[Federal Register: March 4, 2009 (Volume 74, Number 41)]
[Rules and Regulations]
[Page 9525-9563]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04mr09-12]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327
RIN 3064-AD35
Assessments
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Final rule.
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SUMMARY: The FDIC is amending our regulation 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: Effective Date: April 1, 2009.
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 reform 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\
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\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)).
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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\
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\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.
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[[Page 9526]]
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\
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\5\ Section 7(b)(3)(E) of the Federal Deposit Insurance Act (12
U.S.C. 1817(b)(3)(E)).
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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.\6\
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\6\ 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).
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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.'' \7\ 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.'' \8\
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\7\ Section 7(b)(1)(D) of the Federal Deposit Insurance Act (12
U.S.C. 1817(b)(1)(D)).
\8\ 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)).
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The 2006 Assessments Rule
Overview
On November 30, 2006, pursuant to the requirements of the Reform
Act, the FDIC published in the Federal Register a final rule on the
risk-based assessment system (the 2006 assessments rule).\9\ The rule
became effective on January 1, 2007.
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\9\ 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.
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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 regulator and
other information the FDIC deems relevant.\10\ 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.\11\ 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.)
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\10\ 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)).
\11\ The capital groups and the supervisory groups have been in
effect since 1993. In practice, the supervisory group evaluations
are 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, institutions with a CAMELS rating of 1 or 2
are assigned to supervisory group A, those with a CAMELS rating of 3
to group B, and those with a CAMELS rating of 4 or 5 to group C.
Table 1--Determination of Risk Category
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Supervisory group
Capital category --------------------------------------------------
A B C
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Well Capitalized............................................. I
III
Adequately Capitalized....................................... II
Undercapitalized............................................. III IV
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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 without further notice-and-comment rulemaking, provided that
no single change from one quarter to the next can exceed three basis
points.\12\ Base assessment rates within Risk Category I varied from 2
to 4 basis points, as set forth in Table 2 below.
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\12\ The Board cannot adjust rates more than 2 basis points
below the base rate schedule because rates cannot be less than zero.
[[Page 9527]]
Table 2--2007-08 Base Assessment Rates
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Risk category
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I*
---------------------------------- II III IV
Minimum Maximum
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Annual Rates (in basis points)..................................... 2 4 7 25 40
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* 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--2007-08 Actual Assessment Rates
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Risk category
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I*
---------------------------------- II III IV
Minimum Maximum
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Annual Rates (in basis points)..................................... 5 7 10 28 43
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* Rates for institutions that do not pay the minimum or maximum rate vary between these rates.
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
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.\13\
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\13\ Based upon September 30, 2008 data, approximately 26
percent of small Risk Category I institutions (other than
institutions less than 5 years old) were charged the minimum rate
and approximately 23 percent were charged the maximum rate.
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The supervisory and debt ratings method (or debt ratings 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.
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\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).
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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
[[Page 9528]]
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.\15\
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\15\ Based upon September 30, 2008, data, and ignoring the large
bank adjustment (described below), approximately 41 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.
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Assessment rates for insured branches of foreign banks in Risk
Category I are determined using ROCA components.\16\
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\16\ 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.
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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).\17\
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\17\ 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).
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With certain exceptions, beginning in 2010, the 2006 assessments
rule charges new institutions in Risk Category I (those established for
less than five years), 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 rule making in November 2006, the FDIC also
set the DRR at 1.25 percent, effective January 1, 2007.\18\ 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. 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 then existing assessment rate schedule.
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\18\ In November 2007 and October 2008, the Board again voted to
maintain the DRR at 1.25 percent for 2008 and 2009, respectively. 71
FR 69325 (Nov. 30, 2006) and 72 FR 65576 (Nov. 21, 2007).
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Recent failures of FDIC-insured institutions caused the reserve
ratio of the Deposit Insurance Fund (DIF) to decline from 1.19 percent
as of March 30, 2008, to 1.01 percent as of June 30, 0.76 percent as of
September 30, and 0.40 percent (preliminary) as of December 31. Twenty-
five institutions failed in 2008, and the FDIC expects a substantially
higher rate of institution failures in the next few years, leading to a
further decline in the reserve ratio. Already, 14 institutions have
failed in 2009. Because the fund reserve ratio fell below 1.15 percent
as of June 30, 2008, and was expected to remain below 1.15 percent, the
Reform Act required the FDIC to establish and implement a Restoration
Plan to restore the reserve ratio to at least 1.15 percent within five
years.
The Proposed Rule
On October 7, 2008, the FDIC established a Restoration Plan for the
DIF.\19\ In the FDIC's view, restoring the reserve ratio to at least
1.15 percent within five years required an increase in assessment
rates. Since rates were already three basis points above the base rate
schedule, a new rulemaking was required. Consequently, on October 7,
2008, the FDIC Board of Directors also adopted a notice of proposed
rulemaking with request for comments on revisions to the FDIC's
assessment regulations (the proposed rule or NPR).\20\ The NPR proposed
that, effective January 1, 2009, assessment rates would increase
uniformly by seven basis points for the first quarter 2009 assessment
period. Effective April 1, 2009, the NPR proposed to alter the way in
which the FDIC's risk-based assessment system differentiates for risk
and set new deposit insurance assessment rates. Also effective on April
1, 2009, the NPR proposed to make technical and other changes to the
rules governing the risk-based assessment system. The proposed rule was
published concurrently with the Restoration Plan on October 16, 2008,
with a comment period scheduled to end on November 17, 2008.\21\
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\19\ 73 FR 61,598 (Oct. 16, 2008).
\20\ 12 CFR 327.
\21\ See 73 FR 61,560 (Oct. 16, 2008).
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On November 7, 2008, the FDIC Board approved an extension of the
comment period until December 17, 2008, on the parts of the proposed
rulemaking that would become effective on April 1, 2009. The comment
period for the proposed 7 basis point rate increase for the first
quarter of 2009, with its separate proposed effective date of January
1, 2009, was not extended and expired on November 17, 2008. The final
rule on the rate increase for the first quarter of 2009 was approved as
proposed by the FDIC Board on December 16, 2008.\22\
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\22\ 73 FR 78,155 (Dec. 22, 2008).
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The FDIC received almost 5,000 comments on the parts of the
proposed rule that would become effective on April 1, 2009, including
proposed changes in how the FDIC's risk-based assessment system
differentiates for risk and corresponding new assessment rates. This
final rule implements the remaining changes that the FDIC proposed in
the October notice of proposed rulemaking, with some alteration.
II. Overview of the Final Rule
In this rulemaking, the FDIC seeks 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 rulemaking will make the assessment system more
sensitive to risk. The rulemaking should also make the risk-based
assessment system fairer, by limiting the subsidization of riskier
institutions by safer ones. The assessment rate schedule established in
this rule should provide sufficient revenue to cover losses resulting
from a large volume of institution failures and raise the insurance
fund's reserve ratio over time. However, as explained below, the FDIC
is simultaneously issuing an interim rule to impose a 20 basis point
special assessment (and possible additional special assessments of up
to 10 basis points thereafter). The final rule, which differs in
several ways from the proposed rule, is set out in detail in ensuing
sections, but is briefly summarized here. The final rule will take
effect April 1, 2009, and will apply to assessments for the second
quarter of 2009 (which will be collected in September 2009) and
thereafter.
[[Page 9529]]
Risk Category I
The final rule introduces a new financial ratio into the financial
ratios method. This new ratio will capture certain brokered deposits
(in excess of 10 percent of domestic deposits) that are used to fund
rapid asset growth. The new financial ratio in the final rule differs
from the one proposed in the NPR in two ways. It excludes deposits that
an insured depository institution receives through a deposit placement
network on a reciprocal basis, such that: (1) For any deposit received,
the institution (as agent for depositors) places the same amount with
other insured depository institutions through the network; and (2) each
member of the network sets the interest rate to be paid on the entire
amount of funds it places with other network members (henceforth
referred to as reciprocal deposits). It also raises the asset growth
threshold from that proposed in the NPR. The final rule also updates
the uniform amount and the pricing multipliers for the weighted average
CAMELS component ratings and financial ratios.
The final rule provides that the assessment rate for a large
institution with a long-term debt issuer rating will be determined
using a combination of the institution's weighted average CAMELS
component ratings, its long-term debt issuer ratings (converted to
numbers and averaged) and the financial ratios method assessment rate,
each equally weighted. The new method will be known as the large bank
method.
Under the final rule, the financial ratios method or the large bank
method, whichever is applicable, will determine a Risk Category I
institution's initial base assessment rate. The final rule will broaden
the spread between minimum and maximum initial base assessment rates in
Risk Category I from 2 basis points to an initial range of 4 basis
points and adjust the percentage of institutions subject to these
initial minimum and maximum rates.
Adjustments
Under the final rule, an institution's total base assessment rate
can vary from the initial base rate as the result of possible
adjustments. The final rule also increases the maximum possible Risk
Category I large bank adjustment from one-half basis point to one basis
point. Any such adjustment up or down will be made before any other
adjustment and will be subject to certain limits, which are described
in detail below.
Under the final rule, an institution's unsecured debt adjustment--
the institution's ratio of long-term unsecured debt (and, for small
institutions, certain amounts of its Tier 1 capital) to domestic
deposits--will lower the institution's base assessment rate.\23\ Any
decrease in base assessment rates will be limited to five basis points.
The unsecured debt adjustment differs from the adjustment proposed in
the NPR in several ways. The adjustment is larger for a given amount of
unsecured debt (and, for small institutions, Tier 1 capital) and the
maximum adjustment of five basis points is larger than the proposed
maximum of two basis points in the NPR. The adjustment excludes senior
unsecured debt that the FDIC has guaranteed under its Temporary
Liquidity Guarantee Program. Finally, the adjustment lowers the
threshold for inclusion of a small institution's Tier 1 capital.
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\23\ Long-term unsecured debt includes senior unsecured and
subordinated debt.
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Also, under the final rule, an institution's secured liability
adjustment--which is based on the institution's ratio of secured
liabilities to domestic deposits--will raise its base assessment rate.
An institution's ratio of secured liabilities to domestic deposits (if
greater than 25 percent), will increase its assessment rate, but the
resulting base assessment rate after any such increase can be no more
than 50 percent greater than it was before the adjustment. The secured
liability adjustment will be made after any large bank adjustment or
unsecured debt adjustment. This adjustment also differs from the
adjustment proposed in the NPR in that an institution's ratio of
secured liabilities to domestic deposits must be greater than 25
percent for an adjustment to exist, rather than 15 percent as proposed
in the NPR.
Institutions in all risk categories will be subject to the
unsecured debt adjustment and secured liability adjustment. In
addition, the final rule makes a final adjustment for brokered deposits
(the brokered deposit adjustment) for institutions in Risk Category II,
III or IV. An institution's ratio of brokered deposits to domestic
deposits (if greater than 10 percent) will increase its assessment
rate, but any increase will be limited to no more than 10 basis points.
The brokered deposit adjustment is as proposed in the NPR and will
include reciprocal deposits.
Insured Branches of Foreign Banks
The final rule makes 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 will be subject to any large bank adjustment, but not
to the unsecured debt adjustment or secured liability adjustment. In
fact, no insured branch of a foreign bank in any risk category will be
subject to the unsecured debt adjustment, secured liability adjustment
or brokered deposit adjustment.
New Institutions
The final rule makes conforming changes in the treatment of new
insured depository institutions.\24\ For assessment periods beginning
on or after January 1, 2010, any new institutions in Risk Category I
will be assessed at the maximum initial base assessment rate applicable
to Risk Category I institutions.
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\24\ As discussed below, subject to exceptions, the final rule
defines a new insured depository institution as a bank or thirft
that has not been federally insured for at least five years as of
the last day of any quarter for which it is being assessed.
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For assessments for the last three quarters of 2009, until a Risk
Category I new institution received CAMELS component ratings, it will
have an initial base assessment rate that is 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 final rule adopted in 2006. For these three quarters, all
other new institutions in Risk Category I will be treated as
established institutions, except as provided in the next paragraph.
Either before or after January 1, 2010: no new institution,
regardless of risk category, will be subject to the unsecured debt
adjustment; any new institution, regardless of risk category, will be
subject to the secured liability adjustment; and a new institution in
Risk Categories II, III or IV will be subject to the brokered deposit
adjustment. After January 1, 2010, no new institution in Risk Category
I will be subject to the large bank adjustment.
Assessment Rates
As explained below, estimated losses from projected institution
failures have risen considerably since the NPR was published last fall.
Consequently, initial base assessment rates as of April 1, 2009, which
are set forth in Table 4 below, are slightly higher than proposed in
the NPR.
[[Page 9530]]
Table 4--Initial Base Assessment Rates as of April 1, 2009
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Risk category
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I*
---------------------------------- II III IV
Minimum Maximum
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Annual Rates (in basis points)..................................... 12 16 22 32 45
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* Initial base rates that were not the minimum or maximum rate will vary between these rates.
After applying all possible adjustments, minimum and maximum total
base assessment rates for each risk category will be as set out in
Table 5 below.
Table 5--Total Base Assessment Rates
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Risk category Risk category Risk category Risk category
I II III IV
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Initial base assessment rate.................... 12-16 22 32 45
Unsecured debt adjustment....................... -5-0 -5-0 -5-0 -5-0
Secured liability adjustment.................... 0-8 0-11 0-16 0-22.5
Brokered deposit adjustment..................... .............. 0-10 0-10 0-10
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Total base assessment rate.................. 7-24.0 17-43.0 27-58.0 40-77.5
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* 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.
These rates and other revisions to the assessment rules take effect
for the quarter beginning April 1, 2009, and will be reflected in the
fund balance as of June 30, 2009, and assessments due September 30,
2009 and thereafter.
Because the outlook for losses to the insurance fund has
deteriorated significantly since publication of the NPR last fall, the
FDIC is simultaneously issuing an interim rule that provides for a 20
basis point special assessment on June 30, 2009. The interim rule also
provides that the Board may impose additional special assessments of up
to 10 basis points thereafter if the reserve ratio of the DIF is
estimated to fall to a level that that the Board believes would
adversely affect public confidence or to a level which shall be close
to zero or negative at the end of a calendar quarter.
The final rule continues to allow the FDIC Board to adopt actual
rates that are higher or lower than total base assessment rates without
the necessity of further notice and comment rulemaking, provided that:
(1) the Board cannot increase or decrease total 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 cannot
be more than three basis points higher or lower than the total base
rates without further notice-and-comment rulemaking.
Technical and Other Changes
The final rule also makes technical changes and one minor non-
technical change to the assessments rules. These changes are detailed
below.
III. Risk Category I: Financial Ratios Method
Brokered Deposits and Asset Growth
The final rule adds a new financial measure to the financial ratios
method. This new financial measure, the adjusted brokered deposit
ratio, will measure the extent to which brokered deposits are funding
rapid asset growth. The adjusted brokered deposit ratio will affect
only those established Risk Category I institutions whose total gross
assets are more than 40 percent greater than they were four years
previously, after adjusting for mergers and acquisitions, rather than
20 percent greater as proposed in the NPR, and whose brokered deposits
(less reciprocal deposits) make up more than 10 percent of domestic
deposits.25 26 27 Generally speaking, the greater an
institution's asset growth and the greater its percentage of brokered
deposits, the greater will be the increase in its initial base
assessment rate. Small changes in asset growth rate or brokered
deposits as a percentage of domestic deposits will lead to small
changes in assessment rates.
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\25\ As discussed below, subject to exceptions, the final rule
defines an established depository institution as 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.
\26\ 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.
\27\ References hereafter to ``asset growth'' or ``growth in
assets'' refer to growth in gross assets.
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If an institution's ratio of brokered deposits to domestic deposits
is 10 percent or less or if the institution's asset growth over the
previous four years is less than 40 percent, the adjusted brokered
deposit ratio will be zero and will have no effect on the institution's
assessment rate. If an institution's ratio of brokered deposits to
domestic deposits exceeds 10 percent and its asset growth over the
previous four years is more than 70 percent (rather than 40 percent as
proposed in the NPR), the adjusted brokered deposit ratio will 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 exceeds 10 percent but its asset growth
over the previous four years is between 40 percent and 70 percent,
overall asset growth rates will be converted into an asset growth rate
factor ranging between 0 and 1, so that the adjusted brokered deposit
ratio will equal a gradually increasing fraction of the ratio of
brokered deposits to domestic deposits (minus the 10 percent
threshold). The asset growth rate factor is derived by multiplying by
3\1/3\ an
[[Page 9531]]
amount equal to the overall rate of growth minus 40 percent and
expressing the result as a decimal fraction rather than as a percentage
(so that, for example, 3\1/3\ times 10 percent equals 0.33 * * *).\28\
The adjusted brokered deposit ratio will never be less than zero.
Appendix A contains a detailed mathematical definition of the ratio.
Table 6 gives examples of how the adjusted brokered deposit ratio would
be determined.
---------------------------------------------------------------------------
\28\ 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 6--Adjusted Brokered Deposit Ratio
----------------------------------------------------------------------------------------------------------------
A B C D E F
----------------------------------------------------------------------------------------------------------------
Ratio of
brokered
deposits to Adjusted
Ratio of domestic Cumulative brokered
brokered deposits minus asset growth Asset growth deposit ratio
Example deposits to 10 percent rate over four rate factor (column C
domestic threshold years times column
deposits (column B E)
minus 10
percent)
----------------------------------------------------------------------------------------------------------------
1............................... 5.0% 0.0% 5.0% .............. 0.0%
2............................... 15.0% 5.0% 5.0% .............. 0.0%
3............................... 5.0% 0.0% 35.0% .............. 0.0%
4............................... 35.0% 25.0% 55.0% 0.500 12.5%
5............................... 25.0% 15.0% 80.0% 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 40 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 55 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 3\1/3\ (55 percent--40
percent, with the result expressed as a decimal fraction 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 70 percent
greater than they were four years previously (Column D). Therefore, its
adjusted brokered deposit ratio is equal to its ratio of brokered
deposits to domestic deposits of 25 percent minus the 10 percent
threshold (Column F).
The FDIC is adding this new risk measure for a couple of reasons. A
number of costly institution failures, including some recent failures,
involved rapid asset growth funded 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 adjusted brokered deposit ratio generally will include brokered
deposits as defined in Section 29 of the Federal Deposit Insurance Act
(12 U.S.C. 1831f), and as implemented in 12 CFR 337.6, which is the
definition used in banks' quarterly Reports of Condition and Income
(Call Reports) and thrifts' quarterly Thrift Financial Reports (TFRs).
However, for assessment purposes in Risk Category I, the ratio will not
include reciprocal deposits (that is, deposits that an insured
depository institution receives through a deposit placement network on
a reciprocal basis, such that: (1) for any deposit received, the
institution (as agent for depositors) places the same amount with other
insured depository institutions through the network; and (2) each
member of the network sets the interest rate to be paid on the entire
amount of funds it places with other network members. All other
brokered deposits will 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.
Based on data as of September 30, 2008, approximately 8.7 percent
of institutions in Risk Category I would have exceeded both the 10
percent brokered deposit threshold and 40 percent minimum 4-year
cumulative asset growth threshold, so that their adjusted brokered
deposit ratio would be greater than zero. A smaller percentage of
institutions would actually have been charged a higher rate solely due
to the adjusted brokered deposit ratio because the minimum or maximum
initial rates applicable to Risk Category I would continue to apply to
some institutions both before and after accounting for the effect of
this ratio. Only 1.1 percent of Risk Category I institutions would have
had an initial base assessment rate more than 1 basis point higher as a
result of the adjusted brokered deposit ratio.\29\
---------------------------------------------------------------------------
\29\ These estimates do not exclude deposits that an institution
receives through a deposit placement network on a reciprocal basis
and, thus, might overstate the effects on assessment rates for some
institutions.
---------------------------------------------------------------------------
Comments
The FDIC received many comments arguing that brokered deposits
should not increase assessment rates for Risk Category I institutions
and that the brokered deposit provisions in the NPR do not account for
the use to which institutions put these deposits. The FDIC is not
persuaded by the arguments. Recent data show that institutions with a
combination of brokered deposit reliance and robust asset growth tend
to
[[Page 9532]]
have a greater concentration in higher risk assets. In addition, there
is a statistically significant correlation between the adjusted
brokered deposit ratio, on the one hand, and the probability that an
institution will be downgraded to a CAMELS rating of 3, 4, or 5 within
a year, on the other, independent of the other measures of asset
quality contained in the financial ratios method.
The FDIC received several comments, including comments from several
industry trade groups, arguing that institutions should be able to have
a ratio of brokered deposits to domestic deposits greater than 10
percent without triggering the adjusted brokered deposit ratio and that
the minimum asset growth rate required to trigger the adjusted brokered
deposit ratio should be greater than 20 percent. The comments disputed
the characterization of 20 percent cumulative asset growth over four
years as ``rapid.'' One trade association noted that the proposed
minimum growth rate (20 percent) was lower than the nominal GDP growth
between third quarter 2004 and third quarter 2007.
The FDIC is persuaded in part. The final rule raises the minimum 4-
year asset growth rate required to trigger the adjusted brokered
deposit ratio from 20 percent to 40 percent. The final rule also
increases from 40 percent to 70 percent the asset growth rate required
to make an institution's adjusted brokered deposit ratio equal to its
institution's ratio of brokered deposits to domestic deposits less the
10 percent threshold. Additional analysis has revealed that these
growth rates are as predictive of downgrade probabilities as those
originally proposed and are more consistent with the intent of the
ratio, which was to capture only those institutions with rapid asset
growth.
However, in the FDIC's view, a ratio of brokered deposits to
domestic deposits greater than 10 percent is a significant amount of
brokered deposits. Still, for institutions in Risk Category I, brokered
deposits alone will not trigger higher rates, but must be combined with
significant asset growth.
The FDIC received over 3,300 comment letters arguing that certain
reciprocal deposits should not be included in the adjusted brokered
deposit ratio.\30\ Most of the comments were form letters. Commenters
argued that these reciprocal deposits are a stable source of funding.
According to the comments, most customers (83 percent) are not seeking
the highest rate of interest available and choose to keep their deposit
at the same institution when it matures. The commenters also argued
that these deposits are local deposits and not out-of-market funds and
stated that 80 percent of these deposits are placed with an insured
institution within 25 miles of a branch location of the relationship
bank. The commenters further argued that the interest rate on these
deposits reflects that of local markets since the insured institution
that originates the deposit sets the interest rate, rather than a
third-party broker. Commenters also argued that these deposits may have
franchise value in the event of a bank failure.
---------------------------------------------------------------------------
\30\ When an institution receives a deposit through a network on
a reciprocal basis, it must place the same amount (but owed to a
different depositor) with another institution through the network.
Many of the comment letters also argued that these reciprocal
deposits should not be included in the brokered deposit adjustment
applicable to institutions in Risk Categories II, III and IV. The
brokered deposit adjustment applicable to these risk categories is
discussed below.
---------------------------------------------------------------------------
The FDIC is persuaded that reciprocal deposits like those described
in the comment letters should not be included in the adjusted brokered
deposit ratio applicable to institutions in Risk Category I.\31\
(However, as discussed below, reciprocal deposits will be included in
the brokered deposits adjustment applicable to institutions in Risk
Categories II, III and IV.) The FDIC recognizes that reciprocal
deposits may be a more stable source of funding for healthy banks than
other types of brokered deposits and that they may not be as readily
used to fund rapid asset growth.
---------------------------------------------------------------------------
\31\ Excluding these deposits from the Call Report and TFR will
require changes to these forms. The FDIC anticipates that the
necessary changes will be made beginning with the June 30, 2009
reports of condition.
---------------------------------------------------------------------------
The FDIC also received several comments arguing that brokered
deposits that consist of balances swept into an insured institution by
a nondepository institution, such as balances swept into an insured
institution from a brokerage account at a broker-dealer, should be
excluded from the adjusted brokered deposit ratio.\32\ Commenters
argued that these sweep accounts are stable, relationship-based
accounts. Commenters also stated that the aggregate flows in and out of
the sweep accounts tend to offset one another and are thus predictable.
Some commenters differentiated between sweeps from affiliated brokerage
firms and those from non-affiliated firms. These commenters argued that
broker-dealer affiliated sweeps are not rate-sensitive accounts and are
not designed to compete with the high rates of interest paid by other
insured institutions and, therefore, do not raise the same concerns as
other brokered deposits about the high cost of funding of risky banks.
The commenters maintained that these accounts are typically used for
idle investment funds or as a safe investment and are designed to
better manage excess cash. Some commenters suggested that bankers would
be willing to separately report sweep balances from an affiliated
brokerage.
---------------------------------------------------------------------------
\32\ Many of these comment letters also argued that these swept
deposits should not be included in the brokered deposit adjustment
applicable to institutions in Risk Categories II, III and IV. The
brokered deposit adjustment for these risk categories is discussed
below.
---------------------------------------------------------------------------
Some commenters supported excluding brokered deposits swept from
unaffiliated brokerages through a sweep program, since the deposits
have the characteristics of core deposits and are not driven by yield.
According to the commenters, there is no price competition; deposits
from unaffiliated brokerages are used for the convenience and safety of
the customer.
The FDIC is not persuaded by these arguments. In the FDIC's view,
deposits swept from broker-dealers can and have contributed to high
rates of insured depository institution asset growth and, thus, fall
squarely within the type of brokered deposits that the adjusted
brokered deposit ratio was meant to capture. In addition, as noted in
the NPR, many sweep programs can be structured so that swept balances
are not brokered deposits.
Pricing Multipliers, the Uniform Amount, and the Range of Rates
The final rule contains a recalculated uniform amount and
recalculated pricing multipliers for the weighted average CAMELS
component rating and financial ratios. The uniform amount and pricing
multipliers under the final rule adopted in 2006 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.\33\ These probabilities were then
converted to pricing multipliers for each risk measure. The new pricing
multipliers were derived using essentially the same statistical
techniques, but based upon data from the end of the years 1988 to
2006.\34\ The new pricing multipliers are set out in Table 7 below.
---------------------------------------------------------------------------
\33\ 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.
\34\ 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. Data on downgrades to CAMELS
3, 4 or 5 is from the years 1989 to 2007.
[[Page 9533]]
Table 7--New Pricing Multipliers
------------------------------------------------------------------------
Pricing
Risk measures * multipliers **
------------------------------------------------------------------------
Tier 1 Leverage Ratio.................................. (0.056)
Loans Past Due 30-89 Days/Gross Assets................. 0.575
Nonperforming Assets/Gross Assets...................... 1.074
Net Loan Charge-Offs/Gross Assets...................... 1.210
Net Income before Taxes/Risk-Weighted Assets........... (0.764)
Adjusted brokered deposit ratio........................ 0.065
Weighted Average CAMELS Component Rating............... 1.095
------------------------------------------------------------------------
* 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) will continue to be multiplied by the corresponding
pricing multipliers. The sum of these products will be added to a new
uniform amount, 11.861.\35\ The new uniform amount is also derived from
the same statistical analysis.\36\ As under the final rule adopted in
2006, no initial base assessment rate within Risk Category I will 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 final rule sets the initial minimum
base assessment rate for Risk Category I at 12 basis points and the
maximum initial base assessment rate for Risk Category I at 16 basis
points.
---------------------------------------------------------------------------
\35\ 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.
\36\ 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.\37\ These cutoff values will be used in future periods, which
could lead to different percentages of institutions being charged the
minimum and maximum rates.
---------------------------------------------------------------------------
\37\ 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 system in place on June 30, 2008: (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.\38\
---------------------------------------------------------------------------
\38\ For the assessment period ending September 30, 2008,
approximately 26 percent of small Risk Category I institutions
(other than institutions less than 5 years old) were charged the
minimum rate and approximately 23 percent were charged the maximum
rate.
---------------------------------------------------------------------------
Table 8 gives initial base assessment rates for three institutions
with varying characteristics, given the new pricing multipliers above,
using initial base assessment rates for institutions in Risk Category I
of 12 basis points to 16 basis points.\39\
---------------------------------------------------------------------------
\39\ These are the initial base rates for Risk Category I
proposed below.
\40\ Under the proposed rule, pricing multipliers, the uniform
amount, and financial ratios will continue to be rounded to three
digits after the decimal point. Resulting assessment rates will be
rounded to the nearest one-hundredth (1/100th) of a basis point.
Table 8--Initial Base Assessment Rates for Three Institutions *
--------------------------------------------------------------------------------------------------------------------------------------------------------
C D E F G H
-----------------------------------------------------------------------------
A B Institution Institution Institution
1 2 3
--------------------------------------------------------------------------------------------------------------------------------------------------------
Pricing Risk Contributio Risk Contributio Risk Contributio
multiplier measure n to measure n to measure n to
value assessment value assessment value assessment
rate rate rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
Uniform Amount............................................... 11.861 ........... 11.861 ........... 11.861 ........... 11.861
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 (%)................... 0.575 0.400 0.230 0.600 0.345 1.000 0.575
Nonperforming Loans/Gross Assets (%)......................... 1.074 0.200 0.215 0.400 0.430 1.500 1.611
Net Loan Charge-Offs/Gross Asset (%)......................... 1.210 0.147 0.177 0.079 0.096 0.300 0.363
Net Income before Taxes/Risk-Weighted Assets (%)............. (0.764) 2.500 (1.910) 1.951 (1.491) 0.518 (0.396)
Adjusted Brokered Deposit Ratio (%).......................... 0.065 0.000 0.000 12.827 0.834 24.355 1.583
Weighted Average CAMELS Component Ratings.................... 1.095 1.200 1.314 1.450 1.588 2.100 2.300
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sum of Contributions..................................... ........... ........... 11.35 ........... 13.18 ........... 17.48
[[Page 9534]]
Initial Base Assessment Rate............................. ........... ........... 12.00 ........... 13.18 ........... 16.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
*Figures may not multiply or add to totals due to rounding.\40\
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 11.35 basis points, but the table
reflects the initial base minimum assessment rate of 12 basis points.
For Institution 3 in the table, the sum actually equals 17.48 basis
points, but the table reflects the initial base maximum assessment rate
of 16 basis points.
Under the final rule, the FDIC will 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 will 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 will 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 this rulemaking, 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 will continue to be
calculated from the report of condition filed by each institution as of
the last day of the quarter.\41\ CAMELS component rating changes will
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.\42\
---------------------------------------------------------------------------
\41\ Reports of condition include Reports of Income and
Condition and Thrift Financial Reports.
\42\ 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.
---------------------------------------------------------------------------
Comments
One industry trade group noted that some banks expressed a concern
that the expanded range of rates for Risk Category I, particularly in
combination with the proposed adjustment for secured liabilities
(discussed below), could result in differences in rates among
institutions that are too large compared to differences in risk. This
could lead to some institutions bearing disproportionate costs and
being competitively disadvantaged. However, another trade group
expressed concerns that the range of rates for Risk Category I is too
narrow, insufficiently reflecting differences in risk and creating a
cross subsidy within the risk category.\43\ The FDIC considers the 4-
basis point range for the initial base assessment rate in Risk Category
I to be appropriate.
---------------------------------------------------------------------------
\43\ The same trade group argued that rates for Risk Categories
III and IV should be higher than proposed.
---------------------------------------------------------------------------
IV. Risk Category I: Large Bank Method
For large Risk Category I institutions now subject to the debt
ratings method, the final rule derives assessment rates from the
financial ratios method as well as long-term debt issuer ratings and
CAMELS component ratings. The new method is known as the large bank
method. The rate using the financial ratios method is first converted
from the range of initial base rates (12 to 16 basis points) to a scale
from 1 to 3 (financial ratios score).\44\ The financial ratios score is
then given a 33\1/3\ percent weight in determining the large bank
method assessment rate, as are both the weighted average CAMELS
component rating and debt-agency ratings.
---------------------------------------------------------------------------
\44\ The assessment rate computed using the financial ratios
method would be converted to a financial ratios score by first
subtracting 10 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 13, 10 would be
subtracted from 13 and the result would be multiplied by one-half to
produce a financial ratios score of 1.5.
---------------------------------------------------------------------------
The weights of the CAMELS components remain the same as in the
final rule adopted in 2006. The values assigned to the debt issuer
ratings also remain the same. The weighted CAMELS components and debt
issuer ratings will continue to be converted to a scale from 1 to 3.
The initial base assessment rate under the large bank method will
be derived as follows: (1) An assessment rate computed using the
financial ratios method will be converted to a financial ratios score;
(2) the weighted average CAMELS rating, converted long-term debt issuer
ratings, and the financial ratios score will each be multiplied by a
pricing multiplier and the products summed; and (3) a uniform amount
will be added to the result. The resulting initial base assessment rate
will 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 is 1.692, and the uniform
amount is 3.873.\45\
---------------------------------------------------------------------------
\45\ 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. For the assessment period ending
June 30, 2008, under the assessment system then in place: (1) 45
percent of large institutions in Risk Category I (other than
institutions less than 5 years old) were charged the minimum assessment
rate (ignoring large bank adjustments), 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) were charged
the maximum assessment rate (ignoring
[[Page 9535]]
large bank adjustments), compared with 19 percent of small
institutions.\46\ 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).47 48 These cutoff values would be used in
future periods, which could lead to different percentages of
institutions being charged the minimum and maximum rates.
---------------------------------------------------------------------------
\46\ For the assessment period ending September 30, 2008, under
the assessment system then in place: (1) 41 percent of large
institutions in Risk Category I (other than institutions less than 5
years old) were charged the minimum assessment rate (again ignoring
large bank adjustments), compared with 26 percent of small
institutions; and (2) 11 percent of large institutions in Risk
Category I (other than institutions less than 5 years old) were
charged the maximum assessment rate (ignoring large bank
adjustments), compared with 23 percent of small institutions.
\47\ The cutoff value for the minimum assessment rate is an
average score of approximately 1.601. The cutoff value for the
maximum assessment rate is approximately 2.389.
\48\ 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, an exception for 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.
---------------------------------------------------------------------------
Under the final rule adopted in 2006, large institutions that lack
a long-term debt issuer rating are assessed using the financial ratios
method by itself, subject to the large bank adjustment. This will
continue under the final rule.
Under the final 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 13.50 basis points would be computed as
follows:
The financial ratios method assessment rate less 10 basis
points would be multiplied by one-half (calculated as (13.5 basis
points--10 basis points) x 0.5) to produce a financial ratios score of
1.75.
The weighted average CAMELS score, debt ratings score and
financial ratios score will each be multiplied by 1.692 and summed
(calculated as 1.70 x 1.692 + 1.65 x 1.692 + 1.75 x 1.692) to produce
8.629.
A uniform amount of 3.873 would be added, resulting in an
initial base assessment rate of 12.50 basis points.
The FDIC anticipates that incorporating the financial ratios score
into the large bank method assessment rate will 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. While the number of potential discretionary adjustments under
this revised large bank method cannot be known with certainty, the
revised method should create a more accurate distribution of initial
rates and, thus, should minimize the number of necessary discretionary
adjustments.\49\
---------------------------------------------------------------------------
\49\ 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).
---------------------------------------------------------------------------
Comments
One trade group supported the proposal and specifically noted that
the FDIC should move away from the debt rating method. Other comments,
including comments from trade groups, argued that the proposed rule
would make it harder for a large bank to be eligible for the lowest
assessment rates. A commenting bank argued that:
Structuring the rules with a goal to maintain parity between
large and small banks would be in violation of [12 U.S.C.
1817(b)(2)(D)]. Arbitrarily establishing targets for percentages of
institutions that fall into a given assessment rate is inconsistent
with not only the governing statute but the whole concept of risk-
based pricing. * * * The fact that, under objective criteria, large
banks may have a greater percentage of institutions that qualify for
the lowest rate is not an indication that the rule is flawed and
needs to change, but may just be a factual representation of the
strength of large banks.\50\
\50\ 12 U.S.C. 1817(b)(2)(D) provides that, ``No insured
depository institution shall be barred from the lowest-risk category
solely because of size.''
---------------------------------------------------------------------------
The FDIC disagrees with the commenting bank. The purpose of the new
large bank method is to create an assessment system for large Risk
Category I institutions that will respond more timely to changing risk
profiles, will improve the accuracy of initial assessment rates,
relative risk rankings, and will create a greater parity between small
and large Risk Category I institutions. The recalibration of the
percentages of large institutions that would have been charged the
minimum and maximum rates applicable to Risk Category I is intended to
better reflect the actual risk posed by large institutions. Under the
debt ratings method, the percentage of large Risk Category I
institutions that were charged the minimum assessment rate changed
little over time despite deteriorating financial conditions. If the
financial ratios method, which is based on a combination of objective
financial ratios and supervisory ratings, were applied to large Risk
Category I institutions, only about 19 percent would have been charged
the minimum assessment rate. While the FDIC continues to believe that
the financial ratios method alone does not adequately provide the
appropriate risk ranking for large and complex institutions, the
deterioration in financial ratios is highly indicative of rapidly
changing risk profiles, which are not fully reflected in the debt
ratings method on a timely basis.
Furthermore, 12 U.S.C. 1817(b)(2)(D) does not prohibit the FDIC
from calibrating a risk-based assessment system so that, at a given
point in time, an equal percentage of small and large institutions
would have been charged the minimum assessment rate, provided that the
risks posed were equal, as, in the FDIC's view, they were.
V. Adjustment for Large Institutions and Insured Branches of Foreign
Banks in Risk Category I
Under the final rule adopted in 2006, 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 final rule will increase the maximum possible large bank
adjustment to one basis point. The adjustment will be made to an
institution's initial base assessment rate before any other adjustments
are made.
[[Page 9536]]
The adjustment cannot: (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 is amending the maximum size of the adjustment for two
primary reasons. First, under the final rule adopted in 2006, 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 will increase from two basis points to four basis
points under the final rule. 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 increase in the maximum possible large bank adjustment
will continue to represent 25 percent of the difference between the
minimum and maximum rates, minimizing the potential number of instances
where the large bank adjustment is insufficient to fully and accurately
reflect the risk that an institution poses.
The purpose of the large bank adjustment is to improve the relative
risk ranking of large Risk Category I institutions with respect to
their initial assessment rates, not total assessment rates. The FDIC
expects that, under the final rule, large bank adjustments will
continue to be made infrequently and for a limited number of
institutions.\51\ The FDIC's view is that the use of supervisory
ratings, financial ratios and agency ratings (when available) will
sufficiently reflect the risk profile and rank orderings of risk in
large Risk Category I institutions in most (but not all) cases.
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\51\ In the seven quarters for which institutions have been
assessed since the 2006 assessment rule went into effect, the total
number of adjustments in any one quarter has ranged from 2 to 16.
For the third quarter of 2008, the FDIC continued or implemented
assessment rate adjustments for 16 large Risk Category I
institutions, 14 to increase an institution's assessment rate, and 2
to decrease an institution's assessment rate. Additionally, the FDIC
sent 2 institutions advance notification of a potential upward
adjustment in their assessment rate.
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The FDIC expects to further clarify its Assessment Rate Adjustment
Guidelines for Large Institutions and Insured Foreign Branches in Risk
Category I (the Guidelines).\52\ The Guidelines will discuss in detail
the quantitative and qualitative factors that the FDIC will rely upon
when deciding whether to make a large bank adjustment. Until then, the
Guidelines will be applied taking into account the changes resulting
from this rulemaking.
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\52\ 72 FR 27,122 (May 14, 2007).
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Comments
An industry trade group and a bank objected to the increase in the
large bank adjustment, arguing that the adjustment is arbitrary and
subjective. The FDIC disagrees. The large bank method appropriately
recognizes the need for subjective, expert judgment-based risk
assessments for large banks. Because large institutions are usually
complex and often have unique operations, an entirely formulaic
approach, while objective, has yielded a distribution of assessment
rates that is not sufficiently reflective of the risk. When the FDIC
decides to increase or decrease a large institution's assessment rate
based upon the large bank adjustment, it does so after reviewing a
large set of financial and performance data in addition to making
qualitative assessments. While the decision to apply an adjustment
cannot be reduced to a formula, the set of data that the FDIC reviews
is consistent from one institution to the next and the FDIC strives to
make its decisions based on the data as consistent as possible and the
reasons for the decisions as clear as possible for the institutions
affected. As stated above, the FDIC intends to publish revised
Guidelines to further clarify the large bank adjustment process.
Despite the existence of a long-established appeals process for
assessment rates, one industry trade group stated that ``[B]ankers felt
that they were not allowed to effectively challenge the adjustments
through the FDIC's appeals process.'' The FDIC notes, however, that no
institution has yet appealed an adjustment (or the lack thereof) to the
Assessment Appeals Committee.\53\
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\53\ Only one institution has requested review of its assessment
rate; it asked for an adjustment when the FDIC had not given one.
However, this institution did not appeal the denial of its request
for review to the Assessment Appeals Committee. The FDIC has also
received 9 responses to the 29 advance notices of intent to increase
an assessment rate using the large bank adjustment that the FDIC has
sent out.
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VI. Adjustment for Unsecured Debt for all Risk Categories
Under the final rule, an institution's base assessment rate (after
making any large bank adjustment) will be reduced from the initial rate
using the institution's ratio of long-term unsecured debt (and, for
small institutions, certain amounts of Tier 1 capital) to domestic
deposits.\54\ Any decrease in base assessment rates as a result of this
unsecured debt adjustment will be limited to five basis points (rather
than two basis points as proposed in the NPR). Unsecured debt will not
include any senior unsecured debt that the FDIC has guaranteed under
the Temporary Liquidity Guarantee Program.
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\54\ 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).
---------------------------------------------------------------------------
The unsecured debt adjustment will be determined by multiplying an
institution's long-term unsecured debt (plus, if the institution is a
small institution, ``qualified'' amounts of Tier 1 capital as explained
below) as a percentage of domestic deposits by 40 basis points (rather
than 20 basis points as proposed in the NPR). For example, an
institution with a ratio of long-term unsecured debt (plus, if the
institution is small, qualified amounts of Tier 1 capital) to domestic
deposits of 3.0 percent will see its initial base assessment rate
reduced by 1.20 basis points (calculated as 40 basis points x 0.03). An
institution with a ratio of long-term unsecured debt (plus, if the
institution is small, qualified amounts of Tier 1 capital) to domestic
deposits of 13.0 percent will have its assessment rate reduced by five
basis points, since the maximum possible reduction will be five basis
points. (40 basis points x 0.13 = 5.20 basis points, which exceeds the
maximum possible reduction.)
For a small institution, the amount of qualified Tier 1 capital
that will be added to long-term unsecured debt will be a portion of the
amount of Tier 1 capital that exceeds a ratio of Tier 1 capital to
adjusted average assets of 5.0%.\55\ The percentage of Tier 1 capital
that is qualified increases as the amount of Tier 1 capital held by a
small institution increases. The qualified amount is set forth in Table
9.
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\55\ Adjusted average assets will be used for Call Report
filers; adjusted total assets will be used for TFR filers.
[[Page 9537]]
Table 9--Amount of Qualified Tier 1 Capital
------------------------------------------------------------------------
Amount of Tier
1 capital
within range
Range of Tier 1 capital to adjusted average assets which is
qualified
(percent)
------------------------------------------------------------------------
<= 5%................................................... 0
> 5% and <= 6%.......................................... 10
> 6% and <= 7%.......................................... 20
> 7% and <= 8%.......................................... 30
> 8% and <= 9%.......................................... 40
> 9% and <= 10%......................................... 50
> 10% and <= 11%........................................ 60
> 11% and <= 12%........................................ 70
> 12% and <= 13%........................................ 80
> 13% and <= 14%........................................ 90
> 14%................................................... 100
------------------------------------------------------------------------
The amount of qualified Tier 1 capital within each of the ranges is
summed to determine the total amount of qualified Tier 1 capital for
this institution. The sum of qualified Tier 1 capital and long-term
unsecured debt as a percentage of domestic deposits will be multiplied
by 40 basis points to produce the unsecured debt adjustment.\56\
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\56\ 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.
---------------------------------------------------------------------------
To illustrate the calculation of qualified Tier 1 capital, consider
a small institution with a Tier 1 leverage ratio of 20.0 percent and
Tier 1 capital of $2.0 million. The amount of qualified Tier 1 capital
is illustrated in Table 10.
Table 10--Example of Qualified Tier 1 Capital for the Unsecured Debt Adjustment
----------------------------------------------------------------------------------------------------------------
Qualified
Tier 1 capital percentage of Qualified Tier 1
Leverage ratio band within band x Tier 1 capital = capital ($000)
($000) (percent)
----------------------------------------------------------------------------------------------------------------
0-5%........................................... 500 .. 0 .. 0
5%-6%.......................................... 100 .. 10 .. 10
6%-7%.......................................... 100 .. 20 .. 20
7%-8%.......................................... 100 .. 30 .. 30
8%-9%.......................................... 100 .. 40 .. 40
9%-10%......................................... 100 .. 50 .. 50
10%-11%........................................ 100 .. 60 .. 60
11%-12%........................................ 100 .. 70 .. 70
12%-13%........................................ 100 .. 80 .. 80
13%-14%........................................ 100 .. 90 .. 90
> 14%.......................................... 600 .. 100 .. 600
----------------------------------------------------------------
Total...................................... 2,000 .. ................. .. 1,050
----------------------------------------------------------------------------------------------------------------
As can be seen in Table 10, each band of the Tier 1 leverage ratio
(up to the last band) contains $100,000 in Tier 1 capital and the
qualified percentage increases linearly until it reaches 100 percent
for amounts over 14.0 percent. The total qualified Tier 1 capital for
this small institution is $1.05 million, which will be added to any
long-term unsecured debt to calculate the institution's unsecured debt
adjustment.
The final rule includes more Tier 1 capital in qualified Tier 1
capital than proposed in the NPR. The NPR proposed including the sum of
one-half of the amount of Tier 1 capital between 10 percent and 15
percent of adjusted average assets and the full amount of Tier 1
capital exceeding 15 percent of adjusted average assets. The FDIC has
concluded, based in part on comments, that the proposal did not give
small institutions sufficient credit for Tier 1 capital.
Ratios for any given quarter will be calculated from the report of
condition filed by each institution as of the last day of the quarter.
Unsecured debt will consist of senior unsecured liabilities and
subordinated debt. A senior unsecured liability is defined as the
unsecured portion of other borrowed money.\57\ Subordinated debt is
defined in the report of condition for the reporting period.\58\ Long-
term unsecured debt is defined as unsecured debt with at least one year
remaining until maturity. However, unsecured debt will not include any
debt that the FDIC has guaranteed pursuant to the Temporary Liquidity
Guarantee Program, since this kind of debt will not decrease FDIC
losses in the event an institution fails.
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\57\ 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.
\58\ 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 final 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.
---------------------------------------------------------------------------
At present, 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
[[Page 9538]]
notice of proposed rulemaking that would adopt similar reporting
requirements. The FDIC anticipates that these revisions will be made
beginning with the June 30, 2009 Call Report and TFR. However, if they
are not, 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.
At present, institutions also do not report debt that the FDIC has
guaranteed pursuant to the Temporary Liquidity Guarantee Program.\59\
The FDIC is pursuing the necessary changes to the Call Report and TFR
to ensure that these amounts are excluded from the separate report of
long-term senior unsecured liabilities and subordinated debt beginning
with the June 30, 2009 Call Report and TFR.
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\59\ Institutions report this debt to the FDIC shortly after
issuing it and also file monthly reports on the amount of this debt
outstanding as of the end of each month. However, neither of these
reports contains all of the information the FDIC needs to deduct
this debt from the unsecured debt adjustment, since neither uses the
definition of ``unsecured debt'' contained in the text. In addition,
the monthly report does not contain maturity information.
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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.
For small institutions (but not large ones), the unsecured debt
adjustment includes a portion of Tier 1 capital for two primary
reasons. 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 and receive subordinated debt.
Comments
The FDIC received several comments on the proposed unsecured debt
adjustment. One commenter found the proposal fair and appropriate.
Another commenter, however, claimed that the proposal would
penalize institutions that do not issue long-term unsecured debt. A
commenter recommended that the FDIC abandon the separate risk
adjustment for unsecured debt. A commenter argued that the proposal
uses arbitrary measures when adjusting for risk and ignores the
probability of default. The FDIC disagrees with these comments. As
noted earlier, greater amounts of long-term unsecured debt provide a
cushion that can reduce the FDIC's loss in the event of failure, thus
reducing the FDIC's risk.
The FDIC specifically sought comments on the size of the unsecured
debt adjustment and whether it should be larger or smaller. Several
commenters argued that the proposed two basis point reduction in base
assessment rates, which was the maximum reduction possible under the
proposal, was arbitrary and too low. Some also argued that the proposed
20 basis point multiplier should be increased. Several noted that the
maximum proposed unsecured debt adjustment was much smaller than the
maximum proposed secured liability adjustment.
The FDIC has concluded that the proposed 20 basis point multiplier
and two basis point maximum reduction were too small. Spreads on
depository institution unsecured debt have, on average, approximately
doubled since the NPR was published. The FDIC has, therefore, doubled
the size of the multiplier, partly to reflect the recent increase in
debt spreads and partly to create greater parity between the size of
the unsecured debt adjustment and the size of the secured liability
adjustment. The FDIC has more than doubled the maximum possible
unsecured debt adjustment to ensure that institutions will retain an
incentive to issue unsecured debt and, again, to create greater parity
between the unsecured debt adjustment and the secured liability
adjustment.
Under the final rule, the FDIC estimates that the reduction in
industry average assessments arising from the unsecured debt adjustment
will exceed the industry average increase in assessments arising from
the secured liability adjustment and (for Risk Categories II, III, and
IV) the brokered deposit adjustment.
An industry trade group recommended that the unsecured debt
adjustment for small institutions include larger amounts of Tier 1
capital. The trade group argued that small institutions should be
rewarded for their additional capital and that the proposal did not
sufficiently reward them. The trade group suggested that the adjustment
include the sum of one-half of the amount of Tier 1 capital between 8
percent and 12 percent of adjusted average assets and the full amount
of Tier 1 capital exceeding 12 percent of adjusted average assets. The
FDIC agrees that small institutions should receive more credit for Tier
1 capital and, and discussed above, has so provided in the final rule.
Another industry trade group suggested that institutions subject to
the large bank method should also be given credit for capital in the
unsecured debt adjustment. However, in the FDIC's view, doing so would
undo the one of the purposes of including a portion of Tier 1 capital
in the unsecured debt adjustment for small banks, which was to give
small banks, which generally do not (and generally cannot) issue much
unsecured debt, a benefit equivalent to that of large banks. If a large
institution's assessment rate does not appropriately factor its
capital, the FDIC can use the large bank adjustment to alter the rate
(although the FDIC anticipates that the need to do so will seldom
arise).
Some comments suggested that the FDIC include all unsecured and
subordinated debt in the unsecured debt adjustment, regardless of
maturity. One suggested using all unencumbered assets. The FDIC
disagrees. Short-term debt is likely to be paid prior to failure and,
thus, is unlikely to provide a cushion against FDIC losses.
Some commenters argued that it would be more appropriate to use a
ratio of long-term unsecured debt (or unencumbered debt) to insured
deposits, since insured deposits are the true proxy for the FDIC's
risk. The FDIC disagrees. Numerous studies have shown that, as an
institution approaches failure, uninsured depositors tend to demand
payment. In effect, these uninsured depositors receive full payment on
their claims (as if they were insured depositors at failure), leaving
the failed institution with fewer assets to satisfy the FDIC's claims.
VII. Adjustment for Secured Liabilities for All Risk Categories
Under the final rule, an institution's base assessment rate may
increase depending 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 25 percent
(rather than 15 percent as proposed in the NPR), will increase its
assessment rate, but the resulting base assessment rate after any such
increase will be no more than 50 percent greater
[[Page 9539]]
than it was before the adjustment. The secured liability adjustment
will be made after any large bank adjustment or unsecured debt
adjustment.
Specifically, for an institution that has a ratio of secured
liabilities to domestic deposits of greater than 25 percent, the
secured liability adjustment will 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 0.25.
However, the resulting adjustment cannot 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 35 percent, and a base assessment
rate before the secured liability adjustment of 14 basis points, the
secured liability adjustment would be the base rate multiplied by 0.10
(calculated as 0.35 - 0.25), resulting in an adjustment of 1.4 basis
points. However, if the institution had a ratio of secured liabilities
to domestic deposits of 80 percent, its base rate before the secured
liability adjustment of 14 basis points would be multiplied by 0.50
rather than 0.55 (calculated as 0.80 - 0.25), since the resulting
adjustment can be no greater than 50 percent of the base assessment
rate before the secured liability adjustment.\60\
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\60\ Under the final rule, the ratio of secured liabilities to
domestic deposits will be rounded to three digits after the decimal
point. The resulting amount and adjusted assessment rate will be
rounded to the nearest one-hundredth (1/100th) of a basis point.
---------------------------------------------------------------------------
Ratios of secured liabilities to domestic deposits for any given
quarter will be calculated from the report of condition filed by each
institution as of the last day of the quarter. For banks, secured
liabilities 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 published a notice of
proposed rulemaking to revise the TFR so that thrifts will separately
report these items and the FDIC anticipates that this revision will be
effective for the June 30, 2009 TFR. Until the TFR is revised, however,
any of these secured amounts not reported separately from unsecured or
other liabilities by a thrift in its 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.
Under the final rule adopted in 2006, 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 figure into an institution's
assessment under the final rule adopted in 2006, 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 final rule adopted in 2006, 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.\61\
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\61\ 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.
---------------------------------------------------------------------------
Comments
The vast majority of commenters were opposed to the secured
liability adjustment. The few commenters that supported the FDIC's
proposal called the secured liability adjustment fair and appropriate,
and viewed the logic for the increased charge as clear and compelling.
One of the supportive commenters stated that core deposits are more
advantageous to an institution than secured liabilities, as they are
cheaper and allow cross-selling of products. As a result, prudent
institutions show a preference for core funding. The commenter found
the proposed threshold to be reasonable.
Many of the commenters opposed to the adjustment suggested that the
NPR gave too much weight to risk adjustments based on arbitrary
measures, and ignored the probability of default. Commenters argued
that the true risk of a bank lies in the quality of its assets, rather
than how the assets are funded. Some noted that the presence of
unsecured liabilities (as opposed to secured liabilities) is no
guarantee of the quality of a bank's assets or that the assets would be
sufficient to cover a bank's deposit liabilities in case of bank
failure. Commenters believe that the FDIC should abandon the proposed
approach of targeting certain funding sources.
Some commenters argued that the proposed secured liability
adjustment appears to run contrary to established programs that have
implied government support, including borrowings from the Federal
Reserve through the Term Auction Facility. Commenters viewed the
secured liability adjustment as unfair to institutions that have
limited options for funding.
Many of the comments (over 1,100) were particularly concerned about
the effect the FDIC's proposal would have on Federal Home Loan Bank
(FHLB) advances. Commenters argued that FHLB advances are a stable,
reliable source of liquidity, and a key tool for asset/liability
management, interest rate risk and net interest margin maintenance.
Many commenters suggested that the secured liability adjustment was
counterproductive since banks benefit from FHLB dividend income. Many
commenters cautioned that deterring the use of FHLB advances (and other
secured liabilities) will lead to increased use of riskier funding
sources, higher funding costs, and decreased lending. Most of the
commenters viewed the proposal as unfairly penalizing institutions that
use FHLB advances prudently. Several commenters suggested that FHLB
advances should be excluded from any secured liability adjustment for
at least five years since some FHLB advances do not mature before the
effective date of the proposal.
Many commenters argued against the proposal because they believe it
would impair the mission of the FHLB system. The commenters asserted
that because the proposal discourages the use of FHLB advances, it
would lead to a decline in FHLB earnings. Commenters representing
community service groups
[[Page 9540]]
expressed concern that any decline in FHLB earnings would undermine
FHLB contributions to community down payment and closing cost
assistance programs, community investment programs, affordable housing
programs, and foreclosure prevention programs. Commenters also noted
that FHLBs already regulate the use of their advances.
Commenters also noted the effect the proposal would have on the use
of repurchase agreements (repos). Many commenters argued that repos are
a safe and effective source to manage liquidity. Others remarked that
repos are an important tool used to attract commercial deposits, which
can neither be secured nor bear interest. One commenter suggested that
the definition of secured liabilities used in the proposal, exclude
repos with state and local governments where the securities sold are
federal government or agency securities. In addition, the commenter
expressed concern that the proposal would put banks at a competitive
disadvantage to non-depository institutions.
Commenters also expressed concern that the proposed secured
liability adjustment would harm the covered bond market at a time when
additional sources of mortgage funding are needed and when bank
regulatory agencies have supported development of this market.
Many commenters argued that the 15 percent threshold is arbitrary
and simplistic. One commenter suggested raising the threshold to 30
percent. Some comments suggested adjusting the threshold by subtracting
the balance that is secured by agency bonds or investment grade
securities or by subtracting long-term advances. Other commenters
recommended eliminating the secured liability adjustment if the bank
has capital above a certain amount.
The FDIC remains generally unpersuaded by these comments, which do
not respond to the reasons for the secured liability adjustment. The
FDIC has not argued that secured liability funding makes a bank more
likely to fail. Rather, as noted above, the primary purpose of the
secured liability adjustment is to remedy an 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. This result is not fair to institutions that do not rely
heavily on secured funding. 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. A risk-
based system should take this likelihood into account. These arguments
apply equally whether an institution's secured liabilities consist of
FHLB advances, repurchase agreements or other forms of secured
borrowing.
The FDIC intended the secured liability adjustment to apply only to
those institutions that rely heavily on secured funding. The revenue
loss to the DIF is relatively small until reliance on secured funding
becomes significant. To ensure that the adjustment applies only to
those institutions that rely heavily on secured funding and impose a
significant revenue loss on the DIF, the final rule raises the ratio of
secured liabilities to domestic deposits that will trigger the
adjustment to 25 percent. As Table 11 demonstrates, as of September 30,
2008, only 10 percent of insured institutions would have had a secured
liability adjustment and only 5 percent would have had an increase in
assessment rate of greater than 10 percent. Consequently, the
adjustment should have no effect on funding choices for the vast
majority of institutions and is unlikely to have a significant overall
effect on secured borrowing, the FHLB system, affordable housing or
foreclosure prevention.
Table 11--Percentage of Institutions Subject to the Secured Liability
Adjustment Using Different Thresholds
[As of September 30, 2008]
------------------------------------------------------------------------
Minimum ratio of secured
liabilities to domestic
-------------------------------
15% 25%
------------------------------------------------------------------------
Percentage of all institutions that 24% 10%
would have been subject to the secured
liability adjustment...................
Percentage of all institutions that 10% 5%
would have had more than a 10% increase
in assessment rate due to the secured
liability adjustment...................
------------------------------------------------------------------------
Some commenters noted that many states require that banks
collateralize any public funds they have on deposit; since public funds
pose no additional risk to the DIF, banks should not be penalized by
the secured liability adjustment when pledging collateral for the
public funds. The FDIC agrees. The FDIC did not, and did not intend to,
include collateralized public funds among secured liabilities for
purposes of the adjustment. For purposes of the secured liability
adjustment, deposits, regardless of whether they are collateralized,
are not considered a secured liability.
Many comments focused on the timing of the proposal. Most
commenters noted that discouraging alternate funding sources would hurt
bank liquidity and tighten credit availability, which is inconsistent
with market realities in the current economic downturn. Comments on the
general timing of the proposal suggested that it should be delayed
until at least the beginning of 2010; others commented that a phase-in
schedule for the secured liability adjustment should be used.
Commenters thought that a delay in the proposal would decrease the
likelihood that the secured liability adjustment would conflict with
other policy measures currently being used to increase liquidity.
Additionally, commenters asserted that the proposal does not give
institutions an opportunity to adjust their funding mix to account for
the new assessment rate structure.
In the FDIC's view, the secured liability adjustment will not have
any material effect on liquidity and will not conflict with other
measures intended to increase liquidity. As noted above, the secured
liability adjustment will affect only about 10 percent of the industry
and will cause more than a 10 percent increase in assessment rates for
only about 5 percent of the industry. The FDIC also sees no reason to
delay implementation to allow institutions to adjust their funding mix.
The NPR was published in October 2008 and the secured liability
adjustment will be based upon data submitted as of June 30, 2009, which
allows institutions over eight months to adjust their funding mix.
[[Page 9541]]
Some commenters were concerned that the proposed secured liability
adjustment would result in sharp increases in assessments when
amendments take effect to the Statement of Financial Accounting
Standards No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities (FAS 140) in 2010. FAS 140
will require banks to report assets in special-purpose vehicles and
variable-interest entities, which often include securitized assets, on
their balance sheets. These assets are presently accounted for off-
balance sheet. As a result, commenters argue that the adoption of both
FAS 140 and the proposed secured liability adjustment would result in
an unintended increase in assessments to certain insured institutions.
FAS 140 has not yet been adopted. As proposed, it would not take
effect until 2010. If and when FAS 140 is adopted in final form, the
FDIC can then consider whether the secured liability adjustment needs
to be modified.
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 final rule states that an institution in Risk
Category II, III, or IV will also be subject to an assessment rate
adjustment for brokered deposits (the brokered deposit adjustment).
This adjustment will be limited to those institutions whose ratio of
brokered deposits to domestic deposits is greater than 10 percent;
asset growth rates will not affect the adjustment. The adjustment will
be determined by multiplying 25 basis points times the difference
between an institution's ratio of brokered deposits to domestic
deposits and 0.10.\62\ However, the adjustment will never be more than
10 basis points. The adjustment will be added to the base assessment
rate after all other adjustments had been made. Ratios for any given
quarter will be calculated from the Call Reports or TFRs filed by each
institution as of the last day of the quarter.
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\62\ Under the final rule, the ratio of brokered deposits to
domestic deposits will be rounded to three digits after the decimal
point. The resulting brokered deposit charge will be rounded to the
nearest one-hundredth (1/100th) of a basis point.
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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.\63\
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\63\ 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).
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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.
The brokered deposit adjustment, unlike the adjusted brokered
deposit ratio applicable to Risk Category I, will include all brokered
deposits as defined in Section 29 of the Federal Deposit Insurance Act
(12 U.S.C. 1831f), and implemented by 12 CFR 337.6, which is the
definition used in banks' quarterly Reports of Condition and Income
(Call Reports) and thrifts' quarterly Thrift Financial Reports (TFRs),
above 10 percent of an institution's assets. The adjustment will
include reciprocal deposits, as well as brokered deposits that consist
of balances swept into an insured institution by another institution,
such as balances swept from a brokerage account.
The statutory restrictions on accepting, renewing or rolling over
brokered deposits when an institution becomes less than well
capitalized apply to all brokered deposits, including reciprocal
deposits. Market restrictions may also apply to these reciprocal
deposits when an institution's condition declines. For these reasons,
the final rule includes these reciprocal brokered deposits in the
brokered deposit adjustment.
To illustrate the brokered deposit adjustment with a simple
example, take a Risk Category II institution with an initial base
assessment rate of 22 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 will be as calculated, 7.5 basis
points. Assuming that the secured liability adjustment for this
institution is 2 basis points and that the institution has no other
assessment rate adjustments, the total base assessment rate will be
31.5 basis points (calculated as (22 basis points + 2 basis points +
7.5 basis points)).
Comments
Most of the comments on the proposed adjusted brokered deposit
ratio (applicable to Risk Category I) also applied to the proposed
brokered deposit adjustment (applicable to the other risk categories).
The FDIC's response to these comments is as set out in the discussion
of the comments on the adjusted brokered deposit ratio, with one major
exception. The FDIC has decided to include reciprocal deposits in the
brokered deposit adjustment, unlike the adjusted brokered deposit
ratio, applicable to Risk Category I, which excludes them. When an
institution's condition declines and it falls out of Risk Category I,
the statutory and market restrictions on brokered deposits become much
more relevant. Even if such an institution remains well capitalized
(and the statutory restrictions do not apply), the risk that an
institution will become less than well capitalized has increased. These
statutory restrictions can cause severe liquidity problems for
institutions that rely heavily on brokered deposits. For this reason,
the FDIC has decided to include all brokered deposits above 10 percent
of an institution's assets in the brokered deposit adjustment.
[[Page 9542]]
IX. Insured Branches of Foreign Banks
Because base assessment rates will be higher and the difference
between the minimum and maximum initial base assessment rates will
increase from two to four basis points under the final rule, the FDIC
is making a conforming change for insured branches of foreign banks in
Risk Category I. Under the final rule, an insured branch of a foreign
bank's weighted average of ROCA component ratings will be multiplied by
5.076 (which will be the pricing multiplier) and 3.873 (which will be a
uniform amount for all insured branches of foreign banks) will be added
to the product.\64\ The resulting sum will equal a Risk Category I
insured branch of a foreign bank's initial base assessment rate,
provided that the amount cannot be less than the minimum initial base
assessment rate or greater than the maximum initial assessment rate. A
Risk Category I insured branch of a foreign bank's initial base
assessment rate will be subject to any large bank adjustment, but total
base assessment rates cannot 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 will be charged the initial base assessment rate for the
risk category in which they are assigned.
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\64\ An insured branch of a foreign bank's weighted average ROCA
component rating will 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 will 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
appears 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 making conforming changes in the treatment of new
insured depository institutions.\65\ For assessment periods beginning
on or after January 1, 2010, new institutions in Risk Category I will
be assessed at the maximum initial base assessment rate applicable to
Risk Category I institutions, as under the final rule adopted in 2006.
---------------------------------------------------------------------------
\65\ As discussed below, subject to exceptions, the final rule
defines a new insured depository institution as a bank or thrift
that has not been federally insured for at least five years as of
the last day of any quarter for which it is being assessed.
---------------------------------------------------------------------------
Effective for assessment periods beginning before January 1, 2010,
until a Risk Category I new institution receives CAMELS component
ratings, it will have an initial base assessment rate that is 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 final rule adopted in 2006.\66\ All other
new institutions in Risk Category I will be treated as established
institutions, except as provided in the next paragraph.
---------------------------------------------------------------------------
\66\ 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, will be subject to the unsecured debt
adjustment; any new institution, regardless of risk category, will be
subject to the secured liability adjustment; and a new institution in
Risk Categories II, III or IV will be subject to the brokered deposit
adjustment. After January 1, 2010, no new institution in Risk Category
I will be subject to the large bank adjustment.
XI. Assessment Rate Schedule
As explained in the next section, estimated losses from projected
institution failures have risen considerably since the NPR was
published last fall. Furthermore, certain changes from the NPR made in
response to public comments would have the effect of reducing total
assessment revenue generated under the proposed rates. Consequently,
initial base assessment rates as of April 1, 2009, which are set forth
in Table 12 below, are slightly higher than proposed in the NPR.\67\
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\67\ In the NPR, the FDIC noted that:
[A]t 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 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).
FR 61,560, 61,572-61,573 (Oct. 16, 2008).
Table 12--Initial Base Assessment Rates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Risk category
------------------------------------------------------------------------------------
I *
---------------------------------- II III IV
Minimum Maximum
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points)..................................... 12 16 22 32 45
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Rates for institutions that do not pay the minimum or maximum rate will vary between these rates.
The FDIC projects that the minimum initial assessment rate would
have to be 20 basis points beginning in the second quarter to increase
the reserve ratio to 1.15 percent within 5 years (by the end of 2013).
Under the rates shown in table 12 and adopted in this rule, the year-
end 2013 reserve ratio is projected to be 0.58 percent. After making
all possible adjustments under the final rule, total base assessment
rates for each risk
[[Page 9543]]
category will be within the ranges set forth in Table 13 below.\68\
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\68\ These rates would be in addition to the approximately 1 to
1.2 basis point annual rates that institutions are assessed to pay
the interest on Financing Corporation (FICO) bonds.
Table 13--Total Base Assessment Rates after Adjustments*
----------------------------------------------------------------------------------------------------------------
Risk category Risk category Risk category Risk category
I II III IV
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate.................... 12-16 22 32 45
Unsecured debt adjustment....................... -5-0 -5-0 -5-0 -5-0
Secured liability adjustment.................... 0-8 0-11 0-16 0-22.5
Brokered deposit adjustment..................... .............. 0-10 0-10 0-10
---------------------------------------------------------------
Total base assessment rate...................... 7-24.0 17-43.0 27-58.0 40-77.5
----------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Rates for institutions that do not pay the
minimum or maximum rate will vary between these rates. Adjustments will be applied in the order listed in the
table. The large bank adjustment will be made before any other adjustment.
The new base rate schedule is 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.
However, given the FDIC's estimated losses from projected
institution failures, the assessment rates adopted in the final rule
raise make it likely that the DIF balance and reserve ratio will fall
to zero or below this year. The FDIC believes that it is important that
the fund not decline to a level that could undermine public confidence
in federal deposit insurance. Therefore, the FDIC is simultaneously
issuing an interim rule to impose a 20 basis point special assessment
on June 30, 2009.\69\ The interim rule also provides that the Board may
impose additional special assessments of up to 10 basis points
thereafter, if the reserve ratio of the Deposit Insurance Fund is
estimated to fall to a level that that the Board believes would
adversely affect public confidence or to a level which shall be close
to zero or negative at the end of a calendar quarter.
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\69\ 12 U.S.C. 1817(b)(5) provides:
Emergency special assessments.--In addition to the other
assessments imposed on insured depository institutions under this
subsection, the Corporation may impose 1 or more special assessments
on insured depository institutions in an amount determined by the
Corporation if the amount of any such assessment is necessary--
(A) To provide sufficient assessment income to repay amounts
borrowed from the Secretary of the Treasury under [12 U.S.C.
1824(a)] in accordance with the repayment schedule in effect under
[12 U.S.C. 1824(c)] during the period with respect to which such
assessment is imposed;
(B) To provide sufficient assessment income to repay obligations
issued to and other amounts borrowed from insured depository
institutions under [12 U.S.C. 1824(d)]; or
(C) For any other purpose that the Corporation may deem
necessary.
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Actual Rate Schedule, Ability To Adjust Rates and Effective Date
The final rule sets actual rates at the total base assessment rate
schedule effective April 1, 2009. The FDIC projects an overall average
assessment rate of 15.4 basis points beginning in April 2009. As of
September 30, 2008, the average assessment rate (before accounting for
credit use) was 6.4 basis points for all institutions and 5.5 basis
points for institutions in Risk Category I.
The rate schedule and the other revisions to the assessment rules
will take effect for the quarter beginning April 1, 2009, and will be
reflected in the June 30, 2009 fund balance and the invoices for
assessments due September 30, 2009.
The final rule continues to allow the FDIC Board to adopt actual
rates that are higher or lower than total base assessment rates without
the necessity of further notice-and-comment rulemaking, provided that:
(1) the Board cannot increase or decrease rates from one quarter to the
next by more than three basis points; and (2) cumulative increases and
decreases can not be more than three basis points higher or lower than
the adjusted base rates. Continued retention of this flexibility will
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.
Comments
The FDIC received comments from several industry trade groups and
many banks regarding the proposed increases in assessment rates. Two
comments supported the proposal to increase risk-based assessments.
Many other letters were critical. Several trade groups and other
commenters argued that the proposed assessment rates are too high. Many
commenters urged the FDIC to take advantage of the flexibility that
Congress provided to extend the restoration period beyond five years
under ``extraordinary circumstances.'' Among other things, commenters
argued that the FDIC's invocation of its systemic risk authority to
provide additional guarantees on non-interest bearing transaction
deposits and senior unsecured debt is evidence of ``extraordinary
circumstances.'' Commenters argued that rates should be lower on the
grounds that current economic conditions are severe, that lower rates
would be consistent with the government's efforts to restore stability
to the markets and the financial sector and would make more funds
available to lend in local communities to small businesses and
consumers. One trade group argued that the FDIC should assume slower
insured deposit growth, which would support lower rates.
Several commenters urged the FDIC to withdraw the proposed rule and
delay increasing assessment rates and overhauling the assessment system
until the end of 2009. They argued that the delay would allow time for
a thorough evaluation of the effectiveness of measures recently taken
by the federal government to restore stability to the banking system.
The FDIC agrees that significant increases in deposit insurance
premium rates in times of economic and financial stress are not
desirable. However, the FDIC believes that it is important that the
fund not decline to a level that could undermine public confidence in
federal deposit insurance. The rates that the FDIC has set in this
final rule, combined with the 20 basis point special assessment that
the FDIC will impose on June 30, 2009 (and possible additional special
assessments of up to 10 basis points thereafter), pursuant to
[[Page 9544]]
the interim rule that the FDIC is also adopting, balance these goals.
A few comments asserted that the Restoration Plan penalizes safe
and well-run community banks and urged the FDIC to require the largest
institutions to recapitalize the DIF. In the FDIC's view, the final
rule equitably balances assessments from small and large institutions.
One industry trade group called for assessments to be calculated on
an individual institution basis for Risk Categories II, III, and IV.
Implementing this suggestion would require considerable further
investigation, but might be considered in a future rulemaking.
One trade group argued that rates for Risk Categories III and IV
should be higher. Under the final rule, the highest possible assessment
rate (after adjustments) applicable to Risk Category IV is 77.5 basis
points. The FDIC believes that rates for these risk categories are
appropriate.
XII. Assessment Revenue Needs Under the Restoration Plan
Summary
The FDIC projected last fall that adoption of a rate schedule with
a minimum initial rate of 10 basis points would increase the reserve
ratio to above 1.25 percent by the end of 2013. However, a deepening
recession and continued severe problems in the housing and construction
sectors, financial markets and commercial real estate, contribute to
the FDIC's expectation of significantly higher losses for the insurance
fund compared to the projections of last October included in the
proposed rule. The insurance fund balance and reserve ratio are likely
to decline significantly in 2009 before beginning a gradual recovery in
subsequent years from the effects of new revenue and a declining rate
of bank failures. Even under the rates adopted in the final rule, the
FDIC projects that the reserve ratio may decline to close to zero--or
may turn negative--by or before the end of 2009. The 20 basis point
special assessment to be imposed under the interim rule on June 30,
2009 (and possible additional special assessments of up to 10 basis
points thereafter) are intended to ensure that the reserve ratio does
not decline to a level that could undermine public confidence in
federal deposit insurance.
The FDIC's best estimate is that institution failures could cost
the insurance fund approximately $65 billion from 2009 to 2013, after
incurring approximately $18 billion in estimated costs for failures in
2008. 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 further housing price declines and a
significant economic downturn in specific geographic areas on loan
losses and bank capital; and recent and historic supervisory rating
downgrade and failure rates.
The FDIC also assumes that insured deposits would increase by 7
percent in 2009 and by 5 percent thereafter. The annual average growth
rate in insured deposits was almost 7 percent over the past 5 years and
just over 5 percent over the past 10 years.
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 or fall below the FDIC's best estimate or insured deposit
growth is more or less 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. Section 1817(b)(1)(A)) to maintain a risk-
based system.
(v) Other factors the Board of Directors has determined to be
appropriate.\70\
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\70\ 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)).
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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
significantly reduce the fund balance and reserve ratio.
The financial market disruptions over the past year have increased
the likelihood that the recession will be severe and prolonged.
Declining housing and equity prices, financial market turmoil, and
deteriorating economic conditions will continue to exert significant
stress on banking industry earnings and credit quality, most notably in
residential real estate and construction and development portfolios.
Accelerating job losses and declining household wealth may weaken
consumer credit performance, while slowing business activity increases
the risks in commercial loan portfolios. Significant uncertainty
remains about the outlook for recovery in securitization markets and
the return of confidence to financial markets. Regional disparities in
housing markets and economic conditions have led to variation in
prospects among banks. Institutions most at risk include those with
large volumes of subprime and nontraditional mortgages, particularly
those heavily reliant on securitization, and those with heavy
concentrations of residential real estate and construction and
development loans in markets with the greatest housing price declines.
Institutions that are heavily reliant on non-core funding are exposed
to additional risks.
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
[[Page 9545]]
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 an analysis of the expected widespread
further decline in housing prices and deterioration in overall economic
conditions on the capital positions and earnings of insured
institutions. The analysis simulated high and rising loan loss rates
due to increased non-current loan rates, rising unemployment rates, and
falling collateral values, especially for loans backed by real estate.
As the result of recent and expected deterioration in the U.S. economy
and banking conditions, the projected loss rates have risen
substantially from those contained in the NPR.
The FDIC projects that the costs of institution failures from 2009
through 2013 may total $65 billion. These losses are in addition to the
$18 billion for the estimated costs of failures for 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 2009 will be $1.1
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) in 2008 will total $4.7 billion, or 9 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 on June 30, 2008, bolsters this figure. Near-term projections of
investment income reflect the current outlook of constant to slightly
rising Treasury yields.\71\ In addition, the FDIC expects that it will
invest new funds in short-term securities (primarily overnight
investments) to accommodate increased bank failure activity. These
investments are expected to earn lower rates than the longer-term
securities that they are replacing and will therefore result in less
interest income to the fund. The FDIC projects investments to
contribute an amount equal to 1.3 percent of the starting fund balance
in 2009. The FDIC projects that investment contributions as a percent
of the fund balance will rise gradually in later years.
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\71\ 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.)
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Assessment Revenue, Credit Use, and the Distribution of Assessments
Assessment revenue in 2008 totaled $3.0 billion: $4.4 billion in
gross assessments charged less $1.4 billion in credits used. At the end
of 2008, only 4 percent of the original $4.7 billion in credits
remained. 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.\72\ 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 new
rates go into effect will be very small and that their continued use
will have very little effect on the assessment revenue necessary to
meet the requirements of the plan.\73\
---------------------------------------------------------------------------
\72\ Section 7(b)(3)(E)(iv) of the Federal Deposit Insurance Act
(12 U.S.C. 1817(b)(3)(E)(iv)).
\73\ For 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, the uniform increase
to rates for the first quarter of 2009, and assuming that the
assessment rates adopted in this rule were to remain in effect for the
remainder of this year, the FDIC projects that the fund will earn
assessment revenue of $11.6 billion for all of 2009.\74\
---------------------------------------------------------------------------
\74\ The projection assumes 7 percent annual growth in the
assessment base (which is approximately domestic deposits) in 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 an assessment rate based on the
proposed rate schedule and factors described above. Table 16 shows the
distribution of institutions and domestic deposits by risk category
(divided into four parts for Risk Category I) under the initial base
rate schedule (effective April 1, 2009) based on data as of September
30, 2008; Table 17 shows the distribution of institutions and domestic
deposits by bands of total base assessment rates.\75\ For purposes of
assessment revenue projections beginning in April, the FDIC relied on
the data reflected in Table 17, but also accounted for projected
migration of institutions across risk categories as supervisory ratings
change.
---------------------------------------------------------------------------
\75\ The assessment base is almost equal to total domestic
deposits.
[[Page 9546]]
Table 16--Distribution of Initial Base Assessment Rates and Domestic Deposits* Data as of September 30, 2008
----------------------------------------------------------------------------------------------------------------
Domestic
deposits Percent of
Risk category Initial Number of Percent of (in domestic
assessment rate institutions institutions billions of deposits
$)
----------------------------------------------------------------------------------------------------------------
12 1,577 19 860.1 12
I........................................ 12.01-14 2,637 31 2,863.4 40
14.01-15.99 1,815 22 1,765.2 24
16 1,476 18 812.4 11
II....................................... 22 672 8 818.8 11
III...................................... 32 185 2 83.5 1
IV....................................... 45 21 0 18.8 0
----------------------------------------------------------------------------------------------------------------
* This table and the following two tables exclude insured branches of foreign banks.
Table 17--Distribution of Total Base Assessment Rates and Domestic Deposits* Data as of September 30, 2008
----------------------------------------------------------------------------------------------------------------
Domestic
deposits Percent of
Risk category Total base Number of Percent of (in domestic
assessment institutions institutions billions of deposits
$)
----------------------------------------------------------------------------------------------------------------
7-12 2,649 32 3,381.4 47
I........................................ 12.01-14 2,248 27 1,295.8 18
14.01-16 2,367 28 1,177.2 16
16.01-24 241 3 446.7 6
II....................................... 17-22 435 5 519.7 7
22.01-43 237 3 299.0 4
III...................................... 27-32 107 1 44.3 1
32.01-58 78 1 39.2 1
IV....................................... 40-45 9 0 1.2 0
45.01-77.5 12 0 17.6 0
----------------------------------------------------------------------------------------------------------------
* Because of data limitations, secured liability adjustments for TFR filers are estimated using imputed values
based on simple averages of Call Report filers as of September 30, 2008 (discussed above). Unsecured debt
adjustments are estimated using reported subordinated debt and a portion of non-FHLB other borrowings.
Estimated Insured Deposits
The FDIC believes that it is reasonable to plan for annual insured
deposit growth of 7 percent in 2009 and 5 percent in subsequent years.
During 2008, insured deposits increased by about 11 percent, with the
troubles in the economy and financial markets making the safety of
federally insured deposits an attractive option. The most recent five
year average growth rate was 6.7 percent and the ten year average
growth rate was 5.3 percent. Chart 1 depicts insured deposit growth
since 1992.
[[Page 9547]]
[GRAPHIC] [TIFF OMITTED] TR04MR09.015
Projections of insured deposits are subject to considerable
uncertainty.\76\ Insured deposit growth over the near term could
continue to 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. 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.
---------------------------------------------------------------------------
\76\ The FDIC estimates of insured deposits and projections do
not consider the effect of the temporary increase in the deposit
insurance coverage limit to $250,000 or the guarantee of certain
deposits under the Temporary Liquidity Guarantee Program.
---------------------------------------------------------------------------
Effect on Capital and Earnings
Appendix 2 contains an analysis of the effect of the rates adopted
in this rule on the capital and earnings of insured institutions based
on a range of projected industry earnings. Given the assumptions in the
analysis, for the industry as a whole, projected total assessments in
2009 would result in capital that would be 0.4 to 0.5 percent lower
than if the FDIC did not charge assessments. Based on the range of
projected industry earnings, the proposed assessments would cause 8 to
12 institutions whose equity-to-assets ratio would have exceeded 4
percent in the absence of assessments to fall below that percentage and
6 to 9 institutions to fall below 2 percent.
For profitable institutions, assessments in 2009 would result in
pre-tax income that would be between 6 and 8 percent lower than if the
FDIC did not charge assessments. For unprofitable institutions, pre-tax
losses would increase by an average of 3 to 5 percent. Appendix 2 also
provides an analysis of the range of effects on capital and earnings
for these groups of institutions.
Other Factors that the Board May Consider
In its consideration of proposed rates, the FDIC Board has
considered another factor that it deems appropriate, as permitted by
law.
Updating projections regularly. 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. The
FDIC projects that, under these rates, the reserve ratio will increase
to 0.58 percent by year-end 2013. 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. Additional Comments
One large bank recommended that, in setting assessment rates, most
weight should be given to probability of default, with particular
emphasis on the liquidity strength of the bank, as reflected in its
CAMELS. The commenter argued that if a bank has a low probability of
default, assessments should be low and risk adjustments based on
potential FDIC losses are not justified. The FDIC was urged to
reconsider whether risk adjustments beyond the core measures (debt
ratings, CAMELS, and capital ratios) should be used at all.
Additionally, the writer criticized the FDIC for using proxies for
unencumbered assets that are flawed substitutes.
In the FDIC's view, probability of default is just one element of
the risk posed by an institution. Loss given default is equally
important. For the reasons given above, the FDIC is convinced of the
need for the adjustments contained in the final rule.
[[Page 9548]]
XIV. Technical and Other Changes
The final rule will 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.
Under the final rule adopted in 2006, 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 at the end of 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.\77\
---------------------------------------------------------------------------
\77\ 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.\78\
---------------------------------------------------------------------------
\78\ 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 final rule states 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 will be determined as for any other institution in Risk
Category I subject to the same pricing method, except that the rate
will 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 final rule 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 amending 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.
The final rule makes a technical correction 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 final
rule amends section 327.3(a) to eliminate the reference to paragraph
(b).
Section 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 final rule amends 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.
Section 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 section 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 section 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
is amending section 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 final rule amends 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 final rule amends
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).
Sections 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 five years as
of the last day of any quarter for which it is being assigned.'' In the
FDIC's view, this regulatory language could allow a previously
uninsured institution to be treated as an established institution based
on charter date. To remedy this, the final rule amends 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
[[Page 9549]]
been federally insured for at least five years as of the last day of
any quarter for which it is being assessed.
Section 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 final rule deletes it.
XV. Effective Date
This final rule will become effective on April 1, 2009.
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 invited comments on how to make this proposal
easier to understand and received one response. The comment stated that
the proposal was too complicated and should have included an executive
summary in bullet point format. Making the risk-based assessment system
more responsive to risk entailed some complexity, which we tried to
minimize.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires that each federal
agency either certify that a final 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 rule and publish the analysis for comment.\79\ 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.\80\ The final 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 technical and other changes to the FDIC's assessment
regulations. Nonetheless, the FDIC is voluntarily undertaking an
initial regulatory flexibility analysis of the final rule for
publication.
---------------------------------------------------------------------------
\79\ See 5 U.S.C. 603, 604 and 605.
\80\ 5 U.S.C. 601.
---------------------------------------------------------------------------
As of December 31, 2008, of the 8,305 insured commercial banks and
savings associations, there were 4,567 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 final 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 and by the FDIC's aggregate insurance
losses, expenses, investment income, and insured deposit growth, among
other factors. Given the FDIC's total assessment needs, the final rule
would merely alter the distribution of assessments among insured
institutions. Using the data as of December 31, 2008, the FDIC
calculated the total assessments that would be collected under the base
rate schedule in the final rule.
The economic impact of the final rule 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
final 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.81 82
---------------------------------------------------------------------------
\81\ Throughout this regulatory flexibility analysis (unlike the
rest of the final rule), a ``small institution'' refers to an
institution with assets of $165 million or less.
\82\ 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.
---------------------------------------------------------------------------
Based on the December 2008 data, under the final rule, for more
than 75 percent of small institutions, the change in the assessment
system would result in assessment changes (up or down) totaling five
percent or less of annual revenue. Of the total of 4,567 small
institutions, only eight percent would have experienced an increase
equal to five percent or greater of their total revenue. These figures
do not indicate a significant economic impact on revenues for a
substantial number of small insured institutions. Table 18 below sets
forth the results of the analysis in more detail.
Table 18--Change in Assessments Under the Final Rule as a Percentage of
Total Revenue
------------------------------------------------------------------------
Change in assessments as a Number of Percent of
percentage of total revenue institutions institutions
------------------------------------------------------------------------
More than 10 percent lower.......... 240 5.26
5 to 10 percent lower............... 545 11.93
0 to 5 percent lower................ 2.306 50.49
0 to 5 percent higher............... 1,120 24.52
5 to 10 percent higher.............. 239 5.23
More than 10 percent higher......... 117 2.56
-----------------------------------
Total........................... 4,567 100.00
------------------------------------------------------------------------
The FDIC performed a similar analysis to determine the impact on
profits for small institutions. Based on December 2008 data, under the
final rule, 81 percent of the small institutions with reported profits
would have experienced a change in their annual profits of 5 percent or
less. Table 19 sets forth the results of the analysis in more detail.
[[Page 9550]]
Table 19--Change in Assessments Under the Proposal as a Percentage of
Profit *
------------------------------------------------------------------------
Change in assessments as a Number of Percent of
percentage of profit institutions institutions
------------------------------------------------------------------------
More than 30 percent lower.......... 451 14.77
20 to 30 percent lower.............. 266 8.71
10 to 20 percent lower.............. 616 20.18
5 to 10 percent lower............... 654 21.42
0 to 5 percent lower................ 477 15.62
0 to 10 percent more................ 276 9.04
Greater than 10 percent............. 313 10.25
-----------------------------------
Total......................... 3,053 100.00
------------------------------------------------------------------------
* Institutions with negative or no profit were excluded. These
institutions are shown separately in Table 20.
Of those small institutions with reported profits, only 10 percent
would have experienced a decrease in their total profits of 10 percent
or greater. 65 percent of these small institutions would have a greater
than five percent increase in their profits. Again, these figures do
not indicate a significant economic impact on profits for a substantial
number of small insured institutions.
Table 19 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 final rule on these institutions by
determining the annual assessment change that would result. Table 20
below shows that only 17 percent (256) of the 1,514 small insured
institutions in this category would have experienced an increase in
annual assessments of $10,000 or more. 14% of these institutions would
have experienced a decrease of $10,000 or more.
Table 20--Change in Assessments Under the Final Rule For Institutions
With Negative or No Reported Profit
------------------------------------------------------------------------
Number of Percent of
Change in assessments institutions institutions
------------------------------------------------------------------------
$20,000 decrease or more............ 97 6.40
$10,000-$20,000 decrease............ 108 7.13
$5,000-$10,000 decrease............. 131 8.65
$1,000-$5,000 decrease.............. 203 13.41
$0-$1,000 decrease.................. 78 5.15
$0-$10,000 increase................. 641 42.43
$10,000-$20,000 increase............ 124 8.19
$20,000 increase or more............ 132 8.72
-----------------------------------
Total........................... 1,514 100.0
------------------------------------------------------------------------
The final rule does not directly impose any ``reporting'' or
``recordkeeping'' requirements within the meaning of the Paperwork
Reduction Act. The compliance requirements for the final 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 the final rule would not have a significant economic
impact on a substantial number of small institutions within the meaning
of those terms as used in the RFA.\83\
---------------------------------------------------------------------------
\83\ 5 U.S.C. 605.
---------------------------------------------------------------------------
C. 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.
D. Small Business Regulatory Enforcement Fairness Act
The Office of Management and Budget has determined that the final
rule is not a ``major rule'' within the meaning of the relevant
sections of the Small Business Regulatory Enforcement Act of 1996
(SBREFA) Public Law No. 110-28 (1996). As required by law, the FDIC
will file the appropriate reports with Congress and the General
Accounting Office so that the final rule may be reviewed.
E. 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.
0
For the reasons set forth in the preamble, the FDIC amends chapter III
of title 12 of the Code of Federal Regulations as follows:
PART 327--ASSESSMENTS
0
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, Public Law 109-171, 120 Stat. 9-21, and Sec. 3, Public
Law 109-173, 119 Stat. 3605.
0
2. Revise Sec. 327.3(a)(1) to read as follows:
[[Page 9551]]
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.
* * * * *
0
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 quarterly
report of condition for that quarter.
* * * * *
0
4. In Sec. 327.8, revise paragraphs (g), (h), (i), (l) and (m) and add
paragraphs (o), (p), (q), (r) and (s) 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 (other than an institution
classified as large for purposes of Sec. 327.9(d)(8)) reports assets
of less than $10 billion in its quarterly 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 quarterly 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 savings association 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 savings association 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), and (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, 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 part.
(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 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
defined in the quarterly report of condition for the reporting period
as defined in paragraph (b)), but shall not include any senior
unsecured debt that the FDIC has guaranteed under the Temporary
Liquidity Guarantee Program, 12 CFR Part 370.
(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 quarterly report of condition for the reporting
period; however, subordinated debt shall also include limited-life
preferred stock as defined in the quarterly 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.
(s) Reciprocal deposits--Deposits that an insured depository
institution receives through a deposit placement network on a
reciprocal basis, such that:
[[Page 9552]]
(1) for any deposit received, the institution (as agent for depositors)
places the same amount with other insured depository institutions
through the network; and (2) each member of the network sets the
interest rate to be paid on the entire amount of funds it places with
other network members.
0
7. Revise Sec. 327.9 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), (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), (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 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. The six financial ratios
[[Page 9553]]
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%. The following table sets forth the initial values of
the pricing multipliers:
------------------------------------------------------------------------
Pricing
Risk measures * multipliers **
------------------------------------------------------------------------
Tier 1 Leverage Ratio.................................. (0.056)
Loans Past Due 30-89 Days/Gross Assets................. 0.575
Nonperforming Assets/Gross Assets...................... 1.074
Net Loan Charge-Offs/Gross Assets...................... 1.210
Net Income before Taxes/Risk-Weighted Assets........... (0.764)
Adjusted brokered deposit ratio........................ 0.065
Weighted Average CAMELS Component Rating............... 1.095
------------------------------------------------------------------------
* Ratios are expressed as percentages.
** Multipliers are rounded to three decimal places.
The six financial ratios and the weighted average CAMELS component
rating will be multiplied by the respective pricing multiplier, and the
products will be summed. To this result will be added the uniform
amount of 11.861. 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. Appendix A
to this subpart describes the derivation of the pricing multipliers and
uniform amount 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 moving from Risk Category II, III or IV
to Risk Category I, and its initial base assessment rate would be
determined using the financial ratios method, then that method shall
apply for the portion of the quarter that it was in Risk Category I,
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, subject to
adjustment pursuant to paragraphs (d)(4), (5), and (6) of this section,
as appropriate. 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, again subject to adjustment pursuant to
paragraphs (d)(4), (5), and (6) of this section, as appropriate.
(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. The institution's assessment rate computed using the financial
ratios method shall be converted to a financial ratios score by first
subtracting 10 from the financial ratios method assessment rate and
then multiplying the result by \1/2\. The result 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 1.692 (which shall be the pricing multiplier), and the
products will be summed. To this result will be added 3.873 (which
shall be a uniform
[[Page 9554]]
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.
(i) Implementation of Large Bank Method Changes between Risk
Categories. If, during a quarter, a CAMELS or ROCA 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 or, if the institution is an insured
branch of a foreign bank, using the weighted average ROCA component
rating, subject to adjustment pursuant to paragraph (d)(4). For the
portion of the quarter that the institution was not in Risk Category I,
the institution's initial base assessment rate, which, unless the
institution is an insured branch of a foreign bank, 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 or ROCA 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. 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.
(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)) 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 5.076 (which shall be the pricing multiplier). To this result will
be added 3.873 (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 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 the initial
base 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 initial base
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.
(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,
[[Page 9555]]
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 initial base 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
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 assessment rates for unsecured debt, based on the ratio
of long-term unsecured debt (and, for small institutions as defined in
paragraph (ii) below, specified amounts of Tier 1 capital) to domestic
deposits. Any unsecured debt 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 40 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 the amounts set forth
below:
------------------------------------------------------------------------
Amount of Tier
1 capital
within range
Range of Tier 1 capital to adjusted average assets which is
qualified
(percent)
------------------------------------------------------------------------
<=5%.................................................... 0
>5% and <=6%............................................ 10
>6% and <=7%............................................ 20
>7% and <=8%............................................ 30
>8% and <=9%............................................ 40
>9% and <=10%........................................... 50
>10% and <=11%.......................................... 60
>11% and <=12%.......................................... 70
>12% and <=13%.......................................... 80
>13% and <=14%.......................................... 90
>14%.................................................... 100
------------------------------------------------------------------------
For institutions that file Thrift Financial Reports, adjusted total
assets will be used in place of adjusted average assets in the
preceding table. The sum of qualified Tier 1 capital and long-term
unsecured debt as a percentage of domestic deposits will be multiplied
by 40 basis points to produce the unsecured debt adjustment for small
institutions.
(iii) Limitation--No unsecured debt adjustment for any institution
shall exceed five basis points.
(iv) Applicable quarterly reports of condition--Ratios for any
given quarter shall be calculated from quarterly 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 quarterly 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 liability 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 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 savings associations--Secured
liabilities for savings associations include Federal Home Loan Bank
advances as reported in quarterly Thrift Financial Reports (``TFRs'').
Secured liabilities for savings associations also include securities
sold under repurchase agreements, secured Federal funds purchased or
other borrowings that are secured. 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 25 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 25 percent,
the institution's assessment rate (after taking into account any
adjustment under paragraphs (d)(5) or (6) of this section) will be
multiplied by the following amount: The ratio of the institution's
secured liabilities to domestic deposits minus 0.25. Ratios of secured
liabilities to domestic deposits shall be calculated from the report of
condition, or similar report, filed by each institution.
(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 assessment rate adjustment for
brokered deposits. Any such brokered deposit adjustment shall be made
after any adjustment under paragraph (d)(5) or (6). The brokered
deposit adjustment includes all brokered deposits as defined in Section
29 of the Federal Deposit Insurance Act (12 U.S.C. 1831f),
[[Page 9556]]
and 12 CFR 337.6, including reciprocal deposits as defined in Sec.
327.8(r), and brokered deposits that consist of balances swept into an
insured institution by another institution. 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 by 25 basis points the difference between an institution's
ratio of brokered deposits to domestic deposits and 0.10. The maximum
brokered deposit adjustment will be 10 basis points. Brokered deposit
ratios for any given quarter are calculated from the quarterly 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 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 that is well capitalized 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 (ii) and (iii) below. 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 is well capitalized
and 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
quarterly reports of condition that have been filed, until the
institution files four such reports. Prior to January 1, 2010,
assessment rates for new institutions in Risk Category I shall be
subject to the large bank adjustment as determined under paragraph
(d)(4) of this section.
(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. Thereafter, the assessment
rate will be determined by annualizing, where appropriate, financial
ratios obtained from all quarterly reports of condition that have been
filed, until the institution files four quarterly reports of condition
or it receives a long-term debt issuer rating and it is a large
institution.
(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.
0
8. Revise Sec. 327.10 to read as follows:
Sec. 327.10 Assessment rate schedules.
(a) Initial Base Assessment Rate Schedule. The initial base
assessment rate for an insured depository institution shall be the rate
prescribed in the following schedule:
[[Page 9557]]
Initial Base Assessment Rate Schedule
--------------------------------------------------------------------------------------------------------------------------------------------------------
Risk category
------------------------------------------------------------------------------------
I *
---------------------------------- II III IV
Minimum Maximum
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual rates (in basis points)..................................... 12 16 22 32 45
--------------------------------------------------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. 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 12 to 16 basis points.
(2) Risk Category II, III, and IV Initial Base Assessment Rate
Schedule. The annual initial base assessment rates for Risk Categories
II, III, and IV shall be 22, 32, 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. The
total base assessment rates after adjustments for an insured depository
institution shall be the rate prescribed in the following schedule.
Total Base Assessment Rate Schedule (After Adjustments) *
----------------------------------------------------------------------------------------------------------------
Risk category Risk category Risk category Risk category
I II III IV
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate.................... 12-16 22 32 45
Unsecured debt adjustment....................... -5-0 -5-0 -5-0 -5-0
Secured liability adjustment.................... 0-8 0-11 0-16 0-22.5
Brokered deposit adjustment..................... .............. 0-10 0-10 0-10
Total base assessment rate...................... 7-24.0 17-43.0 27-58.0 40-77.5
----------------------------------------------------------------------------------------------------------------
* 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 7 to 24 basis points.
(2) Risk Category II Total Base Assessment Rate Schedule. The
annual total base assessment rates for Risk Category II shall range
from 17 to 43 basis points.
(3) Risk Category III Total Base Assessment Rate Schedule. The
annual total base assessment rates for Risk Category III shall range
from 27 to 58 basis points.
(4) Risk Category IV Total Base Assessment Rate Schedule. The
annual total base assessment rates for Risk Category IV shall range
from 40 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.
0
9. Revise Appendix A 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 12 basis points, and
[[Page 9558]]
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.
Equation 1
Downgrade(0,1)i,t = [beta]0 +
[beta]1 (Tier 1 Leverage RatioT) +
[beta]2 (Loans past due 30 to 89 days
ratioi,t) + [beta]3 (Nonperforming asset
ratioi,t) + [beta]4 (Net loan charge-off
ratioi,t) + [beta]5 (Net income before taxes
ratioi,t) + [beta]6 (Adjusted brokered deposit
ratioi,t) + [beta]7 (Weighted average CAMELS
component ratingi,t) where Downgrade(01)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 asset growth rate factor that ranges from 0 to 1 as
shown in Equation 2 below. The asset growth rate factor
(Ai,T) is calculated by subtracting 0.4 from the four-
year cumulative gross asset growth rate (expressed as a number
rather than as a percentage), adjusted for mergers and acquisitions,
and multiplying the remainder by 3\1/3\. The factor cannot be less
than 0 or greater than 1.
Equation 2
[GRAPHIC] [TIFF OMITTED] TR04MR09.016
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. 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. Reciprocal deposits
are not presently reported in the Call Report or TFR. As a result,
and as also described in Table A.1, the Statistical Model is
estimated without deducting reciprocal deposits from brokered
deposits in determining the adjusted brokered deposit 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.
Adjusted brokered deposit ratio Brokered deposits divided by
(%). domestic deposits less 0.10
multiplied by the asset growth rate
factor (which is the term Ai,T as
defined in equation 2 above) that
ranges between 0 and 1.
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
[[Page 9559]]
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: (1) 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; (2) 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; and (3) reciprocal deposits are deducted from
brokered deposits in determining the adjusted brokered deposit
ratio.
Equation 3
diT = [beta]0 + [beta]1 (Tier 1
Leverage RatioiT) + [beta]2 (Loans past due 30
to 89 days ratioiT) + [beta]3 (Nonperforming
asset ratioiT) + [beta]4 (Net loan charge-off
ratioiT) + [beta]5 (Net income before taxes
ratioiT) + [beta]6 (Adjusted brokered deposit
ratioiT) + [beta]7 (Weighted average CAMELS
component ratingiT)
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.\1\
\2\ The minimum downgrade probability cutoff value is 0.0182.
---------------------------------------------------------------------------
\1\ 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.
\2\ 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 0.1506.
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:
Equation 4
PiT = [alpha]0 + [alpha]1 *
diT subject to Min <= PiT <= Min + 4
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 * 0.0182 and Min + 4
= [alpha]0 + [alpha]1 * 0.1506
where 0.0182 is the minimum downgrade probability cutoff value and
0.1506 is the maximum downgrade probability cutoff value, results in
values for the constant amount, [alpha]0 and the scale
factor, [alpha]1:
Equation 5
[GRAPHIC] [TIFF OMITTED] TR04MR09.017
and Equation 6
[GRAPHIC] [TIFF OMITTED] TR04MR09.018
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):
Equation 7
PiT = [(Min - 0.550) + 30.211* [beta]0] +
30.211 * [[beta]1 (Tier 1 Leverage RatioT)] +
30.211 * [[beta]2 (Loans past due 30 to 89 days
ratioT)] + 30.211 * [[beta]3 (Nonperforming
asset ratioT)] + 30.211 * [[beta]4 (Net loan
charge-off ratioT)] + 30.211 * [[beta]5 (Net
income before taxes ratioT)] + 30.211 *
[[beta]6 (Adjusted brokered deposit ratioT)] +
30.211 * [[beta]7 (Weighted average CAMELS component
ratingT)]
again subject to Min <= PiT <= Min + 4
where (Min - 0.550) + 30.211 * [beta]0 equals the uniform
amount, 30.211 * [beta]j 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.
0
10. Revise Appendix B to Subpart A of Part 327 to read as follows:
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
Aa1...................................................... 1.05
Aa2...................................................... 1.15
Aa3...................................................... 1.30
A1....................................................... 1.50
A2....................................................... 1.80
A3....................................................... 2.20
Baa1..................................................... 2.70
Baa2 or worse............................................ 3.00
Fitch's:
AAA...................................................... 1.00
AA+...................................................... 1.05
AA....................................................... 1.15
[[Page 9560]]
AA-...................................................... 1.30
A+....................................................... 1.50
A........................................................ 1.80
A-....................................................... 2.20
BBB+..................................................... 2.70
BBB or worse............................................. 3.00
------------------------------------------------------------------------
0
11. Revise Appendix C to Subpart A of Part 327 to read as follows:
Appendix C to Subpart A
Additional Risk Considerations for Large Risk Category I Institutions
------------------------------------------------------------------------
Examples of associated risk
Information source indicators or information
------------------------------------------------------------------------
Financial Performance and Capital Measures (Level and Trend)
Condition Information. 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.
Asset Quality Measures (Level and
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.
Stress Considerations............. 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.
Loss Severity Indicators
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.
------------------------------------------------------------------------
[[Page 9561]]
By order of the Board of Directors.
Dated at Washington, DC, this 27th day of February, 2009.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
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:
Equation 1
Sf = (Af -10) * 0.5
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:
Equation 2
Si = (1/3) * Sw,i + (1/3) * Sd,i + (1/3) * Sf,i
The pricing multipliers were determined by minimum and maximum
score cutoff values, which were constructed so that fifteen percent
of all large insured institutions in Risk Category I (excluding new
institutions) are assessed the maximum base rate, while twenty-five
percent are assessed the minimum base rate, when computed as of June
2008. The calculated thresholds are 1.601 for the minimum score cut-
off value, and 2.389 for the maximum score cut-off value.
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:
Equation 3
Pi,T = [alpha]0 + [alpha]1 * Si,T subject to
Min <= Pi,T <= Min + 4
where [alpha]0 and [alpha]1 are, respectively,
a constant term and a scale factor used to convert Si,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 final rule, the minimum initial base assessment rate is
12 basis points, so Min equals 12.)
Substituting minimum and maximum score cutoff values (1.601 and
2.389, 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.
Equation 4
Min = [alpha]0 + [alpha]1 * 1.601
Equation 5
Min + 4 = [alpha]0 + [alpha]1 * 2.389
Solving both equations simultaneously results in:
Equation 6
[GRAPHIC] [TIFF OMITTED] TR04MR09.019
Equation 7
[GRAPHIC] [TIFF OMITTED] TR04MR09.020
Substituting equations 6 and 7 into equation 2 produces the
following equation for PiT
Equation 8
Pi,T = (Min -8.127) + 5.076 * [lfloor](1/3) * Sw,iT + (1/3) * Sd,iT
+ (1/3) * Sf,iT[rfloor] = (Min -8.127) + 1.692 * Sw.iT + 1.692 *
Sd.iT + 1.692 * Sf,iT
where Min -8.127 is the uniform amount and 1.692 is a pricing
multiplier. Since Min equals 12 under the final rule, the uniform
amount equals 3.873.
Appendix 2
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 deposit insurance
assessments on the equity capital and profitability of all insured
institutions, based on the assessment rates adopted in the final
rule. Current economic, financial market, and banking industry
conditions lend considerable uncertainty to the outlook for earnings
in 2009. Therefore, this analysis considers the following two
scenarios for pre-tax, pre-assessment income in 2009: (1) Income in
2009 is equal to income for all of 2008, adjusted for mergers; (2)
Income in 2009 is equal to the annualized income over the second
half of 2008, also adjusted for mergers. The first scenario would
result in an industry pre-tax, pre-assessment loss of $7.5 billion.
The second scenario would result in an industry pre-tax, pre-
assessment loss of $88.2 billion.
The financial data used in this analysis are the most recent
available as of December 31, 2008. However, since each bank's risk-
based assessment rate for the fourth quarter has not yet been
finalized, each institution's rate under the rate schedule adopted
in the final rule is based on data as of September 30, 2008.\1\ The
projected use of one-time credits authorized under the Reform Act is
taken into consideration in determining the effective assessment for
an institution.
---------------------------------------------------------------------------
\1\ For purposes of this analysis, the assessment base (like
income) is not assumed to increase, but is assumed to remain at
December 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.
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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.\2\
---------------------------------------------------------------------------
\2\ The analysis does not incorporate any tax effects from an
operating loss carry forward or carry back.
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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
[[Page 9562]]
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 rate (that is, dividends as a fraction of net
income) unchanged from the weighted average rate reported over the
four quarters ending December 31, 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 December 31,
2008 was $1.3 trillion.\3\ Based on the assumptions for earnings and
assessments described above, year-end 2009 equity capital is
projected to equal between $1.215 trillion and $1.267 trillion. In
the absence of an assessment, total equity would be an estimated $6
billion higher.
---------------------------------------------------------------------------
\3\ This excludes equity for those mentioned in the note to
Tables A.1 and A.2.
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On an industry weighted average basis, projected total
assessments in 2009 would result in capital that is between 0.44
percent and 0.47 percent less than in the absence of assessments.
The analysis indicates that assessments would cause 8 to 12
institutions whose equity-to-assets ratio would have exceeded 4
percent in the absence of assessments to fall below that percentage
and 6 to 9 institutions to have below 2 percent equity-to-assets
that otherwise would not have.
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. In order to facilitate a comparison of the impact
of assessments under the two scenarios for earnings, institutions
were assigned to one of three groups: those who were profitable
under both earnings scenarios, those who were unprofitable under
both earnings scenarios, and those who were profitable in one
scenario but unprofitable in the other.
Table A.1 shows that approximately 55 percent to 59 percent of
profitable institutions are projected to owe assessments that are
less than 10 percent of income. Table A.2 shows that profitable
institutions facing an assessment of under 10 percent of income hold
between 43 and 80 percent of all profitable institution assets,
depending on the income scenario. The overall weighted average
reduction in income for profitable institutions is between 5.8
percent and 7.7 percent.
Table A.1--Assessments as a Percent of Income *
[Numbers of profitable institutions]
----------------------------------------------------------------------------------------------------------------
2009 income based on:
-----------------------------------------------------------------------
Results for all of 2008 Annualized results for 2nd half of
Assessments as percent of income ------------------------------------ 2008
-----------------------------------
Number of Percent of Number of Percent of
institutions institutions institutions institutions
----------------------------------------------------------------------------------------------------------------
0.0-5.0................................. 1,087 19 1,029 18
5.0-10.0................................ 2,305 40 2,108 37
10.0-20.0............................... 1,493 26 1,441 25
20.0-40.0............................... 534 9 629 11
40.0-100.0.............................. 200 4 316 6
>100.0.................................. 75 1 171 3
-----------------------------------------------------------------------
Total............................... 5,694 100 5,694 100
----------------------------------------------------------------------------------------------------------------
Table A.2--Assessments as a Percent of Income *
[Assets of profitable institutions]
[$ in billions]
----------------------------------------------------------------------------------------------------------------
2009 income based on:
-----------------------------------------------------------------------
Results for all of 2008 Annualized results for 2nd half of
Assessments as percent of income ------------------------------------ 2008
-----------------------------------
Assets of Percent of Assets of Percent of
institutions assets institutions assets
----------------------------------------------------------------------------------------------------------------
0.0-5.0................................. 1,783 28 1,479 23
5.0-10.0................................ 3,303 52 1,295 20
10.0-20.0............................... 936 15 2,297 36
20.0-40.0............................... 223 4 886 14
40.0-100.0.............................. 45 1 288 5
> 100.0................................. 65 1 110 2
-----------------------------------------------------------------------
Total............................... 6,354 100 6,354 100
----------------------------------------------------------------------------------------------------------------
Notes:
(1) Income is defined as income before taxes, extraordinary items, and deposit insurance assessments.
Assessments are adjusted for the use of one-time credits.
(2) Profitable institutions are defined as those having positive merger-adjusted income (as defined above) for
all of 2008, the second half of 2008, and, by assumption, in 2009.
(3) 10 insured branches of foreign banks and 59 institutions having less than 4 quarters of reported earnings
were excluded from this analysis.
[[Page 9563]]
Tables A.3 and A.4 provide the same analysis for institutions
that were unprofitable under both scenarios. Note that assessments
will have a smaller percentage impact on the losses of unprofitable
institutions as losses rise, so that such institutions are, in
percentage terms, less adversely affected under the scenario based
on the results for the second half of 2008. Table A.3 shows that
approximately 52 percent to 70 percent of unprofitable institutions
are projected to owe assessments that are less than 10 percent of
losses. Table A.4 shows the corresponding asset distribution. The
overall weighted average increase in losses for unprofitable
institutions is between 2.6 and 4.6 percent.
Table A.3--Assessments as a Percent of Losses *
[Numbers of unprofitable institutions]
----------------------------------------------------------------------------------------------------------------
2009 income based on:
-----------------------------------------------------------------------
Results for all of 2008 Annualized results for 2nd half of
Assessments as percent of losses ------------------------------------ 2008
-----------------------------------
Number of Percent of Number of Percent of
institutions institutions institutions institutions
----------------------------------------------------------------------------------------------------------------
0.0-5.0................................. 523 29 801 44
5.0-10.0................................ 411 23 479 26
10.0-20.0............................... 401 22 312 17
20.0-40.0............................... 243 13 111 6
40.0-100.0.............................. 147 8 76 4
> 100.0................................. 93 5 39 2
-----------------------------------------------------------------------
Total............................... 1,818 100 1,818 100
----------------------------------------------------------------------------------------------------------------
Table A.4--Assessments as a Percent of Losses *
[Assets of unprofitable institutions]
[$ in billions]
----------------------------------------------------------------------------------------------------------------
2009 income based on:
-----------------------------------------------------------------------
Results for all of 2008 Annualized results for 2nd half of
Assessments as percent of income ------------------------------------ 2008
-----------------------------------
Assets of Percent of Assets of Percent of
institutions assets institutions assets
----------------------------------------------------------------------------------------------------------------
0.0-5.0................................. 2,235 48 3,181 68
5.0-10.0................................ 1,316 28 1,350 29
10.0-20.0............................... 626 13 115 2
20.0-40.0............................... 372 8 32 1
40.0-100.0.............................. 50 1 14 0
> 100.0................................. 100 2 6 0
-----------------------------------------------------------------------
Total............................... 4,698 100 4,698 100
----------------------------------------------------------------------------------------------------------------
Notes:
(1) Income is defined as income before taxes, extraordinary items, and deposit insurance assessments.
Assessments are adjusted for the use of one-time credits.
(2) Profitable institutions are defined as those having positive merger-adjusted income (as defined above) for
all of 2008, the second half of 2008, and, by assumption, in 2009.
(3) 10 insured branches of foreign banks and 59 institutions having less than 4 quarters of reported earnings
were excluded from this analysis.
In addition to those institutions that remained either
profitable or unprofitable in both earnings scenarios, there were
734 institutions with $2.79 trillion in assets that changed
classification from one scenario to the other. Of these 734
institutions, 634 were profitable when 2009 income equals the
results for all 2008 but unprofitable when 2009 income equals the
annualized results for the second half of 2008, while 100 were
unprofitable under the former scenario and profitable under the
latter scenario.
[FR Doc. E9-4584 Filed 2-27-09; 4:15 pm]
BILLING CODE 6714-01-P