offs/Gross Assets........................ 1.213
Net Income before Taxes/Risk-Weighted Assets............. (0.762)
Adjusted Brokered Deposit Ratio.......................... 0.055
Weighted Average CAMELS Component Rating................. 1.088
------------------------------------------------------------------------
* Ratios are expressed as percentages.
** Multipliers are rounded to three decimal places.
To determine an institution's initial assessment rate under the
base assessment rate schedule, each of these risk measures (that is,
each institution's financial measures and weighted average CAMELS
component rating) would continue to be multiplied by the corresponding
pricing multipliers. The sum of these products would be added to (or
subtracted from) a new uniform amount, 9.872.\29\ The new uniform
amount is also derived from the same statistical analysis.\30\ As at
present, no initial base assessment rate within Risk Category I would
be less than the minimum initial base assessment rate applicable to the
category or higher than the initial base maximum assessment rate
applicable to the category. The proposed rule would set the initial
minimum base assessment rate for Risk Category I at 10 basis points and
the maximum initial base assessment rate for Risk Category I at 14
basis points.
---------------------------------------------------------------------------
\29\ Appendix A provides the derivation of the pricing
multipliers and the uniform amount to be added to compute an
assessment rate. The rate derived will be an annual rate, but will
be determined every quarter.
\30\ The uniform amount would be the same for all institutions
in Risk Category I (other than large institutions that have long-
term debt issuer ratings, insured branches of foreign banks and,
beginning in 2010, new institutions).
---------------------------------------------------------------------------
To compute the values of the uniform amount and pricing multipliers
shown above, the FDIC chose cutoff values for the predicted
probabilities of downgrade such that, using June 30, 2008 Call Report
and TFR data: (1) 25 percent of small institutions in Risk Category I
(other than institutions less than 5 years old) would have been charged
the minimum initial assessment rate; and (2) 15 percent of small
institutions in Risk Category I (other than institutions less than 5
years old) would have been charged the maximum initial assessment
rate.\31\ These cutoff values would be used in future periods, which
could lead to different percentages of institutions being charged the
minimum and maximum rates.
---------------------------------------------------------------------------
\31\ The cutoff value for the minimum assessment rate is a
predicted probability of downgrade of approximately 2 percent. The
cutoff value for the maximum assessment rate is approximately 15
percent.
---------------------------------------------------------------------------
In comparison, under the current system: (1) Approximately 28
percent of small institutions in Risk Category I (other than
institutions less than 5 years old) were charged the existing minimum
assessment rate; and (2) approximately 19 percent of small institutions
in Risk Category I (other than institutions less than 5 years old) were
charged the existing maximum assessment rate based on June 30, 2008
data.
Table 9 gives initial base assessment rates for three institutions
with varying characteristics, assuming the proposed new pricing
multipliers given above, using initial base assessment rates for
institutions in Risk Category I of 10 basis points to 14 basis
points.\32\
---------------------------------------------------------------------------
\32\ These are the initial base rates for Risk Category I
proposed below.
[[Page 61567]]
Table 9--Initial Base Assessment Rates for Three Institutions *
--------------------------------------------------------------------------------------------------------------------------------------------------------
Institution 1 Institution 2 Institution 3
--------------------------------------------------------------------------------
Pricing Contribution Contribution Contribution
multiplier Risk to Risk to Risk to
measure assessment measure assessment measure assessment
value rate value rate value rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
A B C D E F G H
--------------------------------------------------------------------------------------------------------------------------------------------------------
Uniform Amount............................................ 9.872 ........... 9.872 ........... 9.872 ........... 9.872
Tier 1 Leverage Ratio (%)................................. (0.056) 9.590 (0.537) 8.570 (0.480) 7.500 (0.420)
Loans Past Due 30-89 Days/Gross Assets (%)................ 0.576 0.400 0.230 0.600 0.345 1.000 0.576
Nonperforming Loans/Gross Assets (%)...................... 1.073 0.200 0.215 0.400 0.429 1.500 1.610
Net Loan Charge-Offs/Gross Assets(%)...................... 1.213 0.147 0.178 0.079 0.096 0.300 0.364
Net Income Before Taxes/Risk-Weighted Assets (%).......... (0.762) 2.500 (1.905) 1.951 (1.487) 0.518 (0.395)
Adjusted Brokered Deposit Ratio (%)....................... 0.055 0.000 0.000 12.827 0.705 24.355 1.340
Weighted Average CAMELS Component Ratings................. 1.088 1.200 1.306 1.450 1.578 2.100 2.285
Sum of contributions...................................... ........... ........... 9.36 ........... 11.06 ........... 15.23
Initial Base Assessment Rate.............................. ........... ........... 10.00 ........... 11.06 ........... 14.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Figures may not multiply or add to totals due to rounding.\33\
The initial base assessment rate for an institution in the table is
calculated by multiplying the pricing multipliers (Column B) by the
risk measure values (Column C, E or G) to produce each measure's
contribution to the assessment rate. The sum of the products (Column D,
F or H) plus the uniform amount (the first item in Column D, F and H)
yields the initial base assessment rate. For Institution 1 in the
table, this sum actually equals 9.36 basis points, but the table
reflects the proposed initial base minimum assessment rate of 10 basis
points. For Institution 3 in the table, the sum actually equals 15.23
basis points, but the table reflects the proposed initial base maximum
assessment rate of 14 basis points.
---------------------------------------------------------------------------
\33\ Under the proposed rule, pricing multipliers, the uniform
amount, and financial ratios would continue to be rounded to three
digits after the decimal point. Resulting assessment rates would be
rounded to the nearest one-hundredth (1/100th) of a basis point.
---------------------------------------------------------------------------
Under the proposed rule, the FDIC would continue to have the
flexibility to update the pricing multipliers and the uniform amount
annually, without further notice-and-comment rulemaking. In particular,
the FDIC would be able to add data from each new year to its analysis
and could, from time to time, exclude some earlier years from its
analysis. Because the analysis would continue to use many earlier
years' data as well, pricing multiplier changes from year to year
should usually be relatively small.
On the other hand, as a result of the annual review and analysis,
the FDIC may conclude, as it has in the proposed rule, that additional
or alternative financial measures, ratios or other risk factors should
be used to determine risk-based assessments or that a new method of
differentiating for risk should be used. In any of these events, the
FDIC would again make changes through notice-and-comment rulemaking.
Financial measures for any given quarter would continue to be
calculated from the report of condition filed by each institution as of
the last day of the quarter.\34\ CAMELS component rating changes would
continue to be effective as of the date that the rating change is
transmitted to the institution for purposes of determining assessment
rates for all institutions in Risk Category I.\35\
---------------------------------------------------------------------------
\34\ Reports of condition include Reports of Income and
Condition and Thrift Financial Reports.
\35\ Pursuant to existing supervisory practice, the FDIC does
not assign a different component rating from that assigned by an
institution's primary federal regulator, even if the FDIC disagrees
with a CAMELS component rating assigned by an institution's primary
federal regulator, unless: (1) the disagreement over the component
rating also involves a disagreement over a CAMELS composite rating;
and (2) the disagreement over the CAMELS composite rating is not a
disagreement over whether the CAMELS composite rating should be a 1
or a 2. The FDIC has no plans to alter this practice.
---------------------------------------------------------------------------
IV. Risk Category I: Large Bank Method
For large Risk Category I institutions now subject to the debt
issuer rating method, the FDIC proposes to derive assessment rates from
the financial ratios method as well as long-term debt issuer ratings
and CAMELS component ratings. The new method would be known as the
large bank method. The rate using the financial ratios method would
first be converted from the range of initial base rates (10 to 14 basis
points) to a scale from 1 to 3 (financial ratios score).\36\ The
financial ratios score would be given a 33\1/3\ percent weight in
determining the large bank method assessment rate, as would both the
weighted average CAMELS component rating and debt-agency ratings.
---------------------------------------------------------------------------
\36\ The assessment rate computed using the financial ratios
method would be converted to a financial ratios score by first
subtracting 8 from the financial ratios method assessment rate and
then multiplying the result by one-half. For example, if an
institution had an initial base assessment rate of 11, 8 would be
subtracted from 11 and the result would be multiplied by one-half to
produce a financial ratios score of 1.5.
---------------------------------------------------------------------------
The weights of the CAMELS components would remain the same as in
the current rule. The values assigned to the debt issuer ratings would
also remain the same. The weighted CAMELS components and debt issuer
ratings would continue to be converted to a scale from 1 to 3, as they
are currently.
The initial base assessment rate under the large bank method would
be derived as follows: (1) An assessment rate computed using the
financial ratios method would be converted to a financial ratios score;
(2) the weighted average CAMELS rating, converted long-term debt issuer
ratings, and the financial ratios score would each be multiplied by a
pricing multiplier and the products summed; and (3) a uniform amount
would be added to the result. The resulting initial base assessment
rate would be subject to a minimum and a maximum assessment rate. The
pricing multiplier for the weighted average CAMELS ratings, converted
long-term debt issuer rating and financial ratios score would be 1.764,
[[Page 61568]]
and the uniform amount would be 1.651.\37\
---------------------------------------------------------------------------
\37\ Appendix 1 provides the derivation of the pricing
multipliers and the uniform amount.
---------------------------------------------------------------------------
In recent periods, assessment rates for some large institutions
have not responded in a timely manner to rapid changes in these
institutions' financial conditions. Based on June 30, 2008 data and
ignoring large bank adjustments, under the current system: (1) 45
percent of large institutions in Risk Category I (other than
institutions less than 5 years old) would have been charged the
existing minimum assessment rate, compared with 28 percent of small
institutions; and (2) 11 percent of large institutions in Risk Category
I (other than institutions less than 5 years old) would have been
charged the existing maximum assessment rate, compared with 19 percent
of small institutions. The FDIC's proposed values for pricing
multipliers and the uniform amount are such that, using June 30, 2008
data, the percentages of large institutions in Risk Category I (other
than new institutions less than 5 years old) that would have been
charged the minimum and maximum initial base assessment rates would be
the same as the percentages of small institutions that would have been
charged these rates (25 percent at the minimum rate and 15 percent at
the maximum rate).38 39 These cutoff values would be used in
future periods, which could lead to different percentages of
institutions being charged the minimum and maximum rates.
---------------------------------------------------------------------------
\38\ The cutoff value for the minimum assessment rate is an
average score of approximately 1.578. The cutoff value for the
maximum assessment rate is approximately 2.334.
\39\ A ``new'' institution, as defined in 12 CFR 327.8(l) is
generally one that is less than 5 years old, but there are several
exceptions, including, for example, certain otherwise new
institutions in certain holding company structures. 12 CFR
327.9(d)(7). The calculation of percentages of small institutions,
however, was determined strictly by excluding institutions less than
5 years old, rather than by using the definition of a ``new''
institution and its regulatory exceptions, since determination of
whether an institution meets an exception to the definition of
``new'' requires a case-by-case investigation.
---------------------------------------------------------------------------
Large institutions that lack a long-term debt issuer rating are
currently assessed using the financial ratios method by itself. This
will continue under the proposed rule.
Under the proposed rule, the initial base assessment rate for an
institution with a weighted average CAMELS converted value of 1.70, a
debt issuer ratings converted value of 1.65 and a financial ratios
method assessment rate of 11.50 basis points would be computed as
follows:
The financial ratios method assessment rate less 8 basis
points would be multiplied by one-half (calculated as (11.5 basis
points - 8 basis points) [middot] 0.5) to produce a financial ratios
score of 1.75.
The weighted average CAMELS score, debt ratings score and
financial ratios score would each be multiplied by 1.764 and summed
(calculated as 1.70 [middot] 1.764 + 1.65 [middot] 1.764 + 1.75
[middot] 1.764) to produce 8.996.
A uniform amount of 1.651 would be added, resulting in an
initial base assessment rate of 10.65 basis points.
The FDIC anticipates that incorporating the financial ratios score
into the large bank method assessment rate would result in a more
accurate distribution of initial assessment rates and in timelier
assessment rate responses to changing risk profiles, while retaining
the market and supervisory perspectives that debt and CAMELS ratings
provide. A more accurate distribution of initial assessment rates
should require fewer large bank adjustments to rates based upon reviews
of additional relevant information.\40\
---------------------------------------------------------------------------
\40\ The FDIC has issued additional Guidelines for Large
Institutions and Insured Foreign Branches in Risk Category I (the
large bank guidelines) governing these large bank adjustments. 72 FR
27122 (May 14, 2007).
---------------------------------------------------------------------------
V. Adjustment for Large Institutions and Insured Branches of Foreign
Banks in Risk Category I
Under current rules, within Risk Category I, large institutions and
insured branches of foreign banks are subject to an assessment rate
adjustment (the large bank adjustment). In determining whether to make
such an adjustment for a large institution or an insured branch of a
foreign bank, the FDIC may consider such information as financial
performance and condition information, other market or supervisory
information, potential loss severity, and stress considerations. Any
large bank adjustment is limited to a change in assessment rate of up
to 0.5 basis points higher or lower than the rate determined using the
supervisory ratings and financial ratios method, the supervisory and
debt ratings method, or the weighted average ROCA component rating
method, whichever is applicable. Adjustments are meant to preserve
consistency in the orderings of risk indicated by assessment rates, to
ensure fairness among all large institutions, and to ensure that
assessment rates take into account all available information that is
relevant to the FDIC's risk-based assessment decision.
The FDIC proposes to increase the maximum possible large bank
adjustment to one basis point and to make the adjustment to an
institution's base assessment rate before any other adjustments are
made. The adjustment could not: (1) Decrease any rate so that the
resulting rate would be less than the minimum initial base assessment
rate; or (2) increase any rate above the maximum initial base
assessment rate.
The FDIC makes this proposal for two primary reasons. First, at
present, the difference between the minimum and maximum base assessment
rates in Risk Category I is two basis points. The maximum one-half
basis point large bank adjustment represents 25 percent of the
difference between the minimum and maximum rates. While an adjustment
of this size is generally sufficient to preserve consistency in the
orderings of risk indicated by assessment rates and to ensure fairness,
there have been circumstances where more than a half a basis point
adjustment would have been warranted. The difference between the
minimum and maximum base assessment rates would increase from two basis
points under the current system to four basis points under the
proposal. A half basis point large bank adjustment would represent only
12.5 percent of the difference between the minimum and maximum rates
and would not be sufficient to preserve consistency in the orderings of
risk indicated by assessment rates or to ensure fairness. The proposed
increase in the maximum possible large bank adjustment would continue
to represent 25 percent of the difference between the minimum and
maximum rates.
The FDIC expects that, under the proposed rule, large bank
adjustments would be made infrequently and for a limited number of
institutions.\41\ The FDIC's view is that the use of supervisory
ratings, financial ratios and agency ratings (when available) would
sufficiently reflect the risk profile and rank orderings of risk in
large Risk Category I institutions in most (but not all) cases.
---------------------------------------------------------------------------
\41\ In the six quarters since the 2006 assessment rule went
into effect, the total number of adjustments in any one quarter has
ranged from 2 to 13. For the second quarter of 2008, the FDIC
continued or implemented assessment rate adjustments for 13 large
Risk Category I institutions, 12 to increase an institution's
assessment rate, and 1 to decrease an institution's assessment rate.
Additionally, the FDIC sent four institutions advance notification
of a potential upward adjustment in their assessment rate.
---------------------------------------------------------------------------
The FDIC expects to revise its large bank guidelines. Until then,
the guidelines would be applied taking into account the changes
resulting from this rulemaking.
[[Page 61569]]
VI. Adjustment for Unsecured Debt for all Risk Categories
The FDIC proposes to lower an institution's initial base assessment
rate (after making any large bank adjustment) using its ratio of long-
term unsecured debt (and, for small institutions, certain amounts of
Tier 1 capital) to domestic deposits.\42\ Any decrease in base
assessment rates as a result of this unsecured debt adjustment would be
limited to two basis points.
---------------------------------------------------------------------------
\42\ For this purpose, an institution would be ``small'' if it
met the definition of a small institution in 12 CFR 327.8(g)--
generally, an institution with less than $10 billion in assets--
except that it would not include an institution that would otherwise
meet the definition for which the FDIC had granted a request to be
treated as a large institution pursuant to 12 CFR 327.9(d)(6).
---------------------------------------------------------------------------
For a large institution, the unsecured debt adjustment would be
determined by multiplying the institution's long-term unsecured debt as
a percentage of domestic deposits by 20 basis points. For example, a
large institution with a long-term unsecured debt to domestic deposits
ratio of 3.0 percent would see its initial base assessment rate reduced
by 0.60 basis points (calculated as 20 basis points [middot] 0.03). An
institution with a long-term unsecured debt ratio to domestic deposits
of 11.0 percent would have its assessment rate reduced by two basis
points, since the maximum possible reduction would be two basis points.
(20 basis points [middot] 0.11 = 2.20 basis points, which exceeds the
maximum possible reduction.)
For a small institution, the unsecured debt adjustment would factor
in a certain amount of Tier 1 capital (qualified Tier 1 capital) in
addition to long-term unsecured debt. The amount of qualified Tier 1
capital would be the sum of one-half of the amount between 10 percent
and 15 percent of adjusted average assets (between 2 and 3 times the
minimum Tier 1 leverage ratio requirement to be a well-capitalized
institution) and the full amount of Tier 1 capital exceeding 15 percent
of adjusted average assets (above 3 times the minimum Tier 1 leverage
ratio requirement to be a well-capitalized institution).\43\ The sum of
qualified Tier 1 capital and long-term unsecured debt as a percentage
of domestic deposits would be multiplied by 20 basis points to produce
the unsecured debt adjustment.\44\
---------------------------------------------------------------------------
\43\ Adjusted average assets would be used for Call Report
filers; adjusted total assets would be used for TFR filers.
\44\ The percentage of qualified Tier 1 capital and long-term
unsecured debt to domestic deposits will remain unrounded (to the
extent of computer capabilities). The unsecured debt adjustment will
be rounded to two digits after the decimal point prior to being
applied to the base assessment rate. Appendix 2 describes the
unsecured debt adjustment for a small institution mathematically.
---------------------------------------------------------------------------
For example, consider a small institution with no long-term
unsecured debt and a Tier 1 leverage ratio of 17 percent. Assume that
each percentage point of the Tier 1 capital ratio equated to a ratio of
Tier 1 capital to domestic deposits of 1.1 percent. The unsecured debt
adjustment for the portion of capital between 10 percent and 15 percent
of adjusted average assets would be 0.55 basis points (calculated as 20
basis points [middot] (1.1 [middot] 0.5 [middot] (0.15--0.10)).\45\ The
unsecured debt adjustment for the portion of capital above 15 percent
of adjusted gross assets would be 0.44 basis points (calculated as 20
basis points [middot] (1.1 [middot] (0.17-0.15)). The sum of the two
portions of the adjustment equals 0.99 basis points.
---------------------------------------------------------------------------
\45\ Adjusted average assets would be used for Call Report
filers; adjusted total assets would be used for TFR filers.
---------------------------------------------------------------------------
Ratios for any given quarter would be calculated from the report of
condition filed by each institution as of the last day of the quarter.
As noted above, unsecured debt would include senior unsecured and
subordinated debt. A senior unsecured liability would be defined as the
unsecured portion of other borrowed money.\46\ Subordinated debt would
be as defined in the report of condition for the reporting period.\47\
Long-term unsecured debt would be defined as unsecured debt with at
least one year remaining until maturity. However, institutions
separately report neither long-term senior unsecured liabilities nor
long-term subordinated debt in the report of condition. In a separate
notice of proposed rulemaking, the Federal Financial Institution
Examination Council has proposed revising the Call Report to report
separately long-term senior unsecured liabilities and subordinated debt
that meet this definition. The Office of Thrift Supervision (OTS) has
also published a notice of proposed rulemaking that would adopt similar
reporting requirements. Until banks separately report these amounts in
the Call Report, the FDIC will use subordinated debt included in Tier 2
capital and will not include any amount of senior unsecured
liabilities. These adjustments will also be made for TFR filers until
thrifts separately report these amounts in the TFR.
---------------------------------------------------------------------------
\46\ Other borrowed money is reported on the Call Report in
Schedule RC, item 16 and on the Thrift Financial Report as the sum
of items SC720, SC740, and SC760.
\47\ The definition of ``subordinated debt'' in the Call Report
is contained in the Glossary under ``Subordinated Notes and
Debentures.'' For the June 30, 2008 Call Report, the definition
read, in pertinent part, as follows:
Subordinated Notes and Debentures: A subordinated note or
debenture is a form of debt issued by a bank or a consolidated
subsidiary. When issued by a bank, a subordinated note or debenture
is not insured by a federal agency, is subordinated to the claims of
depositors, and has an original weighted average maturity of five
years or more. Such debt shall be issued by a bank with the approval
of, or under the rules and regulations of, the appropriate federal
bank supervisory agency * * *
When issued by a subsidiary, a note or debenture may or may not
be explicitly subordinated to the deposits of the parent bank * * *
For purposes of the proposed rule, subordinated debt would also
include limited-life preferred stock as defined in the report of
condition for the reporting period. The definition of ``limited-life
preferred stock'' in the Call Report is contained in the Glossary
under ``Preferred Stock.'' For the June 30, 2008 Call Report, the
definition read, in pertinent part, as follows:
Limited-life preferred stock is preferred stock that has a
stated maturity date or that can be redeemed at the option of the
holder. It excludes those issues of preferred stock that
automatically convert into perpetual preferred stock or common stock
at a stated date.
---------------------------------------------------------------------------
When an institution fails, holders of unsecured claims, including
subordinated debt, receive distributions from the receivership estate
only if all secured claims, administrative claims and deposit claims
have been paid in full. Consequently, greater amounts of long-term
unsecured claims provide a cushion that can reduce the FDIC's loss in
the event of failure.
The FDIC's proposed definition of a long-term senior unsecured
liability, however, ignores features that may affect whether the
liability would, in fact, reduce the FDIC's loss in the event of
failure. The definition would include liabilities with put options or
other provisions that would allow the holder to accelerate payment (for
example, if capital fell below a certain level). Any kind of put or
acceleration feature could undermine the long-term nature of the
liability. The FDIC is particularly interested in comment on whether
long-term senior unsecured liabilities should exclude those liabilities
with put or other acceleration provisions.
The FDIC is proposing that for small institutions (but not large
ones) the unsecured debt adjustment include a portion of Tier 1
capital. The FDIC has two primary reasons for this proposal. First,
cost concerns and lack of demand generally make it difficult for small
institutions to issue unsecured debt in the market. For reasons of
fairness, the FDIC believes that small institutions that have large
amounts of Tier 1 capital should receive an equivalent benefit for that
capital. Second, the FDIC does not want to create an incentive for
small institutions to convert existing Tier 1 capital into subordinated
debt, for example, by having a shareholder in a closely held
corporation redeem shares
[[Page 61570]]
and receive subordinated debt. The FDIC is greatly interested in
comments on this part of its proposal, including comments on whether
the portion of a small institution's Tier 1 capital to be included in
the unsecured debt adjustment should include more capital.
The FDIC is also particularly interested in comments on the size of
the unsecured debt adjustment and whether it should be larger or
smaller. The FDIC believes that the proposed two basis points is
sufficient to encourage a significant number of institutions to issue
additional subordinated debt or senior unsecured debt, but is
interested in the views of commenters.
VII. Adjustment for Secured Liabilities for All Risk Categories
The FDIC proposes to raise an institution's base assessment rates
based upon its ratio of secured liabilities to domestic deposits (the
secured liability adjustment). An institution's ratio of secured
liabilities to domestic deposits (if greater than 15 percent) would
increase its assessment rate, but the resulting base assessment rate
after any such increase could be no more than 50 percent greater than
it was before the adjustment. The secured liability adjustment would be
made after any large bank adjustment or unsecured debt adjustment.
Specifically, for an institution that had a ratio of secured
liabilities to domestic deposits of greater than 15 percent, the
secured liability adjustment would be the institution's base assessment
rate (after taking into account previous adjustments) multiplied by the
ratio of its secured liabilities to domestic deposits minus 0.15.
However, the resulting adjustment could not be more than 50 percent of
the institution's base assessment rate (after taking into account
previous adjustments). For example, if an institution had a ratio of
secured liabilities to domestic deposits of 25 percent, and a base
assessment rate before the secured liability adjustment of 12 basis
points, the secured liability adjustment would be the base rate
multiplied by 0.10 (calculated as 0.25--0.15), resulting in an
adjustment of 1.2 basis points. However, if the institution had a ratio
of secured liabilities to domestic deposits of 70 percent, its base
rate before the secured liability adjustment of 12 basis points would
be multiplied by 0.50 rather than 0.55 (calculated as 0.70--0.15),
since the resulting adjustment could be only 50 percent of the base
assessment rate before the secured liability adjustment.\48\
---------------------------------------------------------------------------
\48\ Under the proposed rule, the ratio of secured deposits to
domestic deposits would be rounded to three digits after the decimal
point. The resulting amount and adjusted assessment rate would be
rounded to the nearest one-hundredth (1/100th) of a basis point.
---------------------------------------------------------------------------
Ratios of secured liabilities to domestic deposits for any given
quarter would be calculated from the report of condition filed by each
institution as of the last day of the quarter. For banks, secured
liabilities would include Federal Home Loan Bank advances, securities
sold under repurchase agreements, secured Federal funds purchased and
``other secured borrowings,'' as reported in banks' quarterly Call
Reports. Thrifts also report Federal Home Loan Bank advances in their
quarterly TFR, but, at present, do not separately report securities
sold under repurchase agreements, secured Federal funds purchased or
``other secured borrowings.'' The OTS has also published a notice of
proposed rulemaking to revise the TFR so that thrifts will separately
report these items. Until the TFR is revised, any of these secured
amounts not reported separately from unsecured or other liabilities by
a thrift in its TFR would be imputed based on simple averages for Call
Report filers as of June 30, 2008. As of that date, on average, 63.0
percent of the sum of Federal funds purchased and securities sold under
repurchase agreements reported by Call Report filers were secured, and
49.4 percent of other borrowings were secured.
At present, an institution's secured liabilities do not directly
affect its assessments. The exclusion of secured liabilities can lead
to inequity. An institution with secured liabilities in place of
another's deposits pays a smaller deposit insurance assessment, even if
both pose the same risk of failure and would cause the same losses to
the FDIC in the event of failure.
To illustrate with a simple example, assume that Bank A has $100
million in insured deposits, while Bank B has $50 million in insured
deposits and $50 million in secured liabilities. Each poses the same
risk of failure and is charged the same assessment rate. At failure,
each has assets with a market value of $80 million. The loss to the DIF
would be identical for Bank A and Bank B ($20 million each). The total
assessments paid by Bank A and Bank B, however, would not be identical.
Because secured liabilities do not currently figure into an
institution's assessment, the DIF would receive twice as much
assessment revenue from Bank A as from Bank B over a given period
(despite identical FDIC losses at failure).
In general, under the current rules, substituting secured
liabilities for unsecured liabilities (including subordinated debt)
raises the FDIC's loss in the event of failure without providing
increased assessment revenue. Substituting secured liabilities for
deposits can also lower an institution's franchise value in the event
of failure, which increases the FDIC's losses, all else equal.\49\
---------------------------------------------------------------------------
\49\ Overall, whether substituting secured liabilities for
deposits increases, decreases, or leaves unchanged the FDIC's loss
given failure also depends on how the substitution affects the
proportion of insured and uninsured deposits, but FDIC's assessment
revenue will always decline with a substitution.
---------------------------------------------------------------------------
VIII. Adjustment for Brokered Deposits for Risk Categories II, III and
IV
In addition to the unsecured debt adjustment and the secured
liability adjustment, the FDIC is proposing that an institution in Risk
Category II, III, or IV also be subject to an assessment rate
adjustment for brokered deposits (the brokered deposit adjustment).
This adjustment would be limited to those institutions whose ratio of
brokered deposits to domestic deposits was greater than 10 percent;
asset growth rates would not affect the adjustment. The adjustment
would be determined by multiplying 25 basis points times the difference
between an institution's ratio of brokered deposits to domestic
deposits and 0.10.\50\ However, the adjustment would never be more than
10 basis points. The adjustment would be added to the base assessment
rate after all other adjustments had been made. Ratios for any given
quarter would be calculated from the Call Reports or TFRs filed by each
institution as of the last day of the quarter.
---------------------------------------------------------------------------
\50\ Under the proposed rule, the ratio of brokered deposits to
domestic deposits would be rounded to three digits after the decimal
point. The resulting brokered deposit charge would be rounded to the
nearest one-hundredth (1/100th) of a basis point.
---------------------------------------------------------------------------
A brokered deposit would again be as defined in Section 29 of the
Federal Deposit Insurance Act (12 U.S.C. 1831f), which is the
definition used in banks' quarterly Call Reports and thrifts quarterly
TFRs. However, the FDIC is again particularly interested in comments on
whether the definition of a brokered deposit for purposes of the
brokered deposit ratio should exclude sweep accounts or deposits
received through a network on a reciprocal basis that meet the
statutory definition of a brokered deposit or should include high cost
deposits, including those received through a listing service and the
[[Page 61571]]
Internet, that do not meet the statutory definition.
Significant reliance on brokered deposits tends to increase an
institution's risk profile, particularly as the institution's financial
condition weakens. Insured institutions-particularly weaker ones-
typically pay higher rates of interest on brokered deposits. When an
institution becomes noticeably weaker or its capital declines, the
market or statutory restrictions may limit its ability to attract,
renew or roll over these deposits, which can create significant
liquidity challenges.\51\
---------------------------------------------------------------------------
\51\ An adequately capitalized institution can accept, renew and
rollover brokered deposits only by obtaining a waiver from the FDIC.
Even then, interest rate restrictions apply. An undercapitalized
institution may not accept, renew or rollover brokered deposits at
all. Section 29 of the Federal Deposit Insurance Act (12 U.S.C.
1831f).
---------------------------------------------------------------------------
Also, significant reliance on brokered deposits tends to decrease
greatly the franchise value of a failed institution. In a typical
failure, the FDIC seeks to find a buyer for a failed institution's
branches among the institutions located in or around the service area
of the failed institution. A potential buyer usually seeks to increase
its market share in the service area of the failed institution through
the acquisition of the failed institution and its assets and deposits,
but most brokered deposits originate from outside an institution's
market area. The more core deposits that the buyer can obtain through
the acquisition of the failed institution, the greater the market share
of deposits (and the loans and other products that typically follow the
core deposits) it can capture. Furthermore, brokered deposits may not
be part of many potential buyers' business plans, limiting the field of
buyers. Thus, the lower franchise value of the failed institution
created by its reliance on brokered deposits leads to a lower price for
the failed institution, which increases the FDIC's losses upon failure.
In addition, as noted earlier, several institutions that have
recently failed have experienced rapid asset growth before failure and
have funded this growth through brokered deposits. The FDIC believes
that these reasons warrant the additional charge for significant levels
of brokered deposits.
To illustrate the brokered deposit adjustment with a simple
example, take a Risk Category II institution with an initial base
assessment rate of 20 basis points and a ratio of brokered deposits to
domestic deposits of 40 percent. Multiplying 25 basis points times the
difference between the institution's ratio of brokered deposits to
domestic deposits and 10 percent yields 7.5 basis points (calculated as
25 basis points [middot] (0.4-0.1)). Because this amount is less than
the maximum possible brokered deposit adjustment of 10 basis points,
the brokered deposit adjustment would be as calculated, 7.5 basis
points. Assuming that the secured liabilities adjustment for this
institution is 2 basis points and that the institution has no other
assessment rate adjustments, the total base assessment rate would be
29.5 basis points (calculated as (20 basis points + 2 basis points +
7.5 basis points).
IX. Insured Branches of Foreign Banks
Because the base assessment rates would be higher and the
difference between the minimum and maximum initial base assessment
rates would increase from two to four basis points under the proposal,
the FDIC proposes to make a conforming change for insured branches of
foreign banks in Risk Category I. Under the proposal, an insured branch
of a foreign bank's weighted average of ROCA component ratings would be
multiplied by 5.291 (which would be the pricing multiplier) and 1.651
(which would be a uniform amount for all insured branches of foreign
banks) would be added to the product.\52\ The resulting sum would equal
a Risk Category I insured branch of a foreign bank's initial base
assessment rate, provided that the amount could not be less than the
minimum initial base assessment rate nor greater than the maximum
initial assessment rate. A Risk Category I insured branch of a foreign
bank's initial base assessment rate would be subject to any large bank
adjustment. Total base assessment rates could not be less than the
minimum initial base assessment rate applicable to Risk Category I
institutions nor greater than the maximum initial base assessment rate
applicable to Risk Category I institutions. Insured branches of a
foreign bank not in Risk Category I are charged the initial base
assessment rate for the risk category in which they are assigned.
---------------------------------------------------------------------------
\52\ An insured branch of a foreign bank's weighted average ROCA
component rating would continue to equal the sum of the products
that result from multiplying ROCA component ratings by the following
percentages: Risk Management--35%, Operational Controls--25%,
Compliance--25%, and Asset Quality--15%. The uniform amount for
insured branches is identical to the uniform amount under the large
bank method. The pricing multiplier for insured branches is three
times the amount of the pricing multiplier under the large bank
method, since the initial base rate for an insured branch depends
only on one factor (weighted average ROCA ratings), while the
initial base rate under the large bank method depends on three
factors, each equally weighted.
---------------------------------------------------------------------------
No insured branch of a foreign bank in any risk category would be
subject to the unsecured debt adjustment, secured liability adjustment
or brokered deposit adjustment. Insured branches of foreign banks are
branches, not independent depository institutions. In the event of
failure, the FDIC would not necessarily have access to the
institution's capital or be protected by its subordinated debt or
unsecured liabilities. Consequently, an unsecured debt adjustment would
appear to be inappropriate. At present, these branches do not report
comprehensively on secured liabilities. In the FDIC's view, the burden
of increased reporting on secured liabilities would outweigh any
benefit.
X. New Institutions
The FDIC also proposes to make conforming changes in the treatment
of new insured depository institutions.\53\ For assessment periods
beginning on or after January 1, 2010, any new institutions in Risk
Category I would be assessed at the maximum initial base assessment
rate applicable to Risk Category I institutions, as under the current
rule.
---------------------------------------------------------------------------
\53\ Subject to exceptions, a new insured depository institution
is a bank or thrift that has not been chartered for at least five
years as of the last day of any quarter for which it is being
assessed. 12 CFR 327.8(l)
---------------------------------------------------------------------------
Effective for assessment periods beginning before January 1, 2010,
until a Risk Category I new institution received CAMELS component
ratings, it would have an initial base assessment rate that was two
basis points above the minimum initial base assessment rate applicable
to Risk Category I institutions, rather than one basis point above the
minimum rate, as under the current rule.\54\ All other new institutions
in Risk Category I would be treated as are established institutions,
except as provided in the next paragraph.
---------------------------------------------------------------------------
\54\ Certain credit unions that convert to a bank or thrift
charter and certain otherwise new insured institutions in a holding
company structure may be considered established institutions. Both
before and after January 1, 2010, any such institution that is well
capitalized but has not yet received CAMELS component ratings will
be assessed at two basis points above the minimum initial base
assessment rate applicable to Risk Category I institutions.
---------------------------------------------------------------------------
Either before or after January 1, 2010: no new institution,
regardless of risk category, would be subject to the unsecured debt
adjustment; any new institution, regardless of risk category, would be
subject to the secured liability adjustment; and a new institution in
Risk Categories II, III or IV would be subject to the brokered deposit
[[Page 61572]]
adjustment. After January 1, 2010, no new institution in Risk Category
I would be subject to the large bank adjustment.
XI. Assessment Rate Schedule
Recent failures have significantly increased the fund's loss
provisions, resulting in a decline in the reserve ratio. As of June 30,
2008, the reserve ratio stood at 1.01 percent, 18 basis points below
the reserve ratio as of March 31, 2008. This is the lowest reserve
ratio for a combined bank and thrift insurance fund since March 31,
1995. The FDIC expects a higher rate of insured institution failures in
the next few years compared to recent years; thus, the reserve ratio
may continue to decline. Because the reserve ratio has fallen below
1.15 percent and is expected to remain below 1.15 percent, the FDIC is
required to establish and implement a Restoration Plan to restore the
reserve ratio to 1.15 percent within five years, that is, by October 7,
2013.\55\ To fulfill the requirements of the Restoration Plan that the
FDIC is adopting simultaneously with the proposed rule, the FDIC must
increase the average assessment rates it currently charges. Since the
current rates are already 3 basis points uniformly above the base rate
schedule established in the 2006 assessments rule, a new rulemaking is
required. The other proposed changes to the assessment system described
above also require new rulemaking.
---------------------------------------------------------------------------
\55\ Data on estimated insured deposits and the reserve ratio
are available only for each quarter-end; therefore, the reserve
ratio for the end of the fourth quarter of 2013 will be the first
reserve ratio available after October 7 to measure compliance with
the Restoration Plan's requirements. Deposit data needed to compute
the reserve ratio will be available in February of the following
year.
---------------------------------------------------------------------------
Base Rate Schedule
Effective April 1, 2009, the FDIC proposes to set initial base
assessment rates as described in Table 10 below.
Table 10--Proposed Initial Base Assessment Rates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Risk category
------------------------------------------------------------------------------------
I *
---------------------------------- II III IV
Minimum Maximum
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points)..................................... 10 14 20 30 45
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Rates for institutions that did not pay the minimum or maximum rate would vary between these rates.
After making all possible adjustments under the proposed rule,
total base assessment rates for each risk category would be within the
ranges set forth in Table 11 below.
Table 11--Total Base Assessment Rates after Adjustments *
--------------------------------------------------------------------------------------------------------------------------------------------------------
Risk category I Risk category II Risk category III Risk category IV
--------------------------------------------------------------------------------------------------------------------------------------------------------
Initial base assessment rate........ 10-14...................... 20......................... 30......................... 45
Unsecured debt adjustment........... -2-0....................... -2-0....................... -2-0....................... -2-0
Secured liability adjustment........ 0-7........................ 0-10....................... 0-15....................... 0-22.5
Brokered deposit adjustment......... ........................... 0-10....................... 0-10....................... 0-10
-------------------------------------------------------------------------------------------------------------------
Total base assessment rate...... 8-21.0..................... 18-40.0.................... 28-55.0.................... 43-77.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Rates for institutions that did not pay the minimum or maximum rate would vary
between these rates. Adjustments would be applied in the order listed in the table. The large bank adjustment would be made before any other
adjustment.
The proposed base rates are intended to improve the way the
assessment system differentiates risk among insured institutions and
make the risk-based assessment system fairer, by limiting the
subsidization of riskier institutions by safer ones. They are also
intended to increase assessment revenue while the Restoration Plan is
in effect in order to raise the reserve ratio to the minimum threshold
of 1.15 percent within 5 years of the Plan's implementation. As
explained in the next Section, given the FDIC's projections (described
below), the proposed rate schedule would raise the reserve ratio to
1.26 percent by the end of 2013.
Actual Rate Schedule, Ability To Adjust Rates and Effective Date
Based on the information currently available, the FDIC proposes
setting actual rates at the proposed total base assessment rate
schedule effective April 1, 2009. The FDIC projects that this schedule
would raise the overall average assessment rate to 13.5 basis points
beginning in April 2009 and 12.6 basis points in 2010 and thereafter,
from a 6.3 basis point average assessment rate (before accounting for
credit use) as of June 30, 2008. For institutions in Risk Category I,
the projected average rate would be 11.6 basis points beginning in
April 2009 and 11.9 basis points in 2010 and thereafter, up from 5.5
basis points as of June 30, 2008.\56\
---------------------------------------------------------------------------
\56\ Changes in the projected average rates under the proposed
schedule over time reflect projected changes in the migration of
institutions within and across risk categories.
---------------------------------------------------------------------------
However, at the time of the issuance of the final rule, the FDIC
may need to set a higher base rate schedule based on information
available at that time, including any intervening institution failures
and updated failure and loss projections. A higher base rate schedule
may also be necessary because of changes to the proposal in the final
rule, if these changes have the overall effect of changing revenue for
a given rate schedule. In order to fulfill the statutory requirement to
return the fund reserve ratio to 1.15 percent, the base rate schedule
in the final rule could be substantially higher than the proposed
[[Page 61573]]
base assessment rate schedule (for example, if projected or actual
losses at the time of the final rule greatly exceed the FDIC's current
estimates). The base rate schedule in the final rule could possibly be
lower than the proposed base rate schedule. The FDIC seeks particular
comment on possible alternative base rate schedules.
The rate schedule and the other revisions to the assessment rules
would take effect for the quarter beginning April 1, 2009, which would
be reflected in the June 30, 2009 fund balance and the invoices for
assessments due September 30, 2009.
The proposed rule would continue to allow the FDIC Board to adopt
actual rates that were higher or lower than total base assessment rates
without the necessity of further notice-and-comment rulemaking,
provided that: (1) The Board could not increase or decrease rates from
one quarter to the next by more than three basis points; and (2)
cumulative increases and decreases could not be more than three basis
points higher or lower than the adjusted base rates. Continued
retention of this flexibility would enable the Board to act in a timely
manner to fulfill its mandate to raise the reserve ratio to at least
1.15 percent within the 5-year timeframe.
Assessment Rates for the First Quarter of 2009
The FDIC also proposes to raise the current rates uniformly by
seven basis points for the assessment for the quarter beginning January
1, 2009, which would be reflected in the fund balance as of March 31,
2009, and assessments due June 30, 2009. Rates for the first quarter of
2009 only would be as set forth in Table 12:
Table 12--Proposed Assessment Rates for the First Quarter of 2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
Risk category
------------------------------------------------------------------------------------
I *
---------------------------------- II III IV
Minimum Maximum
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points)..................................... 12 14 17 35 50
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Rates for institutions that did not pay the minimum or maximum rate would vary between these rates.
The proposed rates for the first quarter of 2009 would raise almost
as much assessment revenue as under the rates proposed beginning April
1, 2009. Data and system requirements do not make it feasible to adopt
the proposed changes to the risk-based assessment system discussed
above until the second quarter of 2009.
XII. Assessment Revenue Needs Under the Restoration Plan
Summary
Table 13 shows projected minimum initial base assessment rates
needed to raise the reserve ratio to 1.15 percent (the lower bound
under the requirements for the Restoration Plan) in 2013 for
alternative average annual insured deposit growth rates and total costs
of bank failures from 2008 through 2013.
Table 13--Minimum Initial Base Assessment Rates (in Basis Points) Needed To Raise the Reserve Ratio to 1.15 Percent in 2013
--------------------------------------------------------------------------------------------------------------------------------------------------------
If institution failures from 2008 to 2013 cost in total: *
Insured deposit growth rate -----------------------------------------------------------------------------------------------------
$20 Billion $30 Billion $40 Billion $50 Billion $60 Billion $70 Billion
--------------------------------------------------------------------------------------------------------------------------------------------------------
3%................................................ 5 5 8 11 13 16
4%................................................ 5 6 9 11 14 16
5%................................................ 5 7 9 11 14 16
6%................................................ 5 7 9 12 14 17
7%................................................ 5 8 10 12 15 17
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Costs include $12.8 billion for actual and projected failures in 2008.
Under the FDIC's proposed rate schedule, the average rate is
projected to be 13.5 basis points in 2009 (once the rates become
effective in April) and 12.6 basis points in 2010 and beyond. For
institutions in Risk Category I, the average rate is projected to be
11.6 basis points beginning in April 2009, rising to 11.9 basis points
in 2010 and beyond. Given the FDIC's projections, the proposed rates
would increase the reserve ratio to 1.26 percent by year-end 2013.
Current and emerging economic difficulties, particularly in the
housing and construction sector, financial markets and commercial real
estate, contribute to the FDIC's expectation of higher losses for the
insurance fund. The insurance fund balance and reserve ratio are likely
to experience further declines before recovering as the current
problems confronting the banking industry abate. The FDIC projects that
the reserve ratio will continue to fall for the remainder of this year
and early 2009 to a low of 0.65 to 0.70 percent, as the fund's loss
reserves for anticipated failures increase. Higher assessment revenue
should begin to increase the reserve ratio gradually in the latter part
of 2009. As described in more detail below, the FDIC's best estimate is
that institution failures could cost the insurance fund approximately
$40 billion from 2008 to 2013, of which approximately $13 billion
represent actual and projected costs incurred this year (including
almost $9 billion for the failure in July of one institution with over
$30 billion in assets). The FDIC bases its loss projections on:
Analysis of specific troubled institutions and risk factors that may
adversely affect other institutions; analysis of recent and expected
loss rates given failure; stress analyses of the effects of housing
price declines and an economic slowdown in specific geographic areas on
loan losses and bank capital; and recent and
[[Page 61574]]
historic supervisory rating downgrade and failure rates.
The FDIC also assumes that insured deposits would increase on
average 5 percent per year from 2008 to 2013. This assumption is in
line with the most recent 12-month growth rate and average annual
growth rates over the past 5 and 10 years.
Table 13 shows that an initial minimum rate of 9 basis points is
necessary for the reserve ratio to reach 1.15 percent by 2013 assuming
that failures between 2008 and 2013 cost $40 billion and that insured
deposits increase on average by 5 percent annually. With an initial
minimum rate of 9 basis points, the FDIC projects that the reserve
ratio would equal 1.18 percent by the end of 2013.\57\ The FDIC's
proposed rates, with an initial minimum rate of 10 basis points, would
raise the reserve ratio to 1.26 percent by 2013. The FDIC believes that
it would be prudent to provide this margin for error in the event that
losses exceed the FDIC's best estimate or insured deposit growth is
more rapid than expected.
---------------------------------------------------------------------------
\57\ If the minimum initial rate was 8 basis points or less, the
reserve ratio is projected to fall short of the 1.15 percent
threshold.
---------------------------------------------------------------------------
The FDIC had previously expected that the reserve ratio would reach
the 1.25 percent DRR by 2009, consistent with the Board's objectives
for the insurance fund. The recent decline in the reserve ratio and
projected higher rate of bank failures over the next few years make the
possibility of reaching the DRR next year remote absent very high
assessment rates, which the FDIC believes would be inappropriate under
current conditions. Nonetheless, the goal of reaching the 1.25 percent
DRR remains in effect. Under the proposed rates, the reserve ratio is
projected to reach 1.26 percent by the end of 2013.
The FDIC recognizes that there is considerable uncertainty about
its projections for losses and insured deposit growth, and that changes
in assumptions about these and other factors could lead to different
assessment revenue needs and rates. Under the terms of the Restoration
Plan, the FDIC must update its projections for the insurance fund
balance and reserve ratio at least semiannually while the Restoration
Plan is in effect and adjust rates as necessary. In the event that
losses exceed the FDIC's best estimate or insured deposit growth is
more rapid than expected, the Board will be able to adjust assessment
rates.
Factors Considered in Setting the Level of Assessment Rates
In setting assessment rates, the FDIC's Board of Directors has
considered the following factors required by statute:
(i) The estimated operating expenses of the Deposit Insurance Fund.
(ii) The estimated case resolution expenses and income of the
Deposit Insurance Fund.
(iii) The projected effects of the payment of assessments on the
capital and earnings of insured depository institutions.
(iv) The risk factors and other factors taken into account pursuant
to section 7(b)(1) of the Federal Deposit Insurance Act (12 U.S.C.
Section 1817(b)(1)) under the risk-based assessment system, including
the requirement under section 7(b)(1)(A) of the Federal Deposit
Insurance Act (12 U.S.C. 1817(b)(1)(A)) to maintain a risk-based
system.
(v) Other factors the Board of Directors has determined to be
appropriate.\58\
---------------------------------------------------------------------------
\58\ Section 2104 of the Reform Act (amending section 7(b)(2) of
the Federal Deposit Insurance Act, 12 U.S.C. 1817(b)(2)(B)). The
risk factors referred to in factor (iv) include:
(i) The probability that the Deposit Insurance Fund will incur a
loss with respect to the institution, taking into consideration the
risks attributable to--
(I) Different categories and concentrations of assets;
(II) different categories and concentrations of liabilities,
both insured and uninsured, contingent and noncontingent; and
(III) any other factors the Corporation determines are relevant
to assessing such probability;
(ii) the likely amount of any such loss; and
(iii) the revenue needs of the Deposit Insurance Fund.
Section 7(b)(1)(C) of the Federal Deposit Insurance Act (12
U.S.C. 1817(b)(1)(C)).
---------------------------------------------------------------------------
The factors considered in setting assessment rates are discussed in
more detail below.
Case Resolution Expenses (Insurance Fund Losses)
Insurance fund losses from recent insured institution failures and
an expected higher rate of failures over the next few years will tend
to reduce the fund balance and reserve ratio.
The FDIC expects that housing price declines, financial market
turmoil, and generally weaker economic conditions will continue to
exert stress on banking industry earnings and credit quality in the
near term, most notably in residential real estate and construction and
development lending. Significant uncertainty remains about the outlook
for a recovery in mortgage securitization markets and the return of
confidence to financial markets overall. Economic activity in the
industrial Midwest has especially suffered from higher energy and
commodity prices. Housing market downturns in Arizona, California,
Nevada, Florida, and other coastal areas are contributing to declines
in construction and consumer spending and economic downturns in those
areas. Regional disparities in housing market and economic conditions,
as well as financial market difficulties, have led in turn to variation
in prospects among banks. Institutions most at risk include: (1) Those
with large volumes of subprime and nontraditional mortgages,
particularly those heavily reliant on securitization; and (2) those
with heavy concentrations of residential real estate and construction
and development loans in markets with the greatest housing price
declines. Within each of these groups, those heavily reliant on non-
core funding incur additional risks should the availability of these
funds decline as conditions deteriorate.
In developing its projections of losses to the insurance fund, the
FDIC drew from several sources. First, the FDIC relied heavily on
supervisory analysis of troubled institutions. Supervisors also
identified risk factors present in currently troubled institutions (or
that were present in institutions that recently failed) to help analyze
the potential for other institutions with those risk factors to cause
losses to the insurance fund. Second, the FDIC drew on its analysis of
losses to the fund in the event of failure. Current financial market
and economic difficulties make simple reliance on the historical
average or model estimates based on historical data inappropriate for
projecting loss rates given failure, particularly in the near term.
The FDIC also relied on stress analysis designed to evaluate the
effect of a large and widespread decline in housing prices and related
deterioration in overall economic conditions on the capital positions
and earnings of insured institutions. The stress test simulated the
effects of high and rising loan loss rates directly resulting from
falling housing prices and rising unemployment rates in various
geographic areas to identify institutions most vulnerable to these
types of stress. Under the stress test, institutions operating in those
areas with the worst housing and economic conditions experience the
largest increase in loss rates.
The FDIC categorized well-capitalized institutions into various
groups based on stress test results and supervisory analysis. Based on
recent and historical downgrade and failure experience, the FDIC then
applied downgrade and failure assumptions for each group to
[[Page 61575]]
project the cost of failure to the fund over the next few years.\59\
---------------------------------------------------------------------------
\59\ For those institutions that were well rated one year ago
but performed poorly under the stress simulations when applied to
their balance sheets from last year, the FDIC identified the extent
to which these institutions received supervisory ratings downgrades
over the following year. To look beyond what may happen over one
year, the FDIC supplemented this information with data from the late
1980s and early 1990s (a period of many bank failures) on ratings
downgrades over a five-year horizon for institutions with financial
characteristics similar to those performing poorly under the stress
analysis. With this information, the FDIC developed projections of
the volume of well-rated institutions likely to be downgraded over
the next few years. The FDIC then considered data on failure rates
from the late 1980s and early 1990s to project failure rates for
those institutions that may be downgraded over the next few years,
as well as those that are currently not well rated.
---------------------------------------------------------------------------
Based on the various sources of information described above, the
FDIC projects that the costs of institution failures from 2008 through
2013 may be approximately $40 billion. This figure includes almost $13
billion for the costs of actual and projected failures in 2008. The
FDIC recognizes the considerable degree of uncertainty surrounding
these projections and its analyses reveal that either higher or lower
losses are plausible. This uncertainty underscores the need to update
the outlook for insurance fund losses on a regular basis--at least
semiannually--while the Restoration Plan is in effect and to consider
adjustments to assessment rates.
Operating Expenses and Investment Income
The FDIC estimates that its operating expenses in 2008 will be $1
billion. Thereafter, the FDIC projects that operating expenses will
increase on average by 5 percent annually.
The FDIC projects that its investment contributions (investment
income plus or minus unrealized gains or losses on available-for-sale
securities) this year will total $3.7 billion, or 7 percent of the
start-of-year fund balance. A one-time unrealized gain of $1.6 billion
from reclassifying the fund's held-to-maturity securities as available
for sale as of June 30, 2008 bolsters this figure. Projected increases
in interest rates, which will reduce the value of these securities,
will partly offset this gain next year.\60\ In addition, the FDIC
expects that it will invest new funds in short-term securities
(primarily overnight investments) to accommodate increased bank failure
activity. The FDIC generally expects that these investments will earn
lower rates than the longer-term securities that they are replacing and
will therefore result in less interest income to the fund. Accounting
for all of these factors, the FDIC projects investments to contribute
an amount equal to 2.0 percent of the starting fund balance in 2009,
rising gradually to 3.5 percent by 2011 and thereafter.
---------------------------------------------------------------------------
\60\ Future interest rate assumptions are based on consideration
of recent Blue Chip Financial Forecasts as well as recent forward
rate curves. Forward rates are expected yields on securities of
varying maturities for specific future points in time that are
derived from the term structure of interest rates. (The term
structure of interest rates refers to the relationship between
current yields on comparable securities with different maturities.)
---------------------------------------------------------------------------
Assessment Revenue, Credit Use, and the Distribution of Assessments
The FDIC expects that assessment revenue in 2008 will total $3.0
billion: $4.4 billion in gross assessments charged less $1.4 billion in
credits used. By the end of 2008, the projections indicate that only 4
percent of the original $4.7 billion in credits awarded will be
remaining. As part of the Restoration Plan, the FDIC has the authority
to restrict credit use while the plan is in effect, providing that
institutions may still apply credits against their assessments equal to
the lesser of their assessment or 3 basis points.\61\ The FDIC has
decided not to restrict credit use in the Restoration Plan. The FDIC
projects that the amount of credits remaining at the time that the
proposed new rates go into effect will be very small and that their
continued use will have very little effect on the assessment rates
necessary to meet the requirements of the plan.\62\
---------------------------------------------------------------------------
\61\ Section 7(b)(3)(E)(iv) of the Federal Deposit Insurance Act
(12 U.S.C. 1817(b)(3)(E)(iv)).
\62\ For 2008, 2009 and 2010, credits may not offset more than
90 percent of an institution's assessment. Section 7(e)(3)(D)(ii) of
the Federal Deposit Insurance Act (12 U.S.C. 1817(e)(3)(D)(ii)).
---------------------------------------------------------------------------
Accounting for the use of remaining credits, proposed uniform
increase to current rates for the first quarter of 2009 and the
proposed assessment rates effective April 1, 2009, and assuming 5
percent annual growth in the assessment base (which is approximately
domestic deposits), the FDIC projects that the fund will earn
assessment revenue of $10.3 billion for all of 2009.
For the quarter beginning April 1, 2009, the FDIC has derived gross
assessment revenue (i.e., before applying any remaining credits) by
assigning each insured institution to an assessment rate based on the
proposed rate schedule and factors described above. Table 14 shows the
distribution of institutions and domestic deposits by risk category
(divided into four parts for Risk Category I) under the proposed
initial base rate schedule (effective April 1, 2009) based on data as
of June 30, 2008; Table 15 shows the distribution of institutions and
domestic deposits by bands of proposed total base assessment rates.\63\
For purposes of assessment revenue projections beginning next April,
the FDIC relied on the proposed assessment rates based on data as of
June 30, 2008, but also accounted for projected migration of
institutions across risk categories as supervisory ratings change.
---------------------------------------------------------------------------
\63\ The assessment base is almost equal to total domestic
deposits.
Table 14--Distribution of Initial Base Assessment Rates and Domestic Deposits*
[Data as of June 30, 2008]
----------------------------------------------------------------------------------------------------------------
Initial Domestic Percent of
Risk category assessment Number of Percent of deposits (in domestic
rate institutions institutions billions of $) deposits
----------------------------------------------------------------------------------------------------------------
I............................... 10 1,775 21 823.0 12
10.01-12.00 2,976 35 2,945.7 42
12.01-13.99 1,758 21 1,714.4 24
14 1,219 14 593.3 8
II.............................. 20 588 7 896.5 13
III............................. 30 121 1 27.1 0
IV.............................. 45 14 0 29.1 0
----------------------------------------------------------------------------------------------------------------
* This table and the following two tables exclude insured branches of foreign banks.
[[Page 61576]]
Table 15--Distribution of Total Base Assessment Rates and Domestic Deposits *
[Data as of June 30, 2008]
----------------------------------------------------------------------------------------------------------------
Total base Domestic Percent of
Risk category assessment Number of Percent of deposits (in domestic
rate institutions institutions billions of $) deposits
----------------------------------------------------------------------------------------------------------------
I............................. 8.00-10.00 1,834 22 806.6 11
10.01-12.00 2,674 32 3,047.6 43
12.01-14.00 2,588 31 1,632.5 23
14.01-21.00 632 7 589.7 8
II............................ 18.00-20.00 346 4 204.7 3
20.01-40.00 242 3 691.8 10
III........................... 28.00-30.00 72 1 8.0 0
30.01-55.00 49 1 19.1 0
IV............................ 43.00-45.00 9 0 5.8 0
45.01-77.5 5 0 23.3 0
----------------------------------------------------------------------------------------------------------------
* Because of data limitations, secured liability adjustments for TFR filers are calculated using imputed values
based on simple averages of Call Report filers as of June 30, 2008 (discussed below). Unsecured debt
adjustments are calculated using ``Qualifying subordinated debt and redeemable preferred stock'' included in
Tier 2 capital.
As noted earlier, the proposed changes to risk-based assessments
are intended to better capture differences in risk and impose a greater
share of the necessary increase in overall assessments on riskier
institutions. Table 16 shows how institutions would have fared if the
FDIC had proposed leaving the current risk-based assessment system
unchanged except for a uniform increase in rates that would have
produced the same revenue as under the proposed schedule. To produce
the same revenue, the FDIC would have had to increase the current rates
uniformly by 7.6 basis points, based upon data as of June 30, 2008. As
the table shows, 85 percent of institutions, with 74 percent of
domestic deposits, would pay a lower rate under the proposed assessment
rate schedule than under a uniform increase of 7.6 basis points to the
current rate schedule.
Table 16--Difference Between Proposed Assessment Rates and a Uniform Increase in Current Rates To Raise the Same
Revenue
[Data as of June 30, 2008]
----------------------------------------------------------------------------------------------------------------
Domestic Percentage of
Compared to a uniform increase in current rates, Number of Percent of deposits (in total domestic
proposed rates are: institutions institutions billions of $) deposits
----------------------------------------------------------------------------------------------------------------
Over 4 bp lower................................. 339 4 64 1
2-4 bp lower.................................... 3,070 36 1,551 22
0-2 bp lower.................................... 3,819 45 3,551 51
0-2 bp higher................................... 463 5 785 11
2-4 bp higher................................... 541 6 321 5
4-6 bp higher................................... 110 1 121 2
6-8 bp higher................................... 49 1 244 3
8-10 bp higher.................................. 18 0 245 3
Over 10 bp higher............................... 42 0 146 2
----------------------------------------------------------------------------------------------------------------
Estimated Insured Deposits
The FDIC believes that it is reasonable to plan for annual insured
deposit growth of 5 percent. Over the 12 months ending June 30, 2008,
estimated insured deposits increased by 5.4 percent. The most recent
five and ten year average growth rates are also approximately 5
percent. Chart 1 depicts insured deposit growth since 1990.
[[Page 61577]]
[GRAPHIC] [TIFF OMITTED] TP16OC08.020
Projections of insured deposits are subject to considerable
uncertainty. Insured deposit growth over the near term could rise more
rapidly due to a ``flight to quality'' attributable to financial and
economic uncertainties. On the other hand, as the experience of the
late 1980s and early 1990s demonstrated, lower overall growth in the
banking industry and the economy could depress rates of growth of total
domestic and insured deposits. As Table 13 shows, a one percentage
point increase or decrease in average annual insured deposit growth
rates will not have a significant effect on the assessment rates
necessary to meet the requirements of the Restoration Plan, other
factors equal.
Effect on Capital and Earnings
Appendix 3 contains an analysis of the effect of proposed rates on
the capital and earnings of insured institutions. Given the assumptions
in the analysis, for the industry as a whole, projected total
assessments in 2009 would result in capital that would be 0.3 percent
lower than if the FDIC did not charge assessments and 0.1 percent lower
than if current assessment rates remained in effect. The proposed
assessments would cause 6 institutions whose equity-to-assets ratio
would have exceeded 4 percent in the absence of assessments to fall
below that percentage and 5 institutions to fall below 2 percent. The
proposed increase in assessments would cause 3 institutions whose
equity-to-assets ratio would have exceeded 4 percent under current
assessments to fall below that threshold and 1 institution to fall
below 2 percent.
For the industry as a whole, assessments in 2009 would result in
pre-tax income that would be 11 percent lower than if the FDIC did not
charge assessments and 5.6 percent lower than if current assessment
rates remained in effect. Appendix 3 also provides an analysis of the
range of effects on capital and earnings.
Other Factors That the Board May Consider
In its consideration of proposed rates, the FDIC Board has
considered other factors that it deems appropriate, as permitted by
law.
Flexibility to accommodate economic and industry conditions. The
Reform Act generally provides up to 5 years for the FDIC to raise the
fund's reserve ratio to at least 1.15 percent under the Restoration
Plan. The FDIC Board had previously set rates with an objective of
raising the reserve ratio to the 1.25 percent DRR by next year. The
recent decline in the reserve ratio and an anticipated higher rate of
bank failures over the next few years make the possibility of reaching
the 1.25 percent DRR--or even 1.15 percent--next year remote absent
very high assessment rates. The FDIC believes that such high rates
would be inappropriate under current and projected economic and
financial conditions. The FDIC's proposed rates take advantage of the
flexibility to raise rates more gradually.
Reaching the DRR. The FDIC had previously expected that the reserve
ratio would reach the 1.25 percent DRR by 2009, consistent with the
Board's objectives for the insurance fund. The recent decline in the
reserve ratio and an anticipated increase in bank failures make the
possibility of reaching the DRR next year remote absent very high
assessment rates, which the FDIC believes would be inappropriate under
current conditions. Nonetheless, the goal of reaching the 1.25 percent
DRR remains in effect. Under the proposed rates, the reserve ratio is
projected to reach 1.26 by the end of 2013.
Updating projections regularly. The FDIC recognizes that there is
[[Page 61578]]
considerable uncertainty about its projections for losses and insured
deposit growth, and that changes in assumptions about these and other
factors could lead to different assessment revenue needs and rates. The
FDIC projects that, under its proposed rates, the reserve ratio will
increase to 1.26 percent by year-end 2013, providing a margin for error
in the event that losses exceed the FDIC's best estimate or insured
deposit growth is more rapid than expected. Nonetheless, the FDIC
expects to update its projections for the insurance fund balance and
reserve ratio at least semiannually while the Restoration Plan is in
effect and adjust rates as necessary.
XIII. Technical and Other Changes
The FDIC is proposing to change the way assessment rates are
determined for a large institution that is subject to the large bank
method (or an insured branch of a foreign bank) when it moves from Risk
Category I to Risk Category II, III or IV during a quarter.
At present, if, during a quarter, a CAMELS (or ROCA) rating change
occurs that results in a large institution that is subject to the
supervisory and debt ratings method or an insured branch of a foreign
bank moving from Risk Category I to Risk Category II, III or IV, the
institution's assessment rate for the portion of the quarter that it
was in Risk Category I is based upon its assessment rate for the prior
quarter. No new Risk Category I assessment rate is developed for the
quarter in which the institution moves to Risk Category II, III or
IV.\64\
---------------------------------------------------------------------------
\64\ 12 CFR 327.9(d)(5).
---------------------------------------------------------------------------
The opposite holds true for a small institution or a large
institution subject to the financial ratios method when it moves from
Risk Category I to Risk Category II, III or IV during a quarter. A new
Risk Category I assessment rate is developed for the quarter in which
the institution moves to Risk Category II, III or IV.\65\
---------------------------------------------------------------------------
\65\ 12 CFR 327.9(d)(1)(ii). In fact, the FDIC had provided in
the preamble to the 2006 assessments rule that no new Risk Category
I assessment rate would be determined for any large institution for
the quarter in which it moved to Risk Category II, III or IV, but,
as the result of a drafting inconsistency, this intention was not
realized in the regulatory text. 71 FR 69,282, 69,293 (Nov. 30,
2006). The FDIC now believes that a new Risk Category I assessment
rate should be determined for any large institution for the quarter
in which it moves to Risk Category II, III or IV.
---------------------------------------------------------------------------
The FDIC proposes that when a large institution subject to the
large bank method or an insured branch of a foreign bank moves from
Risk Category I to Risk Category II, III or IV during a quarter, a new
Risk Category I assessment rate be developed for that quarter. That
rate for the portion of the quarter that the institution was in Risk
Category I would be determined as for any other institution in Risk
Category I subject to the same pricing method, except that the rate
would only apply for the portion of the quarter that the institution
was actually in Risk Category I.
Since implementation of the 2006 assessments rule in 2007, several
large institutions that were subject to the supervisory and debt
ratings method have moved from Risk Category I to a Risk Category II or
III. More than once, changes occurred in these institutions' debt
ratings or CAMELS component ratings while the institution was in Risk
Category I, but the institutions' assessment rates for the quarter did
not reflect these changes. In one case, an institution received a debt
rating downgrade early in the quarter, but, because it fell to Risk
Category II on the 89th day of the quarter, this debt rating downgrade
did not affect its assessment rate. The FDIC's proposal is intended to
correct these outcomes and better ensure that an institution's
assessment rate reflects the risk that it poses.
The FDIC is also proposing to amend its assessment regulations to
correct technical errors and make clarifications to the regulatory
language in several sections of Part 327 for the reasons set forth
below.
A technical correction is proposed to the language of 12 CFR
327.3(a), the regulatory requirement that each depository institution
pay an assessment to the Corporation. Language creating an exception
``as provided in paragraph (b) of this section'' was inadvertently
retained in the initial clause of section 327.3(a) when the assessment
regulations were amended in 2006. Formerly, paragraph (b) excepted
newly insured institutions from payment of assessments for the
semiannual period in which they became insured institutions; that
exception was eliminated in 2006. Paragraph (b) now addresses quarterly
certified statement invoices and payment dates. Accordingly, the FDIC
proposes to amend section 327.3(a) to eliminate the reference to
paragraph (b).
12 CFR 327.6(b)(1) addresses assessments for the quarter in which a
terminating transfer occurs when the acquiring institution uses average
daily balances to calculate its assessment base. In that situation,
section 327.6(b)(1) provides that the terminating institution's
assessment for that quarter is reduced by the percentage of the quarter
remaining after the terminating transfer occurred, and calculated at
the acquiring institution's assessment rate. Although it can be
inferred that the terminating institution's assessment base for that
quarter is to be used in the reduction calculation, the section is not
explicit. Accordingly, the FDIC proposes to amend the section to
clarify that the reduction calculation is accomplished by applying the
acquirer's rate to the terminating institution's assessment base for
that quarter.
12 CFR 327.8(i) defines Long Term Debt Issuer Rating as the
``current rating'' of an insured institution's long-term debt
obligations by one of the named ratings companies. ``Current rating''
is defined in Sec. 327.8(i) as ``one that has been confirmed or
assigned within 12 months before the end of the quarter for which the
assessment rate is being determined.'' The section also provides: ``If
no current rating is available, the institution will be deemed to have
no long-term debt issuer rating.'' The language of Sec. 327.8(i)
requires the FDIC to disregard a long-term debt issuer rating that is
still in effect--that is, it has not been withdrawn and replaced by
another rating--if it is greater than 12 months old when the FDIC
calculates an institution's assessment rate. To remedy this, the FDIC
proposes to amend Sec. 327.8(i) to read as follows:
(i) Long-Term Debt Issuer Rating. A long-term debt issuer rating
shall mean a rating of an insured depository institution's long-term
debt obligations by Moody's Investor Services, Standard & Poor's, or
Fitch Ratings that has not been withdrawn before the end of the
quarter being assessed. A withdrawn rating shall mean one that has
been withdrawn by the rating agency and not replaced with another
rating by the same agency. A long-term debt issuer rating does not
include a rating of a company that controls an insured depository
institution, or an affiliate or subsidiary of the institution.
Consistent with this amendment, the FDIC proposes to amend two
references to long-term debt issuer rating, as defined in Sec.
327.8(i), ``in effect at the end of the quarter being assessed'' that
appear in 12 CFR 327.9(d) and 12 CFR 327.9(d)(2). The proposal is to
amend these sections by deleting the phrase ``in effect at the end of
the quarter being assessed'' and to add ``as defined in Sec.
327.8(i)'' to section 327.9(d)(2) so that its construction parallels
section 327.9(d).
12 CFR 327.8(l) and (m) define ``New depository institution'' and
``Established depository institution.'' The former is ``a bank or
thrift that has not been chartered for at least five years as of the
last day of any quarter for which it is being assessed''; the latter is
``a bank or thrift that has been chartered for at least
[[Page 61579]]
five years as of the last day of any quarter for which it is being
assigned.'' In the FDIC's view, this regulatory language allows a
previously uninsured institution to be treated as an established
institution based on charter date. To remedy this, the FDIC proposes to
amend sections 327.8(l) and (m) to read as follows:
(l) New depository institution. A new insured depository
institution is a bank or thrift that has been federally insured for
less than five years as of the last day of any quarter for which it
is being assessed.
(m) Established depository institution. An established insured
depository institution is a bank or thrift that has been federally
insured for at least five years as of the last day of any quarter
for which it is being assessed.
12 CFR 327.9(d)(7)(viii), which addresses rates applicable to
institutions subject to the subsidiary or credit union exception,
contains language making the section applicable ``[o]n or after January
1, 2010. * * *'' This language is redundant of language in section
327.9(d)(7)(i)(A) and the FDIC proposes to delete it.
XIV. Effective Date
The FDIC proposes that a final rule following this proposed rule
would become effective on April 1, 2009, except for the proposed
uniform increase of seven basis points to current assessment rates,
which would take effect January 1, 2009, for the assessment for the
first quarter of 2009 only.
XV. Request for Comments
The FDIC seeks comment on every aspect of this proposed rulemaking.
In particular, the FDIC seeks comment on the issues set out below. The
FDIC asks that commenters include reasons for their positions.
Brokered Deposits
1. Under the proposal, the definition of brokered deposits for
purposes of both the adjusted brokered deposit ratio and the brokered
deposit adjustment would include sweep accounts and deposits received
through a network on a reciprocal basis that meet the statutory
definition of a brokered deposit, but would exclude high cost deposits,
including those received through a listing service and the Internet,
that do not meet the statutory definition of a brokered deposit.
a. Should sweep accounts that meet the statutory definition of
brokered deposits be excluded from the definition of brokered deposits
for purposes of the adjusted brokered deposit ratio or the brokered
deposit adjustment? If so, how?
b. Should deposits received through a network on a reciprocal basis
that meet the statutory definition of brokered deposits be excluded
from the definition of brokered deposits for purposes of the adjusted
brokered deposit ratio or the brokered deposit adjustment? If so, how?
c. Should high cost deposits, including those received through a
listing service and the Internet, that do not meet the statutory
definition of a brokered deposit be included in the definition of
brokered deposits for purposes of the adjusted brokered deposit ratio
or the brokered deposit adjustment? If so, how?
The Adjusted Brokered Deposit Ratio
2. Should the proposed new adjusted brokered deposit ratio be
included in the financial ratios method?
3. Under the proposal, only brokered deposits in excess of 10
percent of domestic deposits would be considered. Is this the proper
amount or should the percentage be higher or lower?
4. Under the proposal, asset growth over the previous 4 years would
have to be greater than 20 percent to potentially trigger the adjusted
brokered deposit ratio.
a. Should this amount be higher or lower? Should a different time
period be used?
b. Under the proposal, asset growth rates would be determined using
data adjusted for mergers and acquisitions. An institution that
acquires a new institution (one less than five years old) or that
acquires branches from another institution would, in effect, be treated
as if its assets had grown from internal growth (since its assets four
years previously would not increase, but its current assets would).
i. Should asset growth rates be determined using data adjusted for
mergers and acquisitions? An argument can be made that growth from
mergers and acquisitions is still growth.
ii. Should growth arising from merger with or the acquisition of or
by an institution with no assets four years previously be excluded from
the asset growth determination?
iii. Should growth arising from the acquisition of branches from
another institution be excluded from the asset growth determination? If
so, how could this be done, given that institutions do not report
branch acquisitions in the Call Report or TFR?
The Large Bank Method
5. Under the proposal, the assessment rate for a large institution
with a long-term debt issuer rating would be determined using a
combination of the institution's weighted average CAMELS component
rating, its long-term debt issuer ratings (converted to numbers and
averaged) and the financial ratios method assessment rate, each equally
weighted.
a. Should the financial ratios method be incorporated in this
manner?
b. Should the weight assigned to each of the three measures be
equal, as proposed, or should different weights be assigned?
The Large Bank Adjustment
6. Under the proposal, the maximum large bank adjustment would be
increased to one basis point. Should it be increased? Should it be
increased further?
The Unsecured Debt Adjustment--
7. Under the proposal, an institution's base assessment rate could
be lowered for the unsecured debt adjustment.
a. Should there be an unsecured debt adjustment?
b. For a large institution, the unsecured debt adjustment would be
determined by multiplying the institution's long-term unsecured debts
as a percentage of domestic deposits by 20 basis points.
i. Is this the proper way to calculate an unsecured debt adjustment
for a large institution?
ii. Should other amounts be included in the unsecured debt
adjustment?
iii. Should any amounts be excluded from the adjustment?
c. Are the proposed definitions of long-term unsecured debts the
right definitions or should they be changed?
i. Should a long-term senior unsecured or subordinated debt that
has put options or other provisions that would allow the holder to
accelerate payment (for example, if capital fell below a certain level)
be excluded from the definition? (Under the proposal, it would not be.)
d. Under the proposal, for senior unsecured or subordinated debt to
be considered ``long-term,'' it must have a remaining maturity of at
least one year. Should this period be longer? If so, how long should it
be?
e. For a small institution, the unsecured debt adjustment would
factor in qualified amounts of Tier 1 capital in addition to long-term
unsecured debt. The amount of qualified Tier 1 capital would be the sum
of one-half of the Tier 1 capital amount between 10 percent and 15
percent of adjusted average assets (for Call Report filers) or adjusted
total assets (for TFR filers) and the full amount of Tier 1 capital
amount
[[Page 61580]]
exceeding 15 percent of adjusted average assets (for Call Report
filers) or adjusted total assets (for TFR filers).
i. Should Tier 1 capital be included in the unsecured debt
adjustment for a small institution?
ii. Some may be concerned that this proposal might, in effect,
establish new capital standards. An alternative would be to count some
portion of all Tier 1 capital above 5 percent (the minimum amount
needed for an institution to be well capitalized) in the unsecured debt
adjustment for small institutions. Is this alternative preferable to
the proposal? If so, what portion of Tier 1 capital above 5 percent
should be included in the unsecured debt adjustment?
iii. Should the definition of qualified Tier 1 capital be otherwise
expanded to include larger amounts of capital or reduced to exclude
more capital?
iv. Should other amounts be included in the unsecured debt
adjustment?
8. Under the proposal, any decrease in base assessment rates
resulting from an unsecured debt adjustment would be limited to two
basis points. Is this amount sufficient to encourage a significant
number of institutions to issue additional subordinated debt or senior
unsecured debt? Should the maximum possible adjustment be larger or
smaller?
9. Under the proposal, the unsecured debt adjustment could lower an
institution's rate below the minimum initial base assessment rate for
its risk category. Should this be allowed?
The Secured Liability Adjustment
10. Under the proposal, an institution's base assessment rates
could be increased by the secured liability adjustment.
a. Should there be a secured liabilities adjustment?
b. Should the 15 percent ratio of secured liabilities to domestic
deposits be increased or decreased?
c. Should any increase in assessment rates resulting from the
secured liability adjustment be limited to 50 percent or should another
limit or no limit apply?
Brokered Deposit Adjustment
11. Under the proposal, an institution in Risk Category II, III or
IV would also be subject to an adjustment for brokered deposits.
a. Should a brokered deposit adjustment be made?
b. Is the manner of calculating the adjustment appropriate or
should it be changed?
i. Should the threshold ratio of brokered deposits to domestic
deposits be 10 percent or some higher or lower amount?
ii. Should the multiplication factor be 25 basis points or some
higher or lower amount?
c. Should the adjustment be limited to 10 basis points?
Assessment Rates
12. Under the proposal, effective April 1, 2009, the spread between
minimum and maximum initial base assessment rates in Risk Category I
would increase from the current 2 basis points to an initial range of 4
basis points. Is this the appropriate spread or should it be greater or
less?
13. Under the proposal, effective April 1, 2009, based upon June
30, 2008 data, the percentage of both large and small established Risk
Category I institutions subject to: (a) The minimum initial base
assessment rate would be set at 25 percent; and (b) the maximum initial
base assessment rate would be set at 15 percent. (These percentages
would change over time as institution's risk measures change.) Are
these the proper percentages or should they be higher or lower?
14. Under the proposal, effective April 1, 2009, initial base
assessment rates would be as set forth in Table 17 below.
Table 17--Proposed Initial Base Assessment Rates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Risk category
------------------------------------------------------------------------------------
I *
---------------------------------- II III IV
Minimum Maximum
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points)..................................... 10 14 20 30 45
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Initial base rates that were not the minimum or maximum rate would vary between these rates.
Should these be the initial base assessment rates or should they be
decreased or increased?
15. Under the proposal, effective April 1, 2009, after applying all
possible adjustments, total base assessment rates for each risk
category would be as set out in Table 18 below.
Table 18--Range of Total Base Assessment Rates*
--------------------------------------------------------------------------------------------------------------------------------------------------------
Risk category I Risk category II Risk category III Risk category IV
--------------------------------------------------------------------------------------------------------------------------------------------------------
Initial base assessment rate....... 10--14.................... 20........................ 30........................ 45
Unsecured debt adjustment.......... -2-0...................... -2-0...................... -2-0...................... -2-0
Secured liability adjustment....... 0-7....................... 0-10...................... 0-15...................... 0-22.5
Brokered deposit adjustment........ ........................... 0-10...................... 0-10...................... 0-10
-------------------------------------------------------------------------------------------------------------------
Total base assessment rate..... 8-21.0.................... 18-40.0................... 28-55.0................... 43-77.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Initial base rates that were not the minimum or maximum rate would vary between
these rates.
a. Are these the appropriate rates or should they be decreased or
increased?
b. Is the maximum assessment rates applicable to Risk Categories
III and IV so high that they might cause the failure of an institution
that might not otherwise fail? Should rates for Risk Categories III or
IV be capped at lower amounts? If so, what should the cap(s) be?
c. Under the proposal, an institution's initial base assessment
rate would be
[[Page 61581]]
calculated and adjustments made in the following order: First, any
large bank adjustment; second, any unsecured debt adjustment; third,
any secured liability adjustment; and, finally, any brokered deposit
adjustment. Is this the appropriate order or should it be changed?
16. The proposed rule would continue to allow the FDIC Board to
adopt actual rates that were higher or lower than total base assessment
rates without the necessity of further notice-and-comment rulemaking,
provided that: (1) The Board could not thereafter increase or decrease
rates from one quarter to the next by more than three basis points; and
(2) cumulative increases and decreases could not be more than three
basis points higher or lower than the adjusted base rates without
further notice-and-comment rulemaking. Should the Board the FDIC should
retain this authority to make changes within prescribed limits to
assessment rates, as proposed, without the necessity of additional
notice-and-comment rulemaking?
Assessment Rates for the First Quarter of 2009
17. Should the FDIC uniformly increase current assessment rates by
seven basis points for the first quarter of 2009 as proposed? Should
the increase be greater or less? Should any rate increase be postponed
until the second quarter of 2009 when the proposed changes to the
assessment system would take effect?
Definition of well capitalized for assessment purposes
18. Recently, some institutions have had to write down or write off
the value of stock in Fannie Mae and Freddie Mac. If an institution is
adequately or undercapitalized for assessment purposes, but would be
well capitalized absent such a write-down or write-off, should it be
treated as well capitalized for assessment purposes? If an institution
is undercapitalized for assessment purposes, but would be adequately
capitalized absent such a write-down or write-off, should it be treated
as adequately capitalized for assessment purposes? If so, how would the
institution receive such different capital treatment? Should it have to
file a request for review with the FDIC?
XVI. Regulatory Analysis and Procedure
A. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 113
Stat. 1338, 1471 (Nov. 12, 1999), requires the federal banking agencies
to use plain language in all proposed and final rules published after
January 1, 2000. The FDIC invites your comments on how to make this
proposal easier to understand. For example:
Has the FDIC organized the material to suit your needs? If
not, how could this material be better organized?
Are the requirements in the proposed regulation clearly
stated? If not, how could the regulation be more clearly stated?
Does the proposed regulation contain language or jargon
that is not clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes to the format would make the regulation
easier to understand?
What else could the FDIC do to make the regulation easier
to understand?
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires that each federal
agency either certify that a proposed rule would not, if adopted in
final form, have a significant economic impact on a substantial number
of small entities or prepare an initial regulatory flexibility analysis
of the proposal and publish the analysis for comment.\66\ Certain types
of rules, such as rules of particular applicability relating to rates
or corporate or financial structures, or practices relating to such
rates or structures, are expressly excluded from the definition of
``rule'' for purposes of the RFA.\67\ The proposed rule relates
directly to the rates imposed on insured depository institutions for
deposit insurance, and to the risk-based assessment system components
that measure risk and weigh that risk in determining each institution's
assessment rate, and includes proposed technical and other changes to
the FDIC's assessment regulations. Nonetheless, the FDIC is voluntarily
undertaking an initial regulatory flexibility analysis of the proposal
and seeking comment on it.
---------------------------------------------------------------------------
\66\ See 5 U.S.C. 603, 604 and 605.
\67\ 5 U.S.C. 601.
---------------------------------------------------------------------------
As of June 30, 2008, of the 8,451 insured commercial banks and
savings institutions, there were 4,758 small insured depository
institutions as that term is defined for purposes of the RFA (i.e.,
those with $165 million or less in assets).
For purposes of this analysis, whether the FDIC were to collect
needed assessments under the existing rule or under the proposed rule,
the total amount of assessments collected would be the same. The FDIC's
total assessment needs are driven by the statutory requirement that the
FDIC adopt a restoration plan that provides that the fund reserve ratio
reach at least 1.15 percent within five years (absent extraordinary
circumstances) and by the FDIC's aggregate insurance losses, expenses,
investment income, and insured deposit growth, among other factors. In
this analysis, each institution's existing rate is increased uniformly
so that total FDIC assessment revenue would equal that provided under
the proposed rates. Therefore, beginning April 1, 2009, the proposed
rule would merely alter the distribution of assessments among insured
institutions compared to the adjusted existing rates. Using the data as
of June 30, 2008, the FDIC calculated the total assessments that would
be collected under the base rate schedule in the proposed rule.
The economic impact of the proposal on each small institution for
RFA purposes (i.e., institutions with assets of $165 million or less)
was then calculated as the difference in annual assessments under the
proposed rule compared to the existing rule as a percentage of the
institution's annual revenue and annual profits, assuming the same
total assessments collected by the FDIC from the banking
industry.68 69 70
---------------------------------------------------------------------------
\68\ Throughout this regulatory flexibility analysis (unlike the
rest of the notice of proposed rulemaking), a ``small institution''
refers to an institution with assets of $165 million or less.
\69\ An institution's total revenue is defined as the sum of its
annual net interest income and non-interest income. An institution's
profit is defined as income before taxes and extraordinary items,
gross of loan loss provisions.
\70\ The proposed rates for the first of 2009 would not alter
the present distribution of rates, but would uniformly raise the
rates for all institutions, including all small institutions for RFA
purposes.
---------------------------------------------------------------------------
Based on the June 2008 data, of the total of 4,758 small
institutions, five percent would have experienced an increase in
assessments equal to five percent or more of their total revenue. These
figures do not reflect a significant economic impact on revenues for a
substantial number of small insured institutions. Table 19 below sets
forth the results of the analysis in more detail.
[[Page 61582]]
Table 19--Proposed Assessments Compared to a Uniform Increase in
Assessments as a Percentage of Institution Total Revenue
------------------------------------------------------------------------
Number of Percent of
Change institutions institutions
------------------------------------------------------------------------
More than 10 percent lower..... 142 2.98
5 to 10 percent lower.......... 1,150 24.17
0 to 5 percent lower........... 2,975 62.53
0 to 5 percent higher.......... 253 5.32
5 to 10 percent higher......... 167 3.51
More than 10 percent higher.... 71 1.49
---------------------------------------
Total...................... 4,758 100.00
------------------------------------------------------------------------
The FDIC performed a similar analysis to determine the impact on
profits for small institutions. Based on June 2008 data, of those small
institutions with reported profits, about 6 percent would have an
increase in assessments equal to 10 percent or more of their profits.
Again, these figures do not reflect a significant economic impact on
profits for a substantial number of small insured institutions. Table
20 sets forth the results of the analysis in more detail.
Table 20--Proposed Assessments Compared to a Uniform Increase in
Assessments as a Percentage of Institution Profits*
------------------------------------------------------------------------
Number of Percent of
Change institutions institutions
------------------------------------------------------------------------
More than 30 percent lower..... 496 13.17
20 to 30 percent lower......... 471 12.51
10 to 20 percent lower......... 1,666 44.25
5 to 10 percent lower.......... 624 16.57
0 to 5 percent lower........... 227 6.03
0 to 10 percent more........... 63 1.67
Greater than 10 percent........ 218 5.79
---------------------------------------
Total...................... 3,765 100.00
------------------------------------------------------------------------
* Institutions with negative or no profit were excluded. These
institutions are shown separately in Table 21.
Table 20 excludes small institutions that either show no profit or
show a loss, because a percentage cannot be calculated. The FDIC
analyzed the effect of the proposal on these institutions by
determining the annual assessment change (either an increase or a
decrease) that would result. Table 21 below shows that just over 6
percent (61) of the 991 small insured institutions with negative or no
reported profits would have an increase of $20,000 or more in their
annual assessments.
Table 21--Proposed Assessments Compared to a Uniform Increase in
Assessments for Institutions With Negative or No Reported Profit
------------------------------------------------------------------------
Number of Percent of
Change in assessments institutions institutions
------------------------------------------------------------------------
$20,000 decrease or more....... 62 6.26
$10,000-$20,000 decrease....... 100 10.09
$5,000-$10,000 decrease........ 213 21.49
$1,000-$5,000 decrease......... 349 35.22
$0-$1,000 decrease............. 63 6.36
$0-$10,000 increase............ 89 8.98
$10,000-$20,000 increase....... 54 5.45
$20,000 increase or more....... 61 6.16
---------------------------------------
Total...................... 991 100.0
------------------------------------------------------------------------
The proposed rule does not directly impose any ``reporting'' or
``recordkeeping'' requirements within the meaning of the Paperwork
Reduction Act. The compliance requirements for the proposed rule would
not exceed existing compliance requirements for the present system of
FDIC deposit insurance assessments, which, in any event, are governed
by separate regulations.
The FDIC is unaware of any duplicative, overlapping or conflicting
federal rules.
The initial regulatory flexibility analysis set forth above
demonstrates that, if adopted in final form, the proposed rule would
not have a significant economic impact on a substantial number of small
institutions
[[Page 61583]]
within the meaning of those terms as used in the RFA.\71\
---------------------------------------------------------------------------
\71\ 5 U.S.C. 605.
---------------------------------------------------------------------------
Commenters are invited to provide the FDIC with any information
they may have about the likely quantitative effects of the proposal on
small insured depository institutions (those with $165 million or less
in assets).
XVII. Paperwork Reduction Act
No collections of information pursuant to the Paperwork Reduction
Act (44 U.S.C. 3501 et seq.) are contained in the proposed rule.
A. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
The FDIC has determined that the proposed rule will not affect
family well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, enacted as part of the Omnibus
Consolidated and Emergency Supplemental Appropriations Act of 1999
(Pub. L. 105-277, 112 Stat. 2681).
List of Subjects in 12 CFR Part 327
Bank deposit insurance, Banks, banking, Savings associations.
For the reasons set forth in the preamble, the FDIC proposes to
amend chapter III of title 12 of the Code of Federal Regulations as
follows:
PART 327--ASSESSMENTS
1. The authority citation for part 327 continues to read as
follows:
Authority: 12 U.S.C. 1441, 1813, 1815, 1817-1819, 1821; Sec.
2101-2109, Pub. L. 109-171, 120 Stat. 9-21, and Sec. 3, Pub. L. 109-
173, 119 Stat. 3605.
2. Revise Sec. 327.3(a)(1) to read as follows:
Sec. 327.3 Payment of assessments.
(a) Required. (1) In general. Each insured depository institution
shall pay to the Corporation for each assessment period an assessment
determined in accordance with this part 327.
* * * * *
3. Revise Sec. 327.6(b)(1) to read as follows:
Sec. 327.6 Terminating transfers; other terminations of insurance.
* * * * *
(b) Assessment for quarter in which the terminating transfer
occurs--(1) Acquirer using Average Daily Balances. If an acquiring
institution's assessment base is computed using average daily balances
pursuant to Sec. 327.5, the terminating institution's assessment for
the quarter in which the terminating transfer occurs shall be reduced
by the percentage of the quarter remaining after the terminating
transfer and calculated at the acquiring institution's rate and using
the assessment base reported in the terminating institution's report of
condition for that quarter.
* * * * *
4. Revise Sec. 327.8(g), (h), (i), (l), and (m), and add
paragraphs (o), (p), (q) and (r) to read as follows:
Sec. 327.8 Definitions.
* * * * *
(g) Small Institution. An insured depository institution with
assets of less than $10 billion as of December 31, 2006 (other than an
insured branch of a foreign bank or an institution classified as large
for purposes of Sec. 327.9(d)(8)) shall be classified as a small
institution. If, after December 31, 2006, an institution classified as
large under paragraph (h) of this section reports assets of less than
$10 billion in its reports of condition for four consecutive quarters,
the FDIC will reclassify the institution as small beginning the
following quarter.
(h) Large Institution. An institution classified as large for
purposes of Sec. 327.9(d)(8) or an insured depository institution with
assets of $10 billion or more as of December 31, 2006 (other than an
insured branch of a foreign bank) shall be classified as a large
institution. If, after December 31, 2006, an institution classified as
small under paragraph (g) of this section reports assets of $10 billion
or more in its reports of condition for four consecutive quarters, the
FDIC will reclassify the institution as large beginning the following
quarter.
(i) Long-Term Debt Issuer Rating. A long-term debt issuer rating
shall mean a rating of an insured depository institution's long-term
debt obligations by Moody's Investor Services, Standard & Poor's, or
Fitch Ratings that has not been withdrawn before the end of the quarter
being assessed. A withdrawn rating shall mean one that has been
withdrawn by the rating agency and not replaced with another rating by
the same agency. A long-term debt issuer rating does not include a
rating of a company that controls an insured depository institution, or
an affiliate or subsidiary of the institution.
* * * * *
(l) New depository institution. A new insured depository
institution is a bank or thrift that has been federally insured for
less than five years as of the last day of any quarter for which it is
being assessed.
(m) Established depository institution. An established insured
depository institution is a bank or thrift that has been federally
insured for at least five years as of the last day of any quarter for
which it is being assessed.
(1) Merger or consolidation involving new and established
institution(s). Subject to paragraphs (m)(2), (3), (4), (5) of this
section and Sec. 327.9(d)(10)(ii), (iii), when an established
institution merges into or consolidates with a new institution, the
resulting institution is a new institution unless:
(i) The assets of the established institution, as reported in its
report of condition for the quarter ending immediately before the
merger, exceeded the assets of the new institution, as reported in its
report of condition for the quarter ending immediately before the
merger; and
(ii) Substantially all of the management of the established
institution continued as management of the resulting or surviving
institution.
(2) Consolidation involving established institutions. When
established institutions consolidate into a new institution, the
resulting institution is an established institution.
(3) Grandfather exception. If a new institution merges into an
established institution, and the merger agreement was entered into on
or before July 11, 2006, the resulting institution shall be deemed to
be an established institution for purposes of this section.
(4) Subsidiary exception. Subject to paragraph (m)(5) of this
section, a new institution will be considered established if it is a
wholly owned subsidiary of:
(i) A company that is a bank holding company under the Bank Holding
Company Act of 1956 or a savings and loan holding company under the
Home Owners' Loan Act, and:
(A) At least one eligible depository institution (as defined in 12
CFR 303.2(r)) that is owned by the holding company has been chartered
as a bank or savings association for at least five years as of the date
that the otherwise new institution was established; and
(B) The holding company has a composite rating of at least ``2''
for bank holding companies or an above average or ``A'' rating for
savings and loan holding companies and at least 75 percent of its
insured depository institution assets are assets of eligible depository
institutions, as defined in 12 CFR 303.2(r); or
(ii) An eligible depository institution, as defined in 12 CFR
303.2(r), that has been chartered as a bank or savings association for
at least five years as of
[[Page 61584]]
the date that the otherwise new institution was established.
(5) Effect of credit union conversion. In determining whether an
insured depository institution is new or established, the FDIC will
include any period of time that the institution was a federally insured
credit union.
* * * * *
(o) Unsecured debt--For purposes of the unsecured debt adjustment
as set forth in Sec. 327.9(d)(5), unsecured debt shall include senior
unsecured liabilities and subordinated debt.
(p) Senior unsecured liability--For purposes of the unsecured debt
adjustment as set forth in Sec. 327.9(d)(5), senior unsecured
liabilities shall be the unsecured portion of other borrowed money as
reported on reports of condition (Call Reports and Thrift Financial
Reports).
(q) Subordinated debt--For purposes of the unsecured debt
adjustment as set forth in Sec. 327.9(d)(5), subordinated debt shall
be as defined in the report of condition for the reporting period;
however, subordinated debt shall also include limited-life preferred
stock as defined in the report of condition for the reporting period.
(r) Long-term unsecured debt--For purposes of the unsecured debt
adjustment as set forth in Sec. 327.9(d)(5), long-term unsecured debt
shall be unsecured debt with at least one year remaining until
maturity.
5. Revise Sec. Sec. 327.9 and 327.10 to read as follows:
Sec. 327.9 Assessment risk categories and pricing methods.
(a) Risk Categories.--Each insured depository institution shall be
assigned to one of the following four Risk Categories based upon the
institution's capital evaluation and supervisory evaluation as defined
in this section.
(1) Risk Category I. All institutions in Supervisory Group A that
are Well Capitalized;
(2) Risk Category II. All institutions in Supervisory Group A that
are Adequately Capitalized, and all institutions in Supervisory Group B
that are either Well Capitalized or Adequately Capitalized;
(3) Risk Category III. All institutions in Supervisory Groups A and
B that are Undercapitalized, and all institutions in Supervisory Group
C that are Well Capitalized or Adequately Capitalized; and
(4) Risk Category IV. All institutions in Supervisory Group C that
are Undercapitalized.
(b) Capital evaluations. An institution will receive one of the
following three capital evaluations on the basis of data reported in
the institution's Consolidated Reports of Condition and Income, Report
of Assets and Liabilities of U.S. Branches and Agencies of Foreign
Banks, or Thrift Financial Report dated as of March 31 for the
assessment period beginning the preceding January 1; dated as of June
30 for the assessment period beginning the preceding April 1; dated as
of September 30 for the assessment period beginning the preceding July
1; and dated as of December 31 for the assessment period beginning the
preceding October 1.
(1) Well Capitalized. (i) Except as provided in paragraph
(b)(1)(ii) of this section, a Well Capitalized institution is one that
satisfies each of the following capital ratio standards: Total risk-
based ratio, 10.0 percent or greater; Tier 1 risk-based ratio, 6.0
percent or greater; and Tier 1 leverage ratio, 5.0 percent or greater.
(ii) For purposes of this section, an insured branch of a foreign
bank will be deemed to be Well Capitalized if the insured branch:
(A) Maintains the pledge of assets required under Sec. 347.209 of
this chapter; and
(B) Maintains the eligible assets prescribed under Sec. 347.210 of
this chapter at 108 percent or more of the average book value of the
insured branch's third-party liabilities for the quarter ending on the
report date specified in paragraph (b) of this section.
(2) Adequately Capitalized. (i) Except as provided in paragraph
(b)(2)(ii) of this section, an Adequately Capitalized institution is
one that does not satisfy the standards of Well Capitalized under this
paragraph but satisfies each of the following capital ratio standards:
Total risk-based ratio, 8.0 percent or greater; Tier 1 risk-based
ratio, 4.0 percent or greater; and Tier 1 leverage ratio, 4.0 percent
or greater.
(ii) For purposes of this section, an insured branch of a foreign
bank will be deemed to be Adequately Capitalized if the insured branch:
(A) Maintains the pledge of assets required under Sec. 347.209 of
this chapter; and
(B) Maintains the eligible assets prescribed under Sec. 347.210 of
this chapter at 106 percent or more of the average book value of the
insured branch's third-party liabilities for the quarter ending on the
report date specified in paragraph (b) of this section; and
(C) Does not meet the definition of a Well Capitalized insured
branch of a foreign bank.
(3) Undercapitalized. An undercapitalized institution is one that
does not qualify as either Well Capitalized or Adequately Capitalized
under paragraphs (b)(1) and (b)(2) of this section.
(c) Supervisory evaluations. Each institution will be assigned to
one of three Supervisory Groups based on the Corporation's
consideration of supervisory evaluations provided by the institution's
primary federal regulator. The supervisory evaluations include the
results of examination findings by the primary federal regulator, as
well as other information that the primary federal regulator determines
to be relevant. In addition, the Corporation will take into
consideration such other information (such as state examination
findings, as appropriate) as it determines to be relevant to the
institution's financial condition and the risk posed to the Deposit
Insurance Fund. The three Supervisory Groups are:
(1) Supervisory Group ``A.'' This Supervisory Group consists of
financially sound institutions with only a few minor weaknesses;
(2) Supervisory Group ``B.'' This Supervisory Group consists of
institutions that demonstrate weaknesses which, if not corrected, could
result in significant deterioration of the institution and increased
risk of loss to the Deposit Insurance Fund; and
(3) Supervisory Group ``C.'' This Supervisory Group consists of
institutions that pose a substantial probability of loss to the Deposit
Insurance Fund unless effective corrective action is taken.
(d) Determining Initial Base Assessment Rates for Risk Category I
Institutions. Subject to paragraphs (d)(2)(i), (4), (5), (6), (8), (9)
and (10) of this section, an insured depository institution in Risk
Category I, except for a large institution that has at least one long-
term debt issuer rating, as defined in Sec. 327.8(i), shall have its
initial base assessment rate determined using the financial ratios
method set forth in paragraph (d)(1) of this section. A large insured
depository institution in Risk Category I that has at least one long-
term debt issuer rating shall have its initial base assessment rate
determined using the large bank method set forth in paragraph (d)(2) of
this section (subject to paragraphs (d)(2)(i), (4), (5), (6), (8), (9)
and (10) of this section). The initial base assessment rate for a large
institution whose assessment rate in the prior quarter was determined
using the large bank method, but which no longer has a long-term debt
issuer rating, shall
[[Page 61585]]
be determined using the financial ratios method.
(1) Financial ratios method. Under the financial ratios method for
Risk Category I institutions, each of six financial ratios and a
weighted average of CAMELS component ratings will be multiplied by a
corresponding pricing multiplier. The sum of these products will be
added to or subtracted from a uniform amount. The resulting sum shall
equal the institution's initial base assessment rate; provided,
however, that no institution's initial base assessment rate shall be
less than the minimum initial base assessment rate in effect for Risk
Category I institutions for that quarter nor greater than the maximum
initial base assessment rate in effect for Risk Category I institutions
for that quarter. An institution's initial base assessment rate,
subject to adjustment pursuant to paragraphs (d)(4), (5) and (6) of
this section, as appropriate (which will produce the total base
assessment rate), and adjusted for the actual assessment rates set by
the Board under Sec. 327.10(c), will equal an institution's assessment
rate; provided, however, that no institution's total base assessment
rate will be less than the minimum total base assessment rate in effect
for Risk Category I institutions for that quarter nor greater than the
maximum total base assessment rate in effect for Risk Category I
institutions for that quarter. The six financial ratios are: Tier 1
Leverage Ratio; Loans past due 30--89 days/gross assets; Nonperforming
assets/gross assets; Net loan charge-offs/gross assets; Net income
before taxes/risk-weighted assets; and the Adjusted brokered deposit
ratio. The ratios are defined in Table A.1 of Appendix A to this
subpart. The ratios will be determined for an assessment period based
upon information contained in an institution's report of condition
filed as of the last day of the assessment period as set out in Sec.
327.9(b). The weighted average of CAMELS component ratings is created
by multiplying each component by the following percentages and adding
the products: Capital adequacy--25%, Asset quality--20%, Management--
25%, Earnings--10%, Liquidity--10%, and Sensitivity to market risk--
10%. Appendix A to this subpart contains the initial values of the
pricing multipliers and uniform amount, describes their derivation, and
explains how they will be periodically updated.
(i) Publication and uniform amount and pricing multipliers. The
FDIC will publish notice in the Federal Register whenever a change is
made to the uniform amount or the pricing multipliers for the financial
ratios method.
(ii) Implementation of CAMELS rating changes--(A) Changes between
risk categories. If, during a quarter, a CAMELS composite rating change
occurs that results in an institution whose Risk Category I assessment
rate is determined using the financial ratios method moving from Risk
Category I to Risk Category II, III or IV, the institution's initial
base assessment rate for the portion of the quarter that it was in Risk
Category I shall be determined using the supervisory ratings in effect
before the change and the financial ratios as of the end of the
quarter, subject to adjustment pursuant to paragraphs (d)(4), (5), and
(6) of this section, as appropriate, and adjusted for the actual
assessment rates set by the Board under Sec. 327.10(c). For the
portion of the quarter that the institution was not in Risk Category I,
the institution's initial base assessment rate, which shall be subject
to adjustment pursuant to paragraphs (d)(5), (6) and (7), shall be
determined under the assessment schedule for the appropriate Risk
Category. If, during a quarter, a CAMELS composite rating change occurs
that results in an institution whose initial base assessment rate is
determined using the financial ratios method moving from Risk Category
II, III or IV to Risk Category I, the institution's initial base
assessment rate for the portion of the quarter that it was in Risk
Category I shall be determined using the financial ratios method,
subject to adjustment pursuant to paragraphs (d)(4), (5), and (6) of
this section, as appropriate, and adjusted for the actual assessment
rates set by the Board under Sec. 327.10(c). For the portion of the
quarter that the institution was not in Risk Category I, the
institution's initial base assessment rate, which shall be subject to
adjustment pursuant to paragraphs (d)(5), (6) and (7), shall be
determined under the assessment schedule for the appropriate Risk
Category.
(B) Changes within Risk Category I. If, during a quarter, an
institution's CAMELS component ratings change in a way that would
change the institution's initial base assessment rate within Risk
Category I, the initial base assessment rate for the period before the
change shall be determined under the financial ratios method using the
CAMELS component ratings in effect before the change. Beginning on the
date of the CAMELS component ratings change, the initial base
assessment rate for the remainder of the quarter shall be determined
using the CAMELS component ratings in effect after the change.
(2) Large bank method. A large insured depository institution in
Risk Category I that has at least one long-term debt issuer rating, as
defined in Sec. 327.8(i), shall have its initial base assessment rate
determined using the large bank method. The initial base assessment
rate under the large bank method shall be derived from three
components, each given a 33\1/3\ percent weight: A component derived
using the financial ratios method, a component derived using long-term
debt issuer ratings, and a component derived using CAMELS component
ratings. An institution's initial base assessment rate using the
financial ratios method will be converted from the range of initial
base assessment rates to a scale of from 1 to 3 by subtracting 8 from
its initial base assessment rate (expressed in basis points) and
dividing the result by 2. The quotient will equal an institution's
financial ratios score. Its CAMELS component ratings will be weighted
to derive a weighted average CAMELS rating using the same weights
applied in the financial ratios method as set forth under paragraph
(d)(1) of this section. Long-term debt issuer ratings will be converted
to numerical values between 1 and 3 as provided in Appendix B to this
subpart and the converted values will be averaged. The financial ratios
score, the weighted average CAMELS rating and the average of converted
long-term debt issuer ratings each will be multiplied by 1.764 (which
shall be the pricing multiplier), and the products will be summed. To
this result will be added 1.651 (which shall be a uniform amount for
all institutions subject to the large bank method). The resulting sum
shall equal the institution's initial base assessment rate; provided,
however, that no institution's initial base assessment rate shall be
less than the minimum initial base assessment rate in effect for Risk
Category I institutions for that quarter nor greater than the maximum
initial base assessment rate in effect for Risk Category I institutions
for that quarter. An institution's initial base assessment rate,
subject to adjustment pursuant to paragraphs (d)(4), (5), and (6) of
this section, as appropriate (which will produce the total base
assessment rate), and adjusted for the actual assessment rates set by
the Board pursuant to Sec. 327.10(c), will equal an institution's
assessment rate; provided, however, that no institution's total base
assessment rate will be less than the minimum total base assessment
rate in effect for Risk Category I institutions for that quarter nor
greater than the
[[Page 61586]]
maximum total base assessment rate in effect for Risk Category I
institutions for that quarter.
(i) Implementation of Large Bank Method Changes between Risk
Categories. If, during a quarter, a CAMELS rating change occurs that
results in an institution whose Risk Category I initial base assessment
rate is determined using the large bank method or an insured branch of
a foreign bank moving from Risk Category I to Risk Category II, III or
IV, the institution's initial base assessment rate for the portion of
the quarter that it was in Risk Category I shall be determined as for
any other institution in Risk Category I whose initial base assessment
rate is determined using the large bank method, subject to adjustments
pursuant to paragraph (d)(4), (5), and (6) of this section, as
appropriate, and adjusted for the actual assessment rates set by the
Board under Sec. 327.10(c). If, during a quarter, a CAMELS rating
change occurs that results in a large institution with a long-term debt
issuer rating or an insured branch of a foreign bank moving from Risk
Category II, III or IV to Risk Category I, the institution's assessment
rate for the portion of the quarter that it was in Risk Category I
shall equal the rate determined under paragraphs (d)(2) (and (d)(4),
(5), and (6)) or (d)(3) (and (d)(4), (5), and (6)) of this section, as
appropriate.
(ii) Implementation of Large Bank Method Changes within Risk
Category I. If, during a quarter, an institution whose Risk Category I
initial base assessment rate is determined using the large bank method
remains in Risk Category I, but the financial ratios score, a CAMELS
component or a long-term debt issuer rating changes that would affect
the institution's initial base assessment rate, or if, during a
quarter, an insured branch of a foreign bank remains in Risk Category
I, but a ROCA component rating changes that would affect the
institution's initial base assessment rate, separate assessment rates
for the portion(s) of the quarter before and after the change(s) shall
be determined under paragraphs (d)(2) (and (d)(4), (5), and (6)) or
(d)(3) (and (d)(4) , (5), and (6)) of this section, as appropriate.
(3) Assessment rate for insured branches of foreign banks--(i)
Insured branches of foreign banks in Risk Category I. Insured branches
of foreign banks in Risk Category I shall be assessed using the
weighted average ROCA component rating, as determined under paragraph
(d)(3)(ii) of this section.
(ii) Weighted average ROCA component rating. The weighted average
ROCA component rating shall equal the sum of the products that result
from multiplying ROCA component ratings by the following percentages:
Risk Management--35%, Operational Controls--25%, Compliance--25%, and
Asset Quality--15%. The weighted average ROCA rating will be multiplied
by 5.291 (which shall be the pricing multiplier). To this result will
be added 1.651 (which shall be a uniform amount for all insured
branches of foreign banks). The resulting sum--the initial base
assessment rate--subject to adjustments pursuant to paragraph (d)(4) of
this section and adjusted for assessment rates set by the FDIC pursuant
to Sec. 327.10(c), will equal an institution's total base assessment
rate; provided, however, that no institution's total base assessment
rate will be less than the minimum total base assessment rate in effect
for Risk Category I institutions for that quarter nor greater than the
maximum total base assessment rate in effect for Risk Category I
institutions for that quarter.
(iii) No insured branch of a foreign bank in any risk category
shall be subject to the unsecured debt adjustment, the secured
liability adjustment, or the brokered deposit adjustment.
(4) Adjustment for large banks or insured branches of foreign
banks--(i) Basis for and size of adjustment. Within Risk Category I,
large institutions and insured branches of foreign banks except new
institutions as provided under paragraph (d)(9)(i)(A) of this section,
are subject to adjustment of their initial base assessment rate. Any
such large bank adjustment shall be limited to a change in assessment
rate of up to one basis point higher or lower than the rate determined
using the financial ratios method, the large bank method, or the
weighted average ROCA component rating method, whichever is applicable.
In determining whether to make this assessment rate adjustment for a
large institution or an insured branch of a foreign bank, the FDIC may
consider other relevant information in addition to the factors used to
derive the risk assignment under paragraphs (d)(1), (2), or (3) of this
section. Relevant information includes financial performance and
condition information, other market or supervisory information,
potential loss severity, and stress considerations, as described in
Appendix C to this subpart.
(ii) Adjustment subject to maximum and minimum rates. No adjustment
to the initial base assessment rate for large banks shall decrease any
rate so that the resulting rate would be less than the minimum initial
base assessment rate, or increase any rate above the maximum initial
base assessment rate in effect for the quarter.
(iii) Prior notice of adjustments--(A) Prior notice of upward
adjustment. Prior to making any upward large bank adjustment to an
institution's initial base assessment rate because of considerations of
additional risk information, the FDIC will formally notify the
institution and its primary federal regulator and provide an
opportunity to respond. This notification will include the reasons for
the adjustment and when the adjustment will take effect.
(B) Prior notice of downward adjustment. Prior to making any
downward large bank adjustment to an institution's initial base
assessment rate because of considerations of additional risk
information, the FDIC will formally notify the institution's primary
federal regulator and provide an opportunity to respond.
(iv) Determination whether to adjust upward; effective period of
adjustment. After considering an institution's and the primary federal
regulator's responses to the notice, the FDIC will determine whether
the large bank adjustment to an institution's initial base assessment
rate is warranted, taking into account any revisions to weighted
average CAMELS component ratings, long-term debt issuer ratings, and
financial ratios, as well as any actions taken by the institution to
address the FDIC's concerns described in the notice. The FDIC will
evaluate the need for the adjustment each subsequent assessment period,
until it determines that an adjustment is no longer warranted. The
amount of adjustment will in no event be larger than that contained in
the initial notice without further notice to, and consideration of,
responses from the primary federal regulator and the institution.
(v) Determination whether to adjust downward; effective period of
adjustment. After considering the primary federal regulator's responses
to the notice, the FDIC will determine whether the large bank
adjustment to an institution's initial base assessment rate is
warranted, taking into account any revisions to weighted average CAMELS
component ratings, long-term debt issuer ratings, and financial ratios,
as well as any actions taken by the institution to address the FDIC's
concerns described in the notice. Any downward adjustment in an
institution's assessment rate will remain in effect for subsequent
assessment periods until the FDIC determines that an adjustment is no
longer warranted. Downward adjustments will be made
[[Page 61587]]
without notification to the institution. However, the FDIC will provide
advance notice to an institution and its primary federal regulator and
give them an opportunity to respond before removing a downward
adjustment.
(vi) Adjustment without notice. Notwithstanding the notice
provisions set forth above, the FDIC may change an institution's
initial base assessment rate without advance notice under this
paragraph, if the institution's supervisory or agency ratings or the
financial ratios set forth in Appendix A to this subpart deteriorate.
(5) Unsecured debt adjustment to initial base assessment rate for
all institutions. All institutions within all risk categories, except
new institutions as provided under paragraph (d)(9)(i)(C) of this
section and insured branches of foreign banks as provided under
paragraph (d)(3)(iii) of this section, are subject to downward
adjustment of their initial base assessment rates for unsecured debt,
based on the ratio of long-term unsecured debt (and, for small
institutions as defined in paragraph (d)(5)(ii) of this section,
specified amounts of Tier 1 capital) to domestic deposits. Any such
adjustment shall be made after any adjustment under paragraph (d)(4) of
this section.
(i) Large institutions--The unsecured debt adjustment for large
institutions shall be determined by multiplying the institution's ratio
of long-term unsecured debt to domestic deposits by 20 basis points.
(ii) Small institutions--The unsecured debt adjustment for small
institutions will factor in an amount of Tier 1 capital (qualified Tier
1 capital) in addition to any long-term unsecured debt: the amount of
qualified Tier 1 capital will be the sum of one-half of the amount
between 10 percent and 15 percent of adjusted average assets (for
institutions that file Call Reports) or adjusted total assets (for
institutions that file Thrift Financial Reports) and the full amount of
Tier 1 capital exceeding 15 percent of adjusted average assets (for
institutions that file Call Reports) or adjusted total assets (for
institutions that file Thrift Financial Reports). The ratio of the sum
of qualified Tier 1 capital and long-term unsecured debt to domestic
deposits will be multiplied by 20 basis points to produce the unsecured
debt adjustment for small institutions.
(iii) Limitation--No unsecured debt adjustment for any institution
shall exceed two basis points.
(iv) Applicable reports of condition--Ratios for any given quarter
shall be calculated from reports of condition (Call Reports and Thrift
Financial Reports) filed by each institution as of the last day of the
quarter. Until institutions separately report long-term senior
unsecured liabilities and long-term subordinated debt in their reports
of condition, the FDIC will use subordinated debt included in Tier 2
capital and will not include any amount of senior unsecured liabilities
in calculating the unsecured debt adjustment.
(6) Secured liabilities adjustment for all institutions. All
institutions within all risk categories, except insured branches of
foreign banks as provided under paragraph (d)(3)(iii) of this section,
are subject to upward adjustment of their initial base assessment rate
based upon the ratio of their secured liabilities to domestic deposits.
Any such adjustment shall be made after any applicable large bank
adjustment or unsecured debt adjustment.
(i) Secured liabilities for banks--Secured liabilities for banks
include Federal Home Loan Bank advances, securities sold under
repurchase agreements, secured Federal funds purchased and other
borrowings that are secured as reported in banks' quarterly Call
Reports.
(ii) Secured liabilities for thrifts--Secured liabilities for
thrifts include Federal Home Loan Bank advances as reported in
quarterly thrift financial reports. Secured liabilities for thrifts
also include securities sold under repurchase agreements, secured
Federal funds purchased or other borrowings that are secured when those
items are separately reported in thrift financial reports. Until that
time, any of these secured amounts not reported separately from
unsecured or other liabilities in the TFR will be imputed based on
simple averages for Call Report filers as of June 30, 2008. As of that
date, on average, 63.0 percent of the sum of Federal funds purchased
and securities sold under repurchase agreements reported by Call Report
filers were secured, and 49.4 percent of other borrowings were secured.
(iii) Calculation--An institution's ratio of secured liabilities to
domestic deposits will, if greater than 15 percent, increase its
assessment rate, but any such increase shall not exceed 50 percent of
its assessment rate before the secured liabilities adjustment. For an
institution that has a ratio of secured liabilities (as defined in
paragraph (ii) above) to domestic deposits of greater than 15 percent,
the institution's initial base assessment rate (after taking into
account any adjustment under paragraphs (d)(5) or (6) of this section)
will be multiplied by one plus the ratio of its secured liabilities to
domestic deposits minus 0.15. Ratios of secured liabilities to domestic
deposits shall be calculated from the report of condition filed by each
institution as of the last day of the quarter.
(7) Brokered Deposit Adjustment for Risk Categories II, III, and
IV. All institutions in Risk Categories II, III, and IV, except insured
branches of foreign banks as provided under paragraph (d)(3)(iii) of
this section, shall be subject to an initial base assessment rate
adjustment for brokered deposits. Any such brokered deposit adjustment
shall be made after any adjustment under paragraph (d)(5) or (6). A
brokered deposit is as defined in Section 29 of the Federal Deposit
Insurance Act (12 U.S.C. 1831f). The adjustment under this paragraph is
limited to those institutions whose ratio of brokered deposits to
domestic deposits is greater than 10 percent; asset growth rates do not
affect the adjustment. The adjustment is determined by multiplying the
difference between an institution's ratio of brokered deposits to
domestic deposits and 0.10 by 25 basis points. The maximum brokered
deposit adjustment will be 10 basis points. Brokered deposit ratios for
any given quarter are calculated from the reports of condition filed by
each institution as of the last day of the quarter.
(8) Request to be treated as a large institution--(i) Procedure.
Any institution in Risk Category I with assets of between $5 billion
and $10 billion may request that the FDIC determine its initial base
assessment rate as a large institution. The FDIC will grant such a
request if it determines that it has sufficient information to do so.
The absence of long-term debt issuer ratings alone will not preclude
the FDIC from granting a request. The initial base assessment rate for
an institution without a long-term debt issuer rating will be derived
using the financial ratios method, but will be subject to adjustment as
a large institution under paragraph (d)(4) of this section. Any such
request must be made to the FDIC's Division of Insurance and Research.
Any approved change will become effective within one year from the date
of the request. If an institution whose request has been granted
subsequently reports assets of less than $5 billion in its report of
condition for four consecutive quarters, the FDIC will consider such
institution to be a small institution subject to the financial ratios
method.
(ii) Time limit on subsequent request for alternate method. An
institution whose request to be assessed as a large institution is
granted by the FDIC shall
[[Page 61588]]
not be eligible to request that it be assessed as a small institution
for a period of three years from the first quarter in which its
approved request to be assessed as a large bank became effective. Any
request to be assessed as a small institution must be made to the
FDIC's Division of Insurance and Research.
(iii) An institution that disagrees with the FDIC's determination
that it is a large or small institution may request review of that
determination pursuant to Sec. 327.4(c).
(9) New and established institutions and exceptions--(i) New Risk
Category I institutions--(A) Rule as of January 1, 2010. Effective for
assessment periods beginning on or after January 1, 2010, a new
institution shall be assessed the Risk Category I maximum initial base
assessment rate for the relevant assessment period, except as provided
in Sec. 327.8(m)(1), (2), (3), (4), (5) and paragraphs (d)(9)(ii) and
(iii) of this section. No new institution in Risk Category I shall be
subject to the large bank adjustment as determined under paragraph
(d)(4) of this section.
(B) Rule prior to January 1, 2010. Prior to January 1, 2010, a new
institution's initial base assessment rate shall be determined under
paragraph (d)(1) or (2) of this section, as appropriate. Prior to
January 1, 2010, a Risk Category I institution that has no CAMELS
component ratings shall be assessed at two basis points above the
minimum initial base assessment rate applicable to Risk Category I
institutions until it receives CAMELS component ratings. The initial
base assessment rate will be determined by annualizing, where
appropriate, financial ratios obtained from the reports of condition
that have been filed, until the institution files four reports of
condition.
(C) Applicability of adjustments to new institutions prior to and
as of January 1, 2010. No new institution in any risk category shall be
subject to the unsecured debt adjustment as determined under paragraph
(d)(5) of this section. All new institutions in any Risk Category shall
be subject to the secured liability adjustment as determined under
paragraph (d)(6) of this section. All new institutions in Risk
Categories II, III, and IV shall be subject to the brokered deposit
adjustment as determined under paragraph (d)(7) of this section.
(ii) CAMELS ratings for the surviving institution in a merger or
consolidation. When an established institution merges with or
consolidates into a new institution, if the FDIC determines the
resulting institution to be an established institution under Sec.
327.8(m)(1), its CAMELS ratings for assessment purposes will be based
upon the established institution's ratings prior to the merger or
consolidation until new ratings become available.
(iii) Rate applicable to institutions subject to subsidiary or
credit union exception. If an institution is considered established
under Sec. 327.8(m)(4) and (5), but does not have CAMELS component
ratings, it shall be assessed at two basis points above the minimum
initial base assessment rate applicable to Risk Category I institutions
until it receives CAMELS component ratings. The assessment rate will be
determined by annualizing, where appropriate, financial ratios obtained
from all reports of condition that have been filed, until it receives a
long-term debt issuer rating.
(iv) Request for review. An institution that disagrees with the
FDIC's determination that it is a new institution may request review of
that determination pursuant to Sec. 327.4(c).
(10) Assessment rates for bridge depository institutions and
conservatorships. Institutions that are bridge depository institutions
under 12 U.S.C. 1821(n) and institutions for which the Corporation has
been appointed or serves as conservator shall, in all cases, be
assessed at the Risk Category I minimum initial base assessment rate,
which shall not be subject to adjustment under paragraphs (d)(4), (5),
(6) or (7) of this section.
Sec. 327.10 Assessment rate schedules.
(a) Assessment Rate Schedule for First Quarter of 2009 and Initial
Base Assessment Rate Schedule Beginning April 1, 2009. The annual
assessment rate for an insured depository institution for the quarter
beginning January 1, 2009 shall be the rate prescribed in the following
schedule:
Table 1 to Paragraph (a)--Assessment Rate Schedule for First Quarter of 2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
Risk category
------------------------------------------------------------------------------------
I *
---------------------------------- II III IV
Minimum Maximum
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points)..................................... 12 14 17 35 50
--------------------------------------------------------------------------------------------------------------------------------------------------------
The annual initial base assessment rate for an insured depository
institution beginning April 1, 2009, shall be the rate prescribed in
the following schedule:
Table 2 to Paragraph (a)--Initial Base Assessment Rate Schedule Beginning April 1, 2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
Risk category
------------------------------------------------------------------------------------
I *
---------------------------------- II III IV
Minimum Maximum
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points)..................................... 10 14 20 30 45
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Initial base rates that are not the minimum or maximum rate will vary between these rates.
(1) Risk Category I Initial Base Assessment Rate Schedule. The
annual initial base assessment rates for all institutions in Risk
Category I shall range from 10 to 14 basis points.
(2) Risk Category II, III, and IV Initial Base Assessment Rate
Schedule. The annual initial base assessment rates for
[[Page 61589]]
Risk Categories II, III, and IV shall be 20, 30, and 45 basis points,
respectively.
(3) All institutions in any one risk category, other than Risk
Category I, will be charged the same initial base assessment rate,
subject to adjustment as appropriate.
(b) Total Base Assessment Rate Schedule after Adjustments. For
assessment periods beginning on or after April 1, 2009, the total base
assessment rates after adjustments for an insured depository
institution shall be the rate prescribed in the following schedule.
Table 1 to Paragraph (b)--Total Base Assessment Rate Schedule (After Adjustments) *
--------------------------------------------------------------------------------------------------------------------------------------------------------
Risk category I Risk category II Risk category III Risk category IV
--------------------------------------------------------------------------------------------------------------------------------------------------------
Initial base assessment rate........ 10-14...................... 20......................... 30......................... 45
Unsecured debt adjustment........... -2-0....................... -2-0....................... -2-0....................... -2-0
Secured liability adjustment........ 0-7........................ 0-10....................... 0-15....................... 0-22.5
Brokered deposit adjustment......... ........................... 0-10....................... 0-10....................... 0-10
-------------------------------------------------------------------------------------------------------------------
Total base assessment rate...... 8-21.0..................... 18-40.0.................... 28-55.0.................... 43-77.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Total base rates that are not the minimum or maximum rate will vary between these
rates.
(1) Risk Category I Total Base Assessment Rate Schedule. The annual
total base assessment rates for all institutions in Risk Category I
shall range from 8 to 21 basis points.
(2) Risk Category II Total Base Assessment Rate Schedule. The
annual total base assessment rates for Risk Category II shall range
from 18 to 40 basis points.
(3) Risk Category III Total Base Assessment Rate Schedule. The
annual total base assessment rates for Risk Category III shall range
from 28 to 55 basis points.
(4) Risk Category IV Total Base Assessment Rate Schedule. The
annual total base assessment rates for Risk Category IV shall range
from 43 to 77.5 basis points.
(c) Total Base Assessment Rate Schedule adjustments and
procedures--(1) Board Rate Adjustments. The Board may increase or
decrease the total base assessment rate schedule up to a maximum
increase of 3 basis points or a fraction thereof or a maximum decrease
of 3 basis points or a fraction thereof (after aggregating increases
and decreases), as the Board deems necessary. Any such adjustment shall
apply uniformly to each rate in the total base assessment rate
schedule. In no case may such Board rate adjustments result in a total
base assessment rate that is mathematically less than zero or in a
total base assessment rate schedule that, at any time, is more than 3
basis points above or below the total base assessment schedule for the
Deposit Insurance Fund, nor may any one such Board adjustment
constitute an increase or decrease of more than 3 basis points.
(2) Amount of revenue. In setting assessment rates, the Board shall
take into consideration the following:
(i) Estimated operating expenses of the Deposit Insurance Fund;
(ii) Case resolution expenditures and income of the Deposit
Insurance Fund;
(iii) The projected effects of assessments on the capital and
earnings of the institutions paying assessments to the Deposit
Insurance Fund;
(iv) The risk factors and other factors taken into account pursuant
to 12 U.S.C. 1817(b)(1); and
(v) Any other factors the Board may deem appropriate.
(3) Adjustment procedure. Any adjustment adopted by the Board
pursuant to this paragraph will be adopted by rulemaking, except that
the Corporation may set assessment rates as necessary to manage the
reserve ratio, within set parameters not exceeding cumulatively 3 basis
points, pursuant to paragraph (c)(1) of this section, without further
rulemaking.
(4) Announcement. The Board shall announce the assessment schedules
and the amount and basis for any adjustment thereto not later than 30
days before the quarterly certified statement invoice date specified in
Sec. 327.3(b) of this part for the first assessment period for which
the adjustment shall be effective. Once set, rates will remain in
effect until changed by the Board.
6. Revise Appendices A, B, and C to Subpart A of Part 327 to read
as follows:
Appendix A to Subpart A
Method To Derive Pricing Multipliers and Uniform Amount
I. Introduction
The uniform amount and pricing multipliers are derived from:
A model (the Statistical Model) that estimates the
probability that a Risk Category I institution will be downgraded to
a composite CAMELS rating of 3 or worse within one year;
Minimum and maximum downgrade probability cutoff
values, based on data from June 30, 2008, that will determine which
small institutions will be charged the minimum and maximum initial
base assessment rates applicable to Risk Category I;
The minimum initial base assessment rate for Risk
Category I, equal to 10 basis points, and
The maximum initial base assessment rate for Risk
Category I, which is four basis points higher than the minimum rate.
II. The Statistical Model
The Statistical Model is defined in equations 1 and 3 below.
[[Page 61590]]
[GRAPHIC] [TIFF OMITTED] TP16OC08.021
where Downgrade(0,1)i,t (the dependent variable--the
event being explained) is the incidence of downgrade from a
composite rating of 1 or 2 to a rating of 3 or worse during an on-
site examination for an institution i between 3 and 12 months after
time t. Time t is the end of a year within the multi-year period
over which the model was estimated (as explained below). The
dependent variable takes a value of 1 if a downgrade occurs and 0 if
it does not.
The explanatory variables (regressors) in the model are six
financial ratios and a weighted average of the ``C,'' ``A,'' ``M,''
``E'' and ``L'' component ratings. The six financial ratios included
in the model are:
Tier 1 leverage ratio
Loans past due 30-89 days/Gross assets
Nonperforming assets/Gross assets
Net loan charge-offs/Gross assets
Net income before taxes/Risk-weighted assets
Brokered deposits/domestic deposits above the 10
percent threshold, adjusted for the asset growth rate factor
Table A.1 defines these six ratios along with the weighted
average of CAMELS component ratings. The adjusted brokered deposit
ratio (Bi,T) is calculated by multiplying the ratio of
brokered deposits to domestic deposits above the 10 percent
threshold by an assets growth rate factor that ranges from 0 to 1 as
shown in Equation 2 below. The assets growth rate factor
(Ai,T) is calculated by subtracting 0.2 from the four-
year cumulative asset growth rate (expressed as a number rather than
as a percentage), adjusted for mergers and acquisitions, and
multiplying the remainder by 5. The factor cannot be less than 0 or
greater than 1.
[GRAPHIC] [TIFF OMITTED] TP16OC08.022
The component rating for sensitivity to market risk (the ``S''
rating) is not available for years prior to 1997. As a result, and
as described in Table A.1, the Statistical Model is estimated using
a weighted average of five component ratings excluding the ``S''
component. In addition, delinquency and non-accrual data on
government guaranteed loans are not available before 1993 for Call
Report filers and before the third quarter of 2005 for TFR filers.
As a result, and as also described in Table A.1, the Statistical
Model is estimated without deducting delinquent or past-due
government guaranteed loans from either the loans past due 30-89
days to gross assets ratio or the nonperforming assets to gross
assets ratio.
Table A.1--Definitions of Regressors
------------------------------------------------------------------------
Regressor Description
------------------------------------------------------------------------
Tier 1 Leverage Ratio (%)......... Tier 1 capital for Prompt Corrective
Action (PCA) divided by adjusted
average assets based on the
definition for prompt corrective
action.
Loans Past Due 30-89 Days/Gross Total loans and lease financing
Assets (%). receivables past due 30 through 89
days and still accruing interest
divided by gross assets (gross
assets equal total assets plus
allowance for loan and lease
financing receivable losses and
allocated transfer risk).
Nonperforming Assets/Gross Assets Sum of total loans and lease
(%). financing receivables past due 90
or more days and still accruing
interest, total nonaccrual loans
and lease financing receivables,
and other real estate owned divided
by gross assets.
Net Loan Charge-Offs/Gross Assets Total charged-off loans and lease
(%). financing receivables debited to
the allowance for loan and lease
losses less total recoveries
credited to the allowance to loan
and lease losses for the most
recent twelve months divided by
gross assets.
Net Income before Taxes/Risk- Income before income taxes and
Weighted Assets (%). extraordinary items and other
adjustments for the most recent
twelve months divided by risk-
weighted assets.
[[Page 61591]]
Adjusted Brokered Deposits/ Brokered deposits divided by
Domestic Deposits (%). domestic deposits less 0.10
multiplied by the asset growth rate
factor (four year cumulative asset
growth rate (expressed as a number
rather than as a percentage)
divided by 5 less one).
Weighted Average of C, A, M, E and The weighted sum of the ``C,''
L Component Ratings. ``A,'' ``M,'' ``E'' and ``L''
CAMELS components, with weights of
28 percent each for the ``C'' and
``M'' components, 22 percent for
the ``A'' component, and 11 percent
each for the ``E'' and ``L''
components. (For the regression,
the ``S'' component is omitted.)
------------------------------------------------------------------------
The financial variable regressors used to estimate the downgrade
probabilities are obtained from quarterly reports of condition
(Reports of Condition and Income and Thrift Financial Reports). The
weighted average of the ``C,'' ``A,'' ``M,'' ``E'' and ``L''
component ratings regressor is based on component ratings obtained
from the most recent bank examination conducted within 24 months
before the date of the report of condition.
The Statistical Model uses ordinary least squares (OLS)
regression to estimate downgrade probabilities. The model is
estimated with data from a multi-year period (as explained below)
for all institutions in Risk Category I, except for institutions
established within five years before the date of the report of
condition.
The OLS regression estimates coefficients, [beta]j
for a given regressor j and a constant amount, [beta]0,
as specified in equation 1. As shown in equation 3 below, these
coefficients are multiplied by values of risk measures at time T,
which is the date of the report of condition corresponding to the
end of the quarter for which the assessment rate is computed. The
sum of the products is then added to the constant amount to produce
an estimated probability, diT, that an institution will
be downgraded to 3 or worse within 3 to 12 months from time T.
The risk measures are financial ratios as defined in Table A.1,
except that the loans past due 30 to 89 days ratio and the
nonperforming asset ratio are adjusted to exclude the maximum amount
recoverable from the U.S. Government, its agencies or government-
sponsored agencies, under guarantee or insurance provisions. Also,
the weighted sum of six CAMELS component ratings is used, with
weights of 25 percent each for the ``C'' and ``M'' components, 20
percent for the ``A'' component, and 10 percent each for the ``E,''
``L,'' and ``S'' components.
[GRAPHIC] [TIFF OMITTED] TP16OC08.023
III. Minimum and Maximum Downgrade Probability Cutoff Values
The pricing multipliers are also determined by minimum and
maximum downgrade probability cutoff values, which will be computed
as follows:
The minimum downgrade probability cutoff value will be
the maximum downgrade probability among the twenty-five percent of
all small insured institutions in Risk Category I (excluding new
institutions) with the lowest estimated downgrade probabilities,
computed using values of the risk measures as of June 30,
2008.72 73 The minimum downgrade probability cutoff value
is approximately 2 percent.
---------------------------------------------------------------------------
\72\ As used in this context, a ``new institution'' means an
institution that has been chartered as a bank or thrift for less
than five years.
\73\ For purposes of calculating the minimum and maximum
downgrade probability cutoff values, institutions that have less
than $100,000 in domestic deposits are assumed to have no brokered
deposits.
---------------------------------------------------------------------------
The maximum downgrade probability cutoff value will be
the minimum downgrade probability among the fifteen percent of all
small insured institutions in Risk Category I (excluding new
institutions) with the highest estimated downgrade probabilities,
computed using values of the risk measures as of June 30, 2008. The
maximum downgrade probability cutoff value is approximately 15
percent.
IV. Derivation of Uniform Amount and Pricing Multipliers
The uniform amount and pricing multipliers used to compute the
annual base assessment rate in basis points, PiT, for any
such institution i at a given time T will be determined from the
Statistical Model, the minimum and maximum downgrade probability
cutoff values, and minimum and maximum initial base assessment rates
in Risk Category I as follows:
[GRAPHIC] [TIFF OMITTED] TP16OC08.024
[[Page 61592]]
where [alpha]0 and [alpha]1 are a constant
term and a scale factor used to convert diT (the
estimated downgrade probability for institution i at a given time T
from the Statistical Model) to an assessment rate, respectively, and
Min is the minimum initial base assessment rate expressed in basis
points. ( PiT is expressed as an annual rate, but the
actual rate applied in any quarter will be PiT/4.) The
maximum initial base assessment rate is 4 basis points above the
minimum (Min + 4)
Solving equation 4 for minimum and maximum initial base
assessment rates simultaneously,
Min = [alpha]0 + [alpha]1 * 0.0181 and Min + 4
= [alpha]0 + [alpha]1 * 0.1505
where 0.0181 is the minimum downgrade probability cutoff value and
0.1505 is the maximum downgrade probability cutoff value, results in
values for the constant amount, [alpha]0, and the scale
factor, [alpha]1:
[GRAPHIC] [TIFF OMITTED] TP16OC08.025
Substituting equations 3, 5 and 6 into equation 4 produces an
annual initial base assessment rate for institution i at time T,
PiT, in terms of the uniform amount, the pricing
multipliers and the ratios and weighted average CAMELS component
rating referred to in 12 CFR 327.9(d)(2)(i):
[GRAPHIC] [TIFF OMITTED] TP16OC08.026
where (Min-0.547) + 30.211* [beta]0 equals the uniform
amount, 30.211* [beta] is a pricing multiplier for the associated
risk measure j, and T is the date of the report of condition
corresponding to the end of the quarter for which the assessment
rate is computed.
V. Updating the Statistical Model, Uniform Amount, and Pricing
Multipliers
The initial Statistical Model is estimated using year-end
financial ratios and the weighted average of the ``C,'' ``A,''
``M,'' ``E'' and ``L'' component ratings over the 1988 to 2006
period and downgrade data from the 1989 to 2007 period. The FDIC
may, from time to time, but no more frequently than annually, re-
estimate the Statistical Model with updated data and publish a new
formula for determining initial base assessment rates--Equation 7--
based on updated uniform amounts and pricing multipliers. However,
the minimum and maximum downgrade probability cutoff values will not
change without additional notice-and-comment rulemaking. The period
covered by the analysis will be lengthened by one year each year;
however, from time to time, the FDIC may drop some earlier years
from its analysis.
[[Page 61593]]
Appendix B to Subpart A
Numerical Conversion of Long-Term Debt Issuer Ratings
------------------------------------------------------------------------
Converted
Current long-term debt issuer rating value
------------------------------------------------------------------------
Standard & Poor's:
AAA................................................... 1.00
AA+................................................... 1.05
AA.................................................... 1.15
AA-................................................... 1.30
A+.................................................... 1.50
A..................................................... 1.80
A-.................................................... 2.20
BBB+.................................................. 2.70
BBB or worse.......................................... 3.00
Moody's:
Aaa................................................... 1.00
Aa\1\................................................. 1.05
Aa\2\................................................. 1.15
Aa\3\................................................. 1.30
A1.................................................... 1.50
A2.................................................... 1.80
A3.................................................... 2.20
Baa \1\............................................... 2.70
Baa \2\ or worse...................................... 3.00
Fitch's:
AAA................................................... 1.00
AA+................................................... 1.05
AA.................................................... 1.15
AA-................................................... 1.30
A+.................................................... 1.50
A..................................................... 1.80
A-.................................................... 2.20
BBB+.................................................. 2.70
BBB or worse.......................................... 3.00
------------------------------------------------------------------------
Appendix C to Subpart A
Additional Risk Considerations for Large Risk Category I Institutions
------------------------------------------------------------------------
Examples of associated risk
Information Source indicators or information
------------------------------------------------------------------------
Capital Measures (Level and Trend).
Regulatory capital ratios.
Capital composition.
Dividend payout ratios.
Internal capital growth
rates relative to asset growth.
Profitability Measures (Level and
Trend).
Return on assets and return
on risk-adjusted assets.
Net interest margins,
funding costs and volumes, earning
asset yields and volumes.
Noninterest revenue
sources.
Operating expenses.
Loan loss provisions
relative to problem loans.
Historical volatility of
various earnings sources.
Financial Performance and Asset Quality Measures (Level and
Condition Information. Trend).
Loan and securities
portfolio composition and volume of
higher risk lending activities
(e.g., sub-prime lending).
Loan performance measures
(past due, nonaccrual, classified
and criticized, and renegotiated
loans) and portfolio
characteristics such as internal
loan rating and credit score
distributions, internal estimates
of default, internal estimates of
loss given default, and internal
estimates of exposures in the event
of default.
Loan loss reserve trends.
Loan growth and
underwriting trends.
Off-balance sheet credit
exposure measures (unfunded loan
commitments, securitization
activities, counterparty
derivatives exposures) and hedging
activities.
Liquidity and Funding Measures
(Level and Trend).
Composition of deposit and
non-deposit funding sources.
Liquid resources relative
to short-term obligations,
undisbursed credit lines, and
contingent liabilities.
Interest Rate Risk and Market Risk
(Level and Trend).
Maturity and repricing
information on assets and
liabilities, interest rate risk
analyses.
Trading book composition
and Value-at-Risk information.
Market Information................ Subordinated debt spreads.
Credit default swap
spreads.
Parent's debt issuer
ratings and equity price
volatility.
Market-based measures of
default probabilities.
Rating agency watch lists.
Market analyst reports.
------------------------------------------------------------------------
Information Source Examples of associated risk
indicators or information
------------------------------------------------------------------------
Ability to Withstand Stress
Conditions.
Internal analyses of
portfolio composition and risk
concentrations, and vulnerabilities
to changing economic and financial
conditions.
Stress scenario development
and analyses.
Results of stress tests or
scenario analyses that show the
degree of vulnerability to adverse
economic, industry, market, and
liquidity events. Examples include:
i. An evaluation of credit
portfolio performance under
varying stress scenarios.
ii. An evaluation of non-credit
business performance under
varying stress scenarios.
iii. An analysis of the ability of
earnings and capital to absorb
losses stemming from
unanticipated adverse events.
Contingency or emergency
funding strategies and analyses.
Capital adequacy
assessments.
Stress Considerations............. Loss Severity Indicators.
[[Page 61594]]
Nature of and breadth of an
institution's primary business
lines and the degree of variability
in valuations for firms with
similar business lines or similar
portfolios.
Ability to identify and
describe discreet business units
within the banking legal entity.
Funding structure
considerations relating to the
order of claims in the event of
liquidation (including the extent
of subordinated claims and priority
claims).
Extent of insured
institutions assets held in foreign
units.
Degree of reliance on
affiliates and outsourcing for
material mission-critical services,
such as management information
systems or loan servicing, and
products.
Availability of sufficient
information, such as information on
insured deposits and qualified
financial contracts, to resolve an
institution in an orderly and cost-
efficient manner.
------------------------------------------------------------------------
Dated at Washington, DC, this 7th day of October, 2008.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Valerie Best,
Assistant Executive Secretary.
Appendix 1
Uniform Amount and Pricing Multipliers for Large Risk Category I
Institutions Where Long-Term Debt Issuer Ratings Are Available
The uniform amount and pricing multipliers for large Risk
Category I institutions with long-term debt issuer ratings were
derived from:
The average long-term debt issuer rating, converted
into a numeric value (the long-term debt score) ranging from 1 to 3;
The weighted average CAMELS rating, as defined in
Appendix A;
The assessment rate calculated using the financial
ratios method described in Appendix A, converted to a value ranging
from 1 to 3 (the financial ratios score);
Minimum and maximum cutoff values for an institution's
score (the average of the long-term debt score, weighted average
CAMELS rating and financial ratios score), based on data from June
30, 2008, which was used to determine the proportion of large banks
charged the minimum and maximum initial base assessment rates
applicable to Risk Category I; and
Minimum and maximum initial base assessment rates for
Risk Category I
The financial ratios assessment rate (Af) calculated
using the pricing multipliers and uniform amount described in
Appendix A was converted to a financial ratios score
(Sf), with a value ranging from 1 to 3 as shown in
Equation 1:
[GRAPHIC] [TIFF OMITTED] TP16OC08.027
Each institution's score (Si) was calculated by
dividing its weighted average CAMELS rating (Sw), long-
term issuer score (Sd) and financial ratios score
(Sf) by 1/3 each, and summing the resulting values as
shown in Equation 2:
[GRAPHIC] [TIFF OMITTED] TP16OC08.028
The pricing multipliers were determined by minimum and maximum
score cutoff values, which were computed as follows:
The minimum score cutoff value is the maximum score
among the twenty-five percent of all large insured institutions in
Risk Category I (excluding new institutions) with the lowest scores,
computed as of June 30, 2008.\74\ The minimum score cut-off value is
1.578.
---------------------------------------------------------------------------
\74\ As used in this context, a ``new institution'' means an
institution that has been chartered as a bank or thrift for less
than five years.
---------------------------------------------------------------------------
The maximum score cutoff value is the minimum score
among the fifteen percent of all large insured institutions in Risk
Category I (excluding new institutions) with the highest scores,
computed as of June 30, 2008. The maximum score cut-off value is
2.334.
The uniform amount and pricing multipliers used to compute the
annual base assessment rate in basis points, PiT, for a large
institution i (with a long-term debt rating) at a given time T were
determined based on the minimum and maximum score cut-off values,
and the minimum and maximum initial base assessment rates in Risk
Category I as follows:
[GRAPHIC] [TIFF OMITTED] TP16OC08.029
where [alpha]0 and [alpha]1 are, respectively,
a constant term and a scale factor used to convert i,T
(an institution's score at time T) to an assessment rate, and Min is
the minimum initial base assessment rate expressed in basis points.
(Under the proposal, the minimum initial base assessment rate is 10
basis points, so Min equals 10.)
Substituting minimum and maximum score cutoff values (1.578 and
2.334, respectively) for Si,T and minimum and maximum
initial base assessment rates (Min and Min + 4, respectively) for
Pi,T in equation 3 produces equations 4 and 5 below.
[GRAPHIC] [TIFF OMITTED] TP16OC08.030
[GRAPHIC] [TIFF OMITTED] TP16OC08.031
Solving both equations simultaneously results in:
[GRAPHIC] [TIFF OMITTED] TP16OC08.032
[GRAPHIC] [TIFF OMITTED] TP16OC08.033
[[Page 61595]]
Substituting equations 6 and 7 into equation 2 produces the
following equation for PiT
[GRAPHIC] [TIFF OMITTED] TP16OC08.034
where Min -8.349 is the uniform amount and 1.764 is a pricing
multiplier. Since Min equals 10 under the proposal, the uniform
amount equals 1.651.
Appendix 2
Unsecured Debt Adjustment for a Small Institution
The unsecured debt adjustment for a small institution would be
calculated based on the sum of the institution's long-term senior
unsecured debt, long-term subordinated debt and qualified Tier 1
capital as a percentage of total domestic deposits.
Qualified Tier 1 capital depends on the institution's Tier 1
capital and adjusted average or total assets and would be calculated
in one of two ways. If the institution's Tier 1 leverage ratio were
greater than 15 percent, qualified Tier 1 capital would be
calculated as:
[GRAPHIC] [TIFF OMITTED] TP16OC08.035
where Q is qualified Tier 1 capital, C is total Tier 1 capital and G
is the adjusted average or total assets for an institution i. If the
institution's Tier 1 leverage ratio were greater than 10 percent but
less than 15 percent, then qualified Tier 1 capital would be
calculated as:
[GRAPHIC] [TIFF OMITTED] TP16OC08.036
The unsecured debt adjustment would then be calculated as:
[GRAPHIC] [TIFF OMITTED] TP16OC08.037
where Adj is the unsecured debt adjustment, U is long-term unsecured
senior debt, S is long-term subordinated debt and D is domestic
deposits for institution i.
Appendix 3
Analysis of the Projected Effects of the Payment of Assessments on the
Capital and Earnings of Insured Depository Institutions
I. Introduction
This analysis estimates the effect in 2009 of proposed deposit
insurance assessments on the equity capital and profitability of all
insured institutions, assuming that the Board adopts the proposed
rule.\75\ The analysis assumes that each institution's pre-tax, pre-
assessment income in 2009 is equivalent to the amount reported over
the four quarters ending in June 2008. Each institution's rate under
the proposed rate schedule is based on data as of June 30, 2008.\76\
In addition, the projected use of one-time credits authorized under
the Reform Act is taken into consideration in determining the
effective assessment for an institution.
---------------------------------------------------------------------------
\75\ Beginning April 1, 2009, initial minimum base assessment
rates would range from 10 to 45 basis points under the proposal.
After adjustments to the base rates, total base rates would range
from 8 to 77.5 basis points. For the first quarter of 2009,
assessment rates would range from 12 to 50 basis points.
\76\ For purposes of this analysis, the assessment base (like
income) is not assumed to increase, but is assumed to remain at June
2008 levels. All income statement items used in this analysis were
adjusted for the effect of mergers. Institutions for which four
quarters of earnings data were unavailable, including insured
branches of foreign banks, were excluded from this analysis.
---------------------------------------------------------------------------
II. Analysis of the Projected Effects on Capital and Earnings
While deposit insurance assessment rates generally will result
in reduced institution profitability and capitalization compared to
the absence of assessments, the reduction will not necessarily equal
the full amount of the assessment. Two factors can mitigate the
effect of assessments on institutions' profits and capital. First, a
portion of the assessment may be transferred to customers in the
form of higher borrowing rates, increased service fees and lower
deposit interest rates. Since information is not readily available
on the extent to which institutions are able to share assessment
costs with their customers, however, this analysis assumes that
institutions bear the full after-tax cost of the assessment. Second,
deposit insurance assessments are a tax-deductible operating
expense; therefore, the assessment expense can lower taxable income.
This analysis considers the effective after-tax cost of assessments
in calculating the effect on capital.\77\
---------------------------------------------------------------------------
\77\ The analysis does not incorporate any tax effects from an
operating loss carry forward or carry back.
---------------------------------------------------------------------------
An institution's earnings retention and dividend policies also
influence the extent to which assessments affect equity levels. If
an institution maintains the same dollar amount of dividends when it
pays a deposit insurance assessment as when it does not, equity
(retained earnings) will be less by the full amount of the after-tax
cost of the assessment. This analysis instead assumes that an
institution will maintain its dividend
[[Page 61596]]
rate (that is, dividends as a fraction of net income) unchanged from
the weighted average rate reported over the four quarters ending
June 30, 2008. In the event that the ratio of equity to assets falls
below 4 percent, however, this assumption is modified such that an
institution retains the amount necessary to achieve a 4 percent
minimum and distributes any remaining funds according to the
dividend payout rate.
The equity capital of insured institutions as of June 30, 2008
was $1.35 trillion.\78\ Based on the assumptions for earnings
described above, year-end 2009 equity capital is projected to equal
$1.373 trillion if the recommended assessment rates are adopted. In
the absence of an assessment, total equity would be an estimated $5
billion higher. Alternatively, total equity would be an estimated $2
billion higher if current rates remained in effect.
---------------------------------------------------------------------------
\78\ This excludes equity for those mentioned in the note to
Tables A.1 and A.2.
---------------------------------------------------------------------------
Table A.1 shows the distribution of the effects of assessments
(net of credits) on 2009 equity capital levels across the banking
industry compared to no assessments. On an industry weighted average
basis, projected total assessments in 2009 would result in capital
that is 0.3 percent less than in the absence of assessments. Table
A.2 shows the distribution of the effects of the proposed increase
in assessments on 2009 equity capital levels across the banking
industry. On an industry weighted average basis, the projected
increases in assessments in 2009 would result in capital that is 0.1
percent less than if current assessment rates remained in effect.
The analysis indicates that assessments would cause 6
institutions whose equity-to-assets ratio would have exceeded 4
percent in the absence of assessments to fall below that percentage
and 5 institutions to have below 2 percent equity-to-assets that
otherwise would not have. Alternatively, compared to current
assessments, the proposed increase in assessments would cause 3
institutions whose equity-to-assets ratio would otherwise have
exceeded 4 percent to fall below that threshold and 1 institution to
fall below 2 percent equity-to-assets.
Table A.1--Percentage Reduction in Equity Captal Due to Assessments
[$ in billions]
----------------------------------------------------------------------------------------------------------------
Percent of
Reduction in capital (percent) Number of institutions Total assets Percent of
institutions (percent) assets
----------------------------------------------------------------------------------------------------------------
0.0-0.1..................................... 785 9 2,527 19
0.1-0.2..................................... 835 10 1,191 9
0.2-0.3..................................... 914 11 1,253 9
0.3-0.4..................................... 928 11 4,617 35
0.4-0.5..................................... 896 11 620 5
0.5-1.0..................................... 2,770 33 1,573 12
>1.0........................................ 1,210 15 1,515 11
-------------------------------------------------------------------
Total................................... 8,338 100 13,296 100
----------------------------------------------------------------------------------------------------------------
Table A.2--Percentage Reduction in Equity Capital Due to Proposed Increases in Assessments
[$ in billions]
----------------------------------------------------------------------------------------------------------------
Percent of Percent of
Reduction in capital (percent) Number of institutions Total assets assets
institutions (percent) (percent)
----------------------------------------------------------------------------------------------------------------
0.0-0.1..................................... 1,893 23 4,348 33
0.1-0.2..................................... 2,427 29 5,662 43
0.2-0.3..................................... 1,940 23 995 7
0.3-0.4..................................... 956 11 954 7
0.4-0.5..................................... 444 5 580 4
0.5-1.0..................................... 547 7 436 3
> 1.0....................................... 131 2 322 2
-------------------------------------------------------------------
Total................................... 8,338 100 13,296 100
----------------------------------------------------------------------------------------------------------------
11 insured branches of foreign banks and 113 institutions having less than 4 quarters of reported earnings were
excluded from this analysis. Equity capital referred to in this analysis is the same as defined under
Generally Accepted Accounting Principles.
The effect of assessments on institution income is measured by
deposit insurance assessments as a percent of income before
assessments, taxes, and extraordinary items (hereafter referred to
as ``income''). This income measure is used in order to eliminate
the potentially transitory effects of extraordinary items and taxes
on profitability. Table A.3 shows that, under the proposed rate
schedule, approximately 56 percent of profitable institutions are
projected to owe assessments that are less than 8 percent of income
in 2009. The median projected reduction in income for profitable
institutions under the recommended rates is 7.3 percent, while the
weighted average reduction for the same institutions is 4.4 percent.
For the industry as a whole (including profitable and unprofitable
institutions), assessments in 2009 would reduce income by 11
percent.
Table A.4 shows that the proposed increase in assessments from
current levels exceeds 5 percent of income in 2009 for approximately
33 percent of profitable institutions. The median projected
reduction in income for profitable institutions from the proposed
increase in rates under the proposal is 3.6 percent, while the
weighted average reduction for the same institutions is 2.2 percent.
For the industry as a whole (including profitable and unprofitable
institutions), the increase in assessments in 2009 would reduce
income by 5.6 percent compared to current rates.
[[Page 61597]]
Table A.3--Assessments as a Percent of Income for Profitable Institutions
[$ in billions]
----------------------------------------------------------------------------------------------------------------
Number of Percent of Assets of Percent of
Assessments as pct. of income profitable institutions profitable assets
institutions (percent) institutions (percent)
----------------------------------------------------------------------------------------------------------------
0.0-4.0..................................... 1,036 15 4,021 42
4.0-6.0..................................... 1,618 23 1,293 13
6.0-8.0..................................... 1,303 18 2,367 25
8.0-10.0.................................... 768 11 336 3
10.0-12.0................................... 475 7 396 4
12.0-15.0................................... 497 7 311 3
15.0-20.0................................... 428 6 274 3
> 20.0...................................... 1,001 14 621 6
-------------------------------------------------------------------
Total................................... 7,126 100 9,618 100
----------------------------------------------------------------------------------------------------------------
Table A.4--Proposed Increases in Assessments as a Percent of Income for Profitable Institutions
[$ in billions]
----------------------------------------------------------------------------------------------------------------
Number of Percent of Assets of Percent of
Assessments as pct. of income profitable institutions profitable assets
institutions (percent) institutions (percent)
----------------------------------------------------------------------------------------------------------------
0.0-0.5..................................... 126 2 723 8
0.5-1.0..................................... 87 1 573 6
1.0-2.0..................................... 768 11 2,529 26
2.0-3.0..................................... 1,702 24 1,185 12
3.0-4.0..................................... 1,345 19 2,616 27
4.0-5.0..................................... 754 11 437 5
5.0-10.0.................................... 1,382 19 919 10
> 10.0...................................... 962 13 636 7
-------------------------------------------------------------------
Total................................... 7,126 100 9,618 100
----------------------------------------------------------------------------------------------------------------
Income is defined as income before taxes, extraordinary items, and deposit insurance assessments. Assessments
are adjusted for the use of one-time credits. Unprofitable institutions are defined as those having negative
merger-adjusted income (as defined above) over the 4 quarters ending June 30, 2008, and, by assumption, in
2009. There were 1212 unprofitable institutions excluded from Tables A.3 and A.4. 11 insured branches of
foreign banks and 113 institutions having less than 4 quarters of reported earnings were excluded from this
analysis. Figures may not sum to totals due to rounding.
Dated at Washington DC, this 7th day of October, 2008.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. E8-24186 Filed 10-8-08; 4:15 pm]
BILLING CODE 6714-01-P