[Federal Register Volume 75, Number 84 (Monday, May 3, 2010)]
[Proposed Rules]
[Pages 23516-23556]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-10161]
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Part III
Federal Deposit Insurance Corporation
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12 CFR Part 327
Assessments; Proposed Rule
Federal Register / Vol. 75 , No. 84 / Monday, May 3, 2010 / Proposed
Rules
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327
RIN 3064-AD57
Assessments
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Notice of proposed rulemaking and request for comment.
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SUMMARY: The FDIC proposes to amend our regulations to revise the
assessment system applicable to large institutions to better
differentiate institutions by taking a more forward-looking view of
risk; to better take into account the losses that the FDIC will incur
if an institution fails; to revise the initial base assessment rates
for all insured depository institutions; and to make technical and
other changes to the rules governing the risk-based assessment system.
DATES: Comments must be received on or before 60 days after
publication.
ADDRESSES: You may submit comments, identified by RIN number, by any of
the following methods:
Agency Web Site: http://www.fdic.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on
the Agency Web Site.
E-mail: [email protected]. Include the RIN number in the
subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429
Hand Delivery/Courier: Guard station at the rear of the
550 17th Street Building (located on F Street) on business days between
7 a.m. and 5 p.m.
Instructions: All submissions received must include the agency name
and RIN for this rulemaking. Comments will be posted only to the extent
practicable and, in some instances, the FDIC may post summaries of
categories of comments, with the comments themselves available in the
FDIC's reading room. Comments will be posted at: http://www.fdic.gov/regulations/laws/federal/propose.html, including any personal
information provided with the comment.
FOR FURTHER INFORMATION CONTACT: Lisa Ryu, Chief, Large Bank Pricing
Section, Division of Insurance and Research, (202) 898-3538; Heather L.
Etner, Financial Analyst, Banking and Regulatory Policy Section,
Division of Insurance and Research, (202) 898-6796; Robert L. Burns,
Chief, Exam Support and Analysis, Division of Supervision and Consumer
Protection (704) 333-3132 x4215; Christopher Bellotto, Counsel, Legal
Division, (202) 898-3801; Sheikha Kapoor, Senior Attorney, Legal
Division, (202) 898-3960.
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 of 2005
(collectively, the Reform Act).\1\ The Reform Act, among other things,
gives the FDIC, through its rulemaking authority, the opportunity to
better price deposit insurance for risk.\2\
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\1\ Federal Deposit Insurance Reform Act of 2005, Public Law
109-171, 120 Stat. 9; Federal Deposit Insurance Conforming
Amendments of 2005, Public Law 109-173, 119 Stat. 3601.
\2\ 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,
requires 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 (the Fund or the DIF) due to the composition and concentration of
the institution's assets and liabilities, the likely amount of any such
loss, and the revenue needs of the DIF. The Reform Act leaves in place
the statutory provision allowing the FDIC to ``establish separate risk-
based assessment systems for large and small members of the Deposit
Insurance Fund.'' \3\ But the Reform Act provides that ``[n]o insured
depository institution shall be barred from the lowest-risk category
solely because of size.'' \4\
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\3\ Section 7(b)(1)(D) of the Federal Deposit Insurance Act (12
U.S.C. 1817(b)(1)(D)).
\4\ 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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2006 Assessments Rule
On November 30, 2006, pursuant to the requirements of the Reform
Act, the FDIC adopted by regulation (the 2006 assessments rule) an
assessment system that placed insured depository institutions into risk
categories (Risk Category I, II, III or IV), depending upon supervisory
ratings and capital levels.\5\ Within Risk Category I, the 2006
assessments rule created different assessment systems for large and
small institutions that combined supervisory ratings with other risk
measures to further differentiate risk and determine assessment
rates.\6\
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\5\ 71 FR 69282. (Nov. 30, 2006). 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 (Nov. 30,
2006).
\6\ The 2006 final rule defined a large institution as an
institution (other than an insured branch of a foreign bank) with
$10 billion or more in assets as of December 31, 2006 (although an
institution with at least $5 billion in assets could 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 report of condition for four consecutive quarters, the
FDIC will reclassify the institution as large beginning in the
following quarter. If, after December 31, 2006, an institution
classified as large reports assets of less than $10 billion in its
report 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) (2009) and 327.9(d)(6) (2009).
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To determine assessment rates for large Risk Category I
institutions that had a long-term debt issuer rating, the 2006
assessments rule combined the institution's weighted average CAMELS
component rating and any current long-term debt issuer rating or
ratings assigned by the major U.S. rating agencies (the debt ratings
method). For large institutions that did not have a long-term debt
issuer rating, the rule set initial assessment rates using a financial
ratios method, which combined the weighted average CAMELS component
rating and certain financial ratios. (This method was also applied to
all small institutions.) The 2006 assessments rule allowed the FDIC to
adjust initial assessment rates for large Risk Category I institutions
to ensure that the relative levels of risk posed by these institutions
were consistently reflected in assessment rates; the adjustment is
known as the large bank adjustment.\7\ The FDIC provided additional
detail on the calculation of the large bank adjustment in its
Guidelines for Large Institutions and Insured Foreign Branches in Risk
Category I (the large bank guidelines).\8\
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\7\ 71 FR 69282, 69292-69294 (Nov. 30, 2006).
\8\ 72 FR 27122 (May 14, 2007).
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2009 Assessments Rule
Effective April 1, 2009, the FDIC amended its assessments rule (the
2009 assessments rule) to create the current assessment system. Under
this assessment system, the initial base assessment rate for a Risk
Category I institution is determined by either the financial ratios
method applicable to all small institutions or, for institutions with
at least one long-term debt rating, by a new large bank method.\9\ The
new
[[Page 23517]]
large bank method incorporates a financial ratios score. For a large
institution in Risk Category I with a long-term debt issuer rating, the
initial base assessment rate combines the institution's weighted
average CAMELS component rating, its average long-term debt issuer
ratings, and its financial ratios score, each equally weighted (the
large bank method). The 2009 assessments rule also increased the
maximum large bank adjustment of the initial base assessment rate from
0.50 basis points to 1 basis point.\10\
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\9\ The financial ratios method also applies to large
institutions without at least one long-term debt rating. The 2009
assessments rule added a new measure--the adjusted brokered deposit
ratio--to the financial ratios that were considered under the 2006
assessments rule. The adjusted brokered deposit ratio measures the
extent to which certain brokered deposits are used to fund rapid
asset growth. The adjusted brokered deposit ratio excludes deposits
that a Risk Category I 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 (reciprocal deposits).
\10\ 74 FR 9525, 9535-9536 (Mar. 4, 2009).
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Initial base assessment rates as of April 1, 2009, are set forth in
Table 1 below.
Table 1--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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* Rates for institutions that do not pay the minimum or maximum rate will vary between these rates.
The 2009 assessments rule provided for adjustments to the initial
base assessment rate for institutions in all risk categories. An
institution's total base assessment rate can vary from its initial base
assessment rate as the result of an unsecured debt adjustment and a
secured liability adjustment. The unsecured debt adjustment lowers an
institution's initial base assessment rate using its ratio of long-term
unsecured debt (and, for small institutions, certain amounts of Tier 1
capital) to domestic deposits.\11\ The secured liability adjustment
increases an institution's initial base assessment rate if the
institution's ratio of secured liabilities to domestic deposits is
greater than 25 percent (the secured liability adjustment).\12\ In
addition, institutions in Risk Categories II, III and IV are subject to
an adjustment for large levels of brokered deposits (the brokered
deposit adjustment).\13\
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\11\ Unsecured debt excludes debt guaranteed by the FDIC under
its Temporary Liquidity Guarantee Program.
\12\ The initial base assessment rate cannot increase more than
50 percent as a result of the secured liability adjustment.
\13\ 74 FR 9522, 9541 (Mar. 4, 2009).
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After applying all possible adjustments, the minimum and maximum
total base assessment rates for each risk category under the 2009
assessments rule are set out in Table 2 below.
Table 2--Initial and 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.................. 7-24bp 17-43bp 27-58bp 40-77.5bp
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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.
II. Overview of the Proposal
The FDIC proposes to revise the assessment system applicable to
large institutions to better capture risk at the time an institution
assumes the risk, to better differentiate institutions during periods
of good economic and banking conditions based on how they would fare
during periods of stress or economic downturns, and to better take into
account the losses that the FDIC may incur if an institution fails.
The FDIC has carefully considered the measurements that should be
used to assess large banks' risk. The proposal includes quantitative
measures that are readily available and statistically significant in
predicting an institution's long-term performance. The FDIC believes
that other considerations--such as stress testing, underwriting
characteristics, and risk management practices--are also important in
the risk assessment of large institutions, and they should be factored
into the risk-based assessment system. While the FDIC has already
identified some key metrics for these additional considerations, the
FDIC is seeking further input in a request for comments included in
this proposed rulemaking. The FDIC also anticipates that any final rule
issued pursuant to this notice of proposed rulemaking would be followed
by discussions with the industry on ways to improve the system adopted,
as well as coordination with other regulators. Ultimately, the FDIC
anticipates a further round of rulemaking may be needed to improve the
large bank assessment system adopted pursuant to this rulemaking.
The FDIC proposes to eliminate risk categories for large
institutions to allow the FDIC to draw finer distinctions among large
institutions based upon the risk that they pose. For all large
institutions, the FDIC proposes to eliminate use of long-term debt
issuer ratings. The FDIC has found that debt issuer ratings,
particularly for the largest institutions, do not respond quickly to an
institution's changing risk profile. The FDIC proposes to continue to
rely
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upon CAMELS ratings and financial measures to determine assessment
rates.\14\
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\14\ The proposed rule clarifies that if the FDIC disagrees with
the ratings changes to an institution's risk assignment by its
primary federal regulator or, for state-chartered institutions, by
the state banking supervisor, the FDIC will notify the institution
of its decision and any resulting change to an institution's risk
assignment is effective as of the date of FDIC's transmittal notice.
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The FDIC proposes to combine CAMELS ratings and certain financial
measures into two scorecards--one for most large institutions and
another for large institutions that are structurally and operationally
complex or that pose unique challenges and risks in case of failure
(Highly Complex Institutions). Each scorecard would consist of a
performance component, which would measure an institution's financial
performance and its ability to withstand stress, and a loss severity
component, which would correspond to the level of potential losses in
case of failure. The data underlying these measures are readily
available. Most of the data are publicly available, but some are
gathered during the examination process. Under the proposal, the FDIC
would have the ability to adjust each component where necessary to
produce accurate relative risk rankings.
Because some of the financial measures that the FDIC is proposing
focus on long-term risk, they should mitigate the pro-cyclicality of
the current system. Over the long term, institutions that pose higher
long-term risk will pay higher assessments when they assume these
risks--usually during economic expansions--rather than facing large
assessment increases when conditions deteriorate. In so doing, they
should provide incentives for institutions to avoid excessive risk
during economic expansions.
As shown in Chart 1, the proposed measures were useful in
predicting long-term performance of large institutions over the 2005 to
2009 period. The chart contrasts the predictive values of the proposed
measures with weighted-average CAMELS component ratings and with the
existing financial ratios method. (The financial ratios method is based
on a statistical model that predicts downgrades of small banks within
12 months, but the method also applies to large Risk Category I banks.)
The proposed measures predict the FDIC's view, based on its experience
and judgment, of the proper rank ordering of risk for large
institutions do significantly better than the other two methods and,
thus, better than the current system used for most large Risk Category
I institutions, which combines weighted-average CAMELS composite
scores, the financial ratios method and long-term debt issuer ratings.
(As noted above, debt issuer ratings, particularly for the largest
institutions, do not respond quickly to an institution's changing risk
profile.) For example, in 2006, the proposed measures would have
predicted the FDIC's expert judgment-based risk ranking of large
institutions as of year-end 2009 nearly two and one-half times better
than the risk measures in the existing financial ratios method, which
applies to large banks without debt ratings.
[GRAPHIC] [TIFF OMITTED] TP03MY10.005
The FDIC also proposes to alter assessment rates applicable to all
insured depository institutions to ensure that the revenue collected
under the new assessment system would approximately equal that under
the existing assessment system and also to ensure that the lowest rate
applicable to both small and large institutions would be the same. The
FDIC would retain its flexibility to raise assessment rates up to 3
basis points above or below base assessment rates without the necessity
of further rulemaking.
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\15\ The expert judgment ranking is a risk ranking of large
institutions based on FDIC's current analyses. The ranking is
largely based on the information available through the FDIC's Large
Insured Depository Institution (LIDI) program. Large institutions
that failed or received significant government support over the
period are assigned the worst risk ranking and are included in the
statistical analysis. Appendix 1 describes the statistical analysis
in detail.
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III. Risk-Based Assessment System for Large Insured Depository
Institutions
A ``large institution'' would continue to be defined under the
proposal as an insured depository institution with $10 billion or
greater in total assets for at least four consecutive quarters. The
proposal would apply to all large institutions regardless of whether
they are defined as new.\16\ Insured branches of foreign banks would
not be defined as large institutions.
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\16\ In almost all cases, an institution that has had $10
billion or greater in total assets for four consecutive quarters
will have CAMELS ratings. However, in the rare event that a large
institution has not yet received CAMELS ratings, it would be given a
weighted average CAMELS rating of 2 for assessment purposes until
actual CAMELS ratings are assigned.
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A. Scorecard for Large Institutions (Other Than Highly Complex
Institutions)
The scorecard method would use risk measures to derive an
assessment rate reflective of the risk that an institution poses to the
insurance fund. Each scorecard would produce two scores: A performance
score and a loss severity score. To arrive at a performance score, the
scorecard would combine CAMELS ratings and financial measures into a
single performance score between 0 and 100. The FDIC would have limited
ability to adjust an institution's performance score based upon
quantitative or qualitative measures not adequately captured in the
scorecard.
The scorecard would also combine loss severity measures into a
single loss severity score between 0 and 100. The loss severity score
would then be converted into a loss severity measure. The FDIC would
also have limited ability to alter an institution's loss severity score
based upon quantitative or qualitative measures not adequately captured
in the scorecard. Multiplying the performance score by the loss
severity measure would produce a combined score, which would then be
converted to an initial assessment rate.
In general, a risk measure value reflecting lower risk than the
cutoff value that results in a score of 0 would also receive a score of
0, where 0 equals the lowest risk for that measure. A risk measure
value reflecting higher risk than the cutoff value that results in a
score of 100 would also receive a score of 100, where 100 equals the
highest risk for that measure. A risk measure value between the cutoff
values would be converted to a score between 0 and 100, which would be
rounded to 3 decimal points.
Table 3 shows scorecard measures and the possible range of scores.
Table 3--Scorecard for Large Institutions
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Components Scorecard measures Score
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CAMELS........................... Weighted Average CAMELS. 25-100
------------------------------------------------------------------------
Ability to Withstand Asset- Tier 1 Common Capital 0-100
Related Stress. Ratio (Tier 1 Common
Capital/Total Average
Assets less Disallowed
Intangibles).
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Concentration Measure... 0-100
Higher Risk
Concentrations; or.
Growth-Adjusted
Portfolio
Concentrations..
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Core Earnings/Average 0-100
Total Assets.
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Credit Quality Measure.. 0-100
Criticized and
Classified Items/Tier 1
Capital and Reserves;
or.
Underperforming Assets/
Tier 1 Capital and
Reserves..
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Subtotal................ 0-100
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Outlier Add-ons
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Criticized and 30
Classified Items/Tier 1
Capital and Reserves;
or
Underperforming Assets/
Tier 1 Capital and
Reserves.
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Higher Risk 30
Concentrations.
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Total ability to 0-160
withstand asset-related
stress score
------------------------------------------------------------------------
Ability to Withstand Funding- Core Deposits/Total 0-100
Related Stress. Liabilities.
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Unfunded Commitments/ 0-100
Total Assets.
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Liquid Assets/Short-term 0-100
Liabilities (liquidity
coverage ratio).
------------------------------------------------------------------------
Total ability to 0-100
withstand funding-
related stress score
------------------------------------------------------------------------
Total Performance Score. 0-100
------------------------------------------------------------------------
Potential Loss Severity.......... Potential Losses/Total 0-100
Domestic Deposits (loss
severity measure).
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Secured Liabilities/ 0-100
Total Domestic Deposits.
------------------------------------------------------------------------
Total loss severity 0-100
score.
------------------------------------------------------------------------
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1. Performance Score
The first component of the scorecard for large institutions would
be the performance score. The performance score for large institutions
would be the weighted average of three inputs: (1) Weighted average
CAMELS rating; (2) ability to withstand asset-related stress measures;
and (3) ability to withstand funding-related stress measures. Table 4
shows the weight given to each of these three inputs.
Table 4--Performance Score Inputs and Weights
------------------------------------------------------------------------
Weight
Performance score inputs (percent)
------------------------------------------------------------------------
CAMELS Rating............................................... 30
Ability to Withstand Asset-Related Stress................... 50
Ability to Withstand Funding-Related Stress................. 20
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a. Weighted Average CAMELS Score
To derive the weighted average CAMELS score, a weighted average of
an institution's CAMELS component ratings would first be calculated
using the weights that are applied in the current rule as shown in
Table 5 below.
Table 5--Weights for CAMELS Component Ratings
------------------------------------------------------------------------
Weight
CAMELS component (percent)
------------------------------------------------------------------------
C........................................................... 20
A........................................................... 20
M........................................................... 25
E........................................................... 10
L........................................................... 10
S........................................................... 10
------------------------------------------------------------------------
A weighted average CAMELS rating would be converted to a score that
ranges from 25 to 100. A weighted average rating of 1 would equal a
score of 25 and a weighted average of 3.5 or greater would equal a
score of 100. Weighted average CAMELS ratings between 1 and 3.5 would
be assigned a score between 25 and 100. The score would increase at an
increasing rate as the weighted average CAMELS rating increases.
Weighted average CAMELS ratings between 1 and 3.5 would be assigned
a score between 25 and 100 according to the following equation:
S = 25 + [(20/3) * (C\2\ - 1)],
Where:
S = the weighted average CAMELS score and
C = the weighted average CAMELS rating.
This equation normalizes the weighted average CAMELS score to
the same range as the other components described below so that it
can be added to these components, resulting in a performance score.
This conversion from a weighted average CAMELS rating to a score is
a non-linear conversion. Other conversions used in this proposal
would be linear. The non-linear conversion recognizes that the
difference between higher CAMELS ratings (e.g., a CAMELS 3 versus a
CAMELS 4) represents a greater difference in risk than the
difference between lower CAMELS ratings (e.g., a CAMELS 1 versus a
CAMELS 2).
b. Ability To Withstand Asset-Related Stress Component
The ability to withstand asset-related stress component would
contain measures that are most relevant to assessing a large
institution's ability to withstand such stress. These measures would be
the following:
Tier 1 common capital ratio;
Concentration measure (the higher of the higher-risk
concentrations measure or growth-adjusted portfolio concentrations
measures);
Core earnings/average total assets; and
Credit quality measure (the higher of the criticized and
classified items/Tier 1 capital and reserves or underperforming assets/
Tier 1 capital and reserves).
In general, these measures proved to be the most statistically
significant measures of an institution's ability to withstand asset-
related stress, as described in Appendix 1. Appendix B describes these
measures in detail and gives the source of the data used to determine
them.
Each risk measure within the ability to withstand asset-related
stress portion of the scorecard would be converted linearly to a score
between 0 and 100 where 100 equals the highest risk and 0 equals the
lowest risk for that measure.\17\ For each risk measure, a value
reflecting lower risk than the cutoff value that results in a score of
0 will also receive a score of 0, where 0 equals the lowest risk for
that measure. A value reflecting higher risk than the cutoff value that
results in a score of 100 will also receive a score of 100, where 100
equals the highest risk for that measure. A risk measure value between
the minimum and maximum cutoff values is converted linearly to a score
between 0 and 100. For the Concentration Measure and Credit Quality
Measures, a lower ratio implies lower risk and a higher ratio implies
higher risk. For these measures, a value between the minimum and
maximum cutoff values will be converted linearly to a score between 0
and 100, according to the following formula:
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\17\ This process, in effect, normalizes all the ratios to the
same range of values and allows the numbers to be added together.
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S = (V - Min)*100/(Max - Min),
where S is score (rounded to three decimal points), V is the value
of the measure, Min is the minimum cutoff value and Max is the
maximum cutoff value.
For the Tier 1 Common Capital Ratio and Core Earnings to Average
Total Assets Ratio, a lower value represents higher risk and a higher
value represents lower risk. For these measures, a value between the
minimum and maximum cutoff values is converted linearly to a score
between 0 and 100, according to the following formula:
S = (Max - V)*100/(Max - Min),
where S is score (rounded to three decimal points), V is the value
of the measure, Min is the minimum cutoff value and Max is the
maximum cutoff value.
The concentration measure score would equal the higher of the two
scores that make up the concentration measure score, as would the
credit quality score.\18\ The credit quality score would be based upon
the higher of the criticized and classified items ratio score or the
underperforming assets ratio score.\19\ Table 6 shows each of the
measures, gives the cutoff values for each measure and shows the weight
assigned to the measure to derive a score for an institution's ability
to withstand asset-related stress. Most of the minimum and maximum
cutoff values for each risk measure equal the 10th and 90th percentile
values of the particular measure among large institutions based upon
data from the period between the first quarter of 2000 and the fourth
quarter of 2009.20 21
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\18\ The higher-risk concentration measure gauges concentrations
that are currently deemed to be high risk. The growth-adjusted
portfolio concentration measure does not solely consider high-risk
portfolios, but considers all portfolio concentrations.
\19\ The criticized and classified items ratio measures
commercial credit quality while the underperforming assets ratio is
often a better indicator for consumer portfolios.
\20\ Cutoff values are rounded to one decimal point.
\21\ The measures in which the 10th and 90th percentiles would
not be used would be the higher-risk concentration measure and the
criticized and classified asset ratio due to data availability. Data
on the higher-risk concentration measure are available consistently
since second quarter 2008, and criticized and classified assets are
only available consistently since first quarter 2007. For the
higher-risk concentration measure, the 85th percentile value is used
as a maximum cutoff value. The maximum cutoff value for the
criticized and classified asset ratio is close to but does not equal
the 90th percentile value. These alternative cutoff values are
partly based on recent experience.
[[Page 23521]]
Table 6--Cutoff Values and Weights for Ability To Withstand Asset-Related Stress Measures
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Cutoff values
Scorecard measures -------------------------------- Weight
Minimum Maximum (percent)
----------------------------------------------------------------------------------------------------------------
Tier 1 Common Capital Ratio..................................... 5.8 12.9 15
Concentration Measure........................................... .............. .............. 35
Higher Risk Concentrations; or.............................. 0.0 3.2 ..............
Growth-Adjusted Portfolio Concentrations.................... 7.6 154.7 ..............
Core Earnings/Average Total Assets.............................. 0.0 2.3 15
Credit Quality Measure.......................................... .............. .............. 35
Criticized and Classified Items/Tier 1 Capital and Reserves; 6.5 100.0 ..............
or.........................................................
Underperforming Assets/Tier 1 Capital and Reserves.......... 2.3 35.1 ..............
----------------------------------------------------------------------------------------------------------------
Each score would be multiplied by a respective weight and the
resulting weighted score for each measure would be summed to arrive at
an ability to withstand asset-related stress score, which could range
from 0 to 100. The FDIC recognizes that extreme values for some
measures should have an additional effect on the final scorecard total.
For extreme values of certain measures reflecting particularly high
risk, this score could increase through an outlier add-on.
Specifically, if an institution's ratio of criticized and classified
items to Tier 1 capital and reserves exceeded 100 percent or its ratio
of underperforming assets to Tier 1 capital and reserves exceeded 50.2
percent, the ability to withstand asset-related stress component score
would be increased by 30 points. Additionally, if the higher risk
concentration measure exceeded 4.8, the ability to withstand asset-
related stress component score would be increased by 30 points. These
increases (outlier add-ons) would be determined separately and could
increase the ability to withstand asset-related stress score by up to
60 points; thus, the ability to withstand asset-related stress
component score could be as high as 160 points.\22\
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\22\ That is, the statistical analysis shows that a significant
amount of criticized and classified items or underperforming assets,
or concentrations in high risk portfolios are the most significant
(having coefficients with the largest absolute value) measures that
help differentiate the risk profiles of large institutions and
predict an institution's long-term performance. In addition, recent
experience suggests that a small number of institutions with very
high levels of criticized and classified items or underperforming
assets, or high risk portfolio concentrations are particularly
vulnerable to unexpected asset-related stress. The value that
triggers the outlier add-on for the criticized and classified items
to Tier 1 capital and reserves was determined using FDIC's judgment.
The value that triggers the outlier add-on for the underperforming
assets to Tier 1 capital and reserves is the 95th percentile value
for the distribution of values of that measure for large
institutions from 2000 to 2009. The value that triggers the outlier
add-on for the higher risk concentration measure is the 90th
percentile value for the distribution of values of that measure for
large institutions from second quarter 2008 to fourth quarter 2009.
A lower value was chosen for this measure due to a short history of
available data.
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Table 7 illustrates how the ability to withstand asset-related
stress score would be calculated for a hypothetical bank, Bank A.
Table 7--Ability to Withstand Asset-Related Stress Component for Bank A
----------------------------------------------------------------------------------------------------------------
Weight
Scorecard measures Value Score (percent) Weighted score
----------------------------------------------------------------------------------------------------------------
Tier 1 Common Capital Ratio..................... 7.62 74.37 15 11.15
Concentration Measure........................... .............. 78.13 35 27.35
Higher Risk Concentrations; or.............. 2.50 78.13 .............. ..............
Growth-Adjusted Portfolio Concentrations.... 45.00 25.42 .............. ..............
Core Earnings/Average Total Assets.............. 0.50 78.26 15 11.74
Credit Quality Measure.......................... .............. 100.00 35 35.00
Criticized and Classified Items/Tier 1 104.32 100.00 .............. ..............
Capital and Reserves; or...................
Underperforming Assets/Tier 1 Capital and 33.76 95.91 .............. ..............
Reserves...................................
---------------------------------------------------------------
Subtotal................................ .............. .............. .............. 85.24
----------------------------------------------------------------------------------------------------------------
Outlier Add-ons:
----------------------------------------------------------------------------------------------------------------
Criticized and Classified Items/Tier 1 104.32 .............. .............. 30.00
Capital and Reserves; or...................
----------------------------------------------------------------------------------------------------------------
Underperforming Assets/Tier 1 Capital and 33.76 30.00 .............. ..............
Reserves...................................
Higher Risk Concentrations...................... 2.50 0.00 .............. ..............
----------------------------------------------------------------------------------------------------------------
Total ability to withstand asset-related stress score................................... 115.24
----------------------------------------------------------------------------------------------------------------
Bank A's higher risk concentrations score (78.13) is higher than
its growth-adjusted portfolio concentration score (25.42). Thus, the
higher risk concentration score is multiplied by the 35 percent weight
to get a weighted score of 27.35 and the growth-adjusted portfolio
concentration score would be ignored. Similarly, Bank A's criticized
and classified items to Tier 1 capital and reserves ratio score (100)
is higher than its underperforming assets to Tier 1 capital and
reserves ratio score (95.91). Therefore, the criticized and classified
items to Tier 1 capital and reserves ratio score would be multiplied by
the 35 percent weight to get a weighted score of 35.00 and the
underperforming assets to Tier 1 capital and reserves ratio score would
be ignored. These weighted scores, along with the weighted scores for
the Tier 1 common capital ratio (11.15) and core earnings to average
total assets ratio (11.74), would be
[[Page 23522]]
added together, resulting in the subtotal of 85.24. Because Bank A's
criticized and classified items to Tier 1 capital and reserves ratio
score is greater than 100, the criticized and classified items to Tier
1 capital and reserves ratio outlier add-on would be triggered, and an
additional 30 points would be added to Bank A's score. Bank A's higher
risk concentrations measure score does not exceed 4.8; therefore, the
second outlier add-on would not be triggered. Thus, only the outlier
add-on for the criticized and classified items to Tier 1 capital and
reserves ratio would be added to the subtotal to arrive at the asset
vulnerability component score of 115.24 for Bank A.
c. Ability To Withstand Funding-Related Stress
The ability to withstand funding-related stress component would
contain three measures that are most relevant to assessing a large
institution's ability to withstand such stress--a core deposits to
total liabilities ratio, an unfunded commitments to total assets ratio,
and a liquid assets to short-term liabilities (liquidity coverage)
ratio. These ratios are significant in predicting a large institution's
long-term performance in the statistical test described in Appendix 1.
Appendix B describes these ratios in detail and gives the source of the
data used to determine them.
Each risk measure would be converted to a score between 0 and 100
where 100 equals the highest risk and 0 equals the lowest risk for that
measure. A risk measure value reflecting lower risk than the cutoff
value that results in a score of 0, will also receive a score of 0,
where 0 equals the lowest risk for that measure. A risk measure value
reflecting higher risk than the cutoff value that results in a score of
100, will also receive a score of 100, where 100 equals the highest
risk for that measure. For the Core Deposits/Liabilities measure and
the Liquidity Coverage Ratio, a lower ratio implies higher risk and a
higher ratio implies lower risk. For these measures, a value between
the minimum and maximum cutoff values will be converted linearly to a
score between 0 and 100, according to the following formula:
S = (Max - V)*100/(Max - Min)
Where S is score (rounded to three decimal points), V is the value
of the measure, Min is the minimum cutoff value and Max is the
maximum cutoff value.
For the Unfunded Commitments/Assets measure, a lower value
represents lower risk and a higher value represents higher risk. For
these measures, a value between the minimum and maximum cutoff values
is converted linearly to a score between 0 and 100, according to the
following formula:
S = (V - Min)*100/(Max - Min)
Where S is score (rounded to three decimal points), V is the value
of the measure, Min is the minimum cutoff value and Max is the
maximum cutoff value.
The ability to withstand funding-related stress component score
would be the weighted average of the three measure scores. Table 8
shows the cutoff values and weights for these measures.
Table 8--Cutoff Values and Weights for Ability To Withstand Funding-Related Stress Measures
----------------------------------------------------------------------------------------------------------------
Cutoff values
Scorecard measures -------------------------------- Weight
Minimum Maximum (percent)
----------------------------------------------------------------------------------------------------------------
Core Deposits/Total Liabilities................................. 3.2 79.1 40
Unfunded Commitments/Total Assets............................... 0.3 42.2 40
Liquid Assets/Short-term Liabilities (liquidity coverage ratio). 5.6 170.9 20
----------------------------------------------------------------------------------------------------------------
d. Calculation of Performance Score
The weighted average CAMELS score, the ability to withstand asset-
related stress score, and the ability to withstand funding-related
stress score would then be multiplied by their weights and the results
would be summed to arrive at the performance score. This score would
not be less than 0 or more than 100 under the proposal. In the example
in Table 9, Bank A's performance score would be 81.70.
Table 9--Performance Score for Bank A
------------------------------------------------------------------------
Weight Weighted
Performance score components (percent) Score score
------------------------------------------------------------------------
Weighted Average CAMELS Score....... 30 65.15 19.54
Ability to Withstand Asset-Related 50 115.24 57.62
Stress Score.......................
Ability to Withstand Funding-Related 20 22.69 4.54
Stress Score.......................
-----------------------------------
Total Performance Score......... .......... .......... 81.70
------------------------------------------------------------------------
The performance score could be adjusted, up or down, by a maximum
of 15 points, based upon significant risk factors that are not
adequately captured in the scorecard. The resulting score, however,
could not be less than 0 or more than 100. The FDIC would use a process
similar to the current large bank adjustment to determine the amount of
the adjustment to the performance score.\23\ This discretionary
adjustment is discussed in more detail below.
---------------------------------------------------------------------------
\23\ 12 CFR 327.9(d)(4) (2009).
---------------------------------------------------------------------------
2. Loss Severity Score
The loss severity score would measure the relative magnitude of
potential losses to the FDIC in the event of an institution's failure.
The loss severity score would be based on two measures that are most
relevant to assessing an institution's potential loss severity. The
loss severity measure is the ratio of possible losses to the FDIC in
the event of an institution's failure to total domestic deposits,
averaged over three quarters. A standardized set of assumptions--based
on recent failures--regarding liability runoffs and the recovery value
of asset categories are applied to calculate possible losses to the
FDIC. (Appendix D to the NPR describes the calculation of the measure
[[Page 23523]]
in detail.) A loss severity measure is used as part of the current
large bank adjustment. The second measure is the ratio of secured
liabilities to total domestic deposits. (The greater an institution's
secured liabilities relative to domestic deposits, the greater the
FDIC's potential rate of loss in the event of failure, since secured
liabilities have priority in payment over deposits at failure.) These
measures are quantitative measures that are derived from readily
available data. Appendix B defines these measures and gives the source
of the data used to calculate them.
Each risk measure would be converted to a score between 0 and 100
where 100 equals the highest risk and 0 equals the lowest risk for that
measure. A risk measure value reflecting lower risk than the minimum
cutoff value results in a score of 0, where 0 equals the lowest risk
for that measure. A risk measure value reflecting higher risk than the
maximum cutoff value results in a score of 100, where 100 equals the
highest risk for that measure. A risk measure value between the minimum
and maximum cutoff values is converted linearly to a score between 0
and 100, according to the following formula:
S = (V - Min)*100/(Max - Min),
Where S is score (rounded to three decimal points), V is the value
of the measure, Min is the minimum cutoff value and Max is the
maximum cutoff value.
The loss severity score would be the weighted average of these
scores. Table 10 shows cutoff values and weights for these measures.
The loss severity score would not be less than 0 or more than 100 under
the proposal.
Table 10--Cutoff Values and Weights for Loss Severity Score Measures
----------------------------------------------------------------------------------------------------------------
Cutoff values
Scorecard measures -------------------------------- Weight
Minimum Maximum (percent)
----------------------------------------------------------------------------------------------------------------
Potential Losses/Total Domestic Deposits (Loss Severity Measure) 0.0 30.1 50
Secured Liabilities/Total Domestic Deposits..................... 0.0 75.7 50
----------------------------------------------------------------------------------------------------------------
In the example in Table 11, Bank A's loss severity score would be
36.04.
Table 11--Loss Severity Score for Bank A
----------------------------------------------------------------------------------------------------------------
Weight
Scorecard measures Ratio Score (percent) Weighted score
----------------------------------------------------------------------------------------------------------------
Potential Losses/Total Domestic Deposits (Loss 15.20 50.50 50 25.25
severity measure)..............................
Secured Liabilities/Total Domestic Deposits..... 16.34 21.59 50 10.79
---------------------------------------------------------------
Total Loss Severity Score................... .............. .............. .............. 36.04
----------------------------------------------------------------------------------------------------------------
Similar to the performance score, the loss severity score could be
adjusted, up or down, by a maximum of 15 points, based on significant
risk factors specific to the institution that are not adequately
captured in the scorecard. The resulting score, however, could not be
less than 0 or more than 100. The FDIC would use a process similar to
the current large bank adjustment to determine the amount of the
adjustment to the loss severity score.\24\ This discretionary
adjustment is discussed in more detail below.
---------------------------------------------------------------------------
\24\ 12 CFR 327.9(d)(4) (2009).
---------------------------------------------------------------------------
3. Initial Base Assessment Rate
Under the proposal, once the performance and loss severity scores
are calculated, and potentially adjusted, these scores would be
converted to an initial base assessment rate using the following
method:
First, the loss severity score would be converted into a loss
severity measure that ranges from 0.8 (score of 5 or lower) to 1.2
(score of 85 or higher). Scores that fall at or below the minimum
cutoff of 5 would receive a loss severity measure of 0.8 and scores
that fall at or above the maximum cutoff of 85 would receive a loss
severity score of 1.2. Again, a linear interpolation would be used to
convert loss severity scores between the cutoffs into a loss severity
measure. The conversion would be made using the following formula:
Loss Severity Measure = 0.8 + [(Loss Severity Score - 5) x 0.005]
For example, if Bank A's loss severity score is 36.04, its loss
severity measure would be 0.96, calculated as follows:
0.8 + [(36.04 - 5) * 0.005] = 0.96.
Next, the performance score would be multiplied by the loss
severity measure to produce a total score (total score = performance
score * loss severity measure). Since the loss severity measure ranges
from 0.8 to 1.2, the total score could be up to 20 percent higher or
lower than the performance score. The total score would be capped at
100 under the proposal and would be rounded to two decimal places. For
example, if Bank A's performance score is 81.70 and its loss severity
measure is 0.96, its total score would be 78.43, calculated as follows:
81.70 * 0.96 = 78.43
A large institution with a total score of 30 or lower would pay the
minimum initial base assessment rate and an institution with a total
score of 90 or greater would pay the maximum initial base assessment
rate.\25\ For total scores between 30 and 90, initial base assessment
rates would rise at an increasing rate as the total score increased.
The initial base assessment rate (in basis points) would be calculated
according to the following formula (assuming that the maximum initial
base assessment rate was 40 basis points higher than the minimum rate):
\26\
---------------------------------------------------------------------------
\25\ The score of 30 and 90 equals about the 20th and about the
97th percentile values, respectively, based on scorecard results as
of first quarter 2005 through fourth quarter 2006.
\26\ The rate of increase in the initial base assessment rate is
based on a statistical analysis of failure probabilities as
described in Appendix 2.
---------------------------------------------------------------------------
[[Page 23524]]
[GRAPHIC] [TIFF OMITTED] TP03MY10.006
For example, if Bank A's total score were 78.43, and the minimum
and maximum initial base assessment rates were 10 basis points and 50
basis points, respectively, its initial base assessment rate would be
30.02 basis points, calculated as follows:
---------------------------------------------------------------------------
\27\ The initial base assessment rate would be rounded to two
decimal points.
[GRAPHIC] [TIFF OMITTED] TP03MY10.007
This calculation of an initial assessment rate is based on an
approximated statistical relationship between an institution's total
score and its estimated three-year cumulative failure probability.
Chart 2 illustrates the initial base assessment rate based on a
range of total scores and Bank A's assessment rate is indicated on the
curve.
[GRAPHIC] [TIFF OMITTED] TP03MY10.008
The initial base assessment rate could be adjusted as a result of
the unsecured debt adjustment, secured liability adjustment and
brokered deposit adjustment (discussed below).
B. Scorecard for Highly Complex Institutions
As mentioned above, those institutions that are structurally and
operationally complex or that pose unique challenges and risks in case
of failure (highly complex institutions) would have a different
scorecard under the proposal. A ``highly complex institution'' would be
defined as: (1) An insured depository institution (excluding a credit
card bank) with greater than $50 billion in total assets that is wholly
owned by a parent company with more than $500 billion in total assets,
or wholly owned by one or more intermediate parent companies that are
wholly owned by a holding company with more than $500 billion in
assets, or (2) a processing bank and trust company with greater than
$10 billion in total assets, provided that the information required to
calculate assessment rates as a highly complex institution is readily
available to the FDIC.\28\ Under the proposal, highly complex
institutions would have a
[[Page 23525]]
scorecard with measures tailored to the risks posed by these
institutions, but the methodology involved would be the same for both
scorecards.
---------------------------------------------------------------------------
\28\ A parent company would be defined as 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. A credit card bank
would be defined as a bank for which credit card plus securitized
receivables exceed 50 percent of assets plus securitized
receivables. A processing bank and trust company would be defined as
an institution whose last 3 years' non-lending interest income plus
fiduciary revenues plus investment banking fees exceed 50 percent of
total revenues (and last 3 years' fiduciary revenues are non-zero).
---------------------------------------------------------------------------
The scorecard for highly complex institutions has four additional
measures that do not appear in the scorecard for other large
institutions (the senior bond spread, the institution's parent
company's tangible common equity (TCE) ratio, the 10-day 99 percent
Value at Risk (VaR), and the short-term funding to total assets ratio).
These measures were designed to measure vulnerability to changes in the
market and would be incorporated into the calculation of a highly
complex institution's initial base assessment rate because of the
institution's greater involvement in market activities. Appendix B
describes these measures in detail and gives the source of the data
used to calculate the measures.
The scorecard for highly complex institutions, like the scorecard
for other large institutions, would contain a performance component and
a loss severity component. However, the performance score for highly
complex institutions would contain an additional component--the market
indicators component. Table 12 shows the scorecard measures and the
possible range of scores that would be used for these institutions.
Table 13 gives the weights associated with the four components of the
performance scorecard for highly complex institutions.
Table 12--Scorecard for Highly Complex Institutions
------------------------------------------------------------------------
Components Scorecard measures Score
------------------------------------------------------------------------
CAMELS........................... Weighted Average CAMELS. 25-100
------------------------------------------------------------------------
Market Indicator................. Senior Bond Spread...... 0-100
--------------------------------------
Outlier Add-ons
--------------------------------------
Parent Company Tangible 30
Common Equity (TCE)
Ratio.
--------------------------------------
Total Market Indicator 0-130
score.
------------------------------------------------------------------------
Ability to Withstand Asset- Tier 1 Common Capital 0-100
Related Stress. Ratio (Tier 1 Common
Capital/Total Average
Assets less Disallowed
Intangibles).
--------------------------------------
Concentration Measure... 0-100
Higher Risk
Concentrations; or
Growth-Adjusted
Portfolio
Concentrations
--------------------------------------
Core Earnings/Average 0-100
Total Assets.
--------------------------------------
Credit Quality Measure.. 0-100
Criticized and
Classified Items/Tier 1
Capital and Reserves
Underperforming Assets/
Tier 1 Capital and
Reserves
--------------------------------------
10-day 99% VaR/Tier 1 0-100
Capital.
--------------------------------------
Subtotal................ 0-100
--------------------------------------
Outlier Add-ons
--------------------------------------
Criticized and 30
Classified Items/Tier 1
Capital and Reserves;
or
Underperforming Assets/
Tier 1 Capital and
Reserves
--------------------------------------
Higher Risk 30
Concentrations Measure.
--------------------------------------
Total ability to 0-160
withstand asset-related
stress score.
------------------------------------------------------------------------
Ability to Withstand Funding- Core Deposits/Total 0-100
Related Stress. Liabilities.
--------------------------------------
Unfunded Commitments/ 0-100
Total Assets.
--------------------------------------
Liquid Assets/Short-term 0-100
Liabilities (liquidity
coverage ratio).
--------------------------------------
Short-term Funding/Total 0-100
Assets.
--------------------------------------
Subtotal................ 0-100
--------------------------------------
Outlier Add-ons
--------------------------------------
Short-term funding/Total 30
Assets.
------------------------------------------------------------------------
Total ability to 0-130
withstand funding-
related stress score.
------------------------------------------------------------------------
Total Performance Score. 0-100
------------------------------------------------------------------------
Potential Loss Severity.......... Potential Losses/Total 0-100
Domestic Deposits (loss
severity measure).
--------------------------------------
[[Page 23526]]
Secured Liabilities/ 0-100
Total Domestic Deposits.
------------------------------------------------------------------------
Total loss severity 0-100
score.
------------------------------------------------------------------------
Table 13--Performance Score Components and Weights
------------------------------------------------------------------------
Weight
Performance score components (percent)
------------------------------------------------------------------------
CAMELS Rating.............................................. 20
Market Indicators.......................................... 10
Ability to Withstand Asset-Related Stress.................. 50
Ability to Withstand Funding-Related Stress................ 20
------------------------------------------------------------------------
The additional component, the market indicator component, would be
added to the performance scorecard for highly complex institutions. The
market indicator component contains only one measure, the senior bond
spread score, and one outlier add-on. The FDIC would use the senior
bond spread because this measure can be compared consistently across
institutions. The senior bond spread would be converted linearly to a
score between 0 and 100. The minimum and maximum cutoff values for the
market indicator measure are shown in Table 14. The market indicator
component score would be adjusted by up to 30 points if the
institution's parent company's tangible common equity (TCE) ratio fell
below 4 percent since the market generally perceives a parent company
to be vulnerable if its TCE is less than 4 percent. Including the
outlier add-on, the market indicator component score could be as high
as 130 points.
Table 14--Cutoff Values and Weight for Market indicator Measure
------------------------------------------------------------------------
Cutoff values
Scorecard measures ------------------------ Weight
Minimum Maximum (percent)
------------------------------------------------------------------------
Senior Bond Spread................ 0.6 3.8 100
------------------------------------------------------------------------
The scorecard for highly complex institutions adds one additional
factor to the ability to withstand asset-related stress component--the
10-day 99 percent Value at Risk (VaR)/Tier 1 capital--and one
additional factor to the ability to withstand funding-related stress
component--the short-term funding to total assets ratio. Table 15 and
Table 16 show cutoff values and weights for ability to withstand asset-
related stress measures and ability to withstand funding-related stress
measures, respectively.
Table 15--Cutoff Values and Weights for Ability To Withstand Asset-Related Stress Measures
----------------------------------------------------------------------------------------------------------------
Cutoff values
Scorecard measures -------------------------------- Weight
Minimum Maximum (percent)
----------------------------------------------------------------------------------------------------------------
Tier 1 Common Capital Ratio..................................... 5.8 12.9 10
Concentration Measure: 35
Higher Risk Concentrations; or.............................. 0.0 3.2
Growth-Adjusted Portfolio Concentrations.................... 7.6 154.7
Core Earnings/Average Total Assets.............................. 0.0 2.3 10
Credit Quality Measure: 35
Criticized and Classified Items to Tier 1 Capital and 6.5 100.0
Reserves; or...............................................
Underperforming Assets/Tier 1 Capital and Reserves.......... 2.3 35.1
10-day 99 VaR/Tier 1 Capital.................................... 0.1 0.5 10
----------------------------------------------------------------------------------------------------------------
Table 16--Cutoff Values and Weights for Ability To Withstand Funding-Related Stress Measures
----------------------------------------------------------------------------------------------------------------
Cutoff values
Scorecard measures -------------------------------- Weight
Minimum Maximum (percent)
----------------------------------------------------------------------------------------------------------------
Core Deposits/Total Liabilities................................. 3.2 79.1 30
Unfunded Commitments/Total Assets............................... 0.3 42.2 30
Liquid Assets/Short-term Liabilities (liquidity coverage ratio). 5.6 170.9 20
Short-term Funding/Total Assets................................. 0.0 19.1 20
----------------------------------------------------------------------------------------------------------------
The scorecard for highly complex institutions also adds an
additional outlier add-on. The ability to withstand funding-related
stress component score for highly complex institutions would be
adjusted by 30 points if the ratio of short-term funding to total
assets exceeded 26.9 percent.\29\ The use of
[[Page 23527]]
short-term funding has proved to be highly unstable and the FDIC has
found an increased vulnerability, particularly for institutions that
are active participants, when there is a heavy reliance on this type of
funding. Including the outlier add-on, the ability to withstand
funding-related stress component score for highly complex institutions
could be as high as 130 points.
---------------------------------------------------------------------------
\29\ Historical analysis shows that a significant amount of
short-term funding can increase the risk profile of an institution.
External funding sources can be a critical source of liquidity but
short-term funding exposes an institution to near-term price risk
and rollover risk. These risks increase for an institution during
periods of market disruption or when the institution itself is
experiencing financial distress. The add-on is triggered when the
level of short-term funding to total assets ratio exceeds 26.9%.
This is the 95th percentile of this measure among large institutions
based upon data from the period between the third quarter of 1999
and the second quarter of 2009.
---------------------------------------------------------------------------
To calculate the performance score for highly complex institutions,
the weighted average CAMELS score, the market indicators score, the
ability to withstand asset-related stress score, and the ability to
withstand funding-related stress score would be multiplied by their
weights and the results would be summed to arrive at the performance
score. The score would be capped at 100 under the proposal. The loss
severity score for highly complex institutions would be calculated the
same way as the loss severity score for other large institutions.
As is the case for other large institutions, the performance score
and the loss severity score for highly complex institutions could be
adjusted, up or down, by maximum of 15 points each, based upon
significant risk factors that are not adequately captured in the
scorecard. The resulting scores, however, could not be less than 0 or
more than 100. The FDIC would use a process similar to the current
large bank adjustment to determine the amount of any adjustments.\30\
This discretionary adjustment is discussed in more detail below.
---------------------------------------------------------------------------
\30\ 12 CFR 327.9(d)(4)(2009).
---------------------------------------------------------------------------
The initial base assessment rate for highly complex institutions
would be calculated from the total score in the same manner as for
other large institutions as described above. As in the case of other
large institutions, the initial base assessment rate could also be
adjusted as a result of the unsecured debt adjustment, the secured
liability adjustment, and the brokered deposit adjustment (discussed
below).
C. Large Bank Adjustment to the Performance Score and Loss Severity
Score
Under current rules, large institutions and insured branches of
foreign banks within Category 1 are subject to an assessment rate
adjustment (the large bank adjustment). The large bank adjustment was
designed to preserve consistency in the relative risk rankings of large
institutions as indicated by assessment rates, to ensure fairness among
all large institutions, and to ensure that assessment rates take into
account all available information that is relevant to the FDIC's risk-
based assessment decision. The FDIC proposes that a large bank
adjustment be retained that would be imposed in the same manner (and
subject to the same notice requirements) as under the current rule.\31\
---------------------------------------------------------------------------
\31\ 12 CFR 327.9(d)(4) (2009).
---------------------------------------------------------------------------
As proposed, the FDIC could adjust the performance score and/or the
loss severity score for all large institutions and highly complex
institutions, up or down, by a maximum of 15 points each, based upon
significant risk factors that are not adequately captured in the
scorecard. In determining whether to make a large bank adjustment, the
FDIC may consider such information as financial performance and
condition information and other market or supervisory information. The
FDIC would also consult with an institution's primary Federal regulator
and, for state chartered institutions, state banking supervisor.
Appendix E lists some, but not all, criteria that could be considered
in determining whether or not a discretionary adjustment is necessary.
In general, the proposed adjustments to the performance and loss
severity scores would have a proportionally greater effect on the
assessment rate of those institutions with a higher total score. The
effect of an upward adjustment to a score on the institution's
assessment rate would be calculated as
[GRAPHIC] [TIFF OMITTED] TP03MY10.009
and the effect of a downward adjustment to a score on the institution's
assessment rate would be
[GRAPHIC] [TIFF OMITTED] TP03MY10.010
where Au is an increase in the assessment rate,
Ad is a decrease in the assessment rate, C is the amount
of upward adjustment to score, and P is pre-adjustment score.
Notifications involving an upward adjustment to an institution's
assessment rate would be made in advance of implementing such an
adjustment so that the institution has an opportunity to respond to or
address the FDIC's rationale for proposing an upward adjustment.
Adjustments would be implemented after considering the institution's
response to this notification along with any subsequent changes either
to the inputs or other risk factors that relate to the FDIC's decision.
The FDIC acknowledges the need to clarify and make technical
changes to its adjustment guidelines for large institutions to ensure
consistency with this rulemaking.\32\
---------------------------------------------------------------------------
\32\ 72 FR 27122 (May 14, 2007).
---------------------------------------------------------------------------
D. Liability-Based Adjustments
The proposed rule would continue to allow for adjustments to an
institution's initial base assessment rate as a result of certain long-
term unsecured debt, secured liabilities and brokered deposits. These
adjustments are currently provided for in the 2009 assessments rule,
except that the brokered deposit adjustment currently applies only to
institutions in Risk Categories II, III and IV. The proposed rule would
extend the brokered deposit adjustment to all large institutions since
the adjusted brokered deposit ratio (which took brokered deposits and
growth into account for large Risk Category I institutions) would no
longer apply. The unsecured debt adjustment, secured liability
adjustment and brokered deposit adjustment would be applicable to both
large institutions and highly complex institutions under the proposal.
E. Calculation of Total Assessment Rate
After making the adjustments just described, the resulting
assessment rate would be the total assessment rate. Under the proposal,
unlike the current rule for both large and small institutions, a large
institution's total assessment rate could not be more than 50 percent
lower than its initial base assessment rate. This change ensures that
all institutions would pay assessments even if the minimum initial base
assessment rate is set at 5 basis points or less.
F. Updating Scorecard
The FDIC proposes that it have the flexibility to update the
minimum and maximum cutoff values and weights used in each scorecard
annually, without notice-and-comment rulemaking. In particular, the
FDIC could add new data from each year to its analysis and could, from
time to time, exclude some earlier years from its analysis. Updating
the minimum and maximum cutoff values and weights would allow the FDIC
to use the most
[[Page 23528]]
recent data, thereby improving the accuracy of the scorecard method.
On the other hand, if, as a result of its review and analysis, the
FDIC concludes that additional or alternative measures should be used
to determine risk-based assessments or that a new method should be used
to differentiate risk among large institutions and highly complex
institutions, such changes would be made through notice-and-comment
rulemaking.
Financial ratios for any given quarter would continue to be
calculated from the report of condition filed by each institution or
data collected through the FDIC's LIDI program as of the last day of
the quarter.\33\ CAMELS component rating changes would continue to be
effective as of the date that the rating change is transmitted to the
institution for purposes of determining assessment rates.\34\
---------------------------------------------------------------------------
\33\ Reports of condition include Reports of Income and
Condition and Thrift Financial Reports.
\34\ 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 assigned by an institution's primary federal
regulator, unless: (1) The disagreement over the component rating
also involves a disagreement over a CAMELS composite rating; and (2)
the disagreement over the CAMELS composite rating is not a
disagreement over whether the CAMELS composite rating should be a 1
or a 2. The FDIC has no plans to alter this practice.
---------------------------------------------------------------------------
IV. Assessment Rates
As discussed above, the FDIC proposes a wider range of assessment
rates than under the current assessment system. To maintain
approximately the same total revenue under the proposed rule as under
the current system, the FDIC proposes that the Board adopt new initial
and total base assessment rate schedules set out in Tables 17 and 18,
effective January 1, 2011.
Under the proposed rule, the range of initial base assessment rates
for small institutions and insured branches of foreign banks in Risk
Category I would be uniformly 2 basis points lower than under the
current assessment system; the initial base assessment rate for
institutions in Risk Category II would be unchanged; while the proposed
initial base assessment rate for small institutions and insured
branches in Risk categories III and IV would be somewhat higher. For
large and highly complex institutions the minimum rate in the proposed
range of rates would be 2 basis points lower than the current Risk
Category I minimum assessment rate and the maximum rate in the range
would be slightly higher than current maximum Risk Category IV
assessment rates.\35\
---------------------------------------------------------------------------
\35\ 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.''
---------------------------------------------------------------------------
Actual total assessment rates will be set uniformly 3 basis points
higher than the proposed rates in accordance with the Amended
Restoration Plan that the FDIC adopted on September 29, 2009.\36\
---------------------------------------------------------------------------
\36\ 74 FR 51062 (Oct. 2, 2009). Under current rules, the FDIC
has discretion to increase or decrease assessment rates in effect up
to 3 basis points above or below total base assessment rates without
the need for additional rulemaking. The proposed rule would not
affect this provision.
Table 17--Proposed Initial and Total Base Assessment Rates for Small Institutions and Insured Branches of
Foreign Banks
----------------------------------------------------------------------------------------------------------------
Risk category
Risk category I Risk category II III Risk category IV
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate............ 10-14 22 34 50
Unsecured debt adjustment............... -5-0 -5-0 -5-0 -5-0
Secured liability adjustment............ 0-7 0-11 0-17 0-25
Brokered deposit adjustment............. ................ 0-10 0-10 0-10
-----------------------------------------------------------------------
Total Base Assessment Rate.......... 5-21 17-43 29-61 45-85
----------------------------------------------------------------------------------------------------------------
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. All rates shown would increase 3 basis points on January 1, 2011,
pursuant to the FDIC Amended Restoration Plan adopted on September 29, 2009. 74 FR 51062 (Oct. 2, 2009).
Table 18--Proposed Initial and Total Base Assessment Rates for Large
Institutions
------------------------------------------------------------------------
Large
institutions
------------------------------------------------------------------------
Initial base assessment rate.......................... 10-50
Unsecured debt adjustment............................. -5-0
Secured liability adjustment.......................... 0-25
Brokered deposit adjustment........................... 0-10
-----------------
Total Base Assessment Rate........................ 5-85
------------------------------------------------------------------------
All amounts are in basis points annually. Total base rates that are not
the minimum or maximum rate will vary between these rates. All rates
shown would increase 3 basis points on January 1, 2011, pursuant to
the FDIC Amended Restoration Plan adopted on September 29, 2009. 74 FR
51062 (Oct. 2, 2009).
Based upon the analysis and projections below, the FDIC has
concluded that the proposed assessment rate structure (including the
previously announced 3 basis point uniform increase in assessment rates
beginning January 1, 2011) should satisfy the FDIC's revenue and
liquidity needs. Under the proposal, for the fourth quarter 2009
assessment period, total base assessment rates would have been lower
for about 52 percent of large institutions and 76 percent of small
institutions.\37\ The rates would have been higher for about 48 percent
of large institutions and 9 percent of small institutions. The rates
would have remained the same for 15 percent of small institutions.
---------------------------------------------------------------------------
\37\ For the purpose of this analysis, large institutions are
those with total assets of $10 billion or greater as of December 31,
2009. The estimates in the text regarding the effect of the proposal
on assessment rates, the effect on industry capital and earnings
discussed later in the text and the Regulatory Flexibility Act
analysis discussed later in the text, are based in part on
approximations of a few risk measures.
---------------------------------------------------------------------------
Fund Balance and Reserve Ratio Projections
In September 2009, the FDIC projected that both the Fund balance
[[Page 23529]]
and the reserve ratio as of September 30, 2009, would be negative,
owing, in part, to an increase in provisioning for anticipated
failures. The FDIC also projected the Fund balance and reserve ratio
for each quarter over the next several years using the then most
recently available information on expected failures and loss rates and
statistical analyses of trends in CAMELS downgrades, failure rates and
loss rates. The FDIC projected that, over the period 2009 through 2013,
the Fund could incur approximately $100 billion in failure costs; the
FDIC projected that most of these costs would occur in 2009 and 2010.
Partly as a result of these projections, the FDIC increased risk-
based assessment rates uniformly by 3 basis points effective January 1,
2011. Despite this increase, the FDIC projected that the Fund balance
would become significantly negative in 2010 and would remain negative
until first quarter 2013. According to these projections, the reserve
ratio would return to the statutorily mandated minimum reserve ratio of
1.15 percent in the first quarter of 2017.
As projected, the Fund balance and reserve ratio as of September
30, 2009, and December 31, 2009, were negative. (The Fund balance on
December 31, 2009 was negative $20.9 billion; the reserve ratio was -
0.39 percent.) In February 2010, the FDIC reexamined its projections
using the most recently available information on expected failures and
loss rates, and statistical analyses of trends in CAMELS downgrades,
failure rates and loss rates. This reexamination resulted in no
material changes to the FDIC's projections. However, these projections
are subject to considerable uncertainty. Losses could be less than or
exceed projected amounts, for example, if conditions affecting the
national or regional economies, prove less or more severe than is
currently anticipated.
Effect on Industry Capital and Earnings
The proposed changes involve increases in premiums for some
institutions and reductions in premiums for other institutions. Because
overall revenue remains almost constant, the effect on aggregate
earnings and capital is small. Projections show that imposition of the
new premiums will increase aggregate capital by 2 one-hundredths of one
percent (0.02 percent) over one year. For 6,042 institutions,
assessment rates would decrease and earnings and capital would
increase; for 771 institutions, assessment rates would increase and
earnings and capital would decline. For institutions whose initial
earnings are positive, the change in premiums will increase earnings by
an average of 0.87 percent (on an asset weighted basis). For
institutions whose initial earnings are negative, the change in
premiums will increase losses by an average of 0.85 percent (on an
asset weighted basis).\38\
---------------------------------------------------------------------------
\38\ The proposed changes to assessment rates would not take
effect until January 1, 2011. For two reasons, the analysis in the
text examines the effect on earnings and capital had proposed rates
been in effect on January 1, 2010. First, it is difficult to project
2011 institution income so far in advance. Second, as discussed in
the text, because overall assessment revenue under the proposed
system would remain approximately the same as the current system,
the effect on earnings and capital is small for almost all
institutions. This conclusion holds true for 2011, as well, because
both current and proposed assessment rates will increase uniformly
by three basis points beginning January 1, 2011. (A detailed
analysis of the projected effects of the payment of proposed
assessment on the capital and earnings of insured institutions is
contained in Appendix 3.)
---------------------------------------------------------------------------
Imposition of the proposed assessment rates would make a critical
difference for two institutions, whose tier 1 capital ratio would fall
below 2 percent over a one-year horizon (assuming the proposed rule
were adopted for 2010). No institution's equity-to-capital ratio would
fall below 4 percent over a one-year horizon.\39\
---------------------------------------------------------------------------
\39\ In setting assessment rates, the FDIC's Board of Directors
of the FDIC is authorized to set assessments for insured depository
institutions in such amounts as the Board of Directors may determine
to be necessary. 12 U.S.C. 1817(b)(2)(A). In so doing, the Board
shall consider: (1) The estimated operating expenses of the DIF; (2)
the estimated case resolution expenses and income of the DIF; (3)
the projected effects of the payment on the capital and earnings of
insured depository institutions; (4) the risk factors and other
factors taken into account pursuant to 12 U.S.C. 1817(b) (1) under
the risk-based assessment system, including the requirement under
such paragraph to maintain a risk-based system; and (5) any other
factors the Board of Directors may determine to be appropriate. 12
U.S.C. 1817(b)(2)(B). As reflected in the text, in making its
projections of the Fund balance and liquidity needs, and in making
its recommendations regarding assessment rates, the Board has taken
into account these statutory factors.
---------------------------------------------------------------------------
V. Effective Date
January 1, 2011.
VI. Request for Comments
The FDIC seeks comment on every aspect of this proposed rule. In
particular, the FDIC seeks comment on the questions set out below. The
FDIC asks that commenters include reasons for their positions.\40\ The
FDIC specifically requests comment on the following:
---------------------------------------------------------------------------
\40\ The FDIC may not address all of the questions posed in the
current rulemaking, but may consider the information gathered in
future actions.
---------------------------------------------------------------------------
A. Questions for Future Rulemakings
As mentioned above, the FDIC seeks input on additional measures
that could be incorporated into the assessment system in future
rulemakings.
a. The FDIC would like to factor into the scorecard credit,
liquidity, market, and interest rate stress tests. How should these
stress tests be factored into the scorecard? What methodology and
assumptions should be used?
b. Underwriting is a key determinant of credit quality. The FDIC
would like to develop metrics to measure underwriting quality. How
could underwriting quality best be measured?
c. A high level of counterparty risk can significantly increase an
institution's ability to withstand stress. How could counterparty risk
best be measured?
d. A high level of market risk can significantly increase an
institution's ability to withstand stress. How could market risk best
be measured?
e. How could liquidity risk best be measured?
f. How should the exposure of individual banks to systemic risk be
measured? What activities and behavior constitute exposure to systemic
risk?
g. How is the capability of risk management best assessed?
h. Should the FDIC review the assessment system applicable to small
institutions to determine whether improvements, including improvements
analogous to those being proposed for the large institution assessment
system, should be made to the assessment system used for small
institutions?
B. Questions About the Proposal
1. Deposit Insurance Pricing System:
(a) Should the risk categories be eliminated as proposed?
(b) Should the two scorecards be combined?
(c) Should highly complex institutions be defined as proposed?
(d) Should the risk measures, particularly the components of the
high risk concentrations measure, be defined as proposed?
(e) Should the performance score and loss severity score be
combined as proposed?
(f) Should the initial base assessment rate be calculated as
proposed?
2. Performance Scorecard:
(a) Are the proposed weights assigned to performance score
components and measures appropriate?
(b) Are the cut-off values for the risk measures and the outlier
add-ons appropriate?
(c) Should any other measures be added? Should any measures be
removed or replaced?
(d) For the growth-adjusted portfolio concentration measure, are
the risk weights assigned to each portfolio as described in Appendix C
appropriate?
[[Page 23530]]
(e) For the higher-risk concentration measure, should
concentrations in other portfolios be considered?
(f) Should purchased impaired loans under SOP 03-3 be excluded from
the definition of criticized and classified items or underperforming
assets?
(g) Should the liquidity coverage ratio be computed as proposed?
(h) Are the outlier add-ons appropriate measures? Is the score
addition for add-ons appropriate?
(i) Is the size of the discretionary adjustment to the performance
score appropriate?
3. Loss Severity Scorecard:
(a) Are asset haircuts, runoff, and secured liability assumptions
for the loss severity measure as described in Appendix D appropriate?
(b) Are asset adjustments due to liability runoff and capital
reductions as described in Appendix D applied appropriately?
(c) Are the proposed weights assigned to loss severity measures
appropriate?
(d) Are cut-off values for risk measures and outlier add-ons
appropriate?
(e) Should any other measures be added? Should any measures be
removed or replaced?
(f) Is the size of the discretionary adjustment to the loss
severity score appropriate?
4. Assessment Rate Schedule:
(a) Should the entire proposed assessment rate schedule be adjusted
to make it revenue neutral overall?
(b) Is the basis point range for assessments appropriate?
5. Regulatory Matters:
(a) What is the extent of regulatory burden with implementation of
the proposed deposit insurance pricing system?
(b) Are the requirements in the proposed regulation clearly stated?
If not, how could the regulation be more clearly stated?
(c) Does the proposed regulation contain language or jargon that is
not clear? If so, which language requires clarification?
VII. Regulatory Analysis and Procedure
A. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 113
Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking agencies
to use plain language in all proposed and final rules published after
January 1, 2000. The FDIC invites your comments on how to make this
proposal easier to understand. For example:
Has the FDIC organized the material to suit your needs? If
not, how could this material be better organized?
Are the requirements in the proposed regulation clearly
stated? If not, how could the regulation be more clearly stated?
Does the proposed regulation contain language or jargon
that is not clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes to the format would make the regulation
easier to understand?
What else could the FDIC do to make the regulation easier
to understand?
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires that each Federal
agency either certify that a proposed rule would not, if adopted in
final form, have a significant economic impact on a substantial number
of small entities or prepare an initial regulatory flexibility analysis
of the rule and publish the analysis for comment.\41\ 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.\42\ The proposed rule relates directly to the
rates imposed on insured depository institutions for deposit insurance,
and to the risk-based assessment system components that measure risk
and weigh that risk in determining each institution's assessment rate,
and includes technical and other changes to the FDIC's assessment
regulations. Nonetheless, the FDIC is voluntarily undertaking an
initial regulatory flexibility analysis of the proposed rule for
publication.
---------------------------------------------------------------------------
\41\ See 5 U.S.C. 603, 604 and 605.
\42\ 5 U.S.C. 601.
---------------------------------------------------------------------------
As of December 31, 2009, of the 8,012 insured commercial banks and
savings associations, there were 4,427 small insured depository
institutions as that term is defined for purposes of the RFA (i.e.,
those with $175 million or less in assets).
For purposes of this analysis, whether the FDIC were to collect
needed assessments under the existing rule or under the proposed rule,
the total amount of assessments collected would be the same. The FDIC's
total assessment needs are driven by statutory requirements 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 proposed rule would merely alter the distribution
of assessments among insured institutions. Using data as of December
31, 2009, the FDIC calculated the total assessments that would be
collected under the base rate schedule in the proposed rule.
The economic impact of the final rule on each small institution for
RFA purposes (i.e., institutions with assets of $175 million or less)
was then calculated as the difference in basis points and annual
assessments under the proposed rule compared to the existing rule,
assuming the same total assessments collected by the FDIC from the
banking industry.43 44
---------------------------------------------------------------------------
\43\ Throughout this regulatory flexibility analysis (unlike the
rest of the final rule), a ``small institution'' refers to an
institution with assets of $175 million or less.
\44\ The proposed rule would not go into effect until January 1,
2011. Under the existing assessment system and under the proposed
rule, assessment rates would increase uniformly by three basis
points beginning on that date. Because the increase is uniform in
both cases, the analysis in the text, which compares current
assessment rates with proposed base assessment rates, should apply
equally to 2011.
---------------------------------------------------------------------------
Based on the December 2009 data, under the proposed rule, the
change in the assessment system would result in lower assessments for
the majority of small institutions. Small institutions would experience
an average drop of 1.39 basis points in their assessment rates under
the proposed rule. More than 86 percent of these institutions would
face a lower assessment rate, with 76 percent of them being charged 1
to 2 basis points lower than the current pricing rule. Of the total
4,427 small institutions, only 13 percent would experience an increase
and only 173 institutions would experience an assessment rate increase
of more than 2 basis points. These figures indicate that the proposed
rule will have a positive economic impact for a substantial number of
small insured institutions. Table 19 below sets forth the results of
the analysis in more detail.
[[Page 23531]]
Table 19--Change in Basis Point Assessments Under the Proposed Rule
------------------------------------------------------------------------
Number of Percent of
Change in basis point assessments institutions institutions
------------------------------------------------------------------------
More than -2 basis points lower..... 114 2.58
-2 to -1 basis points lower......... 3,377 76.28
-1 to 0 basis points lower.......... 356 8.04
0 to 1 basis points higher.......... 243 5.49
1 to 2 basis points higher.......... 164 3.70
More than 2 basis points higher..... 173 3.91
-----------------------------------
Total........................... 4,427 100.00
------------------------------------------------------------------------
The FDIC performed a similar analysis to determine the impact on
profits for small institutions. Based on December 2009 data, under the
final rule, 96 percent of the 3,039 small institutions with reported
profits would experience a positive change in their annual profits.
Table 20 sets forth the results of the analysis in more detail.
Table 20--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 .2 percent lower.......... 18 0.59
.1 to .2 percent lower.............. 18 0.59
.05 to .1 percent lower............. 41 1.35
0 to .05 percent lower.............. 2,841 93.48
0 to 1 percent higher............... 121 3.98
-----------------------------------
Total........................... 3,039 100.00
------------------------------------------------------------------------
* Institutions with negative or no profit were excluded. These
institutions are shown separately in the next table.
Of those small institutions with reported profits, less than 4
percent would have experienced a decrease in their profits under the
proposed rule. More than 96 percent of these small institutions would
have an increase in their profits. Again, these figures indicate a
positive economic impact on profits for the majority of small insured
institutions.
Table 21 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 proposed rule on these institutions by
determining the annual assessment change that would result. Table 21
below shows that only 2.81 percent (39) of the 1,388 small insured
institutions in this category would experience an increase in annual
assessments of $10,000 or more. More than 10 percent of these
institutions would experience a decrease of $5,000 or more.
Table 21--Change in Assessments Under the Proposed Rule for Institutions
With Negative or No Reported Profit
------------------------------------------------------------------------
Number of Percent of
Change in assessments institutions institutions
------------------------------------------------------------------------
$5,000-$10,000 decrease............. 147 10.59
$1,000-$5,000 decrease.............. 468 33.72
$0-$1,000 decrease.................. 334 24.06
$0-$1,000 increase.................. 151 10.88
$1,000-$10,000 increase............. 249 17.94
$10,000 increase or more............ 39 2.81
-----------------------------------
Total........................... 1,388 100.00
------------------------------------------------------------------------
The proposed rule does not directly impose any ``reporting'' or
``recordkeeping'' requirements within the meaning of the Paperwork
Reduction Act. The compliance requirements for the proposed rule would
not exceed existing compliance requirements for the present system of
FDIC deposit insurance assessments, which, in any event, are governed
by separate regulations.
The FDIC is unaware of any duplicative, overlapping or conflicting
Federal rules.
The initial regulatory flexibility analysis set forth above
demonstrates that the proposed 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.\45\
---------------------------------------------------------------------------
\45\ 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.
[[Page 23532]]
D. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
The FDIC has determined that the proposed rule will not affect
family well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, enacted as part of the Omnibus
Consolidated and Emergency Supplemental Appropriations Act of 1999
(Pub. L. 105-277, 112 Stat. 2681).
List of Subjects in 12 CFR Part 327
Bank deposit insurance, Banks, Banking, Savings associations.
For the reasons set forth in the preamble, the FDIC proposes to
amend chapter III of title 12 of the Code of Federal Regulations as
follows:
PART 327--ASSESSMENTS
1. The authority citation for part 327 continues to read as
follows:
Authority: 12 U.S.C. 1441, 1813, 1815, 1817-1819, 1821; Sec.
2101-2109, Pub. L. 109-171, 120 Stat. 9-21, and Sec. 3, Pubic Law
109-173, 119 Stat. 3605.
2. In Sec. 327.4, revise paragraphs (c) and (f) to read as
follows:
Sec. 327.4 Assessment rates.
* * * * *
(c) Requests for review. An institution that believes any
assessment risk assignment provided by the Corporation pursuant to
paragraph (a) of this section is incorrect and seeks to change it must
submit a written request for review of that risk assignment. An
institution cannot request review through this process of the CAMELS
ratings assigned by its primary Federal regulator or challenge the
appropriateness of any such rating; each Federal regulator has
established procedures for that purpose. An institution may also
request review of a determination by the FDIC to assess the institution
as a large or a small institution (12 CFR 327.9(d)(9)) or a
determination by the FDIC that the institution is a new institution (12
CFR 327.9(d)(10)). Any request for review must be submitted within 90
days from the date the assessment risk assignment being challenged
pursuant to paragraph (a) of this section appears on the institution's
quarterly certified statement invoice. The request shall be submitted
to the Corporation's Director of the Division of Insurance and Research
in Washington, DC, and shall include documentation sufficient to
support the change sought by the institution. If additional information
is requested by the Corporation, such information shall be provided by
the institution within 21 days of the date of the request for
additional information. Any institution submitting a timely request for
review will receive written notice from the Corporation regarding the
outcome of its request. Upon completion of a review, the Director of
the Division of Insurance and Research (or designee) or the Director of
the Division of Supervision and Consumer Protection (or designee), as
appropriate, shall promptly notify the institution in writing of his or
her determination of whether a change is warranted. If the institution
requesting review disagrees with that determination, it may appeal to
the FDIC's Assessment Appeals Committee. Notice of the procedures
applicable to appeals will be included with the written determination.
* * * * *
(f) Effective date for changes to risk assignment. Changes to an
insured institution's risk assignment resulting from a supervisory
ratings change become effective as of the date of written notification
to the institution by its primary Federal regulator or state authority
of its supervisory rating (even when the CAMELS component ratings have
not been disclosed to the institution), if the FDIC, after taking into
account other information that could affect the rating, agrees with the
rating. If the FDIC does not agree, the FDIC will notify the
institution of the FDIC's supervisory rating; resulting changes to an
insured institution's risk assignment become effective as of the date
of written notification to the institution by the FDIC.
* * * * *
3. In Sec. 327.8, revise paragraphs (g), (h), (i), (m), (n), (o),
(p), (q), and (r), and add paragraphs (t), (u) and (v) 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, and an insured
branch of a foreign institution, 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)(9) 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 or a highly complex institution) 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) Highly Complex Institution. A highly complex institution is an
insured depository institution with greater than $50 billion in total
assets that is not a credit card bank and is wholly owned by a parent
company with more than $500 billion in total assets, or wholly owned by
one or more intermediate parent companies that are wholly owned by a
holding company with more than $500 billion in assets, or a processing
bank and trust company with greater than $10 billion in total assets,
provided that the information required to calculate assessment rates as
a highly complex institution is readily available to the FDIC. If,
after December 31, 2010, an institution classified as highly complex
falls below $50 billion in total assets in its quarterly reports of
condition for four consecutive quarters, or its parent company or
companies fall below $500 billion in total assets for four consecutive
quarters, or a processing bank and trust company falls below $10
billion in total assets in its quarterly reports of condition for four
consecutive quarters, the FDIC will reclassify the institution
beginning the following quarter.
* * * * *
(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)(iii), (iv), 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
[[Page 23533]]
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.
(n) Risk assignment. For all small institutions and insured
branched of foreign banks, risk assignment includes assignment to Risk
Category I, II, III, or IV, and, within Risk Category I, assignment to
an assessment rate or rates. For all large institutions and highly
complex institutions, risk assignment includes assignment to an
assessment rate or rates.
(o) Unsecured debt. For purposes of the unsecured debt adjustment
as set forth in Sec. 327.9(d)(6), 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)(6), 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) of this section, 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)(6), 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)(6), long-term unsecured debt
shall be unsecured debt with at least one year remaining until
maturity.
* * * * *
(t) Processing bank and trust company. A processing bank and trust
company is an institution whose last 3 years' non-lending interest
income plus fiduciary revenues plus investment banking fees exceed 50
percent of total revenues (and its last 3 years' fiduciary revenues are
non-zero).
(u) Parent company. A parent company 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.
(v) Credit Card Bank. A credit card bank is a bank for which credit
card plus securitized receivables exceed 50 percent of assets plus
securitized receivables.
4. Revise Sec. 327.9 to read as follows:
Sec. 327.9 Assessment risk categories and pricing methods.
(a) Risk Categories. Each small insured depository institution and
each insured branch of a foreign bank 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. Institutions in Supervisory Group A that are
Well Capitalized;
(2) Risk Category II. Institutions in Supervisory Group A that are
Adequately Capitalized, and institutions in Supervisory Group B that
are either Well Capitalized or Adequately Capitalized;
(3) Risk Category III. Institutions in Supervisory Groups A and B
that are Undercapitalized, and institutions in Supervisory Group C that
are Well Capitalized or Adequately Capitalized; and
(4) Risk Category IV. Institutions in Supervisory Group C that are
Undercapitalized.
(b) Capital evaluations. Each small institution and each insured
branch of a foreign bank 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
[[Page 23534]]
(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 small institution and each
insured branch of a foreign bank 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 Assessment Rates for Insured Depository
Institutions. A small insured depository institution in Risk Category I
shall have its initial base assessment rate determined using the
financial ratios method set forth in paragraph (d)(1) of this section.
An insured branch of a foreign bank in Risk Category I shall have its
assessment rate determined using the weighted average ROCA component
rating method set forth in paragraph (d)(2) of this section. A large
insured depository institution shall have its initial base assessment
rate determined using the large institution method set forth in
paragraph (d)(3) of this section. A highly complex insured depository
institution shall have its initial base assessment rate determined
using the highly complex institution method set forth at paragraph
(d)(4) of this section.
(1) Financial ratios method. Under the financial ratios method for
small 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)(6) and (7) of this
section, as appropriate (resulting in the institution's total base
assessment rate, which in no case can be lower than 50 percent of the
institution's initial 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 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 9.861. 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
[[Page 23535]]
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)(6) and (7) 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)(6), (7) and (8) of this section,
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)(6) and (7) 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)(6), (7) and (8) of this section, 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)(6) and (7) 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)(6) and (7) of this section, as appropriate.
(2) 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.
(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 1.873 (which shall be a uniform amount for all insured
branches of foreign banks). The resulting sum--the initial base
assessment rate--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, the brokered deposit adjustment, or the
adjustment in paragraph (d)(5) of this section.
(iv) Implementation of changes between Risk Categories for insured
branches of foreign banks. If, during a quarter, a ROCA rating change
occurs that results in 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 using the weighted average ROCA
component rating. For the portion of the quarter that the institution
was not in Risk Category I, the institution's initial base assessment
rate shall be determined under the assessment schedule for the
appropriate Risk Category. If, during a quarter, a ROCA rating change
occurs that results in 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 as provided using the
weighted average ROCA component rating. For the portion of the quarter
that the institution was not in Risk Category I, the institution's
initial base assessment rate shall be determined under the assessment
schedule for the appropriate Risk Category.
(v) Implementation of changes within Risk Category I for insured
branches of foreign banks. 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 paragraph
(d)(2) of this section.
(3) Assessment scorecard for large institutions (other than highly
complex institutions). All large institutions other than highly complex
institutions shall have their quarterly assessments determined using
the scorecard for large institutions.
Scorecard for Large Institutions
------------------------------------------------------------------------
Components Scorecard measures Score
------------------------------------------------------------------------
CAMELS........................... Weighted Average CAMELS. 25-100
------------------------------------------------------------------------
Ability to Withstand Asset- Tier 1 Common Capital 0-100
Related Stress. Ratio (Tier 1 Common
Capital/Total Average
Assets less Disallowed
Intangibles).
--------------------------------------
Concentration Measure... 0-100
Higher Risk
Concentrations; or
Growth-Adjusted
Portfolio
Concentrations.
--------------------------------------
Core Earnings/Average 0-100
Total Assets.
--------------------------------------
Credit Quality Measure.. 0-100
Criticized and
Classified Items/Tier 1
Capital and Reserves;
or
[[Page 23536]]
Underperforming Assets/
Tier 1 Capital and
Reserves.
--------------------------------------
Subtotal................ 0-100
--------------------------------------
Outlier Add-ons
--------------------------------------
Criticized and 30
Classified Items/Tier 1
Capital and Reserves;
or.
--------------------------------------
Underperforming Assets/
Tier 1 Capital and
Reserves
Higher Risk 30
Concentrations.
--------------------------------------
Total ability to 0-160
withstand asset-related
stress score.
------------------------------------------------------------------------
Ability to Withstand Funding- Core Deposits/Total 0-100
Related Stress. Liabilities.
--------------------------------------
Unfunded Commitments/ 0-100
Total Assets.
--------------------------------------
Liquid Assets/Short-Term 0-100
Liabilities (liquidity
coverage ratio).
------------------------------------------------------------------------
Total ability to 0-100
withstand funding-
related stress score.
------------------------------------------------------------------------
Total Performance Score. 0-100
------------------------------------------------------------------------
Potential Loss Severity.......... Potential Losses/Total 0-100
Domestic Deposits (loss
severity measure).
--------------------------------------
Secured Liabilities/ 0-100
Total Domestic Deposits.
------------------------------------------------------------------------
Total loss severity score.... ........................ 0-100
------------------------------------------------------------------------
Note: The large institution scorecard produces two scores: Performance
and loss severity.
(i) Performance score. The performance score for large institutions
is the weighted average of three inputs: Weighted average CAMELS rating
(30%); ability to withstand asset-related stress measures (50%); and
ability to withstand funding-related stress measures (20%).
(A) Weighted Average CAMELS score. To derive the weighted average
CAMELS score, a weighted average of an institution's CAMELS component
ratings is calculated using the following weights:
------------------------------------------------------------------------
Weight
CAMELS component (percent)
------------------------------------------------------------------------
C.......................................................... 25
A.......................................................... 20
M.......................................................... 25
E.......................................................... 10
L.......................................................... 10
S.......................................................... 10
------------------------------------------------------------------------
A weighted average CAMELS rating is converted to a score that
ranges from 25 to 100. A weighted average rating of 1 equals a score of
25 and a weighted average of 3.5 or greater equals a score of 100.
Weighted average CAMELS ratings between 1 and 3.5 are assigned a score
between 25 and 100 according to the following equation:
S = 25 + [(20/3)*(C\2\ - 1)],
Where:
S = the weighted average CAMELS score and
C = the weighted average CAMELS rating.
(B) Ability to Withstand Asset-Related Stress. The ability to
withstand asset-related stress component contains four measures: Tier 1
common ratio; Concentration measure (the higher of the higher-risk
concentrations measure or growth-adjusted portfolio concentrations
measures); Core earnings to average assets; and Credit quality measure
(the higher of the criticized and classified assets to Tier 1 capital
and reserves or underperforming assets to Tier 1 capital and reserves).
Appendices B and C define these measures in detail and give the source
of the data used to determine them.
The concentration measure score is the higher of the scores of the
two measures that make up the concentration measure score (higher risk
concentrations or growth adjusted portfolio concentrations). The credit
quality score is the higher of the criticized and classified items
ratio score or the underperforming assets ratio score. Each asset
related stress measure is assigned the following cutoff values and
weight to derive a score for an institution's ability to withstand
asset-related stress:
Cutoff Values and Weights for Ability To Withstand Asset-Related Stress Measures
----------------------------------------------------------------------------------------------------------------
Cutoff values
Scorecard measures -------------------------------- Weight
Minimum Maximum (percent)
----------------------------------------------------------------------------------------------------------------
Tier 1 Common Capital Ratio..................................... 5.8 12.9 15
Concentration Measure:.......................................... .............. .............. 35
Higher Risk Concentrations; or.............................. 0.0 3.2 ..............
Growth-Adjusted Portfolio Concentrations.................... 7.6 154.7 ..............
Core Earnings/Average Total Assets.............................. 0.0 2.3 15
Credit Quality Measure:......................................... .............. .............. 35
Criticized and Classified Items/Tier 1 Capital and Reserves; 6.5 100.0 ..............
or.........................................................
[[Page 23537]]
Underperforming Assets/Tier 1 Capital and Reserves.......... 2.3 35.1 ..............
----------------------------------------------------------------------------------------------------------------
For each of the risk measures within the ability to withstand
asset-related stress portion of the scorecard, a value reflecting lower
risk than the cutoff value that results in a score of 0 will also
receive a score of 0, where 0 equals the lowest risk for that measure.
A value reflecting higher risk than the cutoff value that results in a
score of 100 will also receive a score of 100, where 100 equals the
highest risk for that measure. A risk measure value between the minimum
and maximum cutoff values is converted linearly to a score between 0
and 100. For the Concentration Measure and Credit Quality Measures, a
lower ratio implies lower risk and a higher ratio implies higher risk.
For these measures, a value between the minimum and maximum cutoff
values will be converted linearly to a score between 0 and 100,
according to the following formula:
S = (V - Min)*100/(Max - Min),
Where S is score (rounded to three decimal points), V is the value
of the measure, Min is the minimum cutoff value and Max is the
maximum cutoff value.
For the Tier 1 Common Capital Ratio and Core Earnings to Average
Total Assets Ratio, a lower value represents higher risk and a higher
value represents lower risk. For these measures, a value between the
minimum and maximum cutoff values is converted linearly to a score
between 0 and 100, according to the following formula:
S = (Max - V)*100/(Max - Min),
Where S is score (rounded to three decimal points), V is the value
of the measure, Min is the minimum cutoff value and Max is the
maximum cutoff value.
Each score is multiplied by a respective weight and the resulting
weighted score for each measure is summed to arrive at an ability to
withstand asset-related stress score, which ranges from 0 to 100.
For extreme values of certain measures reflecting particularly high
risk, this score can increase through an outlier add-on. If an
institution's ratio of criticized and classified items to Tier 1
capital and reserves exceeds 100 percent or its ratio of
underperforming assets to Tier 1 capital and reserves exceeds 50.2
percent, the ability to withstand asset-related stress component score
is increased by 30 points. Additionally, if the higher risk
concentration measure exceeds 4.8, the ability to withstand asset-
related stress component score is increased by 30 points. These
increases (outlier add-ons) are determined separately and can increase
the ability to withstand asset-related score by up to 60 points; thus,
the ability to withstand asset-related component score can be as high
as 160 points.
(C) Ability to Withstand Funding-Related Stress. The ability to
withstand funding-related stress component contains three risk
measures: A core deposits to liabilities ratio, an unfunded commitments
to total assets ratio, and a liquidity coverage ratio. Appendix B
describes these ratios in detail and gives the source of the data used
to determine them. The ability to withstand funding-related stress
component score is the weighted average of the three measure scores.
Each measure is assigned the following cutoff values and weights to
derive a score for an institution's ability to withstand funding-
related stress:
Cutoff Values and Weights for Ability To Withstand Funding-Related Stress Measures
----------------------------------------------------------------------------------------------------------------
Cutoff values
Scorecard measures -------------------------------- Weight
Minimum Maximum (percent)
----------------------------------------------------------------------------------------------------------------
Core Deposits/Total Liabilities................................. 3.2 79.1 40
Unfunded Commitments/Total Assets............................... 0.3 42.2 40
Liquid Assets/Short-term Liabilities (Liquidity Coverage Ratio). 5.6 170.9 20
----------------------------------------------------------------------------------------------------------------
A risk measure value reflecting lower risk than the cutoff value
that results in a score of 0, will also receive a score of 0, where 0
equals the lowest risk for that measure. A risk measure value
reflecting higher risk than the cutoff value that results in a score of
100, will also receive a score of 100, where 100 equals the highest
risk for that measure. For the Core Deposits/Liabilities measure and
the Liquidity Coverage Ratio, a lower ratio implies higher risk and a
higher ratio implies lower risk. For these measures, a value between
the minimum and maximum cutoff values will be converted linearly to a
score between 0 and 100, according to the following formula:
S = (Max - V)*100/(Max - Min)
Where S is score (rounded to three decimal points), V is the value
of the measure, Min is the minimum cutoff value and Max is the
maximum cutoff value.
For the Unfunded Commitments/Assets measure, a lower value
represents lower risk and a higher value represents higher risk. For
these measures, a value between the minimum and maximum cutoff values
is converted linearly to a score between 0 and 100, according to the
following formula:
S = (V - Min)*100/(Max - Min)
Where S is score (rounded to three decimal points), V is the value
of the measure, Min is the minimum cutoff value and Max is the
maximum cutoff value.
(D) Calculation of Performance Score. The weighted average CAMELS
score, the ability to withstand asset-related stress score, and the
ability to withstand funding-related stress score are multiplied by
their weights and the results are summed to arrive at the performance
score. The performance score cannot exceed 100. The performance score
is subject to adjustment, up or down, by a maximum of 15 points, as set
forth in section (d)(5). The resulting score cannot be less than 0 or
more than 100.
(ii) Loss severity score. The loss severity score is based on two
measures: Loss severity measure and secured liabilities to total
domestic deposits ratio. Appendices B and D describe
[[Page 23538]]
these measures in detail. The loss severity score is the weighted
average of these scores. Each measure is assigned the following cutoff
values and weight to derive a score for an institution's loss severity
score:
Cutoff Values and Weights for Loss Severity Score Measures
----------------------------------------------------------------------------------------------------------------
Cutoff values
Scorecard measures -------------------------------- Weight
Minimum Maximum (percent)
----------------------------------------------------------------------------------------------------------------
Potential Losses/Total Domestic Deposits (loss severity measure) 0.0 30.1 50
Secured Liabilities/Total Domestic Deposits..................... 0.0 75.7 50
----------------------------------------------------------------------------------------------------------------
A risk measure value reflecting lower risk than the minimum cutoff
value results in a score of 0, where 0 equals the lowest risk for that
measure. A risk measure value reflecting higher risk than the maximum
cutoff value results in a score of 100, where 100 equals the highest
risk for that measure. A risk measure value between the minimum and
maximum cutoff values is converted linearly to a score between 0 and
100, according to the following formula:
S = (V - Min)*100/(Max - Min)
Where S is score (rounded to three decimal points), V is the value
of the measure, Min is the minimum cutoff value and Max is the
maximum cutoff value.
The loss severity score is subject to adjustment, up or down, by a
maximum of 15 points, as set forth in section (d)(5). The resulting
score cannot be less than 0 or more than 100.
(iii) Initial base assessment rate. The performance and loss
severity scores, with any adjustments under paragraph (d)(5) of this
section, are converted to an initial base assessment rate. The loss
severity score is converted into a loss severity measure that ranges
from 0.8 (score of 5 or lower) and 1.2 (score of 85 or higher). Scores
that fall at or below the minimum cutoff of 5 receive a loss severity
measure of 0.8 and scores that falls at or above the maximum cutoff of
85 receive a loss severity score of 1.2. The following linear
interpolation converts loss severity scores between the cutoffs into a
loss severity measure: (Loss Severity Measure = 0.8 + [(Loss Severity
Score - 5) x 0.005]. The performance score is multiplied by the loss
severity measure to produce a total score (total score = performance
score * loss severity measure). The total score cannot exceed 100. A
large institution with a total score of 30 or lower pays the minimum
initial base assessment rate and an institution with a total score of
90 or greater pays the maximum initial base assessment rate. For total
scores between 30 and 90, initial base assessment rates rise at an
increasing rate as the total score increases, calculated according to
the following formula:
[GRAPHIC] [TIFF OMITTED] TP03MY10.011
Where Rate is the initial base assessment rate and Minimum Rate is
the minimum initial base assessment rate then in effect. Initial
base assessment rates are subject to adjustment pursuant to sections
(d)(6), (d)(7), and (d)(8), resulting in the institution's total
base assessment rate, which in no case can be lower than 50 percent
of the institution's initial base assessment rate.
(4) Assessment scorecard for highly complex institutions. All
highly complex institutions shall have their quarterly assessments
determined using the scorecard for highly complex institutions.
Scorecard for Highly Complex Institutions
------------------------------------------------------------------------
Components Scorecard measures Score
------------------------------------------------------------------------
CAMELS........................... Weighted Average CAMELS. 25-100
------------------------------------------------------------------------
Market Indicator................. Senior Bond Spread...... 0-100
--------------------------------------
Outlier Add-ons
------------------------------------------------------------------------
Parent Company Tangible 30
Common Equity (TCE)
Ratio.
--------------------------------------
Total Market Indicator 0-130
score.
------------------------------------------------------------------------
Ability to Withstand Asset- Tier 1 Common Capital 0-100
Related Stress. Ratio (Tier 1 Common
Capital/Total Average
Assets less Disallowed
Intangibles).
--------------------------------------
Concentration Measure... 0-100
Higher Risk
Concentrations; or
Growth-Adjusted
Portfolio
Concentrations.
-----------------------------------
Core Earnings/Average 0-100
Total Assets.
--------------------------------------
Credit Quality Measure.. 0-100
Criticized and
Classified Items/
Tier 1 Capital and
Reserves.
[[Page 23539]]
Underperforming
Assets/Tier 1
Capital and Reserves.
-----------------------------------
10-day 99% VaR/Tier 1 0-100
Capital.
--------------------------------------
Subtotal................ 0-100
--------------------------------------
Outlier Add-ons
--------------------------------------
Criticized and 30
Classified Items/Tier 1
Capital and Reserves;
or
Underperforming Assets/
Tier 1 Capital and
Reserves
--------------------------------------
Higher Risk 30
Concentrations Measure.
--------------------------------------
Total ability to 0-160
withstand asset-related
stress score.
------------------------------------------------------------------------
Ability to Withstand Funding- Core Deposits/Total 0-100
Related Stress. Liabilities.
--------------------------------------
Unfunded Commitments/ 0-100
Total Assets.
--------------------------------------
Liquid Assets/Short-term 0-100
Liabilities (liquidity
coverage ratio).
--------------------------------------
Short-term Funding/Total 0-100
Assets.
--------------------------------------
Subtotal................ 0-100
--------------------------------------
Outlier Add-ons
--------------------------------------
Short-term funding/Total 30
Assets.
------------------------------------------------------------------------
Total ability to 0-130
withstand funding-
related stress score.
------------------------------------------------------------------------
Total Performance Score. 0-100
------------------------------------------------------------------------
Potential Loss Severity.......... Potential Losses/Total 0-100
Domestic Deposits (loss
severity measure).
--------------------------------------
Secured Liabilities/ 0-100
Total Domestic Deposits.
------------------------------------------------------------------------
Total loss severity 0-100
score.
------------------------------------------------------------------------
The scorecard for highly complex institutions contains the
performance components and the loss severity components of the large
bank scorecard and employs the same methodology. The assessment process
set forth in section (d)(3) for the large bank scorecard applies to
highly complex institutions, modified as follows. The scorecard for
highly-complex institutions contains an additional component--market
indicator--in the performance score; an additional component--10-day 99
percent Value at Risk (VaR)/Tier 1 capital--in the ability to withstand
asset-related stress; and an additional component--short-term funding
to total assets ratio--in the ability to withstand funding-related
stress.
(i) Performance score for highly complex institutions. The
performance score for highly complex institutions is the weighted
average of four inputs: Weighted average CAMELS rating (20%); market
indicator score (10%); ability to withstand asset-related stress score
(50%); and ability to withstand funding-related stress score (20%). To
calculate the performance score for highly complex institutions, the
weighted average CAMELS score, the market indicator score, the ability
to withstand asset-related stress score, and ability to withstand
funding-related stress score are multiplied by their weights and the
results are summed to arrive at the performance score. The resulting
score cannot exceed 100.
(A) Market indicator. The market indicator component contains one
component--the senior bond spread score, and one outlier add-on--the
Parent Tangible Common Equity (TCE) ratio. The senior bond spread is
converted to a score according to the linear interpolation method used
for the large bank scorecard. The minimum and maximum cutoff values for
the market indicator measure are:
Cutoff Values and Weights for Market Indicator Measure
----------------------------------------------------------------------------------------------------------------
Cutoff values
Scorecard measures -------------------------------- Weight
Minimum Maximum (percent)
----------------------------------------------------------------------------------------------------------------
Senior Bond Spread.............................................. 0.6 3.8 100
----------------------------------------------------------------------------------------------------------------
[[Page 23540]]
A risk measure value reflecting lower risk than the minimum cutoff
value results in a score of 0, where 0 equals the lowest risk for that
measure. A risk measure value reflecting higher risk than the maximum
cutoff value results in a score of 100, where 100 equals the highest
risk for that measure. A value between the minimum and maximum cutoff
values will be converted linearly to a score between 0 and 100,
according to the following formula:
S = (V - Min)*100/(Max - Min)
The market indicator component score can be adjusted by up to 30
points if the outlier add-on--institution's parent company's TCE
ratio--falls below 4 percent. Including the outlier add-on, the market
indicator component score can be as high as 130 points.
(B) Ability to withstand asset-related stress. The scorecard for
highly complex institutions adds one additional factor to the ability
to withstand asset-related stress component--the 10-day 99 percent
Value at Risk (VaR)/Tier 1 capital. The cutoff values and weights for
ability to withstand asset-related stress measures are set forth below.
Cutoff Values and Weights for Ability To Withstand Asset-Related Stress Measures
----------------------------------------------------------------------------------------------------------------
Cutoff values
Scorecard measures -------------------------------- Weight
Minimum Maximum (percent)
----------------------------------------------------------------------------------------------------------------
Tier 1 Common Ratio............................................. 5.8 12.9 10
Concentration Measure........................................... .............. .............. 35
Higher Risk Concentrations; or.............................. 0.0 3.2 ..............
Growth-Adjusted Portfolio Concentrations.................... 7.6 154.7 ..............
Core Earnings/Average Total Assets.............................. 0.0 2.3 10
Credit Quality Measure.......................................... .............. .............. 35
Criticized and Classified Items/Tier 1 Capital and Reserves; 6.5 100.0 ..............
or.........................................................
Underperforming Assets/Tier 1 Capital and Reserves.......... 2.3 35.1 ..............
10-day 99% VaR/Tier 1 Capital................................... 0.1 0.5 10
----------------------------------------------------------------------------------------------------------------
Appendix B describes these measures in detail and gives the source
of the data used to calculate the measures.
(C) Ability to withstand funding related stress. The scorecard for
highly complex institutions adds one additional factor to the ability
to withstand funding-related stress component--the short-term funding
to total assets ratio. The cutoff values and weights for ability to
withstand funding-related stress measures for highly complex
institutions are set forth below.
Cutoff Values and Weights for Ability To Withstand Funding-Related Stress Measures
----------------------------------------------------------------------------------------------------------------
Cutoff values
Scorecard measures -------------------------------- Weight
Minimum Maximum (percent)
----------------------------------------------------------------------------------------------------------------
Core Deposits/Total Liabilities................................. 3.2 79.1 30
Unfunded Commitments/Total Assets............................... 0.3 42.2 30
Liquid Assets/Short-term Liabilities (liquidity coverage ratio). 5.6 170.9 20
Short-term Funding/Total Assets................................. 0.0 19.1 20
----------------------------------------------------------------------------------------------------------------
Appendix B describes these measures in detail and gives the source
of the data used to calculate the measures.
The scorecard for highly complex institutions adds an additional
outlier add-on to the scorecard for large institutions. The ability to
withstand funding-related stress component score for highly complex
institutions is adjusted by 30 points if the ratio of short term
funding to total assets exceeds 26.9 percent. The maximum ability to
withstand funding-related stress component score for highly complex
institutions, including the outlier add-on, is 130 points.
(ii) Loss severity score for highly complex institutions. The loss
severity score for highly complex institutions is calculated as
provided for the loss severity score for large institutions in section
(d)(3)(ii).
(iii) The performance score and the loss severity score for highly
complex institutions can be adjusted, up or down, by maximum of 15
points each, as set forth in section (d)(5), resulting in the
institution's initial base assessment rate.
(iv) The initial base assessment rate for highly complex
institutions is calculated from the total score in the same manner as
for large institutions as set forth in section (d)(3). Initial base
assessment rates are subject to adjustment pursuant to sections (d)(6),
(d)(7), and (d)(8), resulting in the institution's total base
assessment rate, which in no case can be lower than 50 percent of the
institution's initial base assessment rate.
(5) Adjustment to performance score and/or loss severity score for
large institutions and highly complex institutions. The performance
score and the loss severity score for large institutions and highly
complex institutions are subject to adjustment under paragraph (d)(5)
of this section, up or down, by a maximum of 15 points each, based upon
significant risk factors that are not adequately captured in the
appropriate scorecard. In making such adjustments, the FDIC may
consider such information as financial performance and condition
information and other market or supervisory information. Appendix E
lists some, but not all, criteria that the FDIC may consider in
determining whether to make such adjustments.
(i) Prior notice of adjustments--(A) Prior notice of upward
adjustment. Prior to making any upward adjustment to an institution's
performance score and/or loss severity score 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
[[Page 23541]]
the adjustment(s) and when the adjustment(s) will take effect.
(B) Prior notice of downward adjustment. Prior to making any
downward adjustment to an institution's performance score and/or loss
severity score because of considerations of additional risk
information, the FDIC will formally notify the institution's primary
Federal regulator and provide an opportunity to respond.
(ii) 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 adjustment to an institution's performance score and/or loss
severity score is warranted, taking into account any revisions to
scorecard measures, 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.
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.
(iii) 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 adjustment to
performance score and/or loss severity score is warranted, taking into
account any revisions to scorecard measures, 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 performance
score and/or loss severity score 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.
(iv) Adjustment without notice. Notwithstanding the notice
provisions set forth above, the FDIC may change an institution's
performance score and/or loss severity score without advance notice
under this paragraph, if the institution's supervisory ratings or the
scorecard measures deteriorate.
(6) Unsecured debt adjustment to initial base assessment rate for
all institutions. All small, large, and highly complex institutions,
except new small institutions as provided under paragraph (d)(10)(i) 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 (d)(6)(ii) of this
section, specified amounts of Tier 1 capital) to domestic deposits. Any
unsecured debt adjustment shall be made after any adjustment under
paragraph (d)(5) of this section. Insured branches of foreign banks are
not subject to the unsecured debt adjustment as provided in paragraph
(d)(2)(iii).
(i) Large institutions and highly complex institutions. The
unsecured debt adjustment for large institutions and highly complex
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 5 basis points. No unsecured debt adjustment for any
institution shall result in a total base assessment rate that is less
than 50 percent of the institution's initial base assessment rate.
(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.
(7) Secured liability adjustment for all institutions. All
institutions, except insured branches of foreign banks as provided
under paragraph (d)(2)(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 adjustment under paragraph (d)(5) or (d)(6)
of this section.
(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.
(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.
(8) Brokered Deposit Adjustment. All small institutions in Risk
Categories II, III, and IV, all large institutions, and all highly
complex institutions 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), (d)(6) or (d)(7) of
this section. The brokered deposit adjustment includes all brokered
deposits as defined in Section 29 of the Federal Deposit Insurance Act
(12 U.S.C. 1831f), and 12 CFR 337.6, including reciprocal deposits as
defined
[[Page 23542]]
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. Insured branches of foreign banks are not subject
to the brokered deposit adjustment as provided in section (d)(2)(iii).
(9) 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 assessment rate
as a large institution. The FDIC will grant such a request if it
determines that it has sufficient information to do so. 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).
(10) New and established institutions and exceptions--(i) New small
institutions. A new small 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 (d)(10)(ii) and (iii) of
this section. No new small institution in any risk category shall be
subject to the unsecured debt adjustment as determined under paragraph
(d)(6) of this section. All new small institutions in any Risk Category
shall be subject to the secured liability adjustment as determined
under paragraph (d)(7) of this section. All new small institutions in
Risk Categories II, III, and IV shall be subject to the brokered
deposit adjustment as determined under paragraph (d)(8) of this
section.
(ii) New large institutions and new highly complex institutions.
All new large institutions and all new highly complex institutions
shall be assessed under the appropriate method provided at paragraph
(d)(3) or (d)(4) of this section and subject to the adjustments
provided at paragraphs (d)(5), (d)(7), and (d)(8) of this section. No
new Highly Complex or large institutions are entitled to adjustment
under paragraph (d)(6) of this section. If a large or highly complex
institution has not yet received CAMELS ratings, it will be given a
weighted CAMELS rating of 2 for assessment purposes until actual CAMELS
ratings are assigned.
(iii) 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.
(iv) Rate applicable to institutions subject to subsidiary or
credit union exception. If a small 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. If a large or highly complex
institution is considered established under Sec. 327.8(m)(4) and (5),
but does not have CAMELS component ratings, it will be given a weighted
CAMELS rating of 2 for assessment purposes until actual CAMELS ratings
are assigned.
(v) 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).
(11) 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)(5), (6),
(7) or (8) of this section.
5. Revise Sec. 327.10 to read as follows:
Sec. 327.10 Assessment rate schedules.
(a) Initial and Total Base Assessment Rate Schedule for Small
Institutions and Insured Branches of Foreign Banks. The initial and
total base assessment rate for a small insured depository institution
or an insured branch of a foreign bank shall be the rate prescribed in
the following schedule:
----------------------------------------------------------------------------------------------------------------
Risk category
Risk category I Risk category II III Risk category IV
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate............ 10-14 22 34 50
Unsecured debt adjustment............... -5-0 -5-0 -5-0 -5-0
Secured liability adjustment............ 0-7 0-11 0-17 0-25
Brokered deposit adjustment............. ................ 0-10 0-10 0-10
-----------------------------------------------------------------------
TOTAL BASE ASSESSMENT RATE.......... 5-21 17-43 29-61 45-85
----------------------------------------------------------------------------------------------------------------
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. All rates shown will increase 3 basis points on January 1, 2011,
pursuant to the FDIC Restoration Plan adopted on September 29, 2009 (74 FR 51062 (Oct. 2, 2009)).
[[Page 23543]]
(1) Risk Category I Initial Base Assessment Rate Schedule. The
annual initial base assessment rates for all institutions in Risk
Category I shall range from 10 to 14 basis points.
(2) Risk Category II, III, and IV Initial Base Assessment Rate
Schedule. The annual initial base assessment rates for Risk Categories
II, III, and IV shall be 22, 34, and 50 basis points, respectively.
(3) Risk Category I Total Base Assessment Rate Schedule after
Adjustments. The annual total base assessment rates after adjustments
for all institutions in Risk Category I shall range from 5 to 21 basis
points.
(4) Risk Category II Total Base Assessment Rate Schedule after
Adjustments. The annual total base assessment rates after adjustments
for all institutions in Risk Category II shall range from 17 to 43
basis points.
(5) Risk Category III Total Base Assessment Rate Schedule after
Adjustments. The annual total base assessment rates after adjustments
for all institutions in Risk Category III shall range from 29 to 61
basis points.
(6) Risk Category IV Total Base Assessment Rate Schedule after
Adjustments. The annual total base assessment rates after adjustments
for all institutions in Risk Category IV shall range from 45 to 85
basis points.
(7) 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) Initial and Total Base Assessment Rate Schedule for Large
Institutions and Highly Complex Institutions. The annual initial base
assessment rate and total base assessment rate for a large insured
depository institution or a highly complex insured depository
institution shall be the rate prescribed in the following schedule:
------------------------------------------------------------------------
Large
institutions
------------------------------------------------------------------------
Initial base assessment rate.......................... 10-50
Unsecured debt adjustment............................. -5-0
Secured liability adjustment.......................... 0-25
Brokered deposit adjustment........................... 0-10
-----------------
TOTAL BASE ASSESSMENT RATE........................ 5-85
------------------------------------------------------------------------
All amounts are in basis points annually. Total base rates that are not
the minimum or maximum rate will vary between these rates. All rates
shown will increase 3 basis points on January 1, 2011, pursuant to the
FDIC Restoration Plan adopted on September 29, 2009 (74 FR 51062 (Oct.
2, 2009)).
(1) Initial Base Assessment Rate Schedule for Large Institutions
and Highly Complex Institutions. The annual initial base assessment
rates for all large institutions and highly complex institutions shall
range from 10 to 50 basis points.
(2) Total Base Assessment Rate Schedule for Large Institutions and
Highly Complex Institutions. The annual total base assessment rates for
all large institutions and highly complex institutions shall range from
5 to 85 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 for all insured
depository institutions up to a maximum increase of 3 basis points or a
fraction thereof or a maximum decrease of 3 basis points or a fraction
thereof (after aggregating increases and decreases), as the Board deems
necessary. Any such adjustment shall apply uniformly to each rate in
the total base assessment rate schedule. In no case may such Board rate
adjustments result in a total base assessment rate that is
mathematically less than zero or in a total base assessment rate
schedule that, at any time, is more than 3 basis points above or below
the total base assessment schedule for the Deposit Insurance Fund, nor
may any one such Board adjustment constitute an increase or decrease of
more than 3 basis points.
(2) Amount of revenue. In setting assessment rates, the Board shall
take into consideration the following:
(i) Estimated operating expenses of the Deposit Insurance Fund;
(ii) Case resolution expenditures and income of the Deposit
Insurance Fund;
(iii) The projected effects of assessments on the capital and
earnings of the institutions paying assessments to the Deposit
Insurance Fund;
(iv) The risk factors and other factors taken into account pursuant
to 12 U.S.C. 1817(b)(1); and
(v) Any other factors the Board may deem appropriate.
(3) Adjustment procedure. Any adjustment adopted by the Board
pursuant to this paragraph will be adopted by rulemaking, except that
the Corporation may set assessment rates as necessary to manage the
reserve ratio, within set parameters not exceeding cumulatively 3 basis
points, pursuant to paragraph (c)(1) of this section, without further
rulemaking.
(4) Announcement. The Board shall announce the assessment schedules
and the amount and basis for any adjustment thereto not later than 30
days before the quarterly certified statement invoice date specified in
Sec. 327.3(b) of this part for the first assessment period for which
the adjustment shall be effective. Once set, rates will remain in
effect until changed by the Board.
6. Revise 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; and
The maximum initial base assessment rate for Risk
Category I, which is four basis points higher than the minimum rate.
II. The Statistical Model
The Statistical Model is defined in equations 1 and 3 below:
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
[[Page 23544]]
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] TP03MY10.012
Where
[GRAPHIC] [TIFF OMITTED] TP03MY10.013
subject to
0 <= Ai,r <= 1 and Bi,r >= 0.
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/ Total loans and lease financing
Gross 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 Sum of total loans and lease financing
Assets (%). 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 Total charged-off loans and lease
Assets (%). 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 Brokered deposits divided by domestic
ratio (%). 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, The weighted sum of the ``C,'' ``A,''
E and L Component Ratings. ``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 for the ``E'' and ``L''
components. (For the regression, the
``S'' component is omitted.)
------------------------------------------------------------------------
7. Revise Appendix B to Subpart A of Part 327 to read as
follows:
Appendix B to Subpart A
Description of Scorecard Measures
(1) Scorecard Measures Applied to All Large Banks
------------------------------------------------------------------------
Quantitative measures (Data
Source) Description
------------------------------------------------------------------------
Tier 1 Common Capital Ratio (Call/ The ratio is calculated as Tier 1
TFR Reports). capital less perpetual preferred
stock and related surplus divided
by average total assets less
disallowed intangibles.
Concentration Measure............. Concentration score takes a higher
score of the following two:
(1) Higher-Risk Concentrations The measure is a sum of following
Measure (LIDI). ratios squared: construction and
development loans (C&D), leveraged
loans, nontraditional mortgages,
subprime consumer loans, and total
exposure (outstanding loan balances
and unfunded commitments) to top 20
single-name borrowers, all as a
ratio to tier 1 capital and
reserves.
[[Page 23545]]
(2) Growth-Adjusted Portfolio The measure is calculated in
Concentrations (Call/TFR Reports). following steps:
(1) Concentration levels (as a ratio
to total risk-based capital) are
calculated for each broad portfolio
category (C&D, other commercial
real estate loans, residential
mortgage (including mortgage-backed
securities), commercial and
industrial loans, credit card and
other consumer loans).
(2) Three-year merger-adjusted
portfolio growth rates are then
scaled to a growth factor of 1 and
1.5. If three years of data are not
available, a growth factor of 1
would be assigned.
(3) Risk weights are assigned to
each category based on relative
SCAP loss rates.
(4) Concentration levels are
multiplied by risk weights and
growth factor and the resulting
value for each portfolio is squared
and summed.
Both concentration measures are
described in detail in Appendix C.
Core Earnings/Average Total Assets Core earnings are defined as
(Call/TFR Reports). quarterly net income less
extraordinary items and realized
gains and losses on available-for-
sale (AFS) and held-to-maturity
(HTM) securities, adjusted for
mergers. The ratio takes a four-
quarter sum of merger-adjusted core
earnings and divides it by a five-
quarter average of total assets. If
four quarters of data on core
earnings are not available, data
for quarters that are available
would be added and annualized. If
five quarters of data on total
assets are not available, data for
quarters that are available would
be averaged.
Credit Quality Measure:........... Asset quality score takes a higher
score of the following two:
a. Criticized and Classified Items/ The sum of criticized and classified
Tier 1 Capital and Reserves items divided by a sum of Tier 1
(LIDI). capital and reserves. Criticized
and classified items include items
with an internal grade of ``Special
Mention'' or worse and include
retail items under Uniform Retail
Classification Guidelines,
securities that are rated sub-
investment grade, and marked-to-
market counterparty positions with
an internal grade of ``Special
Mention'' or worse, or an external
rating of sub-investment grade less
credit valuation allowances (CVA).
Criticized and classified items
exclude loans and securities in
trading books, and the maximum
amount recoverable from the U.S.
government, its agencies, or
government-sponsored agencies,
under guarantee or insurance
provisions.
b. Underperforming Assets/Tier 1 Sum of loans past due 30-89 days,
Capital and Reserves (Call/TFR loans past due 90+ days, nonaccrual
Reports). loans, restructured loans,
restructured 1-4 family loans, and
ORE (excluding the maximum amount
recoverable from the U.S.
government, its agencies, or
government-sponsored agencies,
under guarantee or insurance
provisions) divided by a sum of
Tier 1 capital and reserves.
Core Deposits/Total Liabilities The core deposit ratio is a sum of
(Call/TFR Reports). demand deposits, NOW accounts,
MMDA, other savings deposits, CDs
under $100M less insured brokered
deposits under $100,000 divided by
total liabilities.
Unfunded Commitments/Total Assets Unfunded commitments are unused
(Call/TFR Reports). portions of commitments to make or
purchase extensions of credit in
the form of loans or participations
in loans, lease financing
receivables, or similar
transactions and include unused
commitments for home equity line of
credit, commercial real estate,
construction and land development
loans either secured or not secured
by real estate, securities
underwriting and others, excluding
unused commitments for credit card
lines. Total amount of unfunded
commitments is divided by total
assets.
Liquid Assets/Short-term Liquid assets are defined as the sum
Liabilities (Liquidity Coverage of cash and balances due from
Ratio) (Call/TFR Reports). depository institutions, Federal
funds sold and securities purchased
under agreements to resell, and
agency securities (securities
issued by the U.S. Treasury, U.S.
government agencies, and US
government-sponsored enterprises)
less securities sold under
agreements to repurchase or agency
securities, whichever is smaller.
``Short-term'' liabilities are
defined as a sum of large CDs
(larger than $100,000) with a
remaining maturity of one year or
less, fed funds purchased and
repos, unsecured borrowings with a
remaining maturity of one year or
less, foreign deposits and unused
commitments for asset-backed
commercial paper with a remaining
maturity of one year or less.
Potential Losses/Total Domestic The loss severity ratio is a ratio
Deposits (Loss Severity Measure) of potential losses to the DIF--as
(Call/TFR Reports). calculated in the FDIC's loss
severity model--to domestic
deposits. Appendix D describes the
loss severity model in detail.
Secured Liabilities/Total Domestic The secured liability ratio is a sum
Deposits (Call/TFR Reports). of secured liabilities (FHLB
advances, securities sold under
repurchase agreements, secured
Federal funds purchased, and other
secured borrowings) divided by
domestic deposits.
------------------------------------------------------------------------
(2) Scorecard Measures Applied to Highly Complex Institutions Only
------------------------------------------------------------------------
Quantitative measures Description
------------------------------------------------------------------------
10-day 99% VaR/Tier 1 Capital The ratio is defined as 10-day
(LIDI Reports). 99%VaR based on banks' internal
model divided by Tier 1 capital.
Short-term Funding/Total Assets The short-term funding ratio is a
(Call/TFR Reports). ratio of a sum of Federal funds
purchased and repos to total
assets. If more granular maturity
data are available, we may want to
include non-deposit liabilities
with a remaining maturity of three
months or less.
Senior Bond Spread (IDC).......... Quarterly average of median weekly
spreads for senior bonds with three
to ten years remaining to maturity
issued by the parent company over
comparable-maturity Treasuries.
Parent TCE Ratio (9-Y Reports).... The parent TCE ratio is a ratio of a
sum of common stock, surplus,
undivided profits, accumulated
other comprehensive income, and
other equity capital components
less intangible assets to tangible
assets (total assets less
intangible assets).
------------------------------------------------------------------------
[[Page 23546]]
8. Revise Appendix C to Subpart A of Part 327 to read as follows:
APPENDIX C TO SUBPART A
Concentration Measures
The concentration measure score is a higher of the two
concentration scores: a higher-risk concentration measure and a
growth-adjusted portfolio concentration measure.
1. Higher-Risk Concentration Measure
The higher-risk concentration measure is the sum of the squared
value of concentrations in each of five risk areas and is calculated
as:
[GRAPHIC] [TIFF OMITTED] TP03MY10.014
Where:
H is institution i's higher-risk concentration measure and
k is a risk area.\1\ The five risk areas (k) are defined as:
---------------------------------------------------------------------------
\1\ The high-risk concentration measure is rounded to two
decimal points.
---------------------------------------------------------------------------
Construction and development loans;
Leveraged lending;
Nontraditional mortgages;
Subprime consumer loans; and
Total exposure (outstanding loan balances, unfunded
commitments and counterparty credit risk) to top 20 single-name
borrowers.
Data on higher-risk lending, other than construction and
development loans, are obtained through an examination process and
defined according to the interagency guidance for a given product. A
loan is considered to be leveraged when the obligor's post-financing
leverage as measured by debt-to-assets, debt-to-equity, cash flow-
to-total debt, or other such standards unique to particular
industries significantly exceeds industry norms for leverage.\2\
Nontraditional mortgages are mortgage products that allow borrowers
to defer payment of principal and, sometimes, interest. These
products include ``interest-only'' mortgages and ``payment option'''
adjustable-rate mortgages.\3\ Subprime loans are consumer loans that
are typically made to borrowers with weakened credit histories,
including a combination of payment delinquencies, charge-offs,
judgments, and bankruptcies who may also display reduced repayment
capacity as measured by credit scores, debt-to-income ratios, or
other criteria.\4\
---------------------------------------------------------------------------
\2\ http://www.fdic.gov/news/news/press/2001/pr0901a.html.
\3\ http://www.fdic.gov/regulations/laws/federal/2006/06noticeFINAL.html.
\4\ Generally, subprime borrowers will display a range of credit
risk characteristics that may include one or more of the following:
(1) Two or more 30-day delinquencies in the last 12 months, or one
or more 60-day delinquencies in the last 24 months; (2) judgment,
foreclosure, repossession, or charge-off in the prior 24 months; (3)
bankruptcy in the last 5 years; (4) relatively high default
probability as evidenced by, for example, a Fair Isaac and Co. risk
score (FICO) of 660 or below (depending on the product/collateral),
or other bureau or proprietary scores with an equivalent default
probability likelihood; and/or (5) debt service-to-income ratio of
50 percent or greater, or otherwise limited ability to cover family
living expenses after deducting total monthly debt-service
requirements from monthly income. http://www.fdic.gov/news/news/press/2001/pr0901a.html.
---------------------------------------------------------------------------
2. Growth-adjusted Portfolio Concentration Measure
The growth-adjusted concentration measure is the sum of the
squared values of concentrations in each of seven portfolios, each
of the squared values being first adjusted for growth and risk
weights before summing. The measure is calculated as:
[GRAPHIC] [TIFF OMITTED] TP03MY10.015
Where:
N is institution i's growth-adjusted portfolio concentration measure
\5\;
---------------------------------------------------------------------------
\5\ The growth-adjusted portfolio concentration measure is
rounded to two decimal points.
---------------------------------------------------------------------------
k is a portfolio;
g is a growth factor for institution i's portfolio k; and,
w is a risk weight for portfolio k.
The seven portfolios (k) are defined based on the Call Report
data and they are:
First-lien residential mortgages and mortgage-backed
securities;
Closed-end junior liens and home equity lines of credit
(HELOCs);
Construction and development loans;
Other commercial real estate loans;
Commercial and industrial loans;
Credit card loans; and
Other consumer loans.
The growth factor, g, is based on a three-year merger-adjusted
growth rate for a given portfolio; g ranges from 1 to 1.5 where a 20
percent growth rate equals a factor of 1 and an 80 percent growth
rate equals a factor of 1.5.6 7 For growth rates less
than 20 percent, g is 1; for growth rates greater than 80 percent, g
is 1.5. For growth rates of 20 percent to 80 percent, the growth
factor is calculated as:
---------------------------------------------------------------------------
\6\ The cut-off values of 0.2 and 0.8 correspond to about 45th
percentile and 80th percentile among the large institutions,
respectively, based on the data from 2000 to 2009.
\7\ The growth factor is rounded to two decimal points.
[GRAPHIC] [TIFF OMITTED] TP03MY10.016
Where
[GRAPHIC] [TIFF OMITTED] TP03MY10.017
V is the portfolio amount as reported on the Call Report
and t is the quarter for which the assessment is being determined.
The risk weight for each portfolio reflects relative loss rates
and is based on the mid-point of two-year cumulative indicative loss
rate ranges used in the adverse scenario for the interagency
Supervisory Capital Assessment Program (SCAP) in early
2009.8 9
---------------------------------------------------------------------------
\8\ Board of Governors of the Federal Reserve System, ``The
Supervisory Capital Assessment Program: Overview of Results,'' May
7, 2009. http://www.federalreserve.gov/newsevents/speech/bcreg20090507a1.pdf.
\9\ The risk weights are based on loss rates for each portfolio
relative to the loss rate for C&I loans, which is given a risk
weight of 1.
[[Page 23547]]
Table C.1--Two-Year Cumulative Indicative Loss Range: SCAP Adverse Scenario
----------------------------------------------------------------------------------------------------------------
Two-year cumulative loss range
Portfolio ------------------------------------------------ Risk weights
Minimum Maximum Midpoint
-------------------------------------------------------------------------------------------------
First-Lien Mortgages*........... 4.3 5.8 5.1 0.8
Second/Junior Lien Mortgages.... 12.0 16.0 14.0 2.2
Commercial and Industrial (C&I) 5.0 8.0 6.5 1.0
Loans..........................
Construction and Development 15.0 18.0 16.5 2.5
(C&D) Loans....................
Commercial Real Estate Loans, 7.6 9.4 8.5 1.3
excluding C&D**................
Credit Card Loans............... 18.0 20.0 19.0 2.9
Other Consumer Loans............ 8.0 12.0 10.0 1.5
----------------------------------------------------------------------------------------------------------------
* Assumes that 80 percent of first liens are prime and the
remaining 20 percent at Alt-A.
** Assumes that 80 percent of CRE portfolio are nonfarm non-
residential and the remaining 20 percent are multifamily. The
allocation is based on the aggregate bank data.
9. Add Appendix D to Subpart A of Part 327 to read as follows:
Appendix D to Subpart A
Description of the Loss Severity Model
The FDIC's loss severity model applies a standardized set of
assumptions to an institution's balance sheet for a given quarter to
measure possible losses to the FDIC in the event of an institution's
failure. To determine an institution's loss severity rate, the size
and composition of an institution's liabilities are adjusted to
reflect expected changes (due to uninsured deposit and other
unsecured liability runoff and growth in insured deposits) as an
institution approaches failure. Assets are then reduced to match any
reduction in liabilities.\1\ The institution's asset values are then
further reduced until the Tier 1 leverage ratio reaches 2
percent.\2\ Asset adjustments are made pro rata to asset categories
to preserve the institution's relative proportion of assets by asset
categories. Assumptions regarding asset losses at failure and the
extent of secured liabilities are then applied to the estimated
balance sheet at failure to determine whether the institution has
enough unencumbered assets to cover domestic deposits. Any projected
shortfall is divided by current domestic deposits to obtain an end-
of-period loss severity ratio, which is then averaged over the three
most recent quarters to produce the loss severity measure for the
scorecard.
---------------------------------------------------------------------------
\1\ In most cases, the model would yield reductions in
liabilities and assets prior to failure. Exceptions may occur for
institutions primarily funded through insured deposits, which the
model assumes to grow prior to failure.
\2\ Of course, in reality, runoff and capital declines occur
more or less simultaneously as an institution approaches failure.
The loss severity measure assumptions simplify this process for ease
of modeling.
---------------------------------------------------------------------------
Runoff and Capital Adjustment Assumptions
Table D.1 contains run-off assumptions.
Table D.1--Runoff Rate Assumptions
------------------------------------------------------------------------
Runoff rate*
Liability type (percent)
------------------------------------------------------------------------
Insured Deposits........................................ -32.0
Uninsured Deposits...................................... 28.6
Foreign Deposits........................................ 80.0
Fed Funds Purchased..................................... 40.0
Repurchase Agreements................................... 25.0
Trading Liabilities..................................... 50.0
Federal Home Loan Bank Borrowings <= 1 Year............. 25.0
Federal Home Loan Bank Borrowings > 1 Year.............. 0.0
Other Borrowings <= 1 Year.............................. 50.0
Other Borrowings > 1 Year............................... 0.0
Subordinated Debt and Limited Liability Preferred Stock. 15.0
Other Liabilities....................................... 0.0
------------------------------------------------------------------------
* A negative rate implies growth.
Given the resulting total liabilities after runoff, assets are
then reduced pro rata to preserve the relative amount of assets in
each of the following asset categories and to achieve a Tier 1
leverage of 2 percent:
Cash and Interest Bearing Balances;
Trading Account Assets;
Fed Funds Sold and Repurchase Agreements;
Treasury and Agency Securities;
Municipal Securities;
Other Securities;
Construction and Development Loans;
Nonresidential Real Estate Loans;
Multifamily Real Estate Loans;
1-4 Family Closed-End First Liens;
1-4 Family Closed-End Junior Liens;
Revolving Home Equity Loans; and
Agricultural Real Estate Loans.
Recovery Value of Assets at Failure
Table D.2 shows loss rates applied to each of the asset
categories as adjusted above.
Table D.2--Asset Loss Rate Assumptions
------------------------------------------------------------------------
Loss rate
Asset category (percent)
------------------------------------------------------------------------
Cash and Interest Bearing Balances...................... 0.0
Trading Account Assets.................................. 0.0
Fed Funds Sold and Repurchase Agreements................ 0.0
Treasury and Agency Securities.......................... 0.0
Municipal Securities.................................... 10.0
Other Securities........................................ 15.0
Construction and Development Loans...................... 38.2
Nonresidential Real Estate Loans........................ 17.6
Multifamily Real Estate Loans........................... 10.8
1-4 Family Closed-End First Liens....................... 19.4
1-4 Family Closed-End Junior Liens...................... 41.0
Revolving Home Equity Loans............................. 41.0
Agricultural Real Estate Loans.......................... 19.7
Agricultural Loans...................................... 11.8
Commercial and Industrial Loans......................... 21.5
Credit Card Loans....................................... 18.3
Other Consumer Loans.................................... 18.3
All Other Loans......................................... 51.0
Other Assets............................................ 75.0
------------------------------------------------------------------------
Secured Liabilities at Failure
Table D.3 shows the percentage of each liability category that
is assumed to be secured.
Table D.3--Secured Liability Assumptions
------------------------------------------------------------------------
Percentage
secured at
Liability type failure
(percent)
------------------------------------------------------------------------
Foreign Deposits........................................ 100
Repurchase Agreements................................... 100
Federal Home Loan Bank Borrowings <= 1 Year............. 100
[[Page 23548]]
Federal Home Loan Bank Borrowings > 1 Year.............. 100
Other Borrowings <= 1 Year.............................. 50
Other Borrowings > 1 Year............................... 50
------------------------------------------------------------------------
Loss Severity Ratio Calculation
The FDIC's loss given failure (LGD) is calculated as:
[GRAPHIC] [TIFF OMITTED] TP03MY10.018
An end-of-quarter loss severity ratio is LGD divided by total
domestic deposits at quarter-end and the loss severity measure for
the scorecard is an average of end-of-period loss severity ratio for
three most recent quarters.
9. Add Appendix E to Subpart A of Part 327 to read as follows:
Appendix E to Subpart A
Additional Risk Considerations for Large Institutions
------------------------------------------------------------------------
Examples of Associated Risk
Information Source Indicators or Information
------------------------------------------------------------------------
Adequacy of Capital to Withstand
Stress (Level and Trend)
Regulatory capital ratios
Capital composition
Unrealized losses on
securities
Dividend payout ratios
Internal capital growth
rates relative to asset growth
Robustness of internal
stress testing models and reserve
methodology
Adequacy and Stability of Earnings
to Withstand Stress (Level and
Trend)
Return on assets and
return on risk-adjusted assets
Concentration of revenue
sources
Earning composition
including noncash earnings e.g.,
mortgage servicing rights (MSR),
income from interest reserves)
relative to core income
Net interest margins,
funding costs and volumes, earning
asset yields and volumes
Loan loss provisions
relative to problem loans
Historical volatility of
various earnings sources
Additional Performance Indicators Ability to Withstand Credit-
Related Stress (Level and Trend)
Loan and securities
portfolio composition and volume of
higher risk lending activities or
securities
Loan performance measures
(past due, nonaccrual, classified
and criticized, and renegotiated
loans)
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
Portfolio underwriting
characteristics and trends
(including portfolio growth)
Robustness of credit
administration and credit risk
monitoring (e.g., internal loan
classification)
Off-balance sheet credit
exposure measures (unfunded loan
commitments, securitization
activities, counterparty derivatives
exposures) and hedging activities
Ability to Withstand Liquidity-
Related Stress (Level and Trend)
Composition of deposit
and non-deposit funding sources
Liquid resources relative
to short-term obligations,
undisbursed credit lines, and
contingent liabilities
Reliance on
securitization as a funding source
Level of contingent
liabilities
Robustness of contingency
or emergency funding strategies and
analyses
Ability to Withstand Interest Rate
Shocks
Maturity and repricing
information on assets and
liabilities, interest rate risk
analyses
Robustness of internal
interest rate models
Ability to Withstand Trading
Stress (Level and Trend)
Assessment of trading
desk composition and revenue
dependency (prop trading compared to
customer flow, liquid products
compared to illiquid products)
Assessment of VaR
framework, stress testing framework
and results
Appropriateness of desk
limits.
Ability to Withstand Stress to
Counterparties (Level and Trend)
Gross current exposure
(Top 5 and Total by Client Types and
Ratings) to capital
Current net exposure (Top
5 and Total by Client Types and
Ratings) to capital
Peak potential exposure
(Top 5 and Total by Client Types and
Ratings) to capital
Exposure aggregation
reporting
Margining policies,
netting enforceability and hedging
capabilities.
Market indicator of the
institution's ability to withstand
stress (Level and Trend)
[[Page 23549]]
Subordinated debt spreads
Credit default swap
spreads
Parent's equity price
volatility
Market-based measures of
default probabilities
Rating agency watch lists
Market analyst reports
Additional Loss Severity Ability to identify and
Indicators. 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).
Volumes of brokered
deposits, potentially more volatile
deposits such as Internet or money
desk or high-cost deposits.
Potential for significant
ring-fencing of foreign assets.
Volume of hard-to-value
assets (Level 3 assets)
------------------------------------------------------------------------
Note: The following Appendices will not appear in the Code of
Federal Regulations.
Appendix 1
Statistical Analysis of Measures
The risk measures included in the scorecard and the weights
assigned to those measures are generally based on the results of an
ordinary least square (OLS) model, and in some cases, a logistic
regression model. The OLS model estimates how well a set of risk
measures in 2005 through 2009 can predict the FDIC's view, based on
its experience and judgment, of the proper rank ordering of risk
(the expert judgment ranking) for large institutions as of year-end
2009.
The OLS model is specified as:
[GRAPHIC] [TIFF OMITTED] TP03MY10.019
Where:
k is a risk measure;
n is the number of risk measures; and
t is the quarter that is being assessed
The logistic regression model estimates how well the same set of
risk measures in 2005 through 2008 can predict whether a large bank
fails and it is specified as:
[GRAPHIC] [TIFF OMITTED] TP03MY10.020
Where:
Fail is whether an institution i failed on or prior to year-end 2009
or not.\1\
---------------------------------------------------------------------------
\1\ For the purpose of regression analysis, large institutions
that received significant government support or merged with another
entity with government support.
---------------------------------------------------------------------------
Selecting Risk Measures\2\
---------------------------------------------------------------------------
\2\ The FDIC has conducted a number of robustness tests with
alternative ratios for capital and earnings, a log transformation of
several variables--the liquidity coverage ratio, the brokered
deposit ratio and the growth-adjusted concentration ratio--and
alternative dependent variables--CAMELS and the FDIC's internal risk
ratings. These robustness tests show that the same set of variables
are generally statistically significant in most models; that
converting to a score from a raw ratio generally resolves any
potential concern related to a nonlinear relationship between the
dependent variable and several explanatory variables; and, finally,
that alternative ratios for capital and earnings are not better in
predicting expert judgment ranking or failure.
---------------------------------------------------------------------------
To select the risk measures for the scorecard, the FDIC first
selected a set of financial measures that were deemed to be most
relevant to assessing large institutions' ability to withstand
stress. Those measures were converted to a score between 0 and 100
and then regressed against the expert judgment ranking. A stepwise
selection method was used to select risk measures for each year that
were statistically significant at a 15 percent confidence level or
better.
Table1.1 shows the risk measures that were considered and
descriptive statistics of scores for those measures for large
institutions based on data from 2005-2009. Most of these measures,
other than concentration and credit quality measures, are based on
report of condition and income data and defined in Appendix 1. The
concentration measure is described in detail in Appendix 2. A
distance-to-default measure is calculated as a sum of Tier 1 capital
and 12-quarter average core earnings--both divided by total assets--
divided by the 12-quarter standard deviation in core earnings. The
three-year merger-adjusted asset growth rate (AG) is calculated as:
[GRAPHIC] [TIFF OMITTED] TP03MY10.021
Where t is the quarter for which the assessment is being determined.
[[Page 23550]]
Table 1.1--Descriptive Statistics of Risk Measure Scores
----------------------------------------------------------------------------------------------------------------
Standard
Risk measure Average score Median score deviation of
scores
----------------------------------------------------------------------------------------------------------------
Weighted average CAMELS rating.................................. 41.4 39.9 14.3
Tier 1 common leverage ratio.................................... 65.4 74.7 30.5
Distance-to-default............................................. 62.2 73.7 34.8
Concentration measure........................................... 52.2 46.0 36.3
Three-year merger-adjusted asset growth rate.................... 27.0 15.7 30.5
Core earnings/average assets.................................... 56.6 55.4 30.0
Credit quality measure.......................................... 43.2 33.7 35.2
Core deposits/total liabilities................................. 41.5 33.2 32.9
Liquidity coverage ratio........................................ 75.1 89.9 31.5
Unfunded commitments/total assets............................... 49.1 51.4 32.1
Short-term funding/total assets................................. 32.8 24.8 31.8
Loss severity ratio............................................. 43.3 43.5 30.0
Secured liabilities/total domestic deposits..................... 31.3 21.2 31.7
Brokered deposits/total domestic deposits....................... 22.3 5.7 33.8
----------------------------------------------------------------------------------------------------------------
Table 1.2 shows the results of the OLS models after a stepwise
selection process and the statistical significance of each measure
for years 2005 through 2009. The dependent variable for the model is
an expert judgment ranking as of year-end 2009. The measures
numbered (1) through (9) are statistically significant and have a
positive sign in regression models for multiple years. Those
measures include a weighted average CAMELS rating, a concentration
measure, a core earnings to average total assets ratio, a credit
quality measure, a core deposits to total liabilities ratio, an
unfunded commitments to total assets ratio, a liquid assets to
short-term liabilities ratio, a loss severity measure, and a secured
liabilities to total domestic deposits ratio. The measures without
coefficients are those that are not statistically significant at a
15 percent confidence level.
[[Page 23551]]
[GRAPHIC] [TIFF OMITTED] TP03MY10.022
Table 1.3 shows the results of the logistic regression models
with a stepwise selection process, and the statistical significance
of each measure for years 2005 through 2008. The dependent variable
for the model is whether an institution failed before year-end 2009
or not. The risk measures numbered (1) through (5) are statistically
significant and have a positive sign in regression models for
multiple years. Two additional measures--credit quality measure and
unfunded commitments/total assets-- are significant in a regression
model for a single year. One measure--a Tier 1 common capital
ratio--that is not significant in the OLS model are significant in
the logistic regression model.
[[Page 23552]]
[GRAPHIC] [TIFF OMITTED] TP03MY10.023
Determining Risk Measures Weights
Table 1.4 shows the results of the OLS model with all ten risk
measures that were significant in predicting either the expert
judgment ranking or failure. The weights assigned to each of ten
risk measures in the scorecard are generally, but not entirely,
based on the coefficients for OLS models for 2006 and 2007. For
example, the coefficient for the core earnings to average total
asset ratio is 0.16 in 2007, and the proposal assigns a weight of 15
percent to core earnings to calculate an institution's ability to
withstand asset-related stress score. The coefficients for the
concentration measure and credit quality measure are 0.34, and a 35-
percent weight is assigned to each of these measures. The
coefficient for the liquid assets to short-term funding (liquidity
coverage) ratio is 0.14 in 2007 and the proposal assigns a weight of
20 percent to the liquidity coverage ratio to calculate an
institution's ability to withstand funding-related stress score. The
coefficients for the core deposits to total liabilities ratio and
the unfunded commitments to total assets ratio are 0.20 and 0.12,
respectively, in 2006 (and 0.10 and 0.16, respectively, in 2007),
and a 40-percent weight is assigned to both these measures to
calculate an institution's ability to withstand funding-related
stress score.
The weights assigned to the Tier 1 common capital ratio, the 10-
day 99-percent VaR to Tier 1 capital ratio, and the short-term
funding to total assets ratio are not based on the OLS regression.
For the Tier 1 common capital ratio, the 15-percent weight assigned
in the large institution scorecard (and the 10-percent weight
assigned in the highly complex institution scorecard) reflects its
importance in predicting bank failure. A 10-day 99-percent VaR to
Tier 1 capital ratio is a consistent measure of market risk that is
important for highly complex institutions. Finally, while the OLS
regression does not show a statistical significance, reliance on
short-term funding had an effect on how highly complex institutions
fared over the past four years.
[[Page 23553]]
[GRAPHIC] [TIFF OMITTED] TP03MY10.024
OLS regression results: CAMELS and the Current Small Bank Financial
Ratios
Table 1.5 shows the results of the OLS regression model with the
weighted average CAMELS rating only. These results show that while
the weighted average CAMELS rating is statistically significant in
predicting an expert judgment ranking as of year-end 2009, it only
explains a small percentage of the variation in the year-end 2009
expert judgment ranking--particularly in models for 2005 (10
percent) through 2007 (19 percent).
[GRAPHIC] [TIFF OMITTED] TP03MY10.025
Table 1.6 shows the results of the OLS regression model with a
weighted average CAMELS rating and the current small bank financial
ratios. These results show that adding financial ratios improves the
ability to predict the year-end 2009 expert judgment ranking;
however, the improvement is not as significant as in the model with
proposed measures. For example, in 2006, the model with current
small bank financial ratios would have predicted slightly over 20
percent of the variation in the current expert judgment ranking.
This compares to nearly 50 percent for the model with proposed
measures.
[[Page 23554]]
[GRAPHIC] [TIFF OMITTED] TP03MY10.026
Appendix 2
Conversion of Total Score Into Initial Base Assessment Rate
The formula for converting an institution's total score into an
initial assessment rate is based on a single-variable logistic
regression model, which uses an institution's total score as of
year-end 2006 to predict whether the institution has failed on or
before year-end 2009. The logistic model is specified as:
Fail(0,1)i = -7.7660 + (0.0875 x Score i,2006)
Where:
Fail is whether an institution i failed on or before year-end 2009
or not; and \3\
---------------------------------------------------------------------------
\3\ For the purpose of regression analysis, large institutions
that received significant government support or merged with another
entity with government support are deemed to have failed.
---------------------------------------------------------------------------
Score is an institution i's total score as of year-end 2006.
The plotted points in Chart 5.1 show the estimated failure
probabilities for the actual total scores using the logistic model
and the results are nonlinear.
[[Page 23555]]
[GRAPHIC] [TIFF OMITTED] TP03MY10.027
The proposed calculation of the initial assessment rates
approximates this nonlinear relationship for scores between 30 and
90. A score of 30 or lower results in the minimum initial base
assessment rate and a score of 90 or higher results in the maximum
initial base assessment rate. Assuming an assessment rate range of
40 basis points, the initial base assessment rate for an institution
with a score greater than 30 and less than 90 would be:
[GRAPHIC] [TIFF OMITTED] TP03MY10.028
Appendix 3
Analysis of the Projected Effects of the Payment of Assessments on the
Capital and Earnings of Insured Depository Institutions
This analysis estimates the effect in 2010 of deposit insurance
assessments on the equity capital and profitability of all insured
institutions, based on the total base assessment rates adopted in
the final rule. For purposes of determining pre-tax, pre-assessment
income in 2010, the analysis assumes that income in 2010 will equal
annualized income for the second half of 2009, adjusted for mergers.
While deposit insurance assessments (whatever the rate)
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.
An institution's earnings retention and dividend policies also
influence the extent to which assessments affect equity levels. If
an institution maintains the same dollar amount of dividends when it
pays a deposit insurance assessment as when it does not, equity
(retained earnings) will be less by the full amount of the after-tax
cost of the assessment. This analysis instead assumes that an
institution will maintain its dividend rate (that is, dividends as a
fraction of net income) unchanged from the weighted average rate
reported over the four quarters ending December 31, 2009. 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 proposed changes involve increases in premiums for some
institutions and reductions in premiums for other institutions.
Because overall revenue remains almost constant, the effect on
aggregate earnings and capital is small. Projections show that
imposition of the new premiums will increase aggregate capital by 2
one-hundredths of one percent (0.02 percent) over one year. For
institutions whose initial earnings are positive, the change in
premiums will increase earnings by an average of 0.87 percent (on an
asset weighted basis). For institutions whose initial earnings are
negative, the change in premiums will increase losses by an average
of 0.85 percent (on an asset weighted basis).
There are two institutions for which the imposition of the new
premiums would make a critical difference that would cause their
tier 1 capital ratio to fall below 2 percent over a one-year
horizon. A check was also made whether the imposition of the new
premiums would make a difference in whether an institution's equity-
to-capital ratio would fall below 4 percent in a one-year horizon,
but there are no institutions critically affected in this way.
Among current Risk Category I institutions, 6,030 institutions'
assessment rates would
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decrease, 28 institutions' assessment rates would increase and 2
institutions' assessment rates would remain unchanged. All of the
institutions whose rates would increase are large institutions as
currently defined. For institutions whose assessment rates would
decrease and whose earnings would otherwise be positive, earnings
would increase by an average of 1.2 percent (on an asset weighted
basis). For institutions whose assessment rates would decrease and
whose earnings would otherwise be negative, losses would decline by
an average of 1.0 percent (on an asset weighted basis). For
institutions whose assessment rates would increase and whose
earnings would otherwise be positive, earnings would decrease by an
average of 1.6 percent. For institutions whose assessment rates
would increase and whose earnings would otherwise be negative,
losses would increase by an average of 4.8 percent.
Among current Risk Category II institutions, 11 institutions'
assessment rates would decrease, 16 institutions' assessment rates
would increase and 1,182 institutions' assessment rates (including
the rates for all small Risk Category II institutions) would remain
unchanged. For institutions whose assessment rates would decrease
and whose earnings would otherwise be positive, earnings would
increase by an average of 25.5 percent (on an asset weighted basis).
For institutions whose assessment rates would decrease and whose
earnings would otherwise be negative, losses would decline by an
average of 2.1 percent (on an asset weighted basis). For
institutions whose assessment rates would increase and whose
earnings would otherwise be positive, earnings would decrease by an
average of 2.5 percent (on an asset weighted basis). For
institutions whose assessment rates would increase and whose
earnings would otherwise be negative, losses would increase by an
average of 4.1 percent (on an asset weighted basis).
Among current Risk Category III and IV institutions, 728 out of
729 institutions' assessment rates would increase. For institutions
whose assessment rates would increase and whose earnings would
otherwise be positive, earnings would be reduced by an average of
0.9 percent (on an asset weighted basis). For institutions whose
assessment rates would increase and whose earnings would otherwise
be negative, losses would increase by an average of 1.0 percent (on
an asset weighted basis).
By order of the Board of Directors.
Dated at Washington, DC, this 13th day of April 2010.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2010-10161 Filed 4-30-10; 8:45 am]
BILLING CODE 6714-01-P